B U R G E R & C O M E R , P . C .

CERTIFIED PUBLIC ACCOUNTANTS

Saipan Garment Manufacturers Association

Dear SGMA members:

We are pleased to submit this report summarizing information provided by twelve of the eighteen garment factories operating in the Commonwealth of the Northern Mariana Islands (CNMI) in 1996, in response to a questionnaire sent out by the Saipan Garment Manufacturers Association (SGMA). All figures summarized in this report were provided by the factories themselves; we are not forming an opinion on any of the figures presented. The purpose of this process was to quantify the direct economic impact of the garment industry on the CNMI's economy. We have also included our conclusions about the employment benefits that the CNMI derives from the garment industry.

PROJECT OBJECTIVES, SCOPE OF WORK AND APPROACH

SGMA engaged our firm to objectively assess the economic and employment benefits that the CNMI derives from the garment industry. This assessment is to be disseminated locally and at the Federal government level. Our work was conducted during August, September, and October 1997, and this report contains the results of our assessment.

Project Objectives

The project objectives were to assess the economic and employment benefits the CNMI derives from the garment industry. Our work also would involve analysis of information submitted by the CNMI government and by the factories themselves in response to the questionnaire.

Guam Address: Hengi Plaza, Suite 103-B, 278 South Marine Drive Tamuning, Guam 96911 Phone: 671-646-5044 • Fax- 671-646-5045

Saipan Address: PPP 390 Box 10000 Saipan, MP 96950 Phone: 670-235-8722 • Fax: 670-235-6905

Scope of Work

The scope of this engagement was substantially less than an audit conducted in accordance with generally accepted auditing standards. Consequently, we may not have discovered matters which would have come to our attention if we had undertaken an audit. In some cases we relied upon explanations given to us by interested parties without seeking to gather evidence from independent sources. We have, however, satisfied ourselves where possible that such explanations are consistent with other information made available to us.

Approach

Our report is based primarily on the questionnaire circulated by the SGMA. In addition, we utilized data from existing and previous studies regarding the garment industry, and an overall economic assessment report recently completed by the Bank of Hawaii. Our sources are identified in Appendix A.

Our work included those steps necessary to develop conclusions about the data made available to us. The SGMA office circulated questionnaires to 18 operating factories, and received responses from 12 of the 18 factories. The reliability of the information provided by the factories is the responsibility of the factory owners.

We must point out that there are inherent limitations with a project of this nature. Economic statistics, models and indicators are not always compiled or made available to the public. The CNMI Government has just recently begun to compile data for public use.

INTRODUCTION AND BACKGROUND

In 1993, a U.S. Congressional oversight committee investigated the impact of changing Headnote 3(a) as it relates to the garment industry in the CNMI. A study performed by KPMG Peat Marwick in 1993 attempted to clarify the differences in various reports submitted to this oversight committee. Our report is similar to the 1993 KPMG report.

The CNMI Economy

The economy of the CNMI experienced rapid growth from 1987 to 1991. Concerns about land ownership in the CNMI, coupled with a slowdown in Japan's economy and tightening of credit by Japanese banks contributed to a general slowdown in the

CNMI beginning in mid-l991 and lasting through 1994. The KPMG report stated that local revenues increased 979% from 1980 to 1990. This growth was due primarily to three industries - tourism, construction, and garment manufacturing. Tourism remains as a major contributor to local government revenues. There are roughly 3,800 hotel rooms on the island at present. During the past six years, very few rooms have been added to the supply. Many projects have remained in the planning stages for several years. Tourist arrival figures are steadily increasing (although there have been some declines in certain months in 1997), and there is now a shortage of hotel rooms in Saipan. Flights have been scaled back because of the limited number of available rooms.

Employment Statistics

The CNMI is largely dependent on imported workers. The 1995 census showed that the total population for the CNMI was estimated to be more than 58,800 persons. Residents who are Chamber, Carolinian, or mainland Americans made up approximately 47 percent of the total or just over 27,450. Non-residents (mostly foreign workers) represent the remaining 53 percent or over 31,350 persons.

The Bank of Hawaii report stated that, of the 58,800 residents in 1995, approximately 37,400 were gainfully employed. That report also stated that the majority of the work force (23,587) was foreign. Most imported workers perform manual labor or work in lower level jobs because of restrictions imposed by the Alien Labor Act of 1986. The unemployment rate for the CNMI was shown in the Bank of Hawaii report to be 7.1% of the labor force. It is interesting to note that the unemployment rate for CNMI born individuals was 14.2% while for non-CNMI born individuals it was 5.5%.

There are about 8,800 people working directly in the garment industry in the CNMI. As shown later in this report, the industry is also responsible for at least 1,900 direct government and private sector jobs.

The government is the largest employer in the CNMI, with just over 5,000 employees. Most of the government employees are indigenous people. The CNMI government receives financial assistance from the U.S. Federal government. There has been a reduction in the level of assistance, with further reductions planned. The garment industry and the retail industry collectively employ more people than the CNMI government.

Minimum Wage Rate

The minimum wage in the CNMI is currently $3.05 per hour. The minimum wage is scheduled to increase 30 cents per hour each year until it reaches the U.S. minimum wage rate. It is not reasonable to conclude that CNMI workers are being paid only $3.05 per hour. The employer is responsible for several additional expenses when guest workers are utilized. The employer provides round trip transportation to and from the point of hire. The employer usually pays a recruiting fee, and there are various processing fees assessed locally. The employer also pays all medical expenses for the employee. Subsidized housing is usually provided, as are transportation to and from work and meals during working hours. These additional expenses add to the base pay of $3.05 per hour.

Income Tax Incentives

The CNMI Legislature passed Public Law 9-22 in January 1995. Prior to this law, the CNMI government gave taxpayers a rebate of 95% of income tax on CNMI source income (up to $7.5 million of tax). Public Law 9-22 reduced the rebate to 50% when calculated income tax less available credits exceeds $2,500 for individuals and $100,000 for corporations. The prior rebate was designed to encourage foreign investment in the local economy. The passage of Public Law 9-22 decreased the attractiveness of the CNMI as a place in which to invest.

There is currently a bill circulating which would provide for a higher rebate base individuals. This would not directly affect the garment manufacturing companies.

User Fee

Garment exporters pay three and one-half percent of the invoice value of goods exported to the U.S. under a Customs Certification Act passed by the Fourth CNMI Legislature in 1984. This "user fee" is treated as a non-refundable credit against calculated income tax on the corporation's income tax return. Prior to Public Law 922, the user fee was only three percent of the export value.

Imports/Exports

The CNMI is almost totally dependent on imported products. There is some farming and fishing activity, but most of the food consumed in the CNMI is imported. Accordingly, economic conditions in the countries of the CNMI's primary suppliers have an impact on prices in the CNMI. Price levels in the CNMI are also affected by shipping costs. Prior to the establishment of the garment industry in the CNMI, there was no significant export activity. Since the garment industry emerged and expanded, shipping companies no longer have to send back empty containers. This keeps shipping costs down, since these costs can now be split between the importer of products and the exporter of garments.

Statistics from the CNMI Department of Finance show that the CNMI exported roughly $300 million in 1994 and $500 million in 1995. Exports in 1996 are expected to be just over 500 million. The majority of those exports are garments. Currently, the CNMI has no other significant tangible exports.

THE CNMI GARMENT MANUFACTURING INDUSTRY

Headnote 3(a) of the U.S. Tariff schedules allows the CNMI to export certain goods to the United States without duty and without quota restrictions (except for certain items). As a result of these benefits, thirty-two companies have been issued licenses for the purpose of manufacturing garments. At the date of this report, twenty-three factories are operating.

In 1986, the CNMI government placed a restriction on the issuance of new business licenses for the garment manufacturers, effectively limiting the number of factories that could operate in the CNMI. The moratorium was implemented because of local concerns that the industry was growing too quickly. In 1996, the CNMI Government lifted the moratorium to spur outside investment.

As will be shown later in the report, the garment industry has a tremendous impact on the CNMI economy. Despite its economic impact, the garment industry has been heavily criticized, both locally and by the United States Government, for its dependence on imported workers and conditions under which those employees live and work. The negative publicity has increased in recent months. A recent broadcast by the tabloid show "Inside Edition" is expected to add fuel to the fire.

Industry Employment

The CNMI garment industry employs over 800 CNMI residents. The industry also employs nearly 8,000 non-resident aliens. There were about 8,800 jobs in the industry during 1996. The eighteen factories responding to the questionnaire paid their employees more than $72 million during 1996. A chart showing the number of jobs in the industry over the last five years follows.

BENEFITS DERIVED FROM THE CNMI GARMENT INDUSTRY

The garment industry provides direct and indirect benefits to the CNMI economy. Direct benefits include employee wages and salaries, taxes, user fees, payments for utilities (water, electricity), and payments for supporting services. Indirect benefits are provided through additional activity for those businesses that support the garment industry. Another indirect benefit of the industry is the fact that shipping costs are shared by both importers and exporters. Further, the economic base has been diversified.

Impact on the CNMI Government

The garment industry provided more than $43 million in direct payments to various government agencies during calendar year 1996, as follows:

User fees and excise taxes $ 17,980,642

Wage and Salary and income tax 17,881,025

Utility payments (CUC) 4,156,934

Labor and immigration fees 2,807,276

Medical expenses (CHC) 385,845

Various payments to DPS 35,786

TOTAL $ 43,247,508

Given the CNMI government's unaudited total revenue figure of $220.7 million (as provided by the Department of Finance and reflected in the Bank of Hawaii report) for fiscal year 1996, the garment industry payments above would approximate 20% of total government revenues. The loss of the garment industry would mean that the CNMI government would have to reduce expenditures or find other sources of revenue. Neither result would be easy to achieve.

Impact on CNMI Businesses and Individuals

The garment factories provide other economic benefits to the CNMI through purchases of goods and services from local vendors. For the year ended December 31, 1996 these purchases totaled over $31 million, as follows:

Repair and maintenance $ 9,257,559

Freight and transportation charges 6,569,370

Local purchases for food, gas and supplies 5,993,023

Annual land lease payments 2,153,516

Employee housing rental payments 2,038,175

Travel expenses 1,805,072

Insurance premiums 1,424,908

Telephone charges 1,029,754

Educational and professional fees 639,847

Donations 142,127

TOTAL $ 31,053,351

Impact on CNMI Government Employment

The CNMI Department of Finance reported that the CNMI Government paid nearly $103 million in salaries and wages to its 5,000+ employees in 1996. That amounts to an average of $20,570 per government employee. Since 46% of all government revenue is spent on personnel, then $43.2 million contributed directly by the garment industry is sufficient to pay for almost 970 government employees. This doesn't include the jobs provided or created by other businesses that support the garment industry.

Impact on Private Sector Employment

The CNMI Government reported that the average wage for all private sector workers was $5.02 per hour in 1992 (the latest year for which this information is available). Using a cost of living adjustment factor of 5% per year, the 1996 figure would be roughly $12,700. If we assume that forty percent of a private company's revenues are spent on personnel, then the $31 million provided by the garment industry reflected above is sufficient to pay for over 975 jobs.

The presence of the garment industry creates more than just the 970 government jobs and 975 private sector jobs. There are other jobs created by the fact that garment industry employees patronize CNMI business. Although a significant amount of a garment industry employee's salary is sent off-island, some amount is still spent right here in the CNMI.

CONCLUSION

The garment industry provides a significant percentage of the revenue necessary for government employment and supports a significant number of private sector jobs. The figures presented above would increase if we included the effects of a multiplier. We have not utilized a multiplier, since there are no current statistics available to support the development of a multiplier for the CNMI.

One important benefit brought about by the garment industry is the ability to export. Because the CNMI is so heavily dependent on imported goods, the ability to export allows for some control over shipping costs, since these costs can be shared with importers.

The garment industry provides much needed diversification for the CNMI's economy, which has been largely dependent on tourism. The stagnation of the Japanese economy over the past few years has led to a decrease in spending by Japanese tourists. The combined impact of a decrease in tourist spending and a decrease in foreign investment has had a negative impact on CNMI government revenues. The CNMI government would have to take drastic measures if the garment industry suddenly vacated the island.

The KPMG report concluded that wage rates in the CNMI garment industry, stated as $3.05 per hour, are effectively closer to $4.00 per hour. Given a minimum wage of $3.05 per hour, the rate would now approximate $4.30 per hour. The CNMI does not have a competitive advantage with regard to labor costs over other foreign countries, which export garments to the U.S. Also, with an effective wage rate of $4.30 per hour and increased user fees, the CNMI garment industry finds it harder to make a reasonable return on investment profit.

I have identified more than $74 million in direct economic impact provided by the garment industry. The total impact is greater, but limitations on availability of information makes it impossible for us to estimate the figure. Clearly, the garment industry is a major factor in the CNMI's economy. The loss of the industry would mean a reduction in government and private sector revenues and jobs.

Once again, thank you for this opportunity to be of service. We are always available to answer questions you may have.

Very truly yours,
Burger & Comer, P.C.