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BURGER & COMER, P.C.
Certified Public Accountants October 3, 2000
Dear Mr. Pierce: We are pleased to submit this report summarizing information provided by twenty-two of the thirty three garment factories operating in the Commonwealth of the Northern Mariana Islands (CNMI) in 1999, in response to a questionnaire sent out by the Saipan Garment Manufacturers Association (SGMA). The factories themselves provided all figures summarized in this report; 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 July, August, and September, 2000, 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.
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 that would have come to our attention if we had undertaken an audit. Mr. Richard Pierce
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 33 operating factories, and received responses from 22 of the 33 factories. The reliability of the information provided by the factories is the responsibility of the factory owners. The totals from the 22 factories were projected to the estimated totals for the industry by assuming that these factories constitute exactly two-thirds of the total industry. This ratio seems reasonable considering the dollar value of exports reported by the 22 factories. 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-1991 and lasting through 1994. The 1993 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. Mr. Richard Pierce
Tourist arrival figures for 1998 were substantially lower than 1997 (a drop from over 700,000 to less than 500,000 tourists), and arrivals for 1999 were similar to those experienced in 1992. Arrival figures for the year 2000 to date have only been slightly better than 1999 for the CNMI, while Guam has posted double-digit increases. Hotel occupancy rates, which have been reported by the Hotel Association of the Northern Mariana Islands (HANMI) since 1992, were at their highest in 1996 at 85.6 percent. For 1998, the average occupancy rate was 58.1 percent. Employment Statistics The CNMI is largely dependent on imported workers. First quarter 1999 figures from the CNMI Department of Commerce show an estimated population of 79,429. Of this total, forty two percent (42%), or about 33,000 people, are U.S. citizens. The remaining fifty eight percent (58%), or about 46,000 people, were temporary foreign workers. The 1995 census showed that the total population for the CNMI was estimated to be more than 58,800 persons. Residents who are Chamorro, Carolinian, or mainland Americans made up approximately 47 percent of the total, or just over 27,450. Non-residents (mostly foreign workers) represented the remaining 53 percent, or over 31,350 persons. The trend has been an increasing reliance on foreign workers. The Bank of Hawaii report stated that, of the 54,541 Saipan residents in 1999, approximately 46,183 were either gainfully employed or actively seeking work. That report also stated that the majority of the work force (32,946) was foreign. The unemployment rate for the CNMI was shown in the Bank of Hawaii report to be 5.5% of the labor force. It is interesting to note that the unemployment rate for CNMI born individuals was 13.4% while for non-CNMI born individuals it was 3.2%. There are about 17,500 people working directly in the garment industry in the CNMI. As shown later in this report, the industry is also responsible for at least 9,800 direct government and private sector jobs. Mr. Richard Pierce
Minimum Wage Rate The minimum wage in the CNMI is currently $3.05 per hour. There has been much discussion in the United States Congress about imposing the Federal minimum wage in the CNMI. It is unreasonable to conclude that temporary foreign workers are being paid only $3.05 per hour. The employer is responsible for several additional expenses when utilizing guest workers. 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. The CNMI Department of Commerce reported that the average (mean) wage rate in non-durable manufacturing was $4.31 per hour in the first quarter of 1999. This figure does not include the additional expenses incurred by employers. Income Tax Incentives The CNMI Legislature passed a 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 $100,000. 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 are bills that have been introduced recently to provide further incentives to attract investors to the CNMI. A Free Trade Zone has been established in the CNMI to further entice investors. Mr. Richard Pierce
Garment exporters currently pay three and seven tenths percent (3.7%) of the invoice value of goods exported to the U.S. under a Customs Certification Act passed by the Fourth CNMI Legislature in 1984 and subsequently amended. This "user fee" is treated as a non-refundable credit against calculated income tax on the corporation's income tax return. Initially, the user fee was three percent of the export value. The user fee was increased by Public Law 9-22 to three and one-half percent of the export value. The user fee was further increased by Public Law 11-23 to its current rate, effective July 10, 1998. Imports/Exports The CNMI is almost totally dependent on imported products. There is limited farming and fishing activity, but most of the food consumed in the CNMI is imported. Prices of goods in the CNMI are, therefore, dependent on prices charged by supplier countries and 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. The survey results indicate that the value of garments exported in 1998 was over $950 million, and almost $1.0 billion was exported in 1999. The value of garments exported for the year 2000 is expected to be five to ten percent less than in 1999. 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-four companies have been issued licenses for the purpose of manufacturing garments. At the date of this report, thirty 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. On March 26, 1999 the CNMI Government enacted a law limiting the number of licensed manufacturers to 34 and the number of non-resident workers to 15,727. Mr. Richard Pierce
Industry Employment The CNMI garment industry employs over 1,800 CNMI residents. The industry also employs nearly 16,000 non-resident aliens. There were about 17,500 jobs in the industry during 1999. The twenty-two factories responding to the questionnaire paid their employees more than $132 million in wages alone during 1999. A chart showing the number of jobs in the industry in 1995, the last quarter of 1998 and the first quarter of 1999 follows.
The following chart shows wages paid by the garment industry in 1998 and 1999. There was a slight decrease in total salaries paid from 1998 to 1999.
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 imports and exports. Further, the economic base has been diversified. Impact on the CNMI Government The garment industry provided nearly $73 million in direct payments to various government agencies during calendar year 1999, as follows: User fees and excise taxes $ 41,223,000 TOTAL $ 72,780,000 Given the CNMI government's budgeted revenues of approximately $216 million for fiscal year 1999, the payments above would approximate 34% 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 to maintain current employment. Neither result would be easy to achieve. Impact on CNMI Government Employment The CNMI Department of Finance reported that the CNMI Government paid just over $104 million in salaries and wages to its estimated 5,000 employees in 1999. That amounts to an average of $20,800 per government employee. Since 48% of all government revenue is spent on personnel, then $72.8 million contributed directly by the garment industry is sufficient to pay for about 1,680 government employees. This doesn't include the jobs provided or created by other businesses that support the garment industry.
The garment industry provided other economic benefits to the CNMI through purchases of goods and services from local vendors. For the year ended December 31, 1999 these purchases totaled over $62 million, as follows: Local purchases for food, gas and supplies $ 18,529,000 TOTAL $ 62,394,000 In addition, the twenty-two responding factories spent almost $10 million in 1999 on capital improvements. Impact on Private Sector Employment The CNMI Government reported that the average (mean) wage for all private sector workers was $7.27 per hour for the first quarter of 1999. If we allow an assumption that forty percent of a private company's revenues are spent on personnel, then the $62.4 million provided by the garment industry reflected above is sufficient to pay for over 1,650 jobs. The presence of the garment industry creates more than just the 1,680 government jobs and 1,650 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. Mr. Richard Piercce
The garment industry provides a significant percentage of the revenue necessary for government employment and supports a significant number of private sector jobs. The report title "An Economic Study for the Commonwealth of the Northern Mariana Islands" published in October 1999 indicates that the multiplier for the apparel industry is 1.56. This means that, for every job in the apparel industry, another .56 jobs are created outside the apparel industry. Since about 17,500 are working in the apparel industry, roughly 9,800 other jobs have been created outside the industry. 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 eight 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 CNMI's present competitive advantages in the garment industry include unlimited quantities of exports and no duties levied on goods exported to the United States mainland. The CNMI does not have a competitive advantage with regard to labor costs over other foreign countries, which also export garments to the U.S. We have identified more than $135 million in direct economic impact provided by the garment industry. The total impact is greater, but limitations on availability of information make 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.
Burger & Comer, P.C.
SOURCES OF INFORMATION USED FOR THE REPORT ON THE IMPACT OF THE GARMENT INDUSTRY ON THE CNMI CNMI Government, Department of Finance CNMI Government, Department of Commerce Questionnaires and data provided by the garment factories KPMG Peat Marwick report dated April 23, 1993 Development Associates, Inc. report dated March 1995 "PACIFIC ISLAND POPULATIONS DATA SHEET" produced by the Population/Demography Programme, South Pacific Commission, Noumea, New Caledonia 1996 CNMI Statistical Yearbook, produced by the Central Statistic Division, CNMI Department of Commerce. "Commonwealth of the Northern Mariana Islands Economic Report" dated September 1997, Bank of Hawaii. "Commonwealth of the Northern Mariana Islands Economic Report" dated October 1999, Bank of Hawaii. "An Economic Study for the Commonwealth of the Northern Mariana Islands", released by the Business Development Center of the Northern Marianas College, dated October 1999 |