1.1 Audit findings and opinions
1.1.1 The update of baggage handling system
The original hold baggage security screening process at the Macau International Airport (hereinafter refer to as “MIA”) required the security screening to be carried out before the check-in procedure, so there was a risk that explosives could be placed in the checked baggage. Macau International Airport Company Limited (hereinafter refer to as “CAM”) expected to solve the security loopholes through the project of updating the baggage handling system (Baggage Handling System Upgrade, hereinafter refer to as “BHS”) which was a four-level automatic screening system for explosives. However, the BHS still had fundamental problems after the acceptance of the system: the mis-tracked baggage needed to be sent to the fourth level screening for manual checking, therefore affecting the efficiency of baggage handling; moreover, the failure to show the X-ray image of the mis-tracked or high-risk baggage at the fourth level screening could pose a huge risk to the security operator when handling these baggage that may contain explosives. Due to the impossibility to show the X-ray images, the airport security procedures set for the BHS had safety concerns and was not accepted by the Civil Aviation Authority, resulting in the system not being able to put into operation. The design requirements for the BHS clearly required that the X-ray images of baggage needed to be displayed at the forth level screening; however, the system failed to meet the requirement and there was no discussion about the accountability for these problems.
Faced with such serious security problems, the CAM management took a negative attitude, and even ignored the requirements about the X-ray images at the forth level screening, which was defined in the original design specification. In 2014, the CAM management considered that the system already met the design requirements, and regarded the remedial measures as upgrade plans and set them aside. As a result, the new equipment in which CAM had invested more than 70 million patacas were not put into operation. After the Government of the Macao Special Administrative Region (hereinafter refer to as “MSAR”) required CAM to improve airport security in June 2018, a working group was set up to follow up the relevant work and only approved the BHS upgrade plan almost nine months later. However, the relevant upgrade plan could not completely solve the problems of BHS system and the risks still existed. As at April 2019, there was no formal report or discussion on the problems of BHS system in the Executive Committee and the Board of Directors.
The procedures for airport security should be serious and strict, especially when dealing with suspected explosives. If the screening procedures are not strict enough, it may endanger the safety of the screening operator and even the citizens and tourists at the airport. Although the BHS system had such serious security problems, the CAM management disregarded their existence from the beginning. This situation has deserved attention.
1.1.2 The preparation for the construction of the temporary business aviation hangar
According to the Airport Development Reference Manual of the International Air Transport Association (hereinafter refer to as “IATA”), hangars are usually used for aircraft maintenance, so the hangers in general city airports are not only built for parking. According to the “Macau International Airport Master Plan” (hereinafter refer to as the Airport Master Plan) approved by the MSAR Government in 2011, a permanent business aviation hangar would be provided for the maintenance services after the completion of the first phase expansion. However, the CAM management, on the grounds of developing MIA into a business aircraft maintenance center, considered that it was necessary to construct a hangar as early as possible. As a result, without sufficient research and discussion on the investment returns, the CAM management insisted on taking the risk of investing 240 million patacas to construct a temporary business aviation hangar three years and five months in advance; also this hangar would have to be demolished after the expected operation period of nine years (the actual period only has eight and a half years). The actual operation of the hangar, from the start of operation to its demolition, there would be very likely a great loss between 80 million and 166 million patacas according to the current prices.
Looking at the causes of the problems, the first is that the CAM management did not give importance to the analysis of investment return. Although the analysis of investment return and the operation model were not formally reported and discussed at the meeting of the Executive Committee and the Board of Directors, the project was still approved. Meanwhile, although the CAM management conducted a simple internal analysis of investment return at the internal meeting before deciding to construct the hangar, there were fundamental flaws in the related analysis, including: poor estimation according to the functions and positioning of the hangar and its future operation model; overestimation of the revenue and underestimation of the expenses; also it overestimated the residual value of about 68 million patacas. Besides, tenants of the outdoor parking stands can changed to the hangar; therefore, it leads to self-competition and the influence on income was not taken into account. In addition, the analysis also did not consider the option of using the land of the hangar for other purposes, such as being converted into outdoor parking stands; moreover, though excluding the deficiencies in estimation which led to the serious overestimation of the rate of return, even if the estimation is correct, the actual return of the project calculated at the internal rate of return (hereinafter refer to as “IRR”) is only 2.01%. Therefore, the project of constructing and operating a hangar faces great uncertainties and risks, and unless the project has a proportional and appreciable return, it should not be recommended as an ideal investment.
On the other hand, the temporary business aviation hangar was planned to provide maintenance, repair and overhaul services (hereinafter refer to as “MRO”) in order to develop MIA into a business aircraft maintenance center, which was approved by the Executive Committee, the Board of Directors and the MSAR Government through different occasions and ways. However, after the termination of the contract with the MRO contractor due to the internal and external factors that caused failure to deliver the hangar to the contractor, the CAM management did not actively find another MRO supplier; on the contrary, it changed the purpose of the hangar for aircraft parking only on the grounds of the keen demand for parking resources and the difficulty of management of the original plan. In fact, the provision of MRO services is a more reasonable and economically viable position, and the current 15 outdoor business aircraft parking stands at MIA, which were rebuilt in 2016, provide sufficient parking stands for long-term tenants at lower rents than the hangar. However, the utilization rate was still less than 75% until 2018, so there were no urgent needs for more parking stands and imbalance between supply and demand. As there were no maintenance services, the temporary business aviation hangar failed to achieve the expected economic benefits.
The investment in the temporary business aircraft hangar without in-depth studies is most likely to make a loss, and the decision to change the purpose of the hangar for aircraft parking only also causes lower potential income, both of which harm shareholders’ interests. On the other hand, CAM conducted international tendering for the provision of MRO services and awarded the contract, but the contract was terminated before the operation of the hangar; subsequently, CAM decided not to provide MRO services suddenly. This has a long-term negative impact on the international reputation of MIA, especially in terms of its consistency, reliability and professionalism.
1.2 Audit suggestions
CAM should:
Ensure that the purchased equipment has the feasibility of actual operation in order to achieve the intended functions and objectives.
Address the problem in a timely manner.
Reflect the problem truthfully to the supervisor and conduct a review in order to clarify the responsibility.
Before proposing an investment project, make in-depth and realistic studies on the technical and commercial feasibility of the project to ensure that the investment can at least get reasonable return that is consistent with the risks.
Fully introduce and discuss the project before it is approved.
Execute the decisions and guidelines formulated by the authority thoroughly and seriously, and cannot change or suspend them arbitrarily. If the related decisions and guidelines are found to be defective and need to be revised or even terminated, they must be submitted to the authority and formally be revised or terminated only after thorough discussion.
