Pinocchio and SFO

Once upon a time, there were airport officials who wanted to spin tall tales, spend $745,000 on Honduran boondoggling, and not explain very much

Not being a devotee of equivocating editorials, unreported columns, and predictable letters, I don't often read the opinion pages of our local dailies. But last week I found something that may change my daily reading habits. The San Francisco Chronicle carried a letter to the editor, written by San Francisco International Airport Director John Martin, that was so ludicrous, so preposterous, so sublimely outlandish that I may again become a regular of the local editorial page. Martin's missive came in response to a previous Chronicleguest editorial in which San Francisco Supervisor Aaron Peskin made the unremarkable suggestions that our mismanaged, secretive, fiscally irresponsible airport be audited, and that the Board of Supervisors be allowed to annually review all major capital spending at SFO. Martin was, apparently, outraged.

"He claims airport finances are cloaked in secrecy," Martin wrote. "Not true."

In the history of Pinocchioan whoppers, this statement stands out. Secrecy is almost a cause at SFO. The San Francisco International Airport is an Oz of obfuscation, where billions of dollars in over-budget construction projects have slipped quietly away from the public gaze. It's a Constantinople of concealment, home to multimillion-dollar fees handed to lobbyists for a furtive propaganda campaign in support of a controversial, bay-filling, runway-expansion project. It's a banana republic of back-room boondoggles, where bureaucrats take inappropriate trips to France, Italy, Oman, Honduras, Jamaica -- then divert and commingle public funds in strange private business ventures in the Third World.

To me, the idea that Martin and his boys run anything less than an ongoing covert operation is an idea so boisterously, delightfully absurd that I can't resist the fun of shedding a little light on it.

Perhaps the best way to defrock Martin's claim that airport finances aren't cloaked in obfuscation and secrecy is to quote ... John Martin.

Last month, Martin offered testimony at a Board of Supervisors committee meeting that dealt with SFO's next budget. Martin was trying to explain away an odd line item in the airport's proposed budget asking the city to approve $745,000 in expenditures by an unusual Delaware corporation known to regular readers of this column as SFO Enterprises LLC.

"It is a nice, small, but solid revenue producer," Martin said, sporting his trademark permanent half-smirk. "It is now at a very steady operation. The revenue flow is very predictable. The expenses are very predictable. The payment plan is in place. We're not pursuing risky ventures. We're just staying with what we have. Now it's generating close to $250,000 in annual profit. It's bringing in $955,000, with costs of $745,000."

Let us count obfuscations.

First, and most general- ly, Martin presented this $745,000 infusion of city funds as unexceptional when, in fact, it is an astonishing break with the airport's official line. In 1997, SFO Enterprises was chartered as a private firm specifically to separate the city's treasury from a scheme concocted by airport managers in which they and SFOE would become players in a 1990s airport privatization boom. For a variety of legal reasons, just five years ago airport officials and city officials contended the private firm had to be completely separate from the city. Now, Martin was proposing a large city participation in the venture, without so much as an attempt at explaining away the legal problems and financial risks such a course could engender.

Martin's use of the word "steady" was also -- how shall I put it? -- troubling. SFO Enterprises' sole line of business consists of involvement in a consortium that manages airports in the Central American country of Honduras -- a consortium whose other members appear to be furious at San Francisco airport officials for conducting business in a misleading way, and who seem to be looking to rid themselves of their San Francisco partner.

For Martin to call SFO Enterprises' activities not risky belies the fact that the company appears to have made the City and County of San Francisco potentially liable for future mishaps in what experts describe as the most dangerous airports in the world.

Martin's term "profit" is an absurd concept to apply to SFO Enterprises, a company that kept a significant portion of its expenses off book, charging them to the City and County of San Francisco, until I began writing about those expenditures last year.

And "nice" doesn't adequately describe a company being investigated by Honduran authorities for what they suspect has been a fraud on the Honduran government and for alleged mismanagement of that country's airports.

"It's very difficult to have a positive view of them [SFO Enterprises]," says Jose Gilberto Aquino Guevara, director of the Superintendencia de Licencias y Concesiones, a Honduran government agency that regulates infrastructure concessions. "Ideally, we'd like to rescind their contract. The general populace is very dissatisfied with their behavior. We'd really like to find a way to disentangle ourselves from them."

I guess that makes five. Obfuscations, I mean.

In 1997, at the suggestion of Martin and airport Deputy Director John Costas, the San Francisco Board of Supervisors approved the creation of a bizarre private, for-profit corporation that would have a single shareholder -- the City and County of San Francisco -- and would carry out foreign airport consulting projects. This authorization included what was supposed to be a one-time infusion of taxpayer funds -- $10,000 in start-up capital. From then on, Costas and Martin insisted, the company, eventually dubbed SFO Enterprises, would be self-funding. The new firm, the idea went, would win contracts at airports around the globe. It would earn enough money to expand and to repatriate, at some unnamed future date, profits to the city.

But Third World airports are a risky business, liability-wise. To protect San Francisco from liability for the company's activities, the company would have to be completely separate from city government. To ensure that separation, the private firm's books and other activities would need to be kept secret from most city officials, airport officials argued at the time.

As I reported earlier, Costas, who was put in charge of the new corporation, exploited the "secrecy" portion of this argument and all but sneered at the "separate books" portion. He ignored promises that the firm, SFO Enterprises LLC, would support itself, and turned it into a vacuum that sucked city time and money into a private money sack. Public records I obtained last year showed Costas and his lieutenants diverting at least $900,000 in city funds to the benefit of SFO Enterprises without obtaining specific permission from the Board of Supervisors, in apparent violation of the state laws on official misconduct and federal law on the use of airport money.

SFO Enterprises spent hundreds of thousands of dollars on trips to Rome, Paris, Oman, Jamaica, and elsewhere, attempting to win airport privatization contracts. Costas and Martin hired professionals with expertise relevant to airport privatization, put them on the city payroll, then flew them around the world on behalf of SFO Enterprises, brazenly commingling city and private funds along the way. In the end, the city-paid workers for this "private" enterprise succeeded in just one project: winning the October 2000 bid to take over management of Honduras' four main airports.

To gain the Honduras contract, SFO Enterprises "employees" committed what Honduras government officials and business leaders now call a brazen act of deception.

Bidding rules set up to govern the privatization of Honduras' airports -- a privatization Honduras was compelled to undertake as part of conditions for loans from the International Monetary Fund -- required that lead partners of the bidding consortia have experience managing major international airports. To this end, SFO Enterprises assembled a consortium called "Interairports," made up of various Latin American airport service and infrastructure companies. The consortium then included in its bidding materials a set of catalogs, annual reports, and other materials pertaining to the San Francisco International Airport -- creating the impression that our city's airport was backing the Interairports Honduras privatization bid.

Honduran government officials, business leaders, and consortium members -- and even some officials at the U.S. Embassy in Tegucigalpa -- had become convinced that if Interairports managed Honduras' airports, the country would get access to the expertise and financial power of SFO. Actually, however, SFO Enterprises, and its subsidiary, SFO Honduras, had no formal organizational relationship with San Francisco International Airport. SFO Enterprises was a start-up company with $10,000 in capital, and no experience conducting any sort of business at all.

"You ask anybody; everyone was certain that San Francisco would run our airports," Jose Maria Agurcia, director of the Tegucigalpa chamber of commerce, said last week.

When Interairports, the SFO Enterprises consortium, won the bidding, it suddenly had a system of Third World airports to run, and no money to do it with. So Costas and airport accountant Leo Fermin embarked on what appeared to be a systematic diversion of city money. As I described in September, they obtained walking-around money through a highly unusual $40,000 advance from the city budget, and piggybacked on San Francisco's treasury through extensive use of city personnel and travel funds.

Eventually, though, San Francisco airport officials all but withdrew from Honduras, leaving SFO Enterprises' contractual obligations -- which involved drafting a variety of airport plans and manuals -- to Miami consultants. Most of the work was done by young, inexperienced Honduran architects, with the Miami consultants showing up time and again to review their work, regulators in Honduras told me.

Within this system, according to the Superintendencia de Concesiones, Interairports has done a feeble job of managing the airports of Honduras, increasing fees on everything from passengers to cargo but investing very little. The Superintendencia has fined Interairports $10,000 for failing to live up to contractual benchmarks for improving airport operations. Interairports has sued the agency in Honduran courts, claiming the Superintendencia lacked authority to levy the fine, according to Honduran newspaper reports.

Regardless of the outcome of that lawsuit, Honduran regulators clearly believe Interairports has failed to live up to its obligations. There is at least some evidence to that effect. In the city of San Pedro Sula, for instance, tropical rains often cause much of the airport to flood.

"There are four huge pumps at the airport's low point to avoid flooding, and we've insisted they be kept in working order, but it appears [Interairports] waited until the rainy season is full upon us to attend to repairs -- it's always something like this," according to one report by a Honduran government official, which followed a November report by the International Civil Aviation Organization critical of Interairports' management of its Honduran facilities. "Is this how they operate airports in San Francisco? They never take preventative measures. They're always corrective."

Honduran government officials, business leaders, and others with direct knowledge of SFO Enterprises' management of Honduras' privatized airports paint a picture far different than the small, safe investment vehicle described by Martin. SFO Enterprises is faced with hostile partners, angry regulators, and a Honduran business community whose representatives say they feel the country was defrauded -- by San Francisco.

Meanwhile, SFO Enterprises and, by reasonable extension, the city are facing new financial challenges in Honduras.

During his testimony before the Board of Supervisors budget committee last month, Martin suggested that SFO Enterprises represented a valuable investment for the city, citing the firm's investment of $36,000 for equity in the Interairports consortium. What he didn't say is that SFO Enterprises' relationship with Interairports includes side agreements that could put SFO Enterprises -- and, because of its continued connection to the firm, the city of San Francisco -- in debt to the consortium.

The privatization contract with the Honduran government requires that the consortium make some $60 million in infrastructure investments during the 20 years of its contract. According to travel receipts produced in response to a public records request, airport employee Steve Zehr has met with officials of the International Finance Corp., a World Bank investment banking subsidiary. IFC officials did not return calls for comment, but the Superintendencia de Concesiones said the IFC is currently studying whether to loan money to the Interairports consortium.

According to Interairports contractual agreements, SFO Enterprises would be responsible, along with other members of the consortium, for making an equity contribution that the IFC would require for approving a loan. Presumably, SFO Enterprises' debt would be erased as the consortium became profitable, but this theoretical eventuality is still years off, sources in Honduras say.

That SFO Enterprises is asking for $745,000 in city money would certainly seem to make San Francisco indirectly liable for the risk involved in running the international airports of Honduras. Either that, or the San Francisco City Attorney's Office is remarkably incompetent.

In an official 1997 memo, Deputy City Attorney Melba Yee opined that San Francisco would be protected from liability that SFO Enterprises might create only if the city's finances were kept strictly separate from the private firm's.

"If structured as a separate legal entity with its own source of funds separate from the monies generated from ongoing airport activities, this line of business could produce a long-term source of revenue which lawfully could be provided to the general fund. ... Under this structure, no airport revenues would be used for the corporation, nor would revenues from the corporation be used to operate the airport," she wrote. This need for separation, according to airport officials' arguments at the time, was a core reason for creating the private corporation in the first place.

Back when the private firm was created, John Martin, the airport director, suggested that commingling airport money with SFO Enterprises money could run afoul of federal regulations. The city should allocate $10,000 of its own funds for the start-up of the corporation, rather than obtaining this money from the budget of the airport itself, because use of airport money "would be considered improper revenue diversion and thus violate federal regulations," a 1997 budget analyst's memo quoted Martin as saying. Yet the $745,000 in SFO Enterprises funding would, if approved, come from the airport's budget.

For Yee, the crucial issue was liability for the city, which would be avoided by keeping the two entities' finances separate: "As long as the city acts solely as a shareholder, the corporate formalities are observed ... and the corporation is properly capitalized for the business in which it engages, the protection of the city as a shareholder will be preserved," Yee wrote. "If, on the other hand, the city intervenes in the day-to-day affairs of the corporation or ignores the separate legal identity of the corporation, then the city may lose the protection that is otherwise provided by California law."

In formally asking that $745,000 of city money be allocated to SFO Enterprises, Martin, Costas, et al., appear to have abandoned the ruse that SFO Enterprises is separate, in any meaningful way, from city government, and to be opening the city to enormous potential liability.

When I tried to ask about this amazing and apparently dangerous U-turn in policy, airport officials went quiet. Three weeks ago, I asked airport Public Information Officer Ron Wilson for an interview with Costas. Costas refused to be interviewed. I asked to interview Martin -- nothing. I actually got Leo Fermin, the airport official the city Controller's Office says is responsible for SFO Enterprises' finances, on the phone. He refused to answer questions.

Instead, Wilson subsequently insisted that airport officials would respond only to written questions.

Now, in my previous experience with SFO, I have found that submitting written questions has translated into 10 days of fax warfare, at the end of which time I have amassed a pile of paper full of nonresponsive bromides. In my experience as a journalist, I have discovered that explanations of anything as complex as SFO Enterprises and its operations in Honduras are useless unless an opportunity to ask follow-up questions is provided.

Still, if Wilson insists on written questions, I guess I'll have to play.

Here's my question:

Isn't it time to include money in the SFO budget to pay for the kind of comprehensive financial audit that other city departments obtain on a regular schedule, and the airport hasn't had for 31 years?

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