June 25, 2008

The Kaselehlie Press

Washington D.C. - On June 10, 2008 Acting Director of the Office of Insular Affairs (OIA) Tom Bussanich and the Director of the FSM Office of Statistics, Budget & Economic Management, Overseas Development and Compact Management (SBOC), Fabian Nimea presented statements in Washington D.C.

The presentations were made before the US House of Representatives Committee on Natural Resources Subcommittee on Insular Affairs chaired by Delegate Donna Christensen (D), the delegate to the House of Representatives from the Virgin Islands. The participants were asked to give prepared statements on issues surrounding the implementation of the Compact of Free Association with the United States.

In his statement, Mr. Bussanich said, "Despite the hard work and good intentions of many, we are not satisfied with the results of the outcomes that we have seen. However, we remain firm in our belief that with increased commitment by our partners in the FSM that the Compact will ultimately be successful."

Throughout the rest of his statement he cited both positive and negative concrete examples to support his thesis and closed with these words, "In conclusion, the FSM faces very serious challenges. It's challenges are not resources; it has the resources to implement a large and important program of improvement to schools, health facilities and other critical infrastructure, with beneficial effect for the FSM's economy. What the FSM needs is the will to use its resources as a springboard to better sector performance and improved economic growth.

He said that the US-FSM Joint Economic Management Committee (JEMCO) "still finds the FSM grappling with plans for Capacity Building, Environment and Private Sector development grants but notes progress in budget presentations in Education and Health." Director Nimea said that the Compact is achieving "two of its three major goals". He said that the Compact had achieved its first major goal, "the maintenance of peace and security in the vast region of the former Trust Territory of the Pacific." He said that the second major goal, "to support and help maintain stable democratic governments in our region," has also been successful with the assistance of the Compact of Free Association.

He said, "As a third goal, the drafters and amenders of the Compact have always had in mind that the Compact assistance would itself jumpstart a process of steady, private-sector economic growth in the FSM leading eventually to substantial, national self-reliance. Speaking today, I wish to suggest that, that assumption was at least in some degree misplaced, for reasons we can now understand."

As support for that conclusion he said that in the areas of private sector growth and self-reliance, "the Compact as currently written does not reflect a working understanding of the unique difficulties faced by remote, small island developing states such as in the FSM." He further said that the FSM differs from the other two Freely Associated States (FAS) (the Republic of the Marshall Islands and the Republic of Palau) in that the FSM consists of "four culturally distinct States separated by vast distances". He said that failing to realize that fact "assigns identical obligations and responsibilities to all three of the FAS." He said that it is time to "call for some midcourse adjustments if there is to be any realistic hope of the FSM's reaching the third objective by the year 2023."

He said that the FSM embraced the challenge presented under Compact II to establish a common, performance-based system of budgeting for sectoral Compact grants believing that they would take the nation in the direction of becoming a more meaningful participant in the emerging age of Globalization.

"We had come to realize that the concept of 'self-sufficiency, which had been discussed as a goal of the original Compact, probably was not only unachievable but is in fact undesirable in today's world. We now instead embraced at the onset of the Amended Compact the very different goal of having a healthy degree of 'self-reliance' within the world community and among our neighbors and friends. This means that while we continue to solicit needed goods, services and assistance, we develop our capacities to make contributions to the global society in return." He said that the nation established plans "but the question remained, as to how quickly our capacity to implement them could be brought online…" He told the committee that the FSM's request for a transition period in which to mobilize a coordinated compliance with the new requirements was denied.

Acting Director Bussanich said that the JEMCO, in August 2003 allowed for a five year transitional period for Public Sector Capacity building at the end of which time the government's non-Compact operations were to have been self supporting. He said that transitional period is now over and the Government still is not ready to support itself. He said that OIA does not expect to recommend that JEMCO support projects in fiscal year 2009 that "seek no more than to cover the recurring costs of government offices whose output is ill-defined and only very loosely related to the purpose of these (the six Compact supported) sectors."

Nimea said that during the coming year the US and the FSM would need to examine the organization and function of the JEMCO in order to increase its effectiveness. He said, "The 'tough love' theory of economic stimulation has been shown, ever since 1991, to be invalid as applied to the FSM." The only concrete recommendation that Nimea made other than for a mid-course adjustment of the terms of the Compact and a look at how to make the JEMCO a more effective body was to suggest a possible funding source for the Submarine Fiber Optic Cable for FSM.

He reminded the committee that the Investment Development Fund was established by the US Congress in 1986 as a fund to help start joint venture businesses between Micronesian and American firms. He said that the fund currently has an unappropriated balance of $40 million and that the money if used for the fiber optic cable would be "one of the most intelligent investments the United States could make in opening up real economic development in the FSM, not to mention the equally valuable social service benefits in the sectors of health and education. Importantly, this resource is not dependent on fossil fuel, weather, or transportation. We in the FSM desperately need a source of revenue that meets those criteria."

As a final point Nimea told the subcommittee that the latest quarterly earnings statement for the FSM Trust Fund showed that it had lost 6% of its value and is now down from $139 million to $131 million. He said that factor was yet another of the many challenges that the FSM faces, an "unpredictable force in trying to reach the goal of significant self-reliance by 2023."

In conclusion he said, "There is no single easy answer, and I do not pretend to propose one here, but I sincerely hope that during the coming year our discussion can proceed in an atmosphere where all are taking into consideration the essential realities of the equation." Bussanich's statement was very specific on what the shortcomings and accomplishments of Compact implementation have been. He was also quick to point out that the current administration "under President Manny Mori is addressing crucial matters-the slow pace of infrastructure growth, performance assessment, economic reform, and improvements to conditions in Chuuk-with new energy and focus."

He said that the goals of the Compact are to assist the government of the FSM to promote the economic advancement and budgetary self-reliance of its people. He said that it was never intended to underwrite the entire FSM economy. It was intended to be an economic springboard and to a lesser extent a safety net for the FSM.

He said that in the last five years, the FSM has far too often taken refuge in the safety net. "The result," he said "is lost time, lost opportunities, a declining economy and a continuing over-reliance on public sector employment." Bussanich said that FSM governments often have not complied with the agreements of the Compact and that lack of compliance has been especially visible in four areas: in providing coherent and accurate budgets, in performance and economic reporting, in organizing to implement the infrastructure grant program, and in adhering to the purposes of the following sector grants: Public Sector Capacity Building, Environment, and Private Sector Development.

Bussanich said that for economic progress the FSM must initiate substantial reform of its tax and fiscal policy, the public sector and public sector enterprises, land titling and foreign investment. He said that the FSM lacks expertise in economic planning for growth and yet it does not seek to allocate the funding that has been established for that purpose. "It seeks instead to find ways to maintain public sector payrolls as an apparent first priority."

Director Nimea, in his statement said that he is moving as fast as possible to identify and hire highly qualified economists and statisticians. Bussanich continued his statement saying that the FSM has been very slow in accepting a process based approach for 1) infrastructure project selection, 2) development and adherence to recognized professional construction and safety standards, and 3) project implementation. He said that the FSM prefers to award funds on a formulaic basis among the four states of the FSM and pointed to the obstacle of access to public land particularly in Chuuk where, he said, almost every school needs to be replaced. Having listed some of the problems of the FSM in implementing the Compact agreement

Bussanich said that OIA is encouraged at the progress that has been made in recent months with regard to infrastructure projects. He said that the current administration is actively engaged in addressing the problems.

He had particularly high words of praise for the actions already undertaken by the Department of Education under its new Secretary Mr. Cassiano Shoniber. He listed a good number of positive steps that have recently taken place in that department to help the FSM to move forward in the area of education.

"Despite the challenges facing the FSM, the lack of quality performance data, and the generally poor condition of the schools throughout the country, FSM education systems are taking small steps to serve the country better." Bussanich also said that OIA is encouraged at the overall improvement of the effectiveness of the use of Health Sector funds. There is still a distance to go in this area in that "the health sector is still challenged in financial and human resources in almost all areas" but there have been good accomplishments over the past five years.

Bussanich said that the FSM economy depends on public sector spending of foreign assistance. He said that Government expenditures, two-thirds of which are funded by external grants, account for more than half of the FSM's gross domestic product. He said that even fisheries and tourism, the two private sector industries identified as having growth potential face significant barriers to expansion because of the FSM's remote geographic location, inadequate infrastructure, and poor business environment.

A recent evaluation conducted by the World Bank designed to measure the ease of doing business in 32 Pacific island nations ranked the FSM and Timor Leste number 31, tied for last place in the Pacific.

Before summing up his statement, Acting Director Bussanich said that the Trust Fund Committee is investigating possible "securitization" of future contributions to the Trust Fund with the objective of increasing the 2023 value of the fund assets. He said that securitization would permit the Trust Fund to invest with a longer time horizon by bringing forward the United States contributions scheduled for later years but at a cost. The Committee is analyzing the potential benefits and risks of such a move. Bussanich said that if the plan is deemed advantageous, a change in the Compact law would be necessary before it could be utilized.

The JEMCO will meet in Washington in late August to allocate fiscal year 2009 grant funds and to further discuss the progress in the FSM.