The relationship of Pacific Islands with the U.S. has always been governed by the strategic importance of the islands.
After World War II, and after the years of the Trust Territory, the islands emerged as specific entities with a focus on developing their economies. In some cases, there was independence and in others a different political status, but all the islands retained strong relationships with the U.S., to include fiscal ones.
Most recently and against a background of geopolitical tensions, the U.S. has again recognized the strategic importance of the islands, particularly as the Compacts of Free Association and other agreements and relationships are in negotiation.
By Maureen N. Maratita, Oyaol Ngirairikl and Isaiah John Aguon
The Federated States of Micronesia
President David W. Panuelo brought to the presidency experience as a diplomat after college in the U.S., seven years in the private sector establishing businesses and a non-profit and began his political career in Congress in 2011.
He was first interviewed by the Journal (sister publication to Guam Business Magazine) on Sept. 5, 2019, during a visit to Guam and about four months after he assumed office on May 11 that year.
He told the Journal, “My administration is going to have a very aggressive foreign policy. That means we’re going to engage our partners and really work with them to help with our economic development.”
Aside from the FSM’s Compact Fund, the country has its own (sovereign) FSM Trust Fund, which stood at more than $260 million at the time, and the president had already invited development partners to contribute to it, he said.
The FSM receives millions in funding from each of its development partners: the U.S. through the Compact of Free Association, from Japan’s government and frequently the Japan International Cooperation Agency, from Taiwan and from the World Bank.
The People’s Republic of China became the largest donor to the Pacific region in 2018, according to the magazine’s files, and in 2019 was making significant donations to the FSM. Infrastructure projects funded by the PRC included the gymnasium at the College of Micronesia-FSM, the Chuuk State Government Complex, and roads and bridges in Pohnpei’s municipalities of Madolenihmw and Nett. A convention center was also due to be built, and on Aug. 2, the FSM had also received a $2 million PRC donation to the FSM Trust Fund.
Panuelo said the relationship with the U.S. was “first and foremost.” U.S. funding had in at least one year supported 48% of national and state government expenditures. But, he said, while U.S. funding for infrastructure was backlogged (at about $200 million in 2019), “China is coming in.”
In December 2019, Panuelo made a two-day state visit to Beijing, and his office detailed the “great friendship” discussed with President Xi Jinping. A Dec. 14 release detailed “various signed agreements and/or exchange of letters on economic and technical cooperation, which include a visa waiver for diplomats and government officials,” as well as details of upcoming projects the PRC would fund.
In May 2021, the FSM received a $16 million grant from the PRC, which Panuelo’s office emphasized came with “no political conditions or strings attached.”
On the 100th anniversary of the Communist Party of China in July that year, Panuelo spoke to the people of the FSM, reiterated support for the “One China policy, and reaffirmed the FSM’s “commitment to the Belt and Road initiative,” also offering support to help ensure that the 21st Century Maritime Silk Road adds value and increases the prosperity of citizens across the Blue Pacific Continent.”
Panuelo also acknowledged a continuing partnership with the U.S.
In March 2022, he wrote to the prime minister of the Solomon Islands urging him not to proceed with a security agreement with the PRC. In May 2022, Panuelo wrote to Pacific Island leaders throughout the Pacific — to include the leadership of Guam, Hawaii, and the Pacific Islands Forum about the China-Pacific Island Countries Common Development Vision.
“The China-Pacific Island Countries Common Development Vision seeks to fundamentally alter what used to be bilateral relations with China into multilateral relations, which it accomplishes by referring to all of the Pacific countries with diplomatic relations with China as “one side” while, in the same breath, describing how every country is equal, regardless of size. ‘The Common Development Vision then seeks to ensure Chinese control of “traditional and non- traditional security” of our islands, including through law enforcement training, supplying, and joint enforcement efforts, which can be used for the protection of Chinese assets and citizens. It suggests “cooperation on network governance and cybersecurity” and “equal emphasis on development and security.” and that there shall be “economic development and protection of national security and public interests,” Panuelo wrote.
He called the plan a “smokescreen for a larger agenda.”
Meanwhile other partnerships proceeded.
In August 2022, as the FSM states re-opened after COVID had entered the country, three consulting teams from the World Bank visited the country, to discuss assessment and design of its $35 million Strategic Climate-Oriented Road Enhancement program or SCORE, designed to cover 12 miles of secondary roads in the FSM, discarded vehicles, and a materials testing laboratory to improve the quality of road construction works. SCORE complements the FSM Priority Road Improvements & Management Enhancements or PRIME Project, which focuses on primary and/or arterial roads and bridges. The two projects are part of Panuelo’s Pave the Nation initiative and combine for about $75,250,000 of World Bank funding roads in the FSM.
The same month, the FSM’s negotiating team was holding talks on the Compact of Free Association with the U.S. team, which included Special Presidential Envoy Ambassador Joseph Yun and the Assistant Secretary of the Office of Insular Affairs at the U.S. Department of the Interior Carmen Carmen G. Cantor.
Panuelo had talked to the Journal in 2019 about his wish list for the Compact — and supported a plan to restore Medicaid to FAS citizens, he said. Real IDs were approved for FAS citizens in September 2019, and in December 2020 access to Medicaid benefits was restored.
The Compact Agreements come with other baggage — how much the FAS citizens cost Guam, Hawaii and Arkansas in terms of social services and benefits, and what FAS citizens receive. Healthcare for U.S. military veterans in Micronesia is an issue where much has been promised through the years, but little delivered.
On Jan. 13 this year, Panuelo gave his last State of the Nation Address. Outside of Compact funding, he said the FSM, had received during his administration $747.07 million in foreign support — the most it had ever received.
The Compact discussions were initially supposed to be confidential, particularly on the amount of aid, but hints and references began to surface, and island leaders began to talk more freely, even as the Office of Insular Affairs shared no details.
In any event, the fiscal 2024 budget of President Joseph R. Biden, released by the White House on March 9, confirms the $7.1 billion for the Compacts and the reasoning behind the amount, which it says were to “out-compete China.”
In addition, the budget allocates more than $2.3 billion for the Department of State and the U.S. Agency for International Development (US AID) in support of the Indo-Pacific and “our partners in the region.”
The U.S. Embassy in Pohnpei already has its first-ever US AID office and a representative, who arrived in June 2021, according to Journal files.
See “Military maneuvers,” in this coverage for further Biden budget information.
As to the FSM’s share of the $7.1 billion — assuming Congress gives approval — Panuelo had already shared with his nation on Feb. 11 that the FSM had signed a Memorandum of Understanding with the U.S. on its Compact, and what the country could expect.
“During our new Compact period from 2024 to 2044 the FSM will receive on an annual basis $140 million per year in sector grants,” he said.
Previously, the FSM had received about $80 million a year in grants.
The funding will go to health, education and infrastructure projects — the focus of Compact spending in all three FAS countries. Panuelo said the funding will include “pay level rises for teachers and doctors.” The FSM will receive $2.8 billion during the 20 years, he said.
Panuelo also shared the value of the Compact Trust Fund at $1.1 billion. In the first two years of the new Compact, the U.S. will inject $500 million into that fund. The FSM government anticipates the Compact Trust Fund will conservatively reach more than $4 billion by 2024, he said. “At that point, we will not necessarily need sector grant money from the United States,” he said.
Panuelo also discussed federal programs and services, like Pell grants for its students and National Oceanic and Atmospheric Administration services, and among the most valued services — the U.S. Postal Service, which in the fiscal 2024 Biden budget is allocated $634 million for its mail service to the three countries.
“Only a few items remain for negotiation with the United States,” he said.
The FSM election was held March 7, and Panuelo was not re-elected to Congress.
On March 9, Panuelo wrote an extraordinary 13-page letter to governors and speakers of the FSM, detailing his experiences and concerns with the PRC. The letter was reported on by the Diplomat. The Journal also received the letter.
Panuelo writes that China will be prepared to invade Taiwan by 2027, and is “seeking to ensure that, in the event of a war in our Blue Pacific continent between themselves and Taiwan, that the FSM is at best aligned with the PRC (China) instead of the United States, and at its worst, that the FSM chooses to ‘abstain’ altogether.”
Panuelo advocates relations with Taiwan, and met with Taiwan’s Foreign Minister, Joseph Wu. “I was transparent with foreign minister Wu; we project we need an injection of approximately $50m to meet our future needs. We can and will receive this, over a three-year period, if and when we establish diplomatic relations with Taiwan.” Panuelo said the FSM would also receive an annual $15m “assistance package” to be spent at its discretion.
Referring to the spy balloons, Panuelo writes “… research vessels in our ocean territory are likewise disguised to hide espionage. We are aware of PRC activity in our Exclusive Economic Zone whose purpose includes mapping our maritime territory for potential resources, and mapping our territory for submarine travel paths. We are aware of PRC activity in our Exclusive Economic Zone whose purpose includes communicating with other PRC assets so as to help ensure that, in the event a missile — or group of missiles — ever needed to land a strike on the U.S. Territory of Guam that they would be successful in doing so.” FSM patrol boats that checked on such activity were sent a warning by the PRC to stay away, he wrote.
The president talks of bribery of FSM officials, being followed and threatened and danger to his life and that of his family and more. The letter’s contents will have serious ramifications not only within the FSM, but in the region.
Palau is set to receive more than $800 million in the next Compact Agreement.
President Surangel S. Whipps Jr. says, “It’s not what we wanted but we understand that we have to work together. There are other programs that are equally important,” he says. “That’s why the federal programs — which are part of the discussion now — FEMA (the Federal Emergency Management Agency), the post office … and we know the post office will continue … these are important programs so that we have access to economic security, economic resiliencies.”
Palau has made upgrades to the Roman Tmetuchl International Airport for years, according to the Marianas Business Journal files — the sister publication to Guam Business Magazine. A joint venture agreement with Sojitz Corp., the Japan Airport Terminal Co., Ltd. and the Japan Overseas Infrastructure Investment Corp. for Transport & Urban Development to extended and renovated the terminal at the airport, according to Journal files. The $27.8 million expansion was funded by the Japan International Cooperation Agency and a groundbreaking was held on April 14, 2019.
The airport is part of Compact discussions on infrastructure, Whipps says. “We need to expand our runway.”
He understands that Palau and the U.S. have to come up with an agreement to move forward on, he says, but while the Compact is acceptable, “We still have a long way to go,” he says. “We hope that … these issues will be resolved soon.” Pacific leaders expect Biden to come to the Pacific, they have said. Whipps says of the Compact, “We have an agreement that we hope to be signing with Biden by the end of April that will be comprehensive on those other issues. We’re still in discussion.” Biden hosted Pacific island leaders in Washington D.C. in September 2022.
Whipps has talked to a variety of representatives to include the U.S. military about his country and has frequently said he would welcome not only more infrastructure development, but military tourism, according to Journal files.
“Climate has been an ongoing discussion,” he says. We already suffered the consequences — we live it every day from our jellyfish disappearing to typhoons more frequent to taro crops being flooded because of sea level rise and loss of our coastline. That’s a constant threat.”
The Belau National Hospital in Koror, built in 1991 and low lying is in discussion as part of the Compact discussions. “Our hospital is a big one,” Whipps says and hopes it will warrant serious consideration “of how to relocate the hospital to higher ground.”
The Compact gave Palau an opportunity to raise climate change, he says. “These are all issues that in our negotiations with the United States on the Compact we’ve brought to the table.
“That’s one of the main four parts of the Compact we’re asking — that FEMA must be part of the conversation. That is Palau’s way to combat climate change because as a small island we can easily get wiped out. We’re very vulnerable.”
Palau was hit by Typhoon Typhoon Haiyan on Nov. 6, 2013 and suffered damages estimated at $5.95 million, according to Journal files. This included damages to the Ministry of Education, to the Palau Public Utilities Corp., to the Ministry of Health, to agriculture, to the Bureau of Public Works and $1.8 million in damages to Kayangel State and $2 million in damages to residential homes from Ngarchelong to Koror.
Typhoon Surigae hit Palau on April 16, 2021, and swept through the country, leaving many people with damaged houses and without electricity and power. Typhoon Surigae’s damage to infrastructure and public utilities reached an estimated $4.8 million, and wreaked havoc across the sectors of health, infrastructure, education, food security, community, residential dwellings, communications, and utilities, according to Journal files.
Whipps recognized that previously Guam and the Northern Mariana Islands were firmly in “typhoon alley,” and frequently saw typhoons.
“Now that it’s moved further South, programs like FEMA are critical for security.”
For the bigger picture, he says, “Economic stability — economic security is very important. But when you have these kinds of events, that takes all that away.”
Additionally, due to COVID he says, “Any progress that you make economically just gets wiped out.”
Palau has introduced a goods and service tax, and while the tax is part of Palau’s tax reform, its revenue will also go towards repayment of the $25 million Asian Development Bank loans the country received in 2021 to assist with a variety of aims that included public sector policy and finance development and private sector development, according to Journal files. Whipps says the new system — which did away with gross receipts tax, is more equitable and easier to enforce.
Palauans and Whipps have encouraged and welcomed a military presence in the country.
Aside from U.S. military assets, that has included Palau being a site for part of various military training exercises such the annual Koa Moana, and Cope North in the region in February and March. There is also the longtime presence of the Civic Action Team Palau at Camp Katuu in Airai. The team from the 36th Civil Engineering Squadron focuses on community construction projects, community relation projects and an apprenticeship program, among other aims.
Whipps says current regional geopolitical tensions are important, to include threats to Taiwan.
“I think it’s a big concern to Palau.” Before there was really no defense apparatus in Palau, he says. “Bringing the radar sites to Palau now makes Palau a target.”
Palauans lived through World War II. “People don’t want to repeat that again,” he says. “But we understand the importance of deterrence. We understand the importance of a presence and so I think in Palau we want to make sure that we’re secure because if we’re prepared, that will keep us safe.”
During Valiant Shield in June 2022 Patriot missile systems were fired for the first time in Palau as part of the military exercise. Whipps says, “We want them stationed in Palau. Why did we have to bring them in by plane?”
Due to being part of the homeland being secure, with attention to the Pacific, Whipps says, “We need to make sure that we have the right protection here with the increased risk drawn by the U.S. military.” In the promotion of democracy and a free and open Indo-Pacific, he says, “We appreciate what Australia is doing, what Japan is doing, what Taiwan is doing in making sure that their readiness and capabilities are deterring any threats that are there.”
As to the relevance and trickle down of economic progress to the country’s citizens, Whipps says the level of minimum wage is important so that people can “take care of their families.” It’s important to build a diversified economy, he says.
A U.S. military presence benefits local people and the economy, he says.
“One of the things we’re a bit disturbed about is the Status of Forces Agreement,” he says. Aside from governing the status of the relationship with the U.S., he says the agreement negates the taxes of any contractor doing military work in Palau. “It’s an unfortunate situation,” he says. “Then we’re not contributing to the development of the local economy.”
Subjects such as this will have to be worked through, he says, so that military presence in Palau is positive. In addition, Whipps says, during one of his first visits with Adm. John Aquilino, commander of the U.S. Indo-Pacific Command; the president suggested more port visits to Palau. “… and stay a few days,” Whipps says he told Aquilino, “It is very helpful to the economy.” While Palau does get a limited number of small luxury cruise ships, military port visits would be “very welcome to come,” he says.
“We do want to see improvement in our port structure, so that we can accommodate them,” he says.
As to tourism, visitor numbers are slowly increasing, and Taiwan flights have returned since November with two flights a week. The president says there’s a desire from the Hong Kong and Macao markets to begin flying to Palau again, with two companies visiting the country to discuss potential. “We need tourism,” he says. “But we also want to diversify our market. We want to bring in tourists from other places.”
An Air Niugini weekly flight from Brisbane via Port Moresby to Palau began Feb. 28. “That hopefully will increase tourism from the South [Pacific],” he says. Whipps also hopes for flights from Singapore. “We really want to get flights going again from Korea and from Japan — direct flights to Palau.”
One positive is that IHG Hotels & Resorts has signed a management agreement with Palau Coral Club, to open Hotel Indigo Palau in the fourth quarter 2024 or the first quarter 2025. Palau Coral Club’s largest shareholder is Takao Yasuda, founder of Pan Pacific International Holdings Ltd., which has its headquarters in Japan. The company was formerly known as Don Quijote Holdings Co. Ltd. and changed its name to Pan Pacific International Holdings Corp. in February 2019. “It’s 200 rooms and nice for Palau to provide more accommodation,” Whipps says.
Climate change has its own momentum and remains important to Palau. “The ocean is a critical part of the climate, Whipps says. “If you protect the oceans, you probably solve the climate problem.”
Whipps spoke of climate change and its effect on Palau at the United Nations on Sept. 22, 2021.
The leaders of Palau, Kiribati, Nauru, the Federated States of Micronesia, and the Marshall Islands were in Pohnpei in February for the Micronesian Presidents’ Summit retreat. Whipps again raised the country’s desire to host the Office of the Pacific Ocean Commissioner, part of the Suva agreement. That is proceeding, he said.
“We’re excited to be hosting the office of the Pacific Ocean Commissioner,” he said. The office is due to open in Koror in May.
“We’ll continue to push that agenda and get the world’s understanding of the importance of protecting our ocean,” he says.
Palau also hosted in mid-March members of the Council of Regional Organizations of the Pacific and and a European Union delegation from the Global Climate Change Alliance Plus Scaling up Pacific Adaptation project.
This is a four-and-a-half-year project (from 2019 to 2023, funded through the European Union’s flagship initiative, the Global Climate Change Alliance Plus (GCCA+) which assists the world’s most vulnerable countries to address climate change.
Guam’s role may be expanding from being the “tip of the spear” in the western Pacific to also becoming a hub for U.S. military operations in the region.
Valiant Shield 2022, and Cope North in February and March had exercises that extended from Guam, to Palau, to the Northern Mariana Islands, and the Federated States of Micronesia. In June 2022, as military personnel coordinated efforts for the first live fire exercise in Palau since World War II, counterparts in Guam were supporting them and had the ability to step in, if needed.
These exercises illustrate the U.S. Department of Defense’s focus on the Indo-Pacific region as part of a nationwide policy.
“This intensifying American focus is due in part to the fact that the Indo-Pacific faces mounting challenges, particularly from the PRC. The PRC is combining its economic, diplomatic, military, and technological might as it pursues a sphere of influence in the Indo-Pacific and seeks to become the world’s most influential power,” White House officials wrote in the 2021 Indo-Pacific Strategy to the Pacific. “The PRC’s coercion and aggression spans the globe, but it is most acute in the Indo-Pacific. From the economic coercion of Australia to the conflict along the Line of Actual Control with India to the growing pressure on Taiwan and bullying of neighbors in the East and South China Seas, our allies and partners in the region bear much of the cost of the PRC’s harmful behavior. In the process, the PRC is also undermining human rights and international law, including freedom of navigation, as well as other principles that have brought stability and prosperity to the Indo-Pacific.”
Guam sits south of the Northern Mariana Islands and is almost square center of the Micronesian region, with Palau as well as the Yap State of FSM to the west, and other FSM states to the east. It is 3,958 miles in air travel distance from Hawaii and 1,619 miles from Japan.
Of Guam’s 212 square miles, about one third is used by the U.S. military, one third by the government of Guam, and one third held in private hands.
Other than tourism, Guam’s economy relies on military spending and federal contracts for military construction (See Military Maneuvers on Page).
“Guam serves as the first line of defense for the United States in the Indo-Pacific, but first and foremost, we are an island of indigenous people with due respect and dignity,” Gov. Lourdes A. Leon Guerrero says.
“While we’ve supported the ongoing military buildup as much as the Government of Guam is capable of, we also have ensured responsible development that respects the land and heritage of the CHamoru people,” she says. “In January, we marked the reactivation of the United States Marine Corps on Guam with Marine Corps Base Camp Blaz. In my remarks, I said, ‘We worked with our military partners. We ensured everyone respects regional sensitivities and international security agreements, and with a recognition that the long-term goal must achieve sustainable peace for all.’”
The governor says this encapsulates the role Guam has risen to “and the role we’ll continue to honor as we fortify national security and the safety of the people of Guam.”
Contractors have long been focused on the amount of money that will pour into the Pacific region.
What began in 2006 as an agreement to move $8,000 U.S. Marine Corps personnel from Okinawa to Guam, now involves moving Marines to other locations that include Hawaii and Australia. The Marines now have a base at Marine Corps Base Camp Blaz in Dededo, although that is not complete.
President Joseph R. Biden’s fiscal 2024 budget also allocates funds for additional military construction in Guam, Palau, the NMI and the FSM via the Department of Defense’s 2024 $9.1 billion Pacific Deterrence Initiative.
That “$9.1 billion of targeted investments the Department is making to U.S. force posture, infrastructure, presence, and readiness as well as efforts to bolster the capacity and capabilities of U.S. allies and partners in the Indo-Pacific region, primarily west of the International Date Line,” the White House says in details accompanying the budget.
In 2022, Catherine S. Castro, president of the Guam Chamber of Commerce, told senators of the 36th Guam Legislature that continued investment from the Department of Defense will increase revenues to the government of Guam, according to magazine files.
Section 30 funding (military and federal employee tax monies that go to the Government of Guam) in September 2021 was $76.1 million, she said. In addition, Castro said no one has been better stewards of the environment than the military, according to magazine files.
Joint Region Marianas has 9,500 uniformed personnel assigned as of 2022, with 15,000 family members and expects 15,000 uniformed personnel by 2027, with 25,000 family members.
The U.S. Air Force on Guam has seen an increase in active-duty members, rising from 1,752 in 2000 to 2,060 in 2020. When fully deployed, a little under 2,000 U.S. Marines will be permanently stationed in Guam with about 3,200 “unit deployables” rotated in and out of Guam, the magazine reported.
George Chiu, executive vice president of Tan Holdings and president of the Chinese Chamber of Commerce Guam, said in 2022 also that many members saw their businesses accomplish “a significant increase in growth, despite the pandemic,” because of projects dealing directly and even indirectly with the U.S. military.
A federal project completed in recent years was the Route 3 widening project, an estimated cost of $60 million, which was funded by the U.S. Department of Defense. A ribbon cutting ceremony took place in March 2021, celebrating the completion of the project, which started in February 2018 and finished in July 2020. This widened and improved the Route 1 and Route 3 intersection as part of Guam’s military buildup, expanding its highways.
The plan is to relocate 5,000 Marines including their families to Guam from Okinawa. This is to occur within the next ten years, according to magazine files, although small numbers of personnel may arrive before then.
Rte. 3 is now seen as one of the hottest economic zones in Guam with new businesses either recently constructed or with construction plans being prepared.
That military spending, as Chiu noted, along with about $2 billion in COVID-19 funds from the federal government, were lifeboats for Guam’s COVID-19-decimated economy.
Guam’s tourism industry, the industry the island’s economy heavily relies on, took a hit. Tumon, the tourist district of Guam, was silent with no visitors patronizing the village. For fiscal 2018, tourism arrivals were at 1.52 million five years ago and rose to a height of 1.6 million before the pandemic.
As of February 2023, preliminary tourist arrivals were outperforming initial projections by 21%, signaling a more robust recovery this year, according to the Guam Visitors Bureau, but still nothing like numbers prior to the pandemic. Guam had 230,824 visitor arrivals from October 2022 (the start of fiscal 2023) to February 2023. GVB had projected tourist arrivals of 191,151.
“It is difficult to determine what arrivals would look like in the next five years,” says Leon Guerrero. “But GVB anticipates a recovery to pre-pandemic levels — approximately 1.5 to 1.6 million — around 2025.”
She highlights the importance of tourist spending, which was a primary engine of the island’s economy before COVID-19 struck.
“During Guam’s peak year in tourism and, before the pandemic, the direct travel demand in Guam of $1.9 billion generated a total economic impact [total business sales] of $2.4 billion on the island,” Leon Guerrero said. “This substantially supported many local businesses and improved workforce wages. In Guam’s best year, tourism supported 23,100 jobs and generated $253 million in tax revenues in 2019.”
Today, GVB is working on tourism recovery efforts to better support Guam’s economy, she says.
“GVB’s Research and Strategic Planning Division is currently working with village mayors to develop the ‘One Village One Attraction’ master plan. By leveraging $20 million in federal funds, the bureau will develop an immersive destination environment that encourages the preservation of the CHamoru culture through education, technology, entertainment and activities. This plan will provide further integration within the 19 villages of Guam by establishing unique experiences for both visitors and residents.”
Other upcoming destination development projects are returning.
“For too long, Guam has relied on military spending and tourism dollars as our main economic feeders, but the Leon Guerrero-Tenorio administration believes in a more diverse economic future,” Leon Guerrero says.
“The pandemic put extra emphasis on this, because, as we all saw, tourism is vulnerable in a state of emergency,” she says. “Military spending is inconsistent and restrictive. This is why we established the Economic Diversification Working Group to build new and strengthen existing industries on Guam.”
The world’s top performing economies are incredibly diverse, Leon Guerrero says. “From the United States to China, their strong revenue streams are made up of a variety of industries, so that even if one area experiences a weak year — another may have a good year and make up the difference — if not exceed overall economic projections,” she says.
The Northern Mariana Islands
“The party is over. It’s time to get to work.”
Those were the words of recently sworn-in Gov. Arnold I. Palacios during an interview with Guam Business Magazine in early March, as he raced between meetings with U.S. military and federal officials, and fellow elected officials as he and they look to revise the government’s operational budget halfway through the fiscal year.
Palacios previously served as the NMI’s lieutenant governor with Gov. Ralph DLG. Torres. About midway through their term, Palacios questioned some of the decisions being made, he says. In 2021, he publicly launched his gubernatorial run with then-Mayor David M. Apatang.
The governor doesn’t mince words as he describes the challenges the government and the people of the Northern Mariana Islands face. He says the people of the Northern Marianas understand the only way to get through this is through unity and transparency “by being truthful to ourselves and our people about our challenges.
“We’re looking for the solutions and we have to give hope to our people that we can do this,” he says. “There are alternatives, solutions, roadmaps to recovery, for the most part people are understanding.”
In February, he testified before the U.S. Senate Committee on Energy and Natural Resources, outlining the NMI’s various struggles. “We are grappling with crises on multiple fronts: a government in fiscal disarray; an economy still struggling from the impacts of COVID-19 and several unprecedented typhoon disasters that preceded the pandemic; an unstable environment for businesses and workers; dilapidated infrastructure and systems that are woefully underprepared for the climate crisis; and a shrinking population as citizens leave our islands for greener pastures. Against this backdrop of vulnerabilities are the geopolitical challenges presented by China in our islands and in the region,” he said.
The NMI also has its own construction underway for post-typhoons recovery, and similar funding as other areas as part of the Biden administration’s allocations for telecom upgrades and infrastructure, for example. (See “LIHTC housing program to produce more residential construction in NMI”, and “NMHC rolls out $254M housing and infrastructure programs” on mbjguam.com)
Palacios says there’s a few solutions his administration is looking at, but it starts with a plan.
“The unfortunate part is we haven’t had an economic plan. One of my immediate quests is to (create) a well-defined economic plan … to move us forward,” Palacios says.
He says his team is working on ways to “pivot and reset and reinvigorate” the NMI’s primary industry – tourism, which was decimated by the one-two punch of a series of supertyphoons followed by the COVID-19 pandemic.
“We had a significant share of tourists from Korea and China and so that’s going to be a challenge,” he says. “How do we pivot out of the China market and expand the Korea market and even reinvigorate Japan and other markets?”
He says the NMI is being forced to consider new tourism models.
“The problem with that is we never really taken a look at this industry and to what extent we’ve been expanded to and what is the level of tourism we want,” he says. “We had to research … what is the capacity to accommodate tourism to the extent (where) we don’t jeopardize the beauty of Saipan. We just have to make sure we’re not over-touristed … so we don’t degrade the quality of our lives.”
Palacios says current studies suggests 400,000 to 500,000 tourists a year may be the range that allows the Marianas to capitalize on tourism visits while also “protecting what makes our islands beautiful for our people and our visitors.”
Visitor arrivals had dropped every year between fiscal years 2017 and 2021 – from 653,150 in fiscal year 2017 to 5,365 in fiscal year 2021. Super Typhoon Yutu in 2018 devastated homes, businesses, and infrastructure, including to the Francisco C. Ada International Airport in Saipan, according to Marianas Business Journal files, the sister publication to Guam Business Magazine.
The U.S. Department of Commerce’s Bureau of Economic Analysis reported CNMI’s inflation–adjusted Gross Domestic Product fell by 19.3% in 2018 and another 11.2% in 2019 with sharp declines in tourist spending, casino gambling revenue, and private fixed investment. Revenues from casino gambling dropped over 80% in 2019, according to the BEA.
The Imperial Pacific International casino in Saipan temporarily closed in March 2020 due to the adverse impact of COVID-19. The Commonwealth Casino Commission also suspended the casino’s gaming license in April 2020 due to the casino licensee’s failure to pay the casino regulatory fee and annual casino license fee, among other things. Much of the Saipan casino’s property was auctioned off, according to Journal files and attempts have been made by IPI to find a partner.
COVID-19 further decimated tourism. Travel from Asia declined significantly beginning in January 2020. Visitor arrivals declined about 85% in March 2020 compared to March 2019.
Palacios says infrastructure in Saipan needs to be improved to support tourism and other industries his administration is hoping to either attract or create.
“We haven’t been taking care of that, so we have to work very, very hard … if we take care of our infrastructure then investments can come,” he says, noting that when potential business investors visit among their first questions is whether areas of interest have power, water and other utilities.”
The governor says he is looking at expanding tourism to include educational visits. But his administration is also looking at what it would take to turn the NMI into a financial or a shipping hub.
Other questions, he says, include to what extent the NMI can rely on a military-fueled economy.
“We were actually in meetings this morning [March 10] with Indo-Pacific (military officials) and folks from Washington D.C. and Joint Region Marianas,” he says. His office is carefully looking at ongoing projects in Tinian and the rest of the NMI, he says.
His vision of military growth in the NMI, encompasses ensuring it’s “mutually beneficial while at the same time being good U.S. citizens,” and doing their part to support the nation’s and the region’s peace and stability, he says.
Protests and input led local and military leaders to negotiate a scaled down version of the 2015 Joint Military Training Plans, which initially included a bombing range in the northern island of Pagan and a high caliber firing range in Tinian. Local residents were concerned about the impact to the regions environment and culture.
“We’re also facing geopolitical issues,” Palacios says, noting the rising tensions and the roles that Guam, the NMI and other islands in the region have to play.
In May 2019, the Northern Mariana Islands government and the U.S. Department of Defense signed a $21.9 million 40-year lease agreement for the construction of a divert airfield in Tinian, according to Guam Business Magazine files. (See “Military maneuvers” in this issue)
A groundbreaking was held Nov. 10 for the Garapan Revitalization Project, which is funded by an $11.2 million grant from the U.S. Economic Development Administration, according to files. (See “Saipan casino update, franchise sold, Pacific aid, and more” on mbjguam.com)
Other programs also aim to boost small businesses in the NMI. The U.S. Small Business Administration awarded the Northern Mariana Islands Small Business Development Center at the Northern Marianas College a $952,394 grant to support its small business incubator program, according to Journal files. Officials said the funds are intended to provide existing and aspiring business owners rental space and other resources they need to start new ventures and create jobs in the Marianas.
The possible funding from military construction and potential expansion of tourism markets are a consideration as the NMI looks to the future but as of now, Palacios is worried about the current year’s budget.
In early March, he submitted a revised budget bill to NMI lawmakers, marking real concerns with the ability to meet obligations, including payroll.
“In total, the Commonwealth received $481.8 million, pursuant to Section 602 of the American Rescue Plan Act. These funds were intended to aid the Commonwealth in our response and recovery efforts to mitigate the impacts of the COVID-19 pandemic, including shortfalls in the General Fund for government operations,” Palacios says in his transmittal letter.
“These ARPA funds should have been sufficient to cover expenditures for three more years, through 2026. My Fiscal Response Team, however, have determined that the Commonwealth’s ARPA were overspent and overcommitted within 18 months of receipt.”
Based on the current budget law, the funds were expected to cover salaries for 500 full-time employees, 20% of personnel costs for other government employees, and 100% of non-personnel operations costs at fiscal 2022 appropriation levels of all three branches of government.
Palacios says his administration has been able to find revenue sources to mitigate salaries. so instead of reducing pay-period hours to 64, as originally expected, the reduction will now be to 72 hours.
Other budget changes will include Community Disaster Loans, which were to cover $7.2 million for the Medicaid Program and $13 million for 25% of retiree pensions. These obligations, he says, will have to be covered by NMI local revenues, as well as reimbursements owed by the federal government.
“Achieving fiscal stability and recovery will require the collective efforts of all branches of the government, as well as the support of our community,” he writes in the letter. “Lt. Gov. Apatang and I are committed to maintaining open and transparent communications with the Legislature and the people we serve, as we work together to right our ship of state and place the commonwealth on the path to fiscal sustainability.”
The Marshall Islands
The Marshalls stands to gain $2.3 billion of the $7.1 billion of the Compact of Free Association money in President Joseph R. Biden’s fiscal 2024 budget.
According to the sister publication to Guam Business Magazine — the Marianas Business Journal, Marshall Islands leaders have said the talks cannot be limited to financial provisions and must address the lingering U.S. nuclear weapons test legacy, issues related to the U.S. government’s missile testing range at Kwajalein, and climate problems. A wide range of Republican and Democratic congressional leaders called on the Biden administration to address the nuclear legacy to ensure smooth relations with the Marshall Islands, the paper says.
Joseph “Jerry” Kramer is the president and CEO of Pacific International Inc., a group that he first established in the Marshall Islands in 1976 and which has multiple business interests in the Marshalls and elsewhere in Micronesia. Many of the businesses are run by executives who are also members of the immediate Kramer family. According to Journal files, PII is the largest private sector employer in the Marshalls after the base operator, and after the government of the Marshall islands.
Kramer is the acting chairman of the Aviation Task Force of the Marshall Islands.
He accepted a cabinet appointment to serve on the board of the Micronesian Center for Sustainable Transport, the initiative of the Marshall Islands and the University of the South Pacific that aims to achieve the transport emissions reduction targets set under the Paris Agreement. The initiative to establish the MCST was endorsed by the 15th Micronesian Presidents’ Summit in 2015, as well as by other bodies. In 2017 he was named the Czech Republic’s first honorary consul to the Marshall Islands. In addition to representing the Czech Republic in business and diplomatic activities, Kramer has the authority to issue temporary European Union passports for emergency situations, according to Journal files.
“The nuclear issue should not be avoided,” Kramer says. “I suggest an apology by President Biden.”
In the fiscal 2022 budget of the Marshalls, Compact grants and federal programs for education, health and other activities amounted to more than $100 million out of a $242 million budget, according to Journal files.
The U.S. government has backed other endeavors in the Marshalls through other entities. For example a major expansion of fisheries and aquaculture development projects for remote atolls in the Marshall Islands through a $2 million grant in 2015 from the U.S. Agency for International Development’s Pacific American Climate Fund. The grant was awarded to the community based nonprofit Namdrik Atoll Development Association and Aquaculture Technologies of the Marshall Islands to help island communities adapt to the negative impacts of climate change and improve their livelihoods. This was an initiative of the Rongelap Atoll Local Government in joint partnership with local and U.S. investors.
According to Journal files, Pacific-wide, only nine projects were funded in the first round of grants issued by US AID’s PACAM, and two of them went to marine-related projects in the Marshall Islands. US Aid’s relationship in the Micronesia will now become a more important one, according to the White House and along with Compact funding form part of the “ask” in the budget of $63.1 billion for the region.
The Ronald Reagan Ballistic Missile Defense Test Site is located at the U.S. Army Garrison-Kwajalein on Kwajalein, and houses about 1,500 Americans, comprised of military personnel, Department of Defense civilians and contractors, and about 1,000 Marshallese, according to Journal files.
The base plays a major role in U.S. missile defense work as a key field-testing facility for missile and anti-missile development. Radar, optics, telemetry, and communications equipment on eight islands provide instrumentation for ballistic missile and missile interceptor testing and space operations support, according to the U.S. Department of Defense.
The U.S. has used Kwajalein as a military installation since World War II. It was converted to a missile range in 1964 and islanders were relocated. The U.S. lease of Kwajalein extends to 2066 — with an option to 2086, beyond the Compact with the Marshalls. Renegotiation of the lease in 2003 brought a stalemate for years — according to Journal files, as the Kwajalein Negotiations Committee did not agree with $15 million annually agreed by the government of the Marshall Islands, but rather wanted $19 million according to its appraisal. A difference of $4 million annual land use rent went into an escrow account at the Bank of Guam until 2011, when the KNC conceded to the agreement.
An estimated 12,000 people — many of whom work on Kwajalein — live crowded on Ebeye’s 80 acres. The KNC had wanted better conditions on Ebeye as part of the negotiations.
The Asian Development Bank has studied water supply and sanitation on Ebeye as well as other infrastructure projects in Majuro.
Vectrus Systems Corp. manages Kwajalein base services through an Army Logistics Civil Augmentation Program, according to Journal files. A LOGCAP contract does not require competitive bidding.
From a business perspective, the range at Kwajalein provides opportunities for local businesses in the Marshall Islands, as well as employment for its citizens.
Kramer says Vectrus has been proactive since its management at Kwajalein. “There are more opportunities, and a more cooperative base support.” The arrangement could go further, Kamer says. “There are some rules that restrict certain RMI business involvement that could be considered to further increase opportunities.”
Students in the Marshall Islands can apply for federal PELL grants. As to how the U.S. might help the local population further, Kramer says, “Of course training and vocational education would benefit and be valuable for citizens through a range of ages – youth and older workers. The problem then is that most who receive the training will migrate to the U.S. for better wages and job opportunities.”
Issues that confront the Marshalls are various, Kramer says.
“The most pressing issue is an internal one: land ownership.
“Transportation — and [now] Asia Pacific Airlines — are two of the issues that encourage citizens to migrate,” he says.
“These high costs contribute to the reasons living in the U.S. is more attractive.”
Asia Pacific Airlines has been grounded by the Federal Aviation Administration due to the necessity of re-qualifying its pilots due to an issue of documentation. It is unlikely to return to serving the Marshalls — as well as Palau, the Federated States of Micronesia with cargo until April, according to its president (See the Marianas Business Journal for news on this developing story.) The magazine understands that as of deadline, a State of Emergency in the Marshall Islands may be declared.
Kramer says, “The currant APA situation — with RMI citizens completely helpless to rectify and with no transparency by the FAA is a major issue.”
In addition, he says, “The U.S. [Citizen and Immigration Services] restrictions for transiting Guam cut us off from Asian visitors. The restrictions even for transiting Guam for one hour requires a visa that can take weeks to secure.”
Given that, Kramer says, “Businesses in all the FAS are actively seeking alternatives to transiting Guam.”
Nauru Airlines currently flies to Pohnpei and then to Majuro weekly. The flight continues to Kiribati, Nauru and Brisbane.
The Marshalls has relationships with Australia, as well as Japan. Relationships with
the Pacific Island forum and membership of the Parties to the Nauru Agreement should be nurtured, he says.
After eight deliveries of skipjack tuna to Walmart in 2022, the first year of a new supply deal with the Majuro-based Pacific Island Tuna Provisions company, Walmart is looking to accelerate the volumes of fish being delivered for processing under the U.S. retail giant’s house tuna brand, Great Value. In addition, Walmart met in Majuro in mid-February with Parties to the Nauru Agreement officials. The PNA headquarters opened in Majuro on Feb. , bringing economic opportunity and potential jobs.
“There’s strength in numbers; our small countries don’t have the numbers,” Kramer says. “It helps to join and collaborate with other similar entities in the region. The U.S. fought the PNA. Outside of U.S. grants, the PNA has turned out to be the highest revenue earner for the RMI government and helped develop a sense of pride in that what in the past was considered a gift, was actually revenue from what is owned by the RMI,” he says.
“There is opportunity for economic and social development in the RM,” Kramer says. “It’s only with a vibrant economy can the RMI retain productive age people by their being able to live a comfortable lifestyle.”