Explainer: Why did the U.S. just give $87.3 million to Palau?

 

On 1 October, 2018, Palau celebrates its 24th Independence Day, with a welcome birthday gift of $87.3 million from the United States Department of Interior.

The $87.3 million represents a down payment of a larger economic assistance package of $123.9 million that was appropriated in the U.S. National Defense Authorization Act and the 2018 Omnibus Bill signed into law by President Trump. The funding is actually overdue and a relief for civil servants and elected officials from both Palau and the U.S. who have been working diligently to get the funding secured from the 2010 Compact Review Agreement (CRA).

What can it be used for?

According to a letter signed by U.S. Interior Secretary Ryan Zinke to Palau President Tommy Remengesau, $65.2 million will be paid to the Compact Trust Fund and provides $22.1 in additional economic assistance.

The total funds, $123.9 million, were provided as a lump sum to be allocated as determined by the 2010 Agreement. The terms originally specified in the CRA were for continuing current grant assistance, although at a declining level. Additional resources were provided to support the Compact Trust Fund, infrastructure maintenance and capital projects.

Zinke Letter
Source: Palau Government Facebook post.

While the creation of the Palau Compact Trust Fund has been an important feature of original Compact, it has led to its share of disputes in part due to its lower than expected rates of return. According to an economic review from the Graduate School:

“The CTF was intended to provide $5 million annually from FY1999 to FY2009 and then $15 million annually for government operations through the Compact’s 50th year in FY2044. However, these projections were based on the CTF’s achieving an annual return of 12.5 percent. As it turned out, the CTF achieved a 7.47 percent return through FY2009. This result was actually slightly better than the blended benchmark market rate of return of 7.32 percent over the same period; however, based on projections made at the end of FY2009 the CTF would have failed by FY2022, long before the Compact objective of providing level funding through all 50 years (FY2044).”

Palau has consistently referenced the “inflation adjustment factor” and has sought to have the remaining funds “front ended” so they can be invested to protect from inflation until zeroed out. Having funds in a money earning instrument able to be monitored by both governments provides for transparency and understanding. The money is intended to be subject to a withdrawal schedule under the agreement, but is not part of the documents released publicly at this stage.

Why Palau?

The U.S. and Palau have a special relationship via the Compact of Free Association. It is separate but similar to the Compact of Free Association with the Republic of the Marshall Islands and Federated States of Micronesia (with all three countries referred to as the ‘Freely Associated States’ or FAS). Essentially, the Compact provides for U.S. economic assistance (including eligibility for certain U.S. federal programs), defense of the FAS, and other benefits in exchange for certain operating rights, denial of access to the territory by other nations, and other agreements.

Importantly, flashpoints in the South China Sea and Korean Peninsula have helped revive U.S. policy attention and financial support for the Freely Associated States. In a statement, U.S. Interior Secretary Zinke said, “The U.S. Insular Areas are on the front lines of North Korean aggression and are an important part of the strategic defense for our nation. Authorizing full funding for the agreement is an important element of the Pacific national security strategy to maintain stability in the Western Pacific Region and we look forward to continuing our work with Congress to get this job done.”

Geopolitics over the last several years combined with a new administration have led to improved policy coordination and a whole-of-government approach to its bilateral relationships; U.S. Departments of Interior, State, Commerce, Health & Human Services, Education, Homeland Security, Energy, and others are working much more closely than in recent memory. This has been essential in moving forward interests of both the U.S. and Freely Associated States.

Timeline of the U.S. – Palau Compact

Untitled presentation

What’s next?

Although funding for the Compact Review Agreement was just reignited, it appears the term of the Agreement will still expire at the end of FY2024 and further funding thereafter will be provided from distributions from the Compact Trust Fund. Almost more important than direct financial assistance for Palau are the many federal programs and services Palau currently benefits from that are provided through annual Congressional appropriations. The range of programs included within the Compact include: Postal Services, FDIC, NOAA, Pell grants, FAA, education, health programs, and so forth which are subject to Congressional authorization.  

Palau is a large ocean state, made up of more than 21,000 people and hundreds of islands. Its most pressing issues are dealing with non-communicable diseases, infrastructure development (including for tourism), advocating for global climate action, and sustainable management of its maritime zone. These are all medium and long-term issues that require sustained budgeting and attention.

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Pacific Small Island States Unify for Climate Finance

While much of the world is still thinking about Brexit and its implications for their economy, Pacific island nations are racing against the rising waters as well as funding opportunities for climate resilience. As I’ve written previously, small island states must learn from each other in order to benefit from the complex world of climate finance. Leaders from the Pacific Islands Forum Smaller Islands States (SIS) [which includes Cook Islands, Kiribati, ‎Nauru, ‎Niue, ‎Palau, the Republic of the ‎Marshall Islands, and ‎Tuvalu] are heeding that call, having solidified avenues for closer cooperation as part of the Framework for Pacific Regionalism. While all the areas of collaboration are what one would expect in the Pacific, the coordination on climate change is the most important and essential. By working toward creating a joint proposal to organizations like the Green Climate Fund, SIS will be able to leverage internal expertise and build a robust platform for future climate financing applications.  

At a Special Meeting of the SIS on June 24, 2016 in Palau, leaders agreed to the SIS Regional Strategy to enable greater attention to unique vulnerabilities of the SIS. Host Palau President Tommy Remengesau has been one of the greatest advocates for SIS and Small Island Developing States (SIDS) in international fora. The new framework that SIS will operate under will complement existing policy advocacy with the technical component of climate finance. Additionally, the Pacific Islands Forum’s March 2016 accreditation to the Green Climate Fund as an observer presents an opportunity for internal knowledge creation.

Individual states have learned from the climate finance process as well and will be able to build off their experiences and share best practices. For example, Tuvalu was recently granted $36 million for its Tuvalu Coastal Adaptation Project; but it took more than one round of applications to succeed, because the country filed its technical specifications incorrectly. With the support of the Secretariat of the Pacific Regional Environmental Programme (SPREP) and the UN Development Programme, they were able to highlight the country’s vulnerability and correct technical aspects, creating a winning the application.

For the SIS group, the Cook Islands has also had an important success with the Green Climate Fund. In March 2016, the Cook Islands was the first Pacific country to receive readiness grant to help strengthen its National Designated Authority in order to work with the Green Climate Fund. The Cook Islands can use its experiences to inform SIS neighbors and others at the Pacific Islands Forum.

Finally, this move by Pacific states to work together on climate finance is important because governments have been urged to accelerate funding applications for the Green Climate Fund. This call is a signal that other countries have had difficulties with their applications outside of the Pacific and can benefit from shared best practices. It acknowledges the lack of a level playing field for smaller states that are constrained by physical and human capital.

Spending by Country

Source: http://www.climatefundsupdate.org/regions

With or without the benefit of large internationally-funded projects, Pacific states will continue to find ways to adapt to the changing climate and the threats being posed to their livelihoods. But it is in their best interest to continue to seek international funding, when everyone else is doing it. The amount of approved project spending in East Asia and the Pacific shows Indonesia, China and the Philippines have been the largest recipients of climate financing. Importantly for smaller countries, regional mechanisms do exist such as through the SPREP. Yet it will be the job of individual leaders to form not only greater unity around policy advocacy for climate change but also to ensure the relevant departments collaborate effectively on the bureaucratic and technical aspects of the finance application process.

Leading at the Margins: Palau’s Role in the 2014 Pacific Island Forum

This year states are being asked to take action on sustainable energy projects “irrespective of political status.” As host of this year’s 45th Pacific Islands Forum from July 29 to August 1, leaders of the Republic of Palau are doing their part to call global attention to the plight of Pacific islands. Palau’s efforts coincide with the United Nations designation of 2014 as the ‘Year of the Small Island Developing States’. Palau’s culture of conservation and preservation has helped the state to become a leader in climate adaptation and a formidable partner in pursuing multilateral solutions to migration challenges.

Now is the time to connect conservation with development. Nonprofits, government and the private sector are working together through the Global Island Partnership (GLISPA) in an attempt to build resilient and sustainable island communities. Leaders of small island states like President Tommy Remengesau of Palau seek to reverse the trend of increasing spending on defense budgets and instead spend more on conservation, and peaceful relationship-building efforts. Through GLISPA, actors are trying to find “island solutions to island challenges” because “nature forms part of [their] economy.” At a GLISPA meeting earlier this year, Palau’s Ambassador to the United States Hersey Kyota quipped that the country has an informal motto to “take enough for yourself, leave some for others.” Over time, traditional concepts of conservation have changed with technology, enabling people to store more and for companies to produce more than they need to live sustainably.

President Remengesau is expecting at least 500 people to attend the Pacific Island Forum this year, including heads of state. During his recent visit to Japan, Remengesau extended an invitation to Prime Minister Shinzo Abe to attend the forum in the wake of Japan’s increasing development projects in the region. Japan continues to add to its Aid-for-Trade programs including a new agreement in June with the Kingdom of Tonga which will help the state to purchase goods from Japan’s earthquake and tsunami-damaged region. To counter China’s diplomatic and economic efforts and as part of the ‘rebalance,’ the United States has notably increased its presence at PIF meetings since Secretary Clinton’s visit to the Cook Islands in 2012; last year the US sent Department of Interior Secretary Sally Jewell along with a delegation also representing Departments of State, Homeland Security, Energy, Agriculture, Health and Human Services and US Pacific Command. In contrast, New Zealand Prime Minister John Key may not attend due to upcoming elections in September; but, NZ recently created a new position and appointed former Labour Member of Parliament Shane Jones as Ambassador for Pacific Economic Development, to help coordinate and boost the country’s relationships, development programs and fisheries projects.

More important than the number of attendees is the commitments that can be made and followed through by larger states, and the impact a cohesive Pacific group of nations can have on swaying the international community to not only change their behaviors but help . At last year’s PIF meeting in the Solomon Islands, members signed the Majuro Declaration and made specific commitments, hoping to launch a “new wave of climate leadership.” So far it seems Australia has been the only state to move away from its commitments, with Prime Minister Tony Abbott holding the country’s plans hostage; Australia previously agreed to have 20% of its electricity generated from renewables by 2020 as well as its pursuit of emissions reductions targets. Small island states meanwhile created ambitious targets to transform their economies: Niue and the Cook Islands aim to generate 100% of their energy from renewables by 2020, Vanuatu seeks 65% by 2020, and Nauru and Solomon Islands have targets of 50% renewable energy generation by 2020 and 2015, respectively.

Emissions reductions are a more delicate political issue than changing sources of energy for both large and small states because of the economic implications for heavy polluting industries in particular and businesses in general; in the Pacific though, according to Kyota, the tension surrounding who is to blame for high emissions levels inducing climate change becomes old news when states must deal with the consequences including ocean acidification, overfishing and rising sea levels. Kiribati for example is facing certain sea level rise that will make its islands uninhabitable, and the government is investigating options for mass migration.

Palau has to evolve with “climate mitigation,” according to Ambassador Kyota, due to “things that were not caused by us.” Palau has a population of about 20,000 people, and is currently facing prospects of severe drought this year due to El Nino weather patterns. Multilateral cooperation will be critical to changing the rhetoric and discourse of climate adaptation and mitigation, and should aim to prevent free-riding. In opposition to Tony Abbott’s complaints about economic impacts of carbon pricing and other climate-related regulations, Kiribati’s President Anote Tong said “We’re not talking about the growth GDP, we’re not talking about what it means in terms of profit and losses of the large corporations, we’re talking about our survival.”  For Kiribati, “our future is already here … we will be underwater.” President Tong recently announced that Kiribati would prohibit commercial fishing in the Phoenix Islands Protected Area, which is about the size of the state of California. President Remengesau has also recently called for a total ban on commercial fishing, in the country’s Exclusive Economic Zone, which would create a sanctuary an area the size of Ukraine. Banning export-oriented commercial fishing is likely to have a larger impact on government budgets than on local fishermen and food supplies, as fishing revenues come primarily from selling permits to overseas vessels. For Kiribati, Palau and others, the short term losses will outweigh the benefits of restoring stocks of tuna for global food security and regional conservation efforts.

Thanks to Japanese investment through the Pacific Environment Community Fund, in March this year Palau installed a new solar power generation system and salt water desalination plant which exemplifies the water-energy nexus. It will reduce reliance on fossil fuels while also providing clean, safe drinking water to residents. According to the Pacific Islands Forum Secretariat, administrator of the fund, the governments of Samoa, Tuvalu, Cook Islands, Nauru, theSolomon Islands, Fiji, Federated States of Micronesia, Kiribati, Niue, Republic of Palau, Republic of Marshall Islands and Vanuatu have to date utilized the PEC Fund “for national renewable energy and seawater desalination projects.”

Many events are happening this year specifically to coincide with the Year of the Small Island Developing States, and there are positive signs that the international community is recognizing the opportunity to act to support the efforts of island states. On June 17, US President Barack Obama proposed to create the world’s largest marine sanctuary in addition to other actions at the State Department-led “Our Ocean” conference; President Obama seeks to use his presidential authority if necessary but will work to create guidelines based on stakeholder input. The US, Japan and China as the world’s largest economies must continue to follow and model the efforts of the smallest states as they transform what we think of as sustainable development. As water increases in scarcity and ocean acidification intensifies in the Pacific, Australia should reverse its mistakes on climate initiatives. The PIF meeting in July hopes to continue the groundswell of action, leading to a well-prepared UN Conference on Small Island Developing States to be held in Samoa in September. At each multilateral setting, Japan, the European Union the US have continued to display their support for sustainable development initiatives, recognizing not only the pristine environment to be saved and peoples to support, but also the potential to showcase to their own publics the power of creating more areas for conservation and the need for a shift in discourse. It will be up to all actors – including Palau as leader of the PIF – to keep one another engaged in this critical year.