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First 5-Year Review of the Compact for The Government of the United States of America First Five-Year Review of the Compact of Free Association, As Amended, Between the Governments of the United States and the Republic of the Marshall Pslands Report to the Congress of the United States of America • TABLE OF CONTENTS Pages Executive Summary 1-2 Purpose of the Report 1 Overview of Findings and Recommendations 1 .. Assistance Framework of the Compact. 2-12 Profile of the Marshall Islands 2 Periods of U.S. Assistance. 3-5 PrecCompact of Free AssociatiOn 3 The Compact of Free Association 3 The Compact's First Direct Financial Assistance Period: FY 1987 - FY 20014 The Amended Compact: FY 2004 - FY 2003 4- New Fiscal and Financial Accountability Framework 6-12 From General Operational Support to Assistance to Select Sectors 6-8 From Direct Payments to Annual Grants 8-10 Annual Sector Budgets Grant Management Responsibilities Enforcement Tools The Joint Economic and Financial Accountability Committee (JEMFAC) " From Generalization to Country Development Plans, the MTBIF And Portfolios From Line Item Budgeting to performance-Based Management And Budgeting From U.S. Discretionary Grants for Education to Supplemental Education.Grant From Reliance on Annual U.S. Assistance to Trust Fund Proceeds Socioeconomic Profile ofthe Marshall Islands Population Migration Migration from the Freely Associated States GDP, Growth and Structural Change 15 Increased Economic Activity from 2000 to 2008 15-17 .I I TABLE OF CONTENTS Pages Expansionary Fiscal Policy Government-Resources Peaked in 2005 Employment and Wages 18.19 Public Sector-Led Expansion'Followed Painful Downward Adjustment. 18 Growth in Public Sector Employment 18 The Wholesale and Retail Sector Leads Private Employment .18 Wage Rates 19 Government and Private Sector Tr:ends Widened Wage Differential between the Sectors External Debt 19-21 Fiscal Policy 21-23 Stressors Point to Need for Fiscal Policy Adjustment The RMI's Comprehensive Adjustment Program and Reform Efforts Developments in the Private Sector 23-2S Agriculture 23 Niche Production Basic Food Security Fisheries 23-24 Business-Friendly National Fisheries Development Plan RMl's Hole in Jmplementi~gthe" Nauru Agreement Commercial Fishing Tourism 24-2S National Development PI.an . Slow-Growing Industry ." Economic Risksand Vulnerabilities . -':-.::"'. Public Sector Expansion: Re-Growth after Reduction-in-Force 26 Rising Payroll 27-28 Fiscal Planning and Public Sector Management 28-29 . Medium-Term Planning Process Shortcomings Need Longe.r-Term Focus Restructuring-Expectations and Reform TABLE OF CONTENTS Pages Compact Trust Fund Viability 29-31 Trust Fund Provisions Projected level of Sufficiency and Actual Value Positive Contribution by the Taiwan Subsidies to Public Sector Enterprises 31-32 Subsidies a Growing Fiscal Concern Tax Administration 32 Revenue and Tax Reforms Recommendations of PFTAC Value-Added Tax Rejected and Sales Tax Proposed by TRAM Effectiveness of U.S. Financial, Program and Technical Assistance 33-58 The Education Sector 33-40 Education Developments 33-36 Data Collection and Reporting Increased Access to Education Increasing Student Enrollment in the Face of Out-Migration low Student Achievement , Discouraging Student Re~ention Rates Declining Numbers of College of the Marshall Islands Graduates Unknown Impact of Incre,ased Scholarship Funding Focus on Teacher Certification Disorganization among Vocational Programs Issues for the Future: Moving Education Forward 36-40 Refocus the Amended Compact's SEG and Education Sector Grants Maintain the Supplemental Education Gra.nt (SEG) Despite Administrative Problems Clarify the Budgetary Roles and Responsibilities of the MOE, the Nitijela and the U.S. Reexamine Fiscal Practices and MOH Subsidies for Transportation and Electricity Increase Community Involvement The Health Sector 41-S0 Amended Compact Funding Uses and Trends 41-42 '1:: . ~~ Basic Health Sector Grant Ebeye Special Needs for Health Sector Performance 42-47 Increased Per Capital Spe.nding Planned New Hospital for Majuro Reorganized Ministry Performance Budgeting Implemented TABLE OF CONTENTS Pages Diarrheal Disease Still a Problem Infectious Disease Risks Complicate Effective-Chronic Disease Management Other Health Problems . Restructuring Expectations and Reform Major Vulnerabilities .47,50 Non-Communicable Disease Unintended Consequences of Using Compact Dollars to Support. ~alari~s Data Reporting Inconsistencies Unplanned Approach to Decrement Adjustment A Health System in Doub'le Jeopardy and Stretched Thin' Which Takes Precedence? Performance Manageme'nt Improvements Bring Unintended Risks The Public Sector Infrastructure Program SO-53 Early Consistent Commitment SO-52 Education and Health Facilities Were Top Priorities Improved Education Facilities Hospitals and Outer Islan'd Dispensaries Repa,ired and Maintained Infrastructure Developed atthe College of the Marshall Islands 52-53 Funding Committed to Meet Accreditation Requirement Infrastructure Maintenance' Fund 53 The Environment Sector 53-54 . Private Sector Development and Public Sector Capacity Building 54 The Disaster Assistance Emergency Fund (DAEF) . 54-55 Single Audit Assistance 55 Judicial Training 55 Extended Federal Programs, Servic~s and Technical Assistance 55-58 FAA Airport Improvenient Program (AlP) Grants .ell< - FAATechnical Assistance Conclusions and Recommendations 58-60 Appendices 61-77 A. Public Sector Infrastructure Develop,.ryent Project Summary B. 2004 to 2009 Maintenance Projects C. Project Descriptions EXECUTIVE" SUMMARY Purpose of the Report This report reviews the terms of the Compact of Free Association between the Government of the United States (U.S.) and the Government of the Republic of the Marshall Islands (RMI) as required by Section 104(h)(2) of Public Law 108-188, the Compacts of Free Association Amendments Act of 2003 (Amended Cor:npact). The law states that the review is to occur during the year of the fifth, tenth and fifteenth anniversaries of its enactment. The Compact was enacted on December 17, 2003. The fifth year of implementation ended in FY 2008 on September 30,2008'; The report addresses the overall nature of the developing relationship between the U.S. and the RMI; describes the general social, political and economic conditions of the RMI, including estimates of economic growth, per capita income and immigration rates; and assessesprogress made in the following areas: • The use and effectiveness of United States financial, program and technical assistance. • The status of economic policy reforms including but not limited to progress toward establishing self-sufficient tax rates. • The status of efforts to increase investment including the rate of infrastructure investment of U.S. financial assistance under the Compacts, non-U.S. contributions to the trust funds, and the level of private investment. Lastly, the report considers the operating requirements of the RMI in meeting its strategic development objectives and offers recommendations on ways to increase the effectiveness of United States assistance. Overview of Findi~gs and Recommendations The RMI is in a fragile fiscal condition from the effects of the recent worldwide recession, inflation, investment decisions and decreases in annual Compact grant assistance. Weak internal fiscal policies have also contributed to the situation. Development planning and the introduction of performance management and budgeting have helped to rationalize the new accountability regimen required by the Amended Compact, but the process and its tools need improvement. Education and health funding has not been prioritized to achieve the strategic outcomes identified by the RMI; rather program and personnel expansion have occurred in the face of declining financial resources. The RMI has chosen to dedicate few resources to the 1 Although this report focuses on fiscal years 2004-2008, when appropriate, references will be made to actions and developments since that time. 1 other Compact sectors of environment, public sector capacity building and private sector development. The Amended Compact sets forth a process for collaborative management of annual allocations and related policy decision-making by the U.S.and the RMI through the Joint Economic Management and Financial Accountability Committee (JEMFAC). Recommendations are primarily addressed to JEMFACfor improving the use and effectiveness of the Compact's annual assistance. ASSISTANCE FRAMEWORK OF THE COMPACT Profile of the Marshall Islands The Republic of the Marshall Islands covers a landmass area measuring 181 square kilometers in the North Pacific Ocean. The country consists of five single islands and two archipelagic island chains of 29 coral atolls, each with several small islets. Majuro, the capital of the RMIlies about 2,300 miles southwest of Hawaii. The islands of Bikini and Enewetak are former U.S.nuclear test sites. Kwajalein Atoll, famous as a World War II (WWII) battleground, surrounds the world's largest lagoon and is used as a missile test range. The island of Ebeye (Kwajalein Atoll) is the second largest settlement in the RMI, after Majuro, and is one of the most densely populated locations in the Pacific region. The nation's matrilineal culture revolves around a complex system of clans and hierarchical lineages and titles tied to land ownership. No public (government) ownership of land exists. Over 90% of its estimated 52,000 inhabitants are of Micronesian origin and Marshallese descent. Approximately two-thirds of the people reside
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