Amended Compacts of Free Association: 2004- 2023

In 2003, the United States approved separate amended compacts with the  FSM and RMI that (1) continue the defense relationship, including a new  agreement providing U.S. military access to Kwajalein Atoll in the RMI  through 2086; (2) strengthen immigration provisions; and (3) provide an  estimated $3.6 billion in financial assistance to both nations from 2004  through 2023, including about $1.5 billion to the RMI (see app. Financial assistance is provided in the form of annual sector  grants and contributions to each nation’s trust fund. In addition, the RMI has not enacted  economic policy reforms needed to improve its growth prospects. The RMI development plan identifies fishing and tourism as key  potential private sector growth industries. Although the RMI has undertaken efforts aimed at economic policy  reform, it has made limited progress in implementing key tax, land,  foreign investment, and public sector reforms that are needed to improve  its growth prospects. The RMI Faces Challenges to Effectively Implementing Compact Assistance for Its Long-Term Development Goals

The RMI has allocated funds to priority sectors, although several factors  have hindered its use of the funds to meet long-term development needs. Lack of planning for declining U.S. assistance. The usefulness of the RMI’s quarterly  performance reports has also been limited by incomplete and  inaccurate information. Staff and skill limitations have constrained the  RMI’s ability to provide day-to-day monitoring of sector grant  operations. RMI Trust Fund May Not Provide Sustainable Income After Compact Grants End

Market volatility and choice of investment strategy could lead to a wide  range of RMI trust fund balances in 2023 (see app. Although the RMI has  supplemented its trust fund balance with additional contributions, other  sources of income are uncertain or entail risks. Our analysis indicates  that, under various scenarios, the RMI’s trust fund could fall short of the  maximum allowed disbursement level—an amount equal to the inflation- adjusted compact grants in 2023—after compact grants end, with the  probability of shortfalls increasing over time (see fig. As of June 2007,  the RMI trust fund committee had not appointed an independent auditor  or a money manager to invest the fund according to the proposed  investment strategy. However, the RMI faces  significant challenges in working toward the compact goals of economic  advancement and budgetary self-reliance as the compact grants decrease. Largely dependent on government spending of foreign aid, the RMI has  limited potential for private sector growth, and its government has made  little progress in implementing reforms needed to increase investment  opportunities and tax income. Because the trust fund’s earnings are intended as a main source of  U.S. assistance to the RMI after compact grants end, the fund’s potential  inadequacy to provide sustainable income in some years could impact the  RMI’s ability to provide government services. Prior Recommendations

Our prior reports on the amended compacts include recommendations  that the Secretary of the Interior direct the Deputy Assistant Secretary for  Insular Affairs, as chair of the RMI management and trust fund  committees, to, among other things,    ensure that JEMFAC address the lack of RMI progress in implementing  reforms to increase investment and tax income;    coordinate with other U.S. agencies on JEMFAC to work with the the  RMI to establish plans to minimize the impact of declining assistance;    coordinate with other U.S. agencies on JEMFAC to work with the RMI  to fully develop a reliable mechanism for measuring progress toward  compact goals; and    ensure the RMI trust fund committee’s assessment and timely reporting  of the fund’s likely status as a source of revenue after 2023. For example, in August 2006,  JEMFAC discussed the RMI’s slow progress in implementing economic  reforms. This is a work of the U.S. government and is not subject to copyright protection in the  United States.
Why GAO Did This Study

In 2003, the U.S. government extended its economic assistance to the Republic of the Marshall Islands (RMI) through an Amended Compact of Free Association. From 2004 to 2023, the United States will provide an estimated $1.5 billion to the RMI, with annually decreasing grants as well as increasing contributions to a trust fund. The assistance, targeting six sectors, is aimed at assisting the country's efforts to promote economic advancement and budgetary self-reliance. The trust fund is to be invested and provide income for the RMI after compact grants end. The Department of the Interior (Interior) administers and oversees this assistance. Drawing on prior GAO reports ( GAO-05-633 , GAO-06-590 , GAO-07-163 , GAO-07-513 , GAO-07-514R), this testimony discusses (1) the RMI's economic prospects, (2) implementation of the amended compact to meet long-term goals, and (3) potential trust fund earnings. In conducting its prior work, GAO visited the RMI, reviewed reports, interviewed officials and experts, and used a simulation model to project the trust fund's income. Prior GAO reports recommended, among other things, that Interior work with the RMI to address lack of progress in implementing reforms; plan for declining grants; reliably measure progress; and ensure timely reporting on the fund's likely status as a source of revenue after 2023. Interior agreed with GAO's recommendations.

What GAO Found

The RMI has limited prospects for achieving its long-term development goals and has not enacted policy reforms needed to achieve economic growth. The RMI economy depends on public sector spending of foreign assistance rather than on private sector or remittance income. At the same time, the two private sector industries identified as having growth potential--fisheries and tourism--face significant barriers to expansion because of a costly business environment. RMI emigrants also lack marketable skills needed to increase revenue from remittances. Despite declining grants under the compact, RMI progress in implementing key policy reforms to improve the private sector environment, such as tax or land reform, has been slow. In August 2006, the RMI's compact management committee began to address the country's slow progress in implementing reforms. Although the RMI has made progress in implementing compact assistance, it faces several challenges in allocating and using this assistance to support its long-term development goals. RMI grant allocations have reflected compact priorities by targeting health, education, and infrastructure. However, political disagreement over land use in Kwajalein Atoll, where the United States has a missile testing facility, and over management of public entities has negatively affected infrastructure projects. The RMI also has not planned for long-term sustainability of services that takes into account declining compact assistance. Inadequate baseline data and incomplete performance reports have further limited the RMI's ability to adequately measure progress. Although single-audit reporting has been timely, insufficient staff and skills have limited the RMI's ability to monitor day-to-day sector grant operations. Interior's Office of Insular Affairs (OIA) has conducted administrative oversight of the sector grants but has been constrained by competing oversight priorities. The RMI trust fund may not provide sustainable income for the country after compact grants end. Market volatility and the choice of investment strategy could cause the RMI trust fund balance to vary widely, and there is increasing probability that in some years the trust fund will not reach the maximum disbursement level allowed--an amount equal to the inflation-adjusted compact grants in 2023--or be able to disburse any income. In addition, although the RMI has supplemented its trust fund income with a contribution from Taiwan, other sources of income are uncertain or entail risk. Trust fund management processes have also been problematic; as of June 2007, the RMI trust fund committee had not appointed an independent auditor or a money manager to invest the fund according to the proposed investment strategy.