Government of the Federated States of Micronesia

FSM Chief Executives submit communiqué

Palikir, POHNPEI – (FSM Information Services): February 17, 2006 – The Chief Executives of the Federated States of Micronesia concluded their meeting in Palikir and issued the following communiqué to summarize its three day meeting which began February 13, 2006.

Briefings/Update:

1. Amended Compact and Related Issues

The Chief executive were informed that JEMCO has not disallowed the use of Compact Infrastructure funds for the purchase or lease of private lands, provided the FSM develops a fair and equitable process for leasing and purchasing of private lands. Assistance from the valuation specialist under the PSDP TA will be helpful in developing such a process, and the governments should put a priority on this.

There is a risk of the FSM not receiving further funds from the US if the audits for FY 2003/04/05 are not completed by June 2006. The OIA would like improvements in the budgeting process and, in particular would like a better link between the SDP and the Budget formulation process. Infrastructure spending for health and education should be allocated to those sectors.

A JEMCO meeting is planned for San Francisco from March 23-24, 2006. It is hoped that there will be an opportunity to have a technical meeting at the same time so that implementation issues can be discussed. OCM was directed to work with the Trust Fund Board to expedite placing the fund into a higher yield account.

2. Omnibus Infrastructure Development Project

It was explained that FSM’s infrastructure needs are significantly greater than that which can be funded under the Compact, and other potential sources of assistance are needed. For the Project to proceed, three of the four State Governments need to participate. As per email received from OIA, Compact infrastructure funds can be used for the Omnibus loan payments. The tripartite financing agreements must be signed by the end of February. The Governor of Chuuk indicated they wish to participate in the Project if necessary legislative issues can be addressed.

3. Basic Social Services (BSS) Project

The Conference was informed that the Project could only continue if three States and the National Government participate and 31 March 2006 is the deadline to clarify whether the Project is to continue.

Chuuk Governor stated they have now agreed to participate though legislation still needs to be passed. Governor David said that Pohnpei is now willing to participate as all necessary departments are cooperating. The appropriate Pohnpei legislation will need to be modified before the State could continue to participate.

4. Private Sector development Project

The Closing date for meeting the conditions for the 2nd Tranche of the PSD Program loan was 1 November 2005 but the ADB has not closed the loan. The National Government has met the conditions and Kosrae and Yap are close to meeting the requirements. They should send evidence of compliance to the Project Implementation Unit at the FSM Department of Economic Affairs.

The President requested the Department of Economic Affairs to write to the ADB to clarify whether Chuuk and Pohnpei could still qualify if they met the requirements.

5. Tax Reform

The meeting was updated on the work of tax reform work. Assistance from IMF and PFTAC are forthcoming. There was created through Presidential Order an Executive Steering Committee (ESC) to be comprised of high level representatives form the national and state governments to implement the recommendations of the Tax Reform Task Force. Two of the States have submitted names of their representatives and the other States were encouraged to designate representatives keeping in mind the need to ensure the representatives are EPIC members. FSM may bear the cost for committee members to attend some of the earlier meetings, but the States will likely be required to meet the costs for later meetings.

The meeting agreed that representatives from the respective state legislatures are invited as members on ESC, therefore the Presidential Order should be amended accordingly.

6. Foreign Aid

The meeting was up-dated on some of the foreign assistance that FSM is receiving including those from China, Japan, the EU and FAO. It was reported that numerous federal program grants may be available for further assistance and information can be accessed through various websites. The Chief executives discussed the Chinese assistance of $2.5 million and expressed their appreciation and support for it.

The meeting was updated on the Japanese grant aid and Kosrae was assured that it Kosrae would be the next State scheduled to receive assistance from Japan.

7. Submarine Fibre Optic Cable (SFOC)

The first phase of the Project is to link Pohnpei to the cable that will link Guam to Kwajelein and Majuro. Telecom intends to borrow between $13-15 million for this project. Phase II involves linking Pohnpei to Chuuk, Pohnpei to Kosrae and Yap to Guam. These three additional links would cost $60.0 million.

The Governors of Chuuk and Kosrae expressed disappointment in not being part of Phase I. It was reported that the cable link to Pohnpei would improve the phone and internet services to Kosrae, Chuuk and yap because the satellite links will be freed up. Telecom also has other development plans including telephone services to the outer islands in all States. The Chief executives strongly support the early implementation of Phase II of the project.

8. MOMI Negotiations

The Vice-President briefed the meeting on the recommendations made by the Fuel Task Force regarding preparation for the incoming negotiations between the FSM Governments and Mobil Oil Micronesia Inc. (“MOMI”). Of particular significance were the inclusion of Kosrae in any fuel supply arrangement with the other 3 states, and the need for an appraisal of the existing fuel farms in Pohnpei, Chuuk and Yap. The fuel farm assessments would address matters such as the long term viability of the existing tanks, environmental compliance and the cost of upgrading versus building new tanks. Issues on improvements of the fuel sector in FSM was discussed at length.

Questions concerning the cost of appraisals, the cost and location of new facilities and the current relationship between MOMI and the Government were raised and addressed by the presenters.

Action issued and decisions

1. IDP Implementation

The meeting was updated on the progress of implementation of the infrastructure sector grant under the Amended Compact. As of February 14th, 2006, PMU had certified most of the projects listed by the States. Certification will be completed by the end of the month, obligating the entire sector grant for the current funding cycle. The chief executives must decide whether the remaining projects on the list that were not certified due to insufficient funding from the current grant for FY’04, FY’05 and FY’06 would be resubmitted or reprioritized for the FY’07 grant cycle. It was decided that PMU would work closely with the States to determine which projects will not be certified for funding under the current cycle, so a better determination on how to proceed can be made.

2. 4th FSM Games

The 4th FSM Games were planned for Pohnpei in 2006, but because of a conflict with the Micro Games, which is also scheduled for this Summer, the states are not financially able to participate in both. It was decided that the FSM Games will be postponed to Summer 2007, and the venue is to be decided at the next FSM Sports Council meeting, due to be held next month.

3. Investment Development Fund (IDF)

The FSM Development Bank is presently looking to mobilize sources of funding for its lending operation since the Amended Compact has no provision for such. This requires the Bank to consider eliminating any decision-making element that involves government input. This pertains to the existing state sub-accounts under the Investment Development Fund. The proposal was discussed and agreed that a decision be delayed.

4. Compact Reporting Requirements

Office of Compact Management reported that some of the current fixed deadlines for reporting under the Amended Compact are not practical for the FSM. The annual report is due in February, the quarterly at the end of each quarter, and the single audits at the beginning if the 3rd quarter. Except for the quarterly reports, the other deadlines are either different from the US Government reporting deadlines or are impractical, therefore recommendations were made to the change the dates to coincide with US Government deadlines, or to make them more practical.

The chief executives also instructed OCM to urge OIA to release carry-over funds from the capacity building sector grant for FY’04 so the FSM can implement the required institutional capacity to meet the reporting deadlines.

5. Diplomatic Tax Exemption

It was reported that there is no tax exemption for diplomats from state sales tax, so the practices is to reimburse diplomats for taxes paid in local purchases. The Vienna Convention provides for tax exemption for diplomats, but FSM only provides for tax exemption from the import tax, over which the national government has jurisdiction. The Governors were requested to consider amending their perspective tax laws to exempt diplomats from the state sales tax.

6. Tax on Imports of Compact related Purchases

The OIA is concerned that imports of materials or equipment purchased with Compact grants are subject to national and state taxes. OIA suggested these be exempted from taxes to ensure that the entire grant amount goes to the target sectors, especially those for health and education. The chief executives decided that all purchases with compact funds are subject to international tax requirements and no tax exemptions are to be made.