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Chuuk Secession Draft Economic Analysis


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Chuuk Secession Draft Economic Analysis

  1. 1. Economic Growth and Sustainability CHUUK ECONOMIC STUDY 2018 PRELIMINARY FINAL JDS Consulting
  2. 2. JDS Consulting – 2018 2 Index Executive Summary and Fiscal Outlook State Government Revenues 1. Local Revenues Collections 2. COFA Grants 3. COFA Trust Fund 4. Income Taxes and Remittances 5. Foreign Assistance (Other International Partners) National Revenue Sources A) FSM Trust Fund B) Fishing Fee Revenue C) Domicile of Foreign Companies National Government Expenditures FY18 FSM National Budget Summary National Government Service Delivery Responsibilities Economic Analysis Summary Chuuk’s Opportunities for Economic Development Additional Sources of Foreign Revenues Needed Infrastructure Development Tourism  Markets – Tourist Origins o China o Others – Japan, Korea, Russia  Sea and Air Transportation Access from Target Markets o Cruise Ships o Airlines  Accommodations  Visitor Activities and Attractions AquaCulture Import Substitution Healthcare Spending Conclusions References
  3. 3. JDS Consulting – 2018 3 Executive Summary JDS Consulting was contracted to conduct an economic study for the Chuuk State Political Status Commission. The purpose of the study is to:  Research economic forecasts and possible revenue sources for an independent Chuuk.  Research anticipated revenues and entitlements to its share of the Amended Compact of Free Association (COFA), and COFA and FSM Trust Fund investments.  Provide economic analysis based on the current economic situation and an assessment of anticipated revenues from Chuuk ocean revenues, foreign investment, foreign assistance, and other revenue sources that can make Chuuk become economically sustainable.  Map out potential opportunities based on the economic analysis. Chuuk’s Current Political Status and Economic Situation Chuuk is the most populous state in the Federated States of Micronesia (FSM), a nation formed from four states (Chuuk, Pohnpei, Yap and Kosrae) formerly of the US Trust Territory of the Pacific Islands (TTPI). These island states, formerly under Japanese administration, were assigned to the United States by the United Nations to administer following WWII. Three other states of the TTPI became the US Commonwealth of Mariana Islands, the Republic of Palau (Palau) and the Republic of the Marshall Islands (RMI), respectively. The FSM became an independent nation in 1986 when it left US trusteeship and entered into a Compact of Free Association (COFA) with the United States. This new status was formally recognized by the United Nations in 1990 when it ended the FSM’s Trusteeship status. Chuuk has approximately 46% of the total population of the FSM. However, the population is highly decentralized, being spread among 40 municipalities, 16 municipalities on islands within the vast Chuuk Lagoon and 24 in the Outer islands. Under the COFA, FSM citizens can freely travel to, live, attend school and work in the US or join the US military and remittances from COFA migrants is an secondary source of income for many Chuuk residents. Importantly, the FSM and the four states currently receive significant economic assistance in the form of annual grants from the United States under the amended COFA plus contributions to the Compact Trust Fund (CFT). The CTF was established to contribute to the FSM budgetary self-reliance with an ongoing source of revenue after Fiscal Year 2023. Also, under the COFA, the US can operate armed forces in Compact areas, and demand land for operating bases (subject to negotiation) to support FSM and US defense.
  4. 4. JDS Consulting – 2018 4 The Chuuk economy, with FY2016 GDP (Gross Domestic Product) of $93.1M, is dominated by a large public sector. With a population of 46,688, Chuuk’s per capita GDP is 53% less than the average GDP per capita in the other states.(1) Roughly 50% of those employed are in the public sector (mostly in education and healthcare). There is a very small tourism sector primarily centered on the niche of wreck diving (albeit the world’s best). Finally, under the COFA, Chuuk citizens can reside and work in the United States and remittances from family members living in the US provide an additional source income for many Chuuk residents. However, much of the population continues to rely primarily on subsistence fishing and agriculture. Beginning FY24, the FSM (and thus Chuuk State) will no longer receive COFA Grants and will instead rely on annuities from the COFA Trust Fund and the FSM Trust Fund. The actual amount will depend upon future fund investment returns and Trust Fund Agreement (TFA) drawdown rules. Based on projected balances and TFA drawdown rules, within a few years following FY23, there is significant risk that CTF annual income will be completely subject to market volatility and likely insufficient to sustain budgetary needs. This is known as “the Fiscal Cliff.” While changes to the TFA drawdown rules are being suggested to make annuities more regular and predictable, the immediate impact would be even lower TF revenues beginning immediately in 2024. Any rule changes would need to be part of a bilateral agreement between the US and FSM. Moreover, for an independent Chuuk Republic, there is uncertainty regarding the outcome of Chuuk’s future attempts to claim and receive its (or any) share of the CTF—adding another level of unpredictability to a Chuuk Republic’s future income from these sources. While Fishing Fees are a substantial source of revenue for the FSM National government, any sharing of those revenues with the States is currently at the discretion of the National government. Thus, while the current national government leaders have pledged to use Fishing Fees to meet future Compact Trust Fund short-falls for the states, there is nothing to compel future National leaders to do so, and Chuuk’s future receipt of those fees is uncertain. Similarly, under international law, an independent Chuuk Republic would have the rights to Fishing Fees for its 200 mile Exclusive Economic Zone (EEZ), but the amount it would depend on negotiation of borders, allocation of Fishing Days to Chuuk by the Parties to the Nauru Agreement (assuming the Chuuk Republic becomes a member) and the then market rate for Fishing Days. The following table summarizes the Fiscal Outlook beginning FY2024:
  5. 5. JDS Consulting – 2018 5 Revenue Assumptions: The basis for these projections rely on historical averages and existing revenue sources (both State and National) in the FSM and do not take into account potential revenue from future Economic Development activities. Operating Revenue The projected Operating Revenue for Chuuk State and for an independent Chuuk Republic are composed of ‘Taxes and Fees’, ‘Other Revenue’ and ‘Foreign Assistance’. The Taxes and Fees Current Fiscal Outlook Summary for Chuuk FY2024 and beyond Est. Annual Chuuk Gov’t Revenues ($Millions) CHUUK State CHUUK Republic (Independent) Operating Revenue Low High Low High Taxes / Fees Revenue Share( Inc Tax, GRT) $2M $3M $4M $11M Sales / Service Tax $2M $4M $2M $7M Usage Fees / Other $1M $1M $1M $1M Sub-Total Local Taxes/Fees $5M $8M $7M $18M Other Revenue FSM Trust Fund $3M $- $- $- Fishing Fees $- $- $10M $16M Captive Insurance (Foreign Domicile) $- $- $- $5M Sub-Total Other Revenue $3M $- $10M $21M Foreign Assistance US: Compact Trust Fund Drawdown $8M $24M $- $24M Other: China, US, EU, Japan $- $- $- $2M Sub-Total Foreign Assistance $8M $24M $M $26M Total Operating Revenue $16M $32M $17M $65M Less Sector Allocations ($24M) ($24M) ($24M) ($24M) Less Other Gov’t Expenses ($8M) ($8M) ($15M) ($15M) Surplus (Deficit) ($16M) $0M ($21M) $26M Infrastructure - Lump Sum FSM Infrastructure Grants Foreign Aid: US Trust Fund $4M $9M $9M WB, ADB Grants, EU $10M $10M Global Climate Fund $70M $70M
  6. 6. JDS Consulting – 2018 6 portion of revenues generally are not restricted by statute, and are composed of Personal and Corporate Income Tax, and Business Taxes also known as ‘Gross Receipts Tax’. For the States, these taxes are shared with the National government; 50% goes to the State, a portion is deposited to the FSM Trust Fund and the remaining tax revenue goes to the National government. For an independent Chuuk, all of these tax revenues would be retained. The Tax revenue amount will fluctuate depending on the level of funds received from other sources, especially the COFA revenues. The Other Revenue category consists of funds received from existing domestic activities in the FSM such as the FSM Trust Fund investment income, ‘Fishing Fees’ and ‘Captive Insurance’. The FSM Trust Fund is intended to support FSM States with operating revenue shortfalls, post FY23. Currently, the National government receives significant Other Revenue from ‘Fishing Fees’ and ‘Captive Insurance’; these funds are shared with the States on an ad hoc basis. Given the uncertainty over Chuuk’s potential allocation of Fishing Fees post FY23, an independent Chuuk would have rights to the Fishing Fees. The $10 million estimate would be a conservative assumption. The estimate of $16 million is based on 25% of the $63 million FSM is currently receiving as a member the Parties to the Nauru Agreement (PNA). Similar to the National government, we assumed an independent Chuuk could also enable legislation to establish an overseas domicile for captive insurance of foreign corporations. In FY16, the National government received about $6M in revenues for Captive Insurance, however, in the past has received over $27M in one year, alone. We based our estimate of $5M on these factors. ‘Foreign Assistance’ consists of financial assistance generally in the form of grants from foreign sources. Post FY23, the US Compact Trust Fund drawdowns will replace current COFA Grants. The COFA Grants currently support about 70% of the economic activity in Chuuk. Post FY23, conservative estimates by the Graduate School USA recommend a $30M annual drawdown, with about $12M for Chuuk. This would be a significant decrease in total operating revenues resulting in a projected funding deficit. However, based on the current Trust Fund rules, the drawdown target is the FY23 Grant amount, ~$83M. For Chuuk, we estimate a high of about $33M ($24M for sectors; $9M for Infrastructure) for the first few years after FY23, all of which is earmarked to support primarily the Education and Health sectors, with 30% for Infrastructure. All of the Trust Fund projections are subject to the negotiations with the FSM, and the COFA- Joint Trust Fund Committee. Sector Allocations are the current spending levels of roughly $24 M, in Chuuk for sectors such as Education and Healthcare that are currently supported by COFA grants.
  7. 7. JDS Consulting – 2018 7 Other Government Expenses are the costs of maintaining a Chuuk government beyond the Sector Spending. This is estimated as $8 M for Chuuk as a state in the FSM and $15 M for Chuuk to operate as a National Government. Infrastructure Grants are separated from Operating revenues as they are generally for a predefined time period and for a specific program or project. In FY18, Chuuk will receive the benefit of about $12M for the Telecommunications cable infrastructure project funded by the World Bank. Also, COFA Infrastructure Carryover grants will support critical Infrastructure development. Post FY23, we estimated 30% of the Trust Fund allocations will continue to be stipulated for Infrastructure. Summary For 2024 and beyond, as a state in the FSM, Chuuk likely faces deficits of as much as $16 M, but the status quo state budget can be maintained if the FSM National Government commits to making up Chuuk’s COFA shortfall with the Fishing Fee revenues the National Government controls. The National Government has indicated it intends to do so, but there is no guarantee they will, or that future FSM national governments will continue to do so, unless there is a change in the FSM constitution. Alternatively, as an Independent Republic, Chuuk will be entitled under international law to Fishing Fees for its EEZ, though the amount it can receive is uncertain. However, Chuuk will also have to argue for its share of the COFA and FSM Trust Funds and results of that are uncertain. Thus an independent Chuuk faces deficits of $21 M or surpluses of $26 M relative to the status quo depending on the ability of its leaders to negotiate for those revenue sources.
  8. 8. JDS Consulting – 2018 8 FSM COFA Grant Sector Allocations The COFA grant allocations support multiple sectors of the FSM. For the period FY2006-2016, about 85% of the Sector (non-Infrastructure) allocations went to Education (including the College of Micronesia) and Health. The remaining allocations went to Public Sector Capacity Building (PSCB), Private Sector Development (PSD), Environment and Enhanced Reporting and Accountability ERA. See Exhibits 1-3(2) The grant portion of the Compact ends in September of Fiscal Year 2023. Exhibit 1 – FY2006-FY2016 Grant Allocations by Sector (Non-Infrastructure) Sector FSM_All Natl COM-FSM Chuuk Kosrae Pohnpei Yap % By State 100% 4.2% 4.6% 39.3% 10.9% 25.0% 15.9% % By Sector Education $365M $14M $32M $135M $33M $96M $55M 53% Health $223M $7M $94M $23M $63M $36M 32% PSCB $49M $6M $23M $8M $6M $7M 7% PSD $30M $2M $10M $8M $2M $8M 4% Environment $18M $M $7M $2M $4M $4M 3% ERA $6M $M $3M $1M $1M $1M 1% Grand Total $690M $29M $32M $271M $75M $173M $109M 100% Exhibit 2 – FY2006-FY2016 Grant Allocation (Non-Infrastructure) by National/College of Micronesia (COM)/ State Education, 53% Health, 32% PSCB, 7% PSD, 4% Environment, 2% ERA, 1% FSM Sector Allocations FY2006-FY2016 Education Health PSCB PSD Environment ERA
  9. 9. JDS Consulting – 2018 9 Fiscal Yr FSM_All Natl COM-FSM Chuuk Kosrae Pohnpei Yap FY2006 $67M $6M $1M $25M $8M $17M $11M FY2007 $65M $2M $5M $25M $7M $17M $10M FY2008 $60M $5M $4M $22M $7M $14M $9M FY2009 $74M $3M $4M $28M $8M $17M $13M FY2010 $68M $2M $4M $26M $7M $17M $11M FY2011 $72M $3M $4M $29M $7M $18M $10M FY2012 $59M $2M $4M $23M $7M $15M $9M FY2013 $57M $2M $3M $22M $6M $14M $9M FY2014 $52M $2M $22M $6M $13M $9M FY2015 $58M $M $2M $25M $7M $15M $9M FY2016 $57M $2M $1M $24M $5M $14M $10M Grand Total $690M $29M $32M $271M $75M $173M $109M Exhibit 3 – FY2006 – FY2016 Grant Allocation (Non Infrastructure) by Fiscal Year by FSM National_COM / State
  10. 10. JDS Consulting – 2018 10 State Government Revenue Sources 1. Local Revenue Collections For FY2016, total Chuuk State revenues were reported at $37.8M. The COFA grants accounted for about 75% of total revenues. Non-COFA revenues include taxes, fees and other revenue of approximately $8M. The table below summarizes Chuuk State local revenue collections for FY2015 – FY2017 Local Tax and Revenue 2015 2016 2017 Average Revenue Share $2.7M $3.3M $3.5M $3.2M Sales / Service $3.5M $4.M $4.3M $3.9M Fees / Other $.9M $1.1M $1.1M $1.M Total $7.1M $8.4M $8.9M $8.1M 2. CHUUK COFA Grants a) Sector Allocations (Non Infrastructure) – FY2006 – FY2016 From FY2006-FY2016, approximately 85% of the COFA allocated grants (non-Infrastructure) went to the priority Education and Health sectors in Chuuk (2). Approximately 8% of the grant allocations went to Public Sector Capacity Building (PSCB), the remaining 7% of allocations went to Private Sector Development (PSD), Environment, and Enhanced Reporting and Accountability (ERA). The average sector allocation for the period reviewed was ~$24M
  11. 11. JDS Consulting – 2018 11 Exhibit 4 – Chuuk FY2006-FY2016 COFA Grant Allocations by Sector (Non-Infrastructure) (2) Chuuk Sectors FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Total Education $14M $14M $10M $15M $15M $14M $10M $10M $9M $13M $11M $135M Health $6M $7M $7M $11M $9M $9M $9M $9M $9M $9M $10M $94M PSCB $3M $3M $3M $1M $1M $4M $2M $2M $2M $2M $1M $23M Environment $1M $1M $1M $M $1M $1M $1M $1M $1M $1M $1M $7M PSD $1M $1M $1M $2M $1M $1M $1M $1M $1M $1M $.4M $10M ERA $1M $1M $1M $1M $1M $3M Grand Total $25M $25M $22M $28M $26M $29M $23M $22M $22M $25M $24M $271M b) Infrastructure Grants  The COFA agreement stipulates 30% of grant funds to be used for Infrastructure development. As of early 2017, $157M unallocated Amended Compact Infrastructure grants remained available to the FSM and States. Infrastructure Grant allocations for FY2006-2016 are shown below. Exhibit 5 FY Year Natl Chuuk Kosrae Pohnpei Yap FSM_All FY2006 $58.7M $58.7M FY2007 $5.2M $.9M $6.1M FY2009 $.6M $35.M $.6M $4.3M $2.6M $43.M FY2010 $9.3M $5.7M $14.9M FY2011 $1.1M $14.5M $15.5M FY2012 $.8M $1.M $1.7M $5.7M $9.2M FY2013 $1.2M $.2M $1.3M FY2014 $.3M $.3M FY2015 $.5M $.1M $2.6M $3.2M FY2016 $2.M $.M $2.M Grand Total $77.1M $38.4M $1.6M $14.2M $23.M $154.3M Exhibit 5 – FY2006 – 2016 – COFA Infrastructure Grant Allocations Education, 50% Enhanced Reporting and Accountability, 1% Environment, 2% Health, 35% Private Sector Development, 4% Public Sector Capacity Building, 8%
  12. 12. JDS Consulting – 2018 12  Unspent infrastructure grants provide an opportunity to invigorate the economy.  Critical infrastructure development, including hospitals, schools, roadways, power, water, wastewater and solid waste systems can support economic and business development opportunities.  Non-US Foreign Aid Infrastructure development projects currently underway in Chuuk include Telecommunications / Cable projects funded by the World Bank as well as water purification systems with support from the Japan International Cooperation Agency (JICA). Other priority infrastructure projects may also include ferries, docks and airport terminal improvements. c) Compact Grants FY2019 – FY2023  Under the existing amended COFA agreement, for the periods FY2019 – FY2023, approximately $320.8M remain for allocation (unadjusted for inflation)  Historically, Chuuk received approximately 38% - 40% of sector grant allocations, therefore it could be expected to receive that percentage of the remaining $320.8M. 3. Compact Trust Fund –  As of November 2017, the Compact Trust Fund (CTF) balance is about $574M, this amount includes the FY18 U.S. contribution of about $31M. US contributions to the fund will continue through FY2023. Exhibit 6 below shows the accumulated fund balance and accumulated contributions for the period FY2005 – FY2017. Exhibit 6 – Compact Trust Fund Balance by Year $62M $79M $97M $116M $136M $158M $180M $204M $229M $255M $282M $310M $340M $2M $8M $26M $4M $2M $19M $18M $53M $94M $126M $115M $157M $203M $M $100M $200M $300M $400M $500M $600M 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 FSM Compact Trust Fund FY05-FY17 Contributions Balance Accumulated Earnings
  13. 13. JDS Consulting – 2018 13  With an estimated annual growth rate between 5% and 6%, there is high probability the fund balance beginning FY24 will be over $900M.  The structure of the CTF includes a main ‘A Account’, a ‘B Account’, and a ‘C Account’. The ‘B Account’ will be created in FY2022, and used accumulate CTF investment income for distribution to the FSM and States. The ‘C Account’ is an important buffer against market volatility during the distribution period after FY23. (1)  As of FY16, the ‘C Account’ balance is $94M.  Based on the current TFA drawdown rules, CTF revenue in the first few years after FY23 could be sustained at FY23 Grant levels, as the ‘C Account’ can be used to cover investment income shortfalls. However, in years where investment income and the ‘C Account’ balances are insufficient, market volatility could potentially cause significant issues for the FSM finances and economy and thus for Chuuk. TFA Drawdown Rules Modeling The sample exhibits below show different outcomes based on financial modeling of current TFA drawdown rules, and alternative rules designed to reduce the impact of market volatility. These exhibits are for demonstration purposes only.  The Fiscal Cliff - Exhibit 7 shows a sample scenario, based on the current TFA drawdown rules. Starting FY24, the desired CTF revenue (drawdown) is ~$80M.  Annual CTF revenue will be based on the prior fiscal year Fund investment income plus any ‘C Account’ buffer.  In this example scenario, CTF investment income averages 5% annually, however, in 2028, there is a negative market return, of -1%.  The desired $80M revenue is sustained for a few years, through FY2027. However, in FY2028, the ‘C Account’ is depleted and revenue drops 45%, from $31M to $17M. Also, the negative fund performance in FY2028, results in a zero drawdown the following year, in FY2029. Fiscal Year 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 CTF Income % 5% 5% 5% 5% -1% 5% 5% 5% 5% 5% Share% Estimated Annual CTF Revenue by National, State Government National 9% $7M $7M $7M $7M $4M $0.00 $3M $3M $3M $3M Chuuk 39% $31M $31M $31M $31M $17M $0.00 $15M $15M $15M $15M Pohnpei 25% $20M $20M $20M $20M $11M $0.00 $10M $10M $10M $10M Yap 16% $13M $13M $13M $13M $7M $0.00 $6M $6M $6M $6M Kosrae 11% $9M $9M $9M $9M $5M $0.00 $4M $4M $4M $4M Total 100% $80M $80M $80M $80M $43M $0.00 $39M $39M $39M $39M Table 1 – Example market returns FY24 – FY33, based on current TFA drawdown rules. The ‘Share %’ is based on the average COFA Grant allocations from FY2006-FY2016. The drawdown amount as well as the State’s share is subject to change.
  14. 14. JDS Consulting – 2018 14 Exhibit 7 – CTF Annuities based on current TFA Drawdown rules – EXAMPLE Only  Exhibit 8 shows the same example market returns, however, the proposed CTF drawdown rule is based on a 3-year average fund balance multiplied by a pre- determined percentage (e.g., 8%). Exhibit 8 -Drawdowns based on 3 – year average fund balance  Exhibit 9 shows the same market returns, however, the proposed CTF drawdown rule is based on a fixed $30M annual drawdown for all of the FSM governments. The Chuuk State portion would be about 40% (or ~$12M). The $30M fixed annual drawdown, as suggested by the Graduate School USA, would be a significant reduction to Operating $31 $31 $31 $31 $17 $0 $15 $15 $15 $15 $0 $5 $10 $15 $20 $25 $30 $35 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 CTF Drawdown Scenario Average 5% YOY based on current TFA Drawdown Rules Natl_COM Chuuk Pohnpei Yap Kosrae $25 $28 $29 $30 $29 $28 $26 $25 $23 $22 0 5 10 15 20 25 30 35 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 CTF Drawdown Scenario Average 5% YOY based on 3 Year Average Fund Balance Natl_COM Chuuk Pohnpei Yap Kosrae
  15. 15. JDS Consulting – 2018 15 Revenues and thus Sector funding. And, if not replaced, would likely create significant deficits. Exhibit 9– Drawdowns based on a fixed $30M annuity at the FSM Level  As of FY16, the percent of US contributions to the trust fund amount to 89.41%. The FSM contributions to the Compact Trust fund amount to 10.59% (9) Options: A renewed arrangement with the US to enhance the mutually beneficial relationship, would require both US executive and congressional approval. 4. Revenue Sharing (Taxes, Foreign Assistance, Fishing Fees, Corporate Taxes) Revenue Sharing with FSM State governments is as follows: Revenue Source (10) Type State Share Income Taxes  Personal and Corporate 70% (20% deposited to FSM Trust Fund as of 2015)  GRT (Gross receipts tax) 50% Goods and Services  Sales and Excise (rate 6%)  Services & License Fees  Airport Departure Fees 100% Foreign Assistance COFA Grants Project Grants Small Project Distribution depends on purpose; default evenly among states (and national?) Fishing Revenues Parties to Narau (PNA) 0% + ad hoc sharing Corporate Taxes Captive Insurance 0% + ad hoc sharing $12 $12 $12 $12 $12 $12 $12 $12 $12 $12 $0 $2 $4 $6 $8 $10 $12 $14 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 CTF Drawdown Scenario Average 5% YOY based on an annual $30M fixed FSM drawdown Natl_COM Chuuk Pohnpei Yap Kosrae
  16. 16. JDS Consulting – 2018 16 5. Foreign Assistance Per the FSM Constitution, Foreign financial assistance received by the national government shall be deposited in a Foreign Assistance Fund. Except where a particular distribution is required by the terms or special nature of the assistance, each state shall receive a share equal to the share of the national government and to the share of every other state.  Information, Communication and Telecommunications (World Bank ICT) grants of $47.5 million are available to support reform initiatives to lay fiber connection for internet connectivity to Chuuk and Yap. (4) Per the FY18 National FSM budget (PL 20-42, PL 20-54), $12M is allocated for the Chuuk/Yap Telecommunications cable project.  EU NIP (National Indicative Program) The EU agreement with the FSM provides aide in the amount of EUR 14.2M or approximately US $17M (7). The components of the EU aide agreement include Renewable Energy & Energy Efficiency (84%), Measures in favor of civil society (7%), and Support measures (9%). Assumption: Total aid shared equally among FSM Governments Table 2: State Revenue Sources Summary by Period Source Period FSM Amount Chuuk State Amount / Share COFA Grants FY2019-FY2023 $320.8M (unadjusted for inflation) Est. $122M (unadjusted for inflation) COFA Grant Infrastructure Carry Over (CO) FY2018-FY2023 ~$157M Est. 40% of COFA Carryover COFA Trust Fund FY2024 - Target: FY23 Grant Amount (~$83M) Est. 40% of CFT drawdown FSM Trust Fund Annual Est. $100M To be Determined (TBD) Taxes Annual $8M Average Remittances (a) Ongoing Varied Varied Foreign Aid: JICA FY2017 - present $2M World Bank ICT FY2017 - present $47.5M (shared with Yap) EU NIP 2016-2020 $17M $3.4M (1/5th of total aid) (a) Citizens of the FSM are admitted to the US as nonimmigrants under terms of the COFA agreement and are eligible to live, attend school and work in the US indefinitely. Children of COFA migrants born in the US are US citizens.
  17. 17. JDS Consulting – 2018 17 NATIONAL Government Revenue Sources In addition to tax revenues, COFA Grants (primarily for the College of Micronesia), significant National Government revenue sources include the FSM Trust Fund, Fishing Fees, and Corporate Taxes. A) FSM Trust Fund – The FSM Trust fund is a separate fund from the Compact Trust Fund. The purpose of the FSM Trust Fund is to create a single investment fund in which all levels of government may participate in order to contribute to the long-term financial viability of the FSM by providing an additional source of revenue and to enhance the capacity of the National Government  As of FY2016, the FSM Trust fund balance is $94.12M (6).  National Government distributions – Per the FSM Constitution, “at the end of each financial year the Board shall determine the maximum amount of funds available for distribution to the National Government in the following fiscal year.” (8) B) Income Taxes are shared between the National Government and State Governments. The National government share is 30%, the State Governments share is 70% with 20% deposited to the FSM Trust Fund as of FY2015 C) Fishing Fee Revenue  The FSM receives fishing fee revenue as a member nation of the Parties to the Nauru Agreement (PNA). In FY2016, PNA daily fishing rates average $10,000 per day. In FY16, FSM received over $63M in fishing revenues (3). Projected fishing day allocations to the FSM will be 9,000 Fishing Days for FY2018 and FY2019.  In 2017, a ten-year fishing agreement was reached between FSM and Japan. The agreed annual financial package is approximately $22.9 million for 2018 and 2019, respectively. (5) Revenues from this agreement is not considered grant aid and not subject to revenue sharing with the states. D) FSM Earnings from Captive Insurance  National government revenues from the FSM Domicile of foreign companies (captive insurance) are estimated at $6M for FY2016. An agreement with the FSM National Government to share revenues with State governments to fund priority sectors may address potential revenue shortfalls anticipated when the COFA Grants end in FY23.
  18. 18. JDS Consulting – 2018 18 NATIONAL Government Expenditures FY18 FSM National Budget Table 3 summarizes the FSM FY18 National Budget, including budget allocations to directly benefit the States and the FSM Trust Fund. In this budget, of the $17M directly allocated to the states, $12M is for the Chuuk/Yap Telecommunications cable infrastructure project. Also, Congress allocated $5M to the FSM Trust fund. Other Congressional acts include spending for priority infrastructure projects in the Chuuk as well. Division FY18 FSM Nat’l Budget Personnel Travel Contractual OCE (?) Fixed Spending in States FSM Trust Fund Executive Branch $19.5M $9.9M $1.9M $5.8M $1.5M $.3M Legislative Branch $4.4M $1.4M $.9M $1.7M $.4M $.2M $.5M Agencies of Nat’l Government $2.3M $1.1M $.4M $.37M $.4M $.04M National Judicial $1.5M $.9M $.2M $.18M $.2M $.03M Public Auditor $.8M $.5M $.1M $.09M $.1M $.01M Special Programs $.4M $.2M $.M $.05M $.1M $.001M Capital & Human Resources Dev $36.3M $16.M $5.M Grants, Subsidies and Contributions $12.1M $.5M Grand Total $77.2M $14.M $3.5M $8.1M $2.6M $.6M $17.M $5.M Table 3 – FY18 FSM National Budget Summary (FSM Public Law (PL) 20-42, PL-20-54) National Government - Service Delivery Responsibilities The table below summarizes the Service Delivery Responsibilities between the NG and State Government. An independent Chuuk would assume financial responsibility for expenditures currently covered by the National Government. National Government (10) State Government  FSM Police   FSM Customs and Immigration  FSM Finance   College of Micronesia  FSM Telecom
  19. 19. JDS Consulting – 2018 19  NORMA—fishery policing  Intra-state transportation Other:  National Defense  Ratify Treaties  Impose taxes, duties, tariffs   Impose income taxes   Issue currency  Regulate banking, foreign and interstate commerce, insurance  Regulate navigation, shipping  National postal system  Define national crimes and penalties Table 4 - Estimated expenditures for an Independent Chuuk Republic to cover NG service delivery responsibilities (non-Infrastructure) Department Chuuk Republic Department of Justice $2.5M Department of Foreign Affairs $2.M Legislature $2.M Department of Health and Social Affairs $1.5M Office of the President $1.M College of Chuuk $1.M Office of Environment and Emergency Management $1.M Department of Finance and Administration $1.M Department of Resources and Development $1.M National Oceanic Resource Management Authority (NORMA) $.5M Department of Education $.5M Other Grants, Subsidies and Contributions $.5M Grand Total $14.5M
  20. 20. JDS Consulting – 2018 20 Economic Analysis Summary COFA Grants, COFA and FSM Trust Funds, Tax revenue and Foreign Assistance are currently available to support economic sustainability through initiatives such as Export development, Private Sector Development (example: incentives for local entrepreneurs) and possibly foreign investment opportunities. Some revenue sources may be at risk depending on the timing for an independence movement, and agreements reached with the FSM and the US. As an independent nation, revenues from fishing rights, domiciling of captive insurance, selling rights to sea bed mining, establishing a shipping registry, internet domains, residency or citizenship in return for investment, are all possible. As an independent island nation, foreign investment may be more available. Right now, the foreign investment laws are at the national level. Requirements: Effective communication, collaborative leadership, governance and accountability, capacity building (education) for ongoing economic development
  21. 21. JDS Consulting – 2018 21 CHUUK’S OPPORTUNITIES FOR ECONOMIC DEVELOPMENT Regardless of Chuuk’s future political status, strengthened collaboration with strategic partners and stakeholders including the citizens of Chuuk is foundational to managing and achieving the desired outcome of economic sustainability and growth. A public-private collaboration with owners of large businesses on the islands to strongly support structural changes (FDI laws, foreign ownership) could increase private sector development and economic sustainability. This could facilitate foreign investment and assistance from foreign partners (US, EU, Japan, China, Australia, Canada, World Bank, Korea) and private foundations and investors. In order to attract greater foreign private investment and improve the business climate, whether in the FSM or as a independent republic, Chuuk might reexamine the laws and regulation surrounding Foreign Direct Investment.  For small and medium sized businesses, the foreign ownership is limited. Currently, local ownership of (51%-60%) or a residency of more than 5 years is required. A reduction of this limit could increase investment and development.  Develop criteria to award tax or licensing incentives to encourage local entrepreneurs  Ease restrictions on land and business ownership by outside investors to facilitate business sector development proposals.  Offer citizenship to those willing to make a minimum investment. Additional Sources of Foreign Revenues Needed With the ending of the Compact Grants after 2023 and the anticipated reduced and unpredictably variable payments from the Compact Trust Fund thereafter, additional sources of income will be need to be developed to support Chuuk’s economy and its government finances. This will be true regardless of Chuuk’s political status. Though the Compact Grants will end, foreign aid and investment will continue to be a critical component of Chuuk’s fiscal and economic picture, though the sources will become more diverse and less predictable. Funds to counter the impacts of climate change should be pursued, whether from governments, foundations or individuals. However, Chuuk will also need to pursue economic development to provide the jobs, income and taxes both to fund the government and create positive economic outcomes for its people. Fortunately, most of the following suggestions can be pursued regardless of Chuuk’s political status. All the options are just suggestions, with positives and negatives. Each will need to be considered for their cultural, environmental and economic impacts and acceptability. Like other Pacific Islands, Chuuk’s main opportunities are in tourism, fishing, aquaculture (fish and shrimp farming, pearls, etc.), fish processing, and tropical agricultural products (coconut, kava, breadfruit, noni) for export.
  22. 22. JDS Consulting – 2018 22 However, the greatest economic resource for the people of Chuuk has always been the sea— the immense protected Chuuk lagoon and the vast open ocean surrounding it. As with other Pacific islands, land in Chuuk is scarce and precious and throughout its history, Chuuk has relied on the sea for fish and other marine resources and for transportation of goods and passengers. For the last 70 years, Chuuk has been known primarily for wreck diving, albeit the best in the world. Chuuk can expand on this base to include fishing and fish processing, sea floor mining, fish farming, and tourism that takes advantage of Chuuk’s tremendous natural beauty above and below the surface. Infrastructure Development Chuuk’s dispersed population, on multiple islands across a vast lagoon and beyond creates a challenge for the traditional model of centralized infrastructure development—centered on roads, central power plants and grids, phone lines, water treatment plants, sewage treatment plants, landfills, large centralized schools and hospitals. In Chuuk, as in other archipelagos around the world, this has tended to result in most development spending occurring on a main island, usually the capitol. This can be effective if there is a good transportation system to bring people to the main island for needed services, but more often the population simply moves to the main island. However, increasingly technology is favoring small scale dispersed infrastructure such as: solar panels and micro-grids, wireless voice and data and distance learning, composting toilets and other green technologies. Similarly, Chuuk’s lagoon should not be seen as a barrier but a resource for transportation. For thousands of years, the people of Chuuk lagoon and beyond were connected by sailing canoe. Under the Japanese administration, in the decades before it became the center for the Japanese navy, Chuuk was a center of commerce, with fish processing plants, copra farms and sail boats filled the lagoon and the docks on every island. Chuuk’s future infrastructure could focus on docks and a ferry system, connecting the islands, moving goods and people in ways that roads and cars cannot. Another possibility is a more organized and regulated water taxi service. Much of Chuuk’s tourism potential derives from the variety of marine recreational activities that can be offered, especially in the lagoon and encompassing reefs of the principal islands.
  23. 23. JDS Consulting – 2018 23 The Chuuk maritime sector can be developed to adequately serve international trade, the inter- island movement of goods and people, the fishing industry, cruise ship arrivals and recreational activities for both Chuuk residents and visiting tourists. Recent FSM legislation made budget allocations to fund priority infrastructure projects in Chuuk such as telecommunications, road improvement, and upgrades to equipment, municipal docks and bridges. Other critical infrastructure improvements to water, power, sewage, and medical facilities will be key to economic development initiatives such as tourism. TOURISM As with most other islands around the world, the greatest potential for Chuuk’s economic growth is through tourism. Currently, Chuuk is well-known for its wreck diving, arguably the best in the world, but a small niche market. This ignores Chuuk’s tremendous natural beauty, both above and below water. An aggressive and phased approach to Tourism development will be a sustainable source of revenues for the island and:  Is indigenous driven to preserve the culture, and protects and maintains the environment and rich natural resources  Brands Chuuk as a preferred destination for travelers (safe, pristine, adventurous, etc.).  Develops infrastructure to support visitors (transportation, sewage, boat docks, access roads)  Segments the tourist market, and attracts “value driven” visitors  Expands on niche areas such as diving, snorkeling, canoe sailing, traditional navigation, surfing, sports fishing and other water activities  Addresses land and business ownership regulations and other issues  Provides tax and licensing incentives to encourage investment
  24. 24. JDS Consulting – 2018 24 MARKETS—TOURIST ORIGINS China The greatest opportunity for Chuuk to develop a large tourism industry (or as large as Chuuk desires) is to focus on the growing and underserved Chinese market. China is the largest source of tourists in the world and the numbers are growing quickly which much room for further growth. According to the China Outbound Tourism Research Institute, in 2016 China was the source of 154 million international travelers. This is predicted to grow to more than 200 million Chinese travelling overseas by 2022. China’s international travelers are already the world’s biggest-spending tourists: in 2016, (the latest year with reliable numbers) Chinese tourists spent US$261 billion on their vacations overseas, compared with US$124 billion by Americans. As incomes in China continues to increase, more Chinese will think about international travel (currently less than 10 per cent of Chinese currently hold passports). Chinese Tourism in the Region Chinese tourists have shown an appetite for Pacific island travel, but geo-politics and other concerns limit or threaten the ability to grow Chinese tourism in many of those locations. This presents an excellent opportunity for Chuuk to become a preferred island destination for tourists from China. The following is a summary of the current state of Chinese tourism in the CNMI, Guam, Palau and Yap. Chinese Tourism in Saipan and the Commonwealth of Northern Mariana Islands (CNMI) After a decade of economic decline following the end of its garment industry and declining Japanese tourism, Saipan and the CNMI’s economy has been booming, growing an astounding 28.6% in 2016, as a result of Chinese investment and tourism. Unlike the rest of the rest of the United States, where it is relatively difficult and expensive for Chinese visitors to obtain a VISA, the CNMI has a VISA waiver program for China that allows visitors from China to visit and stay for up to 45 days without a VISA. The Marianas Visitors Authority (MVA) now estimating that the number of Chinese visitors has now surpassed the Koreans—two of the CNMI’s basic markets as Japanese arrivals continued their long-term decline. MVA’s FY’16 numbers showed that tourist arrivals on Saipan reached 501,489 for the first time in 10 years. Of that total, 206,483 were from China. The CNMI’s economy has benefited from substantial Chinese investments, with Hong Kong- based Imperial Pacific International the biggest contributor to the Northern Mariana Islands’ economy with its multi-million dollar casino resort project. Car rentals, grocery stores,
  25. 25. JDS Consulting – 2018 25 restaurants, shops, tour agencies, real estate “sales” (leases up to 99-years, as only those of “Northern Marianas decent” can own land) have all contributed to the growth. MVA has also tapped Skywalker Communications Group, an advertising and marketing firm based in Beijing, as its promotional arm as they continue to take advantage of the huge Chinese market. The entry of charter flights and other low cost carriers flying non-stop from major cities in China to Saipan also helped in the growth of tourism. China Eastern, Dynamic, Sichuan Airlines, Hong Kong Airlines and low cost carrier counterpart Hong Kong Express have daily non-stop flights along with Korean airlines Asiana, Eastar, Jeju Air, T’way, Busan Airlines, Jin Air, Korean Airlines and Philippine Airlines. However, Chinese tourism to the CNMI is threatened on multiple fronts:  The US has not renewed the CNMI’s CW worker program, whereby businesses in the CNMI could bring in foreign workers (mostly from the Philippines) for construction, hotel, casino and other tourism related jobs. The need for workers who speak Mandarin Chinese is especially acute. Many of the long-term CW workers in the CNMI will need to leave this year (presenting job opportunities for Compact migrants from Chuuk to obtain jobs and experience in the construction and tourism sectors). With no CW workers, the completion of the casino, and further hotel development (including casino construction on Tinian and Rota) will be a challenge.  The VISA waiver program for China is at risk of being eliminated if relationships between the two countries deteriorate further over issues like trade, North Korea, China’s expansion in the South China Sea or other geo-political issues. Alternatively, China could restrict travel to the US if relations between the two counties sour further.  There may be crackdowns by China on the casino, as there were in Macao, over issues of money-laundering and capital flight. Alternatively, the US could crack down over the same issues as it did when it fined the Dynasty casino in Tinian $75 million, which along with Typhoon Soudelor, resulted in its closing. Thus, the CNMI’s ability to grow, or even maintain its growing Chinese tourism and resulting booming economy is at risk. This presents an opportunity for Chuuk to attract Chinese tourism and related investment as Chuuk will not present the same geopolitical risks to a Chinese investor. Chinese Tourism in Guam In 2016, 26,000 Chinese tourists visited Guam (10% of the number of Chinese visiting the CNMI and only 2% of Guam’s total of 1.23 million visitors). Because Guam is a Territory of the United States, but was not granted a VISA waiver program, obtaining a VISA to travel to Guam from China is difficult and expensive.
  26. 26. JDS Consulting – 2018 26 Given the ongoing military and political tensions between China and the United States and the upcoming US military build-up on Guam, it is unlikely this situation will change any time soon. Moreover, Guam has its own labor issues as it is also highly dependent on foreign workers under the H2-B VISA program, especially for construction, and that program was completely curtailed by the US, with a recent exception made for construction of US military projects. Thus, Guam will have difficulty expanding its current tourism infrastructure over the coming years and will likely continue to focus on its prime Japanese and Korean tourism markets. Chinese Tourism in Palau Visitors from China have played a major role in the growth of Palau’s tourism industry. Currently, most of the tourists from China arrive as part of package tours via charter flights. The result has been growth in lower grade hotel utilization and capacity. However, in recent years Palau has made a conscious effort to limit the number of Chinese tourists in an effort to both upgrade to “higher value” tourism and to maintain its pristine natural environment upon which the nation takes great pride and is Palau’s principle “brand.” Thus, whereas Palau received 88,476 tourists from China in 2015, that number dropped to 57,866 tourists from China in 2017 due to a reduction by half of the number of charter flights from China allowed by Palau. This presents an opportunity for Chuuk to target the Chinese package tour industry with charter flights from China looking for an alternative to Palau. Chinese Tourism in Yap Yap and its atolls have a population of 7,000 people and currently receives about 5,000 visitors a year, but Chinese investors have been planning major tourism developments, possibly in response to the limitations being placed on Chinese tourism in Palau. The company Entertainment & Travel Group (ETG) wants to build a mega resort of up to 1,500 rooms, coupled with an offer to open a regular, direct airline service from China. This was scaled down from the original version of the project which was originally designed as 10,000-hotel room complex, on leased property. This plan for large scale Chinese tourism development has been very controversial in Yap, where cultural traditions remain very strong and visitors would outnumber the small population. Land ownership issues, especially on Yap’s main island where the development is planned, are if anything, even more problematic than in Chuuk. Thus, Chuuk appears better positioned than Yap to eventually pursue the large and growing demand for tourism from China to the region. Opportunity for Chuuk: Working with the Chinese tour operators and developers, currently focused on Palau, Yap and the CNMI to identify suitable locations to develop resorts in Chuuk that would be served via charter flights from China.
  27. 27. JDS Consulting – 2018 27 Others – Japan, Korea, Russia Chuuk’s reputation for the world’s best wreck diving already attracts diving enthusiasts from around the world who are well served by the relatively small Blue Lagoon, Truk Stop, and two live aboard vessels. However, by increasing its air and sea access, amenities and offerings, it can broaden its appeal—first to include families of divers and then those looking for a tropical island vacation. Inter-island cruises (discussed below) would allow Chuuk to tap into another large source of international travelers and further develop its tourism offerings. Chuuk has historic connections with Japan that might be reimagined and used to develop increased investment and tourism. Japan’s growing population of retirees is a potential market. Russians, especially those working in the Russian Far East, have 4-6 weeks of vacation, which they typically take in the winter. Guam and Saipan have been popular, but extended stays with family can be expensive and finding space in Saipan has been increasingly difficult. Korea has passed Japan as the largest source of tourists to Guam and the second largest to the CNMI. Factors include Korea’s strong and growing economy, cold winter weather, and most importantly, the many Korean budget airlines flying to Guam and Saipan. Korean airlines flying to Guam and/or Saipan now include Asiana, T’Way, Jin Air, Busan Air, Jeju Air, and Korean Air. If any one of these carriers were to extend a flight from Guam to Chuuk and offer discount fares, it would open up Chuuk to visitors from Korea, as well as Japan, China, Russia and Guam itself. SEA and AIR TRANSPORTATION ACCESS FROM TARGET MARKETS For Chuuk to increase its tourism industry and attract investment, it will need to be more easily and cheaply accessed by visitors from its target tourist markets. However, scheduled airlines will generally not increase service until the tourist amenities are in place. That is why Chuuk’s most immediate opportunities are: 1) charter flights from China and 2) cruise ships from Guam/Saipan, China and Australia. Cruise Ships For islands around the world—whether in the Caribbean, South Pacific, or the Mediterranean, the tourism industry is often initiated through visits from cruise ships. This solves multiple problems—especially lack of airline access, land, accommodations, and infrastructure. The downside is that the economic benefits of cruise ships are more limited than other forms of tourism development. However, regular visits by cruise ships allow the islands to develop their tourism offerings: diving, day use beach resorts—featuring multiple water activities, tourist markets—featuring indigenous arts and crafts and other souvenirs for purchase, restaurants, historical and cultural tours, entertainment, deep sea fishing, etc.
  28. 28. JDS Consulting – 2018 28 Once the island is established as a desirable tourist destination, other forms of permanent accommodations with increased air access naturally follow. There are several recent developments that Chuuk may be able to capitalize on to establish itself as part of a regular cruise itinerary. Growth of the Chinese Cruise Market According to a May 15, 2017 article in Bloomberg (“Cruises Boom as Millions of Chinese Take to the Seas”): There were 2 million cruise passengers from China in 2016. Passengers from China are set to double to 4.5 million by 2020. All the large international cruise companies are pursuing this large and lucrative market. Moreover, in 2017, China entered the cruise ship construction business and began building cruise ships designed for the requirements of the Chinese market: Chinese kitchens, suites for families traveling together, Chinese style entertainment and larger casinos. Korea’s Jeju Island is a popular destination for cruises from Shanghai and North China, but this faces political risk as when travel was curtailed by the Chinese government during the standoff between the US and North Korea. Similarly, the relationship between China and Japan, the Philippines, Vietnam and the US (Guam and Saipan) have at times been strained. Micronesia, including Chuuk, appears to be a viable alternative itinerary. Vessels could depart from China, Saipan, or even be home-ported in Chuuk. Cruise Ships from Australia Australia already has a developed cruise industry with ships traveling north to Pacific islands, including to the Solomon Islands and islands of Papua New Guinea, just south of Chuuk. These voyages might be extended to include Chuuk on the itinerary. Cruise Ships from Guam and Saipan In 2011, the Micronesian Cruise Association (MCA), a non-profit, non-stock membership organization was established to develop sustainable emerging visitor market segment and cultivate incremental economic activity servicing cruise ships throughout the Micronesian region. Monte Mesa, general manager, Guam Premium Outlets, was appointed as the Association’s interim president and director. There are currently 13-members of the MCA including PATA Micronesia; Yap Visitors Bureau; Pacific Islands Small Business Development Centre (SBDC); Micronesian Divers Association; Guam Publications Inc; Palau Visitors Bureau; Marshall Islands Visitors Bureau; Advance Management Inc and the Guam Visitors Bureau. On February 9, 2018, Guam’s Governor Calvo signed Public Law 34-75 which directs the Guam Visitor’s Bureau to develop and publish, within 60 days, a request for information on
  29. 29. JDS Consulting – 2018 29 developing a cruise ship industry on Guam. The plan would be for cruise ships to be homeported on Guam and traverse throughout Micronesia. A stop (or origination) in Saipan would allow the cruises to take advantage of the CNMI’s Chinese VISA waiver and low cost flights to tap into the Chinese market. Opportunity for Chuuk: Work with 1) the MCA, 2) Chinese cruise companies and 3) the companies cruising from Australia to establish a Micronesian cruise itinerary that includes Chuuk while developing Chuuk as an attractive tourist destination. Airlines Attracting air connections to Chuuk from target markets will be critical to developing Chuuk’s tourist economy. Chuuk currently is served by United Airlines via the “Island Hopper”—One day from Guam to Chuuk (and then onto Pohnpei, Kosrae, Kwajalein, Majuro and Honolulu) the next day the opposite direction from Honolulu through the islands to Chuuk and then onto Guam. Also, Air Niugini has a flight to Chuuk from Port Moresby, Papua New Guinea, where they connect with Tokyo, Hong Kong, Brisbane and Sydney, among other locations. As discussed earlier, Palau currently receives charter flights from China, but they are being restricted by Palau’s government, making them the prime target for Chuuk to develop tourism from China. For scheduled flights, one of the many Asian budget airlines that fly to Guam and Saipan would be a most welcome addition: Cebu Pacific (Philippines), HK (Hong Kong, China), Jin Air, Busan Air, Jeju Air, or T’way ( all Korea) might fly direct to Chuuk from Asia or as a continuation on a flight to Guam. Opportunities for Chuuk: 1) Work with Chinese tour operators for charter flights from China to Chuuk (once suitable locations for accommodations can be secured), 2) Work with the many airlines flying to Guam from Asia to see if they can extend one of their flights to Chuuk. ACCOMMODATIONS Chuuk’s current visitor accommodations consists of the two small dive oriented resorts: Blue Lagoon and Truk Stop, other small hotels and two live-aboards, the Truk Odyssey and SS Thorfinn--these are well-suited for the more adventurous wreck diving crowd they serve. Traditional large resort hotels are probably not well suited to the main populated islands due to the need to acquire large amounts of land, land title issues, lack of infrastructure, lack of sandy beaches, and issues around cultural acceptance and integration.
  30. 30. JDS Consulting – 2018 30 One solution, already discussed, is development of Chuuk as part of a regular cruise ship itinerary. However, this is where Chuuk’s geography, with a dispersed population, but still maintaining many uninhabited small islands, reefs and shoals, can be used to its advantage. Tourist developments can be located on land (or sea) controlled by the government, away from main population centers. For example, in the Maldives, a majority Muslim nation in the Indian Ocean consisting of over 26 atolls with more than 1,100 islands, the local population lives on 185 islands while the other islands are used for business purposes, mostly tourism developments. Boats from the docks at the airport depart directly for the resort islands. Visitors from Europe can enjoy themselves at the resorts according to European cultural norms and minimize potential conflict with local norms. Similarly, other resorts in the Maldives cater to Chinese visitors and their tastes and standards. Nearly 1.4 million tourists visited the Maldives in 2017 and the government for over 400,000 people is 90% funded by tourism proceeds. Thus, Chuuk can follow many of the best practices of similarly situated islands around the world for developing its tourism infrastructure: cruise ships, exclusive resort islands, over water bungalows, floating resorts and even under-water resorts. Over-Water Bungalows/Villas First introduced in Bora Bora, French Polynesia 51 years ago in 1967, over-water bungalows are very popular with tourists worldwide with demand outpacing supply (currently numbering 8,000 worldwide), and would appear to be well suited for Chuuk Lagoon or the outer atolls.
  31. 31. JDS Consulting – 2018 31 Moreover, over-water bungalows or villas solve several problems:  Land scarcity and land ownership issues (though in Chuuk, the shallow lagoon areas can have similar ownership issues).  Shortage of sandy beaches for access to deeper water for swimming, snorkeling, boating, etc.  They can be sited on more remote areas where issues of cultural acceptance are less of an issue.
  32. 32. JDS Consulting – 2018 32 Over-water bungalows rent for $500 to as much as $1,750 per night. 100 bungalows charging $1,000 a night with 80% occupancy would generate $2.9 million in hotel occupancy taxes alone. Moreover, if shallow water locations are found that are not privately owned, the land/water lease payments can be made directly to the government of Chuuk. Opportunity for Chuuk: Work with developers to find suitable locations for developments of overwater bungalow resorts. Small Cruise Ships and Live-Aboard Vessels Chuuk currently has two live-aboard vessels, the Truk Odyssey and the SS Thorfinn. Both cater to wreck divers, traveling throughout the lagoon to different dive locations. As multiple islands throughout Chuuk become seen as tourist destinations, more live-aboard vessels, or even small cruise ships, might be home-ported in Chuuk. These ships would cater to a more traditional cruise customer traveling through the islands.
  33. 33. JDS Consulting – 2018 33 Artificial Islands or Floating Resorts In parts of the world, such as the Mediterranean and Persian Gulf, resorts have been built on artificial islands or artificial extensions of naturally occurring small islands. Similarly, China has been building artificial islands on reefs and shoals in the South China Sea (though for military/strategic purposes, not vacation resorts). This might be an option in Chuuk, whereby land ownership issues could be avoided and any lease payments would go directly to the government. Similarly, in some locations, floating resorts have been anchored in place in protected waters, which also avoids land ownership issues and avoids the environmental concerns caused by artificial island construction. For example, an entire resort might be built in China and then towed and anchored in Chuuk Lagoon. All these would avoid some of the issues around land ownership in Chuuk, have minimal negative impact on existing infrastructure, would make annual payments directly to the Chuuk government and could be very attractive to investors. Underwater Resorts In a few locations around the world, resorts have been built all or partially under water. A resort of this type would be a natural for Chuuk lagoon and would put it on the map, attracting international attention. Again, this would also be a way to avoid land ownership issues.
  34. 34. JDS Consulting – 2018 34 Eco-Tourism—Traditional Arts and Culture—Tourism Villages Many of Chuuk’s islands, especially outside the lagoon, still retain a traditional way of life that has disappeared elsewhere. Visiting these places has great appeal for many around the world. Under this model, an outer island village would agree to host visitors who stay in traditional housing. Traditional Micronesian shipbuilding, seafaring and navigation, art, music and dance would be shared. VISITOR ACTIVITIES AND ATTRACTIONS To expand Chuuk’s appeal beyond wreck diving, Chuuk will need to offer more activities and attractions. This will be critical for attracting cruise ships or larger resorts. For scuba divers, Chuuk could also emphasize the natural beauty of the lagoon as well the wrecks. In some places around the world, underwater art galleries attract divers. Such an exhibit in Chuuk could be co-sponsored by the government of Japan as a peace memorial. Beach clubs could offer: Snorkeling, Sailing—sailboat rental, Para-sailing, Surfing, Kite surfing, Paddle boarding, Jet ski rentals/tours. Other activities include: deep sea fishing, outrigger canoe sailing and navigation, hiking. Tourist villages could offer arts and crafts, traditional cultural performances such as dance, music and food.
  35. 35. JDS Consulting – 2018 35 However, one of the best additions would be Atlantis Submarine, a company that operates in Hawaii, Guam and other islands. Their submarines could open up Chuuk’s famous wrecks and beautiful lagoon to a much wider audience. AQUACULTURE—FISH FARMS, SHRIMP FARMS, PEARL OYSTER FARMS, ETC. WHY: To generate foreign income to replace lost grant funding o Develop large scale fish farming for Export – CO-OP model o Agriculture development: Breadfruit, coconut, kava, noni IMPORT SUBSTITUTION as a means to develop internal market economy. Chuuk is an aid dependent country, to spend less on imports will contribute to economic sustainability. To produce more locally will reduce dependence of foreign aid. Opportunities include:
  36. 36. JDS Consulting – 2018 36 o Working with International Partners (EU, Global Climate Fund) replacing petroleum products with solar / biofuels o Improving healthcare outcomes. Aggressively address the threat of non- communicable diseases, by implementing wellness education. Tax on imports of processed foods and beverages, alcohol and tobacco products. HEALTH CARE SPENDING – Identify drivers of high medical costs and mitigate risks to reduce healthcare spending o Working with the Health Sector to develop medical cost analytics to identify drivers of high cost medical care. Perform analysis of medical cost categories and utilization. o Identifying and segmenting and risk groups and behaviors. Identify patients with chronic disease and manage and implement disease management programs o Engage citizens to take accountability for health by promotion of wellness education programs and tools designed to provide engagement incentives to modify unhealthy behaviors CONCLUSIONS  Understanding the current FSM and Chuuk State economic drivers is key to developing and achieving economic growth and sustainability.  Opportunity exists to maximize infrastructure development projects to support the environment, business development and private investment.  Beginning in 2024, the fiscal health of Chuuk as a state in the FSM would largely depend on the willingness of the FSM National Government to share revenues (especially Fishing Fees) with the states. Alternatively, the fiscal health of Chuuk as independent republic would largely depend on Chuuk’s ability to negotiate for a share of the Compact Trust Fund, negotiate Fishing Fees, and obtain other revenues.  Many of Chuuk’s long-term opportunities for economic development can be pursued regardless of Chuuk’s political status.
  37. 37. JDS Consulting – 2018 37
  38. 38. JDS Consulting – 2018 38 References Statistical data was reviewed and analyzed based on information available from the following sources:  (1) Graduate School USA: FSM FY2016 Statistical Appendicies  (2) US: USCOMPACT.Org FSM Documents (JEMCO reports)  (3) (4) FSM: FY2016 Economic Brief  (5) FSM and Japan Sign New Ten Year Fishing Agreement Press Release - (  (6) Trust Fund for the Federated States of Micronesia – Public Information Office Press Release #1702-02  (7) The Federated State of Micronesia – EU National Indicative Programme for the period 2014 to 2020  (8) FSMC, TITLE 55. GOVERNMENT FINANCE & CONTRACTS - Chapter 12: FSM Trust Fund  (9) FSM: Fiscal Year 2016 Annual Report  (10) Federate States of Micronesia: Public Expenditure Analysis Resources:
  39. 39. JDS Consulting – 2018 39