Economic Growth and Sustainability
STUDY 2018 PRELIMINARY
JDS Consulting – 2018 2
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
Markets – Tourist Origins
o Others – Japan, Korea, Russia
Sea and Air Transportation Access from Target Markets
o Cruise Ships
Visitor Activities and Attractions
JDS Consulting – 2018 3
JDS Consulting was contracted to conduct an economic study for the Chuuk State Political
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
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.
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
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
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
The following table summarizes the Fiscal Outlook beginning FY2024:
JDS Consulting – 2018 5
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.
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
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
FSM Trust Fund $3M $- $- $-
Fishing Fees $- $- $10M $16M
Captive Insurance (Foreign Domicile) $- $- $- $5M
Sub-Total Other Revenue $3M $- $10M $21M
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
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.
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.
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.
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
Education Health PSCB PSD Environment ERA
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
The table below summarizes Chuuk State local revenue collections for FY2015 – FY2017
Local Tax and
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
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
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
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
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
FSM Compact Trust Fund FY05-FY17
Contributions Balance Accumulated Earnings
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.
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
$15 $15 $15 $15
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
$29 $30 $29 $28
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
JDS Consulting – 2018 15
Revenues and thus Sector funding. And, if not replaced, would likely create significant
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
Foreign Assistance COFA Grants
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
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
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
COFA Grants FY2019-FY2023 $320.8M
(unadjusted for inflation)
(unadjusted for inflation)
Est. 40% of COFA
COFA Trust Fund FY2024 -
Target: FY23 Grant
Est. 40% of CFT
FSM Trust Fund Annual Est. $100M
To be Determined
Taxes Annual $8M Average
Remittances (a) Ongoing Varied Varied
Foreign Aid: JICA FY2017 - present $2M
World Bank ICT FY2017 - present
$47.5M (shared with
EU NIP 2016-2020 $17M
$3.4M (1/5th of total
(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.
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
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
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.
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.
Personnel Travel Contractual OCE
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
$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
$36.3M $16.M $5.M
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 Customs and Immigration
College of Micronesia
JDS Consulting – 2018 19
Impose taxes, duties, tariffs
Impose income taxes
Regulate banking, foreign and
interstate commerce, insurance
Regulate navigation, shipping
National postal system
Define national crimes and
Table 4 - Estimated expenditures for an Independent Chuuk Republic to cover NG service
delivery responsibilities (non-Infrastructure)
Department of Justice $2.5M
Department of Foreign Affairs $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
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
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
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.
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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.
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.
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
Other critical infrastructure improvements to water, power, sewage, and medical facilities will
be key to economic development initiatives such as 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
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
JDS Consulting – 2018 24
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
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,
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
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
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.
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.
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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.
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.
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
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
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.
Attracting air connections to Chuuk from target markets will be critical to developing Chuuk’s
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
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.
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.
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.
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.
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,
They can be sited on more remote areas where issues of cultural acceptance are less of
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.
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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
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.
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.
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.
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:
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
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
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
Many of Chuuk’s long-term opportunities for economic development can be
pursued regardless of Chuuk’s political status.
JDS Consulting – 2018 38
Statistical data was reviewed and analyzed based on information available from the following
(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
(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