Summary of the State of the Republic Address As

Summary of the 2006 State of the Republic Address As delivered by President Remengesau on 18 April 2006 at The Senate Chambers I. Introduction The economy is back on track and moving in the right direction. We are indeed ready to enter a now and dynamic phase of expansion, one that can lead our people to an economic prosperity for decades to come if we make the right decisions and set in place the appropriate laws and policies to guide a growth that leaves not Palauan behind. It is time to expand our revenue base to better respond to the needs of our people; specifically, we must create revenue sources that pay for our own infrastructure needs and that place grant revenues from the U.S. that currently finances a very considerable potion of our health and education II. State of the Republic 1. Overview Our economy is ack on rack and heading in the right direction 2. Economic Data In 2004 Palau’s GDP, excluding cost of living increases, grew y 8.8%; with cost of living increases, this is a read growth of 6.1%;. This follows a 2003 real increase of 0.6% Conservative 2005 estimates show a nominal increase of 8.3% and a real growth of 5.4% According to the IMF Article IV Missions, Palau’s overall fiscal deficit has declined from 21% GDP between 2000 and 2002 to under 5% between 2003 and 2005 Current domestic revenues represent 27% of the GDP; IMF and ADP recommend this be increased to 45% by 2008 for Palau to be self-sustaining The public sector declined to 23% GDP, down from 24% in 2004. The agriculture sector accounted for just over 1% of the national output, attributable to a lack of economies of scale in agricultural production that makes food imports cheaper than locally-produced products The fisheries sector contributed just 2% to the GDP; the government has begun a review of the tuna fisheries management framework tin order to harmonize fisheries policies and practices, as well as prioritizing the diversification of mari-culture products. Working with states and the private sector to promote fish farming and other marine projects Manufacturing sector remains thin and underdeveloped, accounting for just over 1% GDP -1- Construction is the most important industrial activity with 15% GDP while hotels and restaurants contributed close to 11% GDP 3. Tourism Visitor arrivals fell 9% from 2004 to 2005 but, excluding the Festival of Arts and MiniGames, visitor numbers continue a steady increase Recognizing the potential adverse impact of mass tourism on the environment, a more coordinated, cohesive approach to maximize the value of tourist dollars spent in Palau is currently underway; an appropriate statistical framework for measuring the impact of each tourism dollar is being pursued. Efforts are underway to diversify tourism products and attract high-end tourists 4. Construction Over the last years, Palau has secured roughly $100 million for infrastructure projects from non-Compact sources Secured a $26 million U.S. grant for airport runway and upgrade airport facilities. Improvements include an Aircraft Rescue and fire-Fighting capacity and the installation of two additional jetways for aircraft. Secured $8 million to fund the connecting road from Ngerikiil to the Compact Road Continue to construct roads in Peleliu and Angaur and $3 million for Koror causeway repair Third phase of Koror road rehabilitation will cost $10 million Secured over $8 million in grants for state infrastructure projects Currently receiving JICA technical assistance to rehabilitate Malakal dump 2006 Current and New Projects Compact Road Koror/Airai road rehabilitation Peleliu dock and Boat Access Ngerbeched Landfill Project National Capitol East/West Access Roads Airport ARFF Building $149.0 million $2.6 million $4.0 million $3.0 million $2.6 million $2.5 million US Japan Japan Japan ROC US -2- Compact road Light Project National Capitol Communication System Airport ARFF//Intervention Vehicles Airport loading bridges Palau airport runway package National Capitol Project Finishing Airport-Ngerikiil Connection Northern Babeldaob Water Distr. Capitol/Melekeok Sewer System Capitol Power/Water System State Economic Stimulus Package Projects Completed in 2005 $2.0 million $41.9 million $1.8 million $1.5 million $19.0 million $2.2 million $3.8 million $1.1 million $2.6 million $1.0 million $2.6 million EU ROC US US US ROC ROC ROC ROC ROC ROC Approx. 20 new projects started and managed by CIP in 2005 at a value of almost $8.5 million. CIP completed over 30 projects in 2005 at a value of almost $17.5 million. 25 CIP projects have been carried over into 2006 at a value of over $12 million. Projected that over 30 new projects to be started in 2006 at a value of $23 million Major projects completed in 2005 include: Mini-SPG Sports Facilities National Capitol Relocation Pkg: A/J Airport Runway Repair/ARFF Design 2004 State Economic Stimulus Packages in almost all States Planned Projects State-Compact Road Connection Improvements Malakal Port Improvements/Expansion Koror-Airai Road Rehabilitation, Phase III Nav Aids Improvements/VTS-AIS Angaur State Port Facilities Improvements -3$1.25 million $10.0 million $10.0 million $6.9 million $5.2 million Kokusai Cross Island Road Compact Road Maintenance Program - Startup Equipment National Prison Facility in Babeldaob Koror Wastewater Collection System Improvements, Phase II Fruit Fly Eradication Project Koror Wastewater Collection System Improvements Airport-Ngerikiil Compact Connection Road, Phase II/III Public School Facility Improvements PPUC Electrical Power Generation Capacity Expansion Private Sector Projects $5.0 million $1.5 million $2.5 million $2.0 million $1.25 million $4 million $8 million $1 million $30 million Aman resort, VIP Hotel, Uchulangas Resort, and Toirechuul Hotel projects underway Planning stages: Aimeliik Golf Course and Malakal Marine Village 5. National Debt 3 outstanding loans: 1) 2000 low-interest loan of $20 million to fund Phase II of the National Capitol; 2) $5 million low-interest loan to NDBP from ROC for consumer loans; and 3) the 2004 low-interest loan of $15 million to fund airport improvements U.S. gave grant funding to convert major portion of airport improvements but will use $3 million of Taiwan loan to fund areas not covered by U.S. grant. Should consider redirecting the remaining balance of the loan to other infrastructure projects, primarily Malakal Port and Koror Waste-Water Collection System Continue to follow policy that loans must only be taken where a strong revenue source exists to may repayment 6. Trust Fund As of December 2005, trust fund holdings are at $155 million Palau has withdrawn $5 million from the stock portfolio for the last 4 budgets Compact has not been perf0rming to anticipation; projected yearly earnings were 12.5% but have averaged only 9.8% over the past eleven years. -4- According to IMF, Trust Fund value will fall short of the projected value in 2010 by as much as $210 million Palau must move rapidly to identify new revenue sources to replace anticipated revenues 7. Annual Budget Must take advantage of strengthening economy and growing revenues to balance the budget by 2009 by following conservative spending patterns and implementing the Cost Reduction Plan Must move rapidly to outsource and privatize appropriate government services III. Preparing for the End of the Compact Plan to incorporate recommendations of the National/State Leadership Symposium into Management Action Plan and direct an inventory of recommendations into National master Development Plan A. Expansion of our Economic Base 1. Tourism Tourism continues to be the engine of the economy; we must take necessary actions to tune up the engine and know where our tourism engine is headed by focusing on 4 rules: Maximize the value of tourist dollars Diversify the tourism portfolio Focus on high-end tourists Ensure that the benefit of tourism revenues flow to Palauans We must move forward with implementing the Sustainable Tourism Development Plan; recommend establishing a “Tourism Promotion Committee” Recommend funding PVA to levels that permit adequate marketing without management responsibilities better left to the government We must undertake the following based on National Symposium recommendations: Upgrade service quality by establishing recognized standards for tourism products Move to the grass roots level and implement an import substitution program and support ‘Made in Palau’ products Develop unique state and national attractions throughout Palau -5- Streamline government permit process to simply the process for tour companies Develop greater incentives for local participation in the tourism industry, including tax breaks and subsidies Discourage package tours that eliminate or limit choice by tourists Develop relevant physical infrastructure to meet the needs of the tourism industry Develop national land-use guidelines and state zoning laws, incl. building code 2. Agriculture As recommended by national Symposium, we must: Provide incentives for local participation through tax breaks, concessionary financing, and marketing support Expand educational opportunities in the field of agriculture Implement the Palau Fruit Fly Eradication Program Improve quarantine capacity Develop an agricultural processing industry with diversified value-added products 3. Aquaculture Provide subsidies and financing opportunities Develop pilot projects Expand educational and training programs Expand the clam-seeding program to other aquaculture products Expand PMDC Improve the promotion of local aquaculture products 4. Fisheries Institute a comprehensive value-added program for processing fish into new products Develop a sustainable catch and release sports fishing program with states Improve revenue stream by improving multilateral and bilateral fishing agreements and increasing fines and penalties for illegal fishing -6- 5. Service Based Export Developments Look to creating and expanding service-based industries, including: An international corporate registration and banking regime An Information Technology Industry Development as a transshipment center through a new international port 6. Information Technology Industry Begin the process of determining the feasibility of an Information Technology Industry by pursuing the possibility of securing a fibre optic cable B. Legislative Agenda Recommend that we focus on the following: A modern tax law that broadens the tax base, that is simple, and that gives foreign businesses necessary credits in their own countries A rational and transparent foreign investment law that serves the interests of the private sector; that injects international financing into the economy; and that rids the economy of front businesses Amendments to banking laws and regulations in line with international standards A simple commercial code that governs financial transactions and places the private sector on an even footing with the rest of the world Environmental laws that protect forests, coral reefs, watersheds, and diverse marine and terrestrial species A comprehensive labor law that protects all of Palau’s workers A law that enhances the collateralization of long term leases so that bank loans are possible using leased land as collateral A statistics law to allow better monitoring of the economy A comprehensive regulatory framework for the management of the road system, including financing mechanisms A comprehensive regulatory framework for water usage and conservation A budget appropriation to finance zoning at the state and national levels -7- C. Health Care Committed to improving health care insurance options for residents and citizens Urge the OEK to put in place a long-term health care plan D. Comprehensive Planning and Zoning Sought technical assistance from the US through the National Oceanic and Atmospheric Administration to focus on establishing national planning guidelines and undertaking zoning pilot projects at the state level. E. Environmental Protection 1. The Micronesian Challenge Congratulate the OEK on endorsing the NBSAP and passing a law prohibiting bottom trawling in Palau’s EEZ Recently signed the Micronesian Challenge to conserve 30% of near-short marine resources and 20% of forest resources by 2020; a critical component of this is implementation of the Protected Area Network Nature Conservancy and Conservation International will match the $2 million Palau will receive from the US Global Environment Fund to establish a $12 million endowment to assist states establish and enforce their protected area networks and provide annual funding resources for environmentally-sound business ventures A final component is to impose a reasonable user’s fee on tourists 2. Natural Resource Development Will work with the OEK, private sector, and states to establish regulations for natural resources, especially petroleum World Bank has offered over $400,000 in grant assistance to develop a comprehensive regulatory schemes for the use of natural resources, including: A petroleum code and model petroleum contracts Petroleum operation regulations Environmental regulations Fiscal regulations Agree with World Bank recommendation to establish task force for petroleum -8- 3. Alternate Energy Resources Will work with international agencies and PPUC to determine and fund appropriate pilot projects at the national and regional level for alternative energy 4. Operation Counter Invasion Instituted ‘Operation Counter Invasion’ with $100,000 in funding from ROC to develop a plan to combat invasive species and pt into place an initial capacity to support the National Invasive Species Committee F. Public and Private Sector Retirement Programs We must fully fund the pension plan but must recognize that we cannot currently afford the plan. We must look at alternative plans, such as a defined contributions plan. We must also equalize pension opportunities so the private sector can reap the benefits at a comparable level to the public sector. We should look to provide incentives to businesses to participate in the pension plan G. Human Resources We must work to: Identify appropriate fields of education and training that fulfil the needs of the economy Provide education and training opportunities to meet these needs Establish incentives to encourage young people to enter into these fileds Provide the necessary tools and equipment to allow them to excel in their chosen fields Develop a systematic way of measuring progress Establish a world standard certification system to ensure quality fo work and raises wage potentials H. Infrastructure 1. Maintenance Palau needs a management and maintenance system for the Compact Road, National Capitol, and water, wastewater, and sewer systems. -9- Intend to establish a National Road Maintenance Program to finance and maintain road system 2. Port Development Recommend reinitiating discussions regarding Palau’s port needs and look into the development of another primary port to permit Malakal to serve the tourism industry. Move towards establishing a Ngardmau duty free zone I. Housing Work with NDBP, OEK, and Housing Authority to ensure sufficient resources are available to permit Palauans to move to their home states and live in their homes upon the completion of the Compact Intend to work to develop low-income incentives to ensure no Palauan is left behind IV.Conclusion Many Pacific islands have had the opportunity to choose their own course and have failed to grasp their moment. Their destinies were therefore not their own. Let us therefore join together, as a people, as a culture, and as a nation and choose to take the other course. Let us observe both the history of our past and the potential of our future and jointly select the path that we feel is wise and worthy of or predecessors. - 10 -