Summary of the 2004 State of the Republic Address As delivered by President Remengesau on 2 April 2004 at Palau National Gymnasium I. Introduction In 2001, the President indicated that Palau was entering a Non-Payday Weekend The government was spending considerably more than it was bringing in and the private sector was under serious attack as a result of the Asian Economic Crisis Introduced the Management Action Plan (MAP); Palau now running on for Efficiency, Effectiveness, Excellence We can look to our neighboring economies and be proud...that Palau is now in an unmatched position to move forward, into our future, and prosper. Over the past three years, Palau has followed the MAP with great effort and care and we are now in a position to reap the benefits of the foundations that we have laid. Palau does not want to follow the undisciplined approach of many of its neighbors in realizing prosperity...we want a voyage that will strengthen our culture, not destroy it. We want a voyage that will preserve our unique environment, not damage it for future generations. We want a voyage that will benefit all the people of Palau, not just the few We do not need to rush our development by developing public institutions and rules that look only to today... This is the peoples’ government. You are the government’s people...your government is only as good as your involvement in its decisions. Palau must establish modern laws that strengthen the economy and permit the private sector to prosper and spread the tax burden equitably Palau does not have a transparent foreign investment law that allows businesses to gain needed partners and financing, or incentive laws for development Palau does not have complete banking laws that protects Palauan depositors and meets international standards Palau does not have a uniform commercial code that establishes consistent rules for private sector transactions Palau does not have a statistics law that permits the evaluation of economic growth prospects and limitations It is time to make the hard decisions, to take the courageous corses and to establish a legislative path that protects and provides opportunities for all Palauans
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II. State of the Republic 1. Overview In the wake of the U.S. Stock Market Crash, Tropical Storm Utor, 9/11, the wars in Afghanistan and Iraq, and SARS, the economy and state of the Republic is very promising Palau now has a Public Sector Investment Program to identify necessary infrastructure and instituted a Cost Reduction Plan to limit gov’t growth and encourage the private sector We have contained the cost of government over the past three years, so that we have greatly limited the negative impacts of the slow international, regional and local economy. Palau has created the National Environmental Protection Council (NEPC) and the Office of Environmental Response and Coordination (OERC) Palau has established the Communications Information Technical Advisory Group (CITA) to identify and implement Palau’s telecommunications future. Management Action Plan (MAP) which coordinates all of the planning activities of the Executive Branch and provides a cohesive vision for Palau’s future. 2. Economic Data Palau’s Gross Domestic Product (GDP) indicates the overall output is estimated to have grown by an average of 2% per year since 2000 The largest sector of the economy is the public sector with 27% estimated share Palau must diversity and increase the contributions of sectors of the economy with potential to support sustainable growth such as agriculture, fisheries and manufacturing. 3. Tourism In 2000 Palau had 57,000 visitors, which dipped by 6% in 2001 In 2002 Palau had 58,000 visitors and in 2003 Palau had 63,000 visitors, an 8% increase January of 2004 had a record-breaking 8,000 tourists, a 60% increase over January 2003 In the past three years, the Executive Branch has actively pursued new airline options Palau Trans Pacific Air (PAIR) began operations in 2003; Palau Micronesia Air to begin operations in 2004; Japan Air Lines continues to increase charter flights Palau International Airport terminal building opened in May 2003 Palau negotiating a low interest $15 million loan with Taiwan for airport improvements -2-
We should look towards new markets, such as long-term tourists; proposed the SilverHair Town Program to permit elderly tourists to take advantage of Palau’s expanded facilities. Expand sports tourism for pro, semi-pro and collegiate levels 4. Construction We expect the construction industry to partner with tourism to stimulate the Republic’s economic expansion. Completion/near completion of the National Capitol, National Museum, and Cultural Center Initiation of Koror/Airai road rehabilitation in late 2004; initiation of airport runway project Over 2003, the CIP office administered a total of roughly 60 projects. In 2003, 19 projects were commenced, with a value of $14 million; for 2004 17 new projects are scheduled with a value of over $22 million Palau needs modern and transparent foreign investment laws, appropriate economic incentive laws, modern tax laws, and revised banking laws that provide foreign investors the necessary comfort and assurances that Palau is ready to do business. 2004 Current and New Projects Compact Road Koror/Airai road rehabilitation Airport runway repair National Caitol - Phase II Peleliu and Angaur Harbor Malakal Sewage Treatment Plant Airport-Ngerikiil Connection Belau National Museum Capitol/Melekeok Sewer System Cultural and Performing Arts Center State Economic Stimulus Package Pacific Arts Festival Facilities Northern Babeldaob Water Distr. -3$149.0 million $20.0 million $15.0 million $13.0 million $8.0 million $4.5 million $3.8 million $2.6 million $2.6 million $2.5 million $2.0 million $1.3 million $1.1 million US Japan ROC ROP and ROC Japan US ROC ROC ROC ROC ROC ROC ROC
Projects Completed in 2003 Phase II of National Capitol relocation Echang Marina Dock Improvement PMA Road Paving - Phase II Malakal Natural Wastewater Treatment Ngarchelong Concrete Road Paving Kayangel Harbor Construction Angaur Concrete Road Paving State Stimulus Projects in Aimeliik, Airai, Angaur, Melekeok, Ngaraard, Ngardmau, Ngaremlengui, Ngchesar, Ngiwal, and Peleliu Projects that Need Funding Comprehensive Solid Waste Disposal Management System Rehabilitation and Expansion of Malakal Port Improvement and Expansion of Koror Wastewater Collection Babeldaob Cross Island Road, Kokusai to Compact Road Other ODA Projects Negotiations with Saga University and Japan gov’t on a $90 million Ocean Thermal Energy Conversion pilot project; currently before the Japan parliament Expand tele-health and tele-medicine capacity through a $5 million grant Negotiated $5 million loan through ROC to finance NDBP loans for housing and small businesses; priority sectors of agriculture, aquaculture, and tourism-related cottage industry Private Sector Projects Construction of Palau Royal Resort ($20 million) between July 2004 and June 2005 Proposed 5-star, $40 million hotel and resort financed by the Cathay Group of Taiwan Construction of Palau’s first 18-hole golf course in Aimeliik ($30 million) including 100200 villas on 2.2 million square meters. Designed by Robin Nelson, renown for developing environmentally sensitive golf courses worldwide. Completion of 66-room, $10 million hotel by Sea Passion Corp. in Malakal by 2005 $16.5 million $10.0 million $5.0 million $5.0 million
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Planned construction of Malakal Marine Resort ($22 million) and Ngerur Island Resort ($45 million) in late 2004/early 2005. Completion of VIP hotel in Ngermid ($3.5 million) in July 2004 Commence construction of PMIC Commercial Complex ($2.5 million) 5. National Debt 2 loans being negotiated through ROC: $5 million for NDBP; $15 for airport runway Both loans comply with Executive Branch policy that loans must only be taken where a strong revenue source exists to may repayment Plans to work with OEK to develop a national Ports Authority to ensure that revenues equal any debt obligations from airport or seaport Will pursue potential loans and grants to improve and expand seaport 6. Trust Fund Palau lost significant portion of stock portfolio value in the 2000 fall of the stock market Worldwide stock markets have increased in value by an average of 33% In 2002 the Palau trust funds sunk to $124.5 million; as of January 2004, these holdings are at $148 million Palau has withdrawn $5 million from the stock portfolio for the last 3 budgets Want to see sufficient holdings to guarantee $15 million withdrawals per year from the end of the Compact to 2043 7. Annual Budget Due to SARS in 2003, Palau’s revenues were short almost $4 million; compounded by weak revenue collections in the economic slowdown and 2002 reduction of Alcohol Tax The government did not spend more than was budgeted in 2003; in act, the Ministry of Finance monitored and analyzed revenue collections in 2003 and implemented expenditure reduction measures that saved $2.9 million or 5% of the fiscal year 2003 budget. The analysis of revenue trends also identified the need to implement revenue enhancement measures, including the restoration of the alcohol tax rates. In 2004 the MOF implemented a spending plan that closely monitors actual revenue receipts from the beginning of the fiscal year and limits expenditures below the level of the 2004 budget MOF continues to implement the Cost Reduction Plan developed in 2003 -5-
Cash flow problems will continue to occur unless Palau builds up its cash reserves Palau needs a mechanism that permits access to cash in anticipation of revenues owned by now received. Prior to the Remengesau administration, Palau spent all of its cash reserves to cover operational expenditures. In fiscal year 2000, Palau had available, and expended, $21.5 million in cumulative investment earnings. In 2000, Palau only had available and expended $700,000 in investment earnings To strengthen cash flow problems, we must take a reality approach and put stringent spending measures in place for 2004 throughout the government while taking serious actions to increase our revenue base. We are seriously exploring the possibility of issuing government bonds to cover revenues that are due, but not yet paid Palau must expand its revenue base while limiting expenditures to develop an emergency reserve system to external crises 8. New Opportunities Reduction of PNCC long-distance rates to $0.99 per minute. Continued negotiations with the U.S. to gain Universal Services and membership in the National Exchange Carriers Association Palau has a significant opportunity to become a regional and international center for large foreign corporations and banks that service them 3 Bills before the OEK provide tax incentives to Japanese corporations if they locate in Palau III. Oil Exploration I am not opposed to the development of our natural resources, such as oil and natural gas, if we develop such resources so that they benefit all of our people and do not harm our environment for future generations President contacted the World Bank to request technical assistance regarding drilling in Velasco Reef. A representative of the World Bank issued a report concluding that: By industry standards, the Velasco Ref is not an industry hot spot; Neither the National Government or the Government of Kayangel have any expertise in the petroleum sector or the environmental risks from oil exploration; Neither the National Government or the Government of Kayangel have a legal framework for oil exploration that is in line with international standards; and
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Licenses issued in the past by the State and National Government fell well short of international standards in terms of environment, social and economic protection. The consultant recommended that: An independent study be taken on Palau=s petroleum potential; An independent environmental study be undertaken to clarify potential environment issues Jurisdictional issues between the National Government and Kayangel be resolved; Public information and institutional capacity and education be instituted; and A comprehensive framework be developed, after which investment opportunities for international companies could be pursued Framework for oil and gas exploration developed through the help of the World Bank. This framework indicated three steps to take: 3 independent studies to determine the appropriateness of exploring oil and gas potential in Palau: a study of the potential oil and gas resources; an environmental study; and a socio-economic study, including an evaluation of capacity, institutional arrangements, and a comprehensive economic model These 3 studies will provide the basis and design structure of an institutional framework, including a Petroleum Code, a standard Petroleum Contract, and environmental and fiscal regulations. Upon completion of the institutional framework, if oil and gas exploration is reasonable, begin implementation and capacity building. World Bank offered $2 million to implement framework OEK developed Petroleum Act prior without an unbiased assessment and study and recommended, through proposed legislation, to create a “Petroleum Authority” that excludes EQPB, the Executive Branch, the Judicial Branch, and the public from input IV. Constitutional Amendment Initiative President has put forth five Constitutional amendments Does not support a Constitutional Convention V. Conclusion For the past three years, the Administration has worked to establish a stronger governmental foundation for future economic growth, focused on consolidating gains, realigning expenditures with revenues, expanding and improving the capacity of the workforce, improving planning capacity, and developing institutions to anticipate issues of expanded development -7-
Except for the shortfall resulting from SARS and other external events, Palau has effectively reduced operational expenditures to almost match local revenue capacity With the new PICRC, Palau can take a greater role in the preservation of coral reefs As a member of the Asian Development Bank, we will see expanded private and public sector technical assistance and grants We need only the patience and the foresight to recognize that good things come to those who plan. Will do everything in my power to ensure that environmental assessment will continue at both the state and national level, on every private and public sector project... To ensure that the benefits of growth go to the people of Palau, we must establish the modern legislative framework that will set us apart form our competitors. We must simply plan our future and have the patience to see our garden grow in a sustainable manner.
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