Foreign Assistance:

U.S. Funds to Two Micronesian Nations Had Little Impact on Economic Development

NSIAD-00-216: Published: Sep 21, 2000. Publicly Released: Sep 21, 2000.

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Pursuant to a congressional request, GAO reviewed foreign assistance, focusing on the: (1) use of the Compact of Free Association funding by the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) between fiscal years 1987 and 1998; (2) progress both nations have made in advancing economic self-sufficiency; (3) role of Compact funds in supporting economic progress; and (4) extent of accountability by the two nations and the United States over Compact expenditures.

GAO noted that: (1) Compact funds were used for general government operations, capital projects such as building roads or investing in businesses, making debt payments, and improving targeted sectors such as energy and communications; (2) while FMS concentrated much of its spending on supporting government activities, the RMI emphasized capital spending; (3) since 1987, the two countries, particularly FSM, have made some progress in achieving economic self-sufficiency, as measured by their governments' lower reliance on U.S. funding; (4) however, both countries remain highly dependent on U.S. assistance, which still provides more than half of total government revenues in each country; (5) scheduled decreases in Compact funding as well as increases in locally generated funds have reduced reliance on U.S. funding; (6) although the amount of Compact funding has decreased since 1987 as required by the terms of the Compact, both countries have received other U.S. funding through their use of U.S. federal services and programs; (7) Compact expenditures to date have led to little improvement in economic development in FSM and RMI; (8) per capita incomes have stagnated in FSM and fallen in RMI; (9) Compact funds spent to support general government operations have maintained high government wages and a large level of public sector employment that has discouraged private sector growth; (10) Compact spending to create and improve infrastructure has not contributed to significant economic growth; (11) in addition, Compact-funded business ventures have generally failed; (12) while the Compact set out specific obligations for reporting and consulting regarding the use of Compact funds, the governments of FSM, RMI, and the U.S. have provided limited accountability over Compact expenditures and have not ensured that funds were spent effectively or efficiently; (13) the U.S. government did not meet the Compact requirement to consult annually with both countries during the first 7 years of Compact assistance; (14) also, the Department of the Interior has devoted few resources to monitoring Compact assistance; and (15) disagreements between the Departments of State and the Interior limited monitoring, as did a Compact provision that guarantees funding to the two nations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: GAO recommended (Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little Impact on Economic Development, GAO/NSIAD-00-216, September 22, 2000) that the U.S. Department of State Negotiator for the Compact of Free Association negotiate new Compact provisions with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) that would require that future U.S. funds to the two countries be provided primarily through specific grants that would facilitate the ability of the United States to (1) direct the money to mutually agreed-upon priority areas and projects and (2) control and monitor expenditures through grant requirements such as performance indicators. The Department of State, in close cooperation with the Department of the Interior, took subsequent action to respond directly to GAO's recommendation. In the renegotiated, amended Compacts, which went into effect on June 25, 2004 for the FSM, and May 1, 2004 for the RMI, there is a requirement that grants to the FSM and the RMI must be targeted to specific priority areas such as health, education, the environment, and public infrastructure. Furthermore, grant conditions normally applicable to U.S. state and local governments will apply. Such terms and conditions include conformance to performance standards and other specifications.

    Recommendation: The Secretary of State should direct the Special Negotiator for the Compact of Free Association to negotiate Compact provisions that provide greater control and effectiveness of expenditures and that include requiring that funds be provided primarily through specific grants that facilitate the ability of the U.S. to: (1) direct the money to mutually agreed-upon priority areas and projects; (2) control and monitor expenditures through grant requirements such as performance indicators, technical and financial planning, incremental funding, and evaluation; and (3) provide technical assistance for planning and implementing the use of funds.

    Agency Affected: Department of State

  2. Status: Closed - Implemented

    Comments: GAO recommended (Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little Impact on Economic Development, GAO/NSIAD-00-216, September 22, 2000) that the U.S. Department of State Negotiator for the Compact of Free Association negotiate new Compact provisions with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) that would include specific eligible uses of future capital account funds provided to the two countries by the United States. The Department of State, in close cooperation with the Department of the Interior, took subsequent action to respond directly to GAO's recommendation. In the renegotiated, amended Compacts, which went into effect on June 25, 2004 for the FSM, and May 1, 2004 for the RMI, there is a requirement that a list of public infrastructure (capital) projects must be specified in continuously reviewed and updated FSM and RMI planning documents.

    Recommendation: The Secretary of State should direct the Special Negotiator for the Compact of Free Association to negotiate Compact provisions that provide greater control and effectiveness of expenditures and that include more specifically defining the eligible uses of capital account funds.

    Agency Affected: Department of State

  3. Status: Closed - Implemented

    Comments: GAO recommended (Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little Impact on Economic Development, GAO/NSIAD-00-216, September 22, 2000) that the U.S. Department of State Negotiator for the Compact of Free Associations negotiate new Compact provisions with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) that would require that funds (either Compact or local revenues) be set aside for maintenance of future FSM and RMI capital projects. The Department of State, in close cooperation with the Department of the Interior, took subsequent action to respond directly to GAO's recommendation. In the renegotiated, amended Compacts, which went into effect on June 25, 2004 for the FSM, and May 1, 2004 for the RMI, there is a requirement that five percent of public infrastructure grants from the United States, combined with a matching amount from the FSM or RMI government, must be placed in an infrastructure (capital projects) maintenance fund.

    Recommendation: The Secretary of State should direct the Special Negotiator for the Compact of Free Association to negotiate Compact provisions that provide greater control and effectiveness of expenditures and that include requiring that funds, either Compact or from local revenues, be set aside for maintenance of capital projects.

    Agency Affected: Department of State

  4. Status: Closed - Implemented

    Comments: The Department of State took action to respond directly to GAO's recommendation. In a key subsidiary agreement to the amended Compacts, which went into effect on June 25, 2004 for the Federated States of Micronesia and May 1, 2004 for the Republic of the Marshall Islands, there is a requirement that these two governments shall not issue negotiable or transferable obligations evidencing indebtedness or encumbrance of funds received under the Compact. The agreement further states that on a case-by-case basis, as part of the grant formulation process, the joint economic management committees may consider requests by these two governments for commitment of Compact funds beyond the current fiscal year.

    Recommendation: The Secretary of State should direct the Special Negotiator for the Compact of Free Association to negotiate Compact provisions that provide greater control and effectiveness of expenditures and that include requiring that consultations that lead to a consensus take place between the U.S. and FSM or RMI governments before either FSM or RMI issue any Compact revenue-backed bonds.

    Agency Affected: Department of State

  5. Status: Closed - Implemented

    Comments: GAO recommended (Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little Impact on Economic Development, GAO/NSIAD-00-216, September 22, 2000) that the U.S. Department of State Negotiator for the Compact of Free Association negotiate new Compact provisions with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) that would require that annual reporting requirements for the FSM and the RMI be expanded to include data and information on specific expenditures in mutually determined priority areas. The Department of State, in close cooperation with the Department of the Interior, took subsequent action to respond directly to GAO's recommendation. In a key subsidiary agreement to the amended Compacts, which went into effect on June 25, 2004 for the FSM, and May 1, 2004 for the RMI, there are numerous reporting requirements. For example, the FSM and the RMI must prepare strategic planning documents that are updated regularly, annual implementation plans that propose sector expenditures and performance measures, annual reports to the U.S. President regarding the use of assistance, quarterly and annual financial reports, and quarterly grant performance reports.

    Recommendation: To achieve greater oversight over expenditures, the Secretary of State should direct the Special Negotiator for the Compact of Free Association to negotiate Compact provisions requiring, in addition to annual financial statement data, expanded annual reporting requirements for FSM and RMI, including a requirement to provide data and information on specific expenditures in mutually determined priority areas on an annual and historic basis presented in a format that is easily understandable to U.S. policymakers and officials responsible for providing and monitoring Compact assistance.

    Agency Affected: Department of State

  6. Status: Closed - Implemented

    Comments: GAO recommended (Foreign Assistance: U.S. Funds to Two Micronesian Nations Had Little Impact on Economic Development, GAO/NSIAD-00-216, September 22, 2000) that the U.S. Department of State Negotiator for the Compact of Free Association negotiate new Compact provisions with the Federated States of Micronesia and the Republic of the Marshall Islands that would require an expanded agenda for future annual consultations with the two countries that would include discussions of (1) progress toward mutually agreed-upon objectives, (2) problems identified in audits, and (3) the role of U.S. program assistance in furthering development. The Department of State, in close cooperation with the Department of the Interior, took subsequent action to respond directly to GAO's recommendation. In a key subsidiary agreement to the amended Compacts, which went into effect on June 25, 2004 for the FMI, and May 1, 2004 for the RMI, joint economic management committees are created that will meet at least once annually for each country. The duties of the committees will include (1) reviewing planning documents and evaluating island government progress to foster economic advancement and budgetary self-reliance; (2) consulting with program and service providers and other bilateral and multilateral partners to coordinate or monitor the use of development assistance; (3) reviewing audits; (4) reviewing performance outcomes in relation to the previous year's grant funding level, terms, and conditions; and (5) reviewing and approving grant allocations (which will be binding) and performance objectives for the upcoming year.

    Recommendation: To achieve greater oversight over expenditures, the Secretary of State should direct the Special Negotiator for the Compact of Free Association to negotiate Compact provisions ensuring an expanded agenda for the annual consultations that will include discussions of: (1) progress toward mutually agreed-upon objectives; (2) questioned costs and management weaknesses identified in financial and program audits; and (3) the role of U.S. program assistance in further development.

    Agency Affected: Department of State

  7. Status: Closed - Implemented

    Comments: GAO recommended (Foreign Assistance: U.S. Funds to Two Micronesian Countries Had Little Impact on Economic Development, GAO/NSIAD-00-216, September 22, 2000) that the U.S. Department of State Negotiator for the Compact of Free Association exclude a "full faith and credit" provision from any future U.S. economic assistance agreement with the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI), and include provisions that would provide that U.S. funds could be withheld from the FSM or the RMI for noncompliance with spending and oversight requirements. The Department of State, in close cooperation with the Department of the Interior, took subsequent action to respond directly to GAO's recommendation. In the renegotiated, amended Compacts, which went into effect on June 25, 2004 for the FSM, and May 1, 2004 for the RMI, there is no "full faith and credit" provision. The United States can withhold future payments if the FSM or the RMI fails to comply with grant terms and conditions. In addition, funds can be withheld if the FSM or RMI governments do no cooperate in U.S. investigations regarding whether Compact funds have been used for purposes other than those set forth in the amended Compacts.

    Recommendation: To secure an improved U.S. ability to enforce compliance with Compact spending and oversight requirements, the Secretary of State should direct the Special Negotiator for the Compact of Free Association to exclude a "full faith and credit" provision from any future economic assistance agreement and to include provisions that will provide that funds can be withheld from FMS and RMI for noncompliance with spending and oversight requirements.

    Agency Affected: Department of State

  8. Status: Closed - Not Implemented

    Comments: No action has yet been taken.

    Recommendation: In order to strengthen accountability and ensure the effective use of the remaining FSM and RMI Compact funds, the Secretary of the Interior should direct the Director of the Office of Insular Affairs to make increased use of existing Compact oversight provisions. The Secretary of the Interior needs to reassess the level of resources being directed to this area and ensure that appropriate agency resources be used to monitor Compact assistance. In particular, the Department of the Interior should review annual independent audits as well as the annual reports prepared by FSM and RMI in order to identify, for example, questioned costs, management weaknesses, or spending that does not support development goals. The Director should ensure that required annual meetings are held with both countries and include the participation of other U.S. agencies, as appropriate, in order to resolve the issues identified previously.

    Agency Affected: Department of the Interior

  9. Status: Closed - Implemented

    Comments: The Department of State took action to respond directly to GAO's recommendation. The renegotiated, amended Compacts, which were approved by Congress in 2003, and went into effect on June 25, 2004 for the Federated States of Micronesia, and May 1, 2004 for the Republic of the Marshall Islands, provide for (1) specific, yearly levels of assistance for each country (decreasing over time), (2) an assistance period of 20 years for each country, and (3) priorities (such as health, education, environment, and public infrastructure) for grant assistance.

    Recommendation: As negotiations to determine the extent and nature of future assistance to FSM and RMI continue, the Secretary of State, in consultation with Congress, should develop guidelines regarding: (1) U.S. policy objectives for assistance; (2) the level, duration, and composition of U.S. assistance; and (3) the agency responsible for U.S. oversight.

    Agency Affected: Department of State

  10. Status: Closed - Implemented

    Comments: As formulated in the amended Compacts' 2003 implementing legislation (P.L. 108-188), this recommendation was achieved. This legislation requires that the President report to the Congress on an annual basis regarding economic progress achieved in the Federated States of Micronesia and the Republic of the Marshall Islands as a result of the Compact and program assistance. The Department of the Interior is projected to be the agency that will prepare this report for the input and approval of an interagency group prior to reporting to the Congress. Furthermore, the Department of the Interior has taken action to implement this recommendation by creating and filling eight new staff positions devoted to Compact implementation. The number of staff and required skills and experience were reviewed within Interior and vetted with other departments and deemed sufficient. New employee areas of expertise include education, health care, infrastructure programs, finance and grant management.

    Recommendation: In the event Interior retains the responsibility for providing and monitoring any additional Compact assistance as a result of the current negotiations, in order to strengthen accountability over expenditures, the Secretary of the Interior should direct the Director of the Office of Insular Affairs to implement a system to centrally monitor program assistance. Further, the Secretary of the Interior should report annually to Congress on Compact and program expenditures and how they are specifically advancing economic progress in FSM and RMI, as well as on compliance with oversight responsibilities for all three countries. The Secretary of the Interior should also ensure that appropriate resources, including the number and skills of staff, are dedicated to monitoring U.S. assistance to both nations.

    Agency Affected: Department of the Interior

 

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