U.S. House International Relations Committee:

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Subcommittee on Asia and The Pacific Holds
A Hearing on U.S. Assistance to Micronesia and the Marshall Islands

June 28, 2000

CHAIRMAN BEREUTER: I regret we've had a delay because of a series of House votes, and it is a hectic day. And we'll do our best to try to give the subject of today's hearing the rapt attention it deserves, but we will undoubtedly be interrupted, and I, myself, am involved in a Banking Committee markup and will have to leave briefly, at least for one of the votes.

But, today, we do meet in open session to receive testimony on the impact of U.S. financial assistance to the Federated States of Micronesia, the FSM, and the Republic of the Marshall Islands, the RMI, in view of the on-going negotiations to renew the financial provisions of the Compact of Free Association which expires in 2001. In 1986, the U.S. government entered into a Compact of Free Association with the FSM and RMI.

The Compact granted these former U.S. trust territory districts their independence and provided a framework for future governmental relations, including the provision for 15 years of U.S. direct payments made by the Department of the Interior to the bank accounts of the FSM and the RMI. The direct payments from Interior were to be used for such purposes as capital construction projects, energy production, communication capabilities, and recurring operational activities, such as infrastructure maintenance.

Nineteen U.S. federal agencies have provided aid through grants, loans, equipment and technical assistance. Title II of the Compact, regarding economic relations, and Title III, regarding the defense veto and additional base rights -- but not the right of strategic denial or the use of Kwajalein Atoll -- will expire in 2001. The United States is already engaging both Micronesia and the Marshall Islands in a new round of negotiations to extend these Compact titles.


However, before negotiations proceed much further, I believe it is incumbent for us to examine carefully and objectively the record of the Compact since 1986 in order to provide a more accurate and acceptable direction for relations in the future.

It is in this context that the chairman of the Senate Committee on Energy and Natural Resources, Senator Frank Murkowski, and I tasked the General Accounting Office to undertake a two-part review of the Compact. The first report, which was issued last month, examines, one, the cost to the U.S. of providing assistance to the FSM and the RMI from fiscal years 1987 through 1999, and, two, funds provided prior to the Compact for the effects of nuclear weapons testing to what is now the RMI.

According to the GAO, more than $2.6 billion -- yes, that's "B" for billion – in financial and other assistance has been provided to the FSM and the RMI during this time period. Of that, approximately $2 billion has been through quarterly cash payments, with minimal or no oversight, to the Islands' bank accounts.

The remaining $500 million was provided by 19 federal agencies in various services, such as education Head Start and Pell Grant funding, weather forecasting support, preventive health services, Job Training and Partnership Act aid, and the like. This translates, over the past 13 years, into approximately $1.5 billion to the FSM, a nation of 131,500 people, and $1.1 billion to the 50,500 inhabitants of the RMI.

The GAO found significant inaccuracies and inconsistencies with the data being used by the Department of the Interior to supervise and monitor federal assistance programs. In fact, Interior is still unable to document $27 million in reimbursements. As the GAO reports, quote, "Collectively, therefore, Interior's ability to accurately report on assistance provided is called into question," end of quote.

This subcommittee's own initial investigation revealed that Interior has assigned only one mid-level individual, only one individual, in the field to simply monitor, not manage, these vast sums of American aid. His responsibilities are extended even further to also include the distant freely associated state of Palau, also a former trust territory, and its $14 million annual aid program.

In other words, one individual has a jurisdiction extending an area over 2,400 miles in length and four time zones. I am told there is only one other individual identified in the Office of Insular Affairs with exclusive responsibility for the FSM and RMI, and this person is in Washington, D.C.

The neglect and indifference of the Interior Department is nothing more than a failure by our own government to fulfill its basic responsibilities to the American taxpayer. That's my conclusion.

Before another dollar is blindly committed, we need to get the U.S. government's own affairs in order. Given what the GAO has revealed, I have serious concerns about the Interior Department's ability to manage U.S. assistance and advance economic development in the FSM and the RMI.

Indeed, Interior's only other experience in this field is with the Bureau of Indian Affairs, and we are all too well aware of the billions of dollars in missing Indian Trust Fund monies and the deplorable conditions in and vast number of failed economic development programs on America's own Indian reservations.

We need to examine the question, I believe: Should some other agency have primary responsibility?

The second part of the GAO review focuses on the use and the impact of U.S. financial assistance to the FSM and the RMI. Where has the $2.6 billion gone? I would say very candidly that when I visited our four trust territories in the Pacific in the early 1980s as a very junior member of the Interior and Insular Affairs Committee, I saw endemic waste and mismanagement, and massive corruption in at least one of those territories.

Unfortunately, as the GAO will report, it is evident that corruption, waste, mismanagement and misuse of funds continues. The abuse continues to divert a significant amount of the resources that ought to have gone to the people of the region, but it didn't.

America's investment in Micronesia and the Marshall Islands seems to have disappeared or to be rusting away in perpetuity. Most economic development projects have failed. The squalor I saw on Ebeye almost 20 years ago apparently still remains there today, perhaps even more intolerable, despite over $1.1 billion in overall assistance to that area.

Sixty million dollars has gone into fishing fleets and processing plants in the FSM. Yet, the ships are rusting in the harbor. They were never appropriate for the kind of fishing that would make sense, or they're smashed up on the reef, and the plants are empty and closed with little or absolutely no operational time resulting from those expenditures.

With the renewal of Title II of the Compact, significant changes are need to stop this deplorable, outrageous example of the fleecing of the American taxpayer and to ensure that our assistance does, in fact, lead the FSM and the RMI on a successful path to economic self- sufficiency in which all islanders, not just a chosen few, do benefit. A successful Compact with genuine and sustainable economic development in these Freely Associated States is certainly in America's short-term and long-term national interest.

The mismanagement and waste of Compact financial assistance is not a partisan issue. This financial and human tragedy has transpired through Republican and Democrat administrations in Washington and many different governments in Palikir and Majuro, largely without public notice.

I am encouraged, although guardedly so, with a few positive reforms that have already occurred or are being proposed in both the FSM and the RMI under their new governments. However, actions speak much louder than words, and significant actions certainly are still needed.

With the current negotiations, both the United States and the Freely Associated States have a special opportunity to reformulate our financial relationship. The FSM and the RMI should recognize that both the world and the U.S. Congress have changed since 1986.

While our special defense relationship certainly remains of important strategic value -- and in no way is this special defense relationship in question or even on the table -- the Soviet Union and the threats it posed no longer exist. In our successful effort to balance the U.S. federal budget, certain domestic programs and constituencies have endured painful cuts.

The FSM and the RMI cannot expect to continue to be shielded from similar experiences. Much, much more will have to be done with less, but the good news is that this can be done with no hardship if funds are no longer spent in such a scandalous fashion. The challenge for the negotiations ahead is to determine how best to do more with less.

I am pleased today that we will have the opportunity to hear from both the GAO and the administration on the Compact's record and to begin to understand where our government should go from here. I am going to work with Mr. Lantos and other members of the subcommittee because I think there are tasks beyond this for the GAO where they can be helpful.


CHAIRMAN BEREUTER: Mr. Lantos, I will introduce our witnesses in a moment, but I want to give you a chance to make any comments at this stage before I go to introductions, and so I would yield to the distinguished gentleman from California, Mr. Lantos, the ranking minority member.


REPRESENTATIVE LANTOS: Thank you very much, Mr. Chairman. Before making a few comments, I want to pay tribute to my chief of staff, Dr. Bob King, who recently returned from the area, who has provided me with invaluable analysis of developments in this region.

Mr. Chairman, I want to commend you for holding this hearing. This is not an issue that is at the top of the headlines, but it represents an area of enormous strategic interest for the United States. This hearing reflects your typical thoughtful and responsible approach to dealing with an issue in an area of importance to our nation.

The United States has had a long-standing relationship with the people of Micronesia and the Marshall Islands. For over four decades, these areas were trust territories of the United States.

When they became independent states in the mid 1980s, we established a special relationship through a Compact of Free Association with both the Federated States of Micronesia and the Republic of the Marshall Islands. Our particularly close relationship has been very beneficial to the United States and to these two countries.

This area has great strategic importance for us. These islands cover a huge area of the Pacific Ocean. During World War II, American military personnel gave their lives to gain control of these strategically significant areas.

We continue to maintain a critical military facility at Kwajalein Atoll in the Marshall Islands. This facility, which we have leased under an agreement with the Republic of the Marshall Islands, has great importance for our national missile defense system testing and for testing other missile and missile defense systems. This facility is also important in tracking space activities.

It continues to be in our interest, Mr. Chairman, to maintain close and friendly relationships with the Marshall Islands and Micronesia. This doesn't mean that there are not problems in the way in which the United States assistance to these two countries has been administered. I want to commend you for requesting the GAO report at this hearing we will consider.

Over the past 15 years since the full independence of Micronesia and the Marshall Islands, the United States has provided some $2.6 billion in assistance under terms of the Compact of Free Association with these two countries. This assistance has been very important for both countries, and the American taxpayers have recognized the importance of doing this.

At the same time, the GAO report clearly indicates that the handling of these funds has been seriously deficient. There is plenty of blame to go around. The Department of Interior has been seriously deficient in its oversight of these programs.

The governments which have received this aid also have not exercised the oversight that should have been done. The assistance has not achieved its intended benefits for the people of Micronesia and the Marshall Islands.

I want to strongly emphasize, Mr. Chairman, the point you made. This is not a partisan issue. The Compact of Free Association with these countries has been negotiated and administered by Republican and Democratic administrations over the course of more than 20 years.

During the Reagan, Bush, and current administration, the problems that are evidenced are not the responsibility of any particular administration or any particular party. It is my sincere hope that we can continue to deal in a constructive and bipartisan fashion with the matter of reconsidering some of the provisions of these two Compacts.

Mr. Chairman, I appreciate the serious and responsible way you have approached this matter, and I want to assure you that I will work with you in the same manner to work out solutions that are in the best interest of our nation.

Thank you, Mr. Chairman.


CHAIRMAN BEREUTER: Thank you, Mr. Lantos. I can assure you we will attempt, and we will, without a doubt, work constructively in a bipartisan fashion, and I appreciated your assurance, although I knew that it would be there without you mentioning it.

I want to welcome to the panel today the delegate from Guam, Mr. Robert Underwood, and I would just tell him as far as this hearing is concerned today, he can consider himself a member of the subcommittee and fully participate. And I will turn now to Mr. Royce, the vice chairman of the subcommittee, for any comments that he might make before we introduce our witnesses.


REPRESENTATIVE ROYCE: Thank you, Mr. Chairman. I'll only take a minute, but let me just say that this subcommittee now is doing some very important oversight work, and I want to thank the chairman for calling this hearing. And the fraud and the waste and the abuse that the GAO has managed to uncover here at the direction of the chairman is, frankly, very troubling.

We're not talking about a small sum of money here, as mentioned, and, as you go through that GAO report, item after item are identified as poor planning, poor management, inadequate construction, inadequate maintenance, misuse of funds. Just to tick off a couple here, $188,000 in funds intended for economic infrastructure upgrade used instead to build a dock in front of the mayor's house; $600,000 of heavy equipment purchased for $1.3 million road used instead for -- at the mayor's personal dock for activities unrelated to road maintenance.

There is little accountability in these expenditures, and the Interior Department's records of these expenditures are a mess. This is more than an accountability problem, though, as we go through it.

The GAO has found that the money we have sent to these countries has done little to promote economic development, which is the stated purpose of the aid. While this aid failure is common throughout the world, what is different here in this case is the amount of money we're spending per person. Here, it's $760 per capita in Micronesia and $1,095 in the Marshall Islands. Now, if you compare that to Africa for a minute, we are spending some $1 per person per year on the African continent.

And, in these islands, we have fostered a dependence mentality that counters economic development, and it counters independence, and we have, yes, a very strategically important relationship with the Marshall Islands and with Micronesia, and as we look forward to renewing this Compact, it's very important that we understand the problems we have had, and it's very important that we remedy this situation, and our failure to do so would hurt our interests there and would hurt support for American engagement elsewhere in the world.

And that's why I want to thank the chairman for holding this important oversight hearing and for the steps that we will be taking to remedy the situation.

Thank you, Mr. Chairman.


CHAIRMAN BEREUTER: Thank you very much, Mr. Royce.

Mr. Underwood, do you have an opening statement? If so, you're recognized.


REPRESENTATIVE UNDERWOOD: Thank you, Mr. Chairman, and I appreciate your leadership on this particular issue and bringing attention to what is not ordinarily understood in the halls of Congress, our relationship with the Compact states of the Federated States of Micronesia and the Republic of the Marshall Islands. I have a statement that I'd like to enter into the record...


CHAIRMAN BEREUTER: Without objection.


REPRESENTATIVE UNDERWOOD: ... and, at the same time, I just want to relate two perspectives on this particular issue. One is that, while we certainly have an obligation to the American taxpayer to insure that money is spent wisely and that we make sure that the federal agencies which are responsible for monitoring and accounting for these funds should do their job -- and there is much evidence that perhaps they haven't -- we should bear in mind that this is a very important relationship.

This is a very strategic area. This is an area of the world which will continue to grow in importance, and it represents a significant part of the Pacific Ocean, and we should bear that in mind, less we have any difficulties in the future.

Secondly, I want to also raise the issue -- although it's not entirely within the context of this -- is that to understand that in the region there live Americans, Americans in Guam and Americans in the Commonwealth of the Northern Mariana Islands, and that the nature of the programs that we have in place in the Compact states of the FSM and the RMI have a direct impact on these two territories as well as the State of Hawaii, a very dramatic impact in terms of the utilization of resources.

And those of us in Guam, in particular, want to be helpful to our island brothers and sisters and neighbors in the region, but at the same time we also want to make sure that any negative effects of lack of economic development, which are translated into dramatic out- migration into a place like Guam, which I represent, should be considered in the context of the negotiations. And, again, I want to thank you for your efforts in this regard.

Thank you.


CHAIRMAN BEREUTER: Thank you very much, Mr. Underwood. We will try not to neglect a consideration of those impacts, and, of course, we have the people of American Samoa in the region as well.


CHAIRMAN BEREUTER: Without objection, additional questions for the record will be submitted by Mr. Burr of North Carolina. The subcommittee has also received testimony from the Commonwealth of the Northern Mariana Islands and a letter from the Minister of Foreign Affairs and Trade of the Republic of the Marshall Islands which will also be included in the record, without objection. Hearing no objection, that will be the order.

Testifying first, if she'll come to the witness table, and anyone else she'd like to bring with her, is Dr. Susan Westin, an associate director of the U.S. General Accounting Office. She is currently responsible for international trade issues. In this capacity, she has led a number of cross-cutting assignments on competitiveness, in addition to heading GAO's assessment of the response to Mexico's financial crisis and the second part of the GAO's review of the FSM and the RMI.

Before joining the GAO, Dr. Westin held faculty positions at the University of Toronto, Northwestern University, and Southeastern University in Washington, D.C.

We will have, then, a distinguished second panel of witnesses, which I hope we'll get to today, if we have any kind of cooperation from our colleagues on the floor, and I will introduce them at that time.

DR. SUSAN WESTIN: I'm not placing you under time restraints here. I know that you'll use the time judiciously. This is something that we are not going to cut you short on. You are the primary witness with your team here today, and we want to listen and hear you in a very thorough fashion. You may proceed as you wish.


DR. SUSAN WESTIN: Thank you, Mr. Chairman. I am pleased to be here today...


CHAIRMAN BEREUTER: Are you short some lights that you need to see?


DR. SUSAN WESTIN: No. I see I do need my little flashlight that I brought with me, so I'll go ahead and use it.

I am pleased to be here today to provide information regarding economic assistance provided by the United States from 1987 through 1998 to the Federated States of Micronesia and the Republic of the Marshall Islands under the Compact of Free Association. The Compact represents a continuation of U.S. financial support that has been supplied to these areas after World War II under the United Nations Trust Territory of the Pacific Islands.

Specifically, my testimony will address four main objectives. Number one, how have the FSM and the RMI used Compact funding?


CHAIRMAN BEREUTER: Would you excuse me just a second? This is the first time we've used some of this audio-visual equipment, and I realize that for people here in attendance, the best screen is the one that's behind you. So if you want to crane around or slightly move your chairs, why, please feel free to do that.

You may proceed.


DR. SUSAN WESTIN: Right. And, Mr. Chairman, the same thing will be televised on the two screens on either side.

Number two, what progress has been made by both nations in advancing economic self-sufficiency? Number three, what has been the role of Compact funds in supporting economic progress, and, number four, how much accountability has there been over Compact expenditures. I will also provide observations on several issues that need to be resolved during the ongoing negotiations to renew Compact economic assistance in both countries.

The main message of my testimony this afternoon is that both the Federated States of Micronesia and the Republic of the Marshall Islands remain highly dependent on U.S. assistance. Furthermore, Compact expenditures have led to little improvement to date in economic development for FSM or RMI.

Many Compact funded projects have failed due to poor planning and management, inadequate construction and maintenance, and misuse of funds. In addition, there has been limited accountability over Compact funds.

Let me first give a little background on the two countries. The FSM is a grouping of 607 small islands in the Western Pacific about 2,500 miles southwest of Hawaii, lying just above the Equator.

The FSM has a total land area of about 270 square miles, but occupies more than one million square miles of the Pacific Ocean. The FSM is composed of four states, Kosrae, Pohnpei, Chuuk, and Yap, with an estimated total population of 131,500.

The RMI is located in the Central Pacific about 2,100 miles southwest of Hawaii and about 2,300 miles southeast of Japan. The country is made up of more than 1,200 islands, islets, and atolls, with a total land area of about 70 square miles, about the same as the District of Columbia. The RMI occupies about 750,000 square miles of the Pacific Ocean and has a total population of approximately 50,500 people.

In 1986, the United States entered into international agreements called the Compact of Free Association with the FSM and RMI. The Compact granted independence to these former trust territory districts following U.S. administration since 1947 and enabled the newly formed countries to participate in world affairs as sovereign nations.

The Compact provided 15 years of direct U.S. payments to the countries through the Department of the Interior to assist them in their efforts to develop self-sustaining economies. This assistance expires in the year 2001, although there is a possible two-year extension. The Compact also gave other U.S. federal agencies the authority to provide assistance such as grants, loans, equipment, and technical assistance.

Turning to the first issue regarding how Compact funds were spent, we found that the FSM spent over $1 billion, and the RMI spent over $500 million in direct funding provided by the Compact. There were three types of expenditures made by both countries, general government expenditures, which supported salaries and supplies; capital expenditures, which supported infrastructure projects, business ventures, and debt service; and expenditures targeted to support specific sectors, such as energy, communications, health, and education. In the RMI, Compact funds were also spent to compensate landowners for use of land on the Kwajalein Atoll by the U.S. military.

Each government has used the money differently. The largest area of expenditures in the FSM was general government operations, which accounted for over 47 percent of the total Compact expenditures. In the RMI, the largest amount of total expenditures, or 45 percent, went to support capital fund activities.

One of the priority areas under the Compact was spending for capital projects. The FSM and RMI together spend $484 million in this area to build infrastructure and government buildings and to support economic development such as fishing boats and processing plants.

The Compact does not provide guidelines to control the timing of expenditures. The FSM and the RMI decided to gain access to funding primarily in the early years of the Compact by issuing $389 million in Compact revenue backed bonds.

This funding was used to retire existing debt, fund capital projects, and make financial investments. This strategy has not paid off for RMI, which in recent years has had to use a high percentage of Compact funding to repay debt. For example, in 1998, RMI used 64 percent of its Compact funds to service its debt, severely limiting the amount available to support new capital investment or general government operations.

The second issue we reviewed was the progress made by the FSM and the RMI in advancing economic self-sufficiency. The FSM and the RMI have made some progress in this area, but both countries remain dependent on U.S. assistance to maintain artificially high standards of living.

We chose dependence on U.S. assistance as our indicator to gauge economic self-sufficiency. Total U.S. assistance, which includes Compact and all other U.S. program assistance, still accounts for at least half of total government revenue in both countries, although government dependence on U.S. funds has fallen from 1987 levels, due to, among other things, increases in local revenues.

To the third issue, we found that Compact expenditures of $1.6 billion have led to little progress in economic development. Substantial Compact expenditures have supported general government operations that have maintained high levels of public sector employment and wages and have acted as a disincentive to private sector growth.

The FSM and the RMI also spent Compact funds for physical infrastructure improvements. Both countries viewed this area as critical to improving quality of life and creating an environment attractive to private businesses.

For example, Compact funds of at least $97 million have been spent to operate and improve energy, including electrical systems. Some of the power generating facilities we visited are quite small. For example, the Tunolos (ph) power plant runs daily from 5 p.m. to 5 a.m. and provides electricity to 53 households.

The countries have spent $22 million to operate and improve communications, including telecommunications systems. Access to and dependability of these services have increased. However, such improvements have not been sufficient to promote significant private sector growth, although we identified one tuna processing plant in the RMI that located to that country in part as a result of the dependable electricity. (OFF-MIKE) RMI, water leaks were evident in the surgery ward, as you can see, and the supporting roof beams were crumbling from rust.


DR. SUSAN WESTIN: The new Ebeye hospital, which is at least two years away from opening, will need to have support beams replaced before construction can continue. The support beams were not adequately protected from the corrosive environment and are already rusting away. You can see that in the photograph on the left.

We identified Compact expenditures that appeared to be a misuse of funds. For example, in Chuuk, the Udot road and dock project was intended to upgrade basic social and economic infrastructure in Udot. The project cost $188,000 in Compact funding.

When we visited the site, we noted that the dock was built directly in front of the mayor's house. We were told that the crane used to build the dock would be left to rust after the dock was completed. The road led from the mayor's house through the jungle to a small village with few other houses along the road.

In contrast, at the end of a road was a junior high school that had received $2,800 in Compact funding to repair the one-room schoolhouse. There were no desks or chairs for the students. Further, we were told that students did not have their own books and were read to by the teacher who used the one set of available textbooks.

As another example of misuse of funds, the FSM used funds in what the U.S. Embassy described as cars and boats for votes. The FSM public auditor reported that $1.5 million was spent on cars and boats that were simply given away to individuals for their personal use. Furthermore, the embassy reported another 187 cars arrived in May, 1999, and were used for re-election assistance.

The fourth issue we examined was the accountability over Compact expenditures. We found that all three governments, the FSM, the RMI, and the United States, provided limited accountability.

Planning and reporting documents of the FSM and RMI, intended to identify development goals and progress in meeting these goals, were incomplete and insufficient. Both countries have failed to fully control and account for Compact expenditures.

For example, both countries have not addressed management weaknesses and misuse of funds identified in financial and program audits. In addition, the U.S. government did not meet many accountability requirements.

For example, required annual consultations with the FSM and RMI did not take place until 1994, seven years after the Compact went into effect. Since that time, four additional consultations have been held with the FSM and three with the RMI. According to a Department of the Interior official, the talks have been cordial diplomatic meetings with little serious discussion of economic growth or compliance with Compact spending requirements.

Further, we found numerous disagreements between the Departments of State and Interior regarding oversight responsibility of the Congress. These disagreements have led to limited monitoring efforts. As one example, disagreements between the departments regarding which agency has authority over Interior staff posted in the countries have contributed to the fact that there are no Interior staff posted in the RMI to monitor U.S. assistance.

Finally, we have some observations to offer. Throughout the course of our work, officials from RMI, FSM, and the United States identified five issues that they feel need to be resolved during the course of the negotiations.

Number one, the objective of future economic assistance needs to be defined. Should economic self-sufficiency continue to be an objective? Should funding have more specific objectives and only be targeted to specific sectors, such as education or health?

Number two, the level and duration of assistance need to be established. How much U.S. funding will be required to meet the objectives established for future economic assistance? Does the United States want to enter into another 15-year commitment to provide economic assistance?

Number three, the funding mechanism for assistance must be determined. What are the costs and benefits of block grants, the funding mechanism used in the current Compact, versus other options such as loan guarantees, project funding, or a trust fund? Should countries be allowed to use funds as collateral for issuing bonds? How does the choice of a funding mechanism affect the cost of program administration and the degree of accountability?

Number four, the degree of accountability over expenditures must be established. Should spending of assistance across time be more tightly controlled by the United States? Should traditional grant conditions be applied, such as the ability to withhold funds if performance requirements are not met? Should there be more specific controls over the eligible use of the funds rather than the broad categories of allowable expenditures currently permitted? How could incentives for accountability be built into future assistance?

And, number five, the administrator of future U.S. assistance should be determined. Which agency or agencies should be responsible for administering assistance? How should staffing issues be resolved? How should the costs of administration be budgeted? Should all federal agencies provide assistance independently, as they do today, or should there be a central fund?

Mr. Chairman, this concludes my prepared presentation. I'll be happy to answer any questions you or other members of the subcommittee have.


CHAIRMAN BEREUTER: Thank you very much, Dr. Westin. I want to thank you and all of the staff that assisted you in the preparation of your report, the field activities, investigations that were conducted, and, as I mentioned to you in a preview examination of this, it seems quite apparent to me that we have more work to do, and that we will be requiring some additional assistance from the GAO.

I am not, I think, a person given easily to overstatement, but I am outraged by what I see in terms of the use of the funds that have been provided, and I am saddened because I have some idea, I think, about how these funds could have brought great benefit to the people living in the Federated States of Micronesia and the Marshall Islands. And, of course, we are concerned about what's happened to our other two trust territories as well. One is the Commonwealth of the Northern Mariana Islands, and the other, in which we have a Compact that came into effect later, in Palau.


CHAIRMAN BEREUTER: I recall thinking in my first visit there -- and this is before the Compacts were signed, when they were still in the trust territories -- how many foreign firms took advantage of trusting people in those areas, providing inappropriate kind of inducements for business contracts, that were being built with U.S. government aid, inappropriate kinds of constructions for tropical environments, and I saw that the buildings built many years earlier by the Japanese, appropriate for a tropical environment, were, despite their age, much better suited to the environment.

And when I looked at the rust already growing on -- taking place on those beams two years before the hospitals opened, and when I saw those barren classrooms in that junior high school where had spent the grand sum of some $2,000-plus dollars, and to see the trucks and the cars that were obviously misused, it's the worst case scenario, more examples of it, at least. There are many -- it's hard to know where to proceed with questions, and I do hope and expect that you'll be able to stay around as we go to our next panel as well, because I think it could, in fact, lead to some dialog between the two of you under questioning from myself or some of the members.

I wanted to ask whether or not you have been able to examine at this point, to investigate, whether or not there are other significant donor sources to the Federated States and to the Republic of the Marshall Islands, such as multilateral institutions, such as nonprofit organizations, or any other foreign aid -- other countries providing foreign assistance. And perhaps a second question to work in -- and I should start the five minute rule if my staff will help here – if you can indicate to me, based upon that examination of debt structure - and I think the example you gave us was from the Marshall Islands -- with debt servicing leaving only 15 percent in Compact expenditures available to support new capital investments, general government operations, and so on, when would the RMI have paid off -- when would it pay off its indebtedness?


DR. SUSAN WESTIN: To answer your first question first, yes, of course, I'll be willing to stay around after the other panel. To answer the question on foreign assistance, there are a few other donors to these countries, such as Japan, Australia, China, and Taiwan. But we're not able to identify any figures in the financial statements that would let us know what these amounts of assistance are.

We do know that some countries provide assistance for particular projects, and, for example, Japan might be asked and it will be agreed that they will plan and build and help with the operations of a particular project, and officials have told us that some of these are quite successful.


CHAIRMAN BEREUTER: Is it aid, then, in effect, in some cases?


DR. SUSAN WESTIN: Yes, that's correct, because they do take into account the planning -- all the way through. That's right.




DR. SUSAN WESTIN: But it's -- excuse me -- but it's not aid in the sense of giving the money to the government. The whole thing is come in and done, and so the money never shows up on the financial statements.

With regard to the multilateral, the multilaterals -- the Asian Development Bank has provided technical assistance to both countries. We haven't looked specifically at the non-government organizations that are there, but we did run into some people who worked for them. But we haven't looked specifically at how much money they have spent there.

Your other question was on looking at the debt structure of the RMI, giving that example. The bonds that they issued earlier in the life of the Compact, I believe, are structured to be paid off in the year 2003. So, given that the Compact has room in it for a two-year extension, those bonds will be paid off at the end of the time of the current Compact, plus the two-year extension.


CHAIRMAN BEREUTER: Dr. Westin, do you know -- have you looked at it enough to know whether or not this is a normal pay-down process, or if this has balloon retirement at the end?


DR. SUSAN WESTIN: I think that it's a normal pay-down process. One of the things that we did try to get after, though, is how were the proceeds of the bond issue spent, because the idea, of course...


CHAIRMAN BEREUTER: That was my next question.


DR. SUSAN WESTIN: ... was to get the money earlier in the life of the Compact and make good investments. We're actually not able to answer that question in any great detail, because the bond proceeds would, in general, be transferred into the general government fund and then not tracked any further in expenditures as coming from the specific bond proceeds.


CHAIRMAN BEREUTER: What are the specific, quote, "interagency disagreements in the United States on levels of and responsibilities for oversight" -- that's a quote -- which have, quote, "limited the U.S. government's ability to meet its accountability requirements." Can you at least give some examples of those kinds of interagency disagreements?


DR. SUSAN WESTIN: Well, I'm sure you'll want to pose that question to the next panel as well, but it's our understanding that there's not complete agreement between the Departments of State and Interior -- for example, who had the responsibility to actually call the annual consultations every year. And, as we noted, we think that this lack of having these annual consultations for the first seven years of the Compact really had an impact on these countries. In our view, that's the time that these annual consultations could have provided the most help to the countries, in terms of discussing what the money was going to be used for and in terms of discussing progress in economic development.

Another disagreement, as I mentioned, seems to be about who's going to have authority over the person posted in-country, and so there is no Interior staff person posted right now to the RMI. And, as you mentioned, the one Interior person who has responsibility has responsibility for overseeing the program assistance, not the direct Compact assistance that we've been talking about.


CHAIRMAN BEREUTER: And that is for the Federated States, for the Marshall Islands, and Palau.




CHAIRMAN BEREUTER: Now, finally -- and then I'll move to my colleagues for some questions -- finally, at least, in this round, you mentioned that there are perhaps 17 or 19 other agencies that are providing direct assistance, in accordance with the Compact.




CHAIRMAN BEREUTER: And that is a significant amount of money, but it's overall a minor percentage of the money. To what extent are they more or less effective in overseeing their expenditures? Do they have the same kind of accounting and documentation requirements or difficulties that you seem to demonstrate in the Department of Interior, or have you had an adequate amount of time to investigate their stewardship?


DR. SUSAN WESTIN: We didn't focus on the program expenditures. If you'll allow me, let me check with my colleagues on this to see if we have a more specific answer.


CHAIRMAN BEREUTER: And would you -- if they are speaking directly, just have them identify themselves.


DR. SUSAN WESTIN: I'll have Leslie Holand (ph) address this. She was the project manager on the job.


MS LESLIE HOLAND: The one comment that might be made is that by the end of fiscal year '98, these two countries wrote off over $50 million in questioned costs. We were not able to determine precisely which of those costs were direct Compact funding versus program funds, but we were told that a significant amount of it is program funding from other agencies, and they took no action to try to resolve the questioned costs.


CHAIRMAN BEREUTER: I'll turn now to Mr. Royce for questions he may have, and then go to Mr. Underwood -- Mr. Rohrabacher.


REPRESENTATIVE ROYCE: Thank you, Chairman.

I guess I would start by just noting that you stated that the country spent $1.6 billion in Compact funds, and the earlier GAO report identified $2.6 billion in Compact assistance. So there's a billion dollars difference there. What makes up that figure?


DR. SUSAN WESTIN: What makes up that figure is in our work, we just looked at the $1.6 billion in direct Compact funding. We didn't look at the part that goes for the nuclear compensation, and we didn't look at the funding from the other 19 agencies.




DR. SUSAN WESTIN: So those two things make up the other billion.


REPRESENTATIVE ROYCE: OK. One of the questions I would have is has, to your knowledge, the U.S. government done anything at this point to try to recover any of the funding in these cases? Is there a provision in the Compact to accomplish collection from the government in some way where these governments in the Marshall Islands and Micronesia have misspent the money?


DR. SUSAN WESTIN: Well, we do know that within the U.S. government, these cases of misuse or misspending were certainly known. We're not aware of any organized effort on the part of the departments to address this problem, and it can be difficult to track and verify the money.

And even in cases where the annual audits conducted by an independent auditor identified possible misuse, we didn't see evidence that the U.S. government was taking action. But it's unclear whether the U.S. government can recover funds that are misspent. Most direct funding is guaranteed under the Compact, and it appears that the Compact itself, the way it's written, makes it difficult, if not impossible, for the U.S. government to withhold funding in cases of misuse.


REPRESENTATIVE ROYCE: Might make it impossible to withhold funding in cases of misuse.




REPRESENTATIVE ROYCE: The State Department, in the testimony that they're going to give later today -- they'll announce that they're exploring a policy that no new federal program would be extended to the Marshall Islands or to Micronesia unless, in their words, it directly advances the goal of economic self-sufficiency. Now, I'm not sure exactly how you define economic self-sufficiency. I mean, self-sufficiency, in this case, might be a somewhat meaningless term.

Is the United States, for instance, self-sufficient? Were these islands self-sufficient previously? So it's sort of an ambiguous term that the State Department is using there in terms of setting its own goal. I wanted to make that point.

And my real question is are there federal programs that we are extending today that we should terminate today, regardless of the State Department's view of this economic self-sufficiency argument, in your view?


DR. SUSAN WESTIN: Mr. Royce, I think that's probably a question that you should put to State Department and Interior.




DR. SUSAN WESTIN: We looked at the way that the funds have been used. Your point on self-sufficiency, I think is well taken. When we were asked to look at the progress made in achieving self-sufficiency, we looked at the Compact, and in the Compact itself, self-sufficiency is not defined, and that's why we had to choose an indicator to use, and, as I said...




DR. SUSAN WESTIN: ... we chose the indicator of the reliance on the U.S. as compared to a percentage of the government revenues they raised. And they have made some progress in that area. For example, FSM -- I think, in 1986, 83 percent of its government revenues were from U.S. assistance. It's down to something like 53 or 54 percent now.


REPRESENTATIVE ROYCE: I see, Dr. Westin. What is the share of the economy there locally that is expanding and where do those revenues...


DR. SUSAN WESTIN: I'm sorry?


REPRESENTATIVE ROYCE: Where are those revenues that displaced the...


DR. SUSAN WESTIN: Oh, where are the revenues coming from?



REPRESENTATIVE ROYCE: ... in the private sector. Where are those revenues...


DR. SUSAN WESTIN: They are raising revenues from local taxes and also from fishing licenses.


REPRESENTATIVE ROYCE: I see, I see. Dr. Westin, I thank you for a very thorough report, and, again, I thank the chairman for this hearing.


CHAIRMAN BEREUTER: Thank you very much.

Delegate Underwood, you're recognized for five minutes.


REPRESENTATIVE UNDERWOOD: Thank you, Mr. Chairman, and, again, I want to thank you for the courtesy you have extended to me, and, Dr. Westin, I was not here for your entire testimony, but, as I understand it, you did give some graphics on the nature of rusting in the tropics.

I just want to point out a little -- just to give some balance to the picture, a little ditty that I used to hear as a young man in Guam that people in the Navy used to say, and that is, "In God we trust; In Guam we rust." And, by that, meaning that the tropical environment is a very punishing environment, and I, just last year, was a witness to a CV (ph) project -- and this represents some of our best engineering that we can think of -- a CV (ph) project for a recreational facility that had to be redone in Guam because the rebar were not done appropriately, and they were not taken care of.

So it is a punishing environment, and, at times, it's true that maybe sometimes the best thinking and the best engineering does not go into it.

In the nature of -- I wanted to ask a question, I guess, that's developmental in nature. These nations are relatively young nations. We're talking about a timeframe in which -- if we made comparisons to the United States' growth from 1776 to 1789, we barely had a Constitution after 13 years after independence.

And so now we have these countries that are in a period of rapid change and rapid development and, in a sense, trying to find their sea legs as they deal with the issue of whether there is such a thing as economic self-sufficiency – the question asked by Mr. Royce -- or perhaps, more appropriately, the notion that there is some kind of, at least, economic stability, some kind of stable economic structure, some kind of rule of law, some kind of process whereby we can actually begin to think of serious economic development in the future.

So I have two questions that are kind of predicated on that. First of all, let's say for the sake of argument that every dollar was spent appropriately, and every dollar was accountable, was -- we could track where every dollar went. Would we be closer to, quote, "economic sufficiency," or is the challenge so daunting in these areas that we would still have a ways to go? That's the first question.

The second question is that as you examine -- perhaps the question was -- you know, when you do a GAO study, sometimes these questions are not asked in a developmental way. Is it better in 1998 than it was in 1990, as opposed to saying, well, where are we in 1999?

So would you venture any commentary on whether things have actually been on the upswing, that things are getting better, that perhaps they're not where we would like them to be -- but would you venture any commentary on the developmental nature of where we're going with this economic assistance?


DR. SUSAN WESTIN: Well, you certainly posed some very weighty questions. On the first one, on the challenge, I think you put it if every dollar had been spent appropriately and accounted for, would there still be a ways to go to economic self-sufficiency. I don't think that I can answer that definitively, based on GAO's work, but it seems to me that, yes, we probably would not see these island countries at self-sufficiency.

What we focused on, though, was to really look and see whether we thought the dollars had been spent appropriately, and I think what I'd like people to take out of our work is if the next Compact is restructured to think about what accountability measures need to be built in so the dollars are spent more appropriately and accounted for.

With regard to the second one, has there been improvement? Yes, and in the photographs that I provided, I did show examples of the power plants. There's been infrastructure improvements, telecommunications. The difficulty, though, is from what we've heard, that although these companies are not losing money, if the United States assistance didn't apply incomes to many of the citizens of these countries, there wouldn't be people to pay for the electricity, and it's not clear that they could be self-sustaining in that sense. But, yes, there have been infrastructure improvements that have taken place.


CHAIRMAN BEREUTER: Will the gentleman yield?


REPRESENTATIVE UNDERWOOD: Thank you. Yes, certainly.


CHAIRMAN BEREUTER: Talking about the power plants and seeing some of the equipment, I want to remind you of what you and your staff told me about the almost total absence of maintenance and how the infrastructure there on mechanical equipment is going to have a very short life unless there is an allocation for maintenance. And I hope I'm not misstating you, but that's my recollection.


DR. SUSAN WESTIN: Yes, sir. But we did visit power plants where they are -- they do understand the problem of maintenance and, in some examples, are really paying attention to this.


CHAIRMAN BEREUTER: Thank you for yielding.




CHAIRMAN BEREUTER: You may continue to ask another question. You have still another minute remaining, if you wish.


REPRESENTATIVE UNDERWOOD: No, I think that takes care. Thank you very much, Dr. Westin.


CHAIRMAN BEREUTER: The gentleman from California is recognized.


REPRESENTATIVE ROHRABACHER: Thank you very much. I'm a little disturbed by a mind set that I'm reading into some of the things that are happening here, Mr. Chairman.

It just seems to me that it's like we're not talking about people who are free and independent and have their own country, but instead still have some sort of relationship with the United States, that we have some responsibility to tell them how to run their lives. I mean, when you treat people like Indians on a reservation, they're going to end up like a lot of Indians ended up in the United States on a reservation, and our reservations were a national disgrace, but the American Indian tribes were dependent on our government running their lives for them.

And it seems to me what we've got here is -- and the same thing, by the way, people treated Indians as if they couldn't run their own affairs, and, thus, they ended up not being able to run their own affairs.


REPRESENTATIVE ROHRABACHER: And I'm very proud that now the American Indians are emerging from that and declaring their independence of these federal programs, and they want to be independent now in the United States, and they're making great progress in our country. In California, especially, I know the Penutian Indians are making great progress, and just 50 years ago, they were living in squalor. Micronesia and the Marshall Islands are located halfway there in the Pacific between Asia and the United States, and I would say they are a very important piece of territory for the world. And, especially, the Kwajalein missile range, which was developed, Mr. Chairman, at a cost of $4 billion to the United States, is even more important now than perhaps it was a few years ago. We have to recognize that.

We know how many lives it took to free these islands -- not just these islands, but the other islands of the Pacific in World War II, and we also know that those islands and these islands have been used for weapons testing. It says here there were 67 nuclear weapons tests on these islands, in which a large number of islanders were irradiated, and many islanders were displaced, and so there have been major problems to overcome.

And it just seems to me from what you're telling us that it looks like a mess out there right now, and I am especially alarmed because there is evidence -- I've always been ringing the alarm bell about what the Communist Chinese are doing, but the Communist Chinese are involved in the Pacific, and they are -- the largest Chinese land satellite tracking system, and an electronic spy station in the Pacific that was built by the Chinese army is located on Tarawa, which is 500 miles south of this missile testing range in Kwajalein.

So there are other Chinese activities going on on other islands throughout the Pacific, and we have to be concerned about this. The Communist Chinese, if they are acting the way the Japanese acted before World War II, they could pose a strategic threat to us.

Furthermore, we need to develop an anti-missile system, which means we will need the Kwajalein range. So these things that we're discussing today are not things that we should just shrug our shoulders and say so what.

Apparently, from what you said, we had grants of over $1.5 billion to the islands, and there's only 130,000 on the islands, and if you take a look for what we got, I mean, it's clear that that money was pretty much wasted. At least a large hunk of it was wasted.

So let me just state from my gut reaction to this and then get your reaction to that. When you treat people like children, they're going to act like children. If you treat people like they're not responsible, they're not going to be responsible.

The Marshall Islands have now a new government that is committed to honest government -- at least they say they are -- and I will put this -- there's a letter that Congressman -- Chairman Bereuter received from the new head of the government there -- he's the Minister of Foreign Affairs and Trade for the Marshall Islands -- making his commitment to reforms, and they say that the new political group -- are we going to put that in the record, Mr. Chairman?

OK. Thank you.

It seems to me that we've got to re-examine the fundamental relationship that we have and have had with these islands for the last 10 to 15 years, and they say that insanity is doing more of the same and expecting different results. Well, perhaps it's time for us to just do this, and that is figure out how much Kwajalein is worth, really worth -- because we've been -- it sounds like to me we've been giving them these grants, but we haven't been giving -- we haven't just been paying them the rent, which they are due, and giving them the responsibility of handling their own affairs.

What about a system of just giving them the money that would be a fair rent for Kwajalein and the use of their islands and letting them run their own affairs rather than having such oversight and such involvement of the United States government in the rest of their affairs?


DR. SUSAN WESTIN: As I had previously mentioned, we didn't look at the payments to Kwajalein as part of this $1.6 billion. But the option to renew Kwajalein -- excuse me, the option to renew the lease on Kwajalein has already been extended for 15 years, and I think some of your questions will probably be better directed to the next panel, to the representative from DOD.

With regard to just letting these people run their own affairs, I think that's something that needs to be determined in the next negotiations. I mean, there are different strategies. Do you just decide that you're going to set up a trust fund and not have accountability?

The last point, though, that I'd like...


REPRESENTATIVE ROHRABACHER: I don't understand. What is this -- we have to decide? I mean, aren't we talking about people who have a right to just -- aren't these sovereign entities?




REPRESENTATIVE ROHRABACHER: Well, what are we deciding this for? What are we talking about? We should be just...


CHAIRMAN BEREUTER: Will the gentleman yield?




CHAIRMAN BEREUTER: Well, the Compact under which we're providing financial assistance will basically be completed, in most respects, as I understand it, next year, and there's already pressure to extend these Compacts, and so...


REPRESENTATIVE ROHRABACHER: And we get more of the same.


CHAIRMAN BEREUTER: ... the question before us is if, indeed, we need to basically re-examine this relationship and financial accountability. You're absolutely right. I think we have a task ahead of us.


REPRESENTATIVE ROHRABACHER: Well, I'm no expert, obviously, on this. I stopped in the Marshall Islands once several years ago, and so I am not expert. But it just -- my gut instinct tells me that, you know, give people their due.

Treat them like adults and give them a fair price for Kwajalein -- and I'll have to look and find out exactly what agreement was made. I hope it was -- I hope we're giving them a market value, because we need that facility, and if we need it, we should give them a fair price for it, and then let them run their own affairs. And people will always surprise you, if you expect them to be responsible and treat them as adults.

So, thank you very much, Mr. Chairman.


CHAIRMAN BEREUTER: Well, I agree with a lot of what the gentleman said, but I want to mention this, that of the $2.6 billion that have been provided to the two freely associated states that are subjects of the hearing today, approximately $2 billion of the $2.6 billion has gone in direct quarterly cash payments. So, basically, they have been treated like adults.

The real question is, I guess, did we, like others that had a colonial relationship with African countries, do a good job of putting in place managerial skills ahead of time, and did we protect them from the scalawags that are out there, international scalawags, that took advantage of them in a whole lot of ways? I know if the gentleman had visited Ebeye with me, which is a small island right near Kwajalein, where I stayed for two days, you would be very upset with the conditions that these people were living in under an American flag.

And I do remember how money that was going to help the nuclear- affected people in the Marshall Islands -- places like Enewetak, which we visited – was being diverted and not going to the people that deserved it at that time. Now, this is before the Compacts were solved -- we concluded.

I think the -- we have a task ahead of us, I'd say, and, in fact, I think there needs to be something like a special task force just to focus on this issue and work with every kind of expertise we can find to get the right kind of arrangements for an extension if we have an extension. And I am counting on the gentleman -- I think there's nothing better than to visit the place, though, and, certainly, my knowledge is obsolete.

But having some background in design and construction, there's no excuse for what I saw at that new hospital. I'd prefer a Japanese built building of 40 years ago to what we're putting up there today.

Thank you, Dr. Westin. We're going to be in touch. If you can stay, as suggested, I'd appreciated it.


DR. SUSAN WESTIN: Certainly, Mr. Chairman. Thank you.


CHAIRMAN BEREUTER: Now we'd like to call our second distinguished panel. Representing the Department of State is Mr. Department of State is Mr. Allen Stayman, who has served since June of 1999 as the U.S. Special Negotiator for the Compact of Free Association. Prior to this posting, Mr. Stayman was Director of the Office of Insular Affairs and Deputy Assistant Secretary for Territorial and International Affairs at the Department of the Interior.

It was in these capacities that he has testified before this subcommittee in previous years. From 1984 to 1993, Mr. Stayman was a professional staff member of the Senate Committee on Energy and Natural Resources.

Representing the Department of the Interior is the current Director of the Office of Insular Affairs, Mr. Ferdinand Danny Aranza. A native of Guam, he previously served as legal counsel to the former delegate from Guam, Congressman Ben Blaz, who served on this subcommittee during his tenure in office.

We are also honored to have Mr. Frederick C. Smith, the Special Assistant to the Under Secretary of Defense for Asia-Pacific Issues. For over 25 years, Mr. Smith has been actively involved in studying, formulating, and implementing U.S. defense policy, first as a Naval officer and now in a civilian capacity. Before his current posting, he served as a visiting professor at the U.S. Naval Academy and as the Principal Deputy Assistant Secretary of Defense for International Security Affairs.


CHAIRMAN BEREUTER: Gentlemen, thank you very much for making yourselves available to us today to help us understand this current situation and then to begin after today to look for a proper course for the Congress. And I understand you're going to testify in the order of your introduction, so any kind of statements -- and I know you – I think all have written statements -- yes, they'll be made a part of the record in their entirety, and if you would try to keep your oral comments to, say, five to eight minutes each, then we will have time for questions.

So, Mr. Stayman, we turn to you. You may proceed.


MR ALLEN STAYMAN: Thank you very much. Mr. Chairman, members of the subcommittee, let me begin by thanking you for requesting these two GAO reports. It is my intention as the Special Negotiator to consider them carefully in order to assure the effective use of U.S. assistance.

Let me summarize by touching on five topics. First, in response to GAO, the department concurs with the recommendations of the May GAO report that future Compact provisions, quote, "require that reliable data be maintained to insure better accountability," close quote.

We also generally agree with the second report regarding problems with the use of Compact funds in advancing self-sufficiency and in accountability. My colleague from the Department of the Interior will speak in more detail to our understanding regarding these problems.

Second, the department shares the assessment of the GAO that notwithstanding these problems with the existing economic program, the Compact has successfully met two of its three primary goals, providing for a transition from trusteeship status and meeting U.S. security interests. The Compact was negotiated and implemented during the Cold War, when political and security objectives were a more immediate priority for the United States than was advancing economic self- sufficiency. It was not until 1993 that a high priority was accorded to economic development.

Third, the United States has continuing interest in these countries which justifies some level of continued economic assistance. These interests include maintaining economic stability and our support for the economic reform strategies; second, sustaining the political stability and close ties we have developed; third, a showing that our strategic interests continue to be met; and, four, developing a strategy for ending mandatory annual payments by the United States by a date certain.

While we recognize the need to continue some level of financial assistance, I want to emphasize our belief in appropriate reductions in future assistance and to greater accountability.

My fourth topic -- we're negotiating with the FSM and the RMI separately. The talks with the FSM are progressing smoothly. We have had two negotiating sessions, and our next round is scheduled for September.

Formal talks with the RMI government have been delayed by a relatively recent change in government. We are pleased by the democratic transition to a new government and with their commitment to reform and accountability. The new government is currently updating its economic development strategy, and we plan formal talks after the update is completed.

Finally, I would like to share our general approach to the negotiations, which has four elements. First, financial assistance. We share GAO's view that there must be effective accountability in any future assistance. Accordingly, we believe that future funds should be provided through a limited number of grants, each with a clearly defined scope and objectives. We also believe that the administration must have the necessary authority and resources to insure that reasonable progress is made toward these objectives.

Second, the department is interested in the concept of a trust fund as a means to terminate mandatory annual financial assistance by a date certain. We are still analyzing what the appropriate trust fund design and the level of funding might be and what contributions should be expected from non-U.S. donors.

Third, regarding program and services assistance, for the same reasons that we believe some level of financial assistance should continue, we believe some program and services assistance should continue. Generally, these programs and services are targeted to priority social and economic objectives, such as small business loans, supporting the postal system, and assuring safe air transportation.

The fourth element in our approach deals with migration. The Compact currently provides that citizens of the freely associated states may freely enter the United States as non-immigrants.

Annual reports to Congress have documented the substantial impact of this migration to Hawaii, Guam, and the Northern Mariana Islands. Of particular concern are migrants who have communicable diseases and criminal records. These conditions are currently grounds for inadmissibility to the U.S. under the Immigration and Nationality Act.

We're considering three responses to the migration issue. First, we believe our approach of committing substantial future assistance to improve health and education of potential migrants can significantly reduce Compact impact.

Second, we're exploring several options for determining admissibility of FAS migrants prior to entry into the United States. And, third, we intend to increase compensation to Hawaii, Guam, and the Northern Mariana Islands.

Thank you for this opportunity to present the Department of State's views today. Let me assure you that we will continue to take every opportunity to keep the committee informed as negotiations proceed.


CHAIRMAN BEREUTER: Mr. Stayman, thank you very much for that succinct statement. Next, we'd like to hear from Mr. Aranza.

Mr. Aranza, you may proceed as you wish.


DIRECTOR FERDINAND ARANZA: Thank you, Mr. Chairman, members of the subcommittee. Thank you for having this hearing, and I'm very pleased to represent the Department of Interior's view on the U.S. Compact with the Marshall Islands and Micronesia.

We concur with what has previously been stated by GAO and by my colleague at the State Department. We concur that the primary U.S. political and strategic interests were achieved successfully by the Compacts.

The Marshall Islands and Micronesia made a successful transition from trust territory wardship under U.S. supervision to fully functioning sovereign democratic governments, and, also, the U.S. obtained defense access rights and the right to deny access to other countries in those strategically located regions in the Pacific. But with respect to accountability and economic objectives, we also concur that the results thus far have, at best, been mixed.

I would like to use my time this afternoon to summarize why we believe the current Compact is having limited impact in achieving FAS economic development and insuring proper accountability in the use of federal funds. Despite 15 years of Compact financial support for the general operations of the FAS governments and a program of capital investment, the FAS are not yet self-sufficient.

Part of the reason is that the Compact did not require a system of goal setting and accountability for results tied to receipt of funding. The Compact and its related agreements instead created a system that allowed financial assistance to flow uninterruptedly to these nations, while limiting the United States ability to affect the results of that spending.

The Federal Assistance Management Regime described in the Compact of Free Association is unique in federal grant management practice. The negotiators created a system that bears little resemblance to established accountability measures that characterize the use of federal funds. The result is a system of payments largely bereft of performance standards and cost principles and procurement rules found in OMB Circular A102, the common rule for grant management.

Mr. Chairman, I believe this is a critical point to understand a little more thoroughly. The Compact's current structure of direct flow-through financial assistance that is guaranteed by the full faith and credit of the United States has a profound impact on the U.S. ability to effectively monitor and control these funds.

Compact financial assistance cannot be considered grants in the normal sense defined by the federal government. This distinction was first drawn by the Interior's solicitor, who opined that the only rules that could apply to Compact funds were those found in the fiscal procedures agreement, the Compact Act, and the laws of the freely associated states.

This conclusion precluded application of normal federal accountability rules. For example, normal grant funds under normal federal regulations are transferred only when needed for immediate payments.

In addition, grant funds normally may not be invested. Grant funds normally are also subject to clear conditions and performance expectations. Allowable costs are also well defined. Finally, normal grant funds can be withheld at any time for non-performance by the U.S., and we also have the clear authority to recoup funds that were not used appropriately.

In contrast, the payment structure of direct financial assistance under the Compact is much more of a flow-through concept. First, under the Compact, the Fiscal Procedures Agreement requires the quarterly transfer of money to the Marshall Islands and Micronesia at predetermined dates rather than when funds are actually needed.

Second, Compact financial assistance is transferred to interest bearing accounts, as opposed to the normal rule that federal grant funds cannot be invested. Third, the Fiscal Procedures Agreement is silent on most performance measures, and the Compacts themselves have no clear standards for what constitutes economic self-sufficiency, or, for that matter, no clear goals or objectives for economic development in the Marshall Islands or Micronesia.

Fourth, the definitions of what constitute appropriate uses of Compact financial assistance for current account or capital expenditure uses are vague, broad, and overlapping. Finally, and most importantly, Compact financial assistance payments are further guaranteed by a pledge of full faith and credit of the United States and are enforceable under the U.S. Court of Claims. This pledge of full faith and credit, in our opinion, removed one of the most important management accountability tools, the ability of the federal government to withhold funds for non-compliance.


DIRECTOR FERDINAND ARANZA: However, even so, we lack traditional grant management tools and we try to address the roots of inadequate local management performance through our technical assistance programs. We have a program with the USDA graduate school to provide a curriculum of management and accounting classes to meet the needs of individual governments.

We've also recently joined forces with the Asian Development Bank to provide in-country advisory teams to bolster the analytic capacities of the freely associated states. We have also consistently provided special attention and technical assistance to bolstering local audit capabilities.

It is the view of the Department of Interior that the economic goals of the freely associated states can be better met if future U.S. assistance is provided with clear expectations about results and with clear standards of performance. We would support the application of the common rule and the code of federal regulations to Compact grants.

These rules, which are familiar to both the Marshall Islands and Micronesia as they administer domestic federal programs, call for basic common sense practices in government management. The rules require effective accounting and reporting, free and open competition and procurement, and defined criteria for acceptable expenditures. Grants developed under these rules will require performance goals and standards and the approval of scopes of work and budget projects.

We have current examples of how normal grant procedures can work to protect the integrity of U.S. taxpayer dollars in the Marshall Islands and Micronesia. In 1994, for example, Section 221B, health and education funding, was withheld from the FSM until the state of Chuuk settled medical debts with the Guam Memorial Hospital. Unlike the other provisions of the Compact, this was not a full faith and credit provision, and, therefore, we felt we had the ability to withhold funds.

Furthermore, separate from Compact financial assistance, the Department of Interior has discretionary technical assistance grants to help them with capital infrastructure and operations and maintenance, and with respect to these funds, we have suspended these grants until certain performance standards were adhered to. For example, there was some mention about the hospitals and the utilities.

We have some operations maintenance grants where we did force the local governments to adhere to hiring professional and trained professionals to help them maintain their utility companies. And so we cite this as an example of where, if we have regular grant conditions, we can enforce better accountability. When effective enforcement tools are available, we believe we can assure that federal funds are used as intended.

Mr. Chairman, just one more minute, sir. In addition to imposing more normal grant conditions to financial assistance under the Compact, we also often speculate how much more accountability would have been achieved if additional and more appropriate administrative and financial resources were devoted to the Department of Interior.

For example, in the waning years of the trust territory, there were at least 43 FTE or full time equivalents at Interior involved in monitoring and controlling a $93 million a year program. Today, in contrast, we only have four full time equivalents devoted to freely associated states' matters, including Palau, for a $145 million a year program.

So we would suggest that one of the things that could be considered is also increasing our administrative resources to deal with monitoring and accountability.

Mr. Chairman, that concludes my oral statement. I'd be glad to answer any questions you might have.


CHAIRMAN BEREUTER: Your last point prompts a couple of questions, but we'll wait on that. Next we'd like to hear from Mr. Frederick C. Smith.

Mr. Smith, you may proceed as you wish.


MR FRED SMITH: Thank you, Mr. Chairman, members of the subcommittee. I appreciate this opportunity to appear today to talk about the significance of our security relationship with the freely associated states.

The Department of Defense has four basic interests in the freely associated states, access by U.S. military forces to utilize the territories of the FAS for transit, overflight, and occasional emergency use; continued unimpeded operation of the Kwajalein missile range in the Republic of the Marshall Islands; the ability to deny military use of freely associated state territory to foreign nations, the so-called strategic denial clause of the Compact; and possible contingency use of land areas, air fields, and harbors.

In return for these rights of military uses and access, we are committed to provide security to these nations and their peoples, quote, "as the United States and its citizens are defended." This is an obligation greater than the United States has assumed under any of its mutual defense treaties.

We see peace in this area of the world. In time of peace, the Department of Defense seeks to shape a strategic environment that will sustain the peace and prevent unrest and conflict. We wish to dampen the source of instability by maintaining a policy of forward engagement and military presence.

The Department of Defense has an extremely important interest in continuing the use of the Kwajalein missile range and the facilities of the Kwajalein Atoll. The requirements of our missile and space surveillance programs, together with our strong interest to maintain full range of military access and security engagement options provided by the Compact, make renewal of the Compact a high priority for the Department of Defense.

Renewal of the Compact will help the United States achieve its security objective of maintaining peace and stability in this region.

Thank you very much, Mr. Chairman.


CHAIRMAN BEREUTER: Thank you very much, Mr. Smith. We'll move to the five-minute rule, but we'll proceed until we're interrupted by votes, or we exhaust our questions, and I'd like to begin with you, Mr. Aranza.

In your very last statement, you talked about the number of FTE you had. When we were still dealing with these areas as trust territories, 43 FTE were involved in monitoring and controlling only a $93 million program and two predecessor sub-agencies of the Department of Interior. Now you're indicating that you're unable to dedicate more for the Office of Insular Affairs and Interior than four FTE to the freely associated states, including Palau, a $445 million program.

Do you have a reduction in the administrative budget? You're suggesting an administrative budget increase, and why isn't this a sufficient priority of Secretary Babbitt that additional resources, if needed, are devoted for this function?


DIRECTOR FERDINAND ARANZA: Mr. Chairman, a few years ago, I believe in 1995, the predecessor of my office, the Office of Territorial and International Affairs, was headed by an assistant secretary, and we had 45 FTEs. But, at that time, there were calls on the hill for the dissolution of that particular office, as the result of the reorganization efforts within the administration, and that downsizing has significantly impacted our ability to effectively oversee Compact funding.


CHAIRMAN BEREUTER: It sounds like a downgraded interest or sense of responsibility, and that's a judgment on priorities within the Department of Interior, isn't it?


DIRECTOR FERDINAND ARANZA: Mr. Chairman, we are currently undertaking a very serious look at how we're organized as an office and how we should beef up our staffing to more adequately handle Compact funding, especially if the future Compact funding is restructured to be less of a pass-through and more of a grant type system.


CHAIRMAN BEREUTER: I'll come back to you in a minute, I'm sure you're happy to know.

But, Mr. Smith, I wanted just to ask if you still have CAT teams in the Federated States of Micronesia or in any other former trust territories – civil action teams, I think they are.


MR FRED SMITH: Yes, I believe we do.


CHAIRMAN BEREUTER: May I tell you I think they have played, for the amount of money, a significant role, and that they're a good use of resources of the Department of Defense. And, as a matter of fact, they've saved a number of lives – people diving in the harbor of Truk. I can tell you one of my constituents was saved by a group there, and it has happened on several occasions.

Mr. Aranza, why is it that the Department of Interior didn't insure the annual consultations of the FSM and the RMI were held during the first seven years of the Compact? What was the impact of not holding those meetings?


DIRECTOR FERDINAND ARANZA: Mr. Chairman, we would agree with GAO that not having those hearings did have a significant impact on the federal government's ability to track and monitor the developments in both the Marshall Islands and Micronesia. However, at the beginning of the Compacts, my understanding is that the administration's policy was a lot more hands-off, and there was a lot less priority given to accountability and financial management issues than there is right now. In fact, it was under this administration that we initiated these annual consultations.


CHAIRMAN BEREUTER: Do you feel that the Department of Interior is now, even since 1987, adequately monitoring the Compact expenditures for the RMI and the FSM?


DIRECTOR FERDINAND ARANZA: Mr. Chairman, I do not believe that we are adequately staffed and have the resources to monitor the amount of -- sure amount of money that's going out to these islands. So resource is one issue. The other issue, as I stated in my statement, is the flow-through nature of these funds and the lack of normal grant conditions and performance standards and other protections that we normally have in our normal programs.


CHAIRMAN BEREUTER: Am I to take that as a yes, we believe we have not adequately monitored the grant programs?




CHAIRMAN BEREUTER: You're giving me reasons, but...


DIRECTOR FERDINAND ARANZA: Given the constraints that we have, Mr. Chairman, I wish we had a more ideal situation, but I think the department did the best it could under less than ideal conditions.


CHAIRMAN BEREUTER: My time has expired. Mr. Underwood.


REPRESENTATIVE UNDERWOOD: Thank you, Mr. Chairman, and I would certainly like to advise our good friend here, Mr. Aranza, that sometimes it's just better to take the lumps. I mean, in this particular issue, it's rather obvious that Interior hasn't done the job that it could have done.

Just so that I -- you know, and I would take a little bit of time to explain perhaps a little bit of perspective on the issue of the Compacts. It was a trust territory, a single trust territory of the United States, given to the United States by the United Nations at the conclusion of World War II.

But unlike all the other trust territories around the world, in the UN, this was designated a strategic trust. As a result of that strategic trust, the United States was able to perform nuclear testing, wall off a significant part of Cipan (ph), bring in troops from nationalist China and train them there, and they did a number of other things which, by any other definition of trust territory, would have been seen as inappropriate.

And that relationship -- I guess that relationship -- which for a long time there, the people in Micronesia would say, well, we have the trust, and the United States has the territory. That trust territory relationship has morphed into these Compacts, and there's a series of kind of trade-offs, if you will.

One is that it is not, strictly speaking, a relationship of one foreign country to another. There is strategic denial. The United States can deny that element of sovereignty to these freely associated states. The United States, in turn, allows migration as non- immigrants into U.S. territory, and, of course, it would go without saying that Guam is disproportionately affected by that, far beyond the State of Hawaii and far beyond the CNMI (ph), which had a significant population to begin with of people from these areas.

And so we have -- and in addition to that, of course, you have these financial arrangements. Some are straight up cash payments. Some are treated as domestic programs. And I think it's incumbent on us here to make clear, I think -- and, you know, obviously, we're all going to have different points of view – to make clear what we expect at a minimum out of this next round, or this ongoing round of negotiations.

It's clear to me that Kwajalein is almost -- it's indispensable. You can't replicate it. I know that people will say openly that they can replicate it, but you can't really replicate it. Would you agree with that, Mr. Smith? I mean, people say, well, we can move to Wake, but in reality, you can't replicate what you do in Kwajalein in Wake.


MR FRED SMITH: It's unique.


REPRESENTATIVE UNDERWOOD: It's unique, OK. And certainly we have to deal with the problems that are associated with accounting for the funds, and the Department of Interior may need a little assistance on that, but they certainly deserve a few lumps in this process.

But, most importantly, I just want to ask -- and from my perspective, I just want to make clear that when these Compacts were negotiated, there was a commitment made to the areas that were nearest to it -- and Guam is the nearest to it -- that if there were adverse consequences, that there would be what is referred to as Compact impact assistance. Since the beginning of these Compacts, it's been -- the total, we think, is over $70 million, and, to date, we've received probably about -- between $15 million and $20 million from the federal government.

What I certainly would like to see is that issue rolled into, because the right to freely migrate as non-immigrants into U.S. territory is a feature of these Compacts, and I think -- because all of these things fit together in some way, I certainly am interested, Mr. Stayman, in your proposal, and maybe you could explain a little bit about what admissibility means in your proposal in discussions with the freely associated states, and what is your impression as to what would happen if we didn't deal with the issue of admissibility and Compact impact assistance, and we severely restricted any kind of economic assistance in the future? What would happen in the region? What would happen in the State of Hawaii? What would happen in general?


MR ALLEN STAYMAN: Well, it's pretty clear, Congressman, that if there was a serious disruption to the economies out there, that there would be an increase in migration. That's one of my concerns, is that while we develop a new program, the temptation is to drastically reduce our level of assistance.

But I think we have to be cognizant of the social, economic, and political consequences of a sharp reduction, and also the migratory consequences. We have to get them to develop their economies so there'll be an incentive to stay at home. People come to Guam because there are better schools and better hospitals and better paying jobs.

The first part of your question was about admissibility. One of the problems we're trying to address is the fact that the Compact not only provides for free entry into the United States as non-immigrants, but it waives the passport and visa requirements. By waiving those, they made it very difficult for the federal government to make determinations on admissibility.

What I mean by that is under the current law, the U.S. has the right to not admit people into the United States for a number of reasons. The ones that are most obvious -- and I stated in my statement -- are if they are criminals, or if they have a communicable disease.


MR ALLEN STAYMAN: Because there was no mechanism to enforce that law, one of the principles of my approach is to try to come up with a mechanism to do that, because, as I understand from the report, which the governor of Guam has filed with the Department of Interior, the relative impact of these migrants on the communities of Guam and Hawaii is disproportionately large. One statistic that I remember is that home nursing care in Guam -- 90 percent of it is for servicing this migrant population, and you have that occurring in many social programs.

So we think if we're able to establish effectively -- I'll call it screening, although that's probably not the right way to do it, but if we can determine admissibility and make sure that those people who have communicable diseases or who are likely to become a public charge as a result of chronic diseases -- we'll be able to deal with that impact while preserving the general underlying intent, which was to allow people to come to the United States to strengthen the ties, to provide education opportunities and employment opportunities.


CHAIRMAN BEREUTER: The time of the gentleman has expired on this round. The gentleman from California, Mr. Rohrabacher, is recognized.


REPRESENTATIVE ROHRABACHER: We certainly shouldn't be permitting people with communicable diseases to come into the United States and into our territory from anywhere. Let me ask the panel -- what's the -- we've renewed the contract for Kwajalein for 15 years. Is that right?


MR ALLEN STAYMAN: That's correct.


REPRESENTATIVE ROHRABACHER: And how much are we -- and how much is being given per year, and who is it going to?


MR FRED SMITH: Mr. Congressman, I have a figure that for -- the Kwajalein related payments are currently $13 million per year.


REPRESENTATIVE ROHRABACHER: Thirteen million, and that's going to continue for 15 years.


MR FRED SMITH: Yes, sir.


REPRESENTATIVE ROHRABACHER: OK. Thirteen million dollars a year for 15 years. And who is the money going to? I understand that's not going to the government of the Marshall Islands?


MR ALLEN STAYMAN: I believe the breakout is roughly that about $7 million of that goes to the landowners. The rest goes to the local government.


REPRESENTATIVE ROHRABACHER: Local government, meaning the government of the Marshall Islands.


MR ALLEN STAYMAN: I believe it goes to the Kwajalein Atoll government.


REPRESENTATIVE ROHRABACHER: Nothing goes to the Marshall Islands government at all?


MR ALLEN STAYMAN: In fact, all of this money is paid to the Marshall Islands government. The U.S. does not pay this money directly to anyone, and then it's the responsibility for the RMI government to make that distribution. But this comes out of a much larger payment, which goes to the...


REPRESENTATIVE ROHRABACHER: OK. Hold on. Thirteen million dollars for the Kwajalein -- for our Kwajalein base and operation there, and the $7 million goes to local people who used to own the...


MR ALLEN STAYMAN: The landowners.


REPRESENTATIVE ROHRABACHER: ... the landowners. Six million goes to the local government that is not the Marshall Island government. What's left for the Marshall Islands?


MR ALLEN STAYMAN: This $13 million -- I don't believe any goes to the Marshall Islands government, to the federal government. It would go to the equivalent of their state government, their Kwajalein government.


REPRESENTATIVE ROHRABACHER: I don't quite understand that. I mean, it seems to me when we're dealing with another country or trying to respect these people as another country, we wouldn't be able to have a base in the other country unless -- a military base, especially an important military base like this...


MR ALLEN STAYMAN: Let me try to clarify if I might.




MR ALLEN STAYMAN: The $13 million is not the total payment. There's a payment under Section 211, which is paid to the government of the Marshall Islands. Out of that amount, they then have internal agreements to make...


REPRESENTATIVE ROHRABACHER: OK. How much is the Marshall Island -- the $13 million is being paid in one account or something from an account. How much is being paid all together to these people for us to use this $4 billion missile testing range?


MR ALLEN STAYMAN: The 2001 projected payment for 211 is $19.1 million.


REPRESENTATIVE ROHRABACHER: OK. So $19.1 million, and of that, I take it, that $6 million is going – the Marshall Island government is able to keep for themselves. Is that right?


MR ALLEN STAYMAN: I'm sorry. It's a little more complicated. Of that $19 million, $11 million would be passed through for Kwajalein. The other $2 million we talked about is, in fact, in another account, Section 213.




MR ALLEN STAYMAN: It's very complicated. We...


REPRESENTATIVE ROHRABACHER: There's only 130,000 people on these islands, and it seems more complicated than -- you know, it doesn't seem that it would have to be complicated with that small a number of people.


MR ALLEN STAYMAN: All I can say is that's what was negotiated.








CHAIRMAN BEREUTER: Will the gentleman yield?




CHAIRMAN BEREUTER: I'll give you more time. It would be helpful, I think, to the gentleman and to me and to all of us if we could have an identification of the money coming for the lease for Kwajalein, where it goes, and then, separate and apart from that, the Compact money that has gone to the Federated -- to the Republic of the Marshall Islands. Would that be...



MR ALLEN STAYMAN: We'll make that available, Mr. Chairman.


REPRESENTATIVE ROHRABACHER: You don't have that now?


MR ALLEN STAYMAN: Yes, I have it in front of me.




MR ALLEN STAYMAN: OK. Right now, the Marshall Islands receives a total of $40.2 million. The Section 211 -- there are...


REPRESENTATIVE ROHRABACHER: But that's Compact money, right, or whatever you want to call it.


MR ALLEN STAYMAN: Right, and out of that, $13 million basically goes for Kwajalein.


REPRESENTATIVE ROHRABACHER: OK. Thirteen million goes for Kwajalein, but that $13 million -- I thought you said that $7 million goes to the local owners, and $6 million goes to the local government. How much goes to the Marshall Islands for the Kwajalein? Does all of that $42 million has to be considered for the use of Kwajalein? Is that what you're saying?


MR ALLEN STAYMAN: No. That is our total Compact assistance. I think part of the difficulty may be that the United States does not generally associate a payment directly with military use, that we're providing...


REPRESENTATIVE ROHRABACHER: But we have a $4 billion facility there. We're dealing with 130,000 people, and in their country, that is their only real asset, their only big asset, except maybe fish around their islands or something like that.

I just want to know how much we're paying those 130,000 people to use that $4 billion facility that's so important to our national security.


MR ALLEN STAYMAN: We're paying $11.1 million under Section 211 and $1.9 million under Section 213, or $13 million...




MR ALLEN STAYMAN: It's 11.1 plus 1.9. So that's $13 million.


REPRESENTATIVE ROHRABACHER: No, no -- $13 million, OK. That's going to the landowners and to the local government. I'm not talking -- you know, I'm talking about that you have 130,000 people who are -- that's a group of people -- they consider themselves nation. How much are we paying that nation -- the 13 -- really nothing's going to the entity of the corporatized 130,000 people.


MR ALLEN STAYMAN: Well, to me, it's a question of whether or not you consider Kwajalein to be part of that country. It is the second largest city. It's where -- I don't know – 30 percent of the population lives.




MR ALLEN STAYMAN: And they're the ones most...


REPRESENTATIVE ROHRABACHER: ... is definitely part of the Marshall Islands.




REPRESENTATIVE ROHRABACHER: All right. And you're saying...


MR ALLEN STAYMAN: I'm just describing -- this is the structure.


REPRESENTATIVE ROHRABACHER: OK. How many landowners are there? Let me ask you that.


MR ALLEN STAYMAN: I'm afraid I don't know. There are...


REPRESENTATIVE ROHRABACHER: Are we talking about a dozen?


MR ALLEN STAYMAN: ... dozens, dozens.


REPRESENTATIVE ROHRABACHER: Dozens. OK. So that -- is it $7 million or $6 million a year that we're giving to the dozens of landowners?




REPRESENTATIVE ROHRABACHER: Seven million dollars. OK. We're giving $7 million a year to dozens of landowners. We're giving $6 million a year to some local Kwajalein government, which I don't -- I'll have to learn about that. But we aren't giving anything to the rest of the Marshall Islanders specifically to rent this facility.


MR ALLEN STAYMAN: That's my understanding.


REPRESENTATIVE ROHRABACHER: All right. Does that seem reasonable to you?


MR FRED SMITH: If I may interject...




MR FRED SMITH: Around the world, with many different countries where we have military access and operating rights, we give aid and assistance to that country, but it's never called rent, per se, for the facility. But we give -- as part of the access agreement, we agree to give a certain amount of -- a level of aid or assistance.


REPRESENTATIVE ROHRABACHER: So you would assume that the rest of that $42 million, we just -- that's basically what we're giving them in order to have that Kwajalein. You'd have to say that. Otherwise, we just wouldn't give them anything.


MR FRED SMITH: Well, I don't know if that's true, because I'm assuming that the rest of the $40-some million...


REPRESENTATIVE ROHRABACHER: Well, let me put it this way to you. If we consider $13 million as the basic payment there, we have -- and it's a -- the price of constructing the facility was $4 billion, so that's $4 billion, and I'm not sure if that would be the -- my guess is the value is more than $4 billion, but $4 billion -- that's pretty low rent for a $4 billion facility. OK.


REPRESENTATIVE ROHRABACHER: Anyway, I just think that when we're trying to deal with what's going on in the Marshall Islands, you know, we have to deal with people fairly, and, yeah, we've been the biggest guy in the block in the whole Pacific for a long time, and, you know, if we're going to demand responsibility, we'd better make sure everything is based on fairness and equity. And I'm not sure -- I have not studied this. I don't know it, but it just -- my -- again, I can only go from gut instincts, and it just seems that there's something -- there's some incongruity in these numbers somewhere.

So with that said, I'm sure that Chairman Bereuter and I will eventually come to the bottom of this, but thank you very much.


CHAIRMAN BEREUTER: Thanks for your valiant effort, Mr. Rohrabacher. I'd like to start on a second round here.

I'm back to Mr. Aranza, you'll be happy to know. In cases where the FSM and the RMI have outstanding debt to U.S. institutions, such as hospitals, what action does the Department of Interior take to help resolve those problems? Do you feel that you have a responsibility? If so, is it being discharged?


DIRECTOR FERDINAND ARANZA: We do have a -- we have the authority, and we have, in at least one instance, actually withheld funds under the Compact that were not full faith and credit until such time as one of the -- the Chuuk state repaid one of the hospital debts. That was the Guam Memorial Hospital debt that I mentioned earlier.




DIRECTOR FERDINAND ARANZA: Right. With respect to other hospital debts, it would kind of depend on the source of the money, or the debt. I think that if it's full faith and credit, direct cash payments, there's very little that the Department of Interior or any other federal agency could do in terms of using that money to leverage repayment of medical debt.


CHAIRMAN BEREUTER: Mr. Aranza, I remember how much difficulty the trust territories were having in getting professional medical care -- people -- at the time, and how, in many cases, they relied on what you might call as medical missionaries who were doing -- were church subsidized medical personnel. Is that a significant problem yet today? Is it one of the reasons why there may yet be so many people going to Hawaii or apparently Guam for medical services?




CHAIRMAN BEREUTER: Does program assistance expire in 2001?


DIRECTOR FERDINAND ARANZA: Federal program assistance? Mr. Chairman, I believe that those – that different federal agencies' programs have their own independent authority, and they're reauthorized at different times by Congress. They don't find their origins in the actual Compact.


CHAIRMAN BEREUTER: I'm sure that would be true of some or most. Can you investigate this matter for us to see if there's any programs that will end automatically in 2001, at the end of the Compact, or if all of the programs providing direct assistance in humanitarian housing and so on have their direct authorization?


DIRECTOR FERDINAND ARANZA: I'd be glad to look into that.


CHAIRMAN BEREUTER: Thank you. Now, the system of land tenure in both the FSM and the RMI appear to be one of the greatest impediments to the development of private enterprise. That was a problem in the Northern Marianas, too. But, in some cases, they took a better solution, I think, in the Commonwealth. What kinds of specific assistance has the Interior Department provided to assist land title registration and reform of the land tenure system?

And, Mr. Stayman, is it possible that the State Department ought to be providing that assistance since you do that, I hope, very well in other parts of the world?

Mr. Aranza first -- do you want to tell me what you know about that problem and whether or not there's any effort to provide assistance?


DIRECTOR FERDINAND ARANZA: In terms of land tenure? Mr. Chairman, I'm not specifically aware of any technical assistance that my office provides specifically for that issue.


CHAIRMAN BEREUTER: We have land title registration problems, which apparently are an impediment to development in these islands, I'm told. I know that's been the case elsewhere.

Mr. Stayman, has the State Department ever thought about providing direct assistance to the freely associated states?


MR ALLEN STAYMAN: Generally, Mr. Chairman, the State Department does not provide assistance to these two countries, largely because of the amount of assistance they're getting from the Department of the Interior.


CHAIRMAN BEREUTER: I know you don't, but have you ever considered it?


MR ALLEN STAYMAN: We have in some limited areas, particularly the public diplomacy area. We do have some spending there, although it's not a State Department program. Of course, the Peace Corps is there, and that's important to their education systems.

And so there are some other programs associated with the state, which are extended. We haven't looked at the specific example you're referring to, but we'd be happy to do that.


CHAIRMAN BEREUTER: Gentlemen, I would say -- and maybe Mr. Rohrabacher would be particularly interested in this, as well as I am. Apparently, staff asked the question of how much of the Kwajalein lease payment does the Kwajalein Atoll Development Authority receive, and what of -- then, when the question was asked what has Cotta (ph) done with the resources, then I understand they walked out of the room and refused to answer.

Given that 20 percent of the RMI population lives in Ebeye -- and I tried to describe to you the squalor that existed with the highest concentration of population in the Pacific on that one island -- what percentage of the RMI government resources are allocated to services and development at Ebeye? Got any rough idea, Mr. Aranza?


DIRECTOR FERDINAND ARANZA: Not at this specific time, Mr. Chairman, but I'll be sure to get back to you on that one.


CHAIRMAN BEREUTER: You know why all those people are living in Ebeye, don't you? Do you want to tell us about that?




CHAIRMAN BEREUTER: Because of Kwajalein, and then the extended family, 10, 12, 15 people, come to be supported by the one person who has the job across on Kwajalein.


MR ALLEN STAYMAN: If I could just add, Mr. Chairman, I think that this goes to the heart of the recommendation or finding that the GAO made -- which much of our assistance was used ineffectively because bad planning and bad management. As I understand it, the RMI government provides very little money to Kwajalein because Kwajalein has this source of funds, which they're -- I mean, they're paid through Section 211 and 213.

And there is, I think, a substantial amount of -- there are a substantial amount of resources going into Kwajalein, but it is the poor planning and poor management on the island which results in many of these problems. It's important to note that the trend in Ebeye -- that in the early 90s, when the Cotta (ph) government had first been organized, they went out and they hired professional city managers, they went out and hired professional managers for their utilities, and around the 1993-94 timeframe, the situation there had improved dramatically.

However, there were some essentially political crises there, there was a change in management, and we saw the use of resources revert to the old pattern, which was funds were generally put almost exclusively into payroll. So the money was taken out of hiring professionals to run the services and the utilities, it was taken out of maintenance, it was taken out of supplies.

I think we have to be cognizant of what GAO has said, that many of the problems here were not due to a lack of resources, but to a lack of planning and a lack of management. That's my view of what the problem is in Ebeye.


CHAIRMAN BEREUTER: Now, in Enewetak, of course, these people are greatly affected by fallout from nuclear hydrogen bombs, and so we moved them off the island, and we scraped the entire surface of the island off and buried it or took it away, and they were allowed to move back. And when I was there, it was like a large sand dune with foot high palm trees and absolutely nothing for the people to do.

And then they decided that the levels of radiation were too high again, and they moved all of these people off again. And when I saw them, they were living in, for example, flimsy packing crates on other islands with no discernible way to make a living, and they had to depend upon the food coming in provided by the United States, irregularly and sporadically, during that period of time, with absolutely nothing to do, no way to make a living.

And then they moved back again, and then they were taken off again, and they decided it wasn't adequately safe for them to be there. And so what has happened to the people of Enewetak?


MR ALLEN STAYMAN: The people of Enewetak are now living on their atoll. I was not aware that that particular group had been moved off. The Bikinians had been moved off and moved back, and the Rongelapese have been moved off and have not moved back.

As far as I recall, the Enewetak community was relocated after the cleanup. But you're absolutely correct, Mr. Chairman. The conditions on the island were such that it was virtually impossible to grow foodstuff...


CHAIRMAN BEREUTER: It was like a sand pile.


MR ALLEN STAYMAN: ... so they could feed themselves.


CHAIRMAN BEREUTER: That's like a sand pile.


MR ALLEN STAYMAN: Yes. Well, a concrete pile is better. The Congress provided, in fact, just a couple of years ago, machinery to break up the surface. It's basically like concrete.




MR ALLEN STAYMAN: Rongelap is one of the other four affected atolls, yes.




DIRECTOR FERDINAND ARANZA: Mr. Chairman, if I could just note that through the Department of Interior, separate from the Compact, we provide about $1.1 million a year for Enewetak support.


CHAIRMAN BEREUTER: And you think it gets to the people?




CHAIRMAN BEREUTER: I hope that's right.

Mr. Underwood.


REPRESENTATIVE UNDERWOOD: Thank you, Mr. Chairman. On the issue of Ebeye -- and, actually, I did get a chance to visit Ebeye. It was early last year, early last year, and the conditions are appalling.

It's very difficult to describe to people who have never been there. I think it's about 10,000 people on one square mile, and it's -- you know, they have some community showers in some instances, and, you know, only a few palm trees, hardly any trees at all, nothing. I mean, it's just kind of wall to wall people who take the water taxis to work in Kwajalein.

But that also presupposes a difficult question on what we propose to do in terms of whether we should monitor that more carefully, or we should look at this as a sovereign to sovereign relationship and say, well, you get the money, and this is basically what it's for, and then you decide how you want to handle that. And that's a very difficult call.

Yet I feel, as a person who certainly has traveled throughout the region continually over the past couple of decades, that, at times, the situations are used to kind of create a lot of emotional support, but then sometimes you don't see the kind of infrastructure support which would go towards ameliorating it.

I do want to point out to, maybe, Mr. Rohrabacher -- I don't know if you -- do you represent Costa Mesa? Is Costa Mesa -- well, you should be proud to know that the largest community of Marshallese, outside of Hawaii and the Marshalls, live in Costa Mesa, so...


REPRESENTATIVE ROHRABACHER: We're trying to make sure they're all Republicans.



REPRESENTATIVE UNDERWOOD: Well, the interesting thing is they're non- immigrants, so they don't become citizens. They just live there. But...


CHAIRMAN BEREUTER: Will the gentleman yield?




CHAIRMAN BEREUTER: Just a little bit of staff input back here. He contends that the largest group outside of Hawaii and Guam is employed by Tyson's Food in Arkansas.


REPRESENTATIVE UNDERWOOD: Well, that's true, too. There's a few hundred of them working at Tyson's, so that makes the chicken taste better, I guess.

Just going back to the issue of strategic denial, maybe Mr. Smith would like to answer the question. Strategic denial in the height of the Cold War seemed very critical and very crucial to the relationship of the United States to the region. How important is strategic denial as a concept today, and what are we denying, and to whom, and potentially to whom, and how important is it in the constellation of our strategic thinking?


MR FRED SMITH: It's important, and I'd say that the -- certainly the future is uncertain, and I'm not aware right now, today, that we're denying any access to other countries, but it's something that we feel we -- it's good to have for the future. And there's probably any number of scenarios you might develop, and I think Mr. Rohrabacher mentioned about the Chinese possibly being active in this region, and maybe for some reason, we may want to exercise it in the future.


REPRESENTATIVE UNDERWOOD: Well, I guess that strategic denial -- we're not denying anybody. It's the Micronesians that are denying it in response to this provision.




REPRESENTATIVE UNDERWOOD: But how critical is it to our thinking? I mean, what could conceivably happen? Well, what about the issue of recognition of -- diplomatic recognition of different countries, as apparently has happened in the case of the Marshalls, where we have switched between Taiwan and the PRC...


MR FRED SMITH: As I understand it...


REPRESENTATIVE UNDERWOOD: ... and it's kind of flip-flopped.


MR FRED SMITH: As I understand it, the strategic denial refers to military units or access, and I don't believe it extends to the diplomatic...


REPRESENTATIVE UNDERWOOD: Well, maybe Mr. Stayman will have any -- is there any thinking about that in the State Department, any sorts of concerns with that, because I know that the Marshall Islands switched their recognition in the past year.


MR ALLEN STAYMAN: The Compact doesn't provide for, I would say, non- defense -- the U.S. does not have the right to object to actions by these governments that are not connected with defense.


REPRESENTATIVE UNDERWOOD: I understand that. I'm just wondering whether there's any concern in the State Department. Has there been any discussion on this particular issue? It's rather obvious that, in this instance, it appears that the Marshall Islands switched from the People's Republic of China, from recognizing the PRC, to Taiwan in order to secure some financial advantage.

So is that a source of concern? Is it an item for discussion, or are you simply saying, well, you know -- I mean, in the nature of State Department activities, trying to move people in a certain direction is part of it, isn't it?


MR ALLEN STAYMAN: We recognize their right to exercise their sovereignty in this area.




CHAIRMAN BEREUTER: The gentleman from California is recognized.


REPRESENTATIVE ROHRABACHER: Well, you have to remember, up until recently, Communist China has been our strategic partner, according to this administration. How can you expect any answer except the one you just received?

But, in fact, the Marshall Islands and these islands of the Pacific are – their friendship and their good relations with the United States and America's ability to be the dominant power in this arena is of incredible strategic importance to the United States of America. Otherwise, we'd have a potential enemy right on our doorstep, when, instead, we can hold at bay any potential enemy because we have friends that are there in this vast Pacific area. And, of course, when you have an administration, again, who bends over backwards not to see a threat from Communist China, you're going to have to have that type of answer.

Let's talk about the Chinese in the Pacific. What about the listening post in Tarawa and the -- was that built by the Chinese military?


MR FRED SMITH: I'm not sure if it was built by the military or some other arm or agency. The Chinese...


REPRESENTATIVE ROHRABACHER: Is it there to -- is that aimed specifically at overseeing what we're doing in Kwajalein? Is that what they do in this big Tarawa -- big dish out there?


MR FRED SMITH: I'm not really familiar with this facility, but I assume that it's a space tracking station and...


REPRESENTATIVE ROHRABACHER: You're not familiar with the facility. Who is...


MR FRED SMITH: No, not that facility.


REPRESENTATIVE ROHRABACHER: Who is familiar with that facility if you are not familiar with it? I mean, it seems to me that that would be something of interest to us. Of course, they are our strategic partners, so we don't have to worry about that. Who would be knowledgeable about that facility?


MR FRED SMITH: Oh, I can find somebody who knows...


REPRESENTATIVE ROHRABACHER: All right. Well, I would suggest that the fact that there is a ultra modern piece of technology sitting on an island 500 miles from our missile testing range, that that would be of some interest to the United States of America, and what its capabilities are and what the purpose of it is, and what type of visitation that it has from what branches of the Chinese government.

Is there some sort of indication of more Chinese activity, in terms of Communist Chinese activity, in these Pacific islands?


MR FRED SMITH: Mr. Rohrabacher, with the freely associated states, I specifically asked several people that question about possible Chinese military activity in this particular region, and I was not able -- nobody knew of any, and, specifically, there's certainly economic and trade activities...


REPRESENTATIVE ROHRABACHER: Of course, we have a problem with Communist China, in that they have taken all of their -- you know, all of their military people -- not all of them, but a huge chunk of their military apparatus, and they've given them civilian clothing and started calling them businessmen, you know, like Cosco is really the merchant marine of the Soviet Union, but they just took the merchant marine uniforms off, and now it's supposedly a private shipping company.

Lee Ko Shing (ph), who is part of the inner leadership in Beijing is -- no, he's just a billionaire whose people are conducting other types of businesses throughout Panama and elsewhere. So you don't see any -- there's no threat, Chinese threat, and I guess we must not even proceed with that line.

Let me just say this, that I do perceive a threat from Communist China, and that's where -- and that's clear from what's been going on in this Congress and for the last few years, and that's something that I -- I believe the Communist Chinese have to be viewed in the same way that the Japanese were viewed in the 1920s. The Japanese viewed themselves as the dominant force in Asia, and they had a right to. The Japanese had a right to dominate all of Asia, or at least to their co-conspirators there, and the United States was the only thing that stood in their way, thus we were their enemy in their mind long before we officially admitted that.

I think the same is true with the Chinese now, and that the Chinese believe they have a right to dominate all of Asia, or at least a huge hunk of Asia there, and, just like the Japanese, the Pacific plays a major part in this strategic game. And the Marshall Islands play even a greater part, because they are not only part of a strategic positioning, but the Kwajalein missile range will permit the United States to develop an anti-missile system that will eventually save us or -- and perhaps could deter aggression from the Communist Chinese in the future, something of enormous value to our country, because now we understand, after years of foot dragging, that a missile defense system is actually important.

And, finally, let me just say this for the record, and that is, Mr. Chairman, we should never underestimate the importance that the Pacific Ocean, the ocean itself, is going to play to the future of humankind. I'm chairman of the Space Aeronautics Subcommittee, so I spend a lot of time studying about the future of space and America's position in space.

I happen to believe that as important as space is to us, we also have overlooked the fact that the ocean will be at least that important to the future of the human race, and the Marshall Islands and others, while they may be going through a period now where they seem less significant than they did 50 years ago during World War II -- but there will be a time when these islands and mankind's commitment to the ocean will find these people in the forefront of developments that will affect life on this planet and will push their lives forward so that they don't live in squalor, and they aren't taken for granted, and that they are treated fairly.

So thank you very much, Mr. Chairman, for this hearing.


CHAIRMAN BEREUTER: Thank you very much, Mr. Rohrabacher.

Gentlemen, I want to thank you for your testimony, for your responses to our questions. We're going to be needing your input, your assistance, for some time to come as we look at this subject.

We share jurisdiction with the Resources Committee. In fact, we offered an opportunity to have a joint hearing with them. It was not convenient at this time. So we are embarked on a study, an investigation, and eventually a drafting responsibility.

I would, in thanking you once more for your time and asking for your future assistance, ask Dr. Westin if she could come back to the witness table very briefly. I have one area to investigate with her, and I think it should be informative for everybody here.

Thank you, gentlemen.

DR. SUSAN WESTIN: I would simply like to ask you to clarify for everybody who's interested and for me and for the committee what will happen now -- what are the timeframes for reaction from the agencies with respect to the second part of your study, which I understand you hope to print to release to the public in September. Can you lay out just what will happen at this point, how much time they will have to respond to some of the information that you presented today and for their input to be considered?


DR. SUSAN WESTIN: Yes, Mr. Chairman. Thanks for the opportunity to clarify that, because I hadn't mentioned that we do have a report, based on our work, coming out in September, a written report.

In this report, we expect to have recommendations to the agencies. I know that we will have recommendation on accountability. There may be other recommendations as well. We're still working through those, based on our findings. We also may have in the report matters for Congress to consider.

GAO procedures are that when we do a report involving an agency, we give the report to the agencies, and they have a chance to comment. We will print their written comments as part of our report and answer questions, or if they disagree with our findings, we will also talk about that. And they will have about 30 days to answer.

Also, the Compact provides for 45 days for both the Republic of the Marshall Islands and for Federated States of Micronesia to comment. So we will provide that report to them as well.

Once we have back their comments, we consider their comments and pull it all together, answer what needs to be answered, and expect the printed report to be available to the public about the end of September.


CHAIRMAN BEREUTER: Thank you very much. I think that's important to lay out that, and -- so that the two freely associated states will have 45 days, and those comments will be a part of the report, along with the 30-day notice comments from the agencies.




CHAIRMAN BEREUTER: Very good. Thank you very much, Dr. Stayman, and thanks to your staff for all of your work on this to this point.

The subcommittee is adjourned.

The FDCH Transcript Service Jun. 28, 2000

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