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Honolulu, Hawai‘i January 11, 2001


Allen P. Stayman Special Negotiator for Compact of Free Association Bureau of East Asian and Pacific Affairs U.S. Department of State


Senator Christian, members of the FSM delegation, Ambassador Watson: I am pleased to join you in this third round of the U.S. -- FSM Compact Negotiations.

I have come to this round of negotiations to present formally the United States’ proposal of November 8, 2000 to the entire FSM Joint Committee on Economic Negotiations (JCN). We hope our meetings will lead to a better understanding of our proposal.

We have agreed to an agenda for this session that will give us the opportunity to discuss each of the provisions of the U.S. proposal in detail. Therefore, I would like to use this opening statement to make several general comments.

First, the U.S. proposal is the product of several months of discussions with, and contains input from, U.S. officials representing dozens of agencies, members of Congress and their staffs, representatives of international financial institutions, as well as potential bilateral donors. In developing our proposal, we have also carefully considered the FSM’s National Development Plan, your April 2000 proposal, and information gathered in our previous sessions.

One of my objectives for this session is to have you better understand the analysis and intent behind the elements of the U.S. proposal. An understanding of our constraints is essential in guiding your response. We also seek more information from you. In order for us to reach agreement and most effectively justify and present a joint proposal to others, such as the Congress, we must have specific and persuasive supporting information.

This has added importance in light of the reports Congress has requested from the General Accounting Office (GAO) on the effectiveness of U.S. assistance to the FSM. These reports have, and will continue to raise questions about the effectiveness of current U.S. assistance, and could affect the dynamic of our negotiations. We must work together to assure that any new agreement overcomes the planning and management problems identified by the GAO. Those findings make it unrealistic to expect Congress to continue total assistance to the FSM at or above current levels.

We have accepted many of the features of your April proposal. Our proposal supports your long-term goals regarding long-term stability and security and ending mandatory annual financial assistance grants from the United States. We are focusing assistance on health, education, and infrastructure. We propose the continuation of most Federal services and programs, and we will have an opportunity to discuss those not included in our proposal. We endorse the concept of a trust fund and view it as an essential element in any agreement, and as the mechanism to lessen the impact of ending mandatory annual U.S. grants.

I have no doubt that we will reach an agreement because our shared goals establish a firm foundation for an agreement. In addition, the excellent work the FSM has done on its National Plan gives us the objectives and priorities that are needed to link U.S. assistance to specific mutual objectives.

Based on Senator Christian’s letter of November 14, 2000, I would generally identify your areas of concern as: (1) the overall level of annual financial assistance including contributions to a trust fund, (2) accountability mechanisms, and (3) the extent of service and program assistance. It is my hope that over these two days, and in more detailed discussions in smaller working groups, you will come to better understand our proposal.

As to the level of funding, the U.S. believes that the FSM can manage a reduction in U.S. assistance for several reasons.

First, the FSM is currently receiving $80.2 million from the U.S. under Section 211, or five percent below the level requested. However, the FSM’s GDP growth rate is projected by the IMF to increase by 2.0 percent in 2000/01.

Second, we understand that debt service payments of roughly $5 million are due to end this year, thus reducing expenses.

Third, nearly $10 million could be saved annually if the practice of appropriating funds directly to legislative offices for special projects is ended. We doubt that such appropriations contribute effectively to national development objectives.

Fourth, state governments continue to have funds available that were to be invested in capital needs and for economic development. These include Section 211 capital account funds allocated to the municipal governments. We also understand that there are significant unexpended balances from the IDF.

Our proposal reflects the fact that we cannot agree to continue current funding levels. Our proposal would maintain a substantial fixed level of funding over a 15-year period. This would avoid disruptive step-downs during this period.

The second general area of concern is the level of contributions to the trust fund. While the FSM proposal assumes that the U.S. will be the sole contributor to such a fund, we view the fund as a collaborative effort with the FSM and other donors. We urge the FSM to commit the FY 02 and FY 03 increases in Section 211 funding to a Trust Fund, a recommendation endorsed recently by the International Monetary Fund. In addition, it would be very helpful if the FSM would seek the support of other potential donors.

We understand that the FSM has held discussions with the ADB regarding support for a Basic Social Services Fund (BSSF). We are most interested in the possibility of establishing a single Trust Fund. We would appreciate information on the FSM’s discussions with the ADB regarding the BSSF as well as existing FSM legislation that establishes an FSM Trust Fund.

The third general concern regards our accountability mechanisms, namely the grant process and the macroeconomic incentive. Both are fundamental features of our proposal. I hope we can reassure you in our further discussions that our requirements are not extraordinary. In fact, with respect to the grant process, we are merely proposing to apply the same general procedures to FSM financial assistance with which other U.S. grant recipients comply such as "the common rule."

Our objective is to establish an annual cycle for the FSM to present its plans for the coming year, to report on performance during the past year, and to discuss grant terms. We see this as a process in which we all work together, as partners, to determine how U.S. assistance will be used to advance selected priority elements of your national plan. This process will also give us an opportunity to identify problems and to agree on how U.S. resources can contribute to solutions.

The underlying objective of the macroeconomic incentive fund is to encourage the FSM governments to implement the public and private sector policy reforms presented in the National Plan. Such accountability mechanisms are necessary to obtain approval of any agreement on our side.

The final area of concern regards continuation of U.S. domestic services and programs. Your proposal to continue all services and programs at current levels must be analyzed on a case-by-case basis, because of the range of issues raised by the various agencies involved. Our experience over the past 14 years of the Compact is that applying U.S. domestic programs in a foreign jurisdiction presents unique problems.

We want to share with you the issues regarding specific services and programs that federal agencies have raised. In many cases, we will need to negotiate subsidiary agreements to respond to U.S. agency concerns. In some cases, you must expect a reduction, not an end, to certain federal services and programs. I look forward to agreeing at this meeting on how we can engage quickly on considering these subsidiary agreements.

Finally, I want to remind you that the U.S. plans to make a proposal regarding the immigration provisions of the Compact. In addition, we are reviewing the General Legal Provisions (Article VII, Title I) of the Compact. We are working expeditiously to complete our internal processes before presenting it.

I also want to sound two notes of caution. First, we must realize that we are running out of time to conclude these negotiations and obtain congressional approval for any future Compact financial assistance. At a minimum, we anticipate that it will take one year for congressional approval after we reach an agreement.

I hope these general comments are helpful in developing your understanding of our position. I look forward to a more specific discussion on each of the elements.

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