KOROR and MELEKEOK Palau — The fulfillment of a decades-old constitutional mandate in Palau is set to open up economic opportunity on the island of Babeldaob.

Constitution Article XIII Section 11 formulated in 1981 mandated a Capitol in Babeldaob. The opening of the Capitol Complex in Melekeok on Oct. 1 looks set to push development with signs already of regional growth to come.

The building was funded by a U.S. grant of $2 million in November 1994 which largely funded the $2.2 million design by a $20 million soft loan from the International Commercial Bank of China in Taiwan and from local funds.

The new $149 million 53-mile Compact Road leads from Airai on the East side of the island to the new capital located about 22 miles from Koror. Daewoo E&C Co. Ltd. constructed the road which was funded from monies granted to Palau through the Compact of Free Association between Palau and the U.S.

Koror the former capital will remain the commercial center of Palau.

About 250 members of around 2 500 government personnel were due to complete the move to the new 94 000 square-meter Capitol complex in Melekeok by Oct 7. The new $50-million complex designed by Architects Hawaii and constructed by Black Micro Corp. brings with it new running costs for the Palau government.

Elbuchel Sadang minister of finance told the Journal “Right now our estimate is about $600 000 to maintain the Capitol. If you include the Compact Road our estimate is $1.5 million [annually] as well as the other connecting roads.” The three-mile run up to the start of the road in Airai has yet to be finished.

The road on the West side of Babeldaob is still not complete. “The road is not turned over to us. It is still under the supervision of the U.S. Army Corps of Engineers. They say it will be completed at the end of the year and Palau will assume that responsibility ” Sadang said.

Maintenance funds have not yet been identified. “That’s our biggest challenge. We’re looking into a grant as well as some tax structure — vehicle tax or a road use tax ” he said.

Plans for a revised tax structure will form part of the agenda of an economic symposium scheduled for Feb. 21 and 22 2007. The economic symposium will be hosted by the Compact Review Commission which is chaired by former president Kuniwo Nakamura.

Sadang said “We’re inviting speakers from the ADB the IMF and other well-known economists to come and speak and help us formulate what has to be formulated. Then we will sit down with the chamber and others. It’s going to be a joint initiative to come up with a workable scheme.” 

Sen. Alan R. Seid chairman of the Committee on Ways & Means & Financial Matters of the 7th Oibiil Era Kellulau and floor leader of the Senate; told the Journal “We will work with the chamber as much as possible to get consensus. There are some bills in committee; we either work with the bills in committee or we rewrite a whole new bill. We will get input from the IMF and the ADB and there is a grant to bring in an outside expert. 

Seid said “Our tax base is antiquated  — it’s been here since the Trust Territory days. We’re talking about changing from a gross revenue to a value added tax or a combination VAT and net profit tax. On VAT we’ve looked at 3%. If we’re going to have a combination then I think VAT should remain at 3%. I really believe a combination is the right direction. We’d be taking it from 4% GRT and converting to VAT. The net profit tax is a minimum 10% to as much as 26% or maybe different levels. It could be on a scale basis.” Seid said the tax would be on profits rather than revenue.

He said the tax changes were necessary. “A country cannot live without tax. There’s always a demand for service. The water system can be privatized as we did with power but at the end of the day we need a more diversified tax base as well.”

Following a 2005 consultation mission the International Monetary Fund issued a Preliminary Report on Palau on Nov. 17 2005. In its summary the report praised Palauan endeavors to overcome the challenges of a small island economy and noted “Prudent management of foreign aid has helped establish a foundation for private sector growth.” The report cautioned that “Longer-term economic prospects are uncertain and depend on the magnitude of future grants and [the] future course of economic policies.” U.S. grants average 18% of an annual Gross Domestic Product that the IMF pegged at an estimated $143.22 million for 2005 (Palau provided information for the GDP; the government is revising its GDP figures for 2001 to 2005.). Compact Trust Fund grants are scheduled to be mostly eliminated in 2009 to be replaced by $15 million annual withdrawals from the fund until 2044. Palau expects to have its grant assistance renewed.

Among its comments on economic policies the IMF mission said it “Welcomes the authorities’ plans to introduce tax reforms that could help raise domestic revenue collection closer to 35% of GDP.” A further IMF mission will visit in 2007.

“It’s not an appropriate time to raise taxes but government needs to provide a better service to its citizens ” Sadang said. Palau has income tax import duties and a 4% gross receipts tax.

Palau joined the Asian Development Bank on Dec. 29 2003 and on Dec. 16 2005 was classified as a Pacific developing member country. According to an Oct. 3 release from the bank Kiyoshi Taniguchi ADB country programs specialist and team leader for Palau; said from 2007 to 2009 “ADB’s assistance will focus on strengthening economic and fiscal management promoting policies for private sector development and facilitating sound infrastructure development and management.” ADB will also award a $600 000 grant in 2007 to help the government enhance policies for economic financial and infrastructure management according to the release. Also a $300 000 technical assistance grant will prepare a water supply and sanitation project in Babeldaob.

The ADB has issued a variety of reports on Palau including a “Country Strategy and Program Update” prior to its three-year assistance plan. A new report is due shortly. The Journal obtained a draft copy of that report which is not expected to change. The report “Policies for Sustainable Growth A Private Sector Assessment for Palau ” is dated June 2006 and was prepared out of the Enterprise Research Institute in Washington D.C.

The latest ADB report assesses the economy employment and the labor market foreign investment and tourism the financial sector security interests the legal system and property rights and a variety of data. A review of the report will appear in an upcoming Journal.

The report recommended that Palau amend its tax structure sooner rather than later. It said “ … Tax reform is an urgent priority. However the government has decided not to pursue modernizing the tax system until 2008/2009 because of lack of skilled personnel to implement new measures to collect taxes. It would be better if Palau could start this process sooner and begin preparation for a new system as soon as possible.”

For commercial interests the relocation of the capital will have a notable effect. Government offices scattered around Koror will move to the OEK building. “The first thing we need to do is to centralize the operation of the government — a ‘one-stop shop.’ All the government offices that are renting will be moving in so we’ll save some money on that.” Sadang said sectors of government that interact with the business community such as the Ministry of Finance and the departments of labor and immigration will relocate to the former Congress building in the center of Koror.

Government offices will open from 7:30 a.m. to 4:30 p.m. in Koror and from 8:30 a.m. to 5:30 p.m. in Melekeok. “The reason we did that ” Sadang said “Is because of the traffic and ministers can visit their offices in Koror and then go to the capital.”

Hotel developments are to come. A Hong Kong-based hotel group has already contacted the national government. “They showed interest in building a hotel ” he said. “A couple of private sector companies are talking directly with the state.”

Some signs of commercial and residential activity around Melekeok are already showing. “There are already small motels there ” Sadang said.

The Capitol itself has one cafeteria in the legislative building with more due in the Capitol complex a bar and grill opened in Melekeok village in 2005 and the Okemii Deli and Internet Café opened on Oct. 1 on Capitol Beach Road.

Hobbs Lowson vice president and country manager for Bank of Hawaii for Palau; said the opening of the Capitol and the road would provide an economic boom for Babeldaob.

“It will begin in a few years time with the increase in housing and small businesses in the area.” Bank of Hawaii would support that growth he said. “I’m hopeful that through the right partnership with the National Development Bank and the USDA [U.S. Department of Agriculture] we might be able to extend loans into Babeldaob. Those partnerships are key due to the land issue here.” He expressed satisfaction with infrastructure improvements to date in Palau. “Infrastructure needs to be taken care of first before Palau gets the big tourism jump it is looking for. All these infrastructure improvements position Palau very well for a growth in tourism.”

Sadang said Palauans are aware of the danger of free-fall commercial growth in Babeldaob. “This administration believes in the balance between the environment and development. The state itself is working on its own master plan. I think the national government has to make sure whatever development comes to Palau has to be environmentally friendly.” He said development should occur commercially residentially and agriculturally. “We want our local people to benefit from all the developments.”

With the opening of the road agricultural development has already begun. Sadang said “A lot of locals are planting Noni and taro. The Noni now is exported to Japan and the taro is also exported. At Palau Community College they are doing some experiments to make Soju.” MBJ