MANDALUYONG CITY Philippines — The Asian Development Bank is pushing for the development of the private sector in Palau to enable the country to boost its economic development.

An ADB economist said one of the ways to also help Palau and other Pacific economies to grow is to invest their trust funds properly.

The Journal has obtained a draft report assessing the private sector in Palau prepared by the Enterprise Research Institute in Washington D.C. for the Manila-based bank. It was recommended that Palau should:

• Reform the financial market to increase bank lending securitize collateral and remove interest rate ceilings;

• Review and reform the legal system for commercial activities by adopting laws on bankruptcy sales of goods and consumer protection;

• Completely overhaul its foreign investment regulations by merging rules for both foreigners and locals and reviewing existing law on limiting foreign workers in the country;

• Undertake tax reform by switching from an inequitable gross receipts tax scheme to a simpler value-added tax system;

• Streamline role of government in the economy by limiting government workers opening the door to partnership with private enterprises for infrastructure services selling additional communication licenses and focusing economic policies on key government agencies;

• Implement land reform and clarify provisions on the 99-year land leases establish an equitable payment scheme on such leases and accelerate resolution of land disputes; and

• Develop a high-end tourism program and implement a tourist head tax centralize selling of diving licenses and use of protected areas to ensure fees are collected and allow foreigners to take part in local tourist businesses and prevent revenue from going abroad instead.

Much of Palau’s economic growth was fueled by its mass tourism industry and payments from the Compact-Impact funds extended by the U.S. which will end by 2009. With an expected drop in external assistance the government of Palau will have to look for funds to maintain its operations and continue financing vital government projects on infrastructure health education etc. Aside from wisely investing its trust funds to help pay for these major expenses the development of the private sector by way of clarifying of laws and reforming some government policies will help attract substantial investments into the country.

“In spite of its small size the range of economic problems facing the country as it attempts to adjust to economic globalization are complex and require careful navigation if Palau is to experience the advantages of internationalization. One of the central themes of this paper is that many of the current policies that are directly or indirectly intended to help and protect Palauans in actuality hinder adjustment to the international economy and reduce the potential gains that could be obtained from Palau’s commercial interactions with the rest of the world ” the report said.

One of the policies the report zeroes in is on the limitation on foreign investors in certain industries such as tourism. According to the report foreigners usually use locals to act as “fronts” for their tourism business. Thus the revenues are repatriated to the foreigners’ home countries instead of staying in Palau where it can generate more economic activities and investments.

“The problem with such fronts is that generally they do not have succession plans upgrading of Palauan participation or the aim of allowing Palauans to buy out the foreign owner. As a result the nominal owners of front businesses receive no training and skills and one of the critical benefits of foreign investment — the transfer of skills — does not occur ” the report said.

Meanwhile Stephen J. Pollard principal economist of the ADB; told the Journal that many Pacific trust funds such as those from Kiribati Tuvalu the Federated States of Micronesia and Marshall Islands are “well-structured well-managed and well-invested have earned and are earning.” One exemption is that of Nauru’s trust fund which was invested mostly in real estate poorly managed and “probably even stolen from.” He said “The bigger issue is how the governments of the Pacific use these earnings for domestic development and whether these earnings flow on into value-added in the country — or just employ more unproductive civil servants.”

Pollard and Benjamin Graham general management and international development consultant; will be presenting a paper on the role and future of trust funds in the Pacific at the 6th Annual Pacific Regional Investment Conference at the Shangri-la Makati Hotel on Nov. 9.

They define the different kinds of trust funds how these funds work and why they should be adopted cite case analyses of trust funds in several Pacific countries   as well as ADB’s role in the promotion of such fund use.

According to Graham the current market capitalization of eight Pacific trust funds totals “nearly U.S. $1 billion. The funds utilize custodial banks investment managers independent consultants auditors and other service providers.” MBJ