PASIG CITY Philippines — Asian Development Bank will not be extending loans to the Marshall Islands for the next five years due to the latter’s inability to properly utilize such loans as well as its high level of assistance from donor countries like the U.S. Japan and Taiwan.

The Manila-based bank cancelled a $7 million loan to the Marshall Islands which was intended to build infrastructure and install equipment to facilitate shipping services in the islands.

Stephen J. Pollard ADB principal economist for poverty reduction; told the Journal "We have already agreed with the RMI government in the update of our country strategy this year [from 2007 to 2011] that we will not provide further loans for at least the next five years. As we see it loans and international finance in general are not the prior need in the RMI at the moment. RMI receives quite substantial funding from the U.S. under the amended Compact and also from the EU [European Union] Japan and from Taipei China [Taiwan]."

He also said the Outer Islands Transport Infrastructure Development Project which was to have built jetties and wharves and install navigation aids in the Marshall Islands was cancelled for a number of reasons. "We could no longer disburse funds on the loan because the government has been in arrears on payments of earlier loans for the past year; government counterpart funds were insufficient; project counterpart staffing was insufficient; the project suffered from delayed implementation during which time costs were re-estimated costs estimates escalated and the project became unviable; government has a relatively high level of debt including debt owed to ADB; and government is suffering from budgetary management problems."

However Pollard said the Marshall Islands would still continue to receive technical assistance from the bank. "The prior development challenge is how best to use all this funding and as agreed with the government this challenge is the focus of ADB’s country strategy and program. We will be using grant technical assistance to help deliver on this challenge."

The Marshall Islands is one of the recipients of a recent technical assistance grant amounting to $8.7 million in partnership with the Australian government to Pacific member economies to help promote private sector development and long-term growth in the region. The technical assistance will be carried out over five years to 2011.

In line with findings of Asian Development Bank’s private sector assessments in the region the technical assistance will seek to reform state-owned enterprises and promote public-private partnerships strengthen the financial sector and improve legal and regulatory business environments.

Specifically the technical assistance will conduct diagnostic studies provide technical expertise on priority reform areas strengthen capacities in relevant government agencies and organizations support regional initiatives and communicate good practice reform opportunities and results according to a press statement from the bank.

The grant comes on the heels of the calls of the U.S. government and Asian Development Bank economists at the 6th Annual Pacific Regional Investment Conference in Manila for Pacific economies to reform their government policies to make them hospitable to private investors and thereby boost their respective economies.

Philip Erquiaga director general of the Asian Development Bank’s Pacific Department; told conference participants on Nov. 9 that gross domestic product growth among the bank’s 14 Pacific member nations has averaged less than one percent per capita annually over the past 30 years. "Poverty is a growing reality for many as the population continues to increase. Critical investments in basic infrastructure and human potential are lagging well behind needs. Youth unemployment is high and rising fueling inevitable social strains. Like all parts of Asia internal migration to urban centers is growing even when good opportunities often don’t exist. In short Pacific islanders are lacking job opportunities and access to basic services. The fundamental requirement for economic growth is investment and the question is where this new investment is going to come from."

Pacific nations need to engage the private sector to help them increase much-needed investments into vital infrastructure projects and basic services needed by their citizens he said. "In the case where governments have begun to ‘get out of the way ‘ the results have been rather positive and tend to reinforce the reform momentum. For instance Samoa’s successful engagement with Richard Branson’s Virgin Blue helped strengthen its national airline through partial privatization thereby turning Polynesian Airlines into Pacific Blue. This transaction has been an immediate success attracting tourists and hotel investors into the country " Erquiaga said.

One of the ways to enhance private sector development in the region is for the governments to invest their trust funds wisely according to the U.S. Department of Interior. Many of these trust funds were established from tax revenues paid by key industries or from financial contributions by multilateral and bilateral donors.

In his conference presentation on Nov. 9 David B. Cohen deputy assistant secretary for the U.S. Department of Interior’s Office of Insular Affairs; said "Overall trust funds are an attractive tool to assist Pacific Island nations.  They can potentially provide a long-term source of income that can provide a cushion to the islands as they address their fiscal and economic challenges."

Cohen is chairman of the trust fund committees set up for the Federated States of Micronesia and the Marshall Islands. The Federated States of Micronesia and the Marshall Islands trust funds like those of Palau were built up from the annual assistance from the U.S. under separate Compacts of Freely Associated States over a fixed period. The Taiwanese government also contributed to the Marshall Islands Trust Fund. Current market value of the Federated States of Micronesia Trust Fund according to Office of Insular Affairs data was $107.2 million as of October 2006 with an average return on investment of 2.2%. The market value of the RMI Trust Fund was placed at $73.8 million as of Oct. 31. No ROI data was available.

He told the Journal the Marshall Islands and Federated States of Micronesia trust funds are invested "broadly by asset class through mutual funds. So for example we might have mutual funds that invest in large-capitalized U.S. stocks small cap-U.S. stocks EAFE or emerging markets covering a wide range of industry sectors.  Sometimes our investment advisor will recommend investments in particular industrial sectors and we might follow that." He did not disclose the names of the companies the trust funds are invested in.

Cohen said all the insular areas have room to improve their business environments. Some of the countries have to make reforms in the "transaction law land registration law others have legal and regulatory rules in place but might need improvements in enforcements fairness and transparency in things." In instances where government policy reforms need to take place he said "it’s important to have a champion on the other side who understands the value of reforming the entire system."

In the case of Marshall Islands for example progress towards economic growth and poverty reduction has been slow as the government continues to dominate the economy according to the Asian Development Bank. Weak governance leading to inefficiencies in budget management and delivery of services as well as the priority in the creation of public sector jobs over the promotion of private sector participation were cited as causes of the Marshall Island’s continued sluggishness.

Over the past three years the Marshall Islands economy was dealt severe blows with the failure of two major local retailers leading to a government-sponsored rescue package; the withdrawal of Outrigger hotel management; the end of international flights by Aloha Airlines; and the closure of the Pacific Micronesia and Orient Shipping Lines tuna loining plant leading to the loss of up to 500 jobs noted the Asian in its country strategy.

Since its membership in Asian Development Bank in 1990 the Marshall Islands received 12 loans for 11 projects totaling about $78.125 million. This has consisted of one fisheries development project two education sector projects two in the health sector three loans in public sector reform two in water supply an emergency rehabilitation assistance loan and the outer island transport project. Asian Development Bank also provided 48 technical assistance projects totaling to $18.6 million. As of fiscal 2005 the Marshall Island’s external debt amounted to $100.8 million. The Marshall Islands government said while its external debt service is high it is still "manageable" provided that no more loans are extended to the islands. Asian Development Bank loans account for about 68% of the islands’ external debt.

There are 14 Pacific member economies in the ADB — Cook Islands Fiji Islands Kiribati RMI FSM Nauru Palau Papua New Guinea Samoa Solomon Islands Timor-Leste Tonga Tuvalu and Vanuatu — most of which are dependent on agriculture fishery tourism and some mining as main drivers of their growth. Cohen’s office meanwhile oversees the relationship of the U.S. with Guam American Samoa U.S. Virgin Islands and the Northern Mariana Islands. It also administers U.S. assistance to the Marshall Islands the Federated States of Micronesia and Palau. MBJ