[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
H.R. 6040, ``CONTINUED FREE ASSOCIATION WITH PALAU ACT OF 2012''; AND
H.R. 6147, ``RONALD WILSON REAGAN EXCLUSIVE ECONOMIC ZONE OF THE
UNITED STATES''
=======================================================================
LEGISLATIVE HEARING
before the
SUBCOMMITTEE ON FISHERIES, WILDLIFE,
OCEANS AND INSULAR AFFAIRS
of the
COMMITTEE ON NATURAL RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
Monday, September 10, 2012
__________
Serial No. 112-127
__________
Printed for the use of the Committee on Natural Resources
Available via the World Wide Web: http://www.fdsys.gov
or
Committee address: http://naturalresources.house.gov
----------
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Washington, DC 20402-0001
COMMITTEE ON NATURAL RESOURCES
DOC HASTINGS, WA, Chairman
EDWARD J. MARKEY, MA, Ranking Democratic Member
Don Young, AK Dale E. Kildee, MI
John J. Duncan, Jr., TN Peter A. DeFazio, OR
Louie Gohmert, TX Eni F.H. Faleomavaega, AS
Rob Bishop, UT Frank Pallone, Jr., NJ
Doug Lamborn, CO Grace F. Napolitano, CA
Robert J. Wittman, VA Rush D. Holt, NJ
Paul C. Broun, GA Raul M. Grijalva, AZ
John Fleming, LA Madeleine Z. Bordallo, GU
Mike Coffman, CO Jim Costa, CA
Tom McClintock, CA Dan Boren, OK
Glenn Thompson, PA Gregorio Kilili Camacho Sablan,
Jeff Denham, CA CNMI
Dan Benishek, MI Martin Heinrich, NM
David Rivera, FL Ben Ray Lujan, NM
Jeff Duncan, SC Betty Sutton, OH
Scott R. Tipton, CO Niki Tsongas, MA
Paul A. Gosar, AZ Pedro R. Pierluisi, PR
Raul R. Labrador, ID John Garamendi, CA
Kristi L. Noem, SD Colleen W. Hanabusa, HI
Steve Southerland II, FL Paul Tonko, NY
Bill Flores, TX Vacancy
Andy Harris, MD
Jeffrey M. Landry, LA
Jon Runyan, NJ
Bill Johnson, OH
Mark E. Amodei, NV
Todd Young, Chief of Staff
Lisa Pittman, Chief Counsel
Jeffrey Duncan, Democratic Staff Director
David Watkins, Democratic Chief Counsel
------
SUBCOMMITTEE ON FISHERIES, WILDLIFE, OCEANS
AND INSULAR AFFAIRS
JOHN FLEMING, LA, Chairman
GREGORIO KILILI CAMACHO SABLAN, CNMI, Ranking Democratic Member
Don Young, AK Eni F.H. Faleomavaega, AS
Robert J. Wittman, VA Frank Pallone, Jr., NJ
Jeff Duncan, SC Madeleine Z. Bordallo, GU
Steve Southerland, II, FL Pedro R. Pierluisi, PR
Bill Flores, TX Colleen W. Hanabusa, HI
Andy Harris, MD Dan Boren, OK
Jeffrey M. Landry, LA Edward J. Markey, MA, ex officio
Jon Runyan, NJ
Doc Hastings, WA, ex officio
---------
CONTENTS
----------
Page
Hearing held on Monday, September 10, 2012....................... 1
Statement of Members:
Faleomavaega, Hon. Eni F.H., a Delegate in Congress from
American Samoa, Prepared statement of...................... 41
Fleming, Hon. John, a Representative in Congress from the
State of Louisiana......................................... 1
Prepared statement of.................................... 3
Sablan, Hon. Gregorio Kilili Camacho, a Delegate in Congress
from the Commonwealth of the Northern Mariana Islands...... 4
Prepared statement of.................................... 5
Statement of Witnesses:
Babauta, Hon. Anthony M., Assistant Secretary, Office of
Insular Affairs, U.S. Department of the Interior........... 9
Prepared statement on H.R. 6040 and H.R. 6147............ 11
Gootnick, David, Director, International Affairs and Trade,
U.S. Government Accountability Office...................... 20
Prepared statement on H.R. 6040.......................... 22
Issa, Hon. Darrell E., a Representative in Congress from the
State of California, Statement submitted for the record on
H.R. 6147.................................................. 7
Kagan, Hon. Edgard D., Deputy Assistant Secretary, Bureau of
East Asian and Pacific Affairs, U.S. Department of State... 14
Prepared statement on H.R. 6040.......................... 16
Additional materials supplied:
Bordallo, Hon. Madeleine Z., a Delegate in Congress from
Guam, Maps and Washington Post article, ``U.S. model for a
future war fans tensions with China and inside Pentagon,''
submitted for the record................................... 44
Manzullo, Hon. Donald A., Chairman, Subcommittee on Asia and
the Pacific, House Committee on Foreign Affairs, Statement
submitted for the record................................... 8
Singh, Vikram J., Deputy Assistant Secretary of Defense for
South and Southeast Asia, Office of the Secretary of
Defense for Policy, U.S. Department of Defense, Statement
submitted for the record................................... 65
LEGISLATIVE HEARING ON H.R. 6040, TO APPROVE THE AGREEMENT PROVIDING
TERMS FOR A CONTINUATION OF THE FREE ASSOCIATION BETWEEN THE UNITED
STATES AND PALAU, AND FOR OTHER PURPOSES. ``CONTINUED FREE ASSOCIATION
WITH PALAU ACT OF 2012''; AND H.R. 6147, TO DESIGNATE THE EXCLUSIVE
ECONOMIC ZONE OF THE UNITED STATES AS THE ``RONALD WILSON REAGAN
EXCLUSIVE ECONOMIC ZONE OF THE UNITED STATES''.
----------
Monday, September 10, 2012
U.S. House of Representatives
Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs
Committee on Natural Resources
Washington, D.C.
----------
The Subcommittee met, pursuant to call, at 2:28 p.m., in
Room 1334, Longworth House Office Building, Hon. John Fleming
[Chairman of the Subcommittee] presiding.
Present: Representatives Fleming, Sablan, Faleomavaega, and
Bordallo.
STATEMENT OF THE HON. JOHN FLEMING, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF LOUISIANA
Dr. Fleming. The Subcommittee will come to order. The
Chairman notes the presence of a quorum. Good afternoon. Today
we are holding a legislative hearing on H.R. 6040, the
Continued Free Association with Palau Act of 2012. And because
of some last minute changes, we will not be hearing our second
panel today. H.R. 6040 was introduced by Congressman Donald
Manzullo, Chairman of the House Foreign Affairs Subcommittee on
Asia and the Pacific. His legislation would implement the 15-
year review that was conducted pursuant to Section 432 of the
Compact.
The Foreign Affairs and Natural Resources Committees shared
jurisdiction over this issue. This Committee's oversight
responsibilities cover the Department of the Interior's role in
implementing the Compact's funding provisions.
It has been a long road in getting to this point to having
a hearing on this issue. The Administration forwarded the
proposal to Congress in January 2011. While the
Administration's draft bill was not introduced in the House,
the intent of it and H.R. 6040 are the same. Implementation of
the 15-year review agreement signed by the U.S. and Palau.
The Compact with Palau went into effect in 1994. The first
15-year review was scheduled for 2009, but was delayed due to
the transition between the Bush and Obama Administrations. The
renegotiated agreement was signed by both parties in September
2010. Under the Compact, Palau is self-governing, conducts its
own foreign affairs and regulates its domestic and foreign
communications. The Compact gives the U.S. full authority and
responsibility for security and defense matters relating to
Palau.
As a member of the House Armed Services Committee, I am
familiar with the Administration's pivot to Asia, the current
concerns within the region and how the Compact provides the
U.S. with the options for forward positioning of military
assets in the region. The Compact also provides financial
assistance, including direct economic assistance and access to
Federal programs to Palau. While the proposed financial package
of $427 million, with $215 million in mandatory funds is
substantially less than the $825 million, with $411 million in
direct assistance provided to Palau in the first 15-year period
of the Compact, the new funding will need to be fully offset as
required by the Rules of the House.
H.R. 6040 is introduced and included in some offsets for
the mandatory funding. At the Asia and Pacific Subcommittee
markup, these offsets were replaced with an offset which would
allow the Secretary of State to deny passports to individuals
with tax debts over $50,000. It is my understanding that this
offset may not work as drafted and an alternative approach may
be necessary.
I am interested to hear from the Administration witnesses
to see if they can recommend any new offset proposals. The
previously recommended offsets regarding net receipt sharing of
energy and mineral receipts, coal mining reforms and fees on
nonproducing oil and gas leases are not acceptable to either
the House or Senate committees.
Today's hearing is an important opportunity to discuss the
Palau Compact and provide Members with the information on the
benefits of the agreement to the United States and the Republic
of Palau.
It is unfortunate that the Department of Defense decided to
submit only written testimony. One of the points given to
support the Compact is national defense. I believe their
presence would have been useful at this hearing.
The second bill--I am sorry, we are not going to take up
the second bill. Oh, we are? OK, I am sorry. The second bill we
will examine is H.R. 6147 introduced by the Chairman of the
Committee on Oversight and Government Reform, Congressman
Darrell Issa of California. This proposal will designate our
exclusive economic zone as the Ronald Wilson Reagan Exclusive
Economic Zone of the United States. This a fitting tribute to
our 40th President who established our 200-mile zone by signing
a Presidential Proclamation on March 10, 1983.
Ronald Reagan was one of our Nation's greatest Presidents.
As someone who grew up during the darkest days of the Cold War,
I will always be grateful that because of his peace through
strength doctrine, the Cold War ended and the Soviet Union
collapsed. President Reagan was also responsible for proposing
the largest tax cut in our Nation's history. And when he left
office in 1989, our national debt was $2.6 trillion. Today it
is 8 times higher and has increased more than $5 trillion
during just the last 4 years. While some may characterize this
designation as trivial, I strongly disagree and I am pleased to
support this effort. I compliment the gentleman from California
for his leadership on behalf of the Great American patriot, who
is fond of telling us that America was truly that shining city
upon a hill.
[The prepared statement of Dr. Fleming follows:]
Statement of The Honorable John Fleming, Chairman,
Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs
Good afternoon, today we are holding a legislative hearing on H.R.
6040, the Continued Free Association with Palau Act of 2012 and H.R.
6147, the Ronald Wilson Reagan Exclusive Economic Zone of the United
States.
H.R. 6040 was introduced by Congressman Donald Manzullo, Chairman
of the House Foreign Affairs Subcommittee on Asia and the Pacific. His
legislation would implement the 15-year review that was conducted
pursuant to Section 432 of the Compact. The Foreign Affairs and Natural
Resources Committee's share jurisdiction over this issue. This
Committee's oversight responsibilities cover the Department of the
Interior's role in implementing the Compact's funding provisions.
It's been a long road in getting to this point to have a hearing on
this issue. The Administration forwarded a proposal to Congress in
January of 2011. While the Administration's draft bill was not
introduced in the House, the intent of it and H.R. 6040 are the same--
implementation of the 15-year review agreement signed by the U.S. and
Palau.
The Compact with Palau went into effect in 1994. The first 15-year
review was scheduled for 2009, but was delayed due to the transition
between the Bush and Obama Administrations. The renegotiated agreement
was signed by both parties in September of 2010.
Under the Compact, Palau is self-governing, conducts its own
foreign affairs and regulates its domestic and foreign communications.
The Compact gives the U.S. full authority and responsibility for
security and defense matters relating to Palau. As a member of the
House Armed Services Committee, I am familiar with Administration's
pivot to Asia, the current concerns within the region and how the
Compact provides the U.S. with options for forward positioning of
military assets in the region.
The Compact also provides financial assistance, direct economic
assistance, and access to federal programs to Palau. While the proposed
financial package of $215 million is substantially less than the $852
million provided to Palau in the first 15-year period of the Compact,
it is funding that will need to be fully offset as required by the
Rules of the House. H.R. 6040 as introduced included some offsets for
the mandatory funding. At the Asia and the Pacific Subcommittee markup,
these offsets were replaced with an offset which would allow the
Secretary of State to deny passports to individuals with tax debts over
$50,000. It is my understanding that this offset may not work as
drafted and an alternative approach may be necessary.
I am interested to hear from the Administration witnesses to see if
they can recommend any new offset proposals. The previously recommended
offsets regarding ``net receipts sharing'' of energy and mineral
receipts, coal mining reforms and fees on nonproducing oil and gas
leases are not acceptable to either the House or Senate Committees.
Today's hearing is an important opportunity to discuss the Palau
Compact and provide Members with information on the benefits of the
agreement to the United States and the Republic of Palau.
The second bill we will examine is H.R. 6147, introduced by the
Chairman of the Committee on Oversight and Government Reform,
Congressman Darrell Issa of California.
This proposal will designate our Exclusive Economic Zone as the
Ronald Wilson Reagan Exclusive Economic Zone of the United States. This
is a fitting tribute to our 40th President who established our 200-mile
zone by signing a Presidential Proclamation on March 10, 1983.
Ronald Reagan was one of our nation's greatest Presidents. As
someone who grew up during the darkest days of the Cold War, I will
always be grateful that because of his ``Peace through Strength''
Doctrine, the Cold War ended, the Soviet Union collapsed.
President Reagan was also responsible for proposing the largest tax
cut in our nation's history and when he left office in 1989, our
national debt was $2.6 trillion. Today, it is eight times higher and it
has increased more than $5 trillion during just the last four years.
While some may characterize this designation as trivial, I strongly
disagree and I am pleased to support this effort. I compliment the
gentleman from California for his leadership on behalf of a great
American patriot who was fond of telling us that America was truly that
``Shining City Upon A Hill''.
______
Dr. Fleming. I now recognize the Ranking Member for any
statement he would like to make at this time.
STATEMENT OF THE HON. GREGORIO KILILI CAMACHO SABLAN, A
DELEGATE IN CONGRESS FROM THE TERRITORY OF THE NORTHERN MARIANA
ISLANDS
Mr. Sablan. Thank you very much, Mr. Chairman, and good
afternoon everyone. We are here today to receive testimony on
two bills, H.R. 6040, to approve the agreement providing for a
continuation of the free association between the United States
and Palau, and H.R. 6147, to designate the Exclusive Economic
Zone of the United States as the Ronald Wilson Reagan Exclusive
Economic Zone of the United States.
I want to begin by thanking you for calling this hearing so
expeditiously after Foreign Affairs Committee Chairwoman Ros-
Lehtinen made the decision to discharge H.R. 6040 from the
Committee. I also want to thank Asia and Pacific Subcommittee
Chairman, Don Manzullo, and my Subcommittee colleague, Eni
Faleomavaega for introducing H.R. 6040.
I grew up in the territory, of which Palau was a part, and
I represent islands that are close by. I have observed from the
front line the relationship between the United States and Palau
all my life. The Secretary of Foreign Affairs of Palau was my
classmate in high school in Chook. And I feel a special
closeness to Palau and responsibility for it beyond my role as
the Ranking Member of this Subcommittee.
When Palau was a territory, this subcommittee's predecessor
had lead jurisdiction in the House regarding legislation
concerning it. Now that it is a sovereign state in free
association with the United States, lead jurisdiction is in the
Asia and Pacific Subcommittee. This bill has been referred to
the Natural Resources Committee and our Subcommittee primarily
because of the provision that would require the Secretary of
the Interior to report to the Committees on Foreign Affairs and
Natural Resources, and the Senate Committee on Energy and
Natural Resources annually on newest programs in Palau
otherwise considered domestic. The Secretary also has
responsibility for administering special assistance given to
Palau which implicates our jurisdiction. But the Committee on
Foreign Affairs has the jurisdiction regarding the types and
levels of assistance and other policies concerning Palau.
The United States took Palau and other Micronesian Islands
that became the territory I mentioned from Japan through some
the bloodiest battles of World War II and governed it for half
a century under an agreement with the United Nations that
required economic and social assistance and eventual self-
government. To preserve strategic control over the islands of
the self-government, our government encourages the status of
free association as an alternative to independence and extended
domestic programs.
The Compact of Free Association negotiated by the Reagan
Administration approved by law by the George H.W. Bush
Administration preserved United States strategic authority over
the lands and waters of Palau and confirms space rights for 50
years. It also requires bilateral negotiations on continuing
their relationship and to determine United States assistance
and the 15, 30 and 40-year marks of this 50 years.
The Asia and Pacific Subcommittee bill would approve an
agreement approved by the 15th anniversary negotiations, and
slightly modified to address Palauan concerns. Continued
arrangements, the Reagan negotiated compact and be consistent
with the revised Compacts of Free Association with the two
other Pacific states that came out of the territory as approved
by the Republican Congress in 2003. That approval included some
Congressional modifications to the negotiated Compact.
President Toribiong of Palau wrote 3 months ago that the 21
months that have elapsed since the agreement was signed has
caused an increasing number of Palauans to question their
agreement and the commitment of the United States to the free
association relationship. And resulted in some Palauans being
enticed by the potential assistance from China and offers of
funding from Arab nations.
The Defense Department has advised that failure to follow
through under the commitments to Palau as reflected in the
proposed agreed legislation would jeopardize our defense
posture in the Western Pacific, which will become increasingly
important. It says that Palau is irreplaceable because it
covers a strategic expanse of the Pacific as large as the State
of Texas, and the free association right of the U.S. to deny
access to other nations prevents China from using ceilings that
it wants to develop its economy and increase its military
protection in the region.
The State Department additionally said that continuing the
association is vital, in addition because Palau votes with the
United States in the United Nations more than any other
member--which is especially important on issues such as Israel.
Mr. Chairman, the agreement was signed 2 years and 1 week
ago. The Executive Branch asked us to approve it at the
beginning of this Congress. A number of leaders in both
parties, in both Houses have supported the agreement from the
first, and no Member has criticized it. The only problem with
approval has been how to offset the cost. We should do our part
and act to facilitate House passage as soon as possible. Mr.
Chairman, I would like insert for the record my full statement,
my opening statement, and I yield back the balance of my time.
Dr. Fleming. Without objection so ordered. The gentleman
yields back.
[The prepared statement of Mr. Sablan follows:]
Statement of The Honorable Gregorio Kilili Camacho Sablan, Ranking
Member, Subcommittee on Fisheries, Wildlife, Oceans and Insular Affairs
Thank you Mr. Chairman. We are here today to receive testimony on
two bills: H.R. 6040, to approve the Agreement providing for a
continuation of the free association between the United States and
Palau and H.R. 6147, to designate the exclusive economic zone of the
United States as the ``Ronald Wilson Reagan Exclusive Economic Zone of
the United States''.
I want to begin by thanking you for calling this hearing so
expeditiously after Foreign Affairs Committee Chairwoman Ros-Lehtinen
took the decision to discharge H.R. 6040 from that committee. I also
want to thank Asia and the Pacific Subcommittee Chairman Don Manzullo
and our Subcommittee colleague, Eni Faleomavaega for introducing H.R.
6040.
I grew up in the territory of which Palau was a part, and represent
islands that are close by. I have observed from the front line the
relationship between the United States and Palau all of my life. And I
feel a special closeness to Palau and responsibility for it beyond my
role as the Ranking Member of this Subcommittee.
When Palau was a territory, this Subcommittee's predecessor had
lead jurisdiction in the House regarding legislation concerning it. Now
that it is a sovereign state in free association with the U.S., lead
jurisdiction is in the Asia and the Pacific Subcommittee.
This bill has been referred to the Natural Resources Committee and
our Subcommittee primarily because of the provision that would require
the Secretary of the Interior to report to the Committees on Foreign
Affairs and Natural Resources and the Senate Committee on Energy and
Natural Resources annually on U.S. programs in Palau otherwise
considered domestic. The Secretary also has responsibilities for
administering special assistance given Palau, which implicates our
jurisdiction. But the Committee on Foreign Affairs has the jurisdiction
regarding the types and levels of assistance and other policies
concerning Palau.
The United States took Palau and the other Micronesian Islands that
became the territory I mentioned from Japan through some of the
bloodiest battles of World War Two and governed it for half a century
under an agreement with the United Nations that required economic and
social assistance and eventual self-government. To preserve strategic
control over the islands after self-government, our government
encouraged the status of free association as an alternative to
independence and extended domestic programs. The Compact of Free
Association negotiated by the Reagan Administration approved by law
under the George H.W. Bush Administration preserved U.S. strategic
authority over the lands and waters of Palau and confers base rights
for 50 years. It also requires bilateral negotiations on continuing the
relationship and to determine U.S. assistance at the 15, 30 & 40-year
marks of this 50 years.
The Asia and the Pacific Subcommittee bill would approve an
agreement approved by the 15th anniversary negotiations and slightly
modify it to address Palauan concerns, continue arrangements of the
Reagan-negotiated Compact, and be consistent with the revised compacts
of free association with the two other Pacific states that came out of
the territory, as approved by the Republican Congress in 2003. That
approval also included some congressional modifications to the
negotiated compacts.
President Toribiong of Palauwrote three months ago that ``[t]he 21
months that have elapsed since the Agreement was signed has caused an
increasing number of Palauans to question the Agreement and the
commitment of the United States to the free association relationship''
and ``resulted in some Palauans being enticed by the potential of
assistance from China and offers of funding from Arab nations.''
The Defense Department has advised that ``[f]ailure to follow
through on our commitments to Palau, as reflected in the proposed
legislation, would jeopardize our defense posture in the Western
Pacific'' which ``will become increasingly important''. It says that
Palau is ``irreplaceable'' because it covers a strategic expanse of the
Pacific as large as Texas, and the free association right of the U.S.
to deny access to other nations prevents China from using sea-lanes
that it wants to develop its economy and increase its military
projection in the region. The State Department additionally says that
continuing the association is ``vital'', in addition because Palau
votes with the United States in the United Nations more than any other
member--which is especially important on issues such as Israel.
Mr. Chairman, the Agreement was signed two years and one week ago.
The Executive branch asked us to approve it at the beginning of this
Congress. A number of leaders of both parties in both houses have
supported the Agreement from the first, and no Member has criticized
it. The only problem with approval has been how to offset the cost. We
should do our part and act to facilitate House passage as soon as
possible.
Our second bill, H.R. 6147, was introduced by our colleague
Representative Darrell Issa, would rename the U.S. Exclusive Economic
Zone (E.E.Z.) after our 40th President, Ronald Wilson Reagan. As we all
know, the framework that allows countries to peacefully claim as
sovereign territory the E.E.Z.s off of their shores is the United
Nations Convention on the Law of the Sea (Convention). Since it was
adopted in 1982, Presidents and Secretaries of State from both
political parties, as well as top U.S. military leaders have expressed
strong support for joining Convention. Unfortunately, President Reagan
was not among them.
Ratifying the Convention is critical for our economy and our
national security. While claiming the E.E.Z. was a step in the right
direction, our grade on ensuring the American people a seat at the
table when global ocean governance issues are being discussed is an
`incomplete.' 162 other countries have ratified the Convention, and are
deciding on rules for accessing outer continental shelf resources,
mining the seabed and navigating in international waters. We are on the
outside looking in. I hope that, as we recognize the importance of our
E.E.Z., we can also express our support to the Senate as they consider
ratification of the Convention this fall.
Thank you again Mr. Chairman. I look forward to hearing from our
witnesses.
______
Dr. Fleming. We are now ready for our panel of witnesses,
which includes The Honorable Anthony M. Babauta, Assistant
Secretary of the Interior for Insular Affairs. Department of
the Interior; The Honorable Edward D. Kagan, Deputy Assistant
Secretary, Bureau of East Asian and Public Affairs with the
Department of State; and Mr. David Gootnick, hopefully that is
correct, Director, International Affairs and Trade with the
Government Accountability Office.
And before we call upon them to testify, I ask unanimous
consent to add the statements from both Congressman Manzullo
and Issa to the hearing record. Hearing no objection, so
ordered.
[The prepared statement of Mr. Issa follows:]
Statement of The Honorable Darrell E. Issa, a Representative in
Congress from the State of California
I would like to start by thanking Chairman Fleming and Ranking
Member Sablan for bringing up my bill H.R. 6147, the ``Ronald Wilson
Reagan Exclusive Economic Zone of the United States,'' for
consideration. I would also like to thank Chairman Hastings and Ranking
Member Markey, of the full committee.
On March 10, 1983 President Ronald Reagan nearly doubled the size
of the United States with the stroke of his pen, at no cost to
taxpayers, when he issued Proclamation 5030, establishing the United
States Exclusive Economic Zone (EEZ). The EEZ extends U.S. sovereignty
over all waters, animals, the seabed and the subsoil, up to 200
nautical miles off America's coast, as well as off the coasts of Puerto
Rico, the Northern Marianna Islands and other U.S. territories and
possessions. The EEZ is consistent with domestic and international law,
and ensures that the United States has sovereign rights for the purpose
of exploring, exploiting, conserving, and managing living and nonliving
resources off our coasts.
We currently have the largest EEZ in the world, spanning over
13,000 miles of coastline and reaching the Gulf of Mexico, Caribbean
Sea, Atlantic Ocean, and Pacific Ocean. President Reagan appreciated
that America is blessed with an abundance of natural resources and
understood that to remain competitive and to promote strong economic
growth, we need to effectively develop and responsibly make use of our
natural wealth.
While policy debates about the management of our EEZ will certainly
continue, the establishment of an EEZ is widely recognized around the
world to be an essential component of marine conservation, resource
management, and national competitiveness. As we strive to meet the
challenges of maintaining our vast sovereign areas, we must also
recognize the abundant opportunity that Ronald Reagan provided our
nation when he first established our EEZ.
In closing, I would once again like to thank Chairman Fleming and
Ranking Member Sablan for bringing this bill before the Subcommittee on
Fisheries, Wildlife, Oceans, and Insular Affairs and for the chance to
be here. This legislation will honor President Reagan's leadership and
foresight in protecting U.S. interests and I look forward to seeing
this bill brought to the House floor and eventually signed into law.
______
[The prepared statement of Mr. Manzullo follows:]
Statement submitted for the record by The Honorable Donald A. Manzullo,
Chairman, Subcommittee on Asia and the Pacific, House Committee on
Foreign Affairs
Chairman Fleming, thank you for allowing me the opportunity for me
to address the Subcommittee. The revised Compact of Free Association
agreement with the Republic of Palau is a significant topic of
discussion, and I am grateful your Subcommittee is holding this hearing
to bring more attention to the issue.
The Compact with Palau was negotiated in the 1980s at the height of
the Cold War with the goal of establishing democratic self-governance
and economic self-sufficiency in Palau, while preserving strategic
control of the Western Pacific. Although it was completed in 1986, it
did not enter into force for another eight years. Thus in 1994, the
United States and the Republic of Palau implemented a Compact of Free
Association ending 49 years of direct American administration under the
auspices of the United Nations' Trust Territory of the Pacific Islands.
The Compact provided for several types of assistance, including
direct economic assistance for 15 years to the Palau government,
establishment of a trust fund to provide Palau $15 million in annual
payments from 2010 to 2044, infrastructure investments, and the
provision of federal services such as postal, weather, and aviation.
The Government Accountability Office, which is represented here today,
estimated that Palau received a total of $852 million between 1995 and
2009.
In late 2010, the Administration completed a 15-year review of the
Compact, as required under the terms of the agreement, and intended to
provide Palau a total of $215 million through the next 15-year
agreement period. This revised agreement does not change the
fundamental provisions of the original Compact; however, it does
gradually reduce the financial support provided by the U.S. and extends
the life of the agreement to 2024. More importantly, the revised
agreement greatly improves the likelihood of the existing trust fund's
ability to sustain payments through to 2044, as originally planned. It
also requires visitors from Palau to have a machine readable passport
to enter the U.S., and it conditions future financial assistance on
Palau's progress in achieving key economic reforms.
In late June of this year I introduced H.R. 6040, which will
approve the revised Compact agreement, certify the United States'
commitment to Palau, and secure our vital interests in the Western
Pacific. It is with utmost urgency that your committee moves this bill
forward and helps push the approval of the Compact with Palau out of
its nearly two-year deadlock in Congress.
Palau is an important friend in the Asia-Pacific region. It is one
of six Pacific Island nations to have diplomatic ties with Taiwan
rather than China. According to the Department of Defense, Palau is
irreplaceable because it covers a strategic expanse of the Pacific as
large as Texas and gives the U.S. the right to deny other nations
access to Palau's land and waterways. This prevents nations like China
from using sea-lanes that it wants to develop its economic and military
projection in the region. In addition, Palau supports the U.S. on 90
percent of the votes regarding Israel at the United Nations.
In a letter to President Obama, President Toribiong of Palau
describes that during the 21 months that have lapsed since the
agreement was signed, an increasing number of Palauans have begun to
question the United States' commitment to the relationship, resulting
in the temptation to accept assistance offers from China, various Arab
nations, or Cuba. I request that this letter be included in the record
and stress that we cannot let this happen.
Over the past few decades, the relationship with Palau has evolved
into a strong partnership with people who share American values and
closely identify with the U.S. With a number of leaders on both sides
of the aisle in both chambers of Congress supporting the agreement, it
is critical that Congress approves the agreement, outlined in H.R.
6040, to ensure the relationship stays steadfast and strong.
Chairman Fleming, thank you again for your continued support and I
look forward to working with you in the near future to finally approve
the revised Compact of Free Association with Palau.
______
Dr. Fleming. Of course, you guys have appeared before us a
number of times, you are well experienced with how we run our
clocks and our microphones. As you know, your written testimony
will appear in full in the hearing record, so I ask that you
keep your oral statements to 5 minutes as outlined in our
invitation letter to you and under Committee Rule 4(a). Our
microphones are not automatic, so please press the button when
you are ready to begin. And the most common mistake is the
mouthpiece is not close enough to the mouth, so please observe
that.
I also want to explain how our timing lights work, very
simply, you have 5 minutes, you are in the green light for the
first 4, yellow light for the last 1 minute, and if you are
still giving your testimony at that point and the light turns
red, we ask that you go ahead and conclude your remarks. Your
entire statement will be entered into the record.
Secretary Babauta, I now recognize you, sir, for 5 minutes
to present your testimony on behalf of the Department of the
Interior.
STATEMENT OF HON. ANTHONY M. BABAUTA, ASSISTANT SECRETARY,
OFFICE OF INSULAR AFFAIRS, U.S. DEPARTMENT OF THE INTERIOR
Mr. Babauta. Thank you very much, Mr. Chairman, and members
of the Subcommittee. I am pleased to be here today to discuss
H.R. 6040 and H.R. 6147. With regard to H.R. 6040, my statement
will focus on the financial assistance in the new agreement
with Palau. The Compact of Free Association with Palau has
proven to be a very successful framework for United States-
Palau relations. The goals of the first 15 years of the Compact
have been met. The trusteeship was terminated; Palau self-
government was restored; a stable democratic state was
established; third countries were denied military influence in
the region of Palau; and with the United States financial
assistance a base for economic growth has been provided.
The original financial terms and conditions of the Compact
have been fully implemented by the U.S. and Palau, and Palau
has made strong economic gains under the Compact of Free
Association. Its growth in real terms has averaged just over 2
percent per year. Palau has taken control of its destiny and is
moving in the right direction. As both the U.S. and Palau began
their Compact review several years ago, the U.S. and Palau
agreed that economic growth would rely on four key factors.
The first is the trust fund's ability to return $15 million
a year; the second, fiscal reforms to shrink Palau's public
sector and raise revenue; the third, increase foreign
investment and private sector growth; and four, continuation of
certain U.S. assistance. The new agreement addresses these
concerns. It extends U.S. assistance in declining annual
amounts through Fiscal Year 2024. The total of direct financial
assistance to Palau under this agreement is $229 million.
Although $26.2 million of that amount has already been
appropriated for direct economic assistance by Congressional
action in Fiscal Year 2010 and in Fiscal Year 2011. An
additional $13.1 million in direct economic assistance has been
appropriated to Palau for Fiscal Year 2012.
The amount of direct assistance will decline every year.
The declining amount of assistance is intended to provide an
incentive for Palau to develop other sources of local revenue
and the Palauan Government will need to make systemic
adjustments in order to live within the same resources. The
agreement contains five categories of financial assistance for
Palau: The first is direct economic assistance for education,
health and the administration of justice and public safety; the
second is infrastructure projects that are mutually agreed in
the amount of $8 million in 2011 through 2013; $6 million in
2014; and $5 million in both 2015 and 2016.
The third category is infrastructure maintenance funds for
capital projects previously financed by the United States. From
2011 through 2024, the U.S. Government will have contributed $2
million annually, and the Palau government will have
contributed $600,000 annually to the fund.
The fourth category is the fiscal consolidation fund. The
United States will have provided grants of $5 million in each
2011 and 2012 to help the Palau government reduce its debt.
Category 5 is the trust fund. The United States will contribute
$3 million annually from 2013 to 2022 and contribute $250,000
in 2023 and Palau will delay withdrawals from the trust fund.
Under the agreement withdrawals from the trust fund may only be
used for education, health, administration of justice and
public safety.
We recommend several changes to H.R. 6040 with regard to
the subsidy for the United States Postal Service, we recommend
striking the second sentence of subsection 105(e). We also
propose language to facilitate financing of the agreement.
And finally, in language concerning an annual report we
recommend that the consultation provisions be amended to
require Federal agencies that administer such programs to
submit annually to the Secretary of the Interior appropriate
material ready for inclusion in the reports.
Under the new agreement, the U.S. and Palau will work
cooperatively through one, an advisory group on economic
financial and management reform, annual bilateral economic
consultations and the provision of other U.S. services and
programs to the U.S. Postal Service, the National Weather
Service, and FAA and the Departments of Education and Health
and Human Services. The Palau Compact legislative proposal does
have PAYGO costs. In the past, the Administration has proposed
a number of offsets and H.R. 6040 would provide a number of
offsets to provide offsets for the Palau agreement.
The Administration looks forward to continuing the U.S.
partnership of Palau, and the Department of the Interior is
proud of the positive advancements U.S. assistance has achieved
in Palau since 1995 and looks forward to the progress that we
anticipate will be made over the period of new agreement.
With regard to H.R. 6147, the exclusive economic zone of
the United States is a zone contiguous of the territorial sea
of the United States which generally extends 200 nautical miles
from the U.S. coastline. The EEZ applies to waters adjacent to
the United States and United States territories and
possessions. It is the largest in the world spanning over
13,000 miles of coastline, larger than combined land area of
all 50 States.
H.R. 6147 would designate the EEZ as the Ronald Wilson
Reagan Exclusive Economic Zone of the United States. And
although the geographic range of the EEZ is relevant to certain
elements of the Department's jurisdiction, the naming of EEZ
does not affect any of the Department's existing authorities or
programs. The Department notes that it is not aware of my
precedence for a designation of this type and therefore the
Department takes no position on H.R. 6147. Thank you very much,
Mr. Chairman.
Dr. Fleming. Thank you Mr. Babauta, thank you for your
testimony.
[The prepared statement of Mr. Babauta follows:]
Statement of Anthony M. Babauta, Assistant Secretary of the Interior-
Insular Areas, U.S. Department of the Interior
Chairman Fleming and members of the Subcommittee, I am pleased to
be here today to discuss H.R. 6040 which would approve the agreement
between the Government of the United States and the Government of the
Republic of Palau following the Compact of Free Association section 432
review, and H.R. 6147 designating the U.S. Exclusive Economic Zone as
the ``Ronald Wilson Reagan Exclusive Economic Zone of the United
States. My colleagues from the Departments of State and Defense will
discuss the importance of the United States--Palau relationship as it
relates to national security and our policies in the Pacific. My
statement today regarding Palau will focus on the financial assistance
components of the new agreement with Palau for which the Department of
the Interior will be responsible.
H.R. 6040
THE UNITED STATES--PALAU RELATIONSHIP
The Department of the Interior and the Government of Palau have
been partners since 1951, when the Navy transferred to the Department
of the Interior the administration of the United Nations Trust
Territory of the Pacific Islands. Since the end of World War II, Palau
has emerged from its status as a war-ravaged protectorate to become a
sovereign nation and member of the world community. Consistent with the
provisions of the 1994 Compact of Free Association, Palau has exercised
its sovereignty in accordance with the principles of democracy and in a
firm alliance with the United States.
The Compact of Free Association has proven to be a very successful
framework for United States--Palau relations. The goals of the first
fifteen years of the Compact have been met: the trusteeship was
terminated; Palau's self-government was restored; a stable democratic
state was established; third countries were denied military influence
in the region of Palau; and with United States financial assistance, a
base for economic growth has been provided.
The original financial terms and conditions of the Compact have
been fully implemented by the United States and Palau. The United
States, through the Department of the Interior, has provided over $600
million of assistance including $149 million used to construct the 53-
mile road system on the island of Babeldoab and $38.7 million for
health care and education block grants. Most of the funding, $400
million, was expended on activities defined under Title Two of the
Compact, which included general government operations, energy
production, communications, capital improvements, health and education
programs and establishment of the Compact Trust Fund.
The Compact Trust Fund was an important feature of U.S. assistance.
Capitalized with $70 million during the first three years of the
agreement in the 1990s, the objective of the trust fund was to produce
an average annual amount of $15 million as revenue for Palau government
operations for the thirty-five year period fiscal year 2010 through
fiscal year 2044. The fund also generated $5 million in annual
operational revenue for Palau since the fourth year of the agreement,
totaling $60 million for the years 1998 through 2009.
Palau has made strong economic gains under the Compact of Free
Association. Its growth, in real terms, has averaged just over two
percent per year. Palau's governmental services are meeting the needs
of its community. Palau has taken control of its destiny and is moving
in the right direction.
COMPACT REVIEW
As both the United States and Palau began the required Compact
section 432 review several years ago, each side took pride in the
growth evident in Palau. However, the review, which examined the terms
of the Compact and its related agreements and the overall nature of the
bilateral relationship, also focused attention on several important
issues. The United States and Palau agreed that prospects for continued
economic growth relied on four key factors: 1) the viability of the
Compact trust fund and its ability to return $15 million a year; 2) the
implementation of fiscal reforms to close the gap between Palau's
revenues and expenditures by shrinking its public sector and raising
revenue; 3) the promotion of increased foreign investment and private
sector growth, and, 4) the continuation of certain United States
assistance, including access to United States Federal domestic programs
and services.
From the perspective of the United States, the viability of the
Compact Trust Fund was of paramount concern. The economies of Pacific
Islands are always fragile; their size, distance from markets and
relative lack of resources make growth a perennial problem. Although
Palau has some relative advantages in contrast to other Pacific island
countries, the Compact Trust Fund was established with the intention of
providing a relatively secure revenue base for Palau's government
through fiscal year 2044. As the 15-year review began, Palau's trust
fund, which had earned roughly 9 percent annually since its inception,
had suffered significant losses. As GAO reported in 2008, it was
uncertain that the trust fund could pay $15 million annually to the
Government of Palau through fiscal year 2044.
COMPACT AGREEMENT
The condition of the Compact Trust Fund, the need for fiscal and
economic reforms, and the goal of strengthening conditions for private
sector growth became the focus of the bilateral review. The Agreement
Between the Government of the United States of America and the
Government of the Republic of Palau Following the Compact of Free
Association Section 432 Review (Agreement) that arose from the 15-year
review, will address these concerns, maintain stability, promote
economic growth and increase the progress already made under the
Compact of Free Association.
The Agreement extends United States assistance, in declining annual
amounts, through fiscal year 2024. The total of direct financial
assistance to Palau under the Agreement is $229 million, although $26.2
million of that amount has already been appropriated for direct
economic assistance by congressional action in fiscal year 2010 and in
fiscal year 2011. An additional $13.1 million in direct economic
assistance has been appropriated to Palau in FY 2012.
Under the Agreement, in 2011 the United States was to provide Palau
$28 million, of which $13 million is the aforementioned direct
assistance. The amount will decline every year thereafter. The
declining amount of assistance is intended to provide an incentive for
Palau to develop other sources of local revenue and serves notice that
the Palauan government has agreed that it will need to make systemic
adjustments to its government in order to live within those same
resources.
The Agreement contains five categories of financial assistance for
Palau. Although I will discuss the Agreement as written, I note that
H.R. 6040 appropriately shifts funding from the originally stated
fiscal years to allow for implementation in the current year.
Direct economic assistance. The Agreement provides for direct
assistance for education, health, administration of justice and public
safety, in amounts starting at $13 million in 2011, declining to $2
million, the last payment, in 2023. As discussed below, this
``glidepath'' is coupled with a gradual increase in how much Palau can
withdraw from it's trust fund. The timing of direct assistance payments
is conditioned on Palau's making certain fiscal reform efforts. If the
United States government determines that Palau has not made meaningful
progress in implementing meaningful reforms, direct assistance payments
may be delayed until the United States Government determines that Palau
has made sufficient progress on the reforms.
Infrastructure projects. Under the Agreement the United States is
to provide grants to Palau for mutually agreed infrastructure
projects--$8 million in 2011 through 2013, $6 million in 2014, and $5
million in both 2015 and 2016. The Agreement does not name any
projects.
Infrastructure maintenance fund. Under the Agreement, a trust fund
will be established to be used for maintenance of capital projects
previously financed by the United States, including the existing
Compact Road. From 2011 through 2024, the United States government will
have contributed $2 million annually and the Palau government will
contribute $600,000 annually to the fund. This will protect crucial
United States investments in Palau that significantly contribute to
economic development.
Fiscal consolidation fund. The United States will have provided
grants of $5 million each in 2011 and 2012 to help the Palau government
reduce its debt. United States creditors must receive priority, and the
Government of Palau must report quarterly on the use of the grants
until they are expended. This fund will also simplify needed economic
adjustments to Palau's fiscal policies.
Trust fund. The Agreement increases the size of Palau's trust fund
directly and indirectly to bolster the likelihood that the trust fund
will yield payments of up to $15 million annually through 2044. First,
the United States will contribute $3 million annually from 2013 through
2022 and contribute $250,000 in 2023. Second, the Government of Palau
will delay withdrawals from the fund, drawing $5 million annually
through 2013 and gradually increasing its withdrawal ceiling from $5.25
million in 2014 to $13 million in 2023. From 2024 through 2044, Palau
is expected to withdraw up to $15 million annually, as originally
scheduled. Under the Agreement, withdrawals from the trust fund may
only be used for education, health, administration of justice and
public safety.
RECOMMENDED CHANGES
We recommend several changes to the bill.
At present, the subsidy for the United States Postal Service (USPS)
is a partial subsidy for domestic postage. The Agreement permits the
USPS, under certain conditions, to impose international postal rates in
the future. A subsidy would still be necessary in that event. Thus, in
the amending language we recommend striking the language ``so long as
domestic postage may be used for mail to Palau, the Federated States of
Micronesia, and the Marshall Islands'' from the second sentence of
subsection 105(e).
Additionally, in order to facilitate financing of the agreement we
would recommend including the following language in the bill:
Funding For Certain Provisions Under Section 105 of Compact of
Free Association.--On the date of enactment of this section,
out of any funds in the Treasury not otherwise appropriated,
the Secretary of the Treasury shall transfer to the Secretary
of the Interior such sums as are necessary for the Secretary of
the Interior to implement sections 1, 2(a), 3, 4(a), and 5 of
the Agreement, which sums shall remain available until expended
without any further appropriation.
Furthermore, in the amending language that would insert a paragraph
(2) of subsection 105(f), the Secretary of the Interior would be
required to submit an annual report to committees of jurisdiction on
the effectiveness of assistance to Palau under certain United States
domestic programs. We recommend that the consultation provision be
amended to require Federal agencies that administer such programs to
submit annually to the Secretary of the Interior appropriate material
ready for inclusion in the reports.
CONTINUING COOPERATION
The United States and Palau will work cooperatively on economic
reform. The Agreement requires the two governments to establish an
advisory group to recommend economic, financial and management reforms.
Palau is committed to adopting and implementing reforms. Palau will be
judged on its progress in such reforms as the elimination of operating
deficits, reduction in its annual budgets, reducing the number of
government employees, implementing meaningful tax reform and reducing
subsidies to public utilities.
Palau's progress in implementing reforms will be addressed at
annual bilateral economic consultations. If the government of the
United States determines that Palau has not made significant progress
on reforms, the United States may delay payment of economic assistance
under the Agreement.
The Agreement also continues to provide Palau with access to other
United States services and grant programs, including the United States
Postal Service, the National Weather Service, and the Federal Aviation
Administration. The Postal Service moves mail between the United States
and Palau, and offers other related services. Palau maintains its own
postal service for internal mail delivery. The National Weather Service
reimburses Palau for the cost of operating its weather station in
Palau, which performs upper air observations twice daily, as requested,
for the purpose of Palau's airport operations and the tracking of
cyclones that may affect other United States territories, such as Guam.
The Federal Aviation Administration provides aviation services to
Palau, including en-route air traffic control from the mainland United
States, flight inspection of airport navigation aids, and other
services.
The proposed legislation will also allow the continuance of other
Federal program services currently available to Palau under separate
authorizing legislation, including programs of the Departments of
Education and Health and Human Services. The general authorization for
Palau to receive such services was created by the Compact, but
individual program eligibility has been created by specific laws that
include Palau as an eligible recipient.
OFFSETS
The Palau Compact legislative proposal does have PAYGO costs. In
the past, the Administration proposed a number of offsets to fund the
Palau legislation, including:
Net Receipt Sharing, which takes into account the
costs of managing Federal oil and gas leases before revenues
are shared with the States;
Terminate payments for reclaiming abandoned coal
mines to states that are already certified as having cleaned up
all of their priority sites; and
Production incentive fees on non-producing Federal
oil and gas leases.
Each example by itself could provide more than enough savings to
offset the costs of the Palau Compact. Net Receipt Sharing, for
example, which has been enacted for five years through annual
appropriations language, would be more than sufficient to offset the
cost.
H.R. 6040 would provide for an offset to fund the Palau agreement.
The Administration is still reviewing the specific language of that
provision.
The Administration looks forward to continuing the United States
partnership with Palau. The Department of the Interior is proud of the
positive advancements United States assistance has achieved in Palau
since 1995 and looks forward to the progress that we anticipate will be
made over the period of the new agreement.
H.R. 6147
The Exclusive Economic Zone (EEZ) of the United States is a zone
contiguous to the territorial sea of the United States, which generally
extends 200 nautical miles from the U.S. coast line, unless it would
extend into or overlap with a 200 EEZ of an adjacent nation. The EEZ
applies to waters adjacent to the United States, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands
(consistent with the Covenant and UN Trusteeship Agreement), and United
States territories and possessions. The U.S. EEZ is the largest in the
world, spanning over 13,000 miles of coastline and containing 3.4
million square nautical miles of ocean--larger than the combined land
area of all fifty states.
The 200 nautical mile EEZ was established by President Reagan
through Proclamation 5030 of March 10, 1983, which affirmed that within
the EEZ, the U.S. had sovereign rights for the purpose of exploring,
exploiting, conserving and managing natural resources, whether living
and nonliving, of the seabed and subsoil and the superjacent waters and
with regard to other activities for the economic exploitation and
exploration of the zone, such as the production of energy from the
water, currents and winds. The Proclamation also affirmed that the U.S.
had jurisdiction as provided for in international law with regard to
the establishment and use of artificial islands, installations, and
structures, marine scientific research, and the protection and
preservation of the marine environment, and other rights and duties
provided for under international law. Many government agencies,
including the Department of the Interior and its bureaus, carry out
functions in the EEZ.
H.R. 6147 would designate the EEZ as the ``Ronald Wilson Reagan
Exclusive Economic Zone of the United States''. The bill would deem any
reference to the EEZ in a law, map regulation, document, paper, or
other record of the United States to be a reference to the ``Ronald
Wilson Reagan Exclusive Economic Zone of the United States''. Although
the geographical range of the EEZ is relevant to certain elements of
the Department's jurisdiction, the naming of the EEZ does not affect
any of the Department's existing authorities or programs. The
Department notes that it is not aware of any precedence for a
designation of this type. Therefore, the Department takes no position
on H.R. 6147.
______
Dr. Fleming. Next, Mr. Kagan, you have 5 minutes, sir.
STATEMENT OF HON. EDWARD D. KAGAN, DEPUTY ASSISTANT SECRETARY,
BUREAU OF EAST ASIAN AND PACIFIC AFFAIRS, U.S. DEPARTMENT OF
STATE
Mr. Kagan. Mr. Chairman, Ranking Member Sablan and members
of the Subcommittee, thank you very much for inviting me to
appear before you today to testify on our important bilateral
relationship with Palau. We are grateful for the sustained
bipartisan commitment to the Compact and to that relationship.
As a valuable contribution to this process made so far by
Members of Congress----
Dr. Fleming. Excuse me just a moment. We are not able to
hear you, is the mic close enough to your mouth?
Mr. Kagan. Sorry about that.
Dr. Fleming. Always an easy mistake to make. So thank you.
Mr. Kagan. We are grateful for the sustained bipartisan
commitment to the Compact and to the relationship with Palau,
and particularly to the valuable contribution to this process
made so far by Members of Congress, including leadership of
several key Committees. And although we have concerns about
some of the specific provisions in H.R. 6040, we hope the
Compact legislation will be passed by Congress and signed by
the President as soon as possible.
As you know, our relationship with Palau as well as with
the rest of the Pacific Island nations is the key aspect of
Administration's focus on expending the scope and the pace of
our engagement in the Asia-Pacific region. I just returned from
accompanying Secretary Clinton to the Pacific Islands post
forum dialog in the Cook Islands where I was grateful to be
joined by my fellow witness, close colleague and good friend,
Assistant Secretary Babauta.
Secretary Clinton's presence at the forum was the first by
a Secretary of State in its 41-year history and highlighted our
sustained commitment to enhancing our relationship with our
Pacific partners, including Palau as part of our broader
engagement with the Asia-Pacific region. While there, I met
with Palau's Minister of Justice and other senior officials and
they raised the status of this legislation, passage of which is
their highest priority in working with the United States.
Mr. Chairman, as you know, the Pacific and the island
countries that reside there are critical to our national
security and are vital to our connection to the Asia-Pacific
region. Among our many friends in the region, we have perhaps
none closer than Palau, a country for which we paid a steep
price to liberate in 1944.
In terms of our foreign policy interests, we have two
critical tasks with Palau. First is to sustain our full and
reinforce our full authority and responsibility for the
security and defense of Palau. And the second is to continue to
strengthen our close cooperation with Palau which helps support
our common goals in everything from fisheries management to
human rights to countering proliferation of weapons of mass
destruction.
Under the Compact of Free Association, the United States
provides for the security of Palau. The security relationship
gives us access to Palau and its waters and the authority to
deny such access by foreign military forces. The relatively
modest annual cost associated with proposed legislation is
leveraged many times over in the important strategic advantages
this arrangement confers on the United States.
In addition, as you know, under the terms of the Compact,
Palauans are eligible to serve in the U.S. Armed Forces and
they volunteer at the U.S. Military at a rate higher than any
individual U.S. State. We are very grateful for their
dedication and honor their sacrifices.
Now Palau is, as you know, one of our closest friends and
supporters. Palau is an ardent advocate for enhanced U.S.
Engagement in the region and has been a very strong supporter
at the United Nations. Palau's voting coincidence in the most
recent U.N. General Assembly with the United States on all
votes is approximately 97 percent, which is quite high.
Our partnership goes beyond defense, we work closely with
Palau in the fight against international crime and terror and
on other issues. And we are particularly grateful that in 2009,
Palau accepted for temporary resettlement, six ethnic Uyghur
detainees from Guantanamo when few other countries would.
As you know, our compact with Palau took effect in 1994. It
does not have a termination date and requires a review on the
15-year, 30-year, and 40-year anniversaries. The direct
economic assistance provisions expired in 2009, and our two
governments have worked very closely over 20 months of
discussions and negotiations to conclude the 15-year review
which resulted in the agreement signed in September 2010. The
legislation will implement the outcomes of the review, and is
important to reflect the shared commitment of our two
governments to our continued partnership.
I would note that there are some provisions in the current
draft of H.R. 6040 that exceed the agreement reached between
the United States and the Government of Palau by extending
additional benefits and supplemental funding to Palau, which
would run counter to the carefully calibrated goals of the
Administration negotiating this agreement. We are prepared to
work with the Subcommittee with interested Members to ensure
legislation reflects the bilateral agreement reached during the
Compact review.
Palau--it is crucial that we provide Palau the assistance
agreed to in the Compact review, and as part of agreement, as
you know, Palauans will be required to have machine readable
passports to travel to the United States in the future. Palau
has been a staunch ally and is essential that we stand by our
commitments. The Palauan people have been loyal and dedicated
partners. They share our interest in regional international
security. Failing to implement the 15-year review of the
Compact with Palau would undermine our national interests. And
in today's dynamic Pacific environment, failure to live up to
our commitments and to stand by our partners and longstanding
friends would not go unnoticed. We believe it is strongly in
the national interest to move quickly. We appreciate the
interest and leadership of this Subcommittee in considering
this legislation promptly and hope both the House and Senate
will pass it as soon as possible.
Thank you again, Mr. Chairman, for giving me the
opportunity to testify before you today and to clarify the
importance of this legislation. I look forward to answering
your questions.
Dr. Fleming. Mr. Kagan, you came very close to the record
of perfection on ending your testimony at the right moment
there. We appreciate that.
Mr. Kagan. Thank you.
[The prepared statement of Mr. Kagan follows:]
Statement of Edgard D. Kagan Deputy Assistant Secretary of State,
Bureau of East Asian and Pacific Affairs, U.S. Department of State
Chairman Fleming, Ranking Member Sablan, and Members of the
Subcommittee, thank you for inviting me to appear before you today to
testify on the importance of our bilateral relationship with Palau as
well as to discuss the Compact with Palau and proposed legislation
approving the results of the mandated 15-year Compact review. Although
we are concerned about specific provisions in H.R. 6040, the Continued
Free Association with Palau Act of 2012, we hope the Compact review
legislation will be passed by the Congress and signed by the President
as soon as possible.
Our relationship with Palau, as well as that with other Compact
nations and independent states in the Pacific, is a key aspect of the
Administration's focus on expanding the scope and pace of our
engagement with the Asia-Pacific region, and specifically on ensuring
that we increase our engagement with Pacific Island nations as we look
forward to what the President has called the ``Pacific Century.'' I was
fortunate during the first few weeks in my current position to be able
to travel with Assistant Secretary for East Asian and Pacific Affairs
Kurt Campbell to the region, including to Palau. My visit to Palau
demonstrated to me the excellent relationship we enjoy with the people
of Palau and President Toribiong. I just returned from accompanying
Secretary Clinton to the Pacific Islands Forum Post-Forum Dialogue and
participating in the latest round of Tuna Treaty negotiations in
Vanuatu. Secretary Clinton's presence at the Pacific Islands Forum was
the first by a Secretary of State in its 41-year history and marked a
historic level of effort and attention being paid by the Administration
to working with our Pacific partners, including Palau, to address many
of the problems they are facing. I was able to meet with Palau's
Minister of Justice and other senior officials, and they raised the
status of the legislation, passage of which is their highest priority
in working with the United States.
Palau Remains a Friend and Reliable Partner
Mr. Chairman, the vast stretch of the Pacific and the island
countries that reside within it share an integral connection to our
western border and are critical to our national security. Linking many
of our close friends and allies, from Japan and Australia to Palau,
Papua New Guinea, and Tonga, the Pacific region forms a crucial
security arc that stretches from California to the Philippines, from
Alaska to New Zealand. Our presence and ties to our partners in the
Pacific not only safeguard our security interests, they also guarantee
access to the critical sea lanes through which much of our trade flows.
Among our many friends and partners in the region, we have perhaps none
stronger than Palau, a country for which we paid a steep price in blood
and treasure to liberate in 1944.
Our relations with our Pacific partners are unfolding against the
backdrop of a shifting strategic environment, where emerging powers in
Asia and elsewhere seek to exert a greater influence in the Pacific
region, through development aid, people-to-people contacts, and
security cooperation. There is greater uncertainty in the region about
the United States' willingness and ability to sustain the robust
forward presence in the Pacific that has been a hallmark of much of the
20th century. That is why the Administration is putting such an effort
into increasing our engagement not only with mainland and maritime
Asia, but with the Pacific as well.
With respect to our foreign policy goals in the region, I think we
have two critical tasks that touch on our historic relationship with
Palau. First, we have to sustain and reinforce our full authority and
responsibility for the security and defense of Palau. We have no
greater responsibility in the eyes of the Palauan people, and I know
that we, and the other federal agencies that work with Palau, take that
responsibility very seriously. Second, we have to ensure that our
partners in the Pacific, including Palau, continue to work with us and
support our common goals in regional and multilateral fora, on
everything from fisheries management to human rights to countering the
proliferation of weapons of mass destruction.
Under the Compact of Free Association, the United States provides
for the security of Palau, which occupies a strategic position in the
Western Pacific. This security relationship gives us access to Palau
and its waters, along with the critical authority to deny such access
by military forces and personnel of other nations. While we have
welcomed for many decades a peaceful and positive approach to relations
in the Pacific by all parties, the relatively modest annual cost
associated with the proposed legislation is leveraged many times over
in the important strategic advantages this arrangement confers on the
United States.
As a result of our security guarantee, Palau does not maintain its
own military forces, but under the terms of our Compacts, their
citizens are eligible to, and do, serve voluntarily in the U.S. Armed
Forces. Palauan citizens volunteer in the U.S. military at a rate
higher than in any individual U.S. state. Approximately 500 Palauan men
and women serve in our military today, out of a population of about
14,000. We are grateful for their sacrifices and dedication to
promoting peace and fighting terrorism. Palau has deployed soldiers for
U.S. coalition missions and participated in U.S.-led combat operations
in the world's most difficult and dangerous places, including
Afghanistan and Iraq, where several Palauans have lost their lives in
combat.
President Toribiong's niece and Minister Jackson Ngiraingas' son
both serve in the U.S. Navy. The son of Minoru Ueki, Palau's Ambassador
to Japan, serves in the U.S. Army. Palau Paramount Chief Reklai has a
daughter and son in the Army. Palau's Ambassador to the United States,
Hersey Kyota, has two adult children serving in the Armed Forces. He
has several nephews serving in the Army and Marine Corps. Similarly,
many other Palauan sons and daughters of other government officials and
of ordinary Palauan citizens served honorably in U.S. military units
since the Compact has been in place, most recently in Afghanistan and
Iraq.
In addition to our specific responsibility for the safety and
security of the Palauan people under the Compact, given the wide range
of U.S. strategic interests and equities in the Western Pacific,
security developments in the region require our sustained presence and
engagement. The Reagan Ballistic Missile Defense Test Site on Kwajalein
Atoll, the presence of U.S. Armed Forces, including the U.S. Coast
Guard, in Guam and in the waters of the Pacific, and our disaster
relief operations throughout the region are all crucial to peace and
security not only for the region, but for the United States. Keeping
our commitments to Palau, as reflected in the proposed legislation,
reinforces our defense posture in the Western Pacific, and therefore
our strategic interests. Access to Palauan waters, lands, airspace, and
its Exclusive Economic Zones (EEZ), grants us economic benefits and
allows us to guard and protect our long-term defense interests in the
region.
With respect to the second goal of maintaining and strengthening
our relationship, Palau is among our strongest supporters in regional
and multilateral fora. In the former, Palau has been an ardent advocate
for enhanced U.S. participation and engagement in the Pacific Islands
Forum and a constructive partner as we work to extend the South Pacific
Tuna Treaty.
At the 66th General Assembly of the United Nations, Palau's voting
coincidence with the United States on all votes is approximately 97
percent, which is markedly higher than 80 percent for the United
Kingdom, 88 percent for Australia, and 70 percent for both Japan and
South Korea. Despite an increase in assistance from others interested
in enhancing their engagement with the region, such as China, Russia,
and the Arab League nations, Palau has not only supported the United
States' on Israel and Cuba-related votes but has been at the forefront
of actively helping garner the support of others. Palau has supported
UN resolutions seeking to combat the spread of weapons of mass
destruction, and joined in efforts to address systematic human rights
abuses in North Korea, Syria, and Iran.
Our Partnership Extends Beyond Defense
The importance of our strong relationship with Palau is not limited
to defense. We work closely with Palau in the fight against
international crime and terror. In 2009, Palau resettled six ethnic
Uighur detainees from Guantanamo when few other countries would. Palau
was our first island partner to sign the U.S. ship rider and ship-
boarding agreements that are successfully increasing maritime
surveillance and law enforcement cooperation in the Pacific Islands.
Palau is a key and constructive player in helping set the tone of
our negotiations with 16 Pacific Island nations on the extension of our
South Pacific Tuna Treaty. This treaty guarantees access to South
Pacific waters to our tuna fleet in return for specific obligations in
terms of environmental regulation, conservation measures, and other
important efforts to sustain the viability of South Pacific tuna stocks
long-term. The value of this treaty to the United States has averaged
more than $360 million a year over the past three years, and I am glad
to report that we have made significant progress toward reaching an
agreement that will ensure that access, and the support for thousands
of tuna industry jobs here in the United States and American Samoa, for
some time to come.
Our people-to-people connections continue to grow strong. Since
1966, more than 4,200 Peace Corps Volunteers have served in Palau,
teaching English and life skills and supporting economic development,
education, capacity building, and marine and terrestrial resource
conservation in Palau and in the two other Freely Associated States.
Today approximately 55 Peace Corps volunteers serve in Micronesia and
Palau.
Responsibility as a Compact Partner
The original process that led to our Compact with Palau was based
on a solemn promise to help this young nation through financial,
security, and other assistance to achieve self-governance and a
sustainable economic development path. The effort that has gone into
the 15-year Compact review, and the positive contribution of Members of
both Houses of Congress to work towards implementing those arrangements
is a symbol of our good faith and partnership, not just in Palau, but
also among all our Pacific partners.
The timing of this review could not be more important. We are now
at a point where the goal of self-governance and democracy in Palau is
firmly in place. The goal of sustainable economic development and
independence, however, remains a work in progress. The tiered nature of
the support agreed to in this 15-year review is designed to reduce
Palau's dependence on U.S. direct economic assistance and assist Palau
in moving towards sustainable economic development. Importantly, it
also requires the Palauan government to undertake serious economic and
fiscal reforms, and, should the United States determine that progress
towards such reform is inadequate, we are able to withhold further
assistance until they are implemented.
Our Compact with Palau took effect in 1994. It does not have a
termination date and requires a review on the 15-year, 30-year, and 40-
year anniversaries. The direct economic assistance provisions of the
Compact, however, expired on September 30, 2009. Our two governments
worked closely over 20 months of discussions and negotiations to
conclude the 15-year review, which resulted in an Agreement signed by
former Deputy Assistant Secretary Frankie Reed and President Toribiong
in September 2010. The legislation will implement the outcomes of the
review and is the manifestation of the shared commitment between our
two governments. I would note, however, that the provisions in the
current draft of H.R. 6040 exceed the agreement reached between the
United States and the Government of Palau by extending additional
benefits and supplemental funding to Palau, which would run counter to
the carefully calibrated goals of the Administration in negotiating the
agreement. We are prepared to work with this Subcommittee and with
interested Members to ensure that the legislation reflects the
bilateral agreement reached during the Compact review.
Those provisions notwithstanding, the proposed Compact Review
legislation would amend Title I of Public Law 99-658 regarding the
Compact of Free Association between the Government of the United States
of America and the Government of Palau. In formal language, this bill
would approve the results of the 15-year review of the Compact,
including the Agreement between our two governments following the
Compact of Free Association Section 432 Review.
The assistance package within the Agreement is designed to relieve
Palau from its dependence upon U.S. direct economic assistance as it
continues to grow and reform its economy. The Agreement provides a
glide path for Palau to move from reliance on the over $18 million it
has been receiving to a sustainable $15 million level, provides for
U.S. contributions to the Trust Fund from FY 2013 through FY 2023 and
decreases the amount Palau may withdraw from the Trust Fund during this
period, to allow the Trust Fund to grow. The terms of the agreement
also commit Palau to a range of economic reforms designed to help
increase fiscal transparency, combat corruption, and create a stronger
foundation for economic sufficiency in the future. If the United States
determines that insufficient progress has been made on economic reform,
we may delay assistance payments until we deem sufficient progress has
been made. The Agreement has other provisions that supplement the
Compact, resulting from a review of how the Compact worked over its
first 15 years. For example, Palau will continue to be eligible for a
wide range of federal programs and services from agencies such as the
U.S. Postal Service, federal weather services, the Federal Aviation
Administration, the Department of Agriculture, and Health and Human
Services. The Agreement will also require Palauan nationals coming to
the United States under the Compact to have machine readable passports
(instead of allowing them to come to the United States without
passports).
If the bilateral Agreement between our two countries is not
implemented, the trust fund would be unable to provide a steady outlay
of $15 million per year, from now until 2044, which was the intended
purpose of the Compact negotiators in the 1980s. To ensure smooth
continuation of our bilateral relationship as well as the continued
economic development and advance of its self sufficiency, it is crucial
we provide Palau the assistance agreed to in the Compact review.
Supporting Palau's Transition to Independence
Our history with Palau began in bloody battle in 1944. It was a
sense of duty, and the understanding that Palau was important to our
strategy in the Pacific, that led thousands of Marines ashore to free
Palau from colonialism and occupation. Palau remains important now, and
that same duty has led the United States down a long road of
partnership with the people of Palau from liberation to trusteeship
and, finally, to independence. That steadfast commitment to our friends
has been noted not just in Palau, but across the Pacific.
Shortly after the end of World War II, the United Nations assigned
the United States administering authority over the Trust Territory of
the Pacific Islands, which included Palau and island districts of
Micronesia that we had liberated from Japanese occupation. Palau
adopted its own constitution in 1981, and the governments of the United
States and Palau concluded a Compact of Free Association that entered
into force on October 1, 1994.
With a government modeled on our own, Palau shares our goals for
human rights and democracy throughout the world. Palau has shown
maturity of a much older nation in its democratic processes, which is a
testament to the commitment to strong values the people of the Pacific
have, and reinforces the value of the Compact as a vehicle for
transition.
Palau has been a staunch ally to the United States, and it is
essential we stand by our commitment to the people of Palau. The
Palauan people have been loyal and dedicated partners, but they are
concerned about their future and that of their grandchildren. Palau is
as interested in regional and international security as we are. Failing
to affirm the results of the 15-year review of the Compact with Palau
is not in our national interest. We appreciate the interest and
leadership of this Subcommittee in considering this legislation
promptly and hope both the House and the Senate will pass it as quickly
as possible.
As the generation for which the Second World War was a defining
experience passes and other emerging powers seek to increase their
influence in the region, passage of this legislation will send a
reassuring signal that the United States is and will be engaged in the
Pacific and will remain a faithful friend and ally through both good
and challenging times.
The Importance of Implementing the Agreement
Mr. Chairman, the President, Secretary Clinton, and others in this
Administration deeply appreciate not only the rich and historic World
War II legacy of the Pacific, but also the continuing strategic role
those islands and waters play globally. The Administration places great
importance on continuing our strong alliance with Pacific Island
partners. I recently visited the battlefield of Peleliu, where more
than 3,000 U.S. Marines were lost liberating the island, a necessary
step towards the eventual liberation of the Philippines and the seizure
of other key island bases that helped bring the war to a close. I met
with Palauans who are working with partners in the United States to
identify personal effects that still remain on the battlefield and to
return them to family members in the United States nearly seventy years
later. These efforts are emblematic of our shared history and the deep
connections that have been forged in the decades since World War II. In
the current political environment in the Pacific region, it is
paramount that we maintain those ties and continue to develop our
strategic framework for a peaceful future in the region. Our investment
will help to ensure that Palau becomes financially independent over
time and continues to stand with us as a loyal, trustworthy, and
democratic ally.
If the Agreement is not implemented, Palau will not have had time
to adjust to the reduction from $18 million to $15 million in combined
direct assistance and trust fund withdrawals on which it has been
relying and will not have embarked on the reforms called for in the
September 2010 agreement. Palau's economy would suffer a serious blow
from the $3 million reduction in assistance (between direct assistance
and trust fund withdrawals), which would seriously damage our bilateral
relationship in a key region of the world. In today's dynamic Pacific
environment, our inability to stand by our partners would not go
unnoticed, and it is likely that Palau would face offers of assistance
from other nations expanding their reach in the Pacific to fill the
void we would leave.
I hope that my testimony today gives you an understanding and sense
of how the Compact deepens our partnership with Palau and serves the
interests of the United States. I look forward to working with you and
other Members of Congress to secure and advance U.S. interests in Palau
by passing the legislation implementing the results of the Compact
review.
Thank you again for giving me the opportunity to testify before you
today and to clarify the importance of this legislation. I look forward
to answering your questions.
______
Dr. Fleming. Next, we have Mr. Gootnick. Sir, you have 5
minutes.
STATEMENT OF DAVID GOOTNICK, DIRECTOR, INTERNATIONAL AFFAIRS
AND TRADE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Gootnick. Thank you, Mr. Chairman. Mr. Chairman and
members of the Subcommittee, thank you for asking GAO to
participate in this hearing. As has been stated, the 1994
Compact provided 15 years of economic assistance, established
the trust fund, built the compact road, and provided for
postal, weather and aviation services. Importantly, the Compact
also established the basis for discretionary Federal programs
such as Head Start, community health centers, Pell Grants,
airport improvements, special education and numerous others.
Taken together since 1994, the Compact and U.S. programs are
valued at more than $850 million, of which U.S. program
assistance was about one-third.
My statement which I will briefly summarize describes one,
the economic provisions of the agreement; two, the impact of
the agreement on Palau's trust fund; three, projected Palau
government revenues under the agreement. In the statement, we
have also provided some descriptive information on 6040 and 343
which we can discuss.
As has been stated the agreement would provide $215 million
in assistance with a steady annual decrement from roughly $28
million to $2 million in 2024. One hundred seven million,
roughly half of the assistance would support government
operations. The agreement also provides $40 million for
infrastructure projects, $28 million for the maintenance fund,
$10 million to debt relief and adds $30 million to the trust
fund.
Importantly the agreement extends postal, weather and
aviation, and the authority to continue discretionary Federal
programs. The agreement puts certain conditions on the $215
million package. For example, economic assistance is directed
to specific sectors such as health, education and public
safety. Also under the agreement, an advisory group would be
appointed and tasked to make recommendations for fiscal and
management reforms. And the U.S. made to lay funding condition
on the progress of these reforms.
For the infrastructure fund, projects must have land title
and a certified scope of work to get funding, and the
maintenance fund is primarily for U.S. finance projects, in
particular, the Compact road and the international airport.
Debt relief prioritizes U.S. creditors and requires U.S.
concurrence on debts to be paid. Regarding the trust fund, the
proposed U.S. contributions and the delay in schedule
withdrawals would markedly improve the fund's prospects. In
2009, we reported that the trust fund would require an annual
return above 10 percent to yield its proposed schedule through
2044. However, under this agreement, the trust fund would need
only a 5 percent return to yield its new schedule withdrawals.
This is well below the nearly 8 percent it has earned to date.
Last, to offset the steady decline in budget support
through 2024, estimates prepared for the Government of Palau
project a growing reliance on trust fund withdrawals and
domestic revenue as well as steady access to U.S. Federal
programs. Specifically the estimates project a steep rise in
domestic revenue, growing from roughly 40 to nearly 60 percent
of government revenue by 2024, and the estimates project that
discretionary Federal programs will grow at roughly the rate of
inflation. They are projected at half of all U.S. assistance
over the next 15 years. As you know, unlike other components of
this agreement these programs depend on annual appropriations.
In summary, Mr. Chairman, the economic provisions of the
agreement extend and gradually reduce compact assistance
through 2024, establish new conditions for the use of U.S.
funds, and reset the trust fund to significantly improve its
long-term prospects. Palau has employed projections of its
long-term fiscal conditions that rely on increased revenue and
the continuation of U.S. Federal programs.
Mr. Chairman, this completes my remarks ahead of schedule,
and I am happy to answer any questions.
Dr. Fleming. Thank you, Mr. Gootnick, both for your
testimony and for ending it early. We thank you for that.
[The prepared statement of Mr. Gootnick follows:]
Statement of David Gootnick, Director, International Affairs and Trade,
U.S. Government Accountability Office (GAO)
Chairman Fleming, Ranking Member Sablan, and Members of the
Subcommittee:
I am pleased to be here today to discuss the September 2010
agreement between the U.S. and Palau governments.\1\
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\1\ The Agreement between the Government of the United States of
America and the Government of the Republic of Palau Following the
Compact of Free Association Section 432 Review (Sept. 3, 2010).
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The Compact of Free Association between the Government of the
United States and the Government of the Republic of Palau, which
entered into force in 1994,\2\ provided for several types of assistance
aimed at promoting Palau's economic advancement and eventual self-
sufficiency.\3\ In addition to establishing Palauan sovereignty and
U.S.-Palau security and defense arrangements, the compact provided
economic assistance to Palau.\4\ This assistance comprised, among other
things, direct economic assistance for 15 years to the Palau
government; the establishment of a trust fund intended to provide Palau
$15 million annually from 2010 through 2044; investments in
infrastructure, including a major road; and the provision of federal
services, such as postal, weather, and aviation. The compact also
established a basis for U.S. agencies to provide discretionary federal
programs related to health, education, and infrastructure. In June
2008, we projected that U.S. assistance to Palau from 1995 through 2009
would exceed $852 million, with assistance under the compact accounting
for about 68 percent and assistance through discretionary programs
accounting for about 31 percent.\5\ We also reported in 2008 that the
likelihood of the Palau trust fund's being able to sustain the planned
payments through 2044 was uncertain.
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\2\ The Compact of Free Association between the Government of the
United States of America and the Government of the Republic of Palau
(Oct. 1, 1994).
\3\ See Proclamation 6726, Placing into Full Force and Effect the
Compact of Free Association with the Republic of Palau, 59 Fed. Reg.
49777 (Sept. 27, 1994). Congress approved the Compact of Free
Association in Public Law 99-658 on November 14, 1986, and Public Law
101-219 on December 12, 1989. The grant funds specified by the compact
are backed by the full faith and credit of the U.S. government.
\4\ Unless otherwise noted, all years cited are fiscal years (Oct.
1-Sept. 30). In addition, all dollar amounts in this report are in
nominal dollars (i.e., unadjusted for inflation).
\5\ GAO, Compact of Free Association: Palau's Use of and
Accountability for U.S. Assistance and Prospects for Economic Self
Sufficiency, GAO-08-732 (Washington, D.C.: June 10, 2008).
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The September 2010 agreement between the U.S. and Palau governments
(the Agreement) followed a formal review of the compact's terms
required 15 years after the compact entered into force.\6\ Provisions
of the Agreement would, among other things, extend economic assistance
to Palau beyond the original 15 years and modify trust fund
arrangements. The Agreement establishes an assistance schedule
beginning in 2011. There are currently two bills pending before the
Congress to approve and implement the Agreement. A bill now pending
before the U.S. Senate would approve the Agreement and also appropriate
funds to implement it.\7\ However, the Senate bill does not reflect the
fact that fiscal year 2011 has passed.\8\ A bill now pending before the
House would approve the agreement, apply an inflation adjustment to
assistance payments, and shift the timing of certain assistance
payments to reflect the passage of fiscal year 2011.\9\
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\6\ Section 432 of the compact provides for the U.S. and Palau
governments to formally review the terms of the compact and its related
agreements and to consider the overall nature and development of their
relationship, on the 15th, 30th, and 40th anniversaries of the
compact's effective date. The governments are to consider the operating
requirements of the Government of Palau and its progress in meeting the
development objectives set forth in section 231(a) of the compact. The
terms of the compact shall remain in force until otherwise amended or
terminated pursuant to title four of the compact.
\7\ Senate Bill 343, as introduced in the Senate, amends Title I of
Public Law 99-658; approves the results of the 15-year review of the
compact, including the Agreement; and appropriates funds for the
purposes of the amended Public Law 99-658 for fiscal years ending on or
before September 30, 2024, to carry out the agreements resulting from
the review. S. 343, 112th Cong. (2011).
\8\ S. 343, as introduced in the Senate.
\9\ House Bill 6040, as introduced in the House, amends Title I of
Public Law 99-658; approves the results of the 15-year review of the
compact, including the Agreement; shifts the schedule of certain
assistance payments; creates an annual reporting requirement for the
Department of the Interior; and includes an offset provision. H.R.
6040, 112th Cong. (2012).
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The Senate Committee on Energy and National Resources held a
hearing to review the pending bill on June 16, 2011; the Subcommittee
on Asia and the Pacific of the House Committee on Foreign Affairs held
a hearing to assess the formal review and proposed Agreement on
November 30, 2011 We testified at both hearings and described the terms
of the Agreement, assessed trust fund balances and disbursement plans
under various assumptions and investment returns, and examined single
audit reports and budget estimates prepared for the Palau
government.\10\
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\10\ GAO, Compact of Free Association: Proposed U.S. Assistance to
Palau and Its Likely Impact, GAO-11-559T (Washington, D.C.: June 16,
2011).
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My statement today updates our November 2011 statement.\11\ In
particular, it describes (1) the extension of economic assistance to
Palau as outlined in the Agreement, (2) the impact that this assistance
would have on the Palau trust fund's sustainability, (3) the projected
role of U.S. assistance in Palau government revenues, and (4) the
pending legislation to implement the Agreement. We used recent data
from the Palau trust fund to update its sustainability, and we reviewed
the bill pending before the House that was introduced in July 2012.\12\
In addition, since Congress has not approved legislation implementing
the agreement, we note that the Department of the Interior has provided
direct economic assistance to Palau. We conducted this work from August
and September 2012 in accordance with all sections of GAO's Quality
Assurance Framework that are relevant to our objectives. The framework
requires that we plan and perform the engagement to obtain sufficient
and appropriate evidence to meet our stated objectives and to discuss
any limitations in our work. We believe that the information and data
obtained, and the analysis we conducted, provide a reasonable basis for
any findings and conclusions in this product.
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\11\ GAO, Compact of Free Association: Proposed U.S. Assistance to
Palau for Fiscal Years 2011-2024, GAO-12-249T (Washington, D.C.: Nov.
30, 2011).
\12\ H.R. 6040.
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Background
Palau consists of 8 main islands and more than 250 smaller islands,
with a total land area of roughly 190 square miles, located
approximately 500 miles southeast of the Philippines. About 20,000
people live in Palau, concentrated largely in one urban center around
the city of Koror, and more than one-quarter of the population is non-
Palauan.\13\ Palau's economy is heavily dependent on its tourism sector
and on foreign aid from the United States, Japan, and Taiwan.\14\
Similar to many small island economies, Palau's public sector spending
represents a significant percentage of its gross domestic product
(GDP).\15\
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\13\ Palau's private sector relies heavily on foreign workers,
mostly from the Philippines. We reported in 2008 that since 1994,
foreign workers, as registered with Palau's Social Security Office, had
grown to account for half of Palau's total labor force. Because many of
these foreign workers send wage income back to their home nations, in
2005 the annual net outflow of remittances from Palau equaled an
estimated 5.5 percent of its gross domestic product (GDP).
\14\ The International Monetary Fund (IMF) projected that in 2010,
Palau's GDP was an estimated $218 million and reported that Palau's GDP
per capita was about $10,500. Business and tourist arrivals were
projected to be 78,000 in 2010. See IMF, Republic of Palau Staff Report
for the Article IV Consultation (Apr. 12, 2010).
\15\ According to the IMF, in 2010, Palau's public sector spending
was projected at approximately 42 percent of its GDP.
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U.S. relations with Palau began when American forces liberated the
islands near the end of World War II. In 1947, the United Nations
assigned the United States administering authority over the Trust
Territory of the Pacific Islands, which included what are now the
Federated States of Micronesia, the Republic of the Marshall Islands,
the Commonwealth of the Northern Mariana Islands, and Palau. Palau
adopted its own constitution in 1981. The U.S. and Palau governments
concluded a Compact of Free Association in 1986; the compact entered
into force on October 1, 1994. The Department of the Interior's
(Interior) Office of Insular Affairs (OIA) has primary responsibility
for monitoring and coordinating all U.S. assistance to Palau, and the
Department of State (State) is responsible for government-to-government
relations.
Key provisions of the compact and its subsidiary agreements address
the sovereignty of Palau, types and amounts of U.S. assistance,
security and defense authorities, and periodic reviews of compact
terms. Table 1 summarizes key provisions of the Palau compact and
related subsidiary agreements.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
.epsIn addition to the U.S. assistance provided under the compact,
U.S. agencies--the Department of Education, the Department of Health
and Human Services (HHS), and Interior, among others--provide
discretionary federal programs in Palau as authorized by U.S.
legislation \16\ and with appropriations from Congress. (See app. II
for a complete listing of these programs in Palau.)
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\16\ The compact's federal programs and services agreement,
establishing the legislative framework for the provision of
discretionary federal programs in Palau, was in force until October 1,
2009. These services continued under program authority in 2010 and
2011.
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In our 2008 report, we projected that U.S. assistance to Palau from
1995 through 2009 would exceed $852 million. Of this total, economic
assistance under the compact accounts for a projected 68 percent and
discretionary federal programs account for a projected 31 percent (see
fig. 1).\17\
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\17\ GAO-08-732.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Agreement Would Extend U.S. Assistance for 15 Years, With Annual
Decreases
The September 2010 Agreement between the U.S. and Palau governments
would extend assistance to Palau to 2024 but steadily reduce the annual
amount provided. The Agreement would also extend the authority and
framework for U.S. agencies to continue compact federal services and
discretionary federal programs.\18\
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\18\ Other provisions in the Agreement would define reporting and
auditing requirements and passport requirements. The Agreement would
require that, by 2018, Palau resolve all deficiencies identified in
annual single audit reports, which are required by the Compact's fiscal
procedures agreement, such that no single audit report recommendations
or deficiencies dating from before 2016 remain. In addition, the
Agreement alters the entry procedures for citizens of Palau visiting
the United States, requiring them to present a valid machine-readable
passport to travel to the United States.
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Assistance to Palau Would Decline through 2024
Key provisions of the Agreement would include, among others,
extending direct economic assistance to Palau, providing infrastructure
project grants and contributions to an infrastructure maintenance fund,
establishing a fiscal consolidation fund, and making changes to the
trust fund. U.S. assistance to Palau under the Agreement would total
approximately $215 million through 2024.\19\
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\19\ The compact provided for direct assistance to Palau only
through 2009. For 2010 through 2012, Interior provided $13.1 million
for direct assistance to Palau each year. For 2013, Interior's Budget
Justification proposed $34 million in direct assistance, while the
Agreement provides for $25.5 million.
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Legislation implementing the Agreement was not approved by Congress
during 2011. Department of the Interior provided $13.1 million for
direct economic assistance in 2011 and again in 2012; however, funds
were not provided either year for infrastructure projects, the
infrastructure maintenance fund, or the fiscal consolidation fund.
Direct economic assistance ($107.5 million). Under
the Agreement, the U.S. government would provide direct
economic assistance--budgetary support for Palau government
operations and specific needs such as administration of justice
and public safety, health, and education--amounting to $13
million in 2011 and declining to $2 million by 2023.\20\ The
Agreement also calls for the U.S. and Palau governments to
establish a five-member Advisory Group to provide annual
recommendations and timelines for economic, financial, and
management reforms. The Advisory Group must report on Palau's
progress in implementing these or other reforms, prior to
annual U.S.-Palau economic consultations.\21\ These
consultations are to review Palau's progress in achieving
reforms \22\ such as improvements in fiscal management,
reducing the public sector workforce and salaries, reducing
government subsidization of utilities, and tax reform. If the
U.S. government determines that Palau has not made significant
progress in implementing meaningful reforms, direct assistance
payments may be delayed until the U.S. government determines
that Palau has made sufficient progress.
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\20\ Congress did not pass legislation appropriating funds for this
assistance in 2011 and therefore the earliest this assistance can begin
is 2012.
\21\ The Agreement requires that Palau undertake economic,
legislative, financial, and management reforms giving due consideration
to those identified by the IMF; the Asian Development Bank; and other
creditable institutions, organizations, or professional firms.
\22\ The compact requires that the United States and Palau consult
annually regarding Palau's economic activities and progress in the
previous year, as described in a report that Palau must submit each
year. Our 2008 report noted that Palau had met reporting conditions
associated with direct assistance but that, contrary to compact
requirements, the bilateral economic consultations had not occurred on
an annual basis; and had been informal and resulted in no written
records. See GAO-08-732.
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Infrastructure projects ($40 million). Under the
Agreement, the U.S. government would provide U.S.
infrastructure project grants to Palau for mutually agreed
infrastructure projects--$8 million annually through 2013,\23\
$6 million in 2014, and $5 million in both 2015 and 2016. The
Agreement requires Palau to provide a detailed project budget
and certified scope of work for any projects receiving these
funds.
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\23\ Under the Agreement, the U.S. government would have provided
U.S. infrastructure project grants amounting to $8 million in 2011;
however, Congress did not pass legislation appropriating such funds in
2011.
---------------------------------------------------------------------------
Infrastructure maintenance fund ($28 million). Under
the Agreement, the U.S. government would make contributions to
a fund to be used for maintenance of U.S.-financed major
capital improvement projects, including the Compact Road and
Airai International Airport.\24\ Through 2024,\25\ the U.S.
government would contribute $2 million annually, and the Palau
government would contribute $600,000 annually to the fund.\26\
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\24\ In 2008, we reported that Palau and U.S. officials had
expressed concerns about Palau's ability to maintain the Compact Road
in a condition that would allow for the desired economic development.
We also reported that Palau made initial efforts to maintain the road,
but at levels that would cause the road to deteriorate over time and
would not provide the economic development benefits envisioned for the
people of Palau. See GAO-08-732.
\25\ The Agreement states that the United States shall provide a
grant beginning in 2011. However, Congress did not pass legislation
appropriating funds for this purpose in 2011 and therefore the earliest
the U.S. contributions can begin is 2012.
\26\ Under the compact, Palau owes the United States a total of $3
million. Under the Agreement, Palau would deposit $3 million in the
infrastructure maintenance fund but not expend it. Any future income
derived from the $3 million must be used exclusively for the
maintenance of the Compact Road.
---------------------------------------------------------------------------
Fiscal consolidation fund ($10 million). Under the
Agreement, the U.S. government would provide grants of $5
million each in 2011 \27\ and 2012, respectively, to help the
Palau government reduce its debts. Unless agreed to in writing
by the U.S. government, these grants cannot be used to pay any
entity owned or controlled by a member of the government or his
or her family, or any entity from which a member of the
government derives income. U.S. creditors must receive
priority, and the Government of Palau must report quarterly on
the use of the grants until they are expended.
---------------------------------------------------------------------------
\27\ Although the Agreement states that the United States shall
provide a grant beginning in 2011, Congress did not pass legislation
appropriating funds for this purpose in 2011 and therefore the earliest
the U.S. contributions can begin is 2012.
---------------------------------------------------------------------------
Trust fund ($30.25 million). Under the Agreement, the
U.S. government would contribute $30.25 million to the fund
from 2013 through 2023. The Government of Palau will reduce its
previously scheduled withdrawals from the fund by $89
million.\28\ From 2024 through 2044, Palau can withdraw up to
$15 million annually, as originally scheduled. Moneys from the
trust fund account cannot be spent on state block grants,
operations of the office of the President of Palau, the Olibiil
Era Kelulau (Palau National Congress), or the Palau Judiciary.
Palau must use $15 million of the combined total of the trust
fund disbursements and direct economic assistance exclusively
for education, health, and the administration of justice and
public safety.
---------------------------------------------------------------------------
\28\ Under the Agreement, Palau would withdraw $5 million annually
through 2013 and gradually increase its maximum withdrawal from $5.25
million in 2014 to $13 million in 2023.
---------------------------------------------------------------------------
Annual U.S. assistance to Palau under the Agreement would decline
from roughly $28 million in 2011 to $2 million in 2024. Figure 2
details the timeline and composition of assistance outlined in the
Agreement.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Agreement Would Continue Compact Federal Services and Extend
Framework for Discretionary Federal Programs
The Agreement would extend the authority for the provision of
compact federal services and discretionary programs in Palau.
Federal services. The Agreement would amend the
compact's subsidiary agreements regarding federal services.
Specifically, the Agreement amends the terms of postal,
weather, and aviation services to Palau.
Federal discretionary programs. The Agreement would
extend the framework for U.S. agencies to provide discretionary
federal programs to Palau, with implementation of the programs
contingent on annual appropriations to those agencies.
Agreement's Provisions Would Significantly Improve Prospects for Palau
Trust Fund
The addition of $30.25 million in U.S. contributions and the delay
of $89 million in Palau withdrawals through 2023, as provided by the
Agreement, would improve the fund's prospects for sustaining scheduled
payments through 2044. At the end of June 2012, the fund had a balance
of approximately $163 million. The trust fund would need a 5.0 percent
annual return to yield the proposed withdrawals from 2011 through 2044
under the Agreement. This rate is well below the 7.9 percent return
that the fund earned from its inception to June 30, 2012.\29\ Figure 3
shows projected trust fund balances in 2012 through 2044 under the
Agreement, with varying rates of return.
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\29\ All rates of return on the trust fund are net of fees and
commissions unless otherwise noted.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The additional contributions and reduced withdrawals scheduled
in the Agreement would also make the trust fund a more reliable source
of revenue under conditions of market volatility. With these changes,
the trust fund would have an approximately 90 percent probability of
sustaining payments through 2044. In comparison, the fund has a 40
percent probability of sustaining the $15 million annual withdrawals
scheduled under the compact through 2044.
Figure 4 compares the probability that the trust fund will sustain
the proposed withdrawals under the terms outlined in the Agreement with
the probability that the trust fund will sustain the withdrawals
scheduled under the compact.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Estimates Prepared for Palau Project Declining Reliance on U.S.
Assistance Under the Agreement
Estimates prepared for the Government of Palau project that Palau's
reliance on U.S. assistance provided under the Agreement will decline,
while its reliance on trust fund withdrawals and domestic revenue will
increase.\30\ These estimates show U.S. assistance, as provided under
the Agreement, declining from 28 percent of government revenue in 2011
to less than 2 percent of government revenue in 2024. The estimates
also show Palau's trust fund withdrawals growing from 5 percent of
government revenue in 2011 to 12 percent in 2024. In addition, the
estimates indicate that Palau's domestic revenue will rise from 40
percent of all government revenue in 2011 to 59 percent in 2024.\31\
Finally, the estimates prepared for Palau project a relatively steady
reliance on U.S. discretionary federal programs, ranging from 12
percent of all government revenue in 2011 to 14 percent in 2024. The
estimates assume that discretionary federal programs will grow at the
rate of inflation; however, discretionary programs are subject to
annual appropriations and may not increase over time.
---------------------------------------------------------------------------
\30\ The Government of Palau provided fiscal projections through
2024 to the Senate Committee on Energy and Natural Resources in January
2011. The estimates were prepared by an independent economist retained
by the Government of Palau.
\31\ In March 2011, the IMF reported that Palau government revenues
as a percentage of GDP are below average for island nations in the
Pacific. The report cited opportunities for increased tax revenues by
eliminating the gross revenue tax, replacing it with a corporate income
tax, introducing a Value Added Tax, and increasing the level of
taxation on high earners. The IMF also noted that Palau could reform
its civil service to decrease wage expenditures. IMF, ``Staff Visit to
Republic of Palau--Concluding Statement of the IMF Mission'' (Mar. 8,
2011).
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Figure 5 shows the types and amounts of Palau's estimated revenues
for 2011 and 2024.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Estimates Prepared for Palau Project Discretionary Program Funding
as Half of U.S. Assistance
The estimates prepared for the Government of Palau project that
U.S. assistance to Palau from 2011 through 2024, including
discretionary federal programs, will total approximately $427 million.
The estimates further project that discretionary programs will account
for nearly half of U.S. assistance through 2024, with assistance
amounts specified in the Agreement accounting for the other half. (See
fig. 6.) In contrast, in 2008, we estimated discretionary program
funding accounted for less than one-third of total U.S. assistance to
Palau from 1995 through 2009.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Pending Legislation Would Approve and Implement the Agreement
Legislation has been introduced in both the Senate and the House
that would approve and implement the September 2010 agreement between
the U.S. and Palau governments.
In February 2011, a bill was introduced in the Senate that would
implement the Agreement, as written.\32\ The Senate bill would
authorize and appropriate funds to Interior for specified assistance.
The Senate bill would also extend the authority, and authorize
appropriations, for the provision of compact federal services in Palau.
However, the proposed legislation does not appropriate funds for
compact federal services. As of September 2012, the Senate has not
acted on this bill.
---------------------------------------------------------------------------
\32\ S. 343.
---------------------------------------------------------------------------
In June 2012, a bill was introduced in the House that would approve
and implement the Agreement, with some modifications.\33\ Specifically,
the pending House bill:
---------------------------------------------------------------------------
\33\ H.R. 6040.
---------------------------------------------------------------------------
Shifts the timing of the provision of some specified
Agreement assistance to account for the fact that fiscal year
2011 has passed.
Extends the full faith and credit provision of the
compact \34\ to the U.S. commitments of assistance under the
Agreement for direct economic assistance, the trust fund, the
infrastructure maintenance fund, the fiscal consolidation fund,
and infrastructure projects.
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\34\ Pursuant to this compact provision, should the United States
fail to provide a payment covered by the pledge, Palau would be able to
seek relief in the U.S. Claims Court or its successor court.
---------------------------------------------------------------------------
Applies an inflation adjustment to the Agreement
assistance for direct economic assistance and infrastructure
project grants, and payments to the trust fund, infrastructure
maintenance fund, and fiscal consolidation fund.\35\
---------------------------------------------------------------------------
\35\ Adjusting direct economic assistance, infrastructure project
grants, and payments to the trust fund, infrastructure maintenance
fund, and fiscal consolidation fund for inflation would increase the
value of U.S. assistance to Palau. Our analysis shows that adjusting
for inflation and reducing fiscal consolidation fund as outlined in
H.R. 6040, the value of U.S. contributions would increase approximately
$12 million.
---------------------------------------------------------------------------
Extends a pledge of the full faith and credit of the
United States for the full payment of the amounts necessary to
conduct the audits of the assistance provided, as called for
under the Agreement.\36\
---------------------------------------------------------------------------
\36\ Under the Agreement, the Government of Palau is to bear the
cost of these audits. According to an Interior official, the cost of
the audits is approximately $500,000 per year.
---------------------------------------------------------------------------
In addition, the Senate and House bills implementing the Agreement
would amend the sections of the Agreement that extend the authority for
the provision of compact federal services and discretionary programs in
Palau. The proposed Senate and House legislation would authorize annual
appropriations for weather and aviation services.\37\ The proposed
Senate and House legislation would extend the eligibility of the
people, government, and institutions of Palau for certain discretionary
programs, including special education and Pell grants.\38\ However, the
proposed bills differ in how they would authorize appropriations to
subsidize postal service to Palau, the Republic of the Marshall
Islands, and the Federated States of Micronesia. The Senate legislation
would have authorized appropriations of $1.5 million to Interior for
2011 through 2024, to subsidize postal services provided by the U.S.
Postal Service.\39\ The proposed House legislation would authorize
appropriations of $1.5 million to Interior beginning in 2012 and
through 2024, to subsidize postal services. Under the proposed House
bill, Interior would be authorized to transfer these funds to the U.S.
Postal Service under the condition that domestic postage may be used
for mail to these countries.\40\
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\37\ S. 343 as introduced in the Senate and H.R. 6040 as introduced
in the House.
\38\ Ibid.
\39\ S. 343.
\40\ H.R. 6040.
---------------------------------------------------------------------------
Chairman Fleming, Ranking Member Sablan, and Members of the
Subcommittee, this completes my prepared statement. I would be happy to
respond to any questions you may have at this time.
GAO Contact and Staff Acknowledgments
For further information about this statement, please contact David
Gootnick at (202) 512-3149 or [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this statement.
Emil Friberg (Assistant Director), Ming Chen, David Dayton, Brian
Hackney, Reid Lowe, Grace Lui, and Valerie L. Nowak made key
contributions to this statement. Robert Alarapon, Benjamin Bolitzer,
Rhonda Horried, Farahnaaz Khakoo, Jeremy Sebest, Cynthia Taylor, and
Anu Mittal provided technical assistance.
This is a work of the U.S. government and is not subject to
copyright protection in the United States. The published product may be
reproduced and distributed in its entirety without further permission
from GAO. However, because this work may contain copyrighted images or
other material, permission from the copyright holder may be necessary
if you wish to reproduce this material separately.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
GAO's Mission
The Government Accountability Office, the audit, evaluation, and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
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to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
______
HIGHLIGHTS
September 10, 2012
COMPACT OF FREE ASSOCIATION
Proposed U.S. Assistance to Palau through Fiscal Year 2024
Why GAO Did This Study
The Compact of Free Association between the United States and the
Republic of Palau, which entered into force in 1994, provided for
several types of assistance aimed at promoting Palau's self-sufficiency
and economic advancement. Included were 15 years of direct assistance
to the Palau government; contributions to a trust fund meant to provide
Palau $15 million each year in fiscal years 2010 through 2044;
construction of a road system, known as the Compact Road; and federal
services such as postal, weather, and aviation. U.S. agencies also
provided discretionary federal programs related to health, education,
and infrastructure. In 2008, GAO projected that total assistance in
fiscal years 1994 through 2009 would exceed $852 million.
In September 2010, the United States and Palau signed an agreement
(the Agreement) that would, among other things, provide for additional
assistance to Palau beginning in fiscal year 2011 and modify its trust
fund. Currently, there are two bills pending before Congress to
implement the Agreement.
In this testimony, GAO updates a November 2011 testimony on (1) the
Agreement's provisions for economic assistance to Palau, (2) its impact
on the trust fund's likelihood of sustaining scheduled payments through
fiscal year 2044, (3) the projected role of U.S. assistance in Palau
government revenues, and (4) the pending legislation to implement the
Agreement. GAO reviewed current trust fund data and new pending
legislation for this testimony.
What GAO Found
The Agreement would provide decreasing assistance, totaling
approximately $215 million through fiscal year 2024 and includes the
following:
direct economic assistance ($107.5 million) for Palau
government operations;
infrastructure project grants ($40 million) to build
mutually agreed projects;
infrastructure maintenance fund ($28 million) for
maintaining the Compact Road, Palau's primary airport, and
certain other major U.S.-funded projects;
fiscal consolidation fund ($10 million) to assist
Palau in debt reduction; and
trust fund contributions ($30.25 million) in addition
to the $70 million contributed under the compact
Assistance to Palau Specified in the Agreement
Notes: All dollar amounts are in nominal dollars (i.e., unadjusted
for inflation). Funds were not provided in fiscal years 2011 or 2012 to
date for infrastructure projects, the infrastructure maintenance fund,
or the fiscal consolidation fund.
Under the Agreement, the United States would contribute to the
trust fund in fiscal years 2013 through 2023, and Palau would reduce
its withdrawals by $89 million in fiscal years 2010 through 2023. GAO
projects that the fund would have a 90 percent likelihood of sustaining
payments through fiscal year 2044 with these changes, versus 40 percent
without these changes.
Estimates prepared for the Palau government project declining
reliance on U.S. assistance under the Agreement--from 28 percent of
government revenue in fiscal year 2011 to 2 percent in fiscal year
2024--and growing reliance on trust fund withdrawals and domestic
revenues. The estimates show trust fund withdrawals rising from 5
percent to 24 percent and domestic revenues rising from 40 to 59
percent, of total government revenue. According to the estimates, U.S.
assistance in fiscal years 2011 through 2024 would total $427 million,
with discretionary federal programs accounting for about half of that
amount.
Congress has not approved legislation to implement the Agreement as
of September 2012. Pending Senate legislation would implement the
Agreement and appropriate funds to do so. Pending House legislation
would implement the agreement, apply an inflation adjustment to
assistance payments, and shift the timing of certain assistance
payments to reflect the fact that 2011 has passed.
______
Dr. Fleming. All kidding aside, we do appreciate the time
and effort that you put into your testimonies, and I realize
sometimes it is difficult to get it all in timely. At this
point, we will begin Member questioning of witnesses. To allow
all Members to participate and ensure we hear from all of our
witnesses today, Members are limited to 5 minutes for their
questions. However, if Members have additional questions, we
can have more than one round of questioning and we usually do.
I now recognize myself for 5 minutes.
Free association did not exist before it was used for the
Republic of Palau and the other two compacts with the Republic
of the Marshall Islands and Federated States of Micronesia. Can
either Secretary here today discuss why this type of
association was agreed to by the United States? And a second
part of that question, was it the intent of the Compact for the
United States to provide funding to Palau for the life of the
Compact outside of the trust fund?
Mr. Babauta. I will attempt to answer the question, Mr.
Chairman. As I understand the history of the trust territories
and eventually maturing to a point they were granted free
association which is the relationship between us and them. It
was the United States responsibility at the time----
Dr. Fleming. Make sure your mic is close to you.
Mr. Babauta. It was my understanding the United States took
on the responsibility shortly after World War II and it
received those areas that were designated as trust territories
of the Pacific Islands under the United Nations with an
agreement that under the United States, our country would
attempt to assist them to a point where they are mature
politically and can seek a different status, a different
relationship. As you know we have the three freely associated
states and the Commonwealth of the Northern Mariana Islands and
they elected to go a different route in its maturation process.
Dr. Fleming. OK. It was the intent of the Compact, I am not
sure if I heard----
Mr. Babauta. About funding outside?
Dr. Fleming. About the funding outside of the trust fund?
Mr. Babauta. I would not know the answer to that question,
sir.
Dr. Fleming. Secretary Kagan?
Mr. Kagan. Unfortunately Mr. Chairman I don't know the
answer either in terms of what the original intent was, but we
would certainly be happy to go and look for that to get you a
good answer.
Dr. Fleming. Yes, I would appreciate you getting back to
us. Again, for historical perspective, really all three
compacts, Marshall Islands, Micronesia and Palau were very
important areas during World War II. Micronesia, Palau were
great staging areas for bombing, and they prove even today to
be very important strategic areas. And so this is certainly
something that we need to focus on.
Secretary Babauta, you mentioned in your testimony that
Palau has made strong economic gains under the Compact that its
growth in real terms has averaged over 2 percent per year,
which really looks pretty good compared to what we are seeing
today on Conis. And Palau's governmental services are a meeting
the needs of the community. What funding or revenue support
these Palau government services, local revenues our outside
funding?
Mr. Babauta. Well, under the new agreement, sir?
Dr. Fleming. Well, I guess really what I am asking about is
the economy itself, it has 2 percent GDP growth right? So what
is sustaining that? Is this outside flow of money? Is this
growth in the economy internally? What is driving that GDP?
Mr. Babauta. What is driving Palau's economy is tourism.
Back in 2005, when we turned over the Compact road to them, at
the time, Palau was receiving tourists at 76,000 per year. I
just recently went to Palau in the beginning of August and
talked to their leadership and President Toribiong. And they
report now their tourism is up at 110,000 tourists per year.
And they have managed to contain their government growth so
that they are able to provide money for education in the
community college and make the right investments to take care
of their people.
Dr. Fleming. And where are the bulk of visitors coming
from?
Mr. Babauta. They actually come from all over, sir. I think
the most recent spike in their tourism has been from China, but
generally, it is one of the top five dive spots in the world so
they are frequented from visitors all over the globe.
Dr. Fleming. I recall back in the day, Japanese visitors
were the main source. I guess it has changed over to Chinese
visitors. Is it still a very sought after scuba diving haven?
Mr. Babauta. I have not scuba dived there yet, but yes,
apparently with their visitors who frequent there yes, it still
is.
Dr. Fleming. Well, it is legendary in its scuba diving and
I myself never got make it there, even though I was fairly
close. Well, these are important things, we will revisit some
of them in a moment when we get back to our second round. Every
time we start these trust funds and we have this flow of money
to various islands, island states around the world, it is
obviously important that we create a sustainable economy, and
that is certainly something that we will need to focus on more
in these discussions. I now yield to gentleman, Mr. Sablan, for
5 minutes.
Mr. Sablan. Thank you very much, Mr. Chairman. And let me
just say something, while it may not be written in the law on
the intention to continue reviewing and continue to provide
assistance to the Republic of Palau, I think there is this
spirit of the arrangement, the Compact arrangements that the
United States would look at ways to assist the Republic of
Palau and their needs in the 15-, 30-, and 40-year period.
Mr. Chairman, coming from an islander, I learned how to
scuba dive just to dive in Palau, so we should all go out there
together, sir, and I will watch you dive.
Welcome, Secretary Babauta, Secretary Kagan and Dr.
Gootnick. Let me start with you, Secretary Kagan. The Compact
provides that the United States will conduct audits at once of
its compact assistance. It says the agreement now shifts the
costs to Palau. I understand that this provision doesn't exist
with the Republic, for the Marshalls and the Federated States
of Micronesia, so the cost can be less than $500,000 for an
audit.
So wouldn't it be in our best interest for the United
States, would we have a greater assurance of getting the audits
at once if the United States continued to provide for these
audits? And why should Palau have greater responsibility for
audits of the used funds that the U.S. wants than the other two
freely associated states?
Mr. Kagan. Mr. Sablan, thank you very much for the
question, it is an excellent question, and reflects your focus
and understanding of these issues. I think the first thing I
would say is that while obviously the three Compact states
share a number of similarities, from our standpoint we do
believe that it is very important to treat them separately for
a number of reasons having do with different circumstances in
each country as well as obviously the different histories of
our engagement there.
In terms of specific provisions, I should note we strongly
support the regular audits, and these audits we think have been
very effective at promoting our shared interest ensuring
efficient use of Compact funds. As to the question of cost,
this was something that was negotiated between us. There were
obviously discussions on this, and I think that the, very
fundamentally, I think the feeling was that this reflected some
of the circumstances that evolved in the last 15 years.
You know, we believe that Palau has a very strong
commitment to ensuring transparency and integrity in the use of
Compact funds and don't believe that this is a particular
challenge in terms of the possibility that shifting the burden
of cost might lead to a change in the audit.
Mr. Sablan. I am going to run out of time, Secretary, and
that is why you are the diplomat here. Let me say something,
you are speaking to a Micronesian, and $500,000 is a lot of
money anywhere, but $500,000 for a small country like Palau is
a huge amount of money that they could use better. So I am
asking, why are you treating them differently than you do the
Republic of Marshall or FSM? That is a concern I have and could
we eventually get an answer?
My second issue here, Secretary Kagan, is that the
Department of State is concerned about specific provisions in
the bill and that the bill would extend benefits and funding to
Palau that would run counter to the carefully calibrated goals
of the Administration and the negotiations. The provisions to
which you refer are continuations of provisions of the Compact,
similar to provisions included in the revised compacts with the
other two freely associated nations negotiated by the Executive
Branch, approved by Republican Congress in 2003. And in one
case, through a Congressional addition to the negotiated
revised compacts, there are millions more in costs that would
not add to the cost of the bill and would be offsetting costs
by the intended amount of offsets to the bill.
My understanding, sir, is that the negotiators for the
Republic of Palau were just ready to throw their arms up
because of the negotiating tactics and things like that. But
what consideration does the Administration's carefully
calibrated goals give to those factors, outside related to the
provisions to which you referred, would you recommend to veto
the bill with this provision? And do you think the Department
would? The additions to the bill separate from the negotiated
bill, the agreement?
Mr. Kagan. I think that our view is first that this was
negotiated over some period of time, and I think it is usual in
negotiations for both sides at times to be frustrated with the
other. I think we are happy that we have reached agreement and
there was strong support both by the Government of Palau and by
the Administration. Our view is that in doing this, as in any
negotiation, there were trade-offs that were made on a variety
of issues, and we believed the resulting agreement was one that
reflected those trade-offs accurately. As I said before, we do
have concerns about this. As to your final question, I would
note we stand ready to work with the Committee and with Members
to address those. Obviously we very strongly support----
Mr. Sablan. Thank you. Because in exchange for this
agreement we have--our relationship with Palau is significant
in terms of the United States national security interest in the
Pacific. It starts at Hawaii and goes all the way up to the
Northern Marianas and up to Okinawa in Japan and the
Philippines. I will yield back the balance of my time to the
second round of questions. Thank you. Thank you, Secretary.
Dr. Fleming. The gentleman yields back. Mr. Faleomavaega
you have 5 minutes, sir.
Mr. Faleomavaega. Thank you, Mr. Chairman, and our Ranking
Member for your leadership and initiative in calling this
important hearing concerning the proposed legislation we are
now considering. I want to focus specifically on H.R. 6040,
which is concerning the Palau situation.
Mr. Chairman, I would like unanimous consent to have the
full text of my statement be made part of the record.
Dr. Fleming. I am sorry, sir I didn't hear.
Mr. Faleomavaega. I would like to request that the full
text of my statement be made a part of the record.
Dr. Fleming. Without objection, so ordered.
[The prepared statement of Mr. Faleomavaega follows:]
Statement of The Honorable Eni F.H. Faleomavaega, a Delegate in
Congress from American Samoa
Mr. Chairman:
Thank you and our Ranking Member, Mr. Sablan, for your leadership
in holding today's hearing on this important legislation to continue
free association with Palau through Fiscal Year 2024. Enactment of this
legislation without further delay is imperative for security,
diplomatic, and economic reasons.
As Ranking Member of the Foreign Affairs' Subcommittee on Asia and
the Pacific, I co-authored H.R. 6040 with Chairman Manzullo. For the
record, fourteen other Members have joined us as original co-sponsors.
Seven Members of the Subcommittee on Fisheries, Wildlife, Oceans and
Insular Affairs have formally supported the bill.
H.R. 6040 would approve and slightly modify terms for continuing
free association with Palau developed pursuant to the Compact of Free
Association negotiated by the Reagan Administration and approved by law
under the George H.W. Bush Administration. The Department of Defense
has written to the Congress that ``[f]ailure to follow through on our
commitments to Palau, as reflected in the proposed legislation, would
jeopardize our defense posture in the Western Pacific''.
According to the DoD, Palau is ``irreplaceable'' because the
islands cover a strategic expanse of the Pacific as big as Texas. The
Compact right of the United States to deny access to other nations
prevents countries like China from using sea-lanes that needs for
economic and military expansion. The Pentagon has made this very clear
with a translation of a Chinese sea strategy map, which I include with
this statement. It shows Palau as a key link in an island chain running
from Japan down to Indonesia that China wants to break through. It has
no chance, other than if the Congress fails to approve this bill. If we
fail to do so, China will fill the gap and shatter the chain of defense
by offering their own kind of assistance to Palau.
The Department of State has similarly written that continuing free
association with Palau is ``vital'' for the United States. It is
important to know that Palau votes with the U.S. in the United Nations
more than any other member. This is critical on issues such as those
concerning Israel and Cuba on which we would otherwise be isolated. The
Arab League and Cuba have offered Palau aid in return for changing its
votes. But as you know, the current administration in Palau has
declined, standing firmly with the United States.
Under the Compact, the decision of whether to continue free
association and Palau's U.S. assistance needs through FY 2024 were to
be determined in a bilateral review and was implemented in FY 2010.
However, the review was not completed until two years ago. It settled
upon a phase out of direct assistance, which would total much less than
during the first period of free association, in contrast to the
substantial increases agreed to by the George W. Bush Administration
and the Republican Congress in 2003 in the revised compacts with the
two other freely associated states.
Leaders on both sides of the aisle on both sides of the Capitol
have expressed strong support for legislation to provide at least what
was agreed to in the review and no Member of Congress has questioned
it.
The Administration's draft bill did not include measures to offset
the cost. After being pressed for such measures, it suggested proposals
that Ranking Member Markey as well as Chairman Hastings said could
still not pass the Committee on Natural Resources, their counterparts
in the Senate committee agreed that they were not viable, and chairmen
of both appropriations committees also agreed that the offsets were not
acceptable.
Chairman Manzullo introduced new legislation with other offsets.
One is in the Foreign Affairs bill before you and is agreed to by the
Senate. It is intended to more than cover the costs of the bill and
would make this a net savings measure. The Speaker and the Majority
Leader are now discussing the options with Foreign Affairs Chairwoman
Ros-Lehtinen and Manzullo to enable the bill to pass the House as soon
as possible.
They understand that the long delay has led some Palauans to
question the Compact Review Agreement and the commitment of the United
States to the association and the serious potential losses for our
country, especially under the full faith and credit clause of the U.S.
constitution.
The Compact was not approved in Palau until the Congress under
President George H. W. Bush added some provisions to the negotiated
Compact to address Palauan concerns. In fact, all free association
agreement laws to date have had such provisions.
H.R. 6040 includes only a few but they are very much needed. They
address concerns increasingly raised by Palauans and are prudent since
Palau, too, needs to approve the Agreement. Members of Congress said
these provisions should be included in the Agreement when it was being
negotiated. The provisions would be consistent with the Agreement to
the Compact and also include the revised compacts approved by the
Republican Congress in 2003. The bill's cost offset is intended to more
than make up for the cost.
Mr. Chairman, these provisions are modest, well justified, and
precedented. They perfect a very good Agreement. I respectfully urge
you to act so that the bill can be enacted into law very soon as it
needs to be in the interests of our great nation.
______
Mr. Faleomavaega. Thank you. I have listened with
tremendous interest in terms of the statements made by our
friends from the Interior Department, and also from the State
Department, quite complimentary, and all have stated a sense
that Palau and this region of the world is vitally important to
the interest of the United States.
Mr. Chairman, I submit I just wish the rhetoric would match
the substance in terms of how we really have been treating
these island countries of this region.
With all due respect, Secretary Kagan, since you are new on
the job, I have been very, very disappointed, both Democratic
and Republican Administrations have never really taken the
Pacific Island countries of this region of the world seriously.
The only real foreign policy we have toward this region, Mr.
Chairman, is really toward New Zealand and Australia. These
island countries are only incidental to our foreign policy,
which we have no foreign policy for the Pacific Island
countries. It is primarily toward New Zealand and Australia.
The question that the Chairman raised earlier, the reason
why we have authority over these islands was specifically after
World War II, unilaterally we just declared this region as a
strategic trust. With or without the United Nations' approval,
we just took over. It was vital and it was part of our
strategic and military interest, that is the reason why we are
there, that is the reason why we ended up with three Compact
associations because the Russians and the Cubans and the
Communists in the United Nations were constantly criticizing
the United States for having a colonial rule over the island
countries. So rather than continue the trust territory, the
Pacific Islands, we negotiated these Compacts of Free
Association and we have three entities: Republic of the
Marshall Islands, Federated States of Micronesia, and the
Republic of Palau.
So now, what is it that we have? Primarily our number one
priority is to make sure that our strategic and military
interests are protected. It is not because of these islands
have oil and gas or resources and such that we have any real
economic interest, it is primarily strategic and military. And
I will say that I am utterly disappointed, the fact that for 2
years we have been dragging this issue, finally having to come
to the Congress to do something by trying to find some sort of
offsets to meet the requirements that we have under the terms
of the Compact.
My understanding Mr. Chairman, the U.S. Constitution
pledges its full faith in credit clauses in whatever the
government of the United States has obligations, and one is
toward Palau as part of the Compact agreements that we had with
this country, guaranteeing our presence in times of war and
emergency for 50 years that we could use Palau. And I might
also add, Mr. Chairman, that this issue is very critical when
we are looking at the South China Sea, and the issues we are
now confronted with China and all the problems with the Asian
countries, I think the question that we have now that we have
to answer, is Palau relevant to our overall strategic and
military interest right now in the Pacific? And I say, Mr.
Chairman, it better be, because right now a lot of Palauan
leaders are seriously questioning the integrity of our own
government whether or not we are willing to fulfill our
obligations and commitments financially in terms of what we
agreed upon in terms of the Compact.
I realize my time is up, Mr. Chairman. I haven't had a
chance to even ask one question, but I really, really thank you
for your leadership and wanted to see this through. But I have
about 100 questions that I want to wait for the second round. I
just want to give that as an opener, and my real concern, Mr.
Chairman, is that we are not paying enough attention. So we
don't even have USAID presence, if we did it was only a million
dollars for the budget, Mr. Kagan, while China has a $600
million economic development program for these island nations.
Do you think they are stupid not to realize that we really
don't care, we really don't have interest except for New
Zealand and Australia, that is basically our foreign policy
toward the Pacific. I am sorry, Mr. Chairman, I will wait for
the second round.
Dr. Fleming. I thank the gentleman. I believe the gentleman
has framed the issue very well. The Chairman now recognizes Ms.
Bordallo the gentlelady from Guam.
Ms. Bordallo. Thank you, Mr. Chairman. I ask unanimous
consent that an August 1st article from The Washington Post
entitled, ``U.S. Model For a Future War Fans Tensions With
China and Inside Pentagon,'' as well as an accompanied map
illustrating the U.S. force posture in the Asia-Pacific region
be included in the record. I believe this article and map
highlight the importance of why we need to pass the Compact
renewal with Palau.
Dr. Fleming. We have a copy of that.
Ms. Bordallo. I hope this doesn't cost me time.
Dr. Fleming. We will reset the time for the gentlelady.
Without objection so ordered so approved.
[The article and maps follow:]
The Washington Post Company
U.S. model for a future war fans tensions with China and inside
Pentagon
By Greg Jaffe, Published: August 1, 2012
When President Obama called on the U.S. military to shift its focus
to Asia earlier this year, Andrew Marshall, a 91-year-old futurist, had
a vision of what to do.
Marshall's small office in the Pentagon has spent the past two
decades planning for a war against an angry, aggressive and heavily
armed China.
No one had any idea how the war would start. But the American
response, laid out in a concept that one of Marshall's longtime
proteges dubbed ``Air-Sea Battle,'' was clear.
Stealthy American bombers and submarines would knock out China's
long-range surveillance radar and precision missile systems located
deep inside the country. The initial ``blinding campaign'' would be
followed by a larger air and naval assault.
The concept, the details of which are classified, has angered the
Chinese military and has been pilloried by some Army and Marine Corps
officers as excessively expensive. Some Asia analysts worry that
conventional strikes aimed at China could spark a nuclear war.
Air-Sea Battle drew little attention when U.S. troops were fighting
and dying in large numbers in Iraq and Afghanistan. Now the military's
decade of battling insurgencies is ending, defense budgets are being
cut, and top military officials, ordered to pivot toward Asia, are
looking to Marshall's office for ideas.
In recent months, the Air Force and Navy have come up with more
than 200 initiatives they say they need to realize Air-Sea Battle. The
list emerged, in part, from war games conducted by Marshall's office
and includes new weaponry and proposals to deepen cooperation between
the Navy and the Air Force.
A former nuclear strategist, Marshall has spent the past 40 years
running the Pentagon's Office of Net Assessment, searching for
potential threats to American dominance. In the process, he has built a
network of allies in Congress, in the defense industry, at think tanks
and at the Pentagon that amounts to a permanent Washington bureaucracy.
While Marshall's backers praise his office as a place where
officials take the long view, ignoring passing Pentagon fads, critics
see a dangerous tendency toward alarmism that is exaggerating the China
threat to drive up defense spending.
``The old joke about the Office of Net Assessment is that it should
be called the Office of Threat Inflation,'' said Barry Posen, director
of the MIT Security Studies Program. ``They go well beyond exploring
the worst cases. . . . They convince others to act as if the worst
cases are inevitable.''
Marshall dismisses criticism that his office focuses too much on
China as a future enemy, saying it is the Pentagon's job to ponder
worst-case scenarios.
``We tend to look at not very happy futures,'' he said in a recent
interview.
China tensions
Even as it has embraced Air-Sea Battle, the Pentagon has struggled
to explain it without inflaming already tense relations with China. The
result has been an information vacuum that has sown confusion and
controversy.
Senior Chinese military officials warn that the Pentagon's new
effort could spark an arms race.
``If the U.S. military develops Air-Sea Battle to deal with the
[People's Liberation Army], the PLA will be forced to develop anti-Air-
Sea Battle,'' one officer, Col. Gaoyue Fan, said last year in a debate
sponsored by the Center for Strategic and International Studies, a
defense think tank.
Pentagon officials counter that the concept is focused solely on
defeating precision missile systems.
``It's not about a specific actor,'' a senior defense official told
reporters last year. ``It is not about a specific regime.''
The heads of the Air Force and Navy, meanwhile, have maintained
that Air-Sea Battle has applications even beyond combat. The concept
could help the military reach melting ice caps in the Arctic Circle or
a melted-down nuclear reactor in Japan, Adm. Jonathan Greenert, the
U.S. chief of naval operations, said in May at the Brookings
Institution.
At the same event, Gen. Norton Schwartz, the Air Force chief,
upbraided a retired Marine colonel who asked how Air-Sea Battle might
be employed in a war with China.
``This inclination to narrow down on a particular scenario is
unhelpful,'' Schwartz said.
Privately, senior Pentagon officials concede that Air-Sea Battle's
goal is to help U.S. forces weather an initial Chinese assault and
counterattack to destroy sophisticated radar and missile systems built
to keep U.S. ships away from China's coastline.
Their concern is fueled by the steady growth in China's defense
spending, which has increased to as much as $180 billion a year, or
about one-third of the Pentagon's budget, and China's increasingly
aggressive behavior in the South China Sea.
``We want to put enough uncertainty in the minds of Chinese
military planners that they would not want to take us on,'' said a
senior Navy official overseeing the service's modernization efforts.
``Air-Sea Battle is all about convincing the Chinese that we will win
this competition.''
Like others quoted in this article, the official spoke on the
condition of anonymity because of the sensitivity of the subject.
A military tech `revolution'
Air-Sea Battle grew out of Marshall's fervent belief, dating to the
1980s, that technological advancements were on the verge of ushering in
a new epoch of war.
New information technology allowed militaries to fire within
seconds of finding the enemy. Better precision bombs guaranteed that
the Americans could hit their targets almost every time. Together these
advances could give conventional bombs almost the same power as small
nuclear weapons, Marshall surmised.
Marshall asked his military assistant, a bright officer with a
Harvard doctorate, to draft a series of papers on the coming
``revolution in military affairs.'' The work captured the interest of
dozens of generals and several defense secretaries.
Eventually, senior military leaders, consumed by bloody, low-tech
wars in Iraq and Afghanistan, seemed to forget about Marshall's
revolution. Marshall, meanwhile, zeroed in on China as the country most
likely to exploit the revolution in military affairs and supplant the
United States' position as the world's sole superpower.
In recent years, as the growth of China's military has outpaced
most U.S. intelligence projections, interest in China as a potential
rival to the United States has soared.
``In the blink of an eye, people have come to take very seriously
the China threat,'' said Andrew Hoehn, a senior vice president at Rand
Corp. ``They've made very rapid progress.''
Most of Marshall's writings over the past four decades are
classified. He almost never speaks in public and even in private
meetings is known for his long stretches of silence.
His influence grows largely out of his study budget, which in
recent years has floated between $13 million and $19 million and is
frequently allocated to think tanks, defense consultants and academics
with close ties to his office. More than half the money typically goes
to six firms.
Among the largest recipients is the Center for Strategic and
Budgetary Assessments, a defense think tank run by retired Lt. Col.
Andrew Krepinevich, the Harvard graduate who wrote the first papers for
Marshall on the revolution in military affairs.
In the past 15 years, CSBA has run more than two dozen China war
games for Marshall's office and written dozens of studies. The think
tank typically collects about $2.75 million to $3 million a year, about
40 percent of its annual revenue, from Marshall's office, according to
Pentagon statistics and CSBA's most recent financial filings.
Krepinevich makes about $865,000 in salary and benefits, or almost
double the compensation paid out to the heads of other nonpartisan
think tanks such as the Center for Strategic and International Studies
and the Brookings Institution. CSBA said its board sets executive
compensation based on a review of salaries at other organizations doing
similar work.
The war games run by CSBA are set 20 years in the future and cast
China as a hegemonic and aggressive enemy. Guided anti-ship missiles
sink U.S. aircraft carriers and other surface ships. Simultaneous
Chinese strikes destroy American air bases, making it impossible for
the U.S. military to launch its fighter jets. The outnumbered American
force fights back with conventional strikes on China's mainland,
knocking out long-range precision missiles and radar.
``The fundamental problem is the same one that the Soviets
identified 30 years ago,'' Krepinevich said in an interview. ``If you
can see deep and shoot deep with a high degree of accuracy, our large
bases are not sanctuaries. They are targets.''
Some critics doubt that China, which owns $1.6 trillion in U.S.
debt and depends heavily on the American economy, would strike U.S.
forces out of the blue.
``It is absolutely fraudulent,'' said Jonathan D. Pollack, a senior
fellow at Brookings. ``What is the imaginable context or scenario for
this attack?''
Other defense analysts warn that an assault on the Chinese mainland
carries potentially catastrophic risks and could quickly escalate to
nuclear armageddon.
The war games elided these concerns. Instead they focused on how
U.S. forces would weather the initial Chinese missile salvo and attack.
To survive, allied commanders dispersed their planes to austere
airfields on the Pacific Islands of Tinian and Palau. They built bomb-
resistant aircraft shelters and brought in rapid runway repair kits to
fix damaged airstrips.
Stealthy bombers and quiet submarines waged a counterattack. The
allied approach became the basis for the Air-Sea Battle.
Think tank's paper
Although the Pentagon has struggled to talk publicly about Air-Sea
Battle, CSBA has not been similarly restrained. In 2010, it published a
125-page paper outlining how the concept could be used to fight a war
with China.
The paper contains less detail than the classified Pentagon
version. Shortly after its publication, U.S. allies in Asia, frustrated
by the Pentagon's silence on the subject, began looking to CSBA for
answers.
``We started to get a parade of senior people, particularly from
Japan, though also Taiwan and to a lesser extent China, saying, `So,
this is what Air-Sea Battle is,'?'' Krepinevich said this year at an
event at another think tank.
Soon, U.S. officials began to hear complaints.
``The PLA went nuts,'' said a U.S. official who recently returned
from Beijing.
Told that Air-Sea Battle was not aimed at China, one PLA general
replied that the CSBA report mentioned the PLA 190 times, the official
said. (The actual count is closer to 400.)
Inside the Pentagon, the Army and Marine Corps have mounted
offensives against the concept, which could lead to less spending on
ground combat.
An internal assessment, prepared for the Marine Corps commandant
and obtained by The Washington Post, warns that ``an Air-Sea Battle-
focused Navy and Air Force would be preposterously expensive to build
in peace time'' and would result in ``incalculable human and economic
destruction'' if ever used in a major war with China.
The concept, however, aligns with Obama's broader effort to shift
the U.S. military's focus toward Asia and provides a framework for
preserving some of the Pentagon's most sophisticated weapons programs,
many of which have strong backing in Congress.
Sens. Joseph I. Lieberman (I-Conn.) and John Cornyn (R-Tex.)
inserted language into the 2012 Defense Authorization bill requiring
the Pentagon to issue a report this year detailing its plans for
implementing the concept. The legislation orders the Pentagon to
explain what weapons systems it will need to carry out Air-Sea Battle,
its timeline for implementing the concept and an estimate of the costs
associated with it.
Lieberman and Cornyn's staff turned to an unsurprising source when
drafting the questions.
``We asked CSBA for help,'' one of the staffers said. ``In a lot of
ways, they created it.''
Julie Tate contributed to this report.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Ms. Bordallo. Thank you. Secretary Kagan, I have a question
for you, the Palau Compact adjusted certain amounts of U.S.
assistance over time to split the cost of the diminished value
between the U.S. and Palau. Now this was prudent for a measure
that determines assistance for a long period of time. The
Republican Congress in 2003 expanded the adjustment in the
negotiated revised Compacts with the other two freely
associated states. However, H.R. 6040 only includes the partial
adjustment factor included in the Compact with Palau.
The Economist cited by the GAO has calculated that the cost
would be less than $1 million a year, using the CBO formula.
This is intended by H.R. 6040 to be more than made up by the
bill's cost offset. Congress urged the Administration to
include a cost adjustment provision in the agreement strongly
desired by Palau. The lack of such a provision casts doubt
whether the agreement could have obtained Palau acceptance. Can
you elaborate why the Administration didn't agree to include a
cost adjustment provision in the agreement, especially after
Congress added one in 2003, and Congress said one would be
needed?
Mr. Kagan. Thank you, Madam Bordallo. Thank you very much
for the question, Madam Bordallo. I think this goes back to
what we discussed before, which is that the overall package
which was negotiated between the United States and the
Government of Palau was one that was carefully calibrated to
address a variety of concerns as was foreseen in the original
15-year review period. We believe that the resulting agreement
is one that accurately reflects the changes in Palau and is one
that has been accepted by both governments. We obviously
believe that the Government of Palau supports this agreement
and are confident that once there is action in the United
States that we are confident that Palau will accept it.
As to the intent, I think the reason was that there was a
feeling that Palau circumstances had evolved to a point where
this approach now was appropriate. Clearly, our goal in doing
negotiations was to safeguard broader U.S. interests, including
trying to ensure the appropriate compensation was provided to
Palau under the terms of the agreement. Now obviously, this is
something that it reflects the different circumstances that
prevailed with the other Compact states, but we believe this is
one that is appropriate and is fair.
Ms. Bordallo. You say the Palau government agrees?
Mr. Kagan. Yes, the Palau government agrees.
Ms. Bordallo. This could be Secretary Babauta or Secretary
Kagan, we all know that Palau is an important strategic ally to
the United States. We should remember the thousands of
Americans paid the ultimate sacrifice to free Palau from
Japanese rule. The Compact about the security of America in the
Pacific region, in the Asia-Pacific region, this capability
directly aligns with the President's broader, military
diplomatic strategy for the region. So my colleagues and I want
to get a Palau Compact passed. Can we expect engagement from
the Administration on offset so that we can pass this Compact
during this Congress? Also, with the delays in passing the
Compact, what message does that send to our allies in the
region? And what diplomatic or political capital have we lost
in not passing the agreement?
Mr. Kagan. Again, thank you very much for the question
which I think goes to the very heart of the why the
Administration very strongly supports prompt action to pass the
Compact, the extension. We believe that failure to move forward
has significant costs not just for our relationship with Palau,
but in a region where people look very closely at how we treat
our friends. So I fully agree with you and fully agree with Mr.
Faleomavaega before that about the need for prompt action. We
stand ready to engage and engage very actively to find
appropriate offsets, I believe we have done that and we will
continue to do so.
Ms. Bordallo. I did ask do you think it will be passed
during this Congress?
Mr. Kagan. It is not for me to speak as to what the
Congress will do.
Ms. Bordallo. Would you be ready?
Mr. Kagan. We stand ready to engage, we strongly support
prompt action and will do whatever we can to support it.
Ms. Bordallo. Thank you. Mr. Chairman, are we going to have
a second round on this?
Dr. Fleming. Indeed.
Ms. Bordallo. Good. I yield back.
Dr. Fleming. The gentlelady yields her time back. I think
our panel seems up to it, so we will begin our second round
here. You can tell this is all very engaging and important
information.
Secretary Kagan, both Mr. Sablan and Ms. Bordallo raised
concerns, time not included in the Compact, for H.R. 6040. Are
the annual audits, inflation rates and U.S. Postal Service's
subsidy language being tied to national rates? The added
benefits you mentioned in your testimony. Are these the only
added benefits? Tell us more about that. Can you expand upon
that because obviously there are a lot of questions about that
in the hearing?
Mr. Kagan. Certainly, Mr. Chairman. As you said, we welcome
this opportunity to engage and discuss because we recognize
that your role in this is critical and we want to try to be as
supportive as possible.
I think that our position is this was very painstakingly
negotiated. As I said, there is a balance between the different
elements. Both sides had to give as well as take. I think our
view is we strongly object to Section 105(e)3.
We made a deliberate decision to negotiate the compact
review agreement as an amendment for several reasons. And one
of these had to do with the desire not to extend the full faith
and credit of the United States the obligations contained in
the Compact. We believe that this is something that is very
much in our interest. We do look forward to a continued
discussion on this.
We also object to the application of Section 215 of the
Compact to the funding commitments in the agreement on the
partial inflation adjustment.
I think that this is in part because of the higher total
dollar costs and also in part because, again, of maintaining
the balance within the different elements of the Compact.
Dr. Fleming. Let me interrupt you because we are all
limited in time.
So, in answer to my question, you read me language from the
bill. I just want to get clarification here. These three
things: Inflation adjustments; tie the U.S. Postal Service
subsidy to retaining domestic U.S. postal rates; and require
the U.S. to pay for annual audits. Do you support that? Does
the Administration support that or not?
Mr. Kagan. Our view is we do not support the inflation
adjustment. I defer to my colleague, Assistant Secretary
Babauta on the postal rates. And on the audits, we believe that
this is fair and appropriate and support the idea of
transferring the financial responsibility for this to Palau.
But again, we stand ready to remain engaged with the Committee
because our goal is to reach prompt agreement so that we can
have prompt action to pass the legislation.
Dr. Fleming. Mr. Babauta.
Mr. Babauta. Mr. Chairman, I join my colleague, Mr. Kagan,
on his thoughts with respect to the audit and who is going to
pay for the cost of the audit. That is something I am trying to
recall the negotiations themselves in Hawaii, where I was
present, exactly why it fell on Palau, and we are happy to get
back to you on exactly why that happened. An inflation
adjustment wasn't part of the finalized negotiated agreement
with Palau, and the language that is referenced in H.R. 6040,
which was amended by the Foreign Affairs Committee, the
renegotiated agreement with the RMI and the FSM also did not
contain the inflation adjustment, as Mrs. Bordallo points out,
when it was submitted to Congress for consideration. And
however, we recognize that Congress saw fit at the time to
include such language in the RMI and FSM agreement.
Dr. Fleming. I got that you don't support that. But what
about the postal rates and the audits?
He was deferring to you on that.
Mr. Babauta. I join him in support of the audits.
On the postal rates, the postal rate was something internal
for us to negotiate on the U.S. side. And that was reflected
eventually in the finalized negotiated agreement. There is
nothing that we are subsidizing within the Postal Service that
takes away from the substance and the financial assistance that
we are going to give to Palau.
Dr. Fleming. So, of these three items, and again I am going
to have to get a little more clarification as to what the
answers are on it, what the Administration supports or what it
doesn't, but had these been agreed to by Palau? That is the
question.
The Administration's position on these three items, have
they been agreed to by Palau?
Mr. Kagan. Yes. This was agreed to and reflected in the
final agreement between the Government of the United States and
the Government of Palau.
Dr. Fleming. All right. Thank you, gentlemen. I yield back.
Ranking Member, Mr. Sablan.
Mr. Sablan. Thank you very much, Mr. Chairman, and let me
also go back, but again, Secretary Kagan, let me ask you two
questions, and I need a short response.
What is the significance of Palau in the U.S. national
security interests in the Pacific?
Mr. Kagan. We believe Palau is critical for two reasons.
One is that it is a very strategically located piece of real
estate that also has a very important economic, exclusive
economic zone and that the Compact which provides us
responsibility for security and defense of Palau also provides
us very critical access for our military forces and the ability
to deny such access to foreign military forces.
The second is Palau is a very close friend and ally and
supporter in a lot of different areas, including the United
Nations but also in the Pacific, and has been a very critical
supporter of our enhanced engagement in the Pacific in the past
3 years.
Mr. Sablan. Thank you. And also let me ask who among all
our friends in the world were the first to take the Uyghur
prisoners from Guantanamo Bay?
Mr. Kagan. I believe that we negotiated agreements with
Bermuda and Palau.
Mr. Sablan. My question is who not----
Mr. Kagan. Palau and Bermuda.
Mr. Sablan. Palau, right?
Mr. Kagan. Yes.
Mr. Sablan. And then we nickel and dime them in
negotiations for the compact financial? That is how we treat
our friends?
Please I am Micronesian. I know how we have been treated. I
grew up with people from Palau. We nickel and dime our very
best friends, Mr. Kagan. I am not being disrespectful here. I
am just being truthful here, what we are worried about is
$500,000; we are worried about subsidies. I think the Assistant
Secretary will take care of the subsidy. But is this how we
treat our friends? Is this how we want to be known in the world
as how we treat our friends?
Mr. Kagan. Mr. Sablan, I appreciate very much the question.
I appreciate it, and I think that the fair response to that is
that we went into this with the desire to enhance and
strengthen the Compact. We wanted to reflect the different
circumstances that prevailed. I do not believe we nickel and
dimed our friends. I believe that what we did was try to
negotiate something that we believed was fair for the people of
Palau and fair for the people of the United States.
Mr. Sablan. But, as you said earlier, Secretary Kagan, and
I am not being, I hope you don't take this as being
disrespectful--maybe I am a little passionate--but you would
not recommend the Administration does not allow this to go into
law, the Congress approves the legislation that is before us.
You would be--you wouldn't say object to it and say it is not
good.
Mr. Kagan. I think we would want to try and work with you
very respectfully to try and address our concerns. But we
strongly support prompt passage of this legislation.
Mr. Sablan. Two years and 1 week, Mr. Secretary, and we
still don't have an offset that Congress agrees to, and this
is, working with you, sir, is the language that means a sense
of Congress. But anyway, I will work you with also, Mr.
Secretary.
Dr. Gootnick, now for the difficult questions, sir, I hope
not. Of the $189 million remaining to be provided, because I
think the $26 million has been appropriated already, isn't $30
million to make up for the initial U.S. underfunding of the
Compact Trust Fund to enable it to provide the revenue it is
supposed to provide through the 50 years of U.S. military base
rights under the Compact? And isn't $28 million for maintenance
of infrastructure that the U.S. considered essential?
Mr. Gootnick. Yes, to your first question, you are correct.
The $30 million plus-up is intended to support the trust fund
to better its prospects to get to 2044. So the agreement, the
Palauans agreed to reduce their withdrawals from the trust fund
in the short term, plus it up toward the end of this 15-year
period to the $15 million but from there on out through 2044 to
yield $15 million.
I would point out that is also not inflation adjusted $15
million. So, by the time you get out to 2044, that $15 million
looks quite different.
With respect to the infrastructure maintenance fund, the
fund stipulates that the priorities are to U.S.-funded
projects, so that is the Compact road first and foremost but,
in addition, improvements to the international airport.
Mr. Sablan. My time is up, Mr. Chairman. I hope there is
another round of questioning.
Dr. Fleming. The gentleman yields his time back.
The Chair recognizes Mr. Faleomavaega for 5 minutes.
Mr. Faleomavaega. Thank you, Mr. Chairman.
Secretary Kagan, from what I am hearing in your testimony,
you are suggesting that the Administration is going to
recommend a veto of this proposed bill H.R. 6040?
Mr. Kagan. As I have said, we look forward to working very
closely with Congress on prompt passage of this legislation. I
think it would be inappropriate to speculate on what our
position would be until we see the final bill.
Mr. Faleomavaega. Not to speculate, let me just give you a
little sense of history here. This was 2 years ago, 2 years
ago, Secretary Clinton wanted legislation enacted so that we
could comply with the provisions of the Compact that we have
agreed with the Republic of Palau. Both the Department of the
Interior and State Departments did not submit a proposed bill
until last year, but it didn't include offsets. And according
to our House Rules, both Houses rejected what the
Administration had suggested.
And now both, the Administration just has not even given
any offerings in terms of what you are willing to do so we can
get this thing done. And that is what forced myself and
Chairman Manzullo and 14 other Members of the Congress on the
Foreign Affairs Committee to propose 6040, so we could go
through this impasse.
Now you say you are willing to do this, but for the past 2
years, Secretary Kagan, that has not been the response of the
Administration. You have been kicking the can down the alley,
the highway, the mountains and the ocean. I don't know what the
heck is going on here. So now we find ourselves in this
predicament. You say the Administration is more than willing to
offer help, and we talk about these things. We are nitpicking
over the assistance that Palau deserves and what we have agreed
upon under the terms of the Compact.
And yet for the billions of dollars that we give in foreign
aid in other countries, do we make demands such as this about
audits? I don't think so.
And Secretary Babauta, I want to ask you this, you are
saying that Palau agreed to these three things about the audits
and about the Postal Service and about the inflationary costs?
My understanding, they have not agreed unless, and that is the
reason why we have these provisions added on the proposed bill.
Mr. Babauta. Well, during the negotiations themselves, as
Assistant Secretary Kagan pointed out, issues were raised, some
were accepted by Palau, some were accepted or denied by the
United States----
Mr. Faleomavaega. Here is an example, Secretary Babauta, on
the audit issue. It is agreed with the Republic of the Marshall
Islands and the Federated States--the joint funding of the
auditing. And yet under this proposal we have, you are
expecting Palau to pay for the entire audit process. Is that
fair?
Mr. Babauta. I would like to say that, during the
negotiations, there was some finality to this issue, which was
accepted by both parties----
Mr. Faleomavaega. Well, somebody screwed up here. Why are
we treating Palau differently from the other two free states?
The question of inflationary adjustment issue, this was already
in the Compact, this provision about cost inflation, and you
are objecting to this.
Secretary Kagan, why are you objecting to the inflationary
cost provision index?
Mr. Kagan. As I said before and as Assistant Secretary
Babauta has said, this is part of a complex set of
negotiations. There were trade-offs that were made, there were
things that were accepted by the United States----
Mr. Faleomavaega. But why are you objecting to this
inflationary index?
Mr. Kagan. We believe that----
Mr. Faleomavaega. Too costly? Eleven billion dollars too
costly for a 12-year period?
Mr. Kagan. We have a responsibility to try and steward our
funds carefully, and we believe this was part of an appropriate
set of negotiations between our governments----
Mr. Faleomavaega. So, in other words, you are going to
continue objecting and not even approve or have any sense of
support for this proposed bill.
Mr. Kagan. I want to make very clear that we do not object
to this proposed bill, that there are certain provisions within
it that we have concerns about and that we look forward to
working with Congress on, but we strongly support prompt action
by Congress to pass this legislation.
Mr. Faleomavaega. What kind of a time schedule are you
looking at, Secretary Kagan, that we can get a firm answer from
the Administration? How soon can you tell us it is yes or no,
forget it, we don't support it, so we know where to go?
Mr. Kagan. We want to make clear that we support this
legislation. We believe there are elements in it----
Mr. Faleomavaega. Another 2 years?
Mr. Kagan. We have absolutely no desire to wait. We would
like to see prompt action. We recognize this is very important
to the people of Palau. We have been pushing for action on this
for some time, and we look forward to working with you to try
and make sure that happens.
Mr. Faleomavaega. Mr. Kagan, I appreciate your comments,
but it just doesn't simply add up to what we have had to endure
for the last 2 years from the Administration.
Mr. Kagan. We look forward to working with you, and we look
forward to prompt action on this.
Mr. Faleomavaega. I am sorry, Mr. Chairman. My time is up.
I will wait for the third round if there is a chance. Thank
you.
Dr. Fleming. The gentleman yields his time, and he predicts
there will be a third round. I suspect he is right.
The Chair now recognizes Ms. Bordallo for 5 minutes.
Ms. Bordallo. Thank you, Mr. Chairman.
Secretary Babauta, I am going to add to my colleague's
comments from American Samoa. He mentioned different concerns,
and when is this U.S. Postal bill--Service--have Palauans
expressed substantial concern about the cuts in and increased
costs for the U.S. Postal Service delivery of mail to the
islands under the agreement?
Just a direct question. Have the Palauans expressed
concern? And further, are you aware of appropriations for a
subsidy to the U.S. Postal Service for mail to independent
countries which requires international rate postage?
Mr. Babauta. I believe, yes, Palau has expressed some
concern over the subsidy of the Postal Service. It is within
the renegotiated agreement.
And to your second question, no, I am not aware of any
subsidy that is provided to----
Ms. Bordallo. You might check on that.
Secretary Kagan, I wanted to ask, following up on
Congressman Faleomavaega's questions, what are your concerns on
this legislation? Could you point them out? The biggest
concerns you have? And there must be two or three that you are
really stuck on in these negotiations.
And again, I will ask the question that I asked earlier,
will you be ready to present this to Congress?
Mr. Kagan. I think we have identified the concerns.
Ms. Bordallo. Before the end of the year?
Mr. Kagan. The answer on your final question is yes. We
strongly support prompt action.
Ms. Bordallo. But you have concerns.
Mr. Kagan. We have some concerns on some specifics. We
think they are relatively minor and can be very easily
addressed.
Ms. Bordallo. Could you mention those minor concerns?
Mr. Kagan. Well, I think, very specifically, the one has to
do with the full faith and credit of the United States. As my
colleague has mentioned, this was not something that was
extended to the other Compact states as part of the 2004
amended Compacts.
And then the other concern has to do with the inflation
adjustment. And we believe that it is very much in our national
interest to try to stick to the overall dollar amounts that
were negotiated. But I think that fundamentally, our strongest
concern is prompt passage of this legislation, so we can keep
our faith with the people and the Government of Palau.
Ms. Bordallo. I have another question for you, Secretary
Kagan.
A major stated goal of the agreement in the negotiations
was to phase out Palau's dependence upon U.S. assistance for
essential services provided by the Government of Palau.
Would any of the provisions of H.R. 6040 run counter to
that goal of the Administration in the negotiations?
Mr. Kagan. Not to the best of my knowledge. I would defer
to my colleague, Assistant Secretary Babauta, who is more
familiar with the specific details of how the Compact
assistance works.
Mr. Babauta. Congresswoman, I don't believe any of the
goals that are in the renegotiated agreement run counter,
generally, to our goals for Palau, which is to continue to see
them grow, to be able to assist them in providing funding for
education, public health, public safety, which are all elements
of the negotiated agreement.
Palau and the United States were very specific with respect
to the U.S. assistance that is going to go out there. It is
going to be used for those areas only. It will not be used for
the president's office. It will not be used by the OEK nor by
the judiciary.
The U.S. funding is going to go straight in to the programs
that are provided to the people of Palau.
Ms. Bordallo. Thank you.
Thank you, Mr. Chairman. I yield back.
Dr. Fleming. The gentlelady yields back.
OK, we shall begin a third round, and we thank you
gentlemen for hanging in there.
Let me see if I can kind of bring some clarity to this
discussion, begin to tie some things together. We are all, I
think, on very similar tracks here.
The whole idea behind the continued funding for Compacts
and really other island situations--I mean, since I have been
Chairman of insular affairs, this seems to come up constantly--
and that is, how do we wean countries off of dependency by
creating an economy on island that will sustain that island
into the future? Part of this idea, of course, was to create a
trust fund, but unfortunately, the return on investment is a
little low right now, so that is a problem.
So my question, I really have two questions, and certainly
any of you on the panel are welcome to take a stab at this, is,
number one, what are we doing to get that GDP up higher?
What other sources, private economy, whether it is through
bringing more visitors to the island, more commerce, are there
other lines of economic growth that we can pursue, and the
other is it really seems like to me there is only one real
major sticking point here and that is the pay-for. And so I
would love to have your response on both of these questions.
Where do you think we are going GDP wise? How are we going
to fix it in a way where this is going to be less and less an
issue in the out years?
And then number two, how we can we get past this pay-for
issue?
Mr. Babauta. Thank you very much, Mr. Chairman.
With respect to the first part of your question, during the
negotiations themselves, the agreement has created an advisory
group on economic reform, which will be comprised of both
members from the United States and Republic of Palau. That
group will meet annually and determine, make recommendations on
reforms that need to occur within government and reforms that
need to occur economically so that you are building, so you are
continuing to have your economy grow. There is language in
there that----
Dr. Fleming. In real terms, though, do we have anything
more than tourism that we are working with here?
Mr. Babauta. Tourism is the largest part of their economy,
sir.
Dr. Fleming. Is there agriculture, natural resources?
Mr. Babauta. They are a haven for how they conserve their
resources, and that is partly why their tourism is as it is, it
is because of their conservation----
Dr. Fleming. By natural resources, I mean any type of
mining or perhaps fisheries, anything else that could utilize
natural resources?
Mr. Babauta. Fisheries, again, is a huge resource for them.
I can ask Mr. Kagan to speak about that since this is an issue
that is kind of more at the forefront.
Dr. Fleming. What can you tell us about the pay-for? Where
can we get past the stumbling block that we are at with the
pay-for?
Mr. Babauta. The Department of the Interior and the OMB
have identified several offsets, as you know. Alternative
offsets have been developed by the House Foreign Affairs
subcommittee which are incorporated into H.R. 6040, and in
principle, we have no objection to the offset identified by the
Foreign Affairs Subcommittee on Asia and the Pacific Islands in
their version of H.R. 6040 that was marked up on July 18th and
have been working with that subcommittee to modify the language
for State Department purposes.
The final language, of course would need to be reviewed by
our OMB process, however, to ensure that equities of all
Executive Branch agencies are safeguarded.
Dr. Fleming. So, basically, what you are saying is that
these various departments are working with our Committees, and
we continue the discussions, but, and you do support the latest
version, the latest iteration. Although we have a problem on
our side with that, obviously, which is I guess the reason why
it is not moving forward, and that is the passport and the
taxation issue. So your department supports that in theory;
really the problem is internally here in Congress, is that
correct? Am I correct about that?
Mr. Kagan. To be clear, we have no objection to it, and we
have engaged with the Committee staff on the details of it.
There are some specific details on how it would be applied
that are of some concern to the State Department but that are
very technical in nature and which we believe should be fairly
easy to address. We recognize that this is obviously a critical
piece of moving this forward, and we appreciate the leadership
the Committee has taken to try and find an appropriate offset
that would allow this to move forward.
Dr. Fleming. Can you follow up on the passport issue? Can
you provide the language to the Committee that we need that
would make that acceptable, the passport taxation issue?
Mr. Kagan. Certainly, we are prepared to continue engaging
on that, and I think, as we have told Committee staff, we have
I believe four specific concerns that are very technical in
nature on how that would be applied.
Dr. Fleming. Yes, if you would get us the language, that
would certainly be appreciated.
I yield back and recognize Mr. Sablan for 5 minutes.
Mr. Sablan. Thank you very much, Mr. Chairman.
Secretary Kagan, I want to thank you, sir, for being
engaged in this issue. Obviously, for us, sometimes it is not
fast enough, but I know you are very engaged, and I appreciate
your taking the time to fly to and go to Palau before Chairman
Fleming did, and I have been inviting him since forever. But
thank you, sir, for what you are doing, and I do have some
questions that I would eventually like you to respond to.
Dr. Gootnick, it is always nice to see you, sir. It is
always good to see you. I also have questions that we will
submit to you and get a response.
Of course my favorite, Secretary Babauta, sir, thank you
for many things that you do for Palau, for the Northern
Marianas in particular, and I am sure for the other territories
and Micronesia and the Pacific.
But I do have some questions, Mr. Secretary.
I hope that we could work out also the U.S. Postal Service
means of delivering packages because this is truly important
for my constituents because if we have to pay international to
ship to Palau or pay international, you know those betel nuts
that they ship from Palau to the Northern Marianas, trust me, I
would have constituents knocking on my door about this issue.
But we really appreciate the time that you are going to work on
this, we are going to try and work together on the postal
delivery issue so we can pay domestic rather than international
rates, and I will work with you, sir.
But let me ask you a question before I get to my other
issue. How does the new agreement affect the Compact trust
fund, in your own opinion, sir?
Mr. Babauta. Well, it affects it in many ways. It
strengthens the Compact trust fund; it makes it so that we are
making investments throughout the life of the second term of
the Compact, so that, at the end of that term, it can provide
the $15 million that is needed after U.S. assistance ends.
Mr. Sablan. Why does the agreement deny the use of funding
by the offices of the President, Palau's congress, because I
can't say the Palau name, I apologize to the Ambassador,
Palau's congress, judiciary and state governments; was there a
problem with Palau's use of earlier resources?
Mr. Babauta. There was no problem. I think it is simply a
reflection of the fact that Palau believes that for those
branches of government, the president or those offices of the
presidency, the OEK, and also the judiciary, that that should
be funded by local funds generated by their own revenue and not
with U.S. assistance. They believe, as does the U.S., that U.S.
assistance should be going directly to programs, such as
education, health care and public safety.
Mr. Sablan. Thank you. Now since we are talking about
money, Mr. Secretary, let me just shift our attention to the
Northern Mariana Islands.
As you know, sir, the Commonwealth is in deep financial
trouble. Our retirement fund, a United States District Court
judge had to--is considering and will make an appointment of ad
litem trustees because my Governor refuses to provide trustees
for a quorum because he has issued an emergency order that he
would seize the money for the retirement fund, for the pension
fund.
We have a hospital, sir, where there is a child, a young
child, who is being fed through a tube and the hospital cannot
even buy her the Pediasure and the remaining supply of tube
that feeds her is actually the one in her body, and that people
in the committee are now chipping in, so that they could
provide and make sure this little girl survives. Her name is
Dora. Where our Governor has terminated a very capable
executive director of the Commonwealth Utilities Corporation
because he said that this guy wasn't doing enough for
alternative energy and then turns around and signs a 25-year,
$190 million plus plus plus deal for fossil fuel. It is all
about the money problem.
His use, emergency after emergency--and recently, sir, your
office paid for a fiscal study of the Commonwealth government
apparently to get a better picture of what is going on. This
document has not been made public. I got three pages of the
report dealing with education. And obviously, I am very
concerned because education is my number one agenda in
Congress. We are spending less per capita in education than any
other U.S. insular area.
You are aware of this Federally funded report?
Mr. Babauta. Yes, sir.
Mr. Sablan. May I have a copy, please?
Mr. Babauta. Absolutely, Congressman. Right now, it is in
draft form. We did this, we entered into kind of an arrangement
with the Governor of CNMI about 4 months ago where our current
contract with a graduate school, we used that to help
assistance the CNMI and assist us in identifying exactly how
their cash flow is laid out, how they are collecting revenue,
and how they are spending their money. I have it in draft form
right now. As soon as it is finalized, I will have my office
come up, and we will brief you about it.
Mr. Sablan. Do we have any idea when? Are you waiting for--
from what I understand, you are waiting for the Governor to say
OK you can release it, right?
Mr. Babauta. Absolutely not, sir.
Mr. Sablan. Any idea when you are going to release this,
Mr. Secretary? Because the problem is the money. We need to
know why and where it is going.
Mr. Babauta. I will follow up when I get back to the
office. I have seen it in draft form. Let me figure out exactly
when we predict that it is going to be in the final form. But I
can't imagine it will take more than a week or two to become
final.
Mr. Sablan. Thank you very much, Mr. Secretary, and again,
thank you, sir, for all that you do. I appreciate it.
Secretary Kagan, please know I appreciate your engagement.
Dr. Gootnick, it is always good to talk to you, sir, and
get some--and differentiate unbiased opinion on several of the
things going on. I appreciate it.
If there is another round coming, I will ask my questions.
But for now, I yield my time.
Dr. Fleming. The gentleman yields back.
Mr. Faleomavaega has taken a couple of deep breaths.
Mr. Faleomavaega. Mr. Chairman, I do want to say it is not
every day that when having a congressional hearing, you get
three rounds of questioning, but I deeply appreciate your
patience and your forbearance in allowing us to continue the
dialogue with our friends here from the Interior Department and
also from the State Department.
Again, I want to ask Secretary Kagan, Chairman Manzullo and
I have had to search wide and low and whatever you want to call
it trying to figure what would be a possible offset because
apparently, the recommendations of offsets of both the Interior
and State Department recommended were not acceptable to both
Houses, the Senate as well as in the House.
So, now, Chairman Manzullo and I thought, well, why do we
have this offset dealing with passports? The flow or the stream
of revenues that we gain from passports is well over $400
million a year. And what we are asking for here for this 10-
year period that we are looking at the bill, that we are
looking at about $183.5 million for a 10-year period from 2013
to 2022 or also, in addition, to $189 million if you add $6
million for infrastructure, maintenance as well as government
operations.
What I wanted to do is just to get a sense from you what--I
guess, we have to put ourselves in the footings of the Palauans
and their leaders. Supposing that we don't approve this bill,
no money comes to Palau; if you were a Palauan, what would you
think your reaction is going to be to that effect? This small
little tiny country, a lot of coconuts and coconut crabs and
all of this and think of it as a little silly island community
out there in the middle of nowhere, which is only about the
size of Texas if you want to put in economic zones and the
ocean, but what do you suppose is going to be the reaction to
the Palauan leaders if we don't honor our obligations and
commitments under the provisions of the Compact?
I had mentioned earlier in my statement, I think we do have
an obligation under the Full Faith and Credit Clause of the
Constitution to pay the Palauans what we do because what are we
getting in exchange? Usage of Palauan waters and their
resources in time of a national emergency in terms of whether
or not we determine this area to be important as far as
strategic and military interests are concerned, and we are
funding, we are paying billions of dollars in what we do there
as far as defense issues are concerned, and we are talking
about $183 million, $184 million billing for a 10-year period,
and we can't even find a stream of revenue to pay for this.
I am not suggesting that $183 million is peanuts. But when
compared to the billions and billions of dollars that we give
to foreign countries that we can't even audit, and here we are
diming and nickeling or nickeling and diming for this amount
for this country that really needs the resource.
Mr. Kagan, how soon will we get an answer from the State
Department whether or not they will support this bill? Because
we really need to know where the Administration's position is
on this.
Mr. Kagan. Congressman Faleomavaega, again, I thank you for
your leadership and particularly your very wise counsel and
advice, which has been one of the reasons why we have
significantly stepped up our engagement in the Pacific in the
past 3\1/2\ years, including Secretary Clinton's meetings with
the Pacific leaders on the margins of the U.N. General
Assembly----
Mr. Faleomavaega. Mr. Secretary, you are not answering my
question. How soon can we get a response to this bill? With all
due respect, I admire Secretary Clinton's trip to the Cook
Islands and the foreign countries, all of that is nice and
well. But I am talking about the needs of Palau, and we are not
meeting these obligations. How can soon can we get a commitment
from the State Department whether or not they support this
bill?
Mr. Kagan. I was just informed that we have provided
alternative language on the offsets to the House Foreign
Affairs Committee. We strongly support prompt action on this
legislation. We, as I said, we believe there is appropriate
room to continue engaging in some of the details, but I think I
want to make very clear that we strongly support prompt action
to fulfill our obligations toward Palau.
And as to your question on how they would feel, I think we
feel very strongly. This is why we are looking for action on
this because we recognize that failure to move quickly will
have significant ramifications, not just for our relationship
with Palau but also for the standing of the United States in
the region.
Mr. Faleomavaega. Secretary Babauta, how soon can we get
the response from the Interior Department concerning this bill?
Mr. Babauta. We strongly support the enactment of the
pending legislation that comprises the negotiated agreement
with Palau.
Mr. Faleomavaega. What does that mean? Two weeks? Three
weeks? A month? How soon can we get a commitment from the
Administration, the Interior Department? I mean, look, we have
been dallying with this thing for 2 years now and the last
thing I want to hear is that we are going to run through this
cycle again for another 2 years before we finally get a
commitment from this Administration on this.
Mr. Babauta. Congressman, this is the second time that I
have testified on this bill, once in Senate and once now here.
I have had staff testifying in front of your Committee. We
strongly support the legislation and with regard to the new
offsets that have been identified by your subcommittee, I said
that we agree in principle, we know that our colleagues at the
State Department are working with your Committee over at
Foreign Affairs to fine tune some technicalities----
Mr. Faleomavaega. What are the technicalities? I hear both
of you gentlemen saying ``technicalities.''
I would like to respectfully request, Mr. Chairman, I would
like to request that both gentlemen submit to this Committee
these technicalities they keep talking about that makes it so
complex, the issue that is now before us. But I know my time is
way over, Mr. Chairman, so I yield back.
Dr. Fleming. The gentleman's time is expired. But quite
frankly, we have some more questions, so if you would like an
opportunity in a moment, you will get that opportunity.
Ms. Bordallo, 5 minutes.
Ms. Bordallo. Thank you.
Thank you Mr. Chairman.
I also want to thank the three witnesses today. It has been
quite a grilling afternoon to Secretary Babauta, Secretary
Kagan and Mr. Gootnick.
I think what I want to say is that the Compact ended in
2009; is that correct? And we are still 3 years later
negotiating over current problems that we don't all agree on.
Now I have been questioned by the President of Palau and
other leaders of Palau to please, please, help in speeding the
negotiations up. So the people of Palau are becoming very
frustrated. And I think it is really up to us to be able to
speed this up, now that the offsets offered by Mr. Faleomavaega
and his committee, but so far, from the three of you,
particularly Secretary Babauta and Kagan, we don't have any
concrete time, and I realize that is difficult for you to speak
about. You can't really say, well, on this particular date, it
is all going to be concluded, but 3 years is a long time. Like
I say, the people of Palau are becoming very, very concerned
about this.
So when you go back to your desks, I sure hope that you are
going to keep it a top priority and be able to do something
about it. But I do thank you for answering our questions this
afternoon. But we, too, are very frustrated, and we want this
to be concluded.
And I would like to, Mr. Chairman, yield the rest of my
time to my colleague from American Samoa because he said
earlier he has 100 questions.
Mr. Faleomavaega. I thank the gentlelady for yielding her
time to me.
And I want to make sure the record reflects this, Mr.
Chairman, that this is not a personal vendetta against
Secretary Kagan or Secretary Babauta. They are both friends.
I think we need to look at the situation, Mr. Chairman, and
our friends who are testifying before us this afternoon. It is
not about the money that I am the concerned about, gentlemen;
it is the principle. It is the principle, the fact that this
great Nation, the most powerful country in the world, has made
a commitment in writing, a Compact, a treaty relationship,
whether it be with 15,000 people or 14 million people, the
principle involved here that I am concerned about, and as I
have said and it has been my criticism publicly for all these
years, as a matter of our basic foreign policy to this region,
we have no policy. Secretary Kagan, we have no policy. Our
basic foreign policy toward this region is actually toward New
Zealand and Australia.
So treaty countries like Palau or the Marshalls or FSM are
only incidental if it really comes to our attention to such an
extent. By the way, the South China Sea crisis and the
situation now definitely is going to impact and has serious
implications in terms of how these Micronesian entities
currently have their relationship with the United States, Palau
being one of them, the size of Texas. And if we are really
serious about our strategic and military interests, that maybe
we are inviting the Palauans to shop somewhere else if the
United States really has no interest in developing this close
relationship.
And I will say that the opportunities that I have had in
discussing these issues with the President of Palau, he is very
concerned, and he is a very strong supporter of the United
States, but the opposition and those who are not necessarily
favorable to us are simply saying, the United States doesn't
care about us, so why should we care about them? We might as
well break the Compact, let's go have relations with other
foreign countries that really will address more seriously our
interests. Because we are not doing it.
A couple years ago, Mr. Chairman, we just forgave Jordan's
$500 million debt that they owed to this government. And let's
talk about billions of dollars that we have forgiven debts in
other foreign countries--billions--I am not talking about
millions--billions of dollars. And here we are haggling over
$183 million for a 10-year period that we should be funding
because it is part of our treaty agreements with this country.
This is where I am really concerned about gentlemen. It is not
the money; it is the principle that I am very concerned about.
And with that, Mr. Chairman, I thank the gentlelady again
for yielding her time.
Dr. Fleming. The gentlelady yields her time back.
Rather than go another round, what the Chair would like to
do is simply to ask another question or so that may be left. I
think we have covered just about everything. I know I have one
question, and then I will open it up for other members of the
panel who would like to ask a final question.
My question, gentlemen, is back to H.R. 6040. Are there
conditions in which the money would be provided, should we get
it passed and find a pay-for, that are benchmarked on certain
factors, certain economic issues, achieving certain benchmarks
economically along the lines of what we have talked about,
tourism and other things, are there such benchmarks,
conditions, and what are they in a general way?
Mr. Babauta. Certainly, there will be benchmarks. There
aren't any current benchmarks where, that I recall that we are
going to begin with. The meeting that we will have, after the
Compact is passed, the advisory group on economic reforms, will
take into consideration reports that have already been issued
about economic reforms that need to take place that are Palau
specific. Economic reforms, changes in government, some of
those reports have been generated by the IMF and by the ADB. I
think, in short measure, that will help initially guide the
group as it moves forward and makes recommendations to put the
Palauan Government itself on what reforms need to take place. I
think that is where we are setting benchmarks.
Dr. Fleming. Thank you and to follow up, does the full
faith and credit language included in H.R. 6040 affect the
ability of the Department of the Interior to withhold funds to
insist on economic and financial improvements by Palau? I am
sort of restating the question but in a more formal way. Again,
back to the full faith and credit language.
Mr. Babauta. I don't believe that it is necessary that that
language needs to be present for the Department of the Interior
to exercise its authority under the negotiated agreement. Under
the negotiated agreement, if there are not meaningful reforms,
not meaningful actions that have taken place in the year after,
the economic group, the advisory group on economic reform had
met, then that allows the Department of the Interior to
withhold money based on whether or not and how much progress--
reasonable and meaningful progress. I think we all recognize
during the negotiations that there are going to be some reforms
that either are going to take time or just are difficult issues
to tackle. But as long as we see that there is an honest
movement toward those reforms, either economic or government
reform, then the U.S. assistance will continue to occur.
Dr. Fleming. Secretary Kagan, do you have anything to add
to that?
Mr. Kagan. I think, with response to your specific
question, Mr. Chairman, is that in fact was one of the concerns
that we have had over the years and one of the reasons why the
language was not in the renewals with FSI, FSM and the Republic
of the Marshall Islands. So while we believe in principle that
ability is there to exercise the appropriate oversight, it
certainly is something that has been raised as a concern, and
that is one of the reasons why we had issues with the full
faith and credit language being in this legislation.
Dr. Fleming. OK. The Chair yields back and opens the panel
for any other questions that you may have.
Mr. Sablan.
Mr. Sablan. I just have one. Let me get something very
clear here, Secretary Kagan and Secretary Babauta, if Congress
passes H.R. 6040 in its present form, would either the
Department of the Interior or the Department of State recommend
its being signed into law? In its present form, the language as
presently written?
Mr. Kagan. I will go first. I think from the Department of
State, there would need to be some greater precision in some of
the details surrounding the offsets. In particular, we have
concerns about some of the legal implications for the State
Department with regard to the passport issues.
Mr. Sablan. We are going back into the technical part, I
think that is Dr. Gootnick's expertise.
Mr. Kagan. Should those things be addressed? I think our
view is it is very important that we proceed with living up to
our obligations.
Mr. Sablan. Thank you very much.
Mr. Babauta. I was going to say I agree with my colleague
and also agree with comments made by Mr. Faleomavaega and Ms.
Bordallo earlier and thank the Congress actually for providing
the funding that we have been able to continue giving to Palau
in the years where the Compact agreement hasn't been passed by
the Congress.
Mr. Sablan. So, if we pass this, we will provide the
funding, the Department of the Interior will administer or
manage the funds transfer between the U.S. Government and the
Republic of Palau; that is how we do it, correct?
Mr. Babauta. Correct. And we do that in close cooperation
with our Federal partners.
Mr. Sablan. Mr. Secretary, one of the best things that
happened in the covenant between the Commonwealth, the people
of the Northern Mariana Islands and the United States was in
the second 702 agreement--so I think some of us are old enough
to remember this; I was one of the special representatives--is
the provision of the full faith and credit one time. And with
the Northern Marianas was able to go out and raise actually
using the full faith and credit of the United States raise more
money than was agreed to in the agreement. And of course,
market conditions were much better then, and is this something
that is being considered here? Would that be a possibility for
the Republic of Palau?
Mr. Babauta. Being able to utilize the language the full
faith and credit?
Mr. Sablan. Yes, they are going to upfront the funding, and
it was then that Interior made the annual payment to the bond
underwriters or whatever they call that.
Mr. Babauta. I am not certain what the motivation would be
if the Palau Government continues to seek full faith and credit
and how different that would be from us seeking a permanent
appropriation, which guarantees that the money is going to be
there as well.
Mr. Sablan. All right. Thank you.
Thank you, Mr. Chairman. I yield back.
Dr. Fleming. The gentleman yields back.
Any other questions.
Mr. Faleomavaega. Mr. Chairman, I can't believe we are
going through the fourth round now. This will be the last, I
promise.
Secretary Babauta, you mentioned something about you have
some kind of a joint committee of some sort with the Palauan
Government to discuss economic issues or something? Can you
explain that for the record?
Mr. Babauta. It is not something that is in place right
now. It will be in place. It is part of the renegotiated
agreement. The only thing that we have been doing with respect
to acting is----
Mr. Faleomavaega. You said three--how many members of the
U.S. Government? How many members from Palau? They meet as a
joint committee or something?
Mr. Babauta. If I recall correctly, sir, it would be equal
members from both Palau and the U.S. Government. The deciding
member will be recommended by the Palau Government, a list of
two or three, and then from that list, the United States will
choose the one person that Palau recommends.
Mr. Faleomavaega. You don't think that it is going to upset
Palau that the U.S. will always have the strong hand because
they have the money? You know what they say about the golden
rule? He who has the gold makes the rule.
Mr. Babauta. No, I don't, sir, and one of the reasons why
is because this particular part of negotiation was recognized
both by the United States and Palau as being needed to continue
economic growth in the Republic.
Mr. Faleomavaega. Well, supposedly the Administration
people, a portion of this Committee doesn't agree with what the
Palauans say that this is the way it should go as far as
economic development goes.
Here is my concern, Secretary Babauta: How can we be making
recommendations on economic improvements or reforms the
Palauans make if we can't even handle our own economy? Does
that make sense?
Mr. Babauta. I hear what you are saying. The guiding
principles I think initially with the Advisory Group on
Economic Reforms will be guided by reports that have already
been issued by the International Monetary Fund and also by the
Asian Development Bank. So those are already there outstanding.
Mr. Faleomavaega. Can I get assurance from you, sir, that
there is going to be no undue influence on the part of the U.S.
To say that this is the way it is going to go, you are not
going to get any money?
Mr. Babauta. You can have my assurance, absolutely.
Mr. Faleomavaega. I thank you.
Mr. Chairman, thank you.
Dr. Fleming. The gentleman yields back.
Any other panel members?
Ms. Bordallo.
Ms. Bordallo. Mr. Chairman, I have no further questions.
Does my colleague want any more time?
Mr. Faleomavaega. No.
Ms. Bordallo. Then, Mr. Chairman, I yield back.
Dr. Fleming. The gentlelady yields back.
I want to thank the panel today for taking a lot of the
hard questions. We put you through four rounds, but we thank
you for standing up to the chore and giving us the best answers
you can. I am convinced that you were very forthcoming. And
while we don't know all the answers today, hopefully together
we will be able to work them out.
I would like to also thank the staff for their work today.
Members of the Subcommittee may have additional questions
for the witnesses, and we ask that you respond to these in
writing. The hearing record will be open for 10 days to receive
these responses.
Again, I want to thank all of the staff members, Members
here, two Members of the House that couldn't make it today, for
all of their efforts as well.
Thank you, and without objection, we are adjourned.
[Whereupon, at 3:48 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Statement of Vikram J. Singh, Deputy Assistant Secretary of Defense for
South & Southeast Asia, Office of the Secretary of Defense for Policy,
U.S. Department of Defense
Introduction
Since its enactment in 1994, the Compact has served as an important
foundation for our security strategy in the Asia-Pacific region,
providing the United States with critical access, influence, and
strategic denial of access to other regional militaries. Our Compact
with Palau, coupled with our compacts with the Federated States of
Micronesia (FSM) and the Republic of the Marshall Islands (RMI), has
enabled DoD to maintain critical access and influence in the Asia-
Pacific region. Passage of H.R. 6040, a bill to amend Title I of PL 99-
658 regarding the Compact of Free Association between the United States
and Palau, is vital to allowing the Department to continue to benefit
from the security arrangement afforded by the Compact.
Palau's Contributions to American and Global Security
The Pacific Islands region is sparsely populated, physically
isolated, and geographically widespread. However, Palau lies at a
pivotal crossroad in the Pacific, an area near critical sea lines of
communication and rich fishing grounds. It is also located directly in
the so-called ``Second Island Chain'' from Mainland Asia, close to all
of the major East and Southeast Asian powers. With our strategic
interests and equities expanding and shifting more toward the Asia-
Pacific region, having Palau as a strong partner in the Pacific is
increasingly important to maintaining military, as well as political
and diplomatic, leadership in this quickly evolving strategic
environment. We must take note of critical security developments in the
Pacific that require the Department's sustained presence and
engagement. Broadly speaking, countries such as China, Russia, and the
Arab states are actively courting Pacific Island States, challenging
the security status quo in the region, and increasing their economic,
diplomatic, and military engagement with the island States. These
critical security developments require sustained U.S. presence and
engagement in the region. Our relationship with Palau under the Compact
would be reinforced with passage of this legislation and would ensure
the United States the extraordinary advantage to deny other militaries
access to Palau. For these reasons, it is imperative that the U.S.
Government sustain this advantage. Since the Compact of Free
Association between the Government of the United States of America and
the Government of Palau went into effect in 1994, the United States has
taken full responsibility for the security and defense of Palau. This
unique security arrangement has created a steadfast and reliable
partner that helps the United States advance its national security
goals in the region.
Palau in the Regional Security Context
Under the provisions of the Compact, Palauans are able to serve in
the U.S. Armed Forces. In fact, Palauans serve in the U.S. Armed Forces
in impressive numbers. Sadly, five Palauans have made the ultimate
sacrifice, and numerous others wounded, fighting on the battlefield in
Afghanistan and Iraq since 9/11. Their sacrifice in the defense of the
U.S. homeland and U.S. and Coalition security interests should not go
unnoticed. Furthermore, in 2009, Palau stepped up to offer resettlement
to six Uighur detainees from Guantanamo Bay at a time when other
countries were hesitant to take these individuals. Most notably, our
commitment to the Compact with Palau allows the Department to leverage
Palau's strategic geopolitical position to sustain U.S. security
interests in the region. The United States exercises full authority
over and responsibility for the security and defense of Palau, an
arrangement similar to those that we have with the Federated States of
Micronesia and the Republic of the Marshall Islands. With this
authority and responsibility, the United States is entitled to military
access to the lands, water, and airspace of Palau and retains the right
to deny such access to the military forces of other nations. Our
current security arrangement affords us expansive access, which will be
an increasingly important asset in the defense and security interests
of the United States in the Asia-Pacific region in coming years. The
Department recognizes the strategic value of the Compact, and we hope
to continue to utilize it to serve our national security interests.
U.S.-Palau Defense Relations
We have growing national security interests and equities in the
Western Pacific, a region that is traditionally overlooked and
undervalued. Together with the two other Compact States, the Federated
States of Micronesia and the Republic of the Marshall Islands, Palau
forms part of an important security zone under exclusive U.S. control
that spans the entire width of the Pacific when we include Hawaii and
the U.S. territories, Guam and the Commonwealth of the Northern Mariana
Islands. Palau's location makes it an important part of the U.S.
strategic presence in the Asia-Pacific, The Palau Compact affords us
strategic positioning in a country with a unique geopolitical position
in the Asia-Pacific, The region's lack of political and security
infrastructure has given rise to a trend of growing transnational
crime, which underscores the importance of continued DoD engagement in
the Western Pacific. With this in mind, the Department seeks to develop
creative ways to remain strategically engaged in the region.
Recognizing that Palau has no military and only limited law enforcement
capabilities and resources, the Department's engagement with Palau
primarily focuses on helping them develop maritime security and
humanitarian assistance capabilities. First, maritime security has been
one of the most fruitful areas of cooperation between our two nations,
DoD sends mobile training teams to Palau to help train local security
personnel in maritime security-related matters, Palau's Exclusive
Economic Zone (EEZ) is part of the Pacific's richest fishing grounds
and has traditionally faced serious problems with foreign exploitation
of the fishery resources. Large numbers far-ranging fishing vessels
from other pacific nations threaten encroachment. Japan, China, Taiwan,
and the United States participate in a highly competitive multi-million
dollar tuna industry. The Department is currently reviewing ways to use
existing DoD assets and cooperative mechanisms to enhance maritime
domain awareness in the region. To combat illegal fishing, the U.S.
Coast Guard has entered into a shiprider agreement with Palau, which
enables Palauan security officials to embark on transiting U.S, Coast
Guard vessels to conduct maritime patrol of its enormous, under-
patrolled EEZ. This kind of ship rider agreement allows the U.S. Coast
Guard to play a more active role in developing partner law enforcement
capacity of the island States. In addition, we are cooperating with
Japan, Australia, Palau, the Marshall Islands, and Micronesia to bring
to fruition the Sasakawa Peace Foundation's $10 million initiative to
support maritime surveillance in all three Compact States. Second, the
Department's humanitarian programs have been very well-received in
island communities. These programs primarily focus on the removal of
explosive remnants of war from the World War'' era, humanitarian
projects, and prisoner of war/missing in action operations. DoD's 12-
person Civic Action Team maintains a rotational presence in Palau,
conducting small to medium scale humanitarian and civic action projects
in the health, education, and infrastructure areas. Especially notable
are the large-scale, multinational, preplanned humanitarian missions,
the U.S. Air Force's Pacific Angel and U.S.
Navy's Pacific Partnership, which include medical and engineering
projects in remote regions that are conducted in close coordination
with local communities. In the summer of 2010, more than 1,900 Palauans
were treated, 14 community service projects were completed, and more
than 1,000 man hours spent across the three states of Koror, Peleliu
and Angaur when USS BLUE RIDGE (LCC-19) stopped in Palau as part of
Pacific Partnership 2010. Also, the longest running humanitarian
campaign in the world, Operation Christmas Drop, which provides air-
dropped supplies to the people of the remote Micronesian Islands each
December, celebrated its 58th anniversary in December 2010 and
continues annually to assist the remote islands of Palau, These
humanitarian missions are evidence that the Department's engagement in
Palau extends well beyond traditional security parameters.
Conclusion
U.S. power projection in the Asia-Pacific region will continue to
be important to our national security interests. The U.S.-Palau Compact
is a strategic asset for U.S. presence in the Western Pacific, an
increasingly important region, Loss of the defense rights and exclusive
access granted to the United States under the Compact would adversely
affect U.S. national security, Our relationship with Palau is unique
and reliable.