Foreign Assistance: Lessons Learned From Donors' Experiences in  
the Pacific Region (17-AUG-01, GAO-01-808).			 
								 
Australia, Japan, New Zealand, the United Kingdom, and the United
States have been the major providers of bilateral development	 
assistance to the Pacific Island nations since 1987. The Asian	 
Development Bank and the European Union have been the major	 
multilateral donors. The donors' main development objectives,	 
according to the planning documents, have been to alleviate	 
poverty and to set the Pacific Island nations on the path to	 
economic self-sufficiency. To achieve these objectives, these	 
donors focus their assistance in key areas, such as education,	 
policy reform, and infrastructure. The United States could draw  
several lessons from the donors' experiences for providing	 
assistance as well as the strategies and approaches the donors	 
have adopted. These lessons could be valuable insights for the	 
United States as it negotiates additional economic assistance to 
the Federal States of Micronesia and the Republic of the Marshall
Islands. On the basis of the donors' experiences, GAO observed	 
that (1) assistance strategies may involve trade-offs in	 
expectations of aid effectiveness if other objectives for	 
providing assistance take priority over development objectives;  
(2) assistance strategies may involve trade-offs between	 
effectiveness and accountability, on the one hand, and		 
administrative costs, on the other hand; (3) effective assistance
depends on a good policy environment in the recipient country to 
create the conditions for sustainable development; (4) strategies
tailored to the individual needs of the recipient country might  
have greater chances of succeeding because they offer recipients 
opportunities for stronger ownership of the program; (5) flexible
strategies enable donors to adapt their assistance to changing	 
circumstances and provide incentives for development		 
achievements; (6) well-designed trust funds can provide 	 
sustainable sources of assistance to Pacific Island nations with 
limited growth options; and (7) sectorwide approaches, although  
generally untested in the Pacific, depend on recipient government
commitment and ability. 					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-808 					        
    ACCNO:   A01607						        
  TITLE:     Foreign Assistance: Lessons Learned From Donors'	      
Experiences in the Pacific Region				 
     DATE:   08/17/2001 
  SUBJECT:   Economically depressed areas			 
	     Foreign economic assistance			 
	     International economic relations			 
	     Foreign governments				 
	     International agreements				 
	     Economic growth					 
	     Compact of Free Association with			 
	     Micronesia 					 								 
	     Marshall Islands					 
	     Micronesia 					 
	     Australia						 
	     Japan						 
	     New Zealand					 
	     European Union					 
	     United Kingdom					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Testimony.                                               **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-01-808
     
Report to Congressional Requesters

United States General Accounting Office

GAO

August 2001 FOREIGN ASSISTANCE

Lessons Learned From Donors? Experiences in the Pacific Region

GAO- 01- 808

Page i GAO- 01- 808 Pacific Development Assistance Strategies Letter 1

Results in Brief 2 Background 4 Major Aid Donors Provided About $11 Billion
in Aid to Pacific

Island Nations 7 Development Experiences Influence Donors? Choices of
Assistance

Strategies 10 Donors? Experiences Can Help Guide U. S. Approaches to Future

Assistance 18 Agency Comments 21

Appendix I Objectives, Scope, and Methodology 23

Appendix II Major Donors of Development Assistance to the Pacific Region 26

Appendix III Recipients of Development Assistance in the Pacific Region 30

Appendix IV Trust Funds in the Pacific 40

Appendix V Sectorwide Approaches to Development Assistance 45

Appendix VI Comments From the Republic of the Marshall Islands 48

Appendix VII Comments From the Federated States of Micronesia 52

Appendix VIII GAO Contact and Staff Acknowledgments 56 Contents

Page ii GAO- 01- 808 Pacific Development Assistance Strategies Tables

Table 1: Cumulative Assistance, Objectives, and Primary Recipients of
Development Assistance From Major Bilateral Donors to the Pacific Region,
1987- 99 27 Table 2: Cumulative Assistance, Objectives, and Primary
Recipients

of Development Assistance From Major Multilateral Donors to the Pacific
Region, 1987- 99 29 Table 3: Information on Pacific Islands That Received

Development Assistance in 1998 31 Table 4: Assistance per Capita and Total
Development Assistance

for Pacific Islands, 1998 33 Table 5: Recipients of Development Assistance
and Their Major

Donors, 1987- 99 34 Table 6: ADB Classification of Resource Endowments and

Opportunities in the Pacific Islands 39

Figures

Figure 1: Map of Pacific Island Nations and Territories 5 Figure 2: Total
Development Assistance to the Pacific Island

Nations, by Donor, 1987- 99 8 Figure 3: Recipients of Development Assistance
to the Pacific

Region, 1987- 99 32 Figure 4: Proportion of Aid and Non- aid in 13 Pacific
Islands? GDP,

1998 37

Abbreviations

ADB Asian Development Bank EU European Union FSM Federated States of
Micronesia GDP gross domestic product OECD Organization for Economic
Cooperation and Development RMI Republic of the Marshall Islands SWAps
sectorwide approaches UNDP United Nations Development Program UNTA United
Nations Technical Assistance USAID U. S. Agency for International
Development

Page 1 GAO- 01- 808 Pacific Development Assistance Strategies

August 17, 2001 The Honorable James V. Hansen Chairman, Committee on
Resources

The Honorable Tom Lantos Ranking Minority Member Committee on International
Relations

The Honorable James A. Leach Chairman, Subcommittee on East Asia and the
Pacific Committee on International Relations

The Honorable Doug Bereuter House of Representatives

From fiscal years 1987 to 2001, the United States gave at least $2.6 billion
1 in economic assistance to the Federated States of Micronesia and the
Republic of the Marshall Islands. A major portion of this assistance, about
$1.7 billion, was provided under an international agreement, the Compact of
Free Association. The Compact provided for assistance to the two Pacific
Island nations over a 15- year period, starting in 1986. Currently, the
United States is negotiating with the two countries to extend the economic
assistance provisions of the Compact, which are set to end in late 2001. To
address concerns that (1) the countries remain highly dependent on U. S.
assistance; (2) the assistance has not significantly improved conditions in
the countries; and (3) the expenditures have received little oversight, the
U. S. negotiator is considering the use of different assistance strategies
than those in the current agreements.

To assist the Congress in its review of the proposals for providing economic
assistance that are under consideration in the negotiations, you asked us to
identify useful lessons from the experiences of other donors in the Pacific.
Specifically, we (1) identify the major donors of development assistance to
the Pacific Island nations and their objectives, (2) discuss the

1 Not adjusted for inflation. This figure does not include nuclear
compensation- related assistance provided to the Republic of the Marshall
Islands.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 808 Pacific Development Assistance Strategies

donors? development assistance strategies 2 and the factors or experiences
that influence their choice of strategies, and (3) report lessons from the
other donors? assistance strategies that could be useful for U. S.
consideration.

For our review, we obtained and analyzed development assistance statistics
for Pacific Island nations from 1987 to 1999. We collected and analyzed
information on objectives, strategies, and development experience from donor
agencies in Australia, Japan, New Zealand, the United Kingdom, and the
United States and from the Asian Development Bank, the European Union, the
United Nations Development Program, and the World Bank. (Further details
about our objectives, scope, and methodology can be found in app. I.)

Australia, Japan, New Zealand, the United Kingdom, and the United States
have been the major providers of bilateral development assistance to the
Pacific Island nations 3 since 1987. 4 The Asian Development Bank and the
European Union have been the major multilateral donors. Of the $11.9 billion
5 in total assistance provided to the region from 1987 to 1999, the five
bilateral donors have given 81 percent of the amount (of which the United
States? share was 26 percent); the two multilateral donors have given 12
percent of the amount; and other donors have provided the remaining 7
percent. The donors? main development objectives, according to their
planning documents, have been to alleviate poverty and to set the Pacific
Island nations on the path to economic self- sufficiency. These

2 We use the terms ?development assistance strategy? and ?assistance
strategy? in this report to define the type of assistance. Donors use a
variety of terms to define the kind of assistance they provide.

3 These nations include the Cook Islands, the Federated States of
Micronesia, Fiji, Kiribati, Nauru, Niue, Palau, Papua New Guinea, the
Republic of the Marshall Islands, Samoa, the Solomon Islands, Tonga, Tuvalu,
and Vanuatu.

4 We relied on information from the Organization for Economic Cooperation
and Development (OECD) to identify the major donors. We recognize that other
countries, such as China and Taiwan, which are not members of the OECD, also
provide significant amounts of assistance. For example, according to The
Sidney Morning Herald (? Pacific Region Enters a New Era of Shifting
Alliances,? May 24, 2001), China recently gave about $157 million to Papua
New Guinea, which was nearly the same as Australia?s annual assistance of
about $167 million. We were not able to obtain assistance data directly from
those countries.

5 Adjusted to 1998 U. S. dollars. Unless noted, development assistance
amounts are adjusted to 1998 dollars, which was the most recent inflation
adjustment made by the OECD. Results in Brief

Page 3 GAO- 01- 808 Pacific Development Assistance Strategies

donors focus their assistance in key areas, such as education, policy
reform, and infrastructure, to achieve these objectives. (See app. II for
further details about the major donors, their objectives, and the recipients
of their assistance.)

The major aid donors believe that many Pacific Island nations will not be
able to achieve self- sustainability without continued assistance in the
foreseeable future or will need assistance indefinitely. In addition, the
donors acknowledge that there are important trade- offs involved in
providing assistance to these nations. One important trade- off can occur
when other objectives for providing assistance, such as foreign policy
interests, place a different emphasis on the accountability or effectiveness
of the development aid. There are also trade- offs between the
administrative costs, effectiveness, and accountability of the assistance.
In this context, the donors have explored and adopted the following
different strategies and approaches to improve the effectiveness and
efficiency of their assistance in the region:

 Five of the major donors have supported projects to improve governance in
the recipient countries, such as developing a rule of law, as a foundation
for effective development.

 One multilateral donor has adopted a subregional approach to development
that tailors aid to the individual characteristics of recipients rather than
applying the same strategy to all of the island nations.

 Two donors have built flexibility into their assistance strategies, which
enables them to provide incentives for positive achievements or to stop
assistance to recipients under undesirable conditions, such as political
instability.

 Six of the major donors have relied on trust funds in the Pacific as a
means of providing recipients with a self- sustaining source of future
revenue.

 All of the major donors have emphasized donor coordination as a tool for
improving efficiency by limiting duplication of projects and reducing the
burden of multiple donor requirements on recipient countries.

 One major donor has adopted a sectorwide approach to assistance- a new
approach in the Pacific region but widely discussed in development
literature- as a pilot project in the health sector in an effort to
encourage the recipient country to take ownership of the development process
on a limited basis.

The United States could draw several lessons from the donors? experiences in
the Pacific, in terms of the context for providing assistance to the region
as well as the strategies and approaches the donors have adopted. These
lessons could be valuable insights for the United States as

Page 4 GAO- 01- 808 Pacific Development Assistance Strategies

it negotiates additional economic assistance to the Federated States of
Micronesia and the Republic of the Marshall Islands. For example, on the
basis of the donors? experiences, we observed that

 assistance strategies may involve trade- offs in expectations of aid
effectiveness if other objectives for providing assistance take priority
over development objectives;

 assistance strategies also involve trade- offs between effectiveness and
accountability, on the one hand, and administrative costs, on the other
hand;

 effective assistance depends on a good policy environment in the recipient
country to create the conditions for sustainable development;

 strategies tailored to the individual needs of the recipient country may
have greater chances of succeeding because they offer, among other things,
opportunities to the recipients for stronger ownership of the program;

 flexible strategies enable donors to adapt their assistance to changing
circumstances and provide incentives for development achievements;

 well- designed trust funds can provide sustainable sources of assistance
to Pacific Island nations with limited growth options; and

 sectorwide approaches, although generally untested in the Pacific, depend
on recipient government commitment and ability.

In general, the 14 island nations in the Pacific Ocean that we reviewed face
significant development challenges. With few exceptions, such as Papua New
Guinea and Fiji, the island nations have small economies and limited natural
resources, and most are highly vulnerable to natural disasters,
environmental problems, and the impacts of climate change. Their remote
location, poor access to commercial and capital markets, and limited
institutional capacity hinder economic development. In many islands, the
public sector is disproportionately large, the private sector is poorly
developed, and there is a shortage of trained personnel to meet development
challenges. Finally, rapid urbanization, population growth, and inadequate
infrastructure are outstripping the countries? ability to meet basic health
and education needs. (See fig. 1 for a map of most of the island nations and
territories in the Pacific region.) Background

Page 5 GAO- 01- 808 Pacific Development Assistance Strategies

Figure 1: Map of Pacific Island Nations and Territories

Source: GAO.

Virtually all of the Pacific Island nations, including the Federated States
of Micronesia (FSM) and the Republic of the Marshall Islands (RMI), receive
development assistance. (See app. III for a description of the recipient
nations and the assistance they receive.) In addition, at least seven island
territories in the Pacific (including New Caledonia) receive direct
government assistance from their associated governments and, in some

Page 6 GAO- 01- 808 Pacific Development Assistance Strategies

cases, a small amount of development assistance from other donors. 6 Five of
the small island nations- Kiribati, Samoa, the Solomon Islands, Tuvalu, and
Vanuatu- are ?least developed countries,? according to the United Nations,
meaning that they have special development needs.

In 1986, the United States entered into a Compact of Free Association with
the FSM and the RMI, both of which were part of the U. N. Trust Territory of
the Pacific Islands administered by the United States. The United States
agreed, in part, to provide economic assistance to these countries to help
them in their efforts to become economically self- sufficient. A portion of
the Compact assistance to the RMI is also used for payments to landowners
related to the U. S. military presence at the Kwajalein Atoll. The
Department of the Interior has responsibility for administering economic
assistance to the two countries. This funding represented a continuation of
U. S. financial support that had been supplied to these areas for almost 40
years after World War II. The two nations have also received support in the
form of direct government services, such as U. S. Postal Service and
National Weather Service assistance, and grants and loans from U. S.
domestic agencies. From fiscal years 1987 through 2001, total U. S. support
to the islands- Compact assistance and other U. S. assistance- is estimated
at more than $2.6 billion. 7 The economic assistance provided to the two
countries through the Compact of Free Association expires in late 2001.
However, the Compact provides funding for an additional 2 years if
negotiations on further assistance are not completed by that time.

In June 2000, the Department of State?s negotiator for the Compact of Free
Association testified that the general approach to the new negotiations

6 The seven territories are American Samoa, Guam, the Commonwealth of the
Northern Mariana Islands, French Polynesia, New Caledonia, Wallis and
Futuna, and Tokelau. In 1999, New Caledonia became an ?outer country? of
France as a step toward achieving full independence. The United States
provides federal transfers to the Commonwealth of the Northern Mariana
Islands, Guam, and American Samoa. In addition, the United States provided
federal transfers to Palau as a territory until 1994, when it became an
independent nation and began receiving U. S. assistance under the Compact of
Free Association. France provides support to French Polynesia, New
Caledonia, and Wallis and Futuna. New Zealand provides support to Tokelau.
Other islands in the Pacific, such as Pitcairn, receive assistance but were
not included in this review.

7 Not adjusted for inflation, on the basis of our analysis and reported in
Renegotiation of the Foreign Aid Agreements With the Federated States of
Micronesia and the Republic of the Marshall Islands, which we submitted to
the House Committee on Appropriations in April 2001.

Page 7 GAO- 01- 808 Pacific Development Assistance Strategies

with the FSM and the RMI includes sector grants and trust fund
contributions, in place of the financial transfers provided in the first 15
years of the Compact, to improve accountability for the use of funds. 8
State concurred with our finding that the FSM, the RMI, and the United
States provided limited accountability over Compact expenditures from 1987
to 1998. 9

From 1987 through 1999, the seven top donor countries and organizations
provided about $11 billion, or 93 percent, of all development assistance to
help Pacific Island nations. The bilateral donors generally targeted their
assistance to a few recipients, while the multilateral donors distributed
aid more broadly to member nations in the region. 10

Five bilateral donors- Australia, Japan, New Zealand, the United Kingdom,
and the United States- and two multilateral donors- the Asian Development
Bank (ADB) and the European Union (EU)- provided about $11 billion in
official development assistance to Pacific Island nations between 1987 and
1999, according to our review of data from the OECD and annual financial
audits of the FSM, the RMI, and Palau. Figure 2 shows the top donors and the
amount of total assistance provided to the Pacific region from 1987 through
1999.

8 The United States has held four negotiating sessions with the FSM to
discuss specific objectives. 9 See Foreign Assistance: U. S. Funds to Two
Micronesian Nations Had Little Impact on Economic Development and
Accountability Over Funds Was Limited

(GAO/ T- NSIAD/ RCED- 00- 227, June 28, 2000) and Foreign Assistance: U. S.
Funds to Two Micronesian Nations Had Little Impact on Economic Development
(GAO/ NSIAD- 00- 216, Sept. 22, 2000). We reported that annual financial
statements of the two countries did not provide information on the final use
of Compact funds because the Compact monies are commingled with local
revenues, and fund transfers are not tracked to the final use. The financial
data also do not include additional assistance, such as loans to the
government or individuals and scholarships to students.

10 Other donors, such as China and Taiwan, are known to provide economic
assistance, but the amounts are not readily available or reported to the
OECD. Also, the data on development assistance levels do not include in-
kind services, such as U. S. Postal Service support to the FSM and the RMI.
Major Aid Donors

Provided About $11 Billion in Aid to Pacific Island Nations

The Major Donors

Page 8 GAO- 01- 808 Pacific Development Assistance Strategies

Figure 2: Total Development Assistance to the Pacific Island Nations, by
Donor, 1987- 99

a ?All others? includes more than 29 other countries and international
organizations. Sources: GAO analysis of data from the OECD and financial
audits for the FSM, the RMI, and Palau.

The major donor countries and organizations have varied widely regarding the
development assistance provided to recipients from 1987 to 1999. The major
bilateral donors, except for Japan and New Zealand, have concentrated their
assistance on relatively few Pacific Island nations. For example, between
1987 and 1999, about 75 percent of Australia?s assistance to the region went
to Papua New Guinea, which is the largest country in the region, and about
91 percent of U. S. assistance went to the FSM, the RMI, and Palau. The
multilateral donors also concentrated on a few recipients. The EU and the
ADB gave about 65 percent and 55 percent of their assistance, respectively,
to their top two recipients- Papua New Guinea and the Solomon Islands for
the EU and Papua New Guinea and Samoa for the ADB. Two major donors, the
United Kingdom?s Department for International Development and the U. S.
Agency for International

Page 9 GAO- 01- 808 Pacific Development Assistance Strategies

Development (USAID), significantly reduced their presence in the Pacific in
the 1990s. The programs of two other donors, New Zealand and Japan, were
under review in those countries at the time we prepared this report. The
purpose of the New Zealand review is to examine how the development
assistance program can best meet the long- term development needs of the
recipients, given that most of the recipient countries will be dependent on
aid indefinitely. The purpose of the program review in Japan is to look for
opportunities to improve Japan?s budget deficit.

Many Pacific Island nations are dependent on a single donor for most of
their assistance. Seven of the 14 recipient countries received more than 50
percent of their aid from a single donor from 1987 through 1999. For
example, the FSM and the RMI received 93 percent and 89 percent of their
assistance, respectively, from the United States, according to our analysis.
In addition, aid is concentrated between donors and recipients linked by
free association agreements. 11 The five Pacific Island nations with free
association status- the FSM, the RMI, and Palau, which are freely associated
with the United States, and Niue and the Cook Islands, which are freely
associated with New Zealand- received an average of 84 percent of their aid
from their top donor, while the other seven recipients received an average
of 37 percent of their aid from their top donor.

According to documents of the major donors, their principal development
objectives are to alleviate poverty in the region and help the island
nations become more self- sufficient. 12 To achieve these objectives,
Australia, for example, focuses its assistance in the Pacific on education
and training, economic reform and governance, health, environment and
natural resources, and private sector development. In 1998- 99, Australia
allocated 35 percent of its aid for education and training, 20 percent for
economic reform and governance, 15 percent for health, 15 percent for
environment

11 ?Free association? is a type of political relationship between sovereign
nations. In the Pacific region, we found five Pacific Island nations with
free association status. According to a State official, the concept of free
association agreed to by the United States and Micronesia in 1978 was an
agreement ?through which a degree of external sovereignty is freely
exchanged in return for a defense commitment and the promise of economic
assistance.?

12 Currently, many recipients remain dependent on development assistance.
For example, in 1998, aid comprised more than 35 percent of the gross
domestic product of 5 of the 14 Pacific Island nations. In the FSM and the
RMI, development assistance was 54 percent and 72 percent, respectively, of
those nations? gross domestic product. Major Donors? Objectives

Page 10 GAO- 01- 808 Pacific Development Assistance Strategies

and natural resources, 5 percent for private sector development, and 10
percent for other areas. Similarly, to achieve its objectives, New Zealand
supports projects around six strategies: security and governance, civil
society, gender equality, social development, the environment, and business.
Finally, as another example, the ADB is tackling poverty through promoting
programs, such as public sector reform programs, in its Pacific member
countries. Since 1995, the ADB has undertaken reform programs in seven
Pacific Island nations for macroeconomic stabilization, good governance,
public sector efficiencies, and private sector development.

The major donors recognize that their choice of assistance strategies must
address long- term aid dependence by many Pacific recipients and tradeoffs
involving multiple objectives for assistance, costs, effectiveness, and
accountability. Within this environment, the donors have tried several
strategies to achieve their development objectives, such as incorporating
flexibility and relying on trust funds. (See app. IV for further information
on trust funds.)

Economic self- sustainability will be a difficult challenge for many Pacific
Island nations and is not a realistic goal for the smaller and more remote
countries, according to officials at and documents from the Australian
Agency for International Development, the Japan Ministry of Foreign Affairs,
the New Zealand Ministry of Foreign Affairs and Trade, and the ADB. The
officials expect that, under the best circumstances, most countries will
need assistance for the foreseeable future to achieve improvements in
development. According to an ADB report, 13 ?[ I] t is widely understood
that the smallest and least- endowed island states will need to be assisted
by free transfers of resources indefinitely, if they are to maintain
standards of welfare that the donors of the aid can bear to look at.??

Two major donors- the United Kingdom Department for International
Development and USAID- chose to cut their bilateral programs significantly
in the 1990s, due to changed priorities and agency budgetary reasons. The
United Kingdom switched from a bilateral program to a regional program in
1995 that focused on three countries- Kiribati, the

13 A. V. Hughes, A Different Kind of Voyage: Development and Dependence in
the Pacific Islands (Manila, Philippines: Asian Development Bank, Feb.
1998). Development

Experiences Influence Donors? Choices of Assistance Strategies

Most Donors Expect Longterm Dependence on Assistance in the Pacific

Page 11 GAO- 01- 808 Pacific Development Assistance Strategies

Solomon Islands, and Vanuatu- where the need was greatest. According to a
Department for International Development official at the regional office in
Fiji, the United Kingdom now expects to end the regional program by 2004, as
part of a worldwide change in the agency?s focus, and will provide support
to the region through multilateral donors. USAID ended its bilateral program
in the South Pacific in 1994, due to agency budgetary reasons, and now
provides modest assistance for a regional environmental program.

In providing assistance to the Pacific, most of the major donors combine
their development interests with other motivations, according to officials
and documents of the donor agencies. These other motivations include
historic ties between the donor and the recipient (such as former
dependencies), foreign policy interests, and strategic interests. 14
Australia?s large commitment of assistance to Papua New Guinea, for example,
responds to development needs in the country but also reflects the
historical relationship and the development assistance program as agreed
through a treaty with its former territory. For New Zealand, the development
assistance program is one pillar of its foreign policy and is intended to
contribute to stability and harmony in the South Pacific. Finally, U. S.
assistance to the FSM and the RMI, through the Compact of Free Association,
is one of three elements (political, economic, and defense) of the Compact.
The defense element includes a right granted to the United States by the FSM
and the RMI to deny access by third countries for military use.

While multiple motivations do not inherently conflict with development
interests, other interests, in some cases, have taken precedence over the
effectiveness and accountability of the development assistance. According to
Australian, New Zealand, and State officials, for example, the donor
countries initially chose to provide unrestricted budget support to former
territories as a means of separating themselves from colonialist
administration. In the case of the Compact with the FSM and the RMI, State
counseled Interior to be lenient in reviewing the use of Compact funds in
the early years of the Compact because State placed a high

14 These multiple motivations are not unique to the Pacific. According to a
study by Alberto Alsenia and David Dollar, Who Gives Foreign Aid to Whom and
Why? (Cambridge, Mass.: National Bureau of Economic Research, June 1998),
there is considerable evidence that aid donations are dictated by political
and strategic considerations, such as historical ties and friendly voting
records in the United Nations. Multiple Motivations for

Providing Assistance Have Led to Different Expectations for Aid
Effectiveness

Page 12 GAO- 01- 808 Pacific Development Assistance Strategies

priority on maintaining friendly relations with the FSM and the RMI. By
1993, however, the United States began placing greater emphasis on the
effectiveness and accountability of the assistance due, in part, to the end
of the Cold War. Finally, according to Ministry of Foreign Affairs
officials, Japan generally selects development projects from the requests of
Pacific Island nations. The criteria for evaluating a specific request
include, for example, the extent to which the project will be seen as a
Japanese contribution but do not include an evaluation of the project need
or sustainability.

In addition to recognizing that their development assistance may be intended
to achieve multiple objectives, the donors have used a range of assistance
strategies in striving to reach a desired balance of aid effectiveness,
accountability, and administrative cost. The donors have used at least six
different strategies to deliver their development assistance to the Pacific
Island nations. These strategies include

 technical assistance, such as the ADB?s funding of the economic advisory
team in the FSM;

 project assistance, such as Japan?s road improvement projects in the RMI;

 program assistance, such as the U. S. Department of Labor?s job training
program in the FSM;

 budget support, such as New Zealand?s support for government operations in
Niue;

 sectorwide programs, such as Australia?s pilot program to support the
health sector in Papua New Guinea; and

 contributions to trust funds, such as Australia?s, New Zealand?s, and the
United Kingdom?s contributions to the Tuvalu Trust Fund, which is intended
to provide self- sustaining revenue.

These strategies often provide different levels of donor control over their
assistance, according to officials with USAID, the New Zealand Ministry of
Foreign Affairs and Trade, and the Australian Agency for International
Development. Technical assistance and project assistance, for example,
enable donors to exercise a high level of control and accountability by
participating directly in funded activities, while unrestricted budget
support and some forms of trust fund contributions allow donors little or no
control over their assistance because the donor is only providing cash to
the recipient. Reduced control over assistance is associated with more
uncertainty in achieving the aid objectives and ensuring accountability.
Yet, donors also acknowledge that the higher level of control involves
greater administrative costs. Thus, there are trade- offs between donor
control and costs, on one side, and expected effectiveness and Donors Also
Strive to

Balance Aid Effectiveness, Accountability, and Cost

Page 13 GAO- 01- 808 Pacific Development Assistance Strategies

accountability, on the other. The following examples illustrate these
tradeoffs:

 New Zealand and Australia have cut the amount of budget support they
provide as an assistance strategy in an effort to improve the effectiveness
of their assistance. They found from their experience that (1) budget
support did not achieve the intended development objectives and (2) these
funds were largely unaccounted for. In 1997, New Zealand eliminated all of
its annual budget support to the Cook Islands and focused on technical and
project assistance after New Zealand found that the Cook Islands government
was misusing funds and had built a large and inefficient public sector. 15
Similarly, the Australian Agency for International Development gradually
eliminated its annual budget support to Papua New Guinea from 1990 to 2000
and replaced it with more than 100 separate project grants, because
Australia could not identify specific development benefits linked to its
cash transfer. At that time, Australia believed that project assistance,
which it refers to as ?jointly programmed activities,? would give it more
control over development activities. According to an Australian official,
delivering budget support to Papua New Guinea required only 1 to 2 staff in
1990; but, by 2000- 01, the Australian program supported more than 100
projects and required 73 staff from the Australian Agency for International
Development, 30 Papua New Guinea staff, and at least 1 contractor for each
project.

 The Australian Agency for International Development, the New Zealand
Ministry of Foreign Affairs and Trade, and USAID have also faced tradeoffs
in adopting policies on the use of development assistance to pay for
recurring expenses- that is, the annual government operations and
maintenance costs- to improve the effectiveness of their aid. On the one
hand, the donors are concerned that providing assistance for recurring
expenses provides a disincentive to recipients to become more
selfsufficient, and that recipients may choose to use assistance to pay for
operating costs that are not related to development. The donors noted that
recipients might decide to defer maintenance with the expectation that donor
assistance will always be available. On the other hand, the donors are
concerned that the projects they helped develop are not maintained or staff
and supplies are not provided, and, thus, the assistance does not have a
sustainable impact. The FSM, for instance, depends on U. S. assistance to

15 The cut in budget support, and related downsizing of the public sector,
precipitated a substantial migration of 5, 000 Cook Islanders (23 percent of
its population) to New Zealand in a short period of time, according to a New
Zealand official.

Page 14 GAO- 01- 808 Pacific Development Assistance Strategies

meet 98 percent of its educational operating expenses, according to a
November 2000 ADB report on a proposed loan to the FSM. 16 Officials at
Interior said the Compact economic assistance was expected to pay for
recurring expenses as well as program expenses and capital improvements. To
address their concerns, Australia and New Zealand adopted a joint policy in
1992 to define acceptable and unacceptable uses of assistance for recurring
expenses. In addition, USAID has a policy on recurrent cost problems, which
calls for funding of recurrent costs under narrow conditions, such as having
a carefully phased plan for shifting the cost burden to the recipient
government.

The major donors are exploring or have adopted assistance strategies
designed to improve aid effectiveness while reacting to the context of
providing aid in the Pacific region- long- term aid dependence; trade- offs
among multiple motivations for assistance; and trade- offs to balance cost,
effectiveness, and accountability.

Australia, Japan, New Zealand, the United Kingdom, and the ADB have adopted
strategies that promote the development of good governance policies in the
recipient countries. This emphasis follows the widely accepted principle
that aid is more effective in countries with good policy environments in
place. 17 According to the Australian Agency for International Development,
?good governance? means competent management of a country?s resources and
affairs in a manner that is open, transparent, accountable, equitable, and
responsive to people?s needs. Australia, for example, supports efforts to
develop a rule of law. The New Zealand Ministry of Foreign Affairs and Trade
believes that good governance is critical to dealing with such issues as
drug trafficking, money laundering, Internet scams, and migratory diseases.
The ADB, as one example of a donor that embraces this principle, shifted its
strategy in 1995 to focus on economic policy and good governance issues.
Between

16 Report and Recommendation of the President to the Board of Directors on a
Proposed Loan to the Federated States of Micronesia for the Basic Social
Services Project (Manila, Philippines: Asian Development Bank, Nov. 2000).

17 According to a World Bank study, Assessing Aid- What Works, What Doesn?t,
and Why

(Washington, D. C.: World Bank, Nov. 1998), where there is sound country
management, an additional 1 percent of gross domestic product in aid
translates into a 1- percent decline in poverty and a similar decline in
infant mortality. In the absence of good policies, aid had no positive
effect on growth. Donors Are Adopting

Strategies to Improve Effectiveness in Light of Long- term Aid Dependence
and Tradeoffs

Strategies That Promote Good Governance

Page 15 GAO- 01- 808 Pacific Development Assistance Strategies

1995 and 1998, the ADB supported reform efforts in seven Pacific Island
nations to improve policy environments, including fiscal reform programs in
the FSM and the RMI, which led to reductions of 37 percent and 33 percent,
respectively, in the size of their public sectors.

In 2000, the ADB adopted a new development strategy for the Pacific that
takes a subregional approach, underscoring the differences between various
Pacific Island nations. The ADB strategy separates the island nations into
three categories that are based on the nations? resource profiles and their
growth prospects. For example, the ADB lists the RMI and the FSM in
different categories. The strategy for the RMI, which is an island atoll
nation with severe development disadvantages emphasizes the use of trust
funds to support sustainable financing of basic services and development of
niche markets such as tourism. In contrast, the strategy for the FSM, which
falls into the category of countries with a higher skill base, good growth
prospects, and moderate resource potential, focuses on physical
infrastructure and private sector development to promote economic growth.

According to the ADB?s strategy, the implementation of its previous strategy
in 1996 provided several lessons, including the need (1) for the Pacific
Island nations to have stronger ownership of policy and reform programs and
(2) to design development strategies that take account of local cultures and
capacities.

Flexible strategies are allowing donors to use their assistance as
incentives and disincentives. Australia recently created two development
incentives within its strategies that can provide funds for activities
outside the annual program plan. One incentive, a fund for Papua New Guinea,
has two components: one, a policy component to encourage and reward the
effective implementation of the government development policy, and, two, a
program component to fund organizations that have track records of good
program management. Another incentive, the Policy and Management Reform
initiative in the Pacific, allocates funds competitively to countries on the
basis of demonstrated commitment to reform. Australia provided assistance
from the fund to Vanuatu, for example, to reinforce a new government?s
commitment to economic and public sector reform.

Flexibility in their strategies also enabled Australia and New Zealand to
stop delivering assistance under undesirable circumstances. New Zealand, for
example, suspended funding to the governments of Fiji, in response to a
coup, and to the Solomon Islands, in response to civil unrest, while
Strategies Tailored to Local

Development Conditions and Needs

Strategies That Incorporate Flexibility

Page 16 GAO- 01- 808 Pacific Development Assistance Strategies

maintaining the assistance to community organizations so that aid for basic
human services could continue. Australia also suspended some of its funding
to Fiji due to political unrest and, in the Solomon Islands, refocused its
aid on peace, security, and basic needs when ethnic conflict disrupted the
country and the delivery of the aid program in mid- 2000. According to New
Zealand officials, flexibility is a key in selecting an assistance strategy,
because it allows donors the ability to adjust programs over time as
priorities and development needs change. Australia?s Pacific Islands
Development Strategy, 1999- 2001 recommends that the donor avoid locking in
commitments to rigidly designed projects to minimize the risk that the donor
is not able to adjust the aid when priorities or other critical
circumstances change.

All of the major donors have highlighted their donor coordination efforts to
improve the efficiency of delivering assistance and reduce the burden of
multiple donor requirements on recipients. Australia and New Zealand, for
example, are studying options for harmonizing their programs to streamline
their own operations and to increase their overall effectiveness. They
believe that harmonization could also minimize the impact of multiple donor
requirements on the recipient government. According to a World Bank
official, the different reporting and other requirements of up to 18
different organizations providing assistance to the health sector in the
Solomon Islands are stretching the capacity of the Solomon Islands
government. In addition, the ADB hosts regular donor consultation meetings
to discuss the development assistance needs of individual recipients and to
coordinate assistance to avoid duplication. Finally, Australian officials
said donor coordination is most effective if the recipient countries lead
the coordination effort. Where the countries lack the capacity to lead the
coordination effort, the donors should assist them to strengthen the
coordination functions. However, according to the Australian officials, some
recipient countries play donors off of each other to increase the amount of
assistance, and, thus, they have limited interest in closer donor
coordination.

Six donors have set up or contributed to trust funds in the Pacific as a
means of providing recipients with a sustainable source of revenue and, in
one case, ending annual bilateral assistance. 18 The ADB?s Millennium
Strategy for the Pacific suggests that trust funds may be an appropriate
assistance strategy for bilateral donors to provide to atoll nations, such
as

18 Australia, Japan, New Zealand, the United Kingdom, the United States, and
the ADB. Strategies Are Based on Donor

Coordination Trust Funds to Address Longterm Dependence

Page 17 GAO- 01- 808 Pacific Development Assistance Strategies

Kiribati and the RMI, which have few natural resources and little potential
for economic growth. A 1999 report prepared for the ADB noted that two trust
funds in the Pacific, the Tuvalu Trust Fund and the Kiribati Revenue
Equalisation Reserve Fund, have been successful but that several others were
less successful due, in part, to fraud, poor management, unclear objectives,
and risky investments. The report stated that the Tuvalu and Kiribati funds
were successful primarily because they were designed to protect the
investment capital from misuse. As a result of its contribution to the
Tuvalu Trust Fund in 1987, the United Kingdom ceased its annual budget
support to Tuvalu, because the trust fund provided the means to balance the
budget. According to the consultant who prepared the report to the ADB,
other funds, such as the Nauru Phosphate Royalties Trust, have been less
successful, because the funds were not designed to ensure good management
and to protect the fund?s capital from being spent. 19 The consultant
believes that a lesson learned from his review of trust funds is that a
well- designed trust fund can help recipient countries reduce their aid
dependency levels and become more self- reliant. (See app. IV for more
discussion about trust funds.)

In 1999, Australia began testing a new approach for delivering assistance,
called a ?sectorwide approach,? 20 after it found that the cost of managing
the project assistance in Papua New Guinea was too high. To reduce its
administrative costs while trying to maintain aid effectiveness, Australia
adopted the sectorwide approach to deliver assistance to the health sector
in Papua New Guinea. Through this pilot project, Australia began moving from
a portfolio of 16 individual health projects to cofinancing (with other
donors) of sectorwide projects and programs identified in Papua New Guinea?s
national health plan. In exchange for giving up control over the projects,
Australia gained a voice in developing the national strategy and allocating
resources for health projects. The approach also encouraged Papua New Guinea
to become a major stakeholder in the development process, following a
generally believed principle that aid is more effective when developing
countries determine their own needs and strategies for meeting them. The
Australian pilot project is small scale and has not yet

19 We did not look at the Nauru Phosphate Royalties Trust fund to make an
independent determination on the success or failure of the investment. 20
There is extensive development literature on the purpose and use of
sectorwide approaches, known as SWAps in the development community.
According to a USAID position paper, there were about 80 sector programs
being prepared or implemented throughout the world as of June 2000, mostly
in highly aid- dependent countries. See appendix V for a discussion of
sectorwide approaches. Sectorwide Approaches to

Balance Administrative Costs, Effectiveness, and Accountability

Page 18 GAO- 01- 808 Pacific Development Assistance Strategies

been evaluated. According to an Australian official, the sectorwide approach
will cover about 25 percent of all of Australia?s assistance to Papua New
Guinea by 2002. Australia is also considering sector- based approaches for
education in Kiribati and, eventually, for health care in the Solomon
Islands.

Our review of the lessons learned from the major donors? experiences in the
Pacific could provide some guidance to the United States as it negotiates
further economic assistance to the FSM and the RMI. These lessons deserve
attention because the current U. S. assistance to the two countries and the
proposed approach for future assistance through the Compact of Free
Association often contrast with the other major donors? experiences, as
discussed in the following points:

 Assistance Strategies May Involve Trade- offs in Expectations of Aid
Effectiveness If the Main Motivation for Assistance Is Not Development.

Donor strategies demonstrate that the effectiveness of the assistance in
achieving the development objectives can depend on the principal motivation
for providing the assistance. Often, donors have multiple motivations for
providing assistance, such as historical links, which could have different
standards for effectiveness and accountability. For example, the U. S.
priority on maintaining friendly relations with the FSM and the RMI during
the early years of the Compact, in order to protect strategic interests in
the region, contributed to limited accountability requirements for the
financial assistance and the degree of oversight.

 Assistance Strategies Involve Trade- offs Between Cost, Effectiveness, and
Accountability.

In general, choosing a strategy involves balancing donor interests in aid
effectiveness and accountability with the higher administrative costs of
donor involvement. When donors try to control their assistance to ensure
effectiveness and accountability, their costs of administering the
assistance increase. In the current Compact, the United States chose a low
administrative cost strategy of providing relatively unrestricted cash
transfers, which led to problems with the effectiveness of and
accountability for the assistance. The proposal for new Compact assistance,
according to a report prepared by an official in State?s Office of Donors?
Experiences

Can Help Guide U. S. Approaches to Future Assistance

Page 19 GAO- 01- 808 Pacific Development Assistance Strategies

Compact Negotiations, 21 would provide financial assistance, in part,
through six sectoral grants- health, education, infrastructure and
maintenance, private sector development, capacity building, and the
environment- each of which would have its own planning, monitoring, and
reporting requirements. State and Interior officials have said that the
United States will need significantly more staff to administer the proposed
sectorwide grants to the FSM and the RMI than they currently have.

 Effective Assistance Depends on a Good Policy Environment in the Recipient
Country.

A common theme running through the major donors? assistance programs is the
emphasis on good governance as a necessary condition for effective and
sustainable development. As the ADB noted, ?[ I] t is important that the
Bank first assist [the countries] to get their economic policy and
governance environments right, thus ensuring that follow- up sector and
project investments achieve due returns.? 22 The United States also embraced
this emphasis by supporting ADB technical assistance and reform programs for
the FSM and the RMI, such as the Economic Management and Policy Advisory
Team in the FSM. The Compact negotiator told the Congress that his approach
for further assistance would include providing targeted grants for good
governance and capacity building.

 Strategies Tailored to Specific Island Conditions May Be More Effective by
Inviting Greater Recipient Ownership of the Program.

Assistance strategies designed to reflect the diversity of the Pacific
Islands may offer more potential to achieve economic growth than strategies
that are not adapted to the recipient?s needs and ability to participate in
the development process. The ADB?s new subregional approach to assistance,
on the basis of differences in resources and growth potential, highlights
the need for accommodating the different needs of the Pacific Island nations
and suggests different strategies for the FSM and the RMI. By addressing
local needs and accounting for local cultures, the assistance

21 John Fairlamb, Compact of Free Association Negotiations: Fulfilling the
Promise, a paper presented to the Island State Security Conference, Asia-
Pacific Center for Security Studies (Honolulu, Hawaii: June 2001).

22 Reforms in the Pacific: An Assessment of the Asian Development Bank?s
Assistance for Reform Programs in the Pacific (Manila, Philippines: Asian
Development Bank, 1999).

Page 20 GAO- 01- 808 Pacific Development Assistance Strategies

strategies are more likely to ensure the political commitment of the
recipient and are more likely to achieve outcomes. The ADB?s approach
contrasts with the current structure of Compact assistance for the FSM and
the RMI, which generally applies the same objectives and strategies for the
two countries.

 Flexible Strategies Are Important to Adapt Assistance to Changing
Circumstances and Needs.

Flexibility in assistance strategies is enabling the donors to respond to
changing conditions in the Pacific. Flexibility not only allows donors to
curtail assistance if the funds are not used effectively or properly, but it
also permits donors to (1) adjust strategies to meet changing needs, such as
transferring resources from one sector to another, and (2) provide rewards
or incentives for good performance. The United States? assistance to the FSM
and the RMI through the first 15 years of the Compact was distributed
according to a negotiated formula that did not allow changes in the
distribution of the funds. Moreover, Interior officials believed that the
provision of assistance with the ?full faith and credit? of the United
States, combined with a lack of controls typically available with domestic
grant assistance, severely limited the ability to change funding levels,
even in cases of misuse of funds.

 Well- designed Trust Funds Can Provide a Sustainable Source of Assistance
and Reduce Long- term Aid Dependence.

Successful trust funds in the Pacific can be designed to maintain and
protect the fund value through prudent investment and management.
Independent economic advisers, as required in the Tuvalu Trust Fund
agreement, can also provide guidance to the government on the most effective
use of fund proceeds. If the funds produce sufficient annual revenue to meet
recipient budget needs and the revenues are used wisely, as has been the
case with the Tuvalu Trust Fund, donors may have opportunities to reduce
their annual assistance levels. The Compact negotiator has discussed similar
trust funds for the FSM and the RMI in his approach for further assistance.
According to FSM and RMI officials, the two countries have adopted their own
trust fund agreements and anticipate using the agreements to invest the
funds from future Compact assistance.

 Sectorwide Approaches Depend on Recipient Governments? Commitment and
Ability.

Page 21 GAO- 01- 808 Pacific Development Assistance Strategies

Although Australia?s sectorwide approach has only been tested on a small
scale in the Pacific and has not yet been evaluated, the extensive
literature on sectorwide approaches in Africa and other locations suggests
that the approaches are effective only under certain conditions. These
include operating in sectors where there is an agreement among donors and
recipients regarding the need for a government role in the financing,
planning, and delivery of services. Moreover, a review of sectorwide
approaches around the world 23 found that such approaches are more effective
when they correspond to the budget responsibility of a single sector, such
as education and health, rather than sector programs for crosscutting
themes, such as the environment. The Compact negotiator said that the
approach for providing further assistance includes financial assistance in
the form of sector grants to the FSM and the RMI in place of the cash
transfers of the current Compact. In addition, three of the six sectors
identified in the negotiator?s proposal- private sector development, the
environment, and capacity building and good governance- are crosscutting
sectors.

We received comments from the Republic of the Marshall Islands and the
Federated States of Micronesia. These governments generally sought greater
discussion regarding the nature of the Compact relationship and the
recognition of the unique nature of their countries. Their comments and our
responses can be found in appendixes VI and VII.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
the date of this report. At that time, we will send copies of this report to
interested congressional committees and to the Honorable Gale A. Norton, the
Secretary of the Interior; the Honorable Colin L. Powell, the Secretary of
State; His Excellency Leo A. Falcam, President of the Federated States of
Micronesia; and His Excellency Kessai Note, President of the Republic of the
Marshall Islands. We will also make copies available to others upon request.

23 New Approaches to Development Co- operation: What can we learn from
experience with implementing Sector Wide Approaches?, Working Paper 140
(London, England: Overseas Development Institute, Centre for Aid and Public
Expenditure, Oct. 2000). Agency Comments

Page 22 GAO- 01- 808 Pacific Development Assistance Strategies

If you or your staff have any questions about this report, please call me at
(202) 512- 4128. An additional GAO contact and staff acknowledgments are
listed in appendix VIII.

Loren Yager Director, International Affairs and Trade

Appendix I: Objectives, Scope, and Methodology

Page 23 GAO- 01- 808 Pacific Development Assistance Strategies

The Chairman of the House Committee on Resources; the Ranking Minority
Member of the House Committee on International Relations; the Chairman of
the Subcommittee on East Asia and the Pacific, House Committee on
International Relations; and the Honorable Doug Bereuter, House of
Representatives, asked us to assist the Congress in its consideration of
future economic assistance for the Federated States of Micronesia (FSM) and
the Republic of the Marshall Islands (RMI) through the Compact of Free
Association. Specifically, our objectives were to (1) identify the major
donors of development assistance to the Pacific Island nations and their
objectives, (2) discuss the donors? development assistance strategies and
the factors or experiences that influence their choice of strategies, and
(3) report lessons from the other donors? assistance strategies that could
be useful for U. S. consideration.

To identify the major donors in the Pacific Islands, we obtained and
reviewed the annual development assistance statistics from 1987 through 1999
as reported by the Development Assistance Committee of the Organization for
Economic Cooperation and Development (OECD). The committee?s database
allowed us to identify the official development assistance provided by
members of OECD?s Development Assistance Committee and multilateral donors
to each Pacific Island nation. We relied on the committee?s conversion of
official development assistance into 1998 U. S. dollars. Our analysis of the
committee?s data found several inconsistencies, such as no reported
development assistance to the FSM and the RMI before 1991. To resolve the
problems that we found in the committee?s data, we relied on our analysis of
the annual financial audits for the FSM, the RMI, and Palau to determine the
U. S. assistance levels to those countries. From our analysis of U. S.
assistance to the FSM and the RMI, we know that the official development
assistance excludes assistance such as educational Pell Grants given
directly to students and U. S. Department of Agriculture housing loans. We
included official development assistance provided to territories in the
Pacific, when reported by the committee, but we excluded the portion of the
assistance that the territories received from their national governments
because it often is a transfer of domestic funds. For example, we did not
include the amount that New Zealand gave to Tokelau because Tokelau is a
territory of New Zealand; however, we did include the amount of assistance
that Australia gave to Tokelau. The committee?s database did not report
official development assistance to some territories, such as American Samoa.
Finally, we did not include development assistance data from other known
donors, such as China and Taiwan. The committee?s database does not report
their assistance because the countries are not members of OECD?s Appendix I:
Objectives, Scope, and

Methodology Major Donors and Their Objectives

Appendix I: Objectives, Scope, and Methodology

Page 24 GAO- 01- 808 Pacific Development Assistance Strategies

Development Assistance Committee. Despite our attempts to collect data from
China and Taiwan, these countries were unwilling to provide the information.
China and Taiwan may be significant donors; one news article, for example,
mentioned that China gave more than $150 million in untied grant aid to
Papua New Guinea in 2000, which was nearly the same as Australia?s annual
assistance of $167 million. 24

To identify the donor objectives, we reviewed recent development planning
documents and interviewed officials from the Australian Agency for
International Development; the Japan Ministry of Foreign Affairs, Economic
Cooperation Bureau and European and Oceanian Affairs Bureau, and the Japan
International Cooperation Agency; the New Zealand Ministry of Foreign
Affairs and Trade, Official Development Assistance agency; the United
Kingdom Department for International Development; the U. S. Agency for
International Development (USAID); the U. S. Department of the Interior,
Office of Insular Affairs; and at major multilateral donor agencies (the
World Bank, the Asian Development Bank (ADB), the European Union (EU), and
the United Nations Development Program).

To collect information on the recipient countries in the Pacific, such as
population, gross domestic product, and geographic characteristics, we
relied on data from the World Bank, the United Nations Development Program,
the Secretariat of the Pacific Community, the Bank of Hawaii, and the U. S.
Central Intelligence Agency?s World Factbook 2000. We found that these data
were often missing or were based on estimates. Through conversations with
donors, we found that the lack of reliable statistics is widely accepted. To
verify the integrity of the data, we (1) checked the reliability of data
sources with multilateral agencies, such as the ADB; (2) cross- checked the
information among various sources reporting Pacific Island data, such as
comparing gross domestic product figures among the World Bank, the United
Nations Development Program, and the Bank of Hawaii; and (3) used our best
judgment.

To identify the major donors? assistance strategies, we relied on
information in donor documents and interviews with donor officials. To
identify and explain the major donors? experiences in their choice of

24 ?Pacific Region Enters a New Era of Shifting Alliances,? The Sidney
Morning Herald

(May 24, 2001). Donor Strategies and

Experiences

Appendix I: Objectives, Scope, and Methodology

Page 25 GAO- 01- 808 Pacific Development Assistance Strategies

strategies, we relied on the donor documents and our meetings with officials
at the bilateral and multilateral donors. From this review of documents and
the interviews, we identified specific assistance strategies, the reasons
for choosing specific strategies, and examples of the effectiveness of the
strategies. Relying on State?s June 2000 testimony on its approach to
negotiations with the FSM and the RMI, we narrowed the range of experiences
identified in interviews and documents in selecting the experiences for
discussion in this report. For our analysis of donor experiences with
sectorwide approaches, trust funds, and good governance, we also relied on
general reports and literature on development assistance to support the
donor information.

To report the lessons learned from the donors? experiences, we identified
common themes that were potentially relevant to economic assistance to the
FSM and the RMI. From this analysis, we developed some observations in the
form of lessons learned from the donors? experiences. We also obtained
information from USAID officials and documents about that agency?s
experiences in providing development assistance and in ending its Pacific
program. Finally, we collected documents from and met with officials from
the State?s Office of Compact Negotiations and Interior?s Office of Insular
Affairs to identify issues related to the negotiations of future economic
assistance to the FSM and the RMI.

We conducted our work from August 2000 through May 2001 in accordance with
generally accepted government auditing standards. Lessons Learned

From Donors? Experiences

Appendix II: Major Donors of Development Assistance to the Pacific Region

Page 26 GAO- 01- 808 Pacific Development Assistance Strategies

From 1987 through 1999, more than 22 countries and 13 multilateral
organizations provided almost $12 billion (in 1998 U. S. dollars) in
development assistance to the Pacific region. The amount of assistance
ranged from a single donation of $10,000 by Spain to total donations by
Australia of more than $3.8 billion. Major bilateral donors, such as
Australia ($ 3.8 billion), the United States ($ 3.1 billion), Japan ($ 1.6
billion), New Zealand ($ 685 million), and the United Kingdom ($ 394
million), accounted for nearly 81 percent of the total development
assistance to the region. The U. S. share was almost 26 percent of the
total. Donations from the EU ($ 900 million) and the ADB ($ 506 million)
constituted more than 80 percent of the aid from multilateral organizations
and close to 12 percent of overall assistance. Together, these seven major
bilateral and multilateral donors were responsible for almost 93 percent of
the development assistance to the region. Other bilateral and multilateral
donors contributed about 7 percent of the assistance.

Table 1 provides a side- by- side comparison of these five major bilateral
donors, their development agencies and stated development objectives, and a
list of the countries receiving more than 10 percent of the donor?s aid to
the region. Table 2 provides similar comparative information for the two
major multilateral donors. Appendix II: Major Donors of Development

Assistance to the Pacific Region

Appendix II: Major Donors of Development Assistance to the Pacific Region

Page 27 GAO- 01- 808 Pacific Development Assistance Strategies

Table 1: Cumulative Assistance, Objectives, and Primary Recipients of
Development Assistance From Major Bilateral Donors to the Pacific Region,
1987- 99

(Amounts in 1998 U. S. dollars)

Major donor

Cumulative development assistance Development organization and objectives
Primary recipient (more than

10% of donor?s aid)

Australia $3.84 billion The Australian Agency for International Development,
an administratively autonomous agency of the Department of Foreign Affairs
and Trade, administers the overseas aid program.

Objectives:

 Reduce poverty and achieve sustainable development.

 Focus on helping countries to achieve the maximum possible degree of self-
reliance by contributing to better governance, stronger growth, greater
capacity, better service delivery, and environmental integrity.

Papua New Guinea: $2. 87 billion, 74.8% of total

United States $3.06 billion The Department of the Interior administers
bilateral

development assistance to the Freely Associated States (FSM, RMI, and Palau)
through the Compact of Free Association.

USAID, an agency of the Department of State, is the primary development
agency of the United States.

Objectives:

 Assist the Freely Associated States in their efforts to advance economic
development and self- sufficiency. (Department of the Interior)

 Support the people of developing countries in their efforts to achieve
enduring economic and social progress and to participate more fully in
resolving the problems of their country. (USAID)

FSM: $1.63 billion, 53. 3% of total RMI: $779 million, 25. 4% of total
Palau: $382 million, 12.5% of total

Japan $1.59 billion The Ministry of Foreign Affairs is responsible for
planning and coordinating Japan?s development assistance. The Japan
International Cooperation Agency and the Japan Bank for International
Cooperation are the implementing agencies.

Objectives:

 Support the self- help efforts of developing countries to achieve economic
self- reliance.

 Focus on supporting social and economic infrastructure development,
economic structural reforms, human resource development for the private
sector, environmental conservation, and regional cooperation.

Papua New Guinea: $560 million, 35.2% of total Fiji: $169 million, 10.7% of
total Solomon Islands: $163 million,

10.2% of total New Zealand $685 million The Development Cooperation Division
of the Ministry of

Foreign Affairs and Trade manages the New Zealand Official Development
Assistance Program.

Objective:

 Achieve lasting improvements in the living conditions of people in
developing countries, especially the poor, by

Oceania unallocated: $160 million, 23.4% of total Cook Islands: $95 million,
13.9%

of total Samoa: $70 million, 10.2% of total Niue: $69 million, 10. 1% of
total

Appendix II: Major Donors of Development Assistance to the Pacific Region

Page 28 GAO- 01- 808 Pacific Development Assistance Strategies

(Amounts in 1998 U. S. dollars)

Major donor

Cumulative development assistance Development organization and objectives
Primary recipient (more than

10% of donor?s aid)

supporting good governance, civil society, social development, gender
equity, environmental protection, and a sound business environment that
encourages private enterprise, and policy and regulatory reforms. United
Kingdom $394 million The Department for International Development is
responsible

for the British aid program. Objectives:

 Eliminate poverty through sustainable development.

 Focus on two key sectors- education, and rights and good governance.

Oceania unallocated: $94 million, 23.7% of total Solomon Islands: $81
million,

20.5% of total Vanuatu: $80 million, 20. 4% of

total Papua New Guinea: $53 million,

13.5% of total Sources: Australian Agency for International Development,
Japan Ministry of Foreign Affairs, New Zealand Ministry of Foreign Affairs
and Trade, the United Kingdom Department for International Development, and
USAID documents and interviews; Compact of Free Association; and GAO
analysis of OECD data and annual financial audits of the FSM, the RMI, and
Palau.

Appendix II: Major Donors of Development Assistance to the Pacific Region

Page 29 GAO- 01- 808 Pacific Development Assistance Strategies

Table 2: Cumulative Assistance, Objectives, and Primary Recipients of
Development Assistance From Major Multilateral Donors to the Pacific Region,
1987- 99

(Amounts in 1998 U. S. dollars)

Major donor Cumulative

development assistance Development organization and objectives Primary
recipient (more than 10%

of donor?s aid)

European Union $900 million The EU assistance structure is comprised of
three organizations. The Directorates- General of External Relations and
Development are the primary policymaking departments, while the Europe Aid
Co- operation Office is responsible for implementing and administering aid
programs and projects.

Objective:

 Poverty reduction supported through an emphasis on economic development;
social and human development; regional cooperation and integration; and the
crosscutting themes of gender equity, environmental sustainability, and
institutional development and capacity building.

Papua New Guinea: $477 million, 52.9% of total Solomon Islands: $112
million,

12.5% of total Asian Development Bank

$506 million a The ADB?s Office of Pacific Operations administers assistance
in the 12 developing member countries.

Objective:

 Poverty reduction supported through economic, governance, and public
sector reform; private sector development; a more active role for women in
social, political, and economic spheres; and sustainable environment
management.

Papua New Guinea: $225 million, 44.4% of total Samoa: $53 million, 10.4% of
total

a This figure does not include most loans provided by the ADB to recipient
countries. Sources: ADB and EU documents and interviews, and GAO analysis of
OECD data.

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 30 GAO- 01- 808 Pacific Development Assistance Strategies

Between 1987 and 1999, donors provided about $11.9 billion in development
assistance to 14 sovereign nations and 5 territories in the Pacific region,
according to data reported by the OECD?s Development Assistance Committee.
The recipients ranged from Papua New Guinea, with almost 70 percent of the
region?s 6.4 million residents, to Niue, with 1,500 residents. This appendix
presents information on the characteristics of the sovereign island nations,
data on their development assistance, and information on how they compare
with other islands in the region.

The Pacific Island countries vary substantially in their size and population
and the composition of their geography. Fiji, with a land area of 7,055
square miles and a population of 785,000, is very different from the remote
and small, low- lying atolls of Kiribati, which encompasses only 266 square
miles and has a population of 85,100. These islands also span a wide range
in terms of their human development. The United Nations Development Program
created the Human Development Index to measure development progress in three
dimensions- life expectancy, educational attainment, and per capita gross
domestic product (GDP)- and to show where each country stands in relation to
the scales, which are expressed as a value between 0 and 1, with 1 being the
highest score. The FSM and the RMI are in the bottom half of a list of
Pacific Island nations, according to their index scores in 1998, despite
their high GDP per capita.

Table 3 displays basic information on development assistance recipients?
land area, geographic characteristics, population, political status, per
capita GDP, and Human Development Index. While Palau ranks the highest
(0.861) and Papua New Guinea the lowest (0.371) in the Human Development
Index, both the FSM and the RMI fall closer to the middle of the index,
reporting 0.569 and 0.563, respectively. Appendix III: Recipients of
Development

Assistance in the Pacific Region Recipient Characteristics and Data

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 31 GAO- 01- 808 Pacific Development Assistance Strategies

Table 3: Information on Pacific Islands That Received Development Assistance
in 1998

(Amounts in 1998 U. S. dollars)

Country Land area

(square miles) Geographic characteristics Population Political status Per
capita

GDP Human

Development Index

Cook Islands 92 15 widely dispersed islands, volcanic peaks, and atolls.
19,200 Independent, in free

association with New Zealand

$2,651 b 0.822 Fiji 7,055 320 islands. Major islands

are mountainous and forested.

785,700 Independent 2,008 0.667 FSM 270 607 islands and atolls. 114,100 a
Independent, in free

association with the United States

1,864 0.569 Kiribati 266 33 islands, almost entirely

low- lying, scattered atolls. 85,100 Independent 530 0.515 Nauru 8 Single
island made up of

nearly exhausted, phosphate- bearing rock.

11,500 Independent 7,017 b 0.663 Niue 101 Coral island. 1,500 Independent,
in free

association with New Zealand

4,733 b 0.774 Palau 170 343 islands, encircled by a

100 mile reef. 18,500 Independent, in free association with the

United States 6,989 0.861

Papua New Guinea 179,490 Largest Pacific island- state

land mass. 4,412,400 Independent 843 0.314 RMI 70 34 coral islands, 870
reefs,

and average elevation of 7 feet.

50,840 c Independent, in free association with the United States

2,008 b 0.563 Samoa 1, 158 4 of 9 islands inhabited. 174,800 Independent
1,004 0.590 Solomon Islands 11,197 850- mile- long double island

chain. Six mountainous main islands.

417,800 Independent 720 0.371 Tonga 386 Main islands volcanic, some

150 coral atolls, 36 inhabited. 98,000 Independent 1,763 0.647 Tuvalu 10 5
atolls, 4 coral islands. 11,000 Independent 345 b 0.583 Vanuatu 4, 707 80
scattered islands, several

active volcanoes. 182,500 Independent 1,319 0.425 Note: The Human
Development Index measures development progress in three dimensions- life
expectancy, educational attainment, and per capita gross domestic product-
and shows where each country stands in relation to the scales, which are
expressed as a value between 0 and 1, with 1 being the highest score. a The
FSM population, according to the 2000 Census, is now about 107,000.

b The Bank of Hawaii, the source of these data, was unable to identify the
specific year for the figures. c Secretariat of the Pacific Community, 1999.

Sources: Bank of Hawaii, New Zealand Ministry of Foreign Affairs and Trade,
Secretariat of the Pacific Community, Central Intelligence Agency?s World
Factbook 2000, the World Bank, and the United Nations Development Program.

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 32 GAO- 01- 808 Pacific Development Assistance Strategies

This section describes development assistance over time, identifies each
recipient?s major donors and how much assistance is provided, compares
differences in the amount of assistance per capita among recipients, and
analyzes the role of development assistance in the economy by measuring
assistance as a percentage of GDP.

Between 1987 and 1999, the FSM and the RMI each received substantially
higher amounts of assistance-$ 1.8 billion and $873 million, respectively-
than other recipients, except for Papua New Guinea, which received $4. 4
billion in assistance. Figure 3 shows the total amount of assistance
received by the major Pacific Island recipients for 1987 through 1999.

Figure 3: Recipients of Development Assistance to the Pacific Region, 1987-
99

a ?All others? includes the Commonwealth of the Northern Marianas, the Cook
Islands, French Polynesia, Kiribati, Nauru, New Caledonia, Niue, Tokelau,
Tonga, Tuvalu, and Wallis and Futuna. Sources: GAO analysis of OECD data and
annual financial audits of the FSM, the RMI, and Palau.

Development Assistance and Its Role in the Recipients? Economy

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 33 GAO- 01- 808 Pacific Development Assistance Strategies

The assistance per capita varied widely for the 14 Pacific Island nations.
Table 4 shows that Niue received more than $2,700 in assistance per capita
in 1998, while Fiji received $46 in assistance per capita. The median
assistance per capita was $680. The RMI and the FSM ranked third and fourth,
respectively, among the recipients.

Table 4: Assistance per Capita and Total Development Assistance for Pacific
Islands, 1998

(Amounts in 1998 U. S. dollars)

Recipient Assistance

per capita Total assistance

(millions)

Niue $2,720 $4.1 Palau 2, 168 40.1 RMI 1, 438 73.1 FSM 1, 010 115.3 Tuvalu
471 5.2 Cook Islands 420 8.1 Tonga 252 24.7 Vanuatu 223 40.6 Samoa 208 36.4
Kiribati 203 17.3 Nauru 183 2.1 Solomon Islands 102 42.6 Papua New Guinea 82
361.2 Fiji 46 36.5

Sources: GAO analysis of OECD data and annual financial audits of the FSM,
the RMI, and Palau; and the Secretariat of the Pacific Community.

Seven of the recipient countries have received more than half of their
assistance from a single donor. The RMI, the FSM, Nauru, and Palau, for
example, have received at least 87 percent of their 1987 through 1999
assistance from a single donor. Table 5 lists the five largest donors, and
their share of total assistance, for each recipient country for 1987 through
1999.

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 34 GAO- 01- 808 Pacific Development Assistance Strategies

Table 5: Recipients of Development Assistance and Their Major Donors, 1987-
99

(Amounts in 1998 U. S. dollars in millions)

Recipient Major donor Total aid Percentage of total aid

New Zealand $94.92 61.8% ADB 23.4 15.2 Australia 15.99 10.4 Japan 4. 4 2.9
UNDP 4. 36 2. 8 Cook Islands

All other donors 10.42 6.8 Australia 194.89 33.4 Japan 169.32 29.0 New
Zealand 60.68 10.4 UNTA 17.15 2.9 France 30.6 5. 2 Fiji

All other donors 111.34 19.1 United States 1,632.26 92.8 Japan 81.91 4.7 ADB
28.84 1.6 Australia 6.07 0.3 UNDP 3. 48 0. 2 FSM

All other donors 6. 64 0. 4 Japan 90.33 38.2 Australia 49.56 21.0 United
Kingdom 29.3 12.4 New Zealand 23.69 10.0 EU 22.56 9.5 Kiribati

All other donors 20.81 8.8 Australia 12.27 67.2 Japan 5. 48 30.0 UNTA 0. 17
0. 9 New Zealand 0.08 0.4 Other UN agencies 0.06 0.3 Nauru

All other donors 0. 19 0. 1 New Zealand 69.02 88.2 Australia 6 7. 7 UNDP 2.
02 2. 6 Japan 0. 59 0. 8 UNTA 0. 49 0. 6 Niue

All other donors 0. 14 0. 2

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 35 GAO- 01- 808 Pacific Development Assistance Strategies

(Amounts in 1998 U. S. dollars in millions)

Recipient Major donor Total aid Percentage of total aid

Palau United States 381.51 87.5 Japan 49.55 11.4 Canada 1.99 0.5 Australia
1.19 0.3 UNTA 0. 39 0. 1 All other donors 1. 56 0. 3 Australia 2872.92 64.6
Japan 559.72 12.6 EU 476.63 10.7 ADB 224.74 5.1 Germany 92.64 2.1 Papua New
Guinea

All other donors 218.27 4.9 United States 779.27 89.2 Japan 50.01 5.7 ADB
36.36 4.2 Australia 2.58 0.3 UNDP 2. 18 0. 2 RMI

All other donors 2. 86 0. 3 Japan 162.5 25.9 EU 112.28 17.9 Australia 111.6
17.8 United Kingdom 80.7 12.9 ADB 40 6. 4 Solomon Islands

All other donors 119.98 19.1 Australia 92.35 27.3 Japan 90.68 26.8 New
Zealand 50.29 14.9 ADB 36.53 10.8 EU 28.35 8.4 Tonga

All other donors 40.09 11.9 United Kingdom 37.44 29.3 Australia 28.72 22.5
Japan 22.81 17.9 New Zealand 22.68 17.8 UNDP 4. 63 3. 6 Tuvalu

All other donors 11.45 9.0 Australia 125.73 22.7 France 111.5 20.2 United
Kingdom 80.29 14.5 Japan 64.76 11.7 EU 55.57 10.0 Vanuatu

All other donors 115.19 20.8

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 36 GAO- 01- 808 Pacific Development Assistance Strategies

(Amounts in 1998 U. S. dollars in millions)

Recipient Major donor Total aid Percentage of total aid

Samoa Japan 135.51 26.6 Australia 101.74 20.0 New Zealand 69.59 13.7 ADB
52.84 10.4 EU 46.69 9.2 All other donors 102.17 20.1 Legend: UNDP = United
Nations Development Program

UNTA = United Nations Technical Assistance Sources: GAO analysis of OECD
data and annual financial audits of the FSM, the RMI, and Palau.

Finally, figure 4 provides information on the proportion of aid that makes
up each country?s GDP. In 6 of 13 countries, aid constitutes 20 percent or
more of their GDP. For example, the FSM and the RMI rely heavily on
development assistance- more than 50 percent of their GDP- to sustain their
economies.

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 37 GAO- 01- 808 Pacific Development Assistance Strategies

Figure 4: Proportion of Aid and Non- aid in 13 Pacific Islands? GDP, 1998

Note: We did not include Tuvalu in this figure because inconsistencies in
the data did not provide reliable information.

Sources: GAO analysis of OECD data and annual financial audits of the FSM,
the RMI, and Palau; the World Bank; and the Bank of Hawaii.

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 38 GAO- 01- 808 Pacific Development Assistance Strategies

Although there are great differences among the size, population, geographic
characteristics, economic development, social indicators, and other features
of Pacific Island recipients of development assistance, the ADB has
classified the island nations according to their development conditions and
recommended assistance strategies for each type of island classification. 25

The ADB places its member countries into three categories on the basis of
resource endowments, population, poverty level, social characteristics,
international labor mobility, growth prospects, and strategies tailored for
each classification. Atoll economies have little prospect for economic
development, and there is special concern about the sustainability of
financing of essential services. The ADB therefore recommends that island
atolls (the RMI, Kiribati, Nauru, and Tuvalu) develop trust funds and
continue to rely on aid for their economic sustainability. In contrast, the
strategy for economically advanced countries (Fiji, Samoa, the FSM, Tonga,
and the Cook Islands) is to focus on physical infrastructure and private
sector development as well as tourism industry development. For Papua New
Guinea, the Solomon Islands, and Vanuatu (the Melanesian nations), the group
with the most potential for growth, the ADB priority is to expand access in
rural areas, reduce high population growth rate, and build local government
capacity. (See table 6 for the ADB?s classification of the Pacific Islands
in its Pacific Strategy.)

25 A Pacific Strategy for the New Millenium (Manila, Philippines: Asian
Development Bank, Sept. 2000). ADB Classification of

Pacific Islands

Appendix III: Recipients of Development Assistance in the Pacific Region

Page 39 GAO- 01- 808 Pacific Development Assistance Strategies

Table 6: ADB Classification of Resource Endowments and Opportunities in the
Pacific Islands Category

Melanesian nations: Papua New Guinea, Vanuatu, Solomon Islands

Economically advanced nations: Fiji, Samoa, FSM, Tonga, Cook Islands Island
atoll nations: RMI, Nauru,

Tuvalu, Kiribati

Natural resource endowments Abundant Moderately good Small, isolated, weak
resource base,

high vulnerability to sea- level rise Population High growth, low density
Not discussed High density Poverty level High Low Low Social indicators and/
or social services Poor Good Not discussed International labor mobility Low
High Not discussed Growth prospects Good Modest Little Strategies Expand
access in rural areas

to basic services and microfinance; reduce high

population growth rate; build local government capacity.

Focus on private sector development and physical infrastructure to promote
economic growth; further develop tourism industry.

Establish and expand trust funds to finance public expenditures; explore
opportunities to develop marine resources, tourism supports, and skills
development for labor export.

Source: ADB.

Appendix IV: Trust Funds in the Pacific Page 40 GAO- 01- 808 Pacific
Development Assistance Strategies

Several trust funds exist in the Pacific. Their objective is to provide a
source of sustainable revenue from the proceeds from investment of the trust
fund capital. According to a report prepared in 1999 for the ADB, 26 these
funds have had mixed results. The Tuvalu Trust Fund, which was set up by aid
donors to provide sustained revenue, is cited as a model for future trust
funds because the fund agreement incorporates key design features. The
report to the ADB, plus other reports by the United Nations 27 and USAID, 28
identify specific design characteristics that may lead to successful trust
funds.

Several trust funds are currently operating in the Pacific. Examples include
the Tuvalu Trust Fund; the Kiribati Revenue Equalisation Reserve Fund; the
Banaban Trust Fund; the Marshall Islands resettlement trust funds for Bikini
Island, Enewetak, Utrik, and Rongelap; the Palau Trust Fund; and the Nauru
Phosphate Royalties Trust. These funds were designed to serve a range of
purposes, including the development of rural communities or outer islands,
management of recurring government expenses, and assistance in achieving
greater financial autonomy.

Six of the seven major donors have contributed to trust funds. For example,
Australia, New Zealand, the United Kingdom, and Japan have donated funds to
the Tuvalu Trust Fund. The United States contributed to the Palau Trust
Fund. Finally, the ADB provided a loan for another trust fund in Tuvalu that
was designed to assist outer island development.

Although the funds of Kiribati and Tuvalu are known for their success in
maintaining fund value, both funds have received criticism because they have
tended to reinvest their revenues into the funds instead of using them for
development. In contrast to the investment success of the Kiribati and
Tuvalu funds, the Banaban Trust Fund has encountered serious difficulties
involving misappropriation and poor management of the fund?s capital,

26 Review of Existing and Proposed Trust Funds, prepared for the ADB
(Wellington, New Zealand: Nimmo- Bell & Company, Mar. 31, 1999). 27 ?Trust
Fund Formulation: A Strategy for Sustainable Development,? in Integrated
Macroeconomic Development Planning and Management for Sustainable
Development: Guidelines for Island Developing Countries (New York: United
Nations, Department for Development Support and Management Services, 1993).

28 Endowments as a Tool for Sustainable Development, USAID Working Paper
#221 (Washington, D. C.: USAID, Center for Development Information and
Evaluation, July 1996). Appendix IV: Trust Funds in the Pacific

Trust Funds in the Pacific

Appendix IV: Trust Funds in the Pacific Page 41 GAO- 01- 808 Pacific
Development Assistance Strategies

due to the failure of the fund structure to separate fund managers and fund
users and to protect the fund capital. Similarly, the Nauru Phosphate
Royalty Trust has lost most of its value due to poor advice from its legal
and economic advisers. In addition, Nauru has borrowed against future
earnings of the Trust. Finally, the Bikini Island Resettlement Trust Fund,
although successful in providing a stream of revenue, has experienced
difficulty in finding an equitable distribution mechanism for revenue to
beneficiaries because clear guidelines were not established in the fund
agreement.

The Tuvalu Trust Fund was created by an international agreement between
Tuvalu, Australia, New Zealand, and the United Kingdom in 1987. The fund was
set up to enable the small island nation to help finance chronic budget
deficits, underpin economic development, and achieve greater financial
autonomy. As a result of the agreement to create the fund, annual British
aid for recurring budget expenses ended. Initial contributions to the fund
in 1987 amounted to Austalian $27.1 million. 29 The initial donors were
Tuvalu, Australia, New Zealand, and the United Kingdom, with later
contributions from Japan and South Korea. The fund capital had $66 million,
as of December 2000, and Tuvalu has set an informal target of $100 million
before it will stop reinvesting in the fund.

The fund management structure includes (1) a Board of Directors, with each
member having been appointed by an original donor; (2) professional fund
management; (3) external auditors; and (4) an advisory committee. According
to one of its members, the advisory committee regularly evaluates and
monitors the fund and provides advisory reports to the government of Tuvalu
and the Board of Directors. Each of the original donors has a member on the
committee, while Tuvalu currently has two members. Although the donors
nominate the advisory committee members, the committee acts independently.
The member from New Zealand, for example, does not consult with New Zealand
on economic decisions.

Another key element of the fund is the separation of fund capital from fund
proceeds available for distribution. The fund capital is held in an ?A?

29 The fund is maintained in Australian dollars. Due to subsequent
contributions by Tuvalu through reinvestment, Tuvalu?s contributions of
Australian $15. 5 million, as of March 1999, made it the largest contributor
to the fund. Example of

Successful Trust Fund: Tuvalu Trust Fund

Appendix IV: Trust Funds in the Pacific Page 42 GAO- 01- 808 Pacific
Development Assistance Strategies

account and invested primarily in Australia. The objectives of the A account
are to maintain the real value of the fund and to provide a regular stream
of income to the government of Tuvalu. Income earned from the investments is
calculated annually. Generally, part of the income is automatically
reinvested to maintain the real value of the fund, while remaining income is
placed in a separate account, the ?B? account, to hold it for distribution
to the government of Tuvalu. According to a report on the 10th anniversary
of the trust fund, 30 the B account has become an important tool for the
government to use in managing its cash flow. The government limits budget
growth to the amount of money the fund can deliver.

According to an advisory committee member, the trust fund agreement does not
allow the donors to intervene in determining how Tuvalu uses the fund
proceeds. A U. N. review of the fund noted that this arrangement provides
the Tuvalu government with a considerable degree of financial independence,
which was not possible under a system of direct bilateral assistance. Bad
decisions by the Tuvalu government would affect only the B account, not the
fund capital.

According to the reports on trust funds, these funds can be effective
instruments for providing development assistance if they are properly
designed and managed. The Nimmo- Bell & Company 1999 report to the ADB 31
identified several issues that trust funds must address:

 The purpose of the fund must be clear and specific, along with containing
clear and measurable goals and objectives.

 There should be a legal structure that permits the establishment of the
fund; tax laws allowing the fund to be tax exempt, within the country and
internationally; and a provision for donations from public and private
contributors.

 There must be a sound, transparent, and accountable governance structure.

30 Tuvalu Trust Fund, 10th Anniversary Profile, 1987- 1997, produced by
Brian Bell, Tuvalu Trust Fund Advisory Committee, with assistance from Garry
Wiseman and Tony Hughes (Wellington, New Zealand: no date)

31 Review of Existing and Proposed Trust Funds.

Key Design Features for Trust Funds

Appendix IV: Trust Funds in the Pacific Page 43 GAO- 01- 808 Pacific
Development Assistance Strategies

 Mechanisms must be provided to ensure involvement of a broad set of
stakeholders, including the beneficiaries, central and local government, and
donors during the design process.

 Adequate protection mechanisms must be built into the structure to
safeguard the capital of the fund and ensure a fair distribution of
benefits.

 Strong linkages should exist between the fund and national strategies and
action plans.

 Baseline information should be collected at the initiation of the trust
fund so that the performance can be measured against the criteria.

 Money managers should be selected on a competitive basis.

 The sophistication of investment management should reflect the size of the
fund in order to keep administrative and transaction costs to an appropriate
level.

 Technical assistance should be provided during the establishment phase and
the first few years of operation to assist fund managers in implementing the
intent of the fund and to monitor its performance.

According to a U. N. report, 32 trust funds are most appropriate for
addressing development problems that require a continuous income stream over
a long- term period. A key advantage of a trust fund for donors is its cost-
effectiveness in reducing the administrative costs associated with
individual projects or aid cycles. The advantages of a trust fund for
recipients are the abilities to (1) improve the coordination, consistency,
and sustainability of overall development efforts; (2) reduce administrative
efforts linked with obtaining assistance and preparing reports on the use of
donor resources; and (3) coordinate disbursements of assistance with
institutional capacity to manage the assistance.

Finally, according to a USAID working paper on endowment funds (trust
funds), several lessons are available from USAID?s involvement in funding
more than 35 endowment funds. 33 These lessons include the need for adequate
financing to establish the fund, the strategic use of matching funds to
leverage the U. S. contribution, and the importance of fund independence
from government or secular interests. The principal conclusions from the
review of USAID endowment funds were that (1) under the appropriate
conditions, such funds can be a viable option for providing long- term,
sustainable development; (2) using funds can be an important strategy for
increasing the capabilities of development partners;

32 ?Trust Fund Formulation: A Strategy for Sustainable Development.? 33
Endowments as a Tool for Sustainable Development.

Appendix IV: Trust Funds in the Pacific Page 44 GAO- 01- 808 Pacific
Development Assistance Strategies

(3) strong institutions that are well managed and have successful track
records are an essential prerequisite to funding; and (4) by their nature,
funds involve less USAID monitoring and oversight than other types of
activities because of built- in safeguards. These safeguards include (1)
USAID involvement in the design of the fund agreement, (2) USAID approval of
the initial Board of Directors and possibly appointment of a board member,
(3) annual audits and performance reports, and (4) a requirement that all
funds be invested in financial instruments offered in the United States
through a U. S.- based financial intermediary. The report concluded that
using well- designed funds that are consistent with USAID and host country
objectives are a ?natural? for countries graduating from USAID assistance.

Appendix V: Sectorwide Approaches to Development Assistance

Page 45 GAO- 01- 808 Pacific Development Assistance Strategies

Sectorwide approaches emerged in the 1990s as a form of assistance designed
to return ownership of the development process to the recipient government,
according to a report by the Overseas Development Institute. 34 The
approaches are a response to (1) recent work on aid effectiveness, which
found that development assistance requires a supportive policy environment
in the recipient country in order to achieve sustainable benefits, and (2)
concern that a proliferation of stand- alone, donor- funded projects has led
to a piecemeal and distorted pattern of development. In addition, donors
believe that poor coordination has contributed to multiple donor agendas and
reporting systems, which has complicated the development process for
recipient countries.

Sectorwide approaches are expected to achieve greater coherence in the use
of aid by allowing recipient governments to assume ownership for the
planning and implementation of all activities within a specific sector. If
the donor projects are not set within a coherent plan and budget, the result
can be an effort that is expensive to manage and in which there is wasteful
duplication, uneven coverage, inconsistent approaches, and poor
sustainability of projects.

The principal characteristic of a fully developed sector program is that all
significant funding for a designated sector should support a single sector
policy and expenditure program, under the recipient government?s leadership.
By requiring recipients to develop their own sector strategies, the
assumption is that sectorwide approaches will enhance country ownership. A
condition for assuming ownership, however, is the presence of sound
policies, such as reasonable macroeconomic and budget policies; a supportive
environment for private sector development; and a role for the public sector
that is consistent with the government?s management and financial capacity.
Donors may have to work closely with the recipients to develop the needed
policy environment. An Australian Agency for International Development
document noted that there are five stages in moving toward a process of
progressively strengthening government sector management. The progression
depends on achieving milestones related to improved effectiveness in
government budget management. The stages range from the first step, in which
a donor provides project- based assistance and implementation within an
agreed policy framework, to the

34 New Approaches to Development Co- operation: What can we learn from
experience with implementing Sector Wide Approaches?, Working Paper 140
(London, England: Overseas Development Institute, Centre for Aid and Public
Expenditure, Oct. 2000). Appendix V: Sectorwide Approaches to

Development Assistance

Appendix V: Sectorwide Approaches to Development Assistance

Page 46 GAO- 01- 808 Pacific Development Assistance Strategies

fifth step of supporting a sector program with a common financing mechanism.
Another benefit of having a coherent sector strategy under the recipient
government?s leadership is that donors support the sector under a common
framework, thus minimizing the problems of poor coordination.

Two reports 35 identified the following conditions for making sectorwide
approaches successful:

 Sectorwide approaches are more relevant for countries and sectors in which
donors? contributions are large enough to create coordination difficulties.
These approaches are less desirable if aid is only a small share of the
budget.

 Sectorwide approaches are potentially more useful when applied to those
sectors in which there exists greater agreement among donors and recipients
regarding the need for a strong government role in the financing, planning,
and delivery of services, hence the dominance of health and education.

 Supportive macroeconomic and budget frameworks must be in place because
there is a longer time frame.

 Donors should not dismiss out of hand sectorwide approaches due to a
perceived lack of recipient capacity. The best strategy may be to strengthen
the sector capacity.

 Sectorwide approaches have been more successful in certain areas, such as
health and education, and have tended to fail when attempting to address
crosscutting themes, such as the environment, or sectors in which there is a
great deal of disagreement about the proper role of government, such as the
agriculture sector. These themes need to be incorporated into various sector
programs, rather than having their own sectorwide approaches.

 Sectorwide approaches are more likely to be successful where public
expenditure is a major feature of the sector and where the donor
contribution is large enough for coordination to be a problem (where aid
forms more than 10 percent of GDP).

As of June 2000, there were about 80 sector programs being prepared and
implemented, mostly in Africa, according to the Overseas Development
Institute. The approaches are found exclusively in highly aid- dependent

35 Improving Aid Effectiveness: What Role for Sector- Wide Approaches?
(USAID, discussion draft paper as of June 15, 2001) and New Approaches to
Development Cooperation: What can we learn from experience with implementing
Sector Wide Approaches?

Appendix V: Sectorwide Approaches to Development Assistance

Page 47 GAO- 01- 808 Pacific Development Assistance Strategies

poor countries. More than half of the approaches have been in the health and
education sectors. Thus far, Australia is the only bilateral donor to take a
sectorwide approach in the Pacific, and this is a limited pilot project that
has not been evaluated.

In addition, from a recent survey of 16 sector programs, more than 80
percent of the aid provided was in the form of traditional project
assistance, making use of individual donor procedures, and just 17 percent
was given in the form of sector budget support. These results may reflect
documents on sectorwide assistance, which describe donors moving from
project assistance strategies to a sectorwide approach. The U. S. proposal
to the FSM and the RMI, by contrast, would shift from a budget support
strategy to a sectorwide approach.

Appendix VI: Comments From the Republic of the Marshall Islands

Page 48 GAO- 01- 808 Pacific Development Assistance Strategies

Appendix VI: Comments From the Republic of the Marshall Islands

Note: GAO comments supplementing those in the report text appear at the end
of this appendix.

See comment 1.

Appendix VI: Comments From the Republic of the Marshall Islands

Page 49 GAO- 01- 808 Pacific Development Assistance Strategies

See comment 2.

Appendix VI: Comments From the Republic of the Marshall Islands

Page 50 GAO- 01- 808 Pacific Development Assistance Strategies

See comment 3.

Appendix VI: Comments From the Republic of the Marshall Islands

Page 51 GAO- 01- 808 Pacific Development Assistance Strategies

The following are GAO?s comments on the letter from the Republic of the
Marshall Islands dated July 19, 2001.

1. We have added text on page 6 of this report to recognize that portions of
the Compact economic assistance to the RMI are used for payments related to
the U. S. military presence at the Kwajalein Atoll. A 1982 Land Use
Agreement between the RMI government and an organization of Kwajalein
landowners obligated the government to make payments to the landowners. In
fiscal year 1998, for example, the RMI government paid about $8 million in
Compact assistance to the landowners.

2. Our report clearly acknowledges that donors need to tailor their
strategies to the individual characteristics of the recipient nations. Page
15 describes the ADB?s subregional approach to development, on the basis of
Pacific Island characteristics. On pages 19 and 20, we suggest that tailored
strategies may be more effective because they are more likely to ensure
recipient commitment.

3. We highlighted Australia?s pilot project to support the health sector in
Papua New Guinea as a sectorwide approach in the Pacific. However, because
the United States is proposing sector grants for the RMI and the FSM, we
included additional information about sectorwide approaches in appendix V.
The appendix summarizes some development conditions that could help
sectorwide approaches succeed. We relied on reports that summarized donor
experiences with these approaches for this information and did not evaluate
individual country approaches outside of the Pacific region. Additional
information on selected sectorwide approaches can be found in (1) New
Approaches to Development Co- operation: What can we learn from experience
with implementing Sector Wide Approaches? and (2) The Status of Sector Wide
Approaches. 36

36 The Status of Sector Wide Approaches, Working Paper 142 (London, England:
Overseas Development Institute, Center for Aid and Public Expenditure, Jan.
2001). GAO Comments

Appendix VII: Comments From the Federated States of Micronesia

Page 52 GAO- 01- 808 Pacific Development Assistance Strategies

Appendix VII: Comments From the Federated States of Micronesia

Note: GAO comments supplementing those in the report text appear at the end
of this appendix.

Appendix VII: Comments From the Federated States of Micronesia

Page 53 GAO- 01- 808 Pacific Development Assistance Strategies

See comment 4. See comment 3. See comment 2.

See comment 1.

Appendix VII: Comments From the Federated States of Micronesia

Page 54 GAO- 01- 808 Pacific Development Assistance Strategies

The following are GAO?s comments on the letter from the Federated States of
Micronesia dated July 19, 2001.

1. The intent of our report was to highlight some of the lessons learned
from other donors? experiences with development assistance throughout the
Pacific. One of the lessons, which we discuss on page 19 of the report, is
that strategies tailored to the individual development conditions of the
recipient country are more likely to succeed. In the case of the FSM, this
lesson implies that the United States could adopt a new strategy with
different assistance levels to reflect improved development conditions.

2. On page 11 of this report, we recognize that many motivations, such as
historical ties, guide the distribution of development assistance to the
Pacific Island nations. In a previous report, 37 we discussed these
historical ties and the current obligation to provide assistance through the
Compact of Free Association through fiscal year 2001, with the possibility
of extended assistance. Nevertheless, as we note on page 4, the FSM, as a
small, island nation in the Pacific, shares similar development challenges
with at least 13 other island nations that receive development assistance.
Also, beginning with footnote 3 and discussed throughout this report, we
note that the major donors provided $11 billion in development assistance to
14 Pacific Island nations. We compiled these data from several sources- the
OECD and annual financial audits of the FSM, the RMI, and Palau.

3. Also on page 11, we have replaced the statement, now on pages 11 and 12,
with other text to clarify our point that multiple objectives for the
Compact may have contributed to reduced expectations for accountability of
the assistance. Also on page 12, we recognize that the Compact economic
assistance to the FSM and the RMI was part of an agreement that included
political and defense elements. The previous report cited in the preceding
response discusses these objectives.

4. We agree that the FSM does not receive assistance from the EU and did not
report that information. As we note in table 2 of this report,

37 Foreign Assistance: U. S. Funds to Two Micronesian Nations Had Little
Impact on Economic Development (GAO/ NSIAD- 00- 216, Sept. 22, 2000). GAO
Comments

Appendix VII: Comments From the Federated States of Micronesia

Page 55 GAO- 01- 808 Pacific Development Assistance Strategies

the EU, however, is one of the major multilateral donors to the Pacific
Island nations and provided $900 million to islands in the region from 1987
to 1999.

Appendix VIII: GAO Contact and Staff Acknowledgments

Page 56 GAO- 01- 808 Pacific Development Assistance Strategies

Emil Friberg, Jr., (202) 512- 8990 In addition to the person named above,
Dennis Richards, Jennifer Li Wong, Ron Schwenn, and Rona Mendelsohn made key
contributions to this report. Appendix VIII: GAO Contact and Staff

Acknowledgments GAO Contact Acknowledgments

(711559)

The first copy of each GAO report is free. Additional copies of reports are
$2 each. A check or money order should be made out to the Superintendent of
Documents. VISA and MasterCard credit cards are also accepted.

Orders for 100 or more copies to be mailed to a single address are
discounted 25 percent.

Orders by mail:

U. S. General Accounting Office P. O. Box 37050 Washington, DC 20013

Orders by visiting:

Room 1100 700 4 th St., NW (corner of 4 th and G Sts. NW) Washington, DC
20013

Orders by phone:

(202) 512- 6000 fax: (202) 512- 6061 TDD (202) 512- 2537

Each day, GAO issues a list of newly available reports and testimony. To
receive facsimile copies of the daily list or any list from the past 30
days, please call (202) 512- 6000 using a touchtone phone. A recorded menu
will provide information on how to obtain these lists.

Orders by Internet

For information on how to access GAO reports on the Internet, send an email
message with ?info? in the body to:

Info@ www. gao. gov or visit GAO?s World Wide Web home page at: http:// www.
gao. gov

Contact one:

 Web site: http:// www. gao. gov/ fraudnet/ fraudnet. htm

 E- mail: fraudnet@ gao. gov

 1- 800- 424- 5454 (automated answering system) Ordering Information

To Report Fraud, Waste, and Abuse in Federal Programs
*** End of document. ***