The project aims to: Increase electricity access, in the state of Chuuk; Scale-up … Contact online >>
The project aims to: Increase electricity access, in the state of Chuuk; Scale-up
WASHINGTON, December 7, 2018 – The World Bank''s Board of Executive Directors has approved US$30 million for the Federated States of Micronesia (FSM)''s Sustainable Energy Development and Access Project, which supports efforts to increase access to electricity, while improving quality of delivery and reducing the reliance on fossil fuels for generation.
The project is consistent with FSM''s National Energy Policy and Energy Master Plan and complements the World Bank-supported Energy Sector Development Project approved in 2014 both of which highlight the need for a more reliable and sustainable energy sector, promoting equitable access to energy across the country and increasing the share of renewable generation. The project will be implemented by the four state utility companies, the state governments and the FSM National government.
"We are pleased to deepen our partnership with the World Bank in our energy sector, through this project that will see more of our people get access to electricity, improve the quality of electricity supply, and help us achieve a greener electricity sector," said Marion Henry, Secretary of Resources and Development. "We are also working to improve the management of our energy utilities through more efficient operation and maintenance, and sector regulation, while also exploring opportunities for the private sector in electricity generation and supply."
The Federated States of Micronesia is made of up of 74 inhabited islands across the states of Pohnpei, Kosrae, Chuuk and Yap, with the population of more than 104,000 reliant mostly on fossil fuels such as diesel for electricity, making the nation highly vulnerable to petroleum price volatility and shocks. Approximately 76 percent of households in Micronesia have some form of electrification, however access rates vary widely among states; Kosrae and Pohnpei have a 95 percent electrification rate while only 27 percent of Chuuk''s population have access to electricity.
"The World Bank is committed to supporting the Federated States of Micronesia in its long-term goal of boosting access to reliable, clean energy, which is essential for economic growth that benefits all Micronesians," said Victoria Kwakwa, the World Bank''s Vice President for East Asia and the Pacific, who has been in FSM this week for talks with national and state governments in Chuuk, Kosrae and Yap.
The project is funded through a US$30 million grant from the International Development Association (IDA), the World Bank''s fund for the most in-need countries.
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Foreign direct investment (FDI) is almost nonexistent due to prohibitions on foreign ownership of land and businesses (in specified industries), difficulties in registering companies (the process requires approvals from the state governments as well as the national government), poor private sector contract enforcement, poor protection of minority (foreign) investors'' rights, weak courts, and weak bankruptcy processes. In addition, lack of infrastructure, poor health and education systems, the scarcity of commercial flights, and high costs of energy, imported goods and various business services also contribute to the lack of FDI.
Pohnpei State''s Legislature amended its laws in September 2018 to reduce requirements on foreign investment. The law specified the business sectors that permit FDI, with the remaining sectors available for Pohnpei citizens only. Domestic capital formation is very low. Commercial banks are classified as foreign entities and their ability to provide commercial loans, especially secured by real estate, is very limited. Banks view all credit to FSM borrowers as essentially unsecured.
Most national political power is delegated to the four states by the FSM Constitution, including regulation of foreign investment and restrictions on leases. Thus, investors must navigate nationwide between five different sets of regulations and licenses. U.S. citizens can live and work in the FSM indefinitely without visas under the Compact but cannot own property on most FSM islands.
FSM voters select national legislators (senators). The national senators then caucus to select the president and vice-president from among the four at-large senators. There are no political parties. On March 7, 2023, President David W. Panuelo lost his bid for the at-large seat for Pohnpei in the FSM Congress, which eliminated his ability to be reelected president for another four-year term. Senators will select a president and vice-president May 11, 2023.
The FSM federal government closed its borders in March 2020 in response to the COVID-19 pandemic and did not allow any repatriations until May 2021. After one and one-half years of intermittent repatriations of one flight per month per island and a subsequent waive of COVID-19 cases, the FSM government re-opened its borders without restrictions. The reopening has boosted the FSM''s tourism industry and jump-started the implementation of infrastructure programs by international organizations
One of the key problems with integrating additional renewable energy has been antiquated power grids in each of the four states. For example, Pohnpei Utility Corporation has only been able to integrate one-third of the installed capacity of solar power due the instability of its antiquated grid. USTD is proposing technical assistance to increase renewable energy integration and provide grid modernization and capacity building assistance to the four state utilities in the FSM, including the Chuuk Public Utility Corporation, Kosrae Utilities Authority, Pohnpei Utilities Corporation, and the Yap State Public Service Corporation.
There are many structural impediments to increasing foreign investment in the FSM. The FSM has no department dedicated to promoting investment nor any ongoing dialogue with potential investors. These challenges, both regulatory and political, affect foreign investment and economic progress in general, and addressing them requires a constitutional and political will to change that is unlikely in the foreseeable future. Some political leaders at the state and national levels are owners of the largest businesses on the islands and strongly oppose the required structural changes that would result in increased competition. The FSM scores in the lowest quintile in almost all measures and international indices of economic activity and climate for doing business.
In theory, the country''s courts support contractual agreements, but enforcement of judicial decisions is weak. Foreign firms doing business in the FSM have difficulty collecting debts owed by FSM governments, companies, and individuals, even after obtaining favorable judgments. For these reasons, the World Bank''s 2020 Doing Business Report ranked the FSM very low in protecting minority investors (185th of 190 countries) and enforcing contracts (183rd of 190 countries). U.S. companies and individuals considering doing business with parties in the FSM should exercise due diligence and negotiate credit and payment arrangements that fully protect their interests.
The government has not undergone any third-party investment policy reviews in the last five years.
The FSM government does not promote, incentivize, or restrict outward investment. Given the small population and lack of capital formation, outward investment is negligible. The U.S. Bureau of Economic Analysis has shown FSM investment in the United States as $1 million +/- for the last ten years.
There is no bilateral investment or taxation agreement between FSM and the United States. The 2003 Amended Compact of Free Association is the only applicable guidance, with additional information available online. Under this treaty, articles imported from the United States into the FSM are guaranteed to receive treatment that is no less favorable than any other foreign country. Articles exported from the FSM to the United States are duty exempt, with a few exceptions as listed in Article IV, Section 242 of the Compact. Post expects the 2023 revision to the Compact to reflect substantially the same terms and conditions as the 2003 version. The FSM is not a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting.
The FSM follows the U.S. common law system and uses U.S. case law as precedent. There are no specialized courts except for Land Courts in Pohnpei and Kosrae. All four states have State Courts and State Supreme Courts. The judicial system remains independent of the executive branch, but is reported to be slow, weak, and lacking the ability to enforce judgments properly. Regulations or enforcement actions are appealable. Appeals may be adjudicated in either the State or National courts.
In September 2018, the Pohnpei State Legislature overrode the Governor''s veto of a bill on foreign investment regulations. The bill became state law over the objection of several local business leaders. The new law placed all decision-making power into the hands of one person, the national Registrar of Corporations.
FSM national and state governments use a "traffic light" system to regulate businesses, with red for prohibited, amber for restricted, and green for unrestricted. Industry classifications in this system vary from state to state. The individual states directly regulate all foreign investment, except in the areas of deep ocean fishing, banking, insurance, air travel, and international shipping, which are regulated at the federal level. Thus, a prospective investor who plans to operate in more than one state must obtain separate permits in each state, and often follow different regulations as well.
The following are the regulations pertaining to restrictions by sector in each of the states:
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