Cover Story
Palau Looks Ahead
Palau Enjoys Modest Success In Key Niches
The sun, it would seem, is shining on Palau. The Compact of Free Association with the United States is in its ninth year with six years of funding yet to come. The young nation has developed friendly, and lucrative, diplomatic relations with the Republic of China (Taiwan) and maintains strong ties to Japan. Stable funding, moderate if continued growth, a steady stream of Asian tourists and shared awareness of Palau’s unique natural environment—all point to a feeling of optimism that is reflected in the theme of the administration of President Tommy E. Remengesau, Jr., “Preserve the best, improve the rest.”
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Yet the Remengesau administration is in the midst of a stormy debate over the key issue of whether the private sector is growing fast enough to satisfy national needs. While there are six more years of U.S. Compact funding, the heftiest outlays of the first years have passed and the Compact is well into its closing stages. The Compact was structured to front-end load funding, and Palau now faces steady, if relatively flat, financial support from Washington for the remainder of the current agreement.
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Just as important, perhaps, is Remengesau’s re-election campaign. He is up for another four-year term next year. His re-election or defeat will hinge on the health of Palau’s private sector. Remengesau’s predecessor, Kuniwo Nakamura, had long and deep ties in Japan’s business community. Many Palau business people believe Nakamura’s strong relationships were able to drive much of the recent Japanese investment. But Remengesau, a comparatively young man, is a more populist president who must still deal with investment expectations set by his predecessor.
Indeed, the pressure is on the Remengesau administration to find ways to drive the economy and still insure the least possible impact on Palau’s most valuable asset—its travel brochure environment. But retail businesses, construction and tourism will impact Palau’s infrastructure and environment. Recently, Remengesau and the Olbiil Era Kelulau, Palau’s national Congress, have had impassioned clashes over “high-end” versus “low-end” tourism. Remengesau favors the high-end, affluent visitors who have spending power, but arrive in fewer numbers and have less of an impact on the country’s world-renowned marine and rainforest environments.
Despite the stormy issues challenging the government, the ongoing effects of the still sputtering Asian economies—and now the clouds of war—most senior officials in government and the business community remain optimistic about Palau’s outlook.
The Palau Visitors Authority is even reporting an upturn in visitor arrivals, reversing a decline between 1999 and 2001. Last year, some 58,560 visitors traveled to Palau, an 8 percent increase over the 54,111 of the previous year—most from Japan and Taiwan. Following the trend, 5,723 visitors arrived this past January, a 29 percent increase over the 4,441 of the previous January. Mary Ann Delemel, the authority’s managing director, attributes the increase to Palau’s continuing strength as a highly regarded dive location and the opening of a new Palau-based airline, Palau Trans Pacific Airlines, that serves the Palau-Taiwan route. PAIR helped boost the number of Taiwanese visitors from 4,654 in December 2001 to 7,152 in December 2002.
Delemel is enthusiastic about the numbers and predicted that this year will be particularly strong. Palau’s tourism industry, she says, is building upon its diving base by focusing on areas of specialized tourism. The agency is currently marketing small-scale island-style “cottages” in the states of Ngaraard and Melekeok as island getaways.
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In keeping with Remengesau’s theme of “preserve and improve” was the completion of the Koror-Babeldaob Bridge in December 2001, the ongoing construction of the Compact Road that will circle Babeldaob, the new national capitol now under construction in the state of Melekeok and a new airport terminal—all with scheduled completion dates by the end of next year.
Moreover, construction began in January on the $3.6 million New Malakal Natural Wastewater Treatment Park and in March on a new complex to house the Belau National Museum. While the complex has been the dream of Director/Curator Faustina Rehuher and the museum’s Board of Directors since the late 1980’s, the present administration brought it to fruition. Remengesau sought and received financial assistance of $2.2 million from Taiwan to build the new museum, which will focus on the environment and culture. In a related project, a building contract was awarded in January for the construction of Ngara-amayong Cultural Center on Babeldaob. Taiwan approved $2.45 million for funding the cultural center that, along with the new Belau National Museum, will be completed in time for the July 2004 Pacific Festival of Arts hosted by Palau.
The national government has also been seeking foreign business investments that will insure economic growth, provide employment for Palauans and have minor impact on the environment. In the past year, the Foreign Investment Board granted permits to five foreign businesses including a construction company, a contractor hired to renovate the Palau Pacific Resort, a television production company, a firm that will develop and operate a resort and a pest control service.
Some innovative opportunities for foreign investment are in the offing. The House of Delegates of the national Congress recently passed a bill to open a free trade zone in the state of Ngardmau to encourage high-end industries such as computer programming firms, database storage and financial services. In July, bottled wines from Katsunuma, Japan will begin an innovative aging process in the immaculate waters of Palau. Palau and Katsunuma will share in the promotion and the sale of the wine. Pearl farming is also being considered. Atlas Pacific, Ltd., an Australian pearl farming company, is another possible investor that would bring currency into Palau and have little impact on the environment.
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Bankers in Palau, always a cautious lot, share in the general optimism. Tukana Bovoro, president of the National Development Bank of Palau, which provides small business loans and home loans for first-time buyers, says that growth at NDBP has been slow but steady. Bovoro takes a conservative position on the state of the economy. “Nevertheless,” he concedes, “so far our performance has been above our projected target.
“It’s a good dilemma to be in,” Bovoro continues. “So many positives are coming into place for the economy—new airlines are bringing in Taiwanese tourism, the Compact Road is progressing toward completion, there are several hotel projects in the pipeline, the government is committed to outsourcing some of its services—the outlook is positive, provided certain fundamentals are put into place.”
Bovoro acknowledges a big demand for new homes among younger Palauans. Unfortunately, few in this economic sector have the resources to take advantage of home loans now being offered for 8 percent.
Stephen Brock, a vice president and country manager for Bank of Hawaii, the country’s largest bank, is also optimistic about the future. “We don’t anticipate any big growth, but at least there is growth.” He attributes the bank’s expansion in Palau to stable government, “the government has good leaders.” And to Palau’s attraction to visitors as, arguably, the best diving spot in the world.
Bank of Hawaii is building a $2 million branch in Koror. The bank is contributing $800,000 for the new building and its landlord, the estate of Isidoro Rudimch, is funding the remainder of the project’s $1.2 million construction cost. Brock says that the banking experience at the new branch “is going to be without compare. . . it will bring modern, international banking to Palau.”
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There are other positive signs in Palau’s economy. Last November, WCTC (Western Carolines Trading Company) posted a profit of $1,260,935 for the fiscal year ending June 2002. While that is a 3 percent drop from the $1,294,460 profit reported in the previous year, President Eusebio Rechucher says that “Business remains stable.”
Some existing airlines are expanding their services. Japan Air Lines increased its charter flights from 11 per year to 15 per year in 2002. Far Eastern Air Transport is investigating the possibilities of a broader base for travel to Palau; a route to the west coast of the United States via Taipei is being considered as a potential to attract more American visitors.
At the same time, Palauan-based airlines are emerging. PAIR’s inauguration in December 2002 doubled the number of flights from Taiwan. In late summer, a second Palauan-based airline, Palau Air, is scheduled to begin operations serving the busy Guam-Yap-Palau corridor, and possibly expanding with flights to Chuuk, Pohnpei and Kosrae. Aloha Airlines of Hawaii recently agreed to provide management assistance for the fledgling carrier.
Flights to Manila, currently served by the region’s dominant airline, Continental Micronesia, are also being considered.
Shallum Etpison, president of NECO Group, comprising 12 different companies, is also cautiously optimistic. “In 1995, Palau was taking off. Now it has kind of leveled off. Nevertheless,” he says, “there is hope.”
In addition, Etpison has joined forces with Hideo “Joe” Morita, whose late father, Akio Morita, was one of the founders of Sony Corp., in a two-phase $85 million construction project. Funding for the project will come from Morita while Etpison will provide the land. The project includes the $3.2 million Malakal Marina Village, partially completed in March of this year, and construction of an $81.8 million island hotel project that “will spread out over an island Morita rents from us.” The project is scheduled for completion in 2005.
Another local business leader, Samuel Scott, who owns Sam’s Tours, adds, “Business is doing well for itself—not growing as much as expected before 9/11 but exceeding our revenues for last year.” Scott favors focusing on high-end tourism as a way to protect the fragile environment. He praises the government for going in the right direction, “building a cultural center, a new airport terminal, KB Bridge, new sewer system—we want the first impression off the plane to be, ‘Wow!’”
Still, for all the debate in Palau about foreign investment and growth, the fact remains that the young republic is far better off than many of its neighbors. Unlike most of the Federated States of Micronesia, it is able to attract a steady stream of Asian visitors and the investors who inevitably follow. And, unlike Guam, the region’s tourism leader with more than one million visitors annually, Palau hasn’t had to deal with bad press about back-to-back typhoons and a mismanaged government in financial ruin.
Indeed, when Tommy Remengesau goes before voters next year, Palau may be one the only countries in the North Pacific where voters will be debating issues related to the nature and pace of economic development. In most other Pacific jurisdictions, voters would be happy to have economic growth of any kind.
