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 billion1

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 strategies2 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 nations3

 since 1987.4 The Asian Development Bank and the

European Union have been the major multilateral donors. Of the $11.9

billion5 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.

10Other 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.”

12Currently, 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

 13A.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

 14These 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

 15The 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

 16Report 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).

17According 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

 18Australia, 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

 19We did not look at the Nauru Phosphate Royalties Trust fund to make an independent

determination on the success or failure of the investment.

20There 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

 21John 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).

22Reforms 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 world23 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.

 23New 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 milliona

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

$2,651b 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. 114,100aIndependent, 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 7,017b0.663

Niue 101 Coral island. 1,500 Independent, in free

association with New

Zealand

4,733b

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.

50,840c

Independent, in free

association with the

United States

2,008b

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 345b0.583

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.)

 25A 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 Nations27

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,

 26Review 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).

28Endowments 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”

 29The 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

ADB31 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.

 30Tuvalu 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)

31Review 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.”

33Endowments 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

 34New 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 reports35 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

 35Improving 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

 36The 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,

 37Foreign 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)
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