HomeReportsBureau of Economic and Business Affairs2023 Investment Climate Statements…Micronesia

# 					2023 Investment Climate Statements: Micronesia			

 In this section										/

													EXECUTIVE SUMMARY											

                -  EXECUTIVE SUMMARY 
                -  1. Openness To, and Restrictions Upon, Foreign Investment                    -  Policies Towards Foreign Direct Investment 
                  -  Limits on Foreign Control and Right to Private Ownership and Establishment 
                  -  Other Investment Policy Reviews 
                  -  Business Facilitation 
                  -  Outward Investment 
                -  2. Bilateral Investment and Taxation Treaties 
                -  3. Legal Regime                    -  Transparency of the Regulatory System 
                  -  International Regulatory Considerations 
                  -  Legal System and Judicial Independence 
                  -  Laws and Regulations on Foreign Direct Investment 
                  -  FSM National 
                  -  Kosrae State 
                  -  Pohnpei State 
                  -  Chuuk State 
                  -  Competition and Anti-Trust Laws 
                  -  Expropriation and Compensation 
                  -  Dispute Settlement                      -  ICSID Convention and New York Convention 
                    -  Investor-State Dispute Settlement 
                    -  International Commercial Arbitration and Foreign Courts 
                  -  Bankruptcy Regulations 
                -  4. Industrial Policies                    -  Investment Incentives 
                  -  Foreign Trade Zones/Free Ports/Trade Facilitation 
                  -  Performance and Data Localization Requirements 
                -  5. Protection of Property Rights                    -  Real Property 
                  -  Intellectual Property Rights 
                -  6. Financial Sector                    -  Capital Markets and Portfolio Investment 
                  -  Money and Banking System 
                  -  Foreign Exchange and Remittances                      -  Foreign Exchange 
                    -  Remittance Policies 
                    -  Sovereign Wealth Funds 
                -  7. State-Owned Enterprises                    -  Privatization Program 
                -  8. Responsible Business Conduct                    -  Additional Resources 
                  -  Climate Issues 
                  -  Deforestation is not an issue in the FSM. 
                -  9. Corruption                    -  Resources to Report Corruption 
                -  10. Political and Security Environment 
                -  11. Labor Policies and Practices 
                -  12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs 
                -  13. Foreign Direct Investment and Foreign Portfolio Investment Statistics 
                -  14. Contact for More Information 

## EXECUTIVE SUMMARY

The Federated States of Micronesia (FSM) is a lower middle income island nation of 104,832 in 2021, an eight percent population decline from 2019. The inhabitants live on 607 islands with a total land area of 271 square miles and an exclusive economic zone (EEZ) of over one million square miles (2.6 million square km) in a remote area of the Western Pacific Ocean. The nation is composed of distinct, separate cultures and languages organized into four states under a weak national government. The FSM is part of the former U.S.-administered Trust Territory of the Pacific Islands, gaining independence in 1986. Since independence, the United States has provided over $100 million annually to the FSM under a Compact of Free Association (Compact or COFA) with the United States. FSM uses the funds for development under the administration of the U.S. Department of Interior’s Office of Insular Affairs (DOI). The World Bank estimates FSM’s 2021 Gross Domestic Income (GDI) at $3,950 per person, a trend reflecting no growth over the previous 10 years. The national currency is the U.S. dollar.

Commercial fishing remains the key economic sector in the FSM. The country’s primary sources of income are the sale of fishing rights ($70 million in FY2020), corporate income taxes, mainly from offshore corporate registrations for captive insurance ($10 million in FY 2020), and special revenue grants ($26 million in FY2020). The FSM continues largely as a subsistence economy, except in larger towns where the economy is centered on government employment and a small commercial sector. The cash economy is primarily fueled by government salaries paid by Compact funds (70 percent of employed adults work in the public sector) and, to a much lesser degree, by family remittances and Social Security benefits paid to FSM citizens who previously worked in the United States or who are the surviving spouse of an American citizen.

Compact funding was anticipated to change in 2023 from direct funding in the form of sector grants, to the use by the FSM of proceeds derived from a trust fund developed from U.S. contributions over 20 years. According to the Government Accounting Office, FSM relied on compact sector grants and a supplemental education grant (SEG) ending in FY 2023 for 28 percent of expenditures in FY 2019. GAO projected disbursements from FSM’s compact trust fund would not cover all the value of these grants, resulting in annual fiscal gaps. Because of rules governing the compact trust fund, FSM faced a 36 percent likelihood of zero disbursements from its compact trust fund in one or more years before FY 2034, even though the fund may have a substantial balance. (Note: The Compact of Free Association is in the final stages of renegotiation as of March 2023 and because of the projected short fall, the direct funding mechanism of sector grants will continue). As of November 2022, the balance of the Compact Fund stood at $911 million, reflecting a 11.5 percent drop in net asset value for 2022. FSM has also created its own trust fund with an overall balance of approximately $400 million in FY2022.

The FSM GDP for 2021 was $404 million, a slight decrease from 2020. The World Bank’ February 2023 Pacific Economic Update (Pacific Island Update) shows a slight contraction in GDP for the FSM in each of the COVID-19 years, including a projected .6 percent decline in 2022. However, it projects healthy growth of 3.0 percent in 2023 and another 2.5 percent in 2024. The economy recorded a trade deficit of $190 million in goods and services for 2021, a 9.25 percent increase from the previous year. FSM government debt at $59.3 million as of December 2022 was extremely low, giving FSM a low 14.75 percent debt/GDP ratio, one of the lowest in the Pacific. Major creditors are the Asian Development Bank (63.75 percent of debt) and the U.S. Rural Utility Services (18.5 percent of debt). Despite the low levels of debt in absolute terms, the International Monetary Fund deemed FSM to be at a high level of debt stress due to the uncertainty created by looming Compact Funding reductions in 2023 and the possible need to borrow to maintain operations of state governments.

Foreign direct investment (FDI) is almost nonexistent due to prohibitions on foreign ownership of land and businesses (in specified industries), difficulties in registering companies (the process requires approvals from the state governments as well as the national government), poor private sector contract enforcement, poor protection of minority (foreign) investors’ rights, weak courts, and weak bankruptcy processes. In addition, lack of infrastructure, poor health and education systems, the scarcity of commercial flights, and high costs of energy, imported goods and various business services also contribute to the lack of FDI.

Pohnpei State’s Legislature amended its laws in September 2018 to reduce requirements on foreign investment. The law specified the business sectors that permit FDI, with the remaining sectors available for Pohnpei citizens only. Domestic capital formation is very low. Commercial banks are classified as foreign entities and their ability to provide commercial loans, especially secured by real estate, is very limited. Banks view all credit to FSM borrowers as essentially unsecured.

Most national political power is delegated to the four states by the FSM Constitution, including regulation of foreign investment and restrictions on leases. Thus, investors must navigate nationwide between five different sets of regulations and licenses. U.S. citizens can live and work in the FSM indefinitely without visas under the Compact but cannot own property on most FSM islands.

FSM voters select national legislators (senators). The national senators then caucus to select the president and vice-president from among the four at-large senators. There are no political parties. On March 7, 2023, President David W. Panuelo lost his bid for the at-large seat for Pohnpei in the FSM Congress, which eliminated his ability to be reelected president for another four-year term. Senators will select a president and vice-president May 11, 2023.

The FSM federal government closed its borders in March 2020 in response to the COVID-19 pandemic and did not allow any repatriations until May 2021. After one and one-half years of intermittent repatriations of one flight per month per island and a subsequent waive of COVID-19 cases, the FSM government re-opened its borders without restrictions. The reopening has boosted the FSM’s tourism industry and jump-started the implementation of infrastructure programs by international organizations

The FSM developed Energy Master Plans (FSM Energy Master Plans (2018)) for each of the states to support efforts to increase renewable energy and increase access to affordable power. The Asian Development Bank provided a grant to the FSM for its Renewable Energy Development Project. The project is financing investment in renewable energy generation facilities in the FSM states of Kosrae and Yap, bolstering energy security and to reduce the reliance on fossil fuels for power generation in those states. Project investments include (i) solar photovoltaic capacity and mini grid and solar home system investments for Kosrae Utilities Authority (KUA) in Kosrae and (ii) the installation and integration of photovoltaic capacity and a battery energy storage system (BESS) for Yap State Public Service Corporation (YSPSC) in Yap. The project also supports institutional strengthening and capacity building in KUA and YSPSC, as well as for Pohnpei Utilities Corporation (PUC) in the FSM state of Pohnpei.

One of the key problems with integrating additional renewable energy has been antiquated power grids in each of the four states. For example, Pohnpei Utility Corporation has only been able to integrate one-third of the installed capacity of solar power due the instability of its antiquated grid. USTD is proposing technical assistance to increase renewable energy integration and provide grid modernization and capacity building assistance to the four state utilities in the FSM, including the Chuuk Public Utility Corporation, Kosrae Utilities Authority, Pohnpei Utilities Corporation, and the Yap State Public Service Corporation.

							1. Openness To, and Restrictions Upon, Foreign Investment					

### Policies Towards Foreign Direct Investment

There are many structural impediments to increasing foreign investment in the FSM. The FSM has no department dedicated to promoting investment nor any ongoing dialogue with potential investors. These challenges, both regulatory and political, affect foreign investment and economic progress in general, and addressing them requires a constitutional and political will to change that is unlikely in the foreseeable future. Some political leaders at the state and national levels are owners of the largest businesses on the islands and strongly oppose the required structural changes that would result in increased competition. The FSM scores in the lowest quintile in almost all measures and international indices of economic activity and climate for doing business.

In theory, the country’s courts support contractual agreements, but enforcement of judicial decisions is weak. Foreign firms doing business in the FSM have difficulty collecting debts owed by FSM governments, companies, and individuals, even after obtaining favorable judgments. For these reasons, the World Bank’s 2020 Doing Business Report ranked the FSM very low in protecting minority investors (185th of 190 countries) and enforcing contracts (183rd of 190 countries). U.S. companies and individuals considering doing business with parties in the FSM should exercise due diligence and negotiate credit and payment arrangements that fully protect their interests.

### Limits on Foreign Control and Right to Private Ownership and Establishment

All four of the FSM states have limits on foreign ownership of small- and medium-sized businesses. Large projects are assessed by the respective state governments on a case-by-case basis. Each state requires a separate application for foreign investment permits. Foreign investment is strictly limited by local ownership requirements (51-60 percent minimum, depending on sector) and residency requirements of more than five years. Financing through bank loans is limited due to a weak financial sector. Local small- and medium-sized businesses are protected from foreign competition through legal restrictions. Larger projects in competition with a business sector already owned by public figures face strong political opposition. Politicians enthusiastically receive large and unrealistic development proposals, but do not move forward primarily due to land issues and traditional landowner disputes. The FSM does not maintain an investment screening mechanism for inbound foreign investment.

### Other Investment Policy Reviews

The government has not undergone any third-party investment policy reviews in the last five years.

### Business Facilitation

FSM lacks a single window for online business registration or information portals providing comprehensive business registration information. The FSM Department of Resources and Development (R&D) maintains information on trade and investment on its website. However, all information is woefully out of date (trade and investment data has not been updated since 2013). Post understands obtaining licenses and permits in a timely manner may depend more on the relationship of the investor (or local legal counsel) with the official in charge, rather than any clear procedure or timeline. The World Bank’s 2020 Ease of Doing Business report ranked the FSM as 158th of 190 countries globally in terms of procedures to register a business (Note: The World Bank is currently gathering data for its Business Enabling Environment Report that will replace the Ease of Doing Business Report).

### Outward Investment

The FSM government does not promote, incentivize, or restrict outward investment. Given the small population and lack of capital formation, outward investment is negligible. The U.S. Bureau of Economic Analysis has shown FSM investment in the United States as $1 million +/- for the last ten years.

							2. Bilateral Investment and Taxation Treaties					

There is no bilateral investment or taxation agreement between FSM and the United States. The 2003 Amended Compact of Free Association is the only applicable guidance, with additional information available online. Under this treaty, articles imported from the United States into the FSM are guaranteed to receive treatment that is no less favorable than any other foreign country. Articles exported from the FSM to the United States are duty exempt, with a few exceptions as listed in Article IV, Section 242 of the Compact. Post expects the 2023 revision to the Compact to reflect substantially the same terms and conditions as the 2003 version. The FSM is not a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting.

							3. Legal Regime					

### Transparency of the Regulatory System

The FSM is not a signatory to any convention on transparency in international investment. Transparency of government actions is typically based more on personalities than on the law. Regulatory bodies sometimes involve themselves in issues beyond their jurisdiction. Conversely, other regulations are not uniformly enforced. It is often difficult to obtain public records, although some states and government organizations do require open meetings. While basic laws are accessible on the internet, text or summaries of proposed regulations are published before enactment but are not printed in an official journal or publication, and there is no appeal or administrative review process. In addition, government audits and statistical reports are not prepared promptly, and timely data are often unavailable (the most recent publications using three- or four-year-old data).

The websites that provide the most relevant economic data on FSM are:

- National Public Auditor  www.fsmopa.fm
- Department of Resources & Development  www.fsmrd.fm
- FSM Statistics  www.fsmstatistics.fm

### International Regulatory Considerations

The FSM signed on to the Pacific Island Countries Trade Agreement (PICTA) in 2001 but did not ratify the agreement. PICTA is a free trade agreement on trade in goods among 14 members of the Pacific Islands Forum (excluding Australia and New Zealand). Eleven countries – Cook Islands, Fiji, Kiribati, Nauru, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu — have ratified PICTA. The FSM is not a member of any regional economic block, nor is it a member of the WTO.

### Legal System and Judicial Independence

The FSM follows the U.S. common law system and uses U.S. case law as precedent. There are no specialized courts except for Land Courts in Pohnpei and Kosrae. All four states have State Courts and State Supreme Courts. The judicial system remains independent of the executive branch, but is reported to be slow, weak, and lacking the ability to enforce judgments properly. Regulations or enforcement actions are appealable. Appeals may be adjudicated in either the State or National courts.

### Laws and Regulations on Foreign Direct Investment

In September 2018, the Pohnpei State Legislature overrode the Governor’s veto of a bill on foreign investment regulations. The bill became state law over the objection of several local business leaders. The new law placed all decision-making power into the hands of one person, the national Registrar of Corporations.

FSM national and state governments use a “traffic light” system to regulate businesses, with red for prohibited, amber for restricted, and green for unrestricted. Industry classifications in this system vary from state to state. The individual states directly regulate all foreign investment, except in the areas of deep ocean fishing, banking, insurance, air travel, and international shipping, which are regulated at the federal level. Thus, a prospective investor who plans to operate in more than one state must obtain separate permits in each state, and often follow different regulations as well.

The following are the regulations pertaining to restrictions by sector in each of the states:

### FSM National

Red: Arms manufacture, minting of currency, nuclear power, radioactive goods.Amber: Increased scrutiny before approval for non-traditional banking services and insurance.Green: Banking, fishing, air transport, international shipping.

### Kosrae State

Red: manufacture of toxic or biohazard materials, gambling, casinos, fishing using sodium/cyanide or compressed air. (Note: There is also currently a ban on all business transactions on Sundays in the capital town. End Note.)Amber: Real estate brokerage, non-ecology-based tourism, trade in reef fish, coral harvesting.Green: Eco-tourism, export of local goods, professional services.

### Pohnpei State

Red: None presently defined, determined by board from among amber candidates.Amber: Everything not classified as green.Green: Businesses with greater than 60 percent FSM ownership, initial capitalization of $250,000 or more, professional services with capitalization of $50,000 or more, and Special Investment Sector businesses with 51 percent FSM ownership in retail, trade, exploration, development, and extraction of land or marine based mineral resources or timber.

### Chuuk State

Red: Determined by the Director, none codified in law.Amber: Casinos, lotteries, and industries that pollute the environment, destroy local culture and tradition, or deplete natural resources.Green: Eco-tourism, professional services, intra-state airline services, exports of local goods.Yap State

Red: Manufacture of toxic materials, weapons, ammunition, commercial export of reef fish, activities injurious to the health and welfare of the citizens of Yap.Amber: None at present.Green: All others.

### Competition and Anti-Trust Laws

There is no law or agency governing competition in the FSM nor does the government require environmental, social, or governance disclosure to help investors and consumers distinguish between high-and-low quality investments.

### Expropriation and Compensation

The FSM Foreign Investment Act of 1997 guarantees no compulsory acquisition or expropriation of property of any foreign investment for which a Foreign Investment Permit is issued, except for violation of laws and regulations and in certain extraordinary circumstances. Those extraordinary circumstances include cases in which such action would be consistent with existing FSM eminent domain law, when such action is necessary to serve overriding national interests, or when either the FSM Congress or the FSM Secretary of Resources and Development has initiated expropriation. There has been no history of expropriation involving foreign investors or U.S. companies.

### Dispute Settlement

#### ICSID Convention and New York Convention

Since 1993, the FSM has been a member of the International Convention on Settlement of Investment Disputes between States and Nationals of Other States (ICSID) but is not a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. To date, there have been no ICSID cases.

#### Investor-State Dispute Settlement

The FSM is not a signatory to a treaty or investment agreement in which binding international arbitration of investment disputes is recognized. Disputes take years to resolve and still may not produce concrete results. Some cases have been on the docket, with little or no movement, for 30 years or more.

#### International Commercial Arbitration and Foreign Courts

There are no provisions under FSM Federal law for alternative dispute resolution. This is also true of the states, except for Kosrae, where an alternative dispute resolution system has taken the place of a small claims court. Judgments from foreign jurisdictions are not enforceable in FSM courts.

### Bankruptcy Regulations

A bankruptcy law has been in existence since 2005, but was used only three times, generally to avoid taxes.

							4. Industrial Policies					

### Investment Incentives

There are currently no government programs or incentives to attract foreign investment.

There is no government agency tasked with developing an industrial strategy; however, the FSM government has made recommendations for growth in several sectors, most notably tourism, fishing, and aquaculture, without substantive measures to realize those goals. The telecommunications sector was opened to meet World Bank conditions for broadband development. However, rivalries between the state-owned telecom operator and the state-owned infrastructure operator have held back the development of broadband infrastructure to meet the needs of both businesses and consumers. Yap, Chuuk, and Pohnpei are connected to international fiber optic cables, enabling broad band access to the main islands in those states. The East Micronesia Cable project is expected to provide broadband connectivity to Kosrae by 2026. Legacy telecom operator FSMTC has rolled out 4G service in Pohnpei and the main island of Weno in Chuuk. The largest state-owned enterprise, Vital Energy, the parent of FSM Petroleum Corporation (FSMPC), built its first solar power plant in Guam in 2013 as a pilot project and plans to expand its renewable energy capacity into FSM in the future.**Vital plays a critical role in the country’s energy infrastructure and service delivery, including maintenance and operation of IPPs and various energy related assets across the country. Given its existing resources, staff and infrastructure footprint, maintenance and operation capacity, and clear legislative mandate**to expand the company’s clean energy business, Vital has the potential to play a significant role in further transition of the FSM energy sector to renewable sources, improving performance and optimization of generation assets, and lowering power costs for the country.

Politicians have called for expansion of the tourism sector, but have created no tax, licensing, or leasing incentives to encourage investment. Although there is considerable potential for growth in the tourism sector, the remoteness of the FSM, land ownership prohibitions, business ownership restrictions, and the current lack of hotel and restaurant facilities and tourism services mean growth in the tourism sector is unlikely to meet local expectations. Data prior to the onset of the COVID-19 pandemic show that growth fell in the areas of scuba diving, boating, and fishing. The March 2020 FSM border closure brought the sector to a standstill. Since the August 2022 reopening of the national borders, tourism has begun to recover gradually.

The United Nations Educational, Scientific and Cultural Organization (UNESCO) adopted the significant archaeological site of Nan Madol as a World Heritage Site in 2016 and has been working toward designating other sites in Yap, Kosrae, and Chuuk. Other efforts, including those by the U.S. Embassy and National Geographic Society, are underway to highlight the considerable cultural heritage extant in the FSM.

The government currently does not offer incentives for green energy investments.

### Foreign Trade Zones/Free Ports/Trade Facilitation

There are no Foreign Trade Zones, Free Trade Zones, Special Economic Zones, or Free Ports in the FSM.

### Performance and Data Localization Requirements

The FSM government mandates local employment when qualified individuals are available. U.S. citizens may reside in and work in the FSM indefinitely. Citizens of other countries must apply for the appropriate permits. The Philippine government in 2017 imposed restrictions on the entry of new Filipino workers into the FSM under the Philippines Overseas Worker Program. Filipinos make up the vast majority of foreign workers in the FSM. Recognizing the severe shortage in skilled workers in the FSM, the outgoing government of President David W. Panuelo has been negotiating the lifting of restrictions on workers with the Filipino government. There are no defined performance requirements for investments.

							5. Protection of Property Rights					

### Real Property

The most important impediments to foreign direct investment (FDI) are derived from land and contract issues. Foreign ownership of land is prohibited; most land is owned and passed on within the clan structure, leading to conflicting title claims, the need to negotiate leases with multiple parties, and the possibility of changes when the original senior lessor dies. Dual citizenship is illegal, so Micronesian citizens born in the United States are unable to inherit or own property unless they renounce their U.S. citizenship. There is no system for land title insurance in any of the country’s four states. The combination of these factors ranked the FSM at 187th out of 190 countries globally in the World Bank’s Ease of Doing Business report’s assessment of registering property.

Although foreign nationals, including corporations, cannot own real property, they can own buildings or other structures and lease the land beneath on a long-term basis.

### Intellectual Property Rights

Intellectual property rights (IPR) in the FSM are nominally protected and the country is a member state of the World Intellectual Property Organization (WIPO). The country is not listed in the USTR Special 301 Report, nor is it listed in the Notorious Market Report. The Embassy has not received complaints from U.S. firms regarding IPR issues, and the only U.S. corporations currently operating in FSM are United Airlines and Matson Shipping. The only three U.S. chains present (Ace Hardware, True Value Hardware, and NAPA auto parts) are 100 percent locally owned franchises.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

							6. Financial Sector					

### Capital Markets and Portfolio Investment

There are no stock or commodities exchanges in the FSM.

### Money and Banking System

The two commercial banks operating in the country, the Bank of Guam and the Bank of the FSM, can only make small, short-term unsecured loans because of the prohibition of using land or businesses as collateral, difficulties inherent in collecting debts, and the inability to identify collateral that can be attached and sold in the event of default. There are no credit reporting agencies. The Bank of the FSM is prohibited by its charter from investing in any securities not insured by the U.S. government, so the bulk of its holdings are in U.S. Treasury bonds. The Bank of Guam operates as a deposit collector and transactions facilitator in the FSM, with most of its loans made in Guam.

The Bank of the FSM is protected from takeover by a trigger from the Federal Deposit Insurance Corporation (FDIC) that will cancel its insurance status if foreign ownership exceeds 30 percent. Foreigners are not allowed to open accounts with the bank unless they provide proof of local residence and work permits and fulfill U.S. Treasury “know thy customer” requirements.

Money exchange companies such as Western Union operate within FSM and handle the majority of remittances.

Since most businesses are family owned, there are no shares that can be acquired for mergers, acquisitions, or hostile takeovers. The FSM enacted a secured transaction law in 2005 and established a filing office in October 2006 primarily to serve the foreign corporate registration market.

### Foreign Exchange and Remittances

#### Foreign Exchange

The currency of the FSM remains the U.S. dollar. The only two commercial banks operating in the country at present are the Bank of Guam and the Bank of the FSM, both FDIC insured.

#### Remittance Policies

There are no specific restrictions on repatriating profits from a business, except in the state of Chuuk, where an amount greater than $50,000 requires state approval.

Statistics on family-level and personal remittances are difficult to obtain, with various World Bank studies reporting figures ranging from $3 million to $14 million per year entering the FSM. However, remittances travel into and out of the country with Micronesians working abroad and in the United States sending money to their families in the FSM, while Filipino professionals and laborers working in FSM send money to their families in the Philippines. The World Bank does not, however, provide monetary estimates of remittance flows.

#### Sovereign Wealth Funds

The FSM has no sovereign wealth fund, but the government established a national trust fund modeled on the Compact Trust Fund to provide additional government income after 2023. That fund is managed by a U.S.-based commercial fund manager.

							7. State-Owned Enterprises					

The FSM has established state monopolies and maintains state-owned enterprises (SOEs) in the areas of fuel distribution, telecommunications, and copra production. These companies are Vital Energy (the parent of FSM Petroleum Corporation, FSMPC), the FSM Telecommunications Corporation, the FSM Telecommunications Cable Corporation, and the FSM Coconut Development Authority, which was folded into Vital Energy in 2014. Legislation passed in 2016 opened the telecom market to private companies to qualify for World Bank funding for broadband development, including a submarine fiber optic cable to Yap and Palau. Other prominent SOEs include the Caroline Fisheries Corporation, the FSM Development Bank, the College of Micronesia, and Caroline Islands Air, Inc.

FSM does not currently adhere to the convention on the Organization of Economic Cooperation and Development (OECD) guidelines on corporate governance of SOEs.

### Privatization Program

There is currently no privatization program in the FSM.

							8. Responsible Business Conduct					

There is little awareness or definition of responsible business conduct (RBC) in the FSM. However, most local businesses are small and generally responsive to the community in which they operate. The two U.S.-based companies in the FSM generally follow RBC principles. The host government does not promote RBC or factor it into evaluations for public contracts, nor does the country adhere to the convention on OECD guidelines for multinational enterprises.

### Additional Resources

Department of State

- Country Reports on Human Rights Practices ;
- Trafficking in Persons Report ;
- Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities ;
- U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises ; and;
- Xinjiang Supply Chain Business Advisory 

Department of the Treasury

- OFAC Recent Actions

Department of Labor

- Findings on the Worst Forms of Child Labor Report ;
- List of Goods Produced by Child Labor or Forced Labor ;
- Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World  and;
- Comply Chain .

### Climate Issues

The International Monetary Fund in September 2019 authored a Climate Change Policy Assessment (CCPA) that takes stock of the Federated States of Micronesia (FSM)’s climate response plans, from the perspective of their macroeconomic and fiscal implications. The CCPA explores the possible impact of climate change and natural disasters and the cost of FSM’s planned response. It suggests macroeconomically relevant reforms that could strengthen the national strategy and identifies policy gaps and resource needs. FSM has made progress toward its Nationally Determined Contribution mitigation pledge by beginning to expand renewable power generation and improve its efficiency.

Sea level rise is the climate issue that most affects the FSM, particularly among its outer island atolls. More frequent and persistent salt water flooding is wreaking havoc on traditional crops. Food insecurity and lack of economic opportunities are leading to extensive out-migration to larger islands and to the United States.

The FSM developed Energy Master Plans (FSM Energy Master Plans (2018)) for each of the states to support efforts to increase renewable energy and increase access to affordable power. The Asian Development Bank provided a grant to the FSM for its Renewable Energy Development Project. The project is financing investment in renewable energy generation facilities in the FSM states of Kosrae and Yap, bolstering energy security and to reduce the reliance on fossil fuels for power generation in those states. Project investments include (i) solar photovoltaic capacity and mini grid and solar home system investments for Kosrae Utilities Authority (KUA) in Kosrae and (ii) the installation and integration of photovoltaic capacity and a battery energy storage system (BESS) for Yap State Public Service Corporation (YSPSC) in Yap. The project also supports institutional strengthening and capacity building in KUA and YSPSC, as well as for Pohnpei Utilities Corporation (PUC) in the FSM state of Pohnpei.

One of the key problems with integrating additional renewable energy has been antiquated power grids in each of the four states. For example, Pohnpei Utility Corporation has only been able to integrate one-third of the installed capacity of solar power due the instability of its antiquated grid. USTD is proposing technical assistance to increase renewable energy integration and provide grid modernization and capacity building assistance to the four state utilities in the FSM, including the Chuuk Public Utility Corporation, Kosrae Utilities Authority, Pohnpei Utilities Corporation, and the Yap State Public Service Corporation.

USTDA is proposing a grant to state-owned FSM Petroleum Corporation (“Vital”) that would fund technical assistance to support the development of a detailed business plan and implementation roadmap for Vital’s expansion into renewable power generation, battery storage systems, mini-grid deployment, and related services.  With the passage of the Transformation Act by the FSM Congress in 2023, Vital has been directed to further diversify and expand its clean energy business pursuant to FSM’s climate goals.  As the country’s state-owned petroleum products company and exclusive fuel supplier to FSM’s four utility companies, Vital plays a critical role in the country’s energy infrastructure and service delivery, including maintenance and operation of IPPs and various energy related assets across the country.  Given its existing resources, staff and infrastructure footprint, maintenance and operation capacity, and clear legislative mandate to expand the company’s clean energy business, Vital has the potential to play a significant role in further transition of the FSM energy sector to renewable sources, improving performance and optimization of generation assets, and lowering power costs for the country.

Because there are no private sector participants in the FSM energy industry (and because the country is tine), there are no regulatory incentives or deterrents (carbon credits, carbon taxes, tax credits, ESG of impact investing support, pollution standards, biodiversity offsets, eco-labelling, tradable permits, or other government policies (creation of protected areas, use of nature-based solutions, sustainable forest management, and other ecosystem management plans)) to achieve policy outcomes that preserve biodiversity, clean air, or other desirable ecological and climate benefits.

### Deforestation is not an issue in the FSM.

Pollution abatement is not an issue in the FSM. The government is focused on climate resilience through the implementation of better emergency disaster response capabilities (e.g., better roads, small island runways, and port improvements).

							9. Corruption					

The FSM has laws prohibiting corruption and there are penalties for corrupt acts. The National Office of the Public Auditor, with support from the Department of Justice, is the entity most active in anti-corruption activities. Several senior ex-FSM Government officials were convicted of corruption under the FSM Financial Management Act, usually involving procurement fraud. An FSM government transportation official pled guilty April 3, 2019, in U.S. District Court to conspiring to launder bribe money he accepted from a U.S.-citizen president of a Honolulu civil engineering company. The official was then-FSM President Peter Christian’s son-in-law who served 18 months in prison in the United States and was subsequently deported back to the FSM in 2021. Corruption is not a predicate offense under the money laundering statute. Bribery is punishable by imprisonment for not more than 10 years in addition to disqualification from holding any government position. Traditional custom permits a lawbreaker to ask and receive forgiveness by paying a fine to those victimized. Given many FSM national, state, and municipal government officials also own businesses, there exists significant potential for conflicts of interest.

The degree to which government officials accept direct bribes is unknown but believed to be commonplace, especially deriving from state actors. Pohnpei State and Yap State are currently prosecuting corruption cases. The Yap State governor and lieutenant governor reported receiving cash envelopes in inauguration presents which they promptly handed to Yap State’s Acting Attorney General who conducted an investigation. In a March 2023 open letter to FSM state and congressional leaders, President Panuelo called out the rampant payment of bribes to FSM government officials by the Peoples Republic of China. The FSM has not signed or ratified the UN Convention on Corruption or the OECD Convention on Combating Bribery.

### Resources to Report Corruption

The FSM has no government agency specifically assigned with responsibility for combatting corruption. State prosecutors are the usual avenue for prosecuting corruption, with several cases brought to trial in the last few years, especially in Pohnpei State. The Public Auditor highlighted irregularities but relies on government prosecutors for enforcement capability. The Department of Justice in prior years prosecuted cases, but activity in this area recently has been varied; Pohnpei State and Yap State have been more active.

The principal contact for these types of cases is:

Leonito “Jun” Bacalando, Jr.Acting Attorney General,FSM Department of JusticePalikir, Pohnpei+691-320-2608 Leonito Bacalando Jr

There are no non-governmental “watchdog” organizations in the FSM that monitor corruption.

							10. Political and Security Environment					

FSM enjoys a stable, democratic form of government with no history of civil or political strife. The islands became part of a UN Trust Territory under U.S. administration following World War II, after periods of Spanish, German, and Japanese control. In 1979, the islands adopted a constitution, formally becoming the Federated States of Micronesia. Independence came in 1986 under a Compact of Free Association with the United States that was amended and renewed in 2003. Portions related to financial assistance currently are being renegotiated and are expected to be completed in 2023. Under this agreement, the U.S. Government guarantees the FSM’s external security.

The country’s last presidential election was held in March 2023, in which incumbent David W. Panuelo lost his bid for the Pohnpei at-large Congressional seat that would have been his path to a second term. The seat was captured by previous President Peter Christian. Congress will determine the next president on May 11, 2023.

Medical care in the FSM is limited due to lack of physicians, medical specialists and medical equipment. Outpatient care on Pohnpei for simple to moderate medical issues is adequate with two private clinics offering well trained physicians who can perform labs, x-rays and who stock quality medicines if prescriptions are needed. These clinics are the Pohnpei Family Health Clinic and MedPharm Clinic.

On Pohnpei there is a public hospital (Pohnpei State Hospital) and a private hospital (Genesis Hospital). Pohnpei State Hospital is the larger of the two hospitals, has more services such as a surgeon, cardiac monitoring, ventilators, and is open 24 hours per day. Genesis Hospital is smaller with fewer services (and a limited capacity for trauma care) and an emergency room only open during the daylight hours. The island states of Kosrae, Chuuk, and Yap have single state-run hospitals. All lack staffing, equipment and adequate facilities to be used for anything other than certain diagnostic tests, limited services and medical/traumatic stabilization while a medical evacuation is initiated.

							11. Labor Policies and Practices					

Wages in FSM are low with minimum wage laws for government employees in all states and the federal government. Only Pohnpei has a minimum wage for the private sector at $1.75 per hour. However, employers report that they cannot hire employees for less than $3.00 per hour. Employment in the public sector is preferred because the wages are significantly higher. The minimum hourly wage for employment with the national government was $2.65. The minimum hourly wage for government workers in the individual states was: Pohnpei $2.00, Chuuk $1.25, Kosrae $1.42 and Yap $1.60. The FSM’s minimum wage was last adjusted January 1, 2015.

There are no laws regulating hours of work (although a 40-hour work week is standard practice, with 32 hours standard in Kosrae State), nor are there enforceable standards of occupational safety and health. While there was one federal regulation that required that employers provide a safe workplace, neither the Department of Health nor the Environmental Protection Agency has enforcement capability, resulting in varying working conditions. There is no law for either the public or private sector that permits workers to remove themselves from dangerous work situations without jeopardizing their continued employment.

Skilled labor in FSM is limited, with few FSM citizens trained to perform tasks of any technical nature. Foreign workers, primarily Filipinos, are typically hired to fill roles requiring technical skills. In September 2018, after having banned all Filipino workers from working in the FSM in mid-2018, the Philippine Department of Foreign Affairs revised its deployment ban on Philippine labor coming to the FSM to ban only new recruits, exempting the 2,000 Filipino workers already in country. Philippine overseas foreign workers were FSM’s main source for educated and skilled labor but, with the ban in place, this pool can no longer be replenished. Recognizing the skills shortage in the FSM, outgoing President David Panuelo opened negotiations with the Philippine government to lift the ban on its citizens working in FSM.

Labor disputes at the state-run hospitals in Pohnpei and Yap led to the dismissal or resignation of several doctors and surgeons, all from the Philippines. As a result, service hours were cut, and doctors were shifter from other hospitals to cover shortfalls. A state of emergency was declared in Yap, triggering a frantic search for replacement medical personnel. Not all of the positions have been refilled.

Most doctors, nurses, accountants, lawyers, engineers, construction foremen, and heavy equipment operators are overseas workers from the Philippines.

The FSM has no collective bargaining or strikes. Unemployment is high, and workers are easily replaced. There is no child labor, except in small family businesses. Occupational safety and health standards are low.

							12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs					

There are no existing DFC projects in FSM.

							13. Foreign Direct Investment and Foreign Portfolio Investment Statistics