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RR RUEHKN
DE RUEHKN #0123/01 2562351
ZNY CCCCC ZZH
R 132351Z SEP 09
FM AMEMBASSY KOLONIA
TO RUEHC/SECSTATE WASHDC 2358
INFO RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHMFISS/CDR USPACOM HONOLULU HI
RUEHKN/AMEMBASSY KOLONIA 2726
RUEHBJ/AMEMBASSY BEIJING 0095

C O N F I D E N T I A L SECTION 01 OF 05 KOLONIA 000123 
 
SIPDIS 
 
STATE FOR A/S KURT CAMPBELL AND DAS SCOTT MARCIEL; INTERIOR FOR 
A/S ANTHONY BABAUTA 
 
E.O. 12958: DECL:  9/14/2019 
TAGS: PREL EAID FM CH
SUBJECT: FAREWELL REFLECTIONS:  A SPECIAL RELATIONSHIP REQUIRES 
IMPROVED AID DELIVERY; CHINA BIDS HIGH 
 
CLASSIFIED BY: Miriam K. Hughes, Ambassador, Amembassy Kolonia, 
State. 
REASON: 1.4 (b), (d) 
1.(SBU)  INTRODUCTION.  Following are observations of Ambassador 
Miriam Hughes as she prepares to depart post following a 
two-year tour of duty.  Comments are offered to provide insights 
from a front-line perspective in a country that is subject to 
unpredictable change and pressure.  Ambassador has completed 
farewell calls on officials of the four island states of the 
Federated States of Micronesia (FSM), as well as the FSM 
National Government (FSMNG).  End Introduction. 
 
 
 
¶2. (C)  SUMMARY.  The Federated States of Micronesia (FSM) 
remains deeply attached to the United States and appreciates 
American collaboration more than that of any other nation.  At 
the same time, Micronesians are anxious to gain access to easy 
cash and to pursue short-term political advantages.  To avoid 
destabilization, we need to redirect resources available under 
the Amended Compact of Free Association to expand our 
partnerships on the ground.  Despite generous U.S. assistance, 
the FSM economy suffered one of the worst outcomes among the 
Pacific nations in FY 2007 and FY 2008, according to a recent 
report of the International Monetary Fund.  Political tension 
has deepened among the four states and the central government, 
with the states increasingly perceiving the FSMNG as an obstacle 
to their development.  The top-down, intrusive mechanisms that 
we use to administer Compact assistance have exacerbated 
tensions and generated perceptions of interventionism.  It is 
timely to review progress and areas for improvement in our 
Compact aid program.  While U.S. interests are relatively 
limited in Micronesia, we retain special obligations, and 
geopolitical stakes are changing.  Chinese influence is rapidly 
expanding and contributing to malaise.  Our overall relationship 
with Micronesia remains strong, but some key elements hang in 
the balance that could affect the unity of a weak Federation. 
End Summary. 
 
 
 
SIGNS OF CHANGE - CHINA PROPOSES A MONOPOLY ON FISH 
 
 
 
¶3. (C) At the conclusion of a two-year tour of duty in the 
Federated States of Micronesia (FSM), Ambassador Hughes observes 
that this small island nation in the far western Pacific has 
been buffeted by change and now confronts complicated choices 
that are difficult for the Micronesians to manage.  China, Japan 
and to a lesser extent Australia, which all maintain active, 
expanding embassies in the FSM, have stepped up their activities 
in a nation that is situated close to the U.S. territory of Guam 
and embraces one million square miles of ocean and coveted 
fishing grounds.  How we fulfill our obligations as a global 
power in the Pacific is reflected on a small scale in the way we 
conduct relations in Micronesia.  Our special relationship with 
this former Strategic Trusteeship Territory remains a source of 
pride and security to the FSM.  Under an original Compact of 
Free Association (1986-2003), America helped create viable 
democratic institutions.  Elections are free and lively, despite 
imperfect voting mechanisms.  However, Micronesian governance is 
erratic and prone to opportunism and secret deal-making. 
 
 
 
¶4. (C) Through various activities, the Peoples Republic of China 
is pressing intensely for advantage.  Luen Thai, which is a 
quasi-state company of China within Tan Holdings, is currently 
negotiating for fishing rights and fish processing facilities in 
all four FSM states.  The potential deal would in effect lock in 
a Tan vertical monopoly to include fishing, fish processing, 
transshipment, marketing and sales, according to one lawyer who 
is engaged in confidential negotiations with the FSMNG, Luen 
Thai, and legal representative of the states.  On the table at 
this time is a supposed draft proposal to grant fishing licenses 
throughout the FSM's 200-mile EEZ.  Fish licensing fees 
estimated at $120 million would accrue exclusively to the FSMNG, 
which the states resent.  The draft agreement provides that all 
fish would be offloaded in the FSM for processing in plants that 
Luen Thai would construct. 
 
 
 
¶5. (C)  The deal depends upon FSMNG acceptance of a loan from 
China's Export-Import Bank that reportedly now exceeds $25 
million.  The FSMNG would use these funds to refurbish 
processing plants and purchase 11 ships, three of which could be 
super long liners for frozen fish transshipment.  The sale of 
airplanes from China is also allegedly part of the proposal. 
 
KOLONIA 00000123  002 OF 005 
 
 
The plants would be constructed and/or refurbished entirely with 
material imported from China, the lawyer said.  Luen Thai has 
offered to guarantee repayment of the loan from China based upon 
its profits from this commercial venture.  It is not clear how 
significantly, if at all, the FSM states would profit.  FSM 
President Emanuel Mori and Secretary of Research and Development 
Peter Christian, among other national leaders, are strong 
supporters of this potential deal.  Owing to the foreign loan 
proposal, the package would need to be approved by the FSM 
Congress.  Action may take place at the January 2010 
Congressional session. 
 
 
 
ECONOMIC DECLINE 
 
 
 
¶6. (SBU)  The FSM is a mixed, roiling pot.  On the one hand, the 
FSM Telecommunications Corporation has advised that cable 
television will soon reach the destitute State of Chuuk, where 
over half the Micronesians in the FSM reside (approximately 
53,000 people.)  In the capital State of Pohnpei, Japan is 
making steady progress on a project to extend the runway of the 
international airport.  The 800-foot extension will enable more 
flights and larger aircraft.  Domination of passenger 
transportation by Continental Airlines' small fleet of 737 
island hopping jets is likely to be challenged in the future. 
The FSM will then need to stand up its own airport security 
system to meet TSA and ICAO standards, rather than depend upon 
Continental. 
 
 
 
¶7. (SBU) Despite these and other signs of modernization, the FSM 
economy continues to deteriorate.  A recent Baseline National 
Poverty Index estimates 29.9 of the FSM population falls below 
this poverty measure.  There is currently no radio station in 
Chuuk that is capable of reaching that state's 42 outer islands 
and atolls.  State revenue is insufficient to supply a dwindling 
Chuuk police force with mobile radios or to even operate a 911 
emergency telephone number.  Crime is rising.  The small State 
of Kosrae (population approximately 7,800) has failed to 
generate sufficient income to cover the state's fourth quarter 
operating expenses in FY 2009 and FY 2010, despite the 
Governor's successful reform initiative two years ago to reduce 
the state work force by over 100 positions.  Pohnpei State has 
made overtures to Taiwan to attract commercial assistance, 
angering China.  Pohnpei Governor John Ehsa is under 
considerable pressure to deliver on a campaign promise to 
provide lunches to high school students, which is currently 
beyond his reach. 
 
 
 
¶8. (U) A recent report of the Executive Board of the 
International Monetary Fund (IMF), which conducted consultations 
in the FSM in February 2009, indicates that economic output 
declined by 3.6 per cent in 2007 and by an estimated 1 per cent 
in FY 2008.  The IMF report states, "As a result of problems 
with disbursing grants under the Compact agreement with the 
United States, rising commodity prices, and difficult business 
environment, the economy has contracted for five years in a row 
- one of the worst outturns among the Pacific nations." 
 
 
 
SMARTER AID DELIVERY 
 
 
 
¶9. (C) A key issue for U.S. interests in Micronesia is how to 
make our ample Compact and other federal program assistance work 
better to build capacity in the FSM and stimulate realistic 
private sector activity.  The aid is generous, totaling some 
$140 million annually for a country with a population of 
approximately 109,000.  However, disbursement of Compact cash 
grants to the states is delayed at the FSM National Government 
level.  Chuukese officials complained to the Ambassador that 
they often do not get their first quarter installments until 
spring, complicating implementation of projects and official 
travel.  Inefficiency and in-fighting within the FSMNG appear to 
hamper the flow of allotments that the national government 
receives regularly from the U.S. Department of the Interior 
(DOI).  The FSM Office of Statistics, Budgets, Overseas Aid and 
Compact Management (SBOC), which is supposed to manage Compact 
funds and policy, is unwieldy, inadequately staffed and at odds 
 
KOLONIA 00000123  003 OF 005 
 
 
with the FSM Department of Finance.  Even when cash grants reach 
the state level, frequently the Micronesians have difficulty 
spending the money.  Significant sums are returned to DOI as 
"carryover funds" that are not absorbed. 
 
 
 
¶10. (C) The challenge of U.S. aid delivery in Micronesia is 
something we as a U.S. Government can and must fix. 
Implementation and monitoring of grants and programs by DOI 
personnel based in Honolulu and Washington occur outside the 
authority of the Chief of Mission and without a cohesive policy 
umbrella.  Some Micronesian leaders are clearly using their DOI 
connections to tie U.S. funds to their political purposes.  As 
one U.S. Government team, we could develop smarter and more 
effective strategies.  Secretary Clinton's Quadrennial Diplomacy 
and Development Review appears to be a promising tool. 
 
 
 
¶11. (SBU)  Our most successful programs in the FSM do not place 
too heavy a burden on the Micronesians at this stage of their 
development.  The FSM is a young and fragile nation, which 
became self-governing only in 1986.  The Embassy receives daily 
reminders of a lack of internal professional capacity. 
Micronesians generally lack the education and technological 
skills to effectively use our taxpayers' money.  However, they 
respond enthusiastically to American leadership of programs and 
projects. 
 
 
 
¶12. (SBU) The visit of the USNS Mercy hospital ship in August 
2008 elicited an outpouring of local volunteerism to help 
Seabees paint a hospital in Chuuk, repair island schools and 
organize inhabitants in three states for the delivery of primary 
medical care.  Even in torrential downpours, the Chuukese 
recently joined U.S. Air Force personnel to stage a resoundingly 
successful Humanitarian Assistance Rescue and Relief Team 
exercise, which included validation of a new mobile hospital 
concept.  Federal Aviation Administration construction projects, 
which are closely managed, have sprung up at all four FSM 
international airports.  The National Oceanic and Atmospheric 
Administration expertly runs weather stations in three states, 
providing regular training to Micronesian staff.  The U.S. 
Postal Service mentors and monitors Micronesian mail workers and 
operations.  Taking over lead responsibility for disaster 
management from FEMA in 2009, USAID subcontractors have begun to 
stockpile relief supplies and initiate practical, grassroots 
responder training.  By working side by side with the 
Micronesians, these and other interagency representatives are 
building pride and partnership. 
 
 
 
¶13. (C)  Problems arise when our federal requirements are too 
sophisticated for the Micronesians, U.S. implementers are far 
away, and a weak central government cannot manage basic 
requirements.  Compact infrastructure grants are a case in 
point.  Only four Micronesian engineers reportedly reside in the 
nation.  None of them is dedicated to Compact infrastructure. 
While some projects have started, progress has been uneven.  Yap 
State officials complain strongly that their state has received 
no projects over the first five years of the Amended Compact. 
Serious Yapese leaders talk increasingly about prospects for 
seceding from the FSM and turning for support to Palau and 
Taiwan.  Throughout the FSM, delays and lack of clarity about 
the allocation of a backlog of some $130 million of Compact 
infrastructure funds bear high, negative visibility and 
political costs.  An FSMNG Program Management Unit (PMU), which 
is supposed to oversee Compact Infrastructure projects, comes 
directly under the control of a busy President.  Not only is 
President Mori frequently away on travel; increasingly, he is 
perceived as a scheming politician who is dedicated primarily to 
his home state of Chuuk and prospects for reelection.  The 
wellbeing of the nation as a whole is rarely mentioned. 
Distrust among the four states and the national government is 
deepening.  Pohnpei has initiated discussion of secession at its 
current Constitutional Convention.  Poor implementation of 
Compact sector grants is one significant source of contention. 
 
 
 
¶14. (C) The FSM states depend for their operations upon Compact 
grant money, which covers approximately 65 percent of state 
budget expenditures.  Former President Joseph Urusemal (Yap), 
who is now a national Senator, pleaded, "Please help us 
 
KOLONIA 00000123  004 OF 005 
 
 
accelerate implementation.  We are now in the fifth year of 
(Amended) Compact implementation and the situation is bad.  I am 
usually very patient, but I have no more patience."  Like 
President Mori and other FSM leaders in the national Congress 
and state governments, Urusemal recommended that DOI open an 
office in Pohnpei to improve communication, coordination, and 
aid administration for the purpose stated in the Compact, which 
is to benefit the Micronesian people.  DOI has a complex and 
difficult role to fulfill in a fragile nation, which cannot be 
well accomplished by long distance, autonomous interventions. 
Ambassador Hughes fully agrees about the need to assign 
development specialists to Pohnpei, without necessarily 
increasing overall costs, and to incorporate them as respected 
colleagues and members of the Embassy Country Team.  In the 
meantime, the U.S. Embassy is the only mission in the FSM that 
has no/no aid personnel - a shortcoming that compromises 
oversight and accountability of substantial U.S. programs and 
debilitates our efforts to coordinate donor assistance with 
other embassies and organizations. 
 
 
 
CHINA'S BIG FOOTPRINT 
 
 
 
¶15. (C)  The rising role of China in the FSM is apparent.  China 
has blanketed the FSM at every level with all-expense paid trips 
that include daily emoluments.  National leaders clearly enjoy 
lavish multiple-city tours.  Municipal leaders, clan chieftans, 
students, and local police have in many cases accepted repeated 
trips.  A traditional leader of Netts municipality in Pohnpei, 
where the new U.S. Embassy is located, told the Ambassador 
during a farewell call that he and his wife each received $1,500 
when they arrived in Beijing, with supplemental cash for 
shopping every day.  At a certain point, he said the Chinese 
hosts asked to separate the men from their wives.  At that 
point, the traditional leader claimed he refused to cooperate 
and he asked to go home. 
 
 
 
¶16. (C)  In Chuuk, five Chinese doctors recently arrived on a 
Beijing government contract to serve two years in the state 
hospital.  Other doctors in the hospital complained to 
Ambassador Hughes that the Chinese did not speak English or 
practice the same type medicine.  Instead, they said the 
Chuukese were teaching the Chinese about western (Micronesian) 
medicine.  In Kosrae, Ambassador found that employees of Luen 
Thai company were living in a house owned by Vice President Alik 
Alik, who has publicly supported China's repression of the 
Uighurs.  Kosrae's Director of Education, an American who has 
resided in the FSM for 17 years, commented, "For the first time, 
I am truly concerned about Chinese intentions." 
 
 
 
RECOMMENDATIONS 
 
 
 
¶17. (C)  Inauguration of the New Embassy Compound on August 26 
sent a clear message about America's renewed commitment. 
Micronesians recognized this reassurance and warmly welcomed the 
fresh impetus.  Over the long run, however, pride in sovereignty 
and the ability to pick and choose for short-term gain may tilt 
Micronesia in unpredictable directions.  To maintain our 
interests, an interagency team might consider some adjustments, 
including: 
 
 
 
--Department of Defense:  Expand engagement, particularly of 
humanitarian missions; reconstitute a roving Civic Action Team 
(CAT) to identify maintenance projects, train Micronesians and 
conduct local surveillance; assign a Defense representative to 
the Embassy. 
 
 
 
--Department of the Interior:  Subcontract development 
specialists to manage grants and programs in-country; channel a 
portion of cash grants through non-governmental organizations; 
facilitate streamlined disbursements to the FSM states; foster 
accountability with less intrusion into internal budgets; join 
the Embassy Country team as valued aid representatives, who can 
expand coordination with other local stakeholders. 
 
KOLONIA 00000123  005 OF 005 
 
 
 
 
 
--Project Management Unit:  Assign American construction 
engineer/s, possibly the Army Corps of Engineers, to 
knowledgeably manage our infrastructure projects; pay American 
personnel from the infrastructure account; initiate a public 
website to track all Compact Infrastructure funds and projects. 
 
 
 
--Joint Economic Management Committee (JEMCO):  Circulate 
resolutions well in advance of this annual meeting, particularly 
to enable the Micronesians to comprehend the contents and 
implications for their budgets; include the U.S. Ambassador to 
the FSM and the Micronesian Ambassador to the U.S. as full 
voting members of this core Compact management mechanism, which 
significantly affects bilateral policy. 
 
 
 
CONCLUSION 
 
 
 
¶18. (C)  A tour of duty in the FSM inculcates respect for the 
Micronesians, who are innately capable and eloquent people with 
unique traditions and long, historical memories.  They recognize 
the benefits of close alignment with the U.S.  Today, 
Micronesians hunger for enhanced American engagement and 
leadership.  Although the nation has viable democratic 
institutions, the Federation itself is under growing strain. 
Each state is a separate entity with its own language, ethnicity 
and culture.  A national identity has not yet substantially 
consolidated.  Five years into the life of the Amended Compact, 
which expires in 2024, the cumbersome, centralized way in which 
we administer grants has proved problematic for a weak national 
government.  Our tone and techniques are perceived as penalizing 
proud peoples and contributing to radicalization of the four 
states.  Influential FSM leaders exploit separate tracks of 
communication. 
 
 
 
¶19. (C)  We need to decide whether to deal with the FSM as a 
neocolonial Trusteeship remnant or a sovereign nation.  The role 
of the U.S. Ambassador must be strengthened as the executive 
manager of all U.S. Government activities in country. 
Otherwise, Micronesia will smile, feign compliance and drift 
toward the highest bidder, quite possibly at an accelerated 
pace.  A better option is to build partnerships for progress, 
including with China, Japan and Australia.  This emerging 
Pacific island nation merits a modest review and some fresh 
approaches and adjustments. 
HUGHES