On Investment Opportunities in the Federated States of Micronesia

1, Brief background of Federated States of Micronesia

2. Summary of Key Economic Statistics and Overview

3. Competitive Advantages of FSM

a. Ocean resources, lagoons, atolls and other natural resources

b. Unique Micronesian Culture

c. Best wreck and marine life dive sites in the world:

4. Summary of Investment Opportunities

a. Agriculture

b. Manufacturing

c. Fisheries / Aquaculture

d. Tourism

e. Further Opportunities for Partnership and Investment in FSM

such as:

i. Telecommunication Submarine Cable

ii. Independent Fuel Storage Facilities

iii. Suppliers for island importers/wholesalers

iv. Outer Island Transport

Federated States of Micronesia – People’s Republic of China

Economic Promotion Mission

April 17-24, 2006

Detail Talking Points

FSM Background:

The Federated States of Micronesia (FSM) is a grouping of 607 small islands in the Western Pacific, lying just above the Equator – some 5008 kilometers (km) southeast of China and 4974 km southwest of Hawaii. The FSM consists of the four States of Chuuk, Kosrae, Pohnpei and Yap. While the country’s total land area amounts to about 701.9 square kilometers, it occupies more than 2.5 million square kilometers of the Pacific Ocean and ranges about 2,740 km from East (Kosrae) to West (Yap).

FSM enjoys a tropical climate, with relatively even, warm temperatures throughout the year at an average of 26 degrees Celcius. The FSM has a total population of about 108,000. The population is young with the median age of 18.9. The FSM Constitution provides for three separate branches of government at both national and state levels: Executive, Legislative and Judiciary.

Economic Overview:

While the government remains the largest contributor to economic activity, the dominance of the government has been significantly diminished over the past few years. The retail and trade sector is the next largest contributor to economic activity, followed by subsistence activities. The priority sectors of commercial fisheries, agriculture and tourism, although relatively small in the structure of the economy, offer the greatest potential for development opportunities.

Key Economic Statistics

Population 107,513 Gross Domestic Product (GDP) $222.07 million

Labor Force Participation Rate 58% (2000) % Government 28%

Total Employment 29,175 (2000) % Private Sector 28%

Private Sector 6,700 % Households 25%

National Government 810 % Other 23%

State Government 5,047 GDP per capita $2,066

Unemployment Rate 22% (2000) Exports $20.1 million

Labor Force in Subsistence 28.4% (2000) Imports $108.9 million

Currency US Dollar

Source: FSM Department of Statistics; ADB Asian Development Outlook 2004

Competitive Advantages:

For the benefit of interested foreign businesspersons and investors from foreign countries who are exploring the opportunities to invest and trade in an island paradise, the Federated States of Micronesia (FSM) may be the place. In fact for those investors from China, the recent decision by the Chinese Government to assist FSM develop its private sector at the tune of US$10 million dollars soft loan could be a very welcoming capital injection for all the potential investment projects in FSM. The potential for development in the FSM is immense.

The more than 2.5 million square kilometers of ocean in the FSM’s 200 mile EEZ is teeming with the world’s largest tuna stock, while the abundant rainfall and temperate climate provide its rich vegetation and flourishing fauna, creating numerous opportunities for agriculture and tourism development. Added to this, the geological make up of the islands along with its hospitable people make it an ideal place to visit, live and invest.

1. Ocean resources, lagoons, atolls and other natural resources:

The ocean is undoubtedly the country's most important resource. The approximate market value per year of tuna harvested within the nation’s EEZ is about US$200 million . At present, the nation has full ownership of tuna stocks capable of a sustained yield of well over 100,000 tons each year.

2. Unique Micronesian Culture:

The people of the FSM are culturally and linguistically Micronesian, with a small number of Polynesians living primarily on Nukuoro and Kapingamarangi atolls of Pohnpei State. The influence of U.S., European, and Japanese contact is also seen. The FSM’s exquisite cultural melting pot offers the tourist a heady assault of myriad traditions and peoples and is the source of yet another competitive advantage as the country goes about developing a prominent tourism industry.

3. Best wreck and marine life dive sites in the world:

The islands of FSM contain some of the world's most renowned dive destinations. Divers worldwide are being increasingly drawn to the underwater wreck museums of Chuuk, and to Yap, home of the giant manta ray with wingspans of even 18 feet. Perhaps lesser known, but no less spectacular, are the coral gardens, shipwrecks, and steep dropoffs of Pohnpei and Kosrae. The unique topological of the islands, its people as well as historical wealth are the unique selling points for the FSM and have helped to establish the country as a sought-after tourist destination.

Investment Opportunities:

As the key national department responsible for economic development in Micronesia, the Department of Economic Affairs is committed to assist and support interested parties in all areas of economic activities in my country. Some of the key opportunities include the following sectoral areas:

1. Agriculture

Agricultural production in the FSM is generally locally-based and small scale. Food is grown for local consumption and to support the relatively small export sales in regional markets, primarily Guam, Saipan and the Marshall Islands. Major export products include bananas, betel nuts and citrus.

Investment opportunities in this sector are expected to be small-scale joint venture arrangements aimed at increasing FSM exports to existing regional markets and expanding to other markets in the region such as Guam, Palau, Marshall Islands, Australia, Japan and hopefully soon into China.

Agriculture Projects Opportunity

Bananas ▪ Over 22 varieties of bananas are grown in the FSM, 13 of which provide 50-100% of daily estimated Vitamin A requirements. Kosrae and Pohnpei’s karat and uht en yap varieties provide 25 and 250 times the beta-carotene of the common Cavendish banana respectively. ▪ Investment

▪ Buyers / Distributors

Betel nut ▪ Previously the predominant exporter of betel nut in the region, Yap saw a significant proportion of its crop destroyed in the 2004 typhoon. This presents an opportunity for growers to replant the entire crop in a more organized and efficient manner, and once again become the prominent supplier in the region. ▪ Development

▪ Investment

▪ Buyers / Distributors

Coconuts ▪ Virgin coconut oil processed from fresh coconuts is being marketed by health food companies as having several nutritional benefits, including boosting immune systems. Fresh coconuts require significantly less labor to produce than copra, thus earning a higher return for farmers.

▪ Copra: Although the world market for copra has fallen, copra is used to produce local specialties like coconut soap. Copra is also proving itself to be a promising biomass energy resource. ▪ Development

▪ Investment

▪ Buyers / Distributors

Noni ▪ Noni is naturally abundant throughout the FSM and presents a lucrative opportunity for coordinated harvesting and export. Acclaimed for its health benefits, noni is distributed in over 50 countries by more than 200 companies. The noni industry is expected to pass the $1 billion mark in 2005. Noni juice retails for $42 per liter. ▪ Investment

▪ Buyers / Distributors

Pepper ▪ Pohnpei pepper is regarded as one of world’s finest peppercorn varieties. Once a high end gourmet product distributed worldwide with prices reaching $5 per ounce and netting farmers $6000 per acre, several local farmers are once again producing Pohnpei pepper for export. ▪ Investment

▪ Buyers / Distributors

Sakau (Kava) ▪ In addition to serving a thriving domestic market, sakau (also known as kava) is being exported and marketed in international health food stores as a dietary supplement for such ailments as anxiety, insomnia, and pain and muscle tension. ▪ Buyers / Distributors

Source: International Noni Communication Council; Banana R & D in the Pacific Status Report (INIBAP/BAPNET)

2. Manufacturing

Opportunities in the manufacturing sector in the FSM focus primarily on small-scale production and most manufacturing draws from the natural resources that are abundantly available on the islands such as coconut palms, clean water, and ocean resources. As per the recent Third Economic Summit, the goal of the manufacturing sector is to improve the competitiveness of these locally available factors of production to promote manufacturing sector development.

Manufacturing Projects Opportunity

Assembly-line manufacturing ▪ Assembly-line for pre-fabricated consumer goods such as clothing, luggage, home décor, etc.

▪ Opportunities exist in shoes and other home products, owing to the cheap labor and proximity to Asia.

▪ As an FAS of the US, the FSM is entitled to special duty waivers for goods exported to the US. ▪ Investment

▪ Distributors

Beer Breweries

▪ With high per capita beer consumption levels, the opportunity for the FSM to develop its own brewery seems potent. This could be done in a two step phase, first with canisters of draft beer retailed at pubs and bars across the islands and then the same beer being bottled and canned nationwide. ▪ Investment

▪ Breweries

▪ Distributors

Coconut Products ▪ Ponape Coconut Products (PCP) Consumer Products has been operating since 1974 and produces body soap, laundry soap, oils, suntan oil, shampoo, and other products. The company’s machinery is less than 10 years old. Product quality is regarded as high by buyers in Guam & Japan, and PCP is seeking financial investments to further develop the operation.

▪ Coconut Development Authority (CDA) is a government agency experimenting with alternative uses of copra and fresh coconuts, including virgin coconut oil, coconut milk, and other products. Opportunities exist for private investment in the processing of these products, as well as export.

▪ The coconut processing plant in Chuuk is currently un-utilized because of lack of adequate managerial resources. The plant is equipped to manufacture soap and process coconut oil. The government is looking to privatize this production unit as a means to increase the production of coconut-based products and process the residual matter for animal feed. ▪ Buyers / Distributors

▪ Investor

▪ Management, Marketing & Product Development

Water ▪ Tropical Waters Kosrae, Inc. (“MELO”) proposes to bottle Kosrae’s abundant spring water primarily for export as a high-end product, similar to the “Fiji water” model. Transportation and bottling arrangements have been identified, and initial efforts to market the water as exclusive product via product placement are being explored. Opportunities are available to invest in and distribute this unique product. ▪ Investment

▪ Buyers / Distributors

3. Fisheries / Aquaculture

As mentioned earlier, FSM is home to some of the world’s richest tuna fishing grounds. The country maintains a 3.0 million square kilometers Exclusive Economic Zone from which it generates revenues of approximately $10 million per year for fishing licenses granted to vessels predominantly from Japan, Taiwan, Korean, China, the U.S., and most recently, the European Union (EU). It is said that the Western Pacific is the only tuna area in the world not being over-fished, and conservation efforts are underway to ensure that this remains the case.

Fisheries Projects Opportunity

Carolina Fisheries Corporation (CFC) Private company wholly-owned by Pohnpei state currently operates two small purse seiners, whose catch is transshipped through Pohnpei to canneries in Thailand. Larger boats could increase efficiency and cost-effectiveness, potentially providing a handsome return. ▪ Investment

Chuuk Fresh Tuna Inc. State-owned transshipment facility provides complete support for long-liners transshipping their catch to Japan. State government has invested $7MM since early 1990’s. Opportunity for private fishing company to take over the entire operation. ▪ Investment

▪ Leasing options

Pacific Tuna Industries, Inc. (PTI) State-owned transshipment and cold storage facility in Kosrae, currently idle. Suitable for use as processing plant with investment. ▪ Investment

▪ Development

Pohnpei Fisheries Corporation (PFC) State-owned processing plant processes and transships tuna loins and steaks for export, primarily to the US. Potential exists to expand operations to include processing of purse seine-caught fish for transshipment to canneries. Facilities are well-maintained, meet US FDA standards, and anticipate certification by the EU. ▪ Investment / Privatization

▪ Management Contract

Yap “Diving Seagull” State-owned fishing corporation operates one purse seiner.

The FSM’s extensive reefs and lagoons offer several promising opportunities for aquaculture ventures both for export as well as domestic consumption. Activities are currently underway to research and develop such products as giant clams, black pearls, and sponges.

Giant Clam Projects Opportunity

National Aquaculture Center (NAC) Currently seeking international markets and export opportunities for shells, meat, and the aquarium trade. Expressions of interest in joint venture partnerships or wholesale privatization are encouraged. ▪ Buyers / Distributors

▪ Investment / Privatization

Black Pearl Projects Opportunity

Nukouro Black Pearls 8,000 black pearls are expected to be harvested in Nukouro in October 2004, with subsequent harvests yielding even higher numbers. Buyers and distributors are encouraged to act early for the greatest selection. ▪ Buyers / Distributors

4. Tourism

The tourism industry is perhaps the FSM’s largest growth opportunity of all. A traditional island life-style, as well as the beauty of the surrounding islands and sea, makes the FSM one of the last truly unspoiled paradises on earth. Each state has its own set of languages and dialects, its own unique customs and practices, and its own traditional cultural heritage, thus creating four distinct worlds in one.

Tourism Projects Opportunity

Eco-tourism ▪ The government is focused on developing eco-tourism resorts in the FSM. Given the country’s out-of-the-way location, it is ideally suited to be marketed and developed as a yet undiscovered and untouched destination with numerous outdoor activities including scuba diving, snorkeling, sports fishing, hiking, bird watching, surfing, and the like.

▪ Kosrae Village Resort: Featuring traditional thatched beachfront cottages, a world class restaurant, and a full PADI 5 star diving operation, the KVR is currently seeking partners. ▪ Investment

▪ Architects, builders

Hotels

▪ Yap: A new 30-room hotel project targeted at Japanese tourists is available for investment. Visitor volumes to Yap have upside potentials given the proximity to Japan. The government land for this has been identified just off the YCA building opposite Trader's Ridge Hotel where the current Land Commission Building (due for demolition stands). The land can be leased for virtually at no cost based on the government's new lease credit scheme. ▪ Investment

▪ Hotel Management

Add-on Flights ▪ More Drop-in Flights via Yap en route to Palau.

▪ All flights to Palau from either Guam or Japan fly over Yap. If the airlines could be made to see benefit in landing on Yap through a special 3 days-2 nights kind of bundle for tourists traveling to Palau, the traveler volumes would increase incrementally. ▪ Airlines

▪ Investors

Cultural Villages ▪ Yap Culture Village: Opportunity exists for a culture village where tourists can spend an evening watching the famous Yap dances/ cultural performances, as well as sample the local cuisine via a buffet system. At a relatively moderate $30-40 per head, this business idea should present adequate value-addition to tourists.

▪ A Pohnpei Culture Center project has been proposed to help promote and enhance cultural tourism in the FSM as well as help to preserve the traditional culture. The Center will provide a stage to teach and present such cultural arts as canoe-making, weaving, carving, dance, and feast preparation. A centrally-located traditional structure built in 2002 has been identified to host the Center. ▪ Investment

▪ Entrepreneurs

▪ Hoteliers

Dive Operators ▪ With effective tourism promotion programs, the FSM can build awareness itself as a world class diving destination.

▪ Chuuk is the biggest lagoon in the world with some of the most exquisite wreck-dive sites. Yap, Kosrae, and Pohnpei are home to stunning and prolific marine life. With focused awareness-building, diver tourism can pick up dramatically and presents numerous opportunities for investment and development of dive shop operations. ▪ Investment

▪ Distributors

▪ Tour agents

Cruises ▪ Given that the FSM has developed port facilities in all four states and has some of the most beautiful lagoons in the world, an opportunity exists for multi-island cruises. Environmentally-friendly cruises in particular would complement the country’s current promotion of eco-tourism activities. ▪ Investment

▪ Tour Operators

▪ Tour agents

Conference Facilities ▪ Pohnpei is currently exploring opportunities to develop the state as a regional conference destination, a possibility enhanced by the recent establishment of the Tuna Commission Secretariat in Pohnpei. Opportunities exist to develop and promote conference facilities on the island. ▪ Investment

▪ Development

▪ Management

Further Opportunities for Partnership and Investment in FSM

Project Opportunity

Telecommunication Submarine Cable FSM Telecommunication Corporation (FSMTC) would like to establish a domestic submarine cable network that would link the FSM islands states and interconnect with the FSMTC’s international cable network.

Independent Fuel Storage Facilities FSM is seeking serious partner(s) to design, build and operate fuel storage facilities in the States of Yap, Chuuk and Pohnpei.

Waste Management and development of waste disposal systems in Yap and Chuuk

Each of the islands on Yap and Chuuk as it exist now, has a sub-optimal waste disposal system, primarily dominated by land-fills. A large opportunity exists for a waste management company to come in, develop a waste collection and processing methodology and build a robust business around it.

Port Authority Management Kosrae State Port Authority seeks to privatize the management component of its airport and seaport. Management partner will be selected through competitive bidding process.

Suppliers for island importers/wholesalers Island importers seek suppliers for such wholesale and retail products as animal feed, liquid petroleum gas, construction materials and supplies, rice, cement, used/refurbished cars and appliances, etc.

Bowling Alley With few existing entertainment options, there is an opportunity to open bowling alleys in the different FSM states. The competitive spirit of local population could be channeled into leagues, community events, and inter-municipal tournaments for all ages and genders. A 12-lane, pre-fabricated facility with synthetic lanes would require an investment of approximately $500,000.

Outer Island Transport With few reliable transportation and freight options to and from the outer islands, an opportunity exists for a private company to profitably operate efficient inter-island transport. Demand is high, as such a service would support eco-tourism opportunities to the outer islands that are currently difficult for tourists to access, as well as increase the ability of outer islands to get their goods to the FSM’s economic centers.

Meat processing plant / slaughter facility Interest exists to open a slaughter facility in the FSM to process both local and imported meat, for both local demand and export. Feasibility study would need to be conducted first.

Useful Information:

FSM Tax Summary

Import Tax (Duties & Customs) ▪ 3% - 100%, based on product category

▪ Assessed on the CIF value of the products

‘Gross Revenues’ tax ▪ $80 for the first $10,000 of gross revenues and 3% for any excess in the calendar year, paid quarterly.

▪ Businesses with less than $2,000 gross revenues eligible for total refund on taxes paid

Wages and Salaries Tax ▪ 6% for the first $11,000 and 10% of additional income

▪ Income less than $5,000 entitled to $1,000 income rebate

Social Security Tax ▪ Both the employee and employer each contribute 3% of wages and salaries

▪ Maximum tax of $3,000 per quarter

Source: Taxation Overview, FSM 2004

Infrastructure Summary

Air Transportation ▪ Continental Micronesia between Honolulu, Marshall Islands, Kosrae, Pohnpei, Chuuk, Guam, and Yap

▪ Palau Micronesia Air between Palau, Yap, Chuuk, and Pohnpei

▪ Domestic travel: Caroline Islands Air and Pacific Missionary Airlines

▪ Air freight service provided by National Fisheries Corporation

Ocean Freight ▪ International shipping: PM&O, Kyowa, Chief Container Services, and Matson Line

▪ Inter-island services provided by state governments

Telecommunications ▪ Service through FSM Telecom Corporation

▪ Telephone, fax, internet, cable, and cellular services available

▪ Wireless internet currently being installed

▪ Broadband technology coming to FSM within 3 years

Energy ▪ Diesel-powered generators in main centers

▪ 110-220 volt 60 cycle

Financial & Legal Services ▪ Commercial Banks: Bank of FSM and Bank of Guam

▪ Development Loans: FSM Development Bank

▪ Accounting Services: Deloitte Touche Tomatsu

▪ Law offices located throughout the country