asian development bank · asian development bank pcr: fsm 24267 project completion report on the...

ASIAN DEVELOPMENT BANK PCR: FSM 24267

PROJECT COMPLETION REPORT

ON THE

FISHERIES DEVELOPMENT PROJECT (Loan 1257-FSM [SF])

IN THE

FEDERATED STATES OF MICRONESIA

December 2002

CURRENCY EQUIVALENTS (as of 8 October 2002)

Currency Unit – United States dollar ($)

ABBREVIATIONS ADF – Asian Development Fund BME – benefit monitoring and evaluation DEA – Department of Economic Affairs EA – executing agency EDA – Economic Development Authority EEZ – exclusive economic zone EIRR – economic internal rate of return FIRR – financial internal rate of return ICB – international competitive bidding LIP – limited international purchasing MIS – management information system MLFC – Micronesia Longline Fishing Corporation MMFA – Micronesia Maritime and Fisheries Academy NFC – National Fisheries Corporation PCR – project completion report PMU – project management unit R&D – Department of Resources and Development SLA – subsidiary loan agreement SOE – statement of expenditures

NOTE

The fiscal year (FY) of the Government and its agencies ends on 30 September. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on 30 September 2000.

CONTENTS Page

BASIC DATA ii MAP vii I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2

A. Relevance of Design and Formulation 2 B. Project Outputs 4 C. Project Costs 6 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 8 J. Performance of Consultants and Suppliers 8 K. Performance of the Borrower and the Executing Agencies 8 L. Performance of the Asian Development Bank 9

III. EVALUATION OF PERFORMANCE 10

A. Relevance 10 B. Efficacy in Achievement of Purpose 10 C. Efficiency in Achievement of Outputs and Purpose 11 D. Preliminary Assessment of Sustainability 13 E. Environmental, Sociocultural, and Other Impacts 13

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 14

A. Overall Assessment 14 B. Lessons Learned 14 C. Recommendations 15

APPENDIXES 1. Detailed Project Cost 17 2. Use of Loan Proceeds by Component 18 3. Status of Compliance with Loan Covenants 19 4. Timeline of Major Events 25 5. Summary of Recommendations of the Memorandums of Understanding and Aide Memoire of Asian Development Bank Missions 28 6. Technical Assistance Completion Report 30 7. Financial and Economic Analyses 32 8. Comparison of Assumptions and Forecasts in the Project Appraisal with Actual Outcomes for Micronesia Longline Fishing Corporation 37 9. Balance Sheet for Micronesia Longline Fishing Corporation, 1999/00–2001/02 38 10. Summary of Profit and Loss for Micronesia Longline Fishing Corporation, 1994/95–2001/02 40 Supplementary Appendix A. Unaudited profit/loss statement of Micronesia Longline Fishing Corporation.

BASIC DATA

A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agencies

6. Amount of Loan 7. Project Completion Report Number

Federated States of Micronesia 1257-FSM(SF) Fisheries Development Government of the Federated States of Micronesia (1) Department of Economic Affairs (2) Micronesia Longline Fishing Corporation SDR4.618 million SDR4.073 million (16 March 2001) SDR4.046 million (31 May 2001) SDR3.792 million (13 May 2002) PCR: FSM 726

B. Loan Data

1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed

3. Date of Board Approval

4. Date of Loan Agreement

5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions

6. Closing Date – In Loan Agreement – Actual – Number of Extensions

7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years)

8. Terms of Relending (if any) – Interest Rate – Maturity (number of years)

– Grace Period (number of years)

21 August 1991 29 August 1991 23 March 1992 25 March 1992 19 October 1993 17 December 1993 17 March 1994 16 September 1994 2 31 December 1998 13 May 2002 4 1% 40 10 6.64% 10 5

iii

9. Disbursements

a. Dates Initial Disbursement

17 January 1995

Final Disbursement

9 May 2002

Time Interval

88 months

Effective Date

16 September 1994

Original Closing Date

31 December 1998

Time Interval

51 months

b. Amount ($) Category or Subloan

Original

Allocation

Last Revised

Allocation

Amount

Cancelled

Amount

Disbursed

Undisbursed

Balancea 01A 3,000,000 3,985,314 0 3,718,860 266,45401B 575,000 0 0 0 001C 300,000 160,970 159,736 160,970 002A 191,000 51,098 0 49,290 1,80802B 65,000 38,889 76 38,889 002C 180,000 169,928 26,311 169,929 (1)02D 81,000 18,900 61,870 18,900 003A 145,000 161,832 0 102,536 59,29603B 408,000 285,294 145,378 285,294 004A 226,000 484,675 0 490,342 (5,667)04B 120,000 0 105,174 0 004C 40,000 0 36,085 0 004D 0 0 0 0 005 80,000 77,742 0 77,742 006 1,089,000 0 200,113 0 007 0 38,476 0 38,476 0 Total 6,500,000 5,473,118 734,743 5,151,228 321,890a Cancelled at the time closing. C. Project Data 1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 6.500 5.151 Local Currency Cost MLFC 0.220 1.000 DEA 0.780 0.316 Total 7.500 6.467

DEA = Department of Economic Affairs, MLFC = Micronesia Longline Fishing Corporation.

iv

2. Financing Plan ($ million)

Cost Appraisal Estimate Actual Implementation Costs Borrower-Financed 1.000 1.316 ADB-Financed 6.500 5.151 Other External Financing 0.000 0.000 Total 7.500 6.467 ADB = Asian Development Bank.

3. Cost Breakdown by Project Components Appraisal Estimate ($ '000) Actual ($)

Foreign (ADB)

Local (FSM) Total

Foreign (ADB)

Local (FSM) Total

Part A Commercial Fisheries Development Vessels, Equipment, & Spares 3,191 4 3,195 3,768,150 0 3,768,150Consulting Services 145 22 167 102,536 0 102,536Initial Working Capital 226 151 377 490,342 1,000,000 1,490,342Shore-Based Facility 0 0 0 38,476 0 38,476 Subtotal A 3,562 177 3,739 4,399,504 1,000,000 5,399,504 Part B Training Vessels, Vehicles, & Spares 640 4 644 38,889 0 38,889Initial Working Capital 120 80 200 0 6,551 6,551 Subtotal B 760 84 844 38,889 6,551 45,440 Part C Marine Resources Management and Conservation Vessels, Vehicles, & Equipment 480 70 550 330,899 0 330,899Incremental Adm. Costs 0 300 300 0 188,550 188,550 Subtotal C 480 370 850 330,899 188,550 519,449 Part D Institutional Strengthening and BME Vehicles & Office Equipment 81 9 90 18,900 0 18,900Consulting Services 408 102 510 285,294 120,787 406,081Project BME & Other Costs 40 70 110 0 0 0 Subtotal D 529 181 710 304,194 120,787 424,981 Service Charge 80 0 80 77,742 0 77,742Unallocated 1,089 188 1,277 0 0 0 Total 6,500 1,000 7,500 5,151,228 1,315,888 6,467,116ADB = Asian Development Bank, BME = benefit monitoring and evaluation, FSM = Federated States of Micronesia.

v

4. Project Schedule Item Appraisal Estimate Actual Date of Contract with Consultants Naval Architect Sep 1994 26 Jun 1995 Economist/Financial Analyst Dec 1994 5 Feb 1996 Vessel Surveyor Not included 13 Jun 1997 Fisheries Business Specialist Not included 22 Oct 1999 Vehicles First Procurement Dec 1994 14 Oct 1994 Last Procurement Dec 1995 8 Nov 1996 Equipment First Procurement Dec 1994 25 Jun 1995 Last Procurement Dec 1995 19 Nov 2001 Vessels First Procurement Mar 1995 8 Aug 1997 Last Procurement Dec 1998 20 Apr 1999

5. Project Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

31 Dec 2000–30 May 2001 Satisfactory Satisfactory 31 May 2001–30 June 2001 Partly Satisfactory Partly Satisfactory 31 July 2001–31 Aug 2002 Unsatisfactory Satisfactory

D. Data on Asian Development Bank Missions Name of Dates No. of No. of Specialization of Mission From To Persons Person-Days Members Appraisal 21 Aug 1991 29 Aug 1991 4 9 Fisheries Specialist Financial Analyst Program Officer Counsel Inception 14 Feb 1994 25 Feb 1994 5 27 Procurement Specialist Two Project Specialists Fisheries Specialist Control Officer SLA 23 Nov 1994 9 Dec 1994 1 17 Staff Consultant Review 8 Mar 1995 13 Mar 1995 1 5 Economist Review 17 Apr 1995 21 Apr 1995 1 5 Staff Consultant SLA 28 May 1995 2 Jun 1995 1 6 Economist SLA 1 Oct 1995 4 Oct 1995 2 8 Project Specialist

Associate Project

Analyst SLA 3 Jul 1996 7Jul 1996 1 5 Economist Review 14 Oct 1996 16 Oct 1996 1 3 Director SLA 6 May 1997 9 May 97 3 12 Financial Specialist Project Specialist

vi

Associate Project

Analyst Review 22 Oct 1997 31 Oct 1997 2 20 Financial Specialist

Associate Project

Analyst Review 3 Jul 1998 13 Jul 1998 2 22 Resource Specialist

Associate Project

Analyst Review 17 May 1999 29 May 1999 3 39 Project Specialist Resource Specialist

Associate Project

Analyst Review 14 Aug 1999 20 Sep 1999 1 38 Staff Consultant Review 30 Aug 1999 1 Sep 1999 1 2 Financial Specialist Review 26 Jan 2000 1 Feb 2000 1 7 Resource Specialist SLA 22 Jul 2000 22 Jul 2000 1 1 Financial Specialist Review 9 Oct 2000 14 Oct 2000 1 6 Staff Consultant Review 16 Oct 2000 21 Oct 2000 1 6 Financial Analyst Review 10 Dec 2000 16 Dec 2000 1 7 Resource Specialist

Associate Project

Analyst Project Completiona 30 Sep 2002 11 Oct 2002 4 45 Resource Specialist Young Professional Consultant Economist

Associate Project

Analyst Total Person-Days 290 SLA = Subsidiary Loan Agreement. a The Project Completion Review Mission comprised Thomas Gloerfelt-Tarp, Resource Specialist/Mission Leader; Raikhan Sabirova, Young Professional; Cecilia Bantugon, Associate Project Analyst; and Derrin Davis, Consultant (Economist).

vii

MAP

I. PROJECT DESCRIPTION

1. The Federated States of Micronesia (FSM) has an exclusive economic zone (EEZ) of about 3.1 million km2, which contains large stocks of commercially valuable tuna species. The national Government is responsible for management of the offshore fishery beyond the state territorial seas (seaward of 12 nautical miles). Tuna is the nation’s largest and most valuable natural resource, a resource that has mostly been exploited by foreign fishing fleets under licensing and other access arrangements. 2. The Government’s strategy in the sector has been to establish a national fishing industry as the backbone of the economy, with an objective of harvesting tuna resources with national vessels and crews. Under the Second National Development Plan (1992–1996) the Government also emphasized the role of the private sector in fisheries development. 3. The Fisheries Development Project (the Project) was designed as a response to the fishing industry development strategy, and in accordance with an emphasis on the role of the private sector. The project aim was to assist the Government in accelerating economic growth through the development of the country’s domestic commercial fishing industry, particularly the harvest of sashimi-grade tuna by privately owned longline fishing vessels (“longliners”).1 A loan of SDR4.772 million to the FSM for the Project was approved on 19 October 1993. 4. The components of the Project, the executing agencies (EAs), and the primary activities in each component, as designed, were as follows.

(i) Part A: Commercial Fisheries Development. This component comprised the provision of six commercial longliners in the 15-meter class, office equipment, spare parts and fishing gear, working capital, and consulting services for the design and construction supervision of the vessels. The EA for this component was the Micronesia Longline Fishing Corporation (MLFC), formally established as a private shareholding company at the initiative of the National Fisheries Corporation (NFC) on 2 December 1991. The main activity of MLFC was commercial fishing, targeting yellowfin and bigeye tuna for export to overseas sashimi markets.

(ii) Part B: Training. This component was designed to provide a training longliner in

the 17-meter class, land vehicles, working capital, and vessel spare parts and gear to NFC (the original EA―see footnote 7) for the use of the Micronesian Maritime and Fisheries Academy (MMFA) in Yap state. This component was to enhance MMFA’s training program for longline fishers, with outputs of about 14 trained students every 6 months, thereby ensuring that, amongst others, the MLFC longliners would have adequate and competent crews.

(iii) Part C: Marine Resources Management and Training. Five suitably equipped

service vessels, land vehicles, office equipment, and incremental local funds constituted this component. It was designed to improve the capabilities of the national Department of Resources and Development (R&D),2 the EA for this component, and the Department of Marine Resources in each of the four states

1 Asian Development Bank. 1992. Appraisal of the Fisheries Development Project in the Federated States of

Micronesia. LAP:FSM 24267. May. 2 Since renamed the Department of Economic Affairs (DEA).

2

to manage, conserve, and protect the nation’s marine resources. Complementary to this component, an advisory technical assistance (TA) would strengthen the Department’s capabilities in resources management and conservation through workshops and on-the-job training. The principal output of Part C was to be a systematic monitoring system to facilitate development of an accurate database concerning foreign fishing vessels operating in the EEZ, focusing on catch quantity, species, area of capture, fish size, and fishing effort.

(iv) Part D: Institutional Strengthening for Preparing, Evaluating, and

Monitoring Fisheries Projects. Part D provided NFC (the original EA for this component―see footnote 7), with land vehicles, office equipment, funding for project benefit monitoring and evaluation (BME), and consulting services for: (i) advising prospective investors in the identification, formulation, and preparation of fisheries projects; (ii) preparing a manual on fisheries project preparation and evaluation; (iii) conducting workshops in the four states on fisheries project identification, formulation, and preparation; and (iv) designing a management information system (MIS) for MLFC.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

5. The Project was consistent with the development objectives of the Government and the country strategy of the Asian Development Bank (ADB). Following a project preparatory TA in October 1990, the Project was subsequently identified by the Country Programming Mission in January 1991 as having been accorded top priority by the Government. The project design was also supported by the recommendations from a commercial fisheries conference held in Pohnpei, FSM in June 1991. Those recommendations indicated the Government's intent to promote the domestic private fisheries sector by creating a favorable investment environment and by building additional support facilities.

6. The Project is considered relevant in that it is focused on the nation’s principal natural resource, a resource for which there are proven international markets. However, the presence of abundant fisheries resources does not guarantee that they can be exploited in an efficient and profitable manner, particularly in a small, isolated, and dispersed nation such as the FSM, as this report will show. 7. Many of the difficulties encountered in the Project resulted from other factors that would potentially harm virtually all industries that are based on the export of fresh produce from the FSM, rather than from poor management in MLFC. These factors were, and are, beyond the control of the EAs, including MLFC. They include a poor enabling environment for private sector investment and activity; an overly bureaucratic operational environment; 3 resistance to the privatization of state-owned entities; administrative constraints imposed by differing national and state agendas; expensive services (e.g., dry-docking); expensive and unreliable airfreight services; and delays in project implementation. Government monopolies for transshipment and the management of airfreight introduced inefficiencies in the sector and imposed a constraint on 3 In The FSM Planning Framework 1999-2002, released by DEA in 2000, it is noted that “Various attempts by FSM

to derive greater value from the [tuna] fishery through direct participation by owning and operating their own fishing vessels have had two common components, heavy public sector involvement and unsatisfactory performance” (p. 83).

3

the Project. Lack of experience by many FSM citizens in managing medium-large private sector activities also imposed a constraint on the level of project success. 8. Concerns arise about some aspects of the design and appraisal of the Project. Defining the Project as a pilot project when it results in the accumulation of debt by the Government of the FSM is one concern. The nomenclature “pilot project” normally implies that the activity is a “test run” or, at least in some ways, is experimental in nature. The Project was, however, expected to include successful commercial outcomes and sustainable viability in the tuna longlining industry. An unsuccessful pilot project would normally be expected to be closed down as an experiment that failed, yet this was clearly never the intention for MLFC. 9. The project design failed to ensure that management of the key state-owned enterprises would be run along sound business management principles or privatized. Furthermore, it rested on the assumption that development and implementation of a business climate that would encourage private sector investment in fisheries, as prioritized during the fisheries summit in 1991, would materialize. 10. The project design and appraisal, especially for MLFC, was focused mainly on technical matters. The difficulties encountered in implementation have included both technical and nontechnical concerns. The early change in project scope—from six 15-meter inshore longliners to six 20-meter offshore longliners—approved during a technical review in late 1994, and a subsequent change in procurement mode from international competitive bidding (ICB) for new vessels to limited international purchasing (LIP) for secondhand vessels on 14 November 1996, invalidated virtually all Part A assumptions. This was a major and costly variation to project design that led to substantial delays in Part A implementation. It also resulted in regular mechanical breakdowns and rendered the keeping of a suitable inventory of spare parts impossible. Success in Part A has been substantially constrained by this design change. It is also important to note that the shift to offshore fishing—outside the 12 nautical miles territorial boundary—meant that Parts B, C, and D were no longer directly complementary to Part A, as intended at design, and thus a single project concept no longer existed. 11. While technical design matters are critical, it has been agreed by most analysts of MLFC and/or the Project that the most important reason for the lack of success is the inappropriate public policy environment and the heavy involvement of the Government in commercial fisheries.4 An important weakness in the design and appraisal of the Project was the almost complete lack of attention to analyzing whether or not an appropriate enabling environment was in place. Desirably, a thorough analysis of the public policy setting needed to precede the design and implementation of the Project. 12. Various risks to project success were evaluated in the appraisal. These risks related mainly to cost and price risks, such as fuel costs and tuna export prices. Irregular and unreliable airfreight services, along with the high cost of airfreight have, however, been a central factor in the difficulties faced by MLFC. Neither of these matters was considered in the appraisal, yet it is clear that a reliable and cost-effective airfreight service is pivotal to success in the fresh sashimi export market.

4 E.g., reports by Burslem (ADB. 1999. Analysis of the National Fisheries Corporation and its Subsidiaries. Manila)

and Tiller (ADB. 1999. Report to the Secretary of Finance on the status of the Micronesia Longline Fishing Corporation. Manila). This conclusion was also reached in The FSM Planning Framework 1999-2002.

4

B. Project Outputs

13. Part A, the principal component of the Project, involved MLFC. The Corporation was to demonstrate the viability of commercial tuna longlining and, thereby, attract private investment into the sector. MLFC was incorporated as a shareholding company in 1991 with an authorized capital of $2 million. A fleet of six small vessels was considered adequate at the time of project appraisal. The change in procurement to secondhand vessels, which subsequently resulted in more downtime due to frequent repair, led to a later recommendation to acquire 12 longliners to ensure sufficient vessel productivity. 14. During a review mission in July 1998, ADB raised concerns about the economic viability of MLFC because (i) $762,000 had accumulated in losses and liabilities due to a protracted start-up period and the procurement of three confiscated vessels from the Government; (ii) of the authorized capital of $2 million, the private sector only purchased 1,599 of the 50,000 voting shares at $20 each, whereas the Government, through NFC, purchased all 50,000 non-voting shares and 500 voting shares; (iii) spare parts and working capital requirements were considerably higher than the appraisal estimates because secondhand vessels were acquired; (iv) catch levels were around half the appraisal estimate;5 and (v) poor transshipment handling, combined with unreliable airfreight services, contributed to the accumulation of losses. However, ADB did not call for a temporary suspension of Part A to undertake a full review to assess the validity of the design parameters, as keeping the vessels in operation was imperative to maintain a cashflow. 15. MLFC deferred scheduled overhauls of engines and hulls in an effort to generate the necessary cash revenue, through increased fishing effort, to sustain operations. Such a strategy subsequently caused prolonged downtime due to the need for major vessel repairs. 16. Four memorandums of understanding, prepared between July 1998 and January 2000, called for measures to restructure MLFC to attract further share subscriptions, and for the rectification of the shortcomings in the transshipment and airfreight services. An evaluation in July–October 1999 devised a time-bound action plan to be strictly followed to avoid the collapse of MLFC. While the national Government (the Borrower) fully endorsed these recommendations and proposed actions, necessary assistance from the Pohnpei state government was not forthcoming. Consequently, transshipment, handled by the Economic Development Authority (EDA), and airfreight services remained the major impediments to MLFC viability. The state-controlled harbor authorities would not accommodate assistance to MLFC in the form of harbor space for docking and repair facilities. 17. ADB's strategy for MLFC was to reach a critical number of vessels to achieve an economic level of production and, consequently, reduced overheads per vessel. With 12 vessels in full operation MLFC would be able to pursue its own transshipment and airfreight service arrangements in collaboration with foreign fishing companies. In 1999/2000, MLFC managed to post a positive cash flow. At this time, discussions on collaboration with fishing companies in the Republic of Korea and Taipei,China commenced, while alternative airfreight services were solicited by the management of MLFC. The overall business environment in the FSM, and in Pohnpei in particular, did not improve however, and neither collaborative agreements nor alternative freight services materialized. 5 The appraisal estimate was 0.46 kg/hook, which is well above regional average catch levels. The actual realized

catch level for MLFC is 0.24 kg/hook, which is in line with regional experience. The catch level used at appraisal appears to have been a mistake and it has even been suggested that there was confusion over kilograms and pounds; that is, 0.46 was the catch level in lbs, but this was incorrectly transcribed as the kg figure.

5

18. By 2002, MLFC’s fleet had been reduced from 12 to seven operational vessels. One vessel had run aground, one was in dry dock, and three were in various stages of repair. Following repeated requests from the Government to utilize the remaining loan funds for spare parts for necessary vessel overhauls and dry-docking, a last payment was made in May 2002 only for purchase of the spare parts. Payment for dry-docking was refused as this was considered a routine operation to be undertaken occasionally by any commercial fishing company. 19. Part B of the Project included a suitably equipped longline training vessel for MMFA. This vessel was to be used to provide graduates with the necessary seagoing experience and, thereby, qualify for employment on the domestic longliners. At appraisal it was envisaged that 14 students would graduate every 6 months and that MLFC's longliners would be crewed with qualified domestic personnel. In addition, it was estimated that foreign longliners would need approximately 150 graduates from MMFA. 20. The purchase of vehicles and computers was in accordance with the project schedule, but in 1997 the Government and ADB agreed that the training vessel be cancelled because MMFA did not have the working capital required to operate the vessel. Considerable delays in updating the curriculum and in various training activities were experienced and these were eventually cancelled. In 1998, the Government revived MMFA's operations with assistance from Japan, the curriculum covering training of fishers uses commercial fishing vessels, including those operated by MLFC, for practical training. Employment on fishing vessels is, however, not a preferred choice for Micronesians and MLFC has experienced high levels of local crew turnover. 21. The Marine Resources Management and Conservation component, Part C of the Project, straddled the management of inshore and offshore resources. But as the Micronesia Maritime Authority already managed the offshore fish stock resources, Part C subsequently concentrated on the inshore management where overexploitation had already occurred and initiatives for stock enhancement activities were in preparation. R&D, now the Department of Economic Affairs (DEA), and the four state marine resources departments received service vessels, vehicles, office equipment, and incremental funds for their activities. An associated TA6 was provided to assist in resource management and conservation. The TA was completed in 1997 and its findings and recommendations were the basis for the Model Fisheries Law, which can be adapted to meet the needs of each state, and which provides for the management and conservation of the marine resources in the states. 22. Part D of the Project primarily envisaged (i) assistance to NFC in advising potential investors about the identification, formulation, and preparation of fisheries projects; (ii) advising the states on fisheries project preparation and evaluation through workshops; and (iii) assistance to MLFC in designing a suitable MIS. 23. The consultant engaged for Part D conducted various workshops in the four states and dealt with R&D, NFC, and appropriate state departments. While the terms of reference emphasized the need for further identification of fisheries projects, the consultant’s input was focused more on creating databases as a basic information tool (although database creation was not an obvious skill of the consultant). The most useful output was probably the creation of

6 TA 1965: Marine Resources Management and Conservation Project. August 1996.

6

a catch chart, which showed MLFC where the highest catch rates of tuna within the FSM's EEZ could be achieved. C. Project Costs

24. The total cost of the Project was estimated at $7.5 million equivalent at appraisal, of which the foreign exchange cost of $6.5 million (87%) was to be financed by ADB from the Asian Development Fund. The local currency cost of $1.0 million (13%) was to be financed by the Government. The Government provided $1.0 million to MLFC in July 1996 for its initial working capital. This also represented the Government’s equity contribution for non-voting shares, as endorsed by the Cabinet for Part A of the Project. The Government spent approximately $316,000 to support the requirements under components B, C and D. Parts of these three components were not completed due to substantial delays in implementation, and $0.7 million of ADB’s contribution was cancelled in March 2001. An additional $0.3 million was cancelled at the time of loan completion in May 2002 at which time a total of $6.467 million of the forecast $7.5 million had been utilized (Appendix 1). D. Disbursements

25. The ADB Board of Directors approved a major change in project scope in December 1996, changing the mode of procurement from the purchase of new fishing vessels through ICB to procurement of secondhand fishing vessels through LIP. Consequently, initial disbursement for Part A was delayed by more than a year because of underestimated vessel budget. The use of an imprest account, coupled with statement of expenditure procedures, facilitated reasonably timely procurement of spare parts and gear, as well as ensuring availability of the working capital needed for the operation of vessels. A total of $5,151,228 was disbursed by ADB, with $4,399,504 disbursed for Part A, $38,889 for Part B, $330,899 for Part C, and $304,194 for Part D (service charges of $77,742 account for the remainder of the total disbursement). The use of loan funds by category is shown in Appendix 2. E. Project Schedule

26. Part A of the Project experienced significant delays in implementation, caused by the following: (i) changes in vessel specifications and size; (ii) underestimation of the cost of new vessels and failure of ICB bidding due to their high cost; and (iii) delays in the approval of procedures for secondhand vessel procurement and finalization of the LIP procedures. 27. MLFC procured three confiscated fishing vessels from its own funds from the Government of the FSM in January 1997 (Appendix 3). The procurement of ADB-funded secondhand vessels commenced in June 1997 and was completed in January 1999. The procurement of vehicles and office equipment under Parts A, B, C, and D was completed as scheduled. 28. Bank procurement processes, combined with the major change in project scope, contributed to delays in the schedule. Delays in procurement adversely affected the beginning of MLFC commercial fishing operations. F. Implementation Arrangements

29. The implementation arrangements planned at appraisal were satisfactory. The establishment of a project coordination committee was undertaken in a timely manner. The

7

major change in vessel procurement meant, however, that the implementation arrangements for Part A as envisaged at appraisal were substantially changed and this negatively affected the implementation and ultimately the viability of MLFC. Another important change was that DEA also became the EA for Parts B and D; it had originally nominated NFC as the EA.7 The latter change, however, did not lead to any delays in project implementation, and the revised arrangements for implementation remained appropriate.

G. Conditions and Covenants

30. The Project became effective 11 months after the approval date of 19 October 1993. Congress approval of all loans is mandatory in the FSM. Congress only convenes twice a year and this, coupled with the formal procedures of government for considering and approving proposals, was the main cause of the delay in loan effectiveness. 31. The general covenants in the Loan Agreement mostly relate to due diligence in project execution and, overall, have been complied with or partly complied with, with two notable exceptions: (i) DEA failed to provide ADB with audited financial statements for Parts B, C, and D for 1997/98, 1998/99, 1999/2000, and 2000/01; and (ii) no project completion report was submitted to ADB within the period stated or before the Project Completion Review Mission. DEA's failure to submit the required audited financial statements for these years occurred because of incomplete accounts of the project activities under its responsibility.8 The Public Auditor has consistently stated that supporting documents are missing from DEA's financial statements. The lack of an official project completion report was due to a misunderstanding of its timing. 32. The financial covenants in the Project Agreement specific to Part A were not complied with. Notwithstanding whether or not the stipulated debt/equity ratio of 20:80 was relevant for a fishing company, it is clear that these covenants should have been modified when the change in procurement mode from new to secondhand vessels was approved. The delay in implementation of Part A resulted in a considerable up-front debt/liability commitment in MLFC. This rendered the covenants irrelevant. A review mission in 1998 suggested that these covenants should be waived (Appendix 4), while their inappropriateness was discussed in all subsequent missions. However, as a deletion or waiver of these covenants would not affect the implementation of Part A of the Project, notes-to-file were lodged instead. 33. Three covenants were deleted. Two of these were associated with the training vessel in Part B; when the vessel was cancelled, the covenants were automatically cancelled. The covenant stipulating that the Borrower should make suitable arrangements with airlines operating within its airspace was also deleted, as this stipulation clearly went beyond the Borrower's control. For details of covenants see Appendix 5. H. Related Technical Assistance

34. The TA is rated partly successful. The objective of the TA was to strengthen the management and conservation of the FSM’s marine resources through capacity building at the national and state levels. A series of workshops and on-the-job training were determined to be

7 The President of FSM, in a memorandum dated 21 May 1993, stated that, “The Department of Resources and

Development [now DEA] shall be deemed the Project Executing Agency which is responsible for carrying out Parts B, C and D of the ADB Fisheries Development Project.”

8 The chief operating officer (COO) of MLFC also noted that the audits could not be completed because of the inappropriate covenants still in place.

8

the most effective tools in implementation. Skill capabilities of the various departments were overestimated at appraisal and the efficient implementation of the TA suffered accordingly. This was exacerbated by the consultants’ poor understanding of local culture and attitudes. The principal outcome was the formulation of the Model Fisheries Law. This was the basis for the adoption of the state model fisheries law in Kosrae. The adoption of this law in Pohnpei and Chuuk is still pending, while Yap has rejected the model, citing insufficient stakeholder consultation. The TA completion report is provided in Appendix 6. I. Consultant Recruitment and Procurement

35. The recruitment of consultants and the procurement of equipment and vehicles were both handled in accordance with ADB guidelines. The procurement of vessels was undertaken initially through ICB. Only four vessels could be purchased, due to the high costs of new vessels, as opposed to the six envisaged in the appraisal. Consequently, it was decided to procure secondhand fishing vessels through LIP. This major change in implementation arrangements was approved by the ADB Board on 14 November 1996. J. Performance of Consultants and Suppliers

36. The naval architect consultant performed the tasks required under the Project and was instrumental in changing the size of the fishing vessels required for the Project. The performance of the economist/financial analyst is considered not satisfactory, with the terms of reference not fully met.9 Additionally, his poor health prevented him from staying in the country for the needed periods of time. Procurement of vehicles was through a local supplier who provided the service required. The secondhand vessels were procured from various suppliers and no problems were encountered. Spare parts and gear were procured using international shopping procedures. K. Performance of the Borrower and the Executing Agencies

37. Evaluation of the performance of the FSM Government, NFC, R&D (now DEA), and MLFC must be undertaken in the context of the public policy environment, institutional capacity, and operational capacity in the FSM. 38. While the national Government’s policy is to support private sector development, the enabling environment to support such development is lacking, particularly at the state level. Such an environment is critical to commercial fisheries, which rely on other sectors of the domestic and international economies (e.g., for fuel/oil, airfreight services, parts). Mobil Oil's monopoly agreement, along with cross subsidies in oil pricing, posed constraints on MLFC’s profitable operation. Concern regarding the fuel tax levy was raised during ADB review missions (Appendix 5). The Government did not, however, follow up on recommendations on this issue. The Government also did not move to establish an investment environment that would facilitate private investment in commercial fisheries. 39. The capacity of MLFC to implement Part A was substantially affected by the procurement of the secondhand vessels. The outcome of this variation to the Project was that, even before operations could begin, MLFC had incurred a considerable debt. The debt also 9 The performance of the consultant and the outcomes of the consultancy were strongly criticized during the Project

Completion Review Mission. However, a check of project files showed that, in a letter dated 17 April 1998, the project director indicated that the consultant “fulfilled the required contractual obligations called for under his amended contract.”

9

made MLFC unattractive to further potential private shareholders and, in the course of implementation, the balance sheet of MLFC showed an accumulation of debt and liabilities. The secondhand vessels also adversely influenced productivity, increased maintenance needs and costs, and resulted in poorer conditions for on-vessel catch storage and the employment of fishers. However, the current catch performance of MLFC vessels is consistent with the regional average. 40. DEA’s performance in Part C is assessed as partly satisfactory in achieving the objective to strengthen the Department in terms of improved institutional capacity to manage and conserve marine resources. DEA, which took over as the EA for Parts B and D from NFC, also attempted to increase its institutional capacity by utilizing the services of the project consultants assigned to this component. MLFC's management and operational performance in Part A are assessed as satisfactory in that all reports were submitted on time, tendering and procurement guidelines were followed, and the fleet operated professionally. The working capital constraints and the failure of MLFC to attract more shareholders were factors outside the control of its management. L. Performance of the Asian Development Bank

41. The Borrower questioned the size of vessels recommended at appraisal in late 1994 and ADB subsequently fielded a consultant to review the request. In December 1994 the consultant agreed with the Borrower’s suggestion to purchase larger vessels, and revision of the ICB tender documents was completed in May 1995. However, it took another 16 months (to October 1996)—after lengthy negotiations with the lowest bidder—to reach the conclusion that the budget for new vessels was insufficient. In December 1996, ADB approved the procurement of secondhand vessels.10 42. The change in procurement from new to secondhand vessels entailed such a deviation from the underpinning assumptions of the operation and performance of Part A that it should have triggered a careful reevaluation by ADB. The Borrower, or at least NFC, which already operated its own longliners in the FSM, should equally have raised concern about this major change to the parameters of the Project. 43. The purchase of secondhand vessels also meant that a large quantity of spare parts was continuously needed because of the age of the mechanical components. Provisions for spare parts were based on new vessels, however, so frequent changes in implementation arrangements and the reallocation of project funds were necessary. Furthermore, ADB's requirement that it approve all purchases, even the smallest spare part, added to time delays and was not conducive to assisting a private sector fishing company whose vessels were tied up waiting to be repaired. MLFC partly overcame this problem by eventually carrying a large stock of spare parts. 44. Conversely, ADB showed considerable flexibility with frequent approvals for changes in scope when it became clear that MLFC could not rely on pivotal support services, e.g., transshipment and reliable airfreight from the FSM. 45. A TA in marine resources management was provided to the Project on a grant basis. However, the TA assumed a certain level of counterpart skills, which were not present. A more

10 Board Paper on Change in Mode of Procurement for Financing of Second-Hand Fishing Vessels. R268-96. 14

November 1996.

10

phased approach, coupled with better understanding of Pacific culture and attitudes by some of the selected consultants, might have resulted in greater impact. 46. Considering the complexity of Part A of the Project, and notwithstanding ADB's stringent procurement requirements (which can be considered onerous for the private sector), ADB was very flexible in its administration, approved frequent changes in scope, and extended the loan closing date four times. However, ADB failed to realize the serious implication for MLFC of the change in procurement mode from new to secondhand vessels, and the performance of ADB cannot therefore be rated higher than partly satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

47. Overall, the Project is rated relevant. It was consistent with the Government’s development objectives and priorities, and with ADB’s country program. It was also consistent with the resource endowment of the FSM. Difficulties encountered in implementation arose from project design faults and the lack of analysis of key risks, particularly the public policy setting and the unreliable and costly airfreight. B. Efficacy in Achievement of Purpose

48. The Project is rated less efficacious. While Part A did not achieve its overall aim of assisting the Government in accelerating economic growth through the development of the country’s domestic commercial fishing industry, particularly the harvest of sashimi-grade tuna by privately owned longline fishing vessels, it succeeded in achieving comparable regional catch rates and running the company professionally. The difficult operating environment, including the uncertainty and cost of airfreight services, delays in project implementation, and an inappropriate policy setting were amongst the key factors in preventing the Project achieving its main aim. In recent analyses of MLFC by ADB, it has been universally agreed that the operating environment is the fundamental problem, with both the national and state governments adhering to unhelpful policies. 49. Part B did not achieve its desired outcomes. The MMFA did not have sufficient working capital to operate the training vessel and after the initial procurement of vehicles and office equipment, purchase of the training vessel was cancelled. The later revitalization of MMFA also showed that Micronesians in general do not like to spend extended periods at sea onboard fishing vessels—a crucial assumption at appraisal. However, trainees from MMFA are still using MLFC for practical training. It should be noted here, that although Micronesians have a long tradition as seafarers, work on a cramped longliner is not an envious profession by any stretch of the imagination. 50. Part C produced some positive results, with the state-based training workshops considered to be of benefit to the state marine resources departments. The workshops also supported the development of legislation for marine resource management in each state, with Kosrae having enacted its model fisheries law, and Chuuk and Pohnpei presently in the process of finalizing their versions of the law. The equipment and goods provided to the states under Part C were also considered very useful by the marine resource departments and most are still operational. Weaknesses in this part of the Project included the failure of consultants to

11

recognize and use the knowledge and skills of local participants, and the failure to ultimately develop and implement a suitable data collection and management system. 51. Part D only partly achieved its purpose. While a financial information system was developed and is now used right across DEA, there are no direct benefits to fisheries development. The envisaged capacity building in fisheries project identification, formulation, and preparation did not take place, and the private sector was therefore not mobilized. 52. The Project, as originally conceived, was to contribute to private sector development in the FSM. Private sector involvement and investment in fisheries was to gradually increase, while NFC was to divest its shares in MLFC to the private sector after 7 years. Private sector interest and investment were predicated on an annual dividend of 12%. The poor financial performance of MLFC, coupled with an inappropriate company structure, did not attract additional investors as anticipated. Instead, the result was that the initial private sector shareholders, with a total investment of only approximately $30,000, held the majority of voting shares and controlled the board and, therefore, the company, which has assets on its balance sheet valued in excess of $3 million. 53. It is concluded that the Project will not contribute to the realization of the wider goal originally established, as the divestiture of public sector involvement in the sector was not realized and ancillary support to an enabling private sector was not forthcoming at the national or state levels. C. Efficiency in Achievement of Outputs and Purpose

54. The Project is considered inefficient. The achievement of the required outputs and, subsequently, outcomes from the Project were significantly constrained by a number of factors, including: (i) lengthy delays in project implementation; (ii) selection of consultants who did not have the full set of appropriate skills and experience for the TA, resulting in poor outcomes for Parts B, C, and D; (iii) institutionalized decision-making processes in Government and ADB; (iv) a high level of public sector involvement and a policy environment that discourages private sector involvement and improved industry efficiency; (v) lack of working capital at MLFC (it was exhausted during the protracted start-up period); (vi) low productivity of the fishing fleet because of mechanical problems and sometimes climatic conditions; (vii) difficulty in maintaining a stock of spare parts because of different engine models in each fishing vessel; (viii) expensive and unreliable airfreight services; and (ix) unfavorable yen exchange rate movements at certain times during project implementation (catches exported to the Japanese market are paid in Yen but all operating costs are in US dollar). 55. Financial and economic analyses were undertaken and reported in the project appraisal in 1992. A financial internal rate of return (FIRR) of 22% for MLFC was forecast, while an economic internal rate of return (EIRR) of 24% was forecast. These were recalculated on the same basis by the Project Completion Review Mission. Cash flows have remained negative in all but one year since project inception, with the cumulative negative net cash flow of MLFC to the end of August 2002 amounting to almost $8.3 million (Appendix 7, Table A7.1). Calculation of the FIRR for the period of project implementation, based on actual cash flows, is not technically possible or realistic because of the overwhelming presence of negative figures. MLFC management has prepared forecasts of cash flows for the years 2002/03 to 2004/05, with these based on particular assumptions about productivity, and airfreight and vessel operations. Those forecasts are shown in Appendix 7, Table A7.1, while the assumptions are shown in Appendix 7, Tables A7.2 and A7.3. Even accepting these forecasts of MLFC for the next 3

12

years, the FIRR is close to a negative 39% (Appendix 7, Table A7.1). This figure serves to show the substantial difference with that reported in the project appraisal, yet is not meaningful in an economic sense. Consequently, the net present value (NPV) was calculated using a discount rate of 0%. This gave a financial NPV of more than -$7.3 million. 56. The revised economic analysis (Appendix 7, Table A7.4) shows cumulative losses of more than $8.8 million, with the EIRR a negative 35%. In this case, the more meaningful economic NPV figure is greater than -$6.5 million. The economic analysis is partial at best, with the time available for the PCR not allowing a comprehensive assessment of all economic benefits and costs (economic benefits are shown in Appendix 7, Table A7.5). Nonetheless, it is certain that the cumulative loss will remain substantial, and the NPV similarly negative, no matter what benefits are identified. 57. The principal reason for the substantial discrepancy between the returns forecast at the time of project appraisal and the returns realized is that the catch rates used in the original analyses were far too optimistic. Rates of 130 metric tons per vessel per year were used in the appraisal, yet such rates are well above the regional average for similar-sized vessels, with only the most efficient vessels catching 90–100 metric tons each year. While the appraisal was based on catches of 130 tons per vessel, the best achieved was just under 62 tons per vessel in 2000/01 (Appendixes 7 and 8). This critical assumption underpins the inaccuracy of the financial and economic forecasts made for MLFC at appraisal. Actual investment and working capital needs were also around $2 million greater in the actual operation of MLFC than forecast in the appraisal (Appendix 7). 58. Certain other benefits and disbenefits, not included in the estimate of the EIRR, arise from the Project. Training provided to the staff of state departments of marine resources, the development of legislation for marine resource management, the availability of equipment such as boats, vehicles, and computers, and the development of a financial information system that is now used in DEA are all benefits that arise from the Project. Local staff now have the capability to implement activities such as those under Part C of the Project. 59. Overall, the EAs performed adequately in project implementation and management. Importantly, the poor outcomes experienced in relation to MLFC were, in general, not a consequence of poor company management. Rather, they resulted from matters beyond the control of management. 60. ADB’s support and administration were also, in general, adequate. Its level of supervision must, however, be questioned. Delays in project implementation, along with delays in procurement of spare parts often resulted from ADB officials becoming too involved in the process. Such micro management, as distinct from monitoring, can interfere with the efficiency of project implementation and operation, particularly when a project includes a substantial commercial component. 61. Finally, as noted elsewhere, the operating environment is the fundamental problem that hinders success in the operations of MLFC: heavy government participation and an inflexible and inappropriate enabling environment for private investment are of particular relevance to lack of successful financial and economic outcomes.

13

D. Preliminary Assessment of Sustainability

62. Overall, the sustainability of the Project is rated less likely. Part A of the Project is not commercially sustainable. MLFC is carrying substantial accumulated losses, has minimal working capital, a weak balance sheet (Appendix 9), and cannot meet its running costs, cover depreciation, or pay interest on its loan from the Government. The company is yet to show a profit, and only in 1999/2000 did it show a small positive net cash flow. A summary of the profit and loss situation is shown in Appendix 10. The company is de facto insolvent but there is a desire by FSM officials to prove that MLFC eventually can be operated profitably. However, this should not be achieved by simply borrowing more money or by injecting cash grants into the company. Rather, significant restructuring of the company and the sector environment is required. 63. Part B was unsuccessful and has not been further pursued. Training for potential longliner crew members is now conducted by MMFA. Management of MLFC, along with government officials, noted that difficulties have been encountered with retaining local crew members, and MLFC's fishing vessels have therefore employed crews from the Philippines and Indonesia. Only four Micronesians now serve on MLFC vessels. 64. Part C will result in sustainable outcomes. In particular, the development of legislation for the management of marine resources is an important project outcome. The provision of equipment also supports sustainability in this component of the Project. Further TA to develop a marine resource data collection and monitoring system would contribute to continued and enhanced success of this project component.

65. The outputs and outcomes defined under Part D were not achieved and, consequently, this component of the Project is not sustainable. Given that existing fisheries projects are not viable there is little point, at the present time, in providing additional support for the development of training programs, systems, and manuals on the preparation and evaluation of fisheries projects in the FSM. Conversely, assistance to develop a more appropriate MIS for MLFC might be considered as part of any restructuring of MLFC. E. Environmental, Sociocultural, and Other Impacts

66. The Project had only little impact on environmental and sociocultural issues. Certain negative environmental impacts are, however, possible. The target species for MLFC are the highly migratory bigeye and yellowfin tuna. Concern has arisen over bigeye stocks in recent times and continued harvesting of this species may be having negative impacts on the bigeye population. This concern is, as with most fish stock assessments, uncertain. However, the National Oceanic Resource Management Authority is monitoring all the catches and the Secretariat of the Pacific Community is collecting the data for all the Pacific countries and is responsible for the regional assessment. 67. The unavoidable by-catch of sharks is increasingly becoming an important cash earner for MLFC and sale of sharkfins in 2001/02 totaled $62,665. MLFC expect this figure to increase slightly in future years. The sharkfin industry is almost certainly not sustainable and is widely considered to be environmentally unacceptable. However, management of MLFC views such an activity as representing a commercial imperative if the company is to survive, yet it is an activity that can result in negative environmental impacts.

14

68. However frustrating the MLFC experience for DEA and the many FSM citizens who bought shares in the company has been, the involvement and exposure to an unfamiliar business, which for long has been touted as one of the most obvious for direct investment and control by Pacific countries, can be seen as very positive learning experience.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

69. While the Project was implemented broadly as conceived, the change of procurement from new to secondhand fishing vessels was a major change to the design. At the time of this change there was a need to revisit the design and reappraise the Project prior to undertaking procurement. At various times during implementation, ADB review missions recommended to change certain project covenants, e.g., the financial ratios in the loan covenants were inappropriate. However, due to approaching loan-closing dates, the changes were not implemented. In hindsight, given that the Project got extended several times, it would have been appropriate to pursue these changes. Other difficulties, such as the poor enabling environment for private sector investment in the FSM were critical, but beyond the control of ADB and the EAs. 70. The Project is overall rated partly successful—though very close to unsuccessful.11 The key factors in favor of the partly successful rating are (i) the new Compact Agreement between the FSM and the United States, which has been continuously negotiated over the last couple of years, places high priority on private sector development and thus is likely to lead to greater privatization efforts of state-owned enterprises and an environment more conducive to business, and (ii) the broad exposure by the over 60 FSM citizens who bought shares in MLFC. Furthermore, despite MLFC's de facto insolvency, a timely restructuring of MLFC coupled with adjustments within airfreight charges and practical state assistance are necessary to turn MLFC around and slowly move it toward economic viability. B. Lessons Learned

71. A number of important lessons can be learned from this Project. First, in designing a project such as the Fisheries Development Project for the FSM the realities—financial, physical, and geopolitical issues—must be clearly understood. The presence of fish stocks does not necessarily mean that a viable commercial fishery can be developed. Conversely, however, fisheries projects will not always fail if they are appropriately designed in the context of a clear understanding of the situation confronted by a particular fishery (such as reliability of airfreight). 72. Design of projects with a commercial component must take account of the public policy setting and enabling environment. A careful analysis of these factors will provide important guidance on the likelihood of success. Agreement to support a project such as this could then be predicated on governments, particularly state governments, making certain policy, regulatory, and legislative changes. 73. A project designed to be commercial and “private sector” in nature must be allowed to be truly commercial and not be constrained by excessive bureaucracy, government monopolies, and requirements that it use particular government services (such as transshipping and 11 This PCR is part of a sample of PCRs independently reviewed by the Operations Evaluation Department. The

review has validated the methodology used and the rating given.

15

airfreight management). In this instance, the lack of vertical integration in fishing, handling, transport, and marketing is a constraint on possible commercial success for MLFC. Duplication of activity that reduces efficiency, such as the operation of fishing fleets by both MLFC (private sector) and NFC (public enterprise), must also be avoided. In this context, it is difficult to comprehend how the Project, in the design phase, could have been conceived as a pilot project.

74. The Project was subject to a major design change: the replacement of new vessels with the purchase of secondhand vessels. At this time Part A of the Project should have been temporarily suspended and a full review undertaken so as the likely outcomes of such a change could be fully understood. 75. ADB standard tendering requirements were more complex than desirable for many aspects of procurement in the Project. It is imperative for a private sector fishing company, whose primary objective is to keep the vessels out at sea fishing, to be able to act fast when mechanical failures occur and be able to buy the necessary spare parts immediately. For Part A, this sometimes caused considerable downtime of the vessels while MLFC was going through ADB's procurement guidelines. 76. The selection of consultants resulted in unsatisfactory and/or incomplete outcomes in certain parts of the Project. Consultants without Pacific experience, along with consultants who did not have appropriate technical skills, led to poor outcomes. C. Recommendations

77. It is obvious that MLFC, as an insolvent company, cannot continue to operate without a major restructuring. The issue of creating a helpful private sector environment is political and rests with the Government. It is also within the Government's prerogative to decide if the conditions in the subsidiary loan agreement temporarily should be changed in order to ease the stipulated repayment schedule, thereby facilitating an improved cash flow for MLFC. However, it is very difficult to argue that a vibrant private sector is being constrained, given that this sector has invested a little less than 3% of the authorized voting share capital in MLFC, which it thus controls by having the majority of the voting shares. The key recommendation is, therefore, to place MLFC immediately into voluntary receivership (a precedent of receivership exists in the FSM) and, subsequently, to restructure the company to place it on a viable footing.12 It must be emphasized that placing the company in voluntary receivership does not necessarily imply failure. Rather, it is an appropriate commercial strategy for changing the direction of a company that is experiencing financial difficulty. In this case, receivership might allow the development of a coherent and objective restructuring program for MLFC. At the same time, it is noted that a receiver could put the company into liquidation if it was clear that it had no chance of ever becoming viable. In this instance, however, a desire by the Government to save MLFC would signal that the first strategy is to examine all possible means of saving the company. 78. Alternatives to receivership include immediate liquidation of the company, or attempting to restructure without using a receiver but, e.g., using the present chief operating officer. Receivership is the preferred option, however, because it prevents the company making investments that place it in further difficulty, and it allows suspension of the board, thereby giving the receiver maximum flexibility to rapidly make and implement decisions in the best 12 This recommendation is similar to one made in a report by an ADB consultant (Simon Tiller) following a mission in

August–September 1999. The Government and the board of MLFC, at that time, expressed willingness to support the consultant’s recommendations for voluntarily receivership.

16

interests of the company and its shareholders. The fact that the Government has such a substantial stake in the company, although it does not have control of the board, supports the strategy of receivership. A related matter is the position of the present private investors. It is recommended that the Government pay them in an amount equivalent to their original investments so that, temporarily, the Government, through its receiver, has full but “arms-length” control of the activities of the company. 79. Given that the new Compact Agreement between the FSM and the United States is coming into effect in 2003 and one of the high priority areas of the Compact is private sector development, it is likely that the Government will move decidedly on this issue. It is therefore recommended that the Project be selected for an in-depth postevaluation in late 2003 or early 2004.

Appendix 1 17

DETAILED PROJECT COST Appraisal Estimate ($ '000) Actual

Foreign (ADB) Local (FSM) Total Foreign (ADB) Local (FSM) Total

Part A Commercial Fisheries Development Vessels, Equipt., & Spares 3,191 4 3,195 3,768,150 0 3,768,150Consulting Services 145 22 167 102,536 0 102,536Initial Working Capital 226 151 377 490,342 1,000,000 1,490,342Shore Based Facility 0 0 0 38,476 0 38,476 Subtotal A 3,562 177 3,739 4,399,504 1,000,000 5,399,504 Part B Training Vessels, Vehicles, & Spares 640 4 644 38,889 0 38,889Initial Working Capital 120 80 200 0 6,551 6,551 Subtotal B 760 84 844 38,889 6,551 45,440 Part C Marine Resources Management & Conservation Vessels, Vehicles & Equipment 480 70 550 330,899 0 330,899Incremental Adm. Costs 0 300 300 0 188,550 188,550 Subtotal C 480 370 850 330,899 188,550 519,449 Part D Institutional Strengthening and BME Vehicles & Office Equipment 81 9 90 18,900 0 18,900Consulting Services 408 102 510 285,294 120,787 406,081Project BME & Other Costs 40 70 110 0 0 0 Subtotal D 529 181 710 304,194 120,787 424,981 Service Charge 80 0 80 77,742 0 77,742Unallocated 1,089 188 1,277 0 0 0 Total

6,500 1,000 7,500 5,151,228 1,315,888 6,467,116

ADB = Asian Development Bank, BME = benefit monitoring and evaluation, FSM = Federated States of Micronesia. Source: Asian Development Bank

18 Appendix 2

USE OF LOAN PROCEEDS BY COMPONENT In $ Cat. Allocation Last % of ADB Contract Disburse- Undisbursed No. Category Name Part Agency (SDR) Allocation Financing Awards ment Balance a/ 01A Vessels, Parts, & Gear A MLFC 2,971,127 3,988,835 100 3,838,200 3,718,860 269,975 02A Land Vehicle & Equipment A MLFC 35,000 51,022 100 49,290 49,290 1,732 03A Consulting Services A MLFC 119,000 163,600 100 164,675 102,536 61,064 04A Initial Wrkg. Cap. & Incremental Cost A MLFC 360,742 488,632 60 490,342 490,342 (1,710) 04D Initial Wrkg. Cap. (airfreight) A MLFC 0 0 60 0 0 0 07 Shore-based Facility A MLFC 28,131 38,476 100 38,476 38,476 0 99 Imprest Fund 2,520 0 0 3,514,000 4,733,085 4,580,983 4,399,504 331,061 01B Vessels, Parts, & Gear B DEA 0 0 100 0 0 0 02B Land Vehicle & Equipment B DEA 27,942 38,889 100 38,889 38,889 0 04B Initial Wrkg. Cap. & Incremental Cost B DEA 0 0 60 0 0 0 27,942 38,889 38,889 38,889 0 01C Vessels, Parts, & Gear C DEA 109,564 160,970 100 160,970 160,970 0 02C Land Vehicle & Equipment C DEA 117,925 167,825 100 171,804 169,929 (2,104) 227,489 328,795 332,774 330,899 (2,104) 02D Land Vehicle & Equipment D DEA 13,580 18,900 100 18,900 18,900 0 03B Consulting Services D DEA 205,968 285,294 100 344,661 285,294 0 04C Initial Working Capital (BME) D DEA 0 0 36 0 0 0 219,548 304,194 363,561 304,194 0 05 Service Charge 57,000 77,742 0 77,742 0 06 Unallocated (MLFC SDR235,500 0 0 0 0 0 and DEA SDR153,000) Total 4,045,979 5,482,705 5,316,207 5,151,228 328,957 ADB = Asian Development Bank, BME = benefit monitoring evaluation, DEA = Department of Economic Affairs (formerly Department of Resources and Development [R&D]), MLFC = Micronesia Longline Fishing Corporation. a Cancelled at the time of loan closing. Note: Unallocated amounts were reallocated during implementation. Source: Asian Development Bank

Appendix 3 19

STATUS OF COMPLIANCE WITH LOAN COVENANTS

COVENANT

Reference in Loan

Agreement

Status of Compliance

The Borrower shall relend to Micronesia Longline Fishing Corporation (MLFC), for purposes of Part A of the Project, an amount equivalent to SDR3,126,000 out of the proceeds of the Loan under a Subsidiary Loan Agreement (SLA) upon terms and conditions satisfactory to the Asian Development Bank (ADB). Except as the Borrower and ADB shall otherwise agree, the terms for relending the proceeds of the loan shall include interest at the rate of at least 6.64% per annum and a repayment period of not more than 15 years including a grace period of 5 years, with MLFC assuming the foreign exchange risk.

Art. III, LA, Section 3.01(a)

Complied with. First amendment to the SLA made in April 1997 increased the onlending amount from SDR3,126,000 to SDR3,514,000. This was the result of the transfer of funds earmarked for the training vessel under Part B.

The Borrower shall cause MLFC and the Department of Economic Affairs (DEA) to carry out their respective parts of the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental, commercial, and fisheries practices.

Art. IV, LA, Section 4.01(a)

Complied with.

In the carrying out of the Project and operation of the project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 6 to this Loan Agreement as follows:

Art. IV, LA, Section 4.01(b)

See following status.

MLFC Shareholding, Capital, and Directors The Borrower shall ensure that MLFC shall at all times be structured as a private commercially oriented corporation with an independent board of directors, a majority of whose members will represent the private sector; and that the private sector will have control of the management of MLFC.

Sch 6, LA, Para A.4

Complied with.

The Borrower shall ensure that as long as MLFC owes any monies to the Borrower pursuant to the SLA, the Borrower shall be entitled to appoint a director to the board of MLFC.

Sch 6, LA, Para A.5

Complied with.

The Borrower shall cause DEA to divest fully its shares in MLFC over a period of no more than 7 years to the private sector. The divestment shall include, among other things, sale of DEA's shareholdings in MLFC to qualified MLFC employees and other shareholders on record at book value or some other agreed price.

Sch 6, LA, Para A.6(a)

Not applicable yet. The 7-year period is from the year of first purchase, which is 1997. However, with MLFC's liabilities and debt it is unlikely that potential investors will buy any shares.

The Borrower shall ensure that at least 50% of MLFC's paid-in voting common shares shall be held by the private sector at any given time. Furthermore, the Borrower shall cause MLFC to ensure that MLFC's paid-in capital (including non-voting common shares) plus accumulated retained earnings shall be set, at any given time, at no less than 30% of the sum of its long-term liabilities and equity.

Sch 6, LA, Para A.6(b)

Partly complied with. Private sector holds more that 50% of the voting shares (about $30,000). However, the non-voting shares of $1 million, are all but used, and long-term liabilities and equity exceeds by far 30%.

The Borrower shall cause the National Fisheries Corporation (NFC) to assist MLFC, if necessary, in contracting transshipment and transportation agents for the timely loading of air cargo in connection with the operation of the first two longliners.

Sch 6, LA Para A.8

Complied with.

20 Appendix 3

COVENANT

Reference in Loan

Agreement


The Borrower shall make suitable arrangements with airlines operating in the Borrower’s territories for space to be made available for the timely shipment of export quality tuna from the Project.

Sch 6, LA Para A.9

Not complied with. This covenant goes beyond the control of the Borrower and should not have been covenanted. This issue is in the Note to File dated 12 January 2001.

The Borrower shall cause the appropriate fishing licenses to be provided to MLFC, where required.

Sch. 6 , LA Para A.6

Complied with.

The Borrower shall cause DEA to take appropriate steps to monitor the environmental impact and overall progress of the Project during implementation and strengthen the Borrower's and NFC's fisheries resource monitoring and management systems.

Sch. 6, LA Para C.11

Partly complied with. With a shift to offshore fisheries the environmental impact of MLFC could not be assessed by DEA. Model Fisheries Law that relates to protection of marine resources is being implemented.

Institutional Strengthening and Policy Reform: Prior to effective date: (i) appoint a full-time assistant project director to assist the DEA secretary in project coordination activities and lend support to the Marine Resource Division in implementing Parts B, C, and D; (ii) DEA shall be provided with a full-time accountant to ensure that the appropriate project accounts are properly maintained, reports are promptly prepared and audits are conducted without delay.

Sch. 6, LA Para D.12

Complied with late. Appointments took place after effectiveness.

The Borrower shall cause DEA to recruit and assign counterpart staff to work closely with the economist/financial analyst (consultant) in preparation for the former’s assumption of the post occupied by the consultant after the expiration of the consultant's assignment.


Complied with.

The Borrower shall establish the post of Marine Resources Management Specialist in DEA to work closely with the consultant under the ADB-financed technical assistance for Institutional Strengthening for Marine Resources Management and Conservation.


Complied with.

The Borrower shall: (i) establish the policy and institutional task forces

recommended by the Third Federated States of Micronesia Commercial Fisheries Development Conference of 1991;

(ii) continue to undertake all necessary action to evolve an optimal fisheries policy suited to the Federated States of Micronesia's conditions; and

(iii) strengthen all institutions involved in the formulation and implementation of fisheries policies.


Overtaken by further ADB TA FSM 2551 and National Fisheries Policy Seminar in Dec 1996. New Fisheries Policy approved by National Congress in July 1997. TA 2832 approved. Title 24 approved in Congress 2002. Tuna Management Law became law in Dec 2000.

Appendix 3 21

COVENANT

Reference in Loan

Agreement


Training To help meet the overall skilled human resources requirements for commercial fisheries development in the Federated States of Micronesia, but particularly for the commercial longliners to be provided to the MLFC, under Part A of the Project, DEA shall, prior to the effective date, enter into a service agreement with the managers of the Micronesia Maritime and Fisheries Academy (MMFA) to operate and maintain the training vessel to be provided under Part B of the Project and to develop a relevant curriculum for the training of longline fishers.

Sch. 6, LA Para E.16(a)

Complied with. Service agreement was signed on 2 Sep 1994. However, the training vessel was later cancelled.

DEA shall make available to MMFA, together with the training vessel, the initial working capital for the training vessel and land vehicles under Part B of the Project in accordance with the terms of the service agreement referred to in para 14(a) above.

Sch. 6, LA Para E.16(b)

Partly complied with. The vehicle was procured and given to MMFA. Training vessel was cancelled in 1997 and funds reallocated to Part A.

DEA shall assist MMFA in preparing the training curriculum referred to in subpara (a) above.

Sch. 6, LA Para E.16(c) Deleted.

DEA shall cause MMFA to conduct training courses for about 24 students in the training vessel annually in the following three major courses: (i) navigation, (ii) engineering, and (iii) fishing gear and techniques for longliners.

Sch. 6, LA Para E.16(d)

Deleted from the Project. However, MMFA has since been revived with assistance from Japan.

All crew members of the vessels to be provided under the Project shall be trained at MMFA in onboard safety and operation of the vessel radio in order to be fully informed on current weather and sea conditions.

Sch. 6, LA Para E.16(e)

Deleted.

With the assistance of the consultant to be engaged under Part D of the Project, DEA shall establish a management information system (MIS) to provide information needed by MLFC's board of directors and management to plan and control MLFC's operation and financial performance. The principal aspects of the MLFC's operations to be monitored shall be determined in consultation with ADB.

Sch. 6, LA Para F.17(a)

Partly complied with. Engagement of MIS consultant dropped due to protracted delays. MLFC developed its own MIS system.

Utilizing the MIS established by DEA on its behalf, MLFC shall prepare annual reports of MLFC's operational and financial performance following completion of each financial year for consideration of MLFC stockholders. The annual reports shall also compare changes in MLFC's performance with that of previous years. These annual reports shall be furnished to ADB within 9 months following the completion of each financial year for review throughout the period of project implementation and for 5 years thereafter.

Sch. 6, LA Para F.17(b)

Complied with. However, the requirement to submit such report after project completion is deemed inappropriate as MLFC needs restructuring.

The Borrower shall make available to MLFC and DEA, promptly as needed, the funds, facilities, services, and other resources which are required, in addition to the proceeds of the loan, for the carrying out of their respective parts of the Project.

Art. IV, LA, Section 4.02

Complied with.

Recruitment by DEA of competent and qualified consultant. Art. IV, LA, Section 4.03

Partly complied with. The Borrower's wish for database development was not strictly compatible with the consultant's qualifications.

22 Appendix 3

COVENANT

Reference in Loan

Agreement


The Borrower shall: (i) cause the Department of Finance on behalf of DEA to

maintain separate accounts for Part C and have such accounts audited annually;

Art. IV, LA, Section 4.05(b)

Partly complied with. Separate accounts established and MLFC obtained audit; however, DEA failed to get its accounts audited in FY1997/98, 1998/99, 1999/2000, and 2000/01 due to lack of supporting documents.

(ii) furnish to ADB through the project coordinator, not later

than six (6) months after the end of each related financial year, unaudited copies of such accounts, and not later than nine (9) months after each related financial year, certified copies of audited accounts with the relative auditors report;

(iii) furnish to ADB any other information concerning such

accounts.

Art. IV, LA, Section 4.06(a)

Partly complied with. MLFC has submitted its audited reports; however, DEA has not submitted audited accounts since 1997/98. Same as above.

The Borrower shall cause MLFC and DEA to furnish to ADB through the project coordinator quarterly reports on the carrying out of their respective parts of the Project and on the operation and management of the project facilities.

Art. IV, LA, Section 4.06(b) PA, Section 2.08(b) PA, Section C(5) Sch. 1

Partly complied with. MLFC has been submitting its report while DEA failed to submit any report since 1998.

Promptly after physical completion of the Project, but not later than three (3) months thereafter or such later date as may be agreed for this purpose between the Borrower and ADB, the Borrower shall cause MLFC and DEA to prepare and furnish to the project coordinator their respective reports, in such form and in such detail as ADB shall request. The project coordinator shall submit these reports to ADB within four (4) months of the physical completion of the Project.

Art. IV, LA, Section 4.06(c) PA Section 2.08(c)

Not complied with.

Suspension, Cancellation, Acceleration of Maturity

The following are specified as additional events for suspension of the right of the Borrower to make withdrawals from the Loan Account for the purposes of Section 8.02(1) of the Loan Regulations: (i) MLFC shall have failed to perform any of its obligations

under the SLA; or (ii) The MLFC Articles of Incorporation and by-laws or any

provision thereof shall have been amended in any manner which in the reasonable opinion of ADB will or may adversely affect the carrying out of Part A of the Project or the operation of the concerned project facilities.

Art. V, LA, Section 5.01

Complied with. Complied with.

SLA has been duly authorized by or ratified by, and executed and delivered on behalf of, the Borrower and MLFC, and is legally binding upon the parties thereto in accordance with its terms, subject only to the effectiveness of this Loan Agreement.

Art. VI, LA, Section 6.02

Complied with.

Appendix 3 23

COVENANT

Reference in Loan

Agreement


MLFC shall: (i) maintain separate accounts for the Project; (ii) have such accounts and related financial statement audited

annually, in accordance with sound auditing standards by independent private auditors acceptable to ADB; and

(iii) furnish to ADB through the project coordinator not later than

nine (9) months after the close of fiscal year to which they relate certified copies of such audited accounts and the report of the auditors as well as the annual report to the stockholders, all in the English language. Additionally, MLFC shall submit to ADB through the project coordinator not later than six (6) months after the end of fiscal year to which they relate unaudited accounts of the Project.

PA, Section 2.09(a)

Complied with. Complied with. Complied with.

MLFC's annual corporate financial statements shall include a balance sheet, statement of income and expenses, and related supporting schedules, in particular the statement of expenditures on the Project, reflecting the project accounts.

PA, Section 2.09(b)

Complied with.

Management and Staffing MLFC, prior to the commencement of its operations as a company and no later than the effective date, shall appoint a qualified manager (the Manager). The Manager shall be designated project director and shall be responsible for the overall execution of the Project. He or she shall coordinate closely with Micronesian Maritime Authority, DEA, and the Department of Marine Resources.

PA, Section A(1) Sch. 1

Complied with.

Training All MLFC crew members shall be trained at MMFA (or have received equivalent training) in onboard safety and operation of the vessel radio in order to be fully informed on current weather and sea conditions.

PA, Section B(4) Sch. 1

Complied with.

MLFC shall submit to ADB through the project coordinator, copies of its annual report to the stockholders which shall contain, among other things, information on project benefits, beneficiaries, and an evaluation of the performance of the project fishing vessels.

PA, Section D(6) Sch. 1

Complied with.

Financial Ratios Except as the Borrower and ADB may otherwise agree, MLFC shall achieve the following financial ratios to ensure its financial soundness: (i) the debt/equity ratio shall not exceed 70:30 during MLFC's

first five years of operations, and 60:40 thereafter; (ii) the current ratio shall not be lower than 1:1 during the first

five years of operations, and 1.5:1 thereafter; and (iii) the debt service coverage ratio shall not be lower than 1.25

starting the year when amortization on the Subsidiary Loan start.

PA, Section E(7) Sch. 1

Staff concerned undertook the necessary action to amend the covenant. This was supported by Director, Area A and the Counsel. However, the Director, Office of Pacific Operations did not agree in view of the approaching closing date. Not complied with. Not complied with. Not complied with.

24 Appendix 4

TIMELINE OF MAJOR EVENTS Year Actions 1991 • Review of fisheries sector in the Federated States of Micronesia (FSM) and establishment of

Micronesia Longline Fishing Corporation (MLFC) in December 1991 • MLFC Inc. and non-voting shares issued to the National Fisheries Corporation (NFC)

1992 • First voting shares sold to FSM citizens in private sector • Asian Development Bank (ADB) Appraisal of Fisheries Development Project • PL-7-101 proposed in FSM Congress for funding Fisheries Development Project

1993 • Report and Recommendation to the ADB Board for FSM Fisheries Development Project • ADB FSM Loan Agreement for Fisheries Development Project

1994 • The loan became effective in September • Chief Operating Officer opened MLFC office in September • MLFC Prospectus and Registration Statement completed in August • The executing agency advised ADB that the proposed vessels (15 meters) were determined as being

too small for the intended operations • ADB fielded a consultant to review the Project in November • ADB consultant recommended revision to larger vessels in December

1995 • ADB put project on hold pending revision of vessel cost/size issues in January/February • ADB and its consultants agreed to proceed on the basis of revisions and tender for six vessels in

May • Chief, Office of Pacific Operations (OPO) approved the change in the size of fishing vessels to be

procured from 15 meters to 20 meters on 30 June. • Acting Secretary of Finance, on 25 August advised ADB about amending Subsidiary Loan

Agreement (SLA) changing the onlending rate from 7% to 6.64%. • MLFC prepared and published tender documents • Possibility of purchasing secondhand vessels first raised in late 1995

1996

January • Extension of bid period for procurement of longline vessels • Evaluation of technical bid by the executing agency • Advise ADB on details of preliminary bid submission for review and approval February • MLFC board meeting—proposed revised prospectus, vessels procurement status. Advised approval

of preliminary evaluation of bids by ADB. Notified bidders to submit revised bids by 7 March • MLFC request for disbursement of capital considered by Project Coordinating Committee (PCC). March • MLFC revised prospectus approved by FSM Registrar; sale of shares reopened • Vessels procurement bid closed and public opening of bid conducted • Marine architect (consultant) commenced technical evaluation of four responsive bids April • Evaluation of bids. Semo identified as the lowest evaluated bidder, but proposed substantially higher

prices than the loan budget ceiling • Chief, OPO approved on 2 April a minor change in implementation arrangement to purchase the

computers and equipment from IS to Direct Purchase procedure as there is only one bidder. May • Full report on tender evaluation results June-July • ADB approved proposal to enter into negotiations with Semo • MLFC board discussed alternative approach to procurement, funds from FSM Government • PCC relays MLFC’s request for remaining $731,840 from FSM Congress (PL 7-101) as government

non-voting shares to satisfy requirements and conditions embedded in Loan Agreement (government counterpart funds) of $1.0 million.

• Procurement of additional office equipment

Appendix 4 25

August-September • Negotiations with Semo • MLFC informed ADB that negotiations with Semo resulted in cancellation of purchase of new vessels

due to insufficient budget under ADB loan October • ADB mission to FSM to discuss and resolve issues of procurement of secondhand vessels and direct

purchase • ADB advised MLFC of proposed Limited International Purchase (LIP) procedures to include

secondhand vessels. MLFC board approved proposed LIP procedures December • ADB Board approved on 5 December the procurement of secondhand fishing vessels through LIP

1997 January • MLFC purchased three confiscated vessels from FSM Government (Pakin, Mokil, Satawan) for total

of $499,500 • MLFC initiated procurement of secondhand vessels February-March • Pakin and Satawan started operating April • ADB rejected financing Pakin, Mokil, and Satawan from loan proceeds • Vice President (East), approved the change in scope by deleting the procurement of training vessels

(Part B) and reallocation of its funds (SDR448,000) to procurement of second-hand vessels under Part A. This resulted in the increase of onlending amount to MLFC thus the revision of SLA.

May • Mokil started operating June • ADB approved purchase of Okat vessel • Marine surveyor started work under Project as required by ADB for procurement of secondhand

vessels • Procurement of vehicles July • Okat started operating August • ADB approved purchase of Nukuoro, including spare parts and gear September-December • Nukuoro arrived and started operation • Procurement of needed spare parts and gear • MLFC conducted viability study of vessels

1998 January • Director, OPO approved on 8 January the: (i) extension of loan closing date from 31 Dec. 1998 to 31

Dec. 1999; (ii) change in scope by setting up of a shore-based facility with the corresponding allocation of loan proceeds ($175,000); and (iii) change in scope by procuring additional second-hand fishing vessels utilizing the savings from buying brand new vessels.

• MLFC purchased Lamotrek vessel (started operating in April) June-July • MLFC purchased Hunter (started operating in August) and Gray Feather (Gray Feather did not start

operating until December 1998) October • MLFC purchase Lanthe (started operating in February 1999) and Tarang (began operating in

February 1999) November • NFC lose lease of airfreight • Poor returns from main market (Japan) due to poor yen/dollar rate December • Gray Feather initial operation

1999 January • On 12 January, Director, OPO approved reallocation of loan proceeds from Category 06 to Category

04A (SDR148,000) to finance additional working capital required for additional second-hand fishing

26 Appendix 4

vessels. • MLFC purchased Woleai (started operating in April 1999) • MLFC purchased Condor (started operating in April 1999) February-April • Tarang, Lanthe, Condor, and Woleai initial operation May • ADB mission fielded • Memorandum of understanding (MOU) signed. MOU recommended restructuring of MLFC:

conversion of government stock into voting stock taking into account MLFC failure to comply with loan covenants specifying parameters of debt/equity ratio and likelihood that interest payments and the principal payment due 15 July 1999 cannot be met

• ADB indicated that the Project cannot continue or be restructured without resolution from MLFC board

• No airfreight (some vessels steamed to Guam for transshipment) June • No resolution indicated by MLFC board • Some vessels continue to transship out of Guam July • On 7 July, Director, OPO approved: (i) utilization of savings of consultant services from the MLFC

component to recruit a Fisheries Specialist; (ii) endorse the change in procurement procedures used by MLFC in acquiring the 3 Government acquired vessels, a change in implementation arrangement; and (iii) seek endorsement of the ADB’s Board of Directors on a no-objection basis with regard to the deferment of compliance with debt-equity ratio covenant. Item (iii) has been addressed in a separate Note to File prepared in January 2001 instead of a paper to the Board citing that the EA will not be able to comply with this covenant.

2000 January

• ADB mission fielded • On 21 January, Director, OPO approved extension of loan closing date for a further year until 31

December 2000. February • On 10 February, Director, OPO approved the reallocation of loan proceeds to cover the activities for

a six-month period: (i) vessel upgrade ($150,000), (ii) maintenance facility ($200,000), (iii) storage and handling facility ($160,000), (iv) airfreight guarantee fund ($170,000), and (v) working capital ($100,000).

July • ADB subsidiary loan agreement mission October • ADB review mission December • ADB review mission • On 21 December, Director, OPO approved: (i) extension of the loan closing date until 15 July 2001,

and (ii) purchase of the last 3 vessels be considered as an “optional” capital resource if and when needed for sound business investment to improve debt/equity ratio of MLFC.

2001 On 16 March, ADB undertook first partial cancellation of $700, 294 under Parts B, C, and D

component of the Loan. On 19 June, Director, OPO approved: (i) extension of loan closing date to 31 December 2001, and

(ii) reallocation of loan proceeds from Category Nos. 04D [Initial Working Capital (SDR125,658)] and 7 [Shore Based Facility (SDR267,681)] to Category 01A (Vessels, Spare Parts and Gears).

2002 Additional amount of $321,000 was cancelled by the closing date on 13 May.

Appendix 5 27

SUMMARY OF RECOMMENDATIONS OF THE MEMORANDUMS OF UNDERSTANDING AND AIDE MEMOIRE OF ASIAN DEVELOPMENT BANK MISSIONS

Mission Date and Memorandum of Understanding/ Aide Memoire Recommendations

Mission Leader

6-9 May 1997 • The Government stressed the need to expedite implementation of the Project and

requested the mission to take necessary steps to ensure quick responses from the Asian Development Bank (ADB), especially in the procurement of secondhand vessels

• The mission requested that counterpart funds be carefully monitored by the executing

agencies (EAs). Additional funds may be required to complete components B, C, and D

I. Powell

22-31 October 1997 • Subsidiary loan agreement (SLA) between the Federated States of Micronesia (FSM)

and Micronesia Longline Fishing Corporation (MLFC) needs to be amended due to reallocation of funds from component B to component A for purchasing additional vessels. The Borrower agreed to initiate the necessary action and amend the SLA and required documents

• Government and MLFC request that the loan closing date of December 1998 be

extended to December 1999

T. Sen

3-13 July 1998 • Mission recommends that the loan covenant on the debt/equity ratio should be waived • The working capital for the operation of 12 secondhand vessels may be substantially

adjusted as soon as official request is received from the Government • ADB’s Private Sector Group and Office of the General Counsel to look into possibilities

for changing the charter of MLFC in order to bring the company in line with the intent of the Project

T. Gloerfelt-Tarp

17-28 May 1999 • Replace the stipulated debt/equity ratio of 60:40 with realistic time-bound debt/equity

ratios reflecting expected performance • FSM Government agrees to reduce its current onlending interest rate to MLFC from the

current 6.7% to 1.5% for the period starting with the effectiveness of the subsidiary loan agreement until 31 December 2000

• The non-voting shares currently held by the National Fisheries Corporation (NFC) will

be converted into voting shares and shall be transferred to the national Government to be held in escrow for a period of 24 months

• Government shall positively consider a reduction of the current fuel tax for fishing

vessels in order to make the industry regionally competitive and subsequently attract more foreign boats

• Mission will recommend that ADB field a two person-month consultancy input to

analyze all the issues listed above and provide clear recommendations for a time-bound action plan

• ADB will consider providing assistance to support restructuring, including: (i) possible extension of loan closing date; (ii) undertake an independent audit with an objective to prepare a proper share prospectus; and (iii) defer consideration of the critical loan covenants

• It is agreed not to proceed with the procurement of the three remaining fishing vessels

to avoid burdening MLFC with additional debt and overhead costs

A. Hinduja

28 Appendix 5

3 August–3 September 1999 • A report of ADB's consultant "Report to the Secretary of Finance on the status of the

Micronesia Longline Fishing Corporation" suggested the urgent need to restructure the company and improve its business environment

• The mission was advised that the Government and the board of MLFC were willing to

support the consultant’s recommendations for voluntarily receivership • The second phase of the short-term consultancy (financed under the loan) would start

in October 1999 for 6 weeks to assist the Government and MLFC to prepare a time-bound action plan for restructuring MLFC into a financially sound and viable entity

Jae Hoon Yoo

26 January–1 February 2000 • Recommended to allocate a total amount of $780,000 for a 6-month period starting 1

February 2000: (i) vessel upgrade ($150,000); (ii) maintenance facilities ($200,000); (iii) storage and handling facilities ($160,000); (iv) working capital needs for airfreight arrangements ($170,000); and (v) working capital ($100,000)

• The existing imprest account will be replenished but with a new ceiling of $100,000 • Further recommended that ADB give in-principle concurrence to the proposed

amendments to the subsidiary loan agreement involving: (i) temporary lowering of the relending interest rate from 6.64% to 1.5% until 31 December 2000; and (ii) a revised payment schedule of interest and principal payable by MLFC under the terms of the subsidiary loan agreement be prepared

T. Gloerfelt-Tarp

20-22 July 2000 • Mission recommends continuing with the present budget allocations and adopting a

more pragmatic approach with respect to the outstanding Economic Development Authority issue. The closing date of 31 December 2000 is appropriate

T. Gloerfelt-Tarp

16-21 October 2000 • Mission was requested by the MLFC board to release the balance of the loan. The

mission advised the board that ADB would require Department of Finance endorsement prior to considering drawdown

• Consideration of extension of the loan depends on report of the staff consultant and

official endorsement of Secretary of Finance

T. Sen

10-16 December 2000 The mission agreed with the Government to propose extension of closing date for component A of the loan (MLFC) based on: (i) long-term debt restructure proposal will be approved and signed by the Government; (ii) the Government shall, no later than 15 January 2001, give notice to MLFC on any outstanding interest payments in accordance with the long-term debt restructuring and require that any arrears are paid within 1 month; (iii) the Government shall, not later than 15 March 2001, give notice to MLFC about the loan repayment schedule for 2001 and ensure payment is made as scheduled; (iv) the present Chief Operating Officer of MLFC will have his contract renewed; (v) the audited financial statements of the Department of Economic Affairs shall be submitted to ADB not later than 15 February 2001; (vi) the Government shall support MLFC’s effort to establish any alternative airfreight service; (vii) the extended loan closing date shall be 15 July 2001; (viii) a new prospectus for issuing shares in MLFC shall be submitted to the Government for signature not later than 1 April 2001; and (ix) an agreement between the Government and the board of MLFC, specifying conditions of the Government’s divestment of its non-voting shares held in MLFC, shall be reached on a date that allows the information to be incorporated into the prospectus.

T. Gloerfelt-Tarp

Appendix 6

29

TECHNICAL ASSISTANCE COMPLETION REPORT Division: PAHQ

Amount Approved: $520,000 TA No. 1965-FSM: Marine Resources Management and

Conservation Revised Amount: $520,000 Executing Agency: Department of Economic Affairs

Source of Funding: TASF

TA Amount Undisbursed $33,688.71

TA Amount Utilized $486,311.29

Date Closing Date Approval 19 Oct 1993

Signing 17 Dec 1993

Fielding of Consultants 16 March 1995

Original 30 Nov 1995

Actual May 1998

Description During appraisal of 21–29 August 1991, the Government of the Federated States of Micronesia (FSM) requested Asian Development Bank (ADB) assistance to strengthen the capabilities of the Marine Resources Division (MRD) of the national Government and the respective departments of marine resources (DMRs) in the states of Chuuk, Kosrae, Pohnpei, and Yap in the proper management and conservation of FSM's marine resources. Especially, the inshore resources had been identified as being overexploited in many lagoons and reef areas. The technical assistance (TA) was associated with Loan 1257: Fisheries Development and was originally designed to cover both the inshore as well as the offshore resources, the latter as part of the sustainable development of an offshore tuna longline fleet under the investment loan. Objectives and Scope The main objective of the TA was to strengthen the management and conservation of FSM's marine resources through on-the-job-training and workshops for the staff of the DMRs in all four states and at the national level. The scope of the TA would encompass: (i) assisting MRD and DMRs in designing and implementing reforms in the management and conservation of fisheries resources, (ii) monitoring the results of the reforms and providing follow-up training for staff if conditions were changed as a result of these reforms, and (iii) preparing appropriate manuals for the management and conservation of the national and the respective states' marine resources. The TA was to produce clear guidelines and strategies to redirect fishing effort away from overfished stocks and determine further requirements for strengthening the extension program as well as prepare regulations for adoption by each state legislature. Evaluation of Inputs The TA was formulated from a rather traditional conservation point of view and did not take into account that management and conservation are not necessarily solved by straightforward technical nor legislative solutions, but are more related to social and economic issues. A total of 24 person-months consulting services was provided by a firm in the following areas: (i) institutional and training specialist, and marine resource specialist. During implementation of the TA a contract variation was approved to include the services of a legal specialist and an institutional and management specialist to cover all the work requirements identified at inception. The team members had all working experience from the Pacific region but the institutional and training specialist and the marine resource specialist apparently displayed a somewhat condescending and arrogant attitude toward counterparts and fisheries officials in general, and both became rather unpopular and a good working environment was never established. Budget was allocated for a photocopier, printers, and computers and all equipment was handed over and improved office efficiency during implementation. Counterpart staff were assigned in the Department of Resources and Development; however, their sector knowledge and management experience were not as good as the TA presumably had expected. This, and the consultants’ superior attitude, did not foster a good working relationship, and it obviously affected the efficiency of the on-the-job-training negatively. Evaluation of Outputs The most important output was the formulation of the Model State Fisheries Law. This Law laid down the functions and objectives of the concerned departments and divisions responsible for marine resources management coupled with the incorporation of rights and responsibilities by the actual resource owners. This law was the base upon which the State Fisheries Law in Kosrae was formulated and enacted. Similar laws for Chuuk and Pohnpei states are in the process of enactment. However, the Model State Fisheries Law has been rejected by Yap state on claims that appropriate stakeholder consultations did not take place during formulation. The training sessions and workshops produced the following information papers: (i) Towards a draft national fisheries policy; (ii) The FSM tuna fishery: Where is it going?; (iii) Guidance notes on fisheries statistics; (iv) Sustainable harvesting of bêches-de-mer; (v) Fisheries management guidelines; (vi) Inshore fisheries management; and (vii) Marine resources for decision makers. The consultants have broadly followed the given terms of reference with the exception of the review and recommendations of DMRs' extension programs as these could not be accommodated logically within the work.

Appendix 6 30

The quality of the work was generally good, albeit in the absence of a good working environment and lack of mutual respect; only the Model State Fisheries Law has been appreciated by the Government as an important first step towards sustainable fisheries for the states. Overall Assessment and Rating Most of the delivered outputs were highly relevant. The Model State Fisheries Law especially has been used to formulate laws, which will govern and manage the marine resources in three of the four states. However, the difficult personalities of the two leading consultants severely constrained a better overall impact. It is in particular doubtful what impact the on-the-job-training has had. For these reasons the TA is rated only partly successful. Major Lessons Learned As this TA is associated with Loan 1257: Fisheries Development, it is relevant to look if this investment component changed and how it subsequently affected the TA. At appraisal, the Project envisaged six small inshore longliners and in this context, management and conservation of the marine resources as well as possible conflicts between commercial and the subsistence fisheries was highly relevant. However, when the scope of the loan changed from inshore to offshore fishery, the justification and relevance of the TA was truncated. From that time onwards, the TA was carried out in isolation of the investment project. A project framework (this Project did not have one) incorporating a loan with an associated T,A with clear links to output levels and cross-referenced assumptions, would have been very useful. Also, the lack of skilled counterparts points to lack of a proper diagnostic analysis of the executing agency at appraisal. Had such an analysis been made, the TA would probably have been formulated with less ambitious goals. Recommendations and Follow-Up Actions None Prepared by

Thomas Gloerfelt-Tarp

Designation

Resource Specialist

Appendix 7

31

FINANCIAL AND ECONOMIC ANALYSES Table A7.1: Financial Analysis of Micronesia Longline Fishing Corporation, 1994/95–

2004/05

Year

Investments and Working

Capital ($)

Operating & Interest

Income ($) Expenses ($)a Net Cash Flow ($)

Cumulative Cash Flow

($) FIRR (%) NPV ($)

1994/95 147,174 2,842 84,316 (228,648) (228,648) 1995/96 62,923 6,004 154,374 (211,294) (439,942) 1996/97 1,402,896 727,451 1,006,654 (1,682,098) (2,122,040) 1997/98 1,405,603 2,714,366 3,026,551 (1,717,787) (3,839,828) 1998/99 1,372,491 3,672,330 4,554,590 (2,254,751) (6,094,579) 1999/00 99,604 4,828,646 4,679,796 49,246 (6,045,334) 2000/01 371,071 3,814,733 4,434,207 (990,545) (7,035,878) 2001/02b 857,127 2,787,233 3,152,329 (1,222,223) (8,258,101) 2002/03c 265,436 (7,992,665) (81.34) (7,992,664) 2003/04c 314,498 (7,678,165) (53.43) (7,678,166) 2004/05c 328,370 (7,349,797) (38.96) (7,349,796) FIRR = financial internal rate of return, NPV = net present value. a Excludes depreciation. b 11 months only (excludes September 2002). c Forecasts prepared by Micronesia Longline Fishing Corporation (MLFC) (Supplementary Appendix A). Sources: Asian Development Bank; Micronesia Longline Fishing Corporation.

A. Discussion 1. The data for the years 1994/95 to 2000/01 were taken from profit and loss statements provided by ADB. The data for the 11 months of 2001/02, to 31 August 2002, were taken from the unaudited profit and loss statement of MLFC (Supplementary Appendix A). Micronesia Longline Fishing Corporation (MLFC) prepared forecasts of cash flows and profit and loss statements for the years 2002/03, 2003/04, and 2004/05. These are used in the table and analysis above. It is noted, however, that the forecasts are based on a number of critical assumptions. These are shown in the following two tables.

Appendix 7 32

Table A7.2: Assumptions Underlying Micronesia Longline Fishing Corporation, Profit and Loss Forecasts

Assumptions Comments Catch levels of 2.5–3.0 tons per voyage Currently around 2.0 tons per voyage Reject fish kept to below 15% of the total catch

Ranged from 14.32% in 2001/02 to 25.82% in 2000/01

Expand the market for sharkfin Grew from zero in 2000/01 to $62,665 in 2001/02; unfavorable from environmental perspective

Negotiate with FSM Government to “return” an amount of $130,330.98 previously repaid

Government approval needed

Negotiate an overdraft with the Bank of FSM Because MLFC is insolvent, a bank would not provide an overdraft without guarantee, such as from the Government

Request further funding from ADB for vessel repairs and maintenance

Government support needed

Use subsidized airfreight at $2.50/kg and Continental freight at $2.15 as much as possible

Beyond the control of MLFC; constrained by space and schedules

Seek cheaper sources of bait and packing materials Cheaper sources should be available Negotiate fuel discounts with Mobil with support from the Government

Reduced fuel and oil costs may be possible with Government support

Relocation of main office to the new facilities at the port to reduce costs and allow more efficient management of handling and transshipment

This strategy should be possible; present office space owned by a board member

Further cuts to administration Difficult without reducing efficient management

Government write-off of the outstanding interest payable Interest outstanding at 31 August 2002 totaled more than $860,000; Government debt to ADB will remain

Reduce interest rate to 1.5% per annum Current rate is 6.64%. Any interest rate below the prevailing FSM commercial bank rate will constitute a subsidy to MLFC.

Start a new repayment schedule (based on the above two assumptions) on 1 January 2003 with monthly installments of $6,000, which leads to full repayment by 15 December 2064.

Repayment schedule well beyond that required of FSM Government to ADB; implies a subsidy to MLFC

Source: Information provided by the Chief Operating Officer of Micronesia Longline Fishing Corporation. 2. The remaining assumptions employed in the preparation of the forecast profit and loss statements are shown in the following table.

Appendix 7

33

Table A7.3: Catch, Income, and Cost Assumptions Underlying Micronesia Longline Fishing Corporation, Profit and Loss Forecasts, 2002/03–2004/05

2002/03 2003/04 2004/05

Sales Annual catch (kg) 500,000 520,000 535,000 Average export price ($/kg) 8.60 8.65 8.65 Average local price ($/kg) 1.05 1.10 1.10 Ratio of reject fish (%) 15 15 15

Costs Av. no. of vessels operating 7.5 8.0 8.5 Airfreight ($/kg) 2.70 2.65 2.60 Marketing cost for exports (%) 14 14 14 Handling—exports ($/kg) 0.15 0.15 0.15 Handling—reject fish ($/kg) 0.12 0.12 0.12 Packing materials ($/box) 15 14 13 Fuel and oil ($/month/vessel) 5,300 5,100 5,100 Bait ($/month/vessel) 3,300 3,100 3,000 Source: Data provided by the chief operating officer of Micronesia Longline Fishing Corporation.

Table A7.4: Economic Analysis, Micronesia Longline Fishing Corporation, 1994/95–2004/05

Year

In–Kind Contri-bution

($)

Invest’s & Working

Capital ($) Expenses

($) Depreci-ation ($)

Oper. & Interest

Income ($)

Economic Benefits

($)

Net Econ. Benefits

($)

Cumulative Net

Benefits ($) EIRR (%) NPV ($)

1994/95 147,174 84,316 3,385 2,842 400 (231,633) (231,633) 1995/96 62,923 154,374 6,870 6,004 823 (217,340) (448,973) 1996/97 120,787 1,402,896 1,006,654 35,835 727,451 32,056 (1,806,665) (2,255,638) 1997/98 188,550 1,405,603 3,026,551 103,132 2,714,366 96,343 (1,913,127) (4,168,765) 1998/99 1,372,491 4,554,590 179,162 3,672,330 101,442 (2,332,471) (6,501,236) 1999/00 99,604 4,679,796 199,920 4,828,646 140,746 (9,928) (6,511,164) 2000/01 371,071 4,434,207 172,705 3,814,733 139,515 (1,023,735) (7,534,899) 2001/02a 857,127 3,152,329 174,665 2,787,233 92,437 (1,304,451) (8,839,350) 2002/03b 265,436c 104,811 370,427 (8,468,923) (76.58) (7,654,339) 2003/04b 314,498c 107,877 422,375 (8,046,548) (48.89 (6,910,779) 2004/05b 328,370c 113,786 442,156 (7,604,392) (35.07) (6,531,557) EIRR = economic internal rate of return, NPV = net present value. a Eleven months only (excludes September 2002). b Forecasts prepared by MLFC. c Profit as forecast by MLFC. Sources: Asian Development Bank; Micronesia Longline Fishing Corporation.

B. Discussion 3. The economic analysis is based on the data used in the financial analysis, along with those data provided in Table A7.5 below. The main economic benefits identified are those that arise from taxation and from the flow-ons from vessel provisioning. The time available for the PCR means that it is not possible to be more thorough or exact in the identification of benefits over and above financial benefits. Taxes are those actually paid, apart from fuel and oil taxes that, in total, are approximately 6% of the cost of these inputs. The flow-on (or multiplier) benefits from vessel provisioning comprise an assumption about the level of such flow-ons. Because many of the items included in provisioning are imported the assumption of 25% (a multiplier of 1.25) of purchase costs is likely to be generous. Even then, as shown in Table A7.4

Appendix 7 34

above, the economic internal rate of return (EIRR) is strongly negative. Other benefits might include those from local employment, although these are relatively minor. Some additional economic activity will also be created by the operations of MLFC, although this will, again, be relatively small. Certainly such benefits would not be sufficient to make a significant difference to the estimated EIRR or the overall viability of MLFC.

Table A7.5: Economic Benefits, Micronesia Longline Fishing Corporation, 1994/95–2004/05

Year Fuel & Oil ($)

Fuel/oil Tax @ 15% ($)

Provis-ioning

($)

Provisioning: Flow-on @

25% ($)a

Social Security Tax ($)

Import Tax ($)

Other Taxes

($) Totals ($) 1994/95 400 400 1995/96 823 823 1996/97 113,004 16,950.66 30,476 7,619 4,658 781 2,047 32,056 1997/98 281,894 42,284.11 74,494 18,623 6,859 19,526 6,340 96,343 1998/99 389,207 58,381.03 136,771 34,193 6,095 - - 101,442 1999/00 450,395 67,559.28 156,476 39,119 6,850 24,606 - 140,746 2000/01 526,057 78,908.52 126,360 31,590 9,691 9,113 - 139,515 2001/02b 343,159 51,473.92 75,170 18,792 6,518 3,795 - 92,437 2002/03 477,000 71,550.00 72,000 18,000 7,830 3,000 - 104,811 2003/04 489,600 73,440.00 76,800 19,200 7,920 3,000 - 107,877 2004/05 520,200 78,030.00 81,600 20,400 7,920 3,000 - 113,786 a Assumed flow-on benefit based on a multiplier of 1.25. b Eleven months only (excludes September 2002). - = not available Source: Micronesia Longline Fishing Corporation.

Table A7.6: Comparison of Financial Internal Rate of Return at Different Catch Rates, Micronesia Longline Fishing Corporation, 1994/95–2004/05

Year

Net Cash Flow (PCR analysis)

(%) FIRR (%)

Net Cash Flow (appraisal—50%

catch) (%) FIRR (%)

Net Cash Flow (appraisal—70%

catch; 90 tons) (%) FIRR (%)

1994/95 (228,648) (736,174) (321,773) 1995/96 (211,294) (860,423) (144,223) 1996/97 (1,682,098) (2,096,896) (1,262,096) 1997/98 (1,717,787) (2,101,603) (1,177,603) 1998/99a (2,254,751) (2,093,991) (1,135,791) 1999/00 49,246 (848,604) 144,996 2000/01 (990,545) (1,147,071) (116,671) 2001/02b (1,222,223) (1,662,627) (594,027) 2002/03 265,436 (81) 265,436 (86) 265,436 (63) 2003/04 314,498 (53) 314,498 (59) 314,498 (37) 2004/05 328,370 (39) 328,370 (43) 328,370 (26) Cumulative Cash Flow, 1995/95–2001/2002

(8,258,100) (11,547,389) (4,607,188)

FIRR = financial internal rate of return. a The large figure in this year occurs because of the investment in capital equipment that occurs in that year. Such investments are included in all the cash flows in the years in which they occurred. b Eleven months only (excludes September 2002). Source: Asian Development Bank

Appendix 7

35

C. Discussion 4. Two variables are particularly important in explaining the wide discrepancy between the financial information (and subsequent FIRR and EIRRs) prepared at the time of appraisal and the actual project outcomes. First, the catch rate of 130 metric tons per vessel per year and a total catch of around 860 metric tons per year from six 15-meter vessels were well above regional averages. The highest level of productivity has normally come from larger Japanese longliners which have reported averaged catches of up to 90 metric tons per annum. 5. Second, the investment in vessels and other assets for MLFC, at appraisal, was estimated at $3.739 million over the period 1992 to 1995. Working capital needs were assumed to be taken initially from this capital and, after project start-up, to be met from the positive cash flows of the company. The actual outcome, in the period 1994/95 to 2001/02, was a commitment in investments and working capital of $5.719 million, almost $2 million more than the appraisal estimates. Continued operating losses also mean that injections of working capital will continue to be required. 6. The combination of overoptimistic catch rates and underestimated investment and working capital needs resulted in operational outcomes typified by ongoing financial losses, the accumulation of such losses, and a growing debt, all of which, in turn, resulted in very poor financial and economic indicators.

36 Appendix 8

COMPARISON OF ASSUMPTIONS AND FORECASTS IN THE PROJECT APPRAISAL WITH ACTUAL OUTCOMES FOR MICRONESIA LONGLINE FISHING CORPORATION

Item Assumption or Forecast Actual Outcome Critical? FIRR 22% Significantly negative (-39%) EIRR 24% Significantly negative (-35%) Training vessel Return FIRR of 7.2% and

EIRR of 9.5% Not viable; project component abandoned

Fish production at full development

860 metric tons per annum Maximum achieved 565 mt in 1999-2000

Yes

Catch per vessel 130.5 mt/annum Best of 62 mt/vessel in 2000/01 Yes Airfreight Regular and reliable services,

including 727 aircraft from Chuuk to Guam 3 times per week

Irregular and unreliable services; no separate service from Chuuk

Yes

Continental Air Micronesia Capacity to ship 20 mt per week

Very limited capacity; often zero

Private sector Greater private sector involvement in fisheries

No additional involvement by FSM citizens except through limited shareholding in MLFC

Vessels 6 new longliners in 15-meter class

12 secondhand longliners, mostly in 20-meter class

Yes

Crew availability Adequate trained crew from MMFA under project

Only 4 Micronesians working on MLFC vessels

Net sales (net of gross receipts tax), $ million

4.79 in 1998/99 4.97 in 1999/00 5.15 in 2000/01 5.34 in 2001/02

3.67 in 1998/99 4.79 in 1999/00 3.70 in 2000/01 2.77 in 2001/02

Yes

Costs—operating, admin., and depreciation (not including interest), $ million

3.12 in 1998/99 3.53 in 1999/00 3.65 in 2000/01 3.77 in 2001/02

4.53 in 1998/99 4.65 in 1999/00 4.37 in 2000/01 3.09 in 2001/02

Yes

Net operating income (not including interest), $ million

1.67 in 1998/99 1.44 in 1999/00 1.50 in 2000/01 1.57 in 2001/02

-0.86 in 1998/99 0.14 in 1999/00 -0.67 in 2000/01 -0.32 in 2001/02

Yes

EIRR = economic internal rate of return, FIRR = financial internal rate of return, mt = metric tons, MLFC = Micronesia Longline Fishing Corporation, MMFA = Micronesia Maritime and Fisheries Academy. Source: Asian Development Bank A. Discussion 1. The Project has accumulated substantial losses and resulted in significant negative returns to the investment. The question that must be asked is why the appraisal led to such promising outcomes, but these were not realized in the Project once it was implemented. 2. Reference to the table above indicates that, in the appraisal, net operating profits were forecast, yet in most years losses have been incurred. Clearly, the main reason for this was the catch rates assumed in the appraisal. Rates of 130 metric tons per vessel per year are well above the regional average, with even the most efficient Japanese vessels rarely catching more than 90 metric tons each year. The appraisal was based on catches of 130 tons per vessel, but the best achieved was just under 62 tons in 2000/01. This critical assumption underpins the inaccuracy of the forecasts made for MLFC at appraisal.

Appendix 9

37

BALANCE SHEET FOR MICRONESIA LONGLINE FISHING CORPORATION, 1999/2000–2001/02 ($)

As of 30 Sep 2000

As of 30 Sep 2001

As of 31 Aug 2002

Assets Current Assets Checking/Savings BFSM/Checking 17,139.38 (21,467.33) 975.58 BFSM/Saving 251,787.56 107,105.91 48,321.79 BOH/Checking 213,699.03 14,968.05 367.47 BOH/Saving-Imprest 100,966.29 4,753.52 4,148.18 Petty Cash 271.58 793.98 1,929.53 Total Checking/Savings 583,863.84 106,154.13 55,742.55 Accounts Receivable 112,909.22 95,895.90 106,982.22 Inventory Bait 43,531.90 67,345.58 32,436.25 Fishing Gears & Supplies 72,078.45 84,709.70 186,374.76 Prepaid Inventory 75,635.30 376.00 337,110.47 Sharkfin 0.00 265.00 1,425.00 Vessel Spare Parts & Gears 181,673.57 257,689.77 296,655.28 Total Inventory 372,919.22 410,386.05 854,001.76 Prepaid Expenses 64,777.62 33,519.36 2,608.63 Total Current Assets 1,134,469.90 645,955.44 1,019,335.16 Fixed Assets House Furnishing Acquisition 6,344.61 6,659.60 6,659.60 Accumulated Depreciation (5,913.32) (5,913.32) (6,659.60) Total House Furnishing 431.29 746.28 0.00 Office Equipment & Furniture Acquisition 31,406.95 32,544.31 32,813.31 Accumulated Depreciation (23,881.24) (23,881.24) (32,813.31) Total Office Equipment & Furniture 7,525.71 8,663.07 0.00 Vehicle Acquisition 45,515.20 51,015.20 51,015.20 Accumulated Depreciation (33,545.25) (33,545.25) (40,219.41) Total Vehicle 11,969.95 17,469.95 10,795.79 Fishing Vessels Acquisition 2,590,574.79 2,590,574.79 2,590,574.79 Improvements 137,211.00 228,443.37 286,326.91 Accumulated Depreciation (436,066.86) (608,771.82) (767,084.70) Total Vessels 2,291,718.93 2,210,246.34 2,109,817.00

Appendix 9 38

Other Prepaid Expense Dry-dock – Hunter 11,216.57 3,967.57 3,967.57 Project Vessels 4,124.47 4,124.47 Vessel Maint. Equipment 12,640.16 16,407.61 16,407.61 Total Other Prepaid Expense 23,856.73 24,499.65 24,499.65 Warehouse Tools & Equipment 14,415.70 14,415.70 15,245.19 Total Fixed Assets 2,349,918.31 2,276,040.99 2,160,357.63 Total Assets 3,484,388.21 2,921,996.43 3,179,692.79 Liabilities & Equity

Liabilities Current Liabilities Account Payable 126,918.24 237,669.95 191,447.67 Payroll Liabilities 61,263.59 71,472.78 84,628.23 Accrued Expenses 1,030.10 17,679.02 Prepaid Sales 2,175.80 (961.25) Total Current Liabilities 189,211.93 328,997.55 275,114.65 Long-term Liabilities ADB Loan Loan - FSM Govt. 3,618,295.88 3,587,670.87 4,264,406.94 Interest Payable 512,185.75 664,795.94 860,212.29 Total ADB Loan 4,130,481.63 4,252,466.81 5,124,619.23

Notes Payable - FSM Govt. 332,500.00 332,500.00 332,500.00 Total Long-Term Liabilities 4,462,981.63 4,584,966.81 5,457,119.23 Total Liabilities 4,652,193.56 4,913,964.36 5,732,233.88

Equity Capital Stock Class A Capital Stock 39,480.00 39,480.00 39,480.00 Class B Capital Stock 1,000,000.00 1,000,000.00 1,000,000.00 Total Capital Stock 1,039,480.00 1,039,480.00 1,039,480.00 Retaining Earnings (Loss) (2,163,215.24) (2,207,285.35) (3,030,947.93) Net Income (Loss) (44,070.11) (823,662.58) (560,573.16) Total Equity (1,167,805.35) (1,991,967.93) (2,552,541.09)

BOH = Bank of Hawaii, BFSM = Bank of Federated States of Micronesia. Source: Micronesia Maritime and Fisheries Academy.

Appendix 10 39

SUMMARY OF PROFIT AND LOSS FOR MICRONESIA LONGLINE FISHING CORPORATION, 1994/95–2001/02 ($)

Yeara 1994/95 1995/96 1996/97 1998/99 1999/00 2000/01 2001/02b

Income 2,842 6,004 727,451 2,714,366 4,828,646 3,814,733 2,787,233 Administration Costs 82,597 146,832 220,745 322,382 358,985 431,883 321,643Operational Costs 0 0 774,368 2,613,504 4,093,197 3,761,893 2,606,046

Other Costsc 1,720 7,542 11,541 90,664 227,615 240,430 236,499 Total Costs 84,317 154,374 1,006,654 3,026,551 4,679,796 4,434,207 3,164,188 Net Income (81,475) (148,370) (279,202) (312,185) 148,850 (619,474) (376,955) Depreciation 3,385 6,870 35,835 103,132 192,920 172,705 174,665 Profit (loss) (84,860) (155,240) (315,037) (415,316) (44,070) (792,179) (551,621) Cumulative Profit (loss) (84,860) (240,100) (555,137) (970,454) (1,014,524) (1,806,702) (2,358,323)a The financial year runs from 1 October to 30 September. b 11 months only. c Including interest. Sources: Asian Development Bank records and Micronesia Longline Fishing Corporation (see supplementary appendix A).

asian development bank · asian development bank pcr: fsm 24267 project completion report on the...

Documents