ENERGY WOES IN THE MARSHALL ISLANDS

UNCLAS MAJURO 000020


E.O. 12958: N/A
TAGS: ECON ENRG PGOV RM
SUBJECT: ENERGY WOES IN THE MARSHALL ISLANDS


1. SUMMARY: The immediate outlook for energy issues in the
RMI remains gloomy. The status quo is fundamentally
unsustainable, and thus far the political will to correct the
problem has not been found. The energy problems act as a severe
damper on any attempts to promote economic development as they
consume resources to little positive effect and add layers of
costs to any transaction. Efforts are underway by technocrats
to improve long-term energy policy in the RMI, but getting the
political buy-in remains a significant stumbling block. END
SUMMARY


2. The RMI's ongoing electricity generation problems refuse
to lie down. The long term problems plaguing the Marshalls
Energy Company (MEC) are representative of the problems facing
the energy sector as a whole. Analysis of MEC conducted by a
USDA Graduate School team identified two major problems with
MEC's operations. The first is ineffective or counter productive
GRMI policies and the second is MEC implementing unsustainable
business models in reaction to those policies. GRMI
interference has come in the form of manipulating tariff rates
for electrical service, keeping them artificially low and not
allowing them to react to fuel price changes quickly and
efficiently. This has forced MEC to generate electricity at a
substantial loss, especially on Kwajalein, Jaluit and Wotje
atolls, where MEC's costs are four times higher than on Majuro
but their prices must be the same. GRMI interference also
resulted in imposition of gross revenue and import taxes on MEC
that damaged their competitive advantage in fuel re-sales to
fishing vessels. Such re-sales had been MEC's one source of
consistent profit. MEC's response to these policies has not
helped their operations in the long term, either. In response
to inflexible and unrealistic tariff rates, MEC subsidized their
power generating operations through fuel re-sales. When taxes
made these non-profitable, MEC diverted funds from maintenance
and depreciation accounts to sustain operations. This has left
power production and transmission efficiencies below benchmark
standards, and MEC without the funds to correct the issue.


3. The situation came to a head when the oil price shocks of
2008 finally wiped out MEC's last reserves. In the face of
rapidly climbing prices they found themselves unable to pay for
the fuel shipments they receive on consignment from SK Networks
of South Korea. Since that time they have continued operations
largely by subsidies from the GRMI, with the underlying funds
coming from international donors. However, these subsidies have
not been managed in a coherent, transparent manner. Some have
been outright grants, but much of the funding has come in the
form of advances against future GRMI utility costs. Advancing
funds provides MEC with immediate operating capital at the cost
of deferring the problem to a later date when the absence of
income from billing the GRMI will limit's MEC's cash flow. Thus
budgeting for the transfers is not sustainable in the medium
term and they have been clouded by a series of loan guarantee
arrangements the GRMI has undertaken on an ad-hoc basis. The
GRMI stated they had the situation under control in December of
2008 when fuel prices dropped dramatically and the GRMI repealed
the import and gross revenue taxes on MEC, theoretically
re-establishing their competitive advantage in fuel re-sales.
This has proven to not be the case.


4. MEC was unable to meet their most recent consignment
payment in February, despite the payment date being extended
from January. The GRMI was again forced to look to outside
sources of funding to keep the lights on, ultimately paying for
the shipment with part of the annual Taiwan grant money and
funds guaranteed by the Japan. An assessment by an energy
policy specialist in the RMI on a project funded by the European
Commission found that fuel sales by MEC have not significantly
increased because it has not had the cash flow needed to
purchase sufficient stocks to make significant sales - also the
winter months are naturally a low point in annual fuel sales as
fewer ships are fishing in RMI waters. The study noted the GRMI
forced MEC to lower tariffs back to unsustainable levels as soon
as fuel prices dropped, rather than allow MEC to recoup some of
its operating capital. The assessment further concluded that
MEC's problems will not be fixed without a major
recapitalization, something that cannot happen at this time as
MEC does not have accurate valuations on assets and the GRMI's
ad-hoc approach to crisis resolution consumes the resources that
could be used for a permanent solution. At this point there is
no apparent solution to MEC's cash flow problems.


5. The RMI's energy issues do not stop there. A series of
projects to install home solar power units on the outer atolls
is not working out as hoped. While many of the units have been
installed under a program funded by the EU, many others are tied
up in political disputes as the change in Government brought a
corresponding change in which outer atolls would be receiving
the units. Other units are waiting for installation funds to
be found. Beyond the problems with getting the units into
place, MEC is finding the units are not bringing in revenue to
make the program sustainable. While the program is able to pay
for the routine maintenance costs of the panels, it will not be
able to pay for replacement batteries for the units when they
are needed in a few years' time.


6. The current energy situation is proving to be a
significant drain on economic development. The GRMI is
constantly scraping for resources to prop up power generation
thus diverting money away from development and growth projects.
It is also placing increasing strain on the already thin GRMI
budget and in the opinion of an economist studying the problem
is likely to push the GRMI towards an "inevitable crash." The
inefficient power generation infrastructure results in
unreliable service and the constant threat of the power going
off in the near future certainly does nothing to promote outside
investment. MEC's current state also prevents it from fully
realizing the value of many of its assets, especially the large
fuel depot, one of the few in the region not owned by an outside
company. The depot could serve as the keystone in a proposed
regional fuel purchasing and distribution scheme, but only if
MEC can obtain the capital needed for startup. The problems
with the outer atoll solar projects are preventing any increase
in productivity of outer atoll economic activity such as copra
production and handicraft manufacture by limiting work to
daylight hours.


7. Moves are finally starting to be made at the technocratic
level to address some of these issues, especially those stemming
from lack of sound, long term policy on energy issues. In the
next few months the Government of Australia will be providing an
alternative energy policy expert to work for the RMI on a two
year contract. The EC is funding an energy policy expert to
help the RMI formulate plans for their overall needs, and the
USDA Graduate School has a team trying to spearhead an overall
reform of GRMI finances that could free considerable resources
and help break the GRMI off of their habit of reeling from one
crisis to the next. The limiting factor on all these efforts is
the will of the national leadership. Most of the solutions to
the RMI's energy problems will require hard choices from the
GRMI, such as allowing tariffs to increase and shrinking the
size of government to free budget resources. Sadly, it is
probable that an outside trigger such as another price shock
will be required to force the political leadership into taking
action on these solutions. Until that time the RMI will most
likely continue to depend on the donor community to keep the
power flowing and continue to waste resources maintaining the
status quo.


BISHOP