REPUBLIC OF NAURU

EUROPEAN COMMISSION



JOINT ANNUAL REPORT 2004



FINAL REPORT
1 June 2005


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1. Executive Summary

Nauru is a tiny Central Pacific nation of 21km2 and populated by about 11,000 people. In
1975 it was the second richest country in the world (measured in GDP per capita) due to the
abundance of phosphate mined on the island. However, phosphate exports fell from 2 M
tonnes in 1980 and 926,000 tonnes in 1990 to a mere 5,000 tonnes during the first 10 months
of 2004. The revenues of the past were not well invested, and today Nauru is practically
bankrupt and dependent on outside support.

Nauru’s current economic situation is grave and there are very limited opportunities for
economic growth. Nauru has few resources; some phosphate remains but mining would
require significant and costly repairs to infrastructure. Other possibilities are fishing, some
limited tourism, very limited agriculture and some private development for general
construction/maintenance and possibly local manufacture.

Nauru’s current national budget is effectively supported by the government of Australia. In
late 2001 under the ‘Memorandum of Understanding for Cooperation in the Management of
Asylum Seekers and Related Issues’ Australia committed a total of $41.5 million to Nauru.
The MOU was renewed in 2004 in which Australia committed a further AUD $29 million.
One other source of income is fishing licenses issued to China, Japan, South Korea, Taiwan
and the United States of America.

In addition to this drastic loss of income there has been a long period of neglect including of
social sectors and infrastructure. All infrastructure except the government buildings are in a
very poor state of disrepair. Many subsistence skills including fishing have been lost and will
need to re-learnt. The education and health sectors have deteriorated and suffer from a chronic
shortage of skilled staff. Widespread illiteracy is reported amongst young people Lifestyle
diseases, truancy in schools and low educational attainments are symptomatic of the neglect
of the social sectors.

Basic services are being supported by the government of Australia including electricity and
drinking water; for the later Nauru is dependant on two reverse osmosis plants. Nauru has
only one square kilometre suitable for food production so is dependent on shipping and air
services for the provision of food and other supplies, notably from Australia. There is no
operating bank.

From a total “welfare-state”, the country and its population will have to face the harsh reality
of a world in which they will have limited resources and thus limited wealth. In 2004 the
government put in place an austerity budget and with support from the government of
Australia is addressing key reforms. Even so the political crisis necessitating a general
election in October 2004 is indicative of a overall lack of nationwide commitment to the
adjustments that are required following loss of the phosphate revenue and near bankruptcy of
the country.

Nauru joined the ACP group in 2000, when it became a signatory to the Cotonou Agreement.
The 9th EDF allocations are € 1.8 million for the A-envelope and € 0.5 million for the B-
envelope. The CSP/NIP was signed on 17 August 2003. The area of concentration is the
energy sector, in particular the promotion of new and renewable sources of energy, which has
been allocated 85% of the A-envelope.


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2. Update on Political, Economic and Social Situation

Nauru’s short history of European contact is informative. Germany and the United Kingdom
first mined for phosphate in 1907. In 1920, a League of Nations mandate named Australia,
New Zealand and the United Kingdom as co-trustees of Nauru, with Australia the
administering power and phosphate mining was taken over by the British Phosphate Company
owned jointly by the trustees. During World War II Nauru was occupied by Japanese forces.
The population was then 2000 and 1200 Nauruans were shipped to the Federated States of
Micronesia, where 463 died of starvation. In 1947 Nauru was placed under United Nations
Trusteeship, with Australia the administering power on behalf of the co-trustees; Australia,
New Zealand and the UK. The British Phosphate Company continued mining until 30 June
1970, when control passed to the Nauru Phosphate Corporation (NPC). Nauru became self-
governing in January 1966 and an independent state in January 1968.

In August 1993 the Governments of Australia and Nauru signed a Compact of Settlement
which ended litigation by Nauru against Australia in the International Court of Justice over
rehabilitation of phosphate land mined before independence. As part of the settlement
Australia paid Nauru $57 million in cash and agreed to provide $50 million over a period of
twenty years (paid in annual instalments of $2.5 million indexed at 1993 values) for projects
to be undertaken under a Rehabilitation and Development Cooperation Agreement. Since
2001 the government of Australia has provided considerable support to Nauru through a series
of Memorandum of Understanding.

The President is elected by and responsible to Parliament and is both head of government and
head of state. The Nauruan Parliament consists of eighteen Members of Parliament (MPs),
who are elected every three years by resident Nauruan citizens over the age of twenty. Nauru
is divided into fourteen districts, which are grouped into eight electoral constituencies. There
are no formal political parties in Nauru. Candidates stand as independents, contesting
elections on the basis of personal or family ties. Loose and fluid alliances develop in
Parliament, usually on the basis of extended family ties. Government is formed by a coalition
of like-minded parliamentarians, with a majority of at least ten votes. At its first sitting,
Parliament chooses a Speaker and a Deputy Speaker, before proceeding to elect the President
from among the remaining members. The President then appoints four or five members of
Parliament to form the Cabinet.

2.1
Update on Political Situation
Following independence, Nauru's political system was very stable. Hammer DeRoburt, the
island's traditional tribal chief, served as President for most of the period from 1968 to 1989
(in 1977 he briefly lost the Presidency to Bernard Dowiyogo). However, from January 2003
to June 2004 Nauru had six Presidents. The current Ludwig Scotty government first came into
power in May 2003 but its reforms did not suit other members of Parliament and Rene Harris
was returned as President following a vote of no confidence in August 2003. Ludwig Scotty
regained the Presidency on 22 June 2004, following a vote of no confidence against Harris.
President Scotty appointed a young, pro-reformist Cabinet and affirmed his intention to
address the long-term issues facing Nauru.

On 30 September 2004, President Scotty declared a state of emergency, dissolved Parliament
and announced a general election would be held on 23 October 2004. This action was

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prompted by a stalemate in Parliament over the Speaker's suspension of the Health Minister
blocking the Government's attempts to present its budget before supply ran out on 30
September 2004. President Scotty’s governemnt recived strong support from the electorate
and in October 2004 the reformist budget was passed.

In May 2005 Nauru shifted its diplomatic allegiance from China to Taiwan after three years of
recognizing mainland China. Previously, Nauru recognized Taiwan from 1980 through 2002.

Women still have no representation in the Parliament and are grossly under-represented at the
higher levels of government service and in the NPC, which is the next largest employer.

2.2

Update on Economic Situation
Economic indicators for Nauru (such as GDP, inflation and GDP growth) are not available.

Nauru’s current national budget is effectively supported by the government of Australia. In
late 2001 under the ‘Memorandum of Understanding for Cooperation in the Management of
Asylum Seekers and Related Issues’ Australia committed a total of $41.5 million to Nauru
including fees associated with Nauru hosting there asylum seeker processing centres on behalf
of the Government of Australia and development aid for health and education, essential
power, water and ports infrastructure. The MOU was renewed in 2004 in which Australia
committed a further AUD $29 million including for the deployment of in-line finance and
police officials to Nauru whilst continuing support of basic services. Australia continues to
support a small scholarship scheme and pays AUD $2.5 million per year to the Rehabilitation
and Development Cooperation programme under the Compact of Settlement signed in 1993
by Australia and Nauru to end litigation by Nauru against Australia in the International Court
of Justice over rehabilitation of phosphate land mined before independence.

The main objectives of the in-line finance team funded by the Australian government is to
develop a viable, sustainable, balanced budget; determine the net worth of the country; work
on the removal of Nauru from the FATF of non-cooperative countries, and come to the
subsequent establishment of a commercial Bank and public diplomacy. The 2004 budget aims
at broadening the tax basis and has introduced salary saving measures, which would be
necessary but unpopular with the general population, hence the need for public awareness
raising on the general financial situation.

Determining the “net worth” of the country is a difficult task as there are no no recent audit
reports available at all, neither of Government Expenditures, nor of the semi-independent
public corporations like the Nauru Phosphate Corporation. Determining where assets are is
the more difficult exercise (the liabilities will not fail to turn up) given the complexity and
non-transparency of the trust-fund constructions plus the total absence of reliable past
information and may take until end 2005 or later.

Working in removing Nauru from the FATF-list of non-cooperative nations is the other main
assignment of the finance team. Legislation is being introduced aiming at satisfying basic
requirements. Most of this is still on paper, the problem is implementation, especially with
complicated matters like the creation of a Financial Intelligence Unit. In its 2004 report,
FATF welcomes Nauru’s efforts to eliminate shell banks but requires additional steps to
ensure previous shell banks are no longer operating before FAFT will consider removing
sanctions.


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2.3
Update on Social Situation
There are no publicly available studies on the current social situation however anecdotal
evidence indicates a number of concerning trends.

There are indications that young people are opting out of formal education by not going to
school. This is attributed to a lack of parental value for education and lack of parental control.
Schools are in a poor state of disrepair. Students still attend the government’s one secondary
school although it is almost derelict. The government of Australia pays an additional salary to
teachers to encourage them to attend and teach. Non state actor representatives report very
high levels of illiteracy amongst young people. An increase in teenage pregnancy, alcohol
abuse and thieving by young men is also reported. Unemployment generally and particularly
among the youth is a key issue facing Nauru and experience from other parts of the Pacific
show a link between youth unemployment and social unrest.

There are also reports of elderly and young children experiencing hunger with families facing
shortages of food and cash. It is vital to start activities such as small scale fish farming,
gardening and placing of fish aggregating devices to increase local food production. Even
here there are difficulties with individuals living on leased land reporting that food they have
grown in small garden plots is removed by the landowners. Improving the social situation of
Nauru may take even more concerted effort than that given to its economic situation.

Nauru’s migrant worker community are particularly affected. Living in sub-standard even
derelict and overcrowded accommodation many families from Kiribati, Tuvalu, China and the
Philippines have not been paid for over a year and do not have the means to return to their
home countries. Their skills are however still key to the people of Nauru. The Kiribati and
Tuvalu communities fish in the reef waters to feed their families and sell fish to Nauruans.
Many also work in the small shops and restaurants which still eke out an existence on the
island.

3. Development Agenda of Nauru

The National Policy Objectives and development strategies for the medium term are set out in
the Nauru Development Plan (2002-2006). Recommended priorities for reform include (i)
addressing the structural budget deficit through expenditure reduction, improvements in
revenue collection, and new revenue measures; (ii) restructuring the trust funds; (iii)
overhauling arrangements for the management of public finance and public enterprises; (iv)
reassessing arrangements for the provision of air services by Air Nauru; and (v) re-
establishing commercial banking services. The government which was elected in May 2003
committed to return to the fiscal and financial reform program initiated in 1998. The high
priority areas identified in the 2004 budget speech are public service salaries, education and
health. All government officials receive a salary of just AUD $100m per fortnight.

4. Overview of past and ongoing cooperation

Nauru joined the ACP group in 2000, when it became a signatory to the Cotonou Agreement.
There is therefore no record of past cooperation. The Country Strategy Paper was signed on
17 August 2003.


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4.1
Focal sectors and macroeconomic support
The 9th EDF NIP foresees an allocation of € 1.8 million for the A-envelope and € 0.5 million
for the B-envelope.

The 9th EDF NIP Focal sector is Support to the Energy Sector, especially the identification
and use of new and renewable sources of energy 85% of the A-envelope (€ 1.53 million) has
been allocated to the focal sector. As such Nauru is one of the countries addressed by the
‘Support to the Energy Sector in five ACP Pacific Islands’ Project which should be
operational toward the end of 2005.

There is no real power utility in Nauru, the production and distribution of electricity (as well
as of drinking water) to its citizens has traditionally been a side business of the Nauru
Phosphate Company.

Electricity tariffs in Nauru are extremely cheap and do not cover the costs of production and
distribution. Despite extremely low tariffs there appears to be a very poor discipline
concerning the payment of electricity bills. There is thus no incentive to reduce consumption
and excessive use or even waste of energy is widespread. One possibility is to use the EC
renewable energy programme for the procurement and installation of a prepaid metering
system for electricity. The main alternative to demand side measures under the renewable
energy programme would be the installation of solar panels. One study carried out in 2002
estimated that the installation of PV with a capacity to produce 100kW peak would cost
roughly EUR 800,000 and would save some 60 tonnes of diesel per year. At the present
moment it would appear that the saving potential with a comparable investment would by far
outweigh the power production capacity of a PV installation, but that will have to be
determined during the start-up phase of the programme. Furthermore, institutional reforms are
also necessary, if not a precondition, particularly the organisational separation of power
production from NPC.

4.2
Projects and programmes outside focal sectors
There are no projects and programmes outside focal sectors.

4.3
Utilisation of Resources for Non Sate Actors
Of the 1.8 million Euro in envelope A, 15% i.e. 0.27 million Euro is allocated to NSAs for
projects in the area of income generation and employment, in particular concerning Women
in Development, Youth Development and training and other employment generating areas
and social areas…….including capacity building’.

There are few functioning NGOs apart from the National Council of Women which is given
some support by the government’s Department of Women’s Affairs. NIANGO – Nauru
Association of NGOs existed in the past but is now defunct. Most NGOs are run by people
also employed as government officials. Churches are active in the social sector but to a
limited extent.

A new development resulting from the current financial crisis is the formation of community
based groups headed by unemployed women. These groups are crossing family barriers
bringing different families living in the same area together to address immediate needs. The
Cabinet Secretary highlighted this as a new phenomenon in social organisation for Nauru
which traditionally organises in family groups.


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A workshop was held in December 2004 attended by over 50 non-state actor groups which
identified the need for training to support the development of NSAs and for projects in
women and youth development in particular in the area of micro-enterprise. There are a
number of implementation problems which need to be resolved including the lack of banking
facilities. The Australian government works through a local entrepreneur as a sort of clearing
house. The key programming priority for 2005 is the finalisation of a financing agreement for
the NSA programme.

4.4

Utilisation of Envelope B
Nauru is situated near the equator and is therefore outside the “cyclone belt”. Unlike other
Pacific island countries it is therefore less likely to need support from the B-envelope for post-
disaster rehabilitation. It was therefore suggested to use Nauru’s B-envelope under the 9th
EDF (EUR 500,000) to mitigate adverse effects of instability in export earnings to support
activities in the focal sector of the A envelope. The FLEX procedures are now being
addressed by the authorities in Nauru.

Regional Cooperation
Regional cooperation programmes address some of the key needs of Nauru’s development
including food production (DSAP); education (PRIDE) and fisheries.

9th EDF
The regional allocation amounts to €29 million and includes three focal sectors “Economic
Integration and Trade” (€9 million), “Human Resources Development” (€8 million) and
“Fisheries” (€5 million) and a non-focal sector, for extension of the 8th EDF programmes to
the 6 new ACP countries (€7 million).

Regional Economic Integration Programme (REIP) - €9.2 million
The programme aims to assist the region in strengthening its capacity to implement PICTA
(free trade area among the Pacific island countries), negotiate trade agreements with
developed partners (eg. EPA), participate in multilateral trade negotiations (WTO) and assist
the private sector in addressing supply-side constraints. The Financing Agreement was signed
in February 2004 immediately followed by the recruitment of TA. A mini-work programme
was approved for the period July to December 2004 to cover the recruitment phase and to
commence implementation of project activities.

Human Resources Development (HRD) – PRIDE (Pacific Regional Initiative for the
Development of Education) - €8 million
The objective of the programme is two-pronged: to assist Pacific island countries (PICs) in
develop a sector-wide strategy for Education and subsequently to finance the implementation
of some parts of that strategy. An education planning workshop was held in Nauru in
November 2004 and the resulting Education Plan will be presented to the government in early
2005.

Fisheries - €5 million
This section comprises two projects:

a)
Extension of PROCFISH to the 6 new ACPs - €1.997 million
The Financing Agreement was signed in February 2004 followed by the recruitment of TA
and implementation of some activities. The objective of the project is to assist Pacific ACP
countries better manage their in-shore fishery by providing basic information on in-shore fish

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stocks. The project undertakes a comparative analyses of reef fisheries in the Pacific ACP
countries. This provides scientific information to governments including local communities
ensuring effective management of the resource. The 2005 work plan includes in-country field
work in all the new Pacific ACP countries.

b)
DEV FISH, a project to be managed by the Forum Fisheries Agency (FFA) in
collaboration with the Secretariat of the Pacific Community (SPC) - €3 million. A financing
decision was made in December 2004 with the Financing Agreement to be signed in March
2005. Implementation should commence immediately thereafter.

The objective of the project is to increase benefits received by PICs from the sustainable use
of marine resources by increasing the capacity to directly participate in the tuna fishing and
processing industry, and through the reinforcement of national and regional policies and
strategies in the sector.

Non-focal sector - €7 million
The non-focal sector is mainly composed of the extension of 8th EDF Natural Resource
projects to the 6 new Pacific ACP countries including Nauru. All such extensions have been
approved and implementation has commenced as per the table below.

PROJECT
EURO
EDF
STATUS

Millions
SOURCE
SPC/DSAP ext.
1.981
9th NF
Approved. FA signed in Feb 2004
SPC/PPP ext.
1.512
9th NF
Approved. FA signed in Feb 2004
SOPAC ext.
2.55
9th NF
Approved. FA signed in Feb 2004
SPREP/PIEN ext.
0.56
9th NF
Approved. FA to be signed in March 2005.

4.5
8th EDF and balances of previous EDFs
This is not applicable to Nauru.

4.6

Other instruments
There are no other instruments. Community budget-lines and STABEX are not applicable to
Nauru.

5. Programming Perspectives for the coming year
The key programming priority for 2005 is the finalisation of a financing agreement for the
NSA programme and start-up of the energy programme.

6. Dialogue in Kiribati with National Authorising Officer and Non State Actors
and Donor Coordination

6.1
Dialogue in Kiribati with National Authorising Officer and Non State Actors
There have been a series of missions to Nauru all of which have included discussion with the
NAO who is the Permanent Secretary for Foreign Affairs. The Head of Delegation mission to
Nauru in September 2004 was proceeded by a mission of the Delegation’s rural development
adviser and the Kiribati and Nauru programme adviser. In October 2004 the Delegations’
energy adviser carried out an assessment of the energy situation and in December the
programme adviser and desk officer from Brussels conducted a consultative workshop with
NSAs. Communication outside of missions proves problematical.


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A workshop held in December 2004 attended by over 50 non-sate actor groups identified the
need for training to support the development of NSAs and for projects in women and youth
development in particular in the area of micro-enterprise. There are a number of
implementation problems which need to be resolved including the lack of banking facilities.
AusAID works through a local entrepreneur using it as a local clearing house. The key
programming priority for 2005 is the finalisation of a financing agreement for the NSA
programme.

6.2

Donor Coordination
The Pacific Forum Secretariat has staffed a “Foreign Aid Management Unit” in the Ministry
of Foreign Affairs. Donors now active in Nauru are Australia, ADB, Taiwan and the
European Commission. Nauru plans to hold a donor coordination meeting in November 2005
in Fiji. The energy sector is a main concern for both ADB and AusAID since it constitutes an
enormous drain on donor resources (at the moment exclusively financed by AusAID). ADB
and AusAID are jointly sending a three person team to Nauru to identify ways to split the
water and power production components from the NPC and to reduce the dependency from
diesel oil imports. There is good liaison with the European Commission 5 Country Renewable
Energy Programme.

7. Conclusions

Nauru is in a serious economic condition and can currently only survive with outside support.

Even though the accurate financial situation of Nauru cannot be determined at this stage, it is
very evident that the country is virtually bankrupt. From a total “welfare-state”, the country
and its population will have to face the harsh reality of a world in which they will have
limited resources and thus limited wealth. This will imply a total change of mentality.

Following the clear support for Nauru from Pacific Island Leaders the European Commission
has taken steps to accelerate its cooperation programme. A crucial obstacle is the
implementation mechanism, as there is no banking system in place. The orientation of our
programmes remains very valid; both energy and NSA-support are crucial and are
complemented by regional programmes.


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