Located in the North Pacific Ocean, the Republic of Palau (Palau) is an archipelago of more than 300 islands with a total land area of 196 square miles. Spread over 325 miles of the Pacific Ocean and the Philippine Sea, Palau is situated 815 miles southwest of Guam. Only 9 of Palau’s 300 islands are inhabited. The largest island of Babeldaob, approximately twenty-miles long and ten-miles wide, comprises seventy-eight percent of Palau’s land area and the second largest landmass in Micronesia after Guam.

Palau’s total population is approximately 19,9072, with seventy percent of the population residing in the capitol of Koror, the country’s commercial and administrative center. Babeldaob, where only a quarter of the population resides, is largely uninhabited and underdeveloped. This is expected to change within the next decade with the scheduled completion of the US-funded Compact Road in 2007, a road network connecting outlying villages in Babeldaob to Koror that completely encircles the island.

Palau’s government is modeled after the United States system, with an executive branch, a bi-cameral legislature and a judiciary branch. The national government is headed by an elected four-year term President and Vice President, and an appointed cabinet. The legislature, Olbiil Era Kelulau (OEK), is comprised of a House of Delegates, with sixteen elected members serving four-year terms, and a Senate, with 14 elected members, also serving four-year terms.

Palau is divided into sixteen states, each administered by an elected governor and a legislature. In addition, each state is also directed by a hierarchy of traditional chiefs responsible for upholding traditional customs and laws. The highest ranking traditional chiefs from each state serve on a Council of Chiefs, established under the Constitution to advise the President on matters concerning traditional customs and laws.

In 1994, Palau entered into the Compact of Free Association (referred to as the Compact) with the United States, and established itself as a sovereign nation. Under this fifty-year political and economic treaty, the U.S. committed US$630 million over the first fifteen years (1994–2009), in exchange for exclusive access to Palau’s waterways with regard to all defense and security matters.

As a sovereign nation, Palau manages its domestic and foreign affairs. Since independence and admittance to the United Nations in 1994, Palau has established diplomatic relations with many countries including Japan, Australia, Taiwan, the Republic of the Philippines, and Korea. Palau is a member of several international organizations and signatory to a number of international agreements and treaties.

Palau faces challenges that are common to remote islands economies; small market, distance from large markets, and limited resources. With an approximate population of 20,000, Palau has a population growth rate of 0.8%, a slight declined from 2000 Census’s growth rate of 2.2%. The median age in Palau is 32.3 years, up from 30.8 in 2000. Nearly 56% of the population lies between the ages of 25 to 65 and the unemployment rate is 4.2 %.

Largely service oriented, Palau’s economy is supported mostly by public administration, trade, tourism and related services, and construction. Palau’s nominal GDP, approximately $157.7 million in FY2006, grew by 9 percent. Per capita income increased to $7,921, compared to $7,267 in 2005. On a per capita basis, Palau is the most prosperous of the Pacific island economies.

Palau’s economy is dependent on foreign funding assistance, and to a lesser degree its developing tourism industry. Palau’s government, which employs 30.6% of the labor force, has the highest wage cost (estimated at $30 million annually) in the region.10 The immediate concern confronting Palau, in the next two years before Compact funds cease, is to expand and diversify its economy, thereby reducing its reliance on foreign assistance.

Tourism continues to be Palau’s main industry. With its diverse marine life and near-pristine environment, Palau is a world-renowned scuba-diving and snorkeling destination. The Asian Development Bank estimated that during 2005/2006, visitor receipts in Palau equaled 45% of the country’s GDP. Tourist arrivals – 80% of whom come from Japan, Taiwan, Korea, and the U.S. – exceeded 82,000 in 2006, an 87% increase in the last fifteen years. According to the Asian Development Bank, Palau ranks the second from the Bahamas in terms of having the highest number of visitor arrivals per capita in small island economies. Palau’s tourism industry has proved somewhat resilient compared to its neighbor islands with an average growth rate of 8% during 2001-2003, after the September 11 attacks, SARS epidemic, the Iraq War, and the ongoing U.S. War on Terror. In 2004, the number of visitors increased over 40%; due mainly to the 9th Annual Pacific Arts Festival and the shooting of the “Survivor” television series. Since 2005, the number of visitor arrivals remained above 80,000 visitors annually, surpassing the number of visitor arrivals during the 1990s.

Due to a variety of factors including falling world fish prices, the formerly lucrative fishing industry has been declining. Palau’s commercial fishing industry, which comprises domestic and international fishing companies, contributed $3 million (2% of GDP) to the economy in 2005, down from an average of $28 million. Despite this drop, the fishing industry, Palau’s major export industry, will continue to play a role in Palau’s economic growth. Palau’s location, rich fishing grounds, and ease of transportation to Asian markets make further development of the fishing industry likely.

Construction, both public infrastructure and private sector projects, also sustained the economy in 2006, contributing 16% of GDP, compared to 15% in the previous year. It is expected that major public and private sector projects currently underway or forthcoming will sustain construction activity growth over the next five years. These include the anticipated Koror Road Rehabilitation project, construction of the Aman Resort, airport Runway Resurfacing, and other smaller commercial and housing projects financed by the National Development Bank of Palau.

Palau’s two main exports were fish and manufactured garments. The value of Palau’s garment industry reached $33.6 million in 2002. The closing of the country’s remaining garment manufacturer in early 2003 ended this budding export industry and left the fishing industry as the only major contributor in Palau’s exports.

As a result of the declining fish and garment industries, the value of Palau’s exports dropped from $20.3 million in 2002 to $8.4 million and $5.8 million in 2003 and 2004 respectively. The exports value picked up to $13.4 million in 2005, mostly from the main contributing sector, fisheries. In the same period, imports (including fuel, machinery, food products, and manufactured goods) reached $105.1 million, down from $107.3 million in 2004. Palau’s major trading partners are the U.S., Singapore, and Japan.

GOVERNMENT INITIATIVES

The government of Palau has established a number of programs to foster economic development, including investment climate and financial sector reforms, to create conditions conducive to private sector development and economic diversification. Although the government recognizes and encourages foreign investment, the country seeks foreign investments that do not compromise the country’s unique natural and cultural resources.

• Foreign Investment Reform. The government of Palau is determined, with proposed foreign investment reform measures pending in the country’s legislature, to create a transparent investment environment, largely by streamlining foreign investment regulations and encouraging the flow of foreign investments into the private sector.
• Financial Reform. With a recently established regulatory and supervisory framework to monitor and regulate financial institutions, Palau enjoys a low risk financial environment. A new proposed amendment has recently passed both house in the OEK and is now awaiting the President’s approval. Once it becomes law, this amendment will greatly improve financial stability of Palau’s banking market and strengthen the FIC supervisory power.
• Tax Incentives for Agri-Business Development and Tax Reform. To expand the country’s agricultural base and attract private sector investments in agri-businesses, the government has passed into law a proposal establishing tax incentives for investments in agriculture production. In addition to the tax incentives for agribusiness development, the proposed tax reform is pushing towards modernizing the current tax system, and providing tax breaks and tax incentives for investments in other industries.
• Regional Integration. The government is engaging in continued economic cooperation within the Pacific region. As a member of regional trade agreements, including the Pacific Island Countries Trade Agreement (PICTA), Palau has opened its doors to preferred access to goods with its the regional trade partners including the Federated States of Micronesia, Australia, the Republic of the Marshall Islands, and New Zealand.
• Ngardmau Free Trade Zone. Established in 2001 under the Ngardmau Free Trade Zone Act, this free trade zone is a vehicle through which the country seeks to establish and encourage new industries and commercial activities. Targeted businesses include ‘light’ manufacturing (such as computer hardware and electronic component parts) and financial and trade-related services. For more details on the Ngardmau Free Trade Zone, see the section on “Light Manufacturing”, under “Growth Opportunities”.

 

Airline Access
Asian Spirit Airline, the Philippines’ fourth biggest airlines, recently began offering service from Manila, Cebu, and Davao to Palau. Continental Micronesia, a wholly-owned subsidiary of Continental Airlines, is continuing to serve Palau with it daily flights from/to Guam.

Through its Guam hub, passengers can connect to 24 other cities in Asia, the Micronesia Islands, and Hawaii. It also provides two weekly direct flights from Manila to Palau with other connection points to South-East Asia and on to Europe. Palau’s tourism industry will most certainly benefit from the increase in regularly scheduled airline service from the Philippines, Australia, the US (via Manila and Guam), Taiwan and Japan.

Babeldaob Road
The completion of the U.S.-funded 53-mile Babeldaob road in 2007 opens doors to expanded economic development on the largest island in Palau. The road facilitates direct access to the lesser developed states on Babeldaob, with fertile agricultural land, historical and cultural sites, wilderness areas, and prime real estate for resort development.

 

 

 

 

 

 

 

Foreign Investment

The Foreign Investment Act of 1990 regulates all foreign investments in Palau. Those interested in undertaking direct investments in Palau are required, to apply for and obtain a Foreign Investment Approval Certificate (FIAC) through the Foreign Investment Board (FIB).

A review of Palau’s foreign investment climate by the International Finance Corporation and the World Bank16 pointed out the following recommendations:

• Replace current regulatory approach with a registration process, and monitoring system, to maximize the quality and quantity of foreign investments to Palau.
• Limit restrictions and conditions of business activities to sectors where reasonable competition will exist, and joint-venture requirements.
• Modify labor permits procedures for foreign workers.

At the time of this report, a bill to make structural and procedural changes, in line with the Asian Development Bank (ADB) recommendations to the current foreign investment regulation policies was introduced by the legislature

Land
Under Palau’s constitution, land cannot be owned by any non-Palauan citizens; moreover, only corporations wholly-owned by Palauan citizens may acquire title to land or waters in Palau. However, foreigners may lease land, either from the government or private landowners, for up to fifty years, with options to renew. Currently, there are attempts for a land reform; if passed, these will allow foreigners to lease land for up to 99 years.

Labor Regulations
Foreign workers are critical to Palau’s developing economy. Approximately 53.7% of total employment is foreign workers, the majority of which are Philippine nationals. Ninety percent of the non-citizen workers are employed in the private sector; the remaining ten percent, most of whom are usually professionals and technical experts, are employed by the government and its agencies.

Location
Palau is the western most archipelagos in the Caroline Island chain, and thus is well-located in close proximity to major Asian markets of Japan, China, Taiwan, and other Southeast Asian countries. Famous for its marine splendors and unique culture, Palau is an attractive travel destination for outbound tourists from nearby Japan, Taiwan and Korea. Location is also vital in developing the country’s other marine-related industries (tuna fishery and marine aquaculture) targeting the seafood markets in Asia.

Governance
Palau is a politically stable sovereign nation, with special ties to the United States. Under the Compact of Free Association with the U.S., the security and defense of Palau and its borders are under U.S. control. In addition, Palau’s products are granted duty free entry into U.S. markets. This presents an attractive opportunity for foreign businesses seeking to leverage Palau’s newly established free-trade zone, deep-sea port, and transshipment location advantages and availability of substantial tariff savings in light manufacturing.

Tax Structure
Palau’s low tax structure is a major incentive for foreign investors. There is no corporate tax levied in Palau. There are three types of taxes, revenue tax (4%), wage and salary tax (6% on first $8,000 and 12% in excess of that amount), and import duties (depending on the type of goods; most products are levied at 3% of their value). In addition, Palau grants temporary income tax exemptions to business activities that will further economic development. Additionally, a foreign investor constructing a facility may be entitled to refund of taxes for costs incurred in developing off-site roads, water, power and sewer access or improvement to service their facility. The amount of refund in any single tax year will not exceed 50% of the amount paid in that tax year by the foreign investor.

Infrastructure
The government of Palau has been developing and improving its infrastructure to support growth and diversification of its economy. As a service-based economy, Palau maintains a system of business infrastructure and encourages commerce by providing valuable services and convenience to industries and other primary businesses.

Transportation.

Domestic and international merchant vessels and fishing fleets as well as international cruise lines are serviced on a regular basis at the country’s commercial port facility, Malakal Commercial Port. Two international shipping companies service Palau, Kyowa (Bali Hai) Line and Matson Line (through Guam). Global freight forwarding is available through Federal Express (FedEx) and DHL International, Inc. (DHL), who have established offices in Koror.

  

The newly renovated Palau International Airport (the renovation included a runway extension project) serves five international airline companies connecting Palau to major cities in Japan, Korea, Taiwan, the Philippines, Yap State (FSM) and the U.S. (via Guam). Increased airline access will expand tourism and export opportunities in Palau. Palau has a well-connected road system from Koror to outlying villages throughout Babeldaob. In 2007, the 53-mile US-funded Babeldaob Road expansion was completed, connecting Koror to the other states in Babeldaob, fostering an expansion of commercial activities in the underdeveloped areas in Babeldaob.

Telecommunication

Telecommunications is critical to trade and economic development and Palau has one of the most well-developed telecommunications sectors in the region. The Palau National Communications Corporation (PNCC) manages the country’s telecommunications services, as well as cable and mobile telephone services. PNCC has state-of-the-art facilities with robust telecommunications infrastructure. Communication access to the rest of the world is facilitated through satellite connection with a fiber-optic network on-island, direct dial capabilities, cellular networks, broadband connections (ISDN and ADSL technologies) and other facilities. Palau Mobile Communications (PMC) and SmartCall Telecom, Inc., are two privately-owned long-distance carriers, provide international and cellular phone roaming telecommunication services. In addition to PNCC, PMC, and SmartCall Telecom, a newly established privately-owned telecommunication company, Palau Broadband (PBB), is planning to launch Wi-Fi high-speed internet and long-distance phone card services in August 2007. The competition in Palau’s telecom market has driven the cost of international calls down to only $0.35 per minute.

Banking and Financial Services. Palau’s financial system consists of 8 commercial banks, including 3 branches of U.S.-chartered banks (Bank of Guam, Bank of Hawaii, and Bank Pacific), one Taiwanese bank branch (First Commercial Bank), one development bank (the National Development Bank of Palau), and a number of non-bank financial institutions and small credit unions. The four foreign-owned and U.S. branches together represent about 80% of total deposits which are insured by the FDIC and follow U.S. prudential regulations.

Natural Resources
Blessed with one of the most diverse marine ecosystems, Palau’s natural resources are the foundation for its growing tourism industry. Palau has one of the most extensive and diverse reef systems and one of the richest tuna fisheries. Palau’s famous Rock Islands are one of the world’s unique marine ecosystems. The country’s active preservation efforts will ensure these islandsremain invaluable aesthetic resources and tourist attractions for years to come. In addition, because of the lack of destructive fishing practices and fairly low levels of development and pollution, Palau’s coral reefs have been kept pristine and thus provide a unique opportunity for reef studies. Through a special cooperative agreement between the U.S. and Japan, a modern marine research facility, the Palau International Coral Research Center, has been established and currently conducts various coral reef and marine diversity studies.

Culture

Claiming a rich cultural history dating back to 1000 BC, Palauans enjoy a fascinating heritage with customary practices, including omesurch (a first-child ceremony) and kemeldiil (funeral ceremony), which are still practiced today. Historical remnants with ancient legends and impressive natural sites are scattered throughout the islands. Palau’s rich cultural heritage, together with pristine natural sites, native arts and crafts, and ethnic cuisine make it a viable niche tourism (cultural, historical, nature and adventure tourism) destination. Palau’s economic development initiatives aim to diversify the local economy. This report identifies growth opportunities for development, in-line with the economic development initiatives of the government. These growth opportunities are categorized into the three main sectors and are listed below. Specific business opportunities, where applicable, are presented in each main growth sector.

Aquaculture
Aquaculture is a growing food-producing sector in Palau’s economy, providing for the domestic market and increasingly contributing to the nation’s trade balance. The country’s aquaculture production has increased dramatically in recent years, and offers promising growth opportunities. The high quality of Palau’s coastal water, its temperature and vast reef systems create ideal conditions for marine aquaculture. Palau’s principal marine aquaculture product is giant clams. These cultured giant clams are in high demand in the marine aquarium industry. The U.S. is the largest consumer of marine aquarium products, importing approximately 90% of all live marine aquarium products, followed by the European Union, Hong Kong, and Japan. Major suppliers of this trade are South-east Asian and Pacific Island countries. The world seafood trade is a fast growing industry, with seafood consumption anticipated to outpace commercial fishery harvests. Seafood importers and distributors are constantly seeking reliable sources of supply and new products to meet the escalating demand, and aquaculture operations have been increasingly filling the demand. Aquaculture supplies 23% of the world’s fishery production. Of the 28 million tons of seafood farmed worldwide per year, cultured mollusks comprise 17%. Cultured giant clams are highly valued in the Asia-Pacific seafood industry. There is great potential for cultured giant clams to supply niche and specialty markets in Asia, particularly Japan and China. Considering the size and consumption demand from these markets, regional cooperation among giant clam cultivators in the freely-associated states (the Republic of the Marshall Islands and the Federated States of Micronesia) will likely be necessary to meet the demand from the Asian seafood market.

The Palau Mariculture Demonstration Center (PMDC), a government-owned facility, is the Micronesian’s largest producers of giant clams, supplying more than 1,500,000 giant clam ‘seedlings’ to nearly 40 private, individual farmers throughout Palau to grow out and sell in the aquarium trade and local consumption market. PMDC also assists local farmers, by providing technical advice, referring contacts for buyers, and helping with packing and shipping. Their current export markets include Germany, France, U.S., Taiwan, as well as CNMI and Guam. In the near future, PMDC have a plan to diversify their products by adding more species of clams and adding soft corals for aquarium trade.

Belau Aquaculture, Inc., a private company, purchases giant clams from these private giant clam farms as well as PMDC for shipment to aquarium buyers in the U.S. Belau Aquaculture also cultures soft corals for the aquarium trade as well. Palau’s marine aquaculture export market has estimated sales of over $300,000 a year. Product research and development projects are ongoing with other marine and fresh-water species, including trochus, grouper, and shrimp.

Tourism

The tourism sector remains one the most lucrative foreign investments in Palau. Palau’s natural beauty and diverse marine life makes it one of the most popular scuba diving destinations in the world, attracting thousands of U.S. and Japanese divers each year. According to the World Tourism Organization’s Tourism Highlights 2006, Asia and the Pacific were regarded as “the second best performing region in the world, ranking only after Africa.” The World Tourism Organization further stated that since 2002, Asia and the Pacific have surpassed the Americas as the number two regional destination in the world, with Europe being the first.

 

With an average of 5,500-8,200 visitor arrivals per month, the majority of visitors to Palau come from Japan, Taiwan, Korea, the United States, Canada, Guam, and the Philippines. In 2003, the number of Taiwanese visitors surpassed the number ofJapanese visiting Palau for the first time, making up 44% of the market, compared to Japan’s 34%. Another significant shift occurred in 2006, when there was a sharp increase in the number of Korean visitors (by over 400% from 2005). Palau is also wellpositioned to play host to some of the more than 30,000 military personnel and family members who will be transferred from Okinawa to Guam in the next few years. With direct flights from Guam, Palau will provide an affordable nearby destination for these soldiers and their families who may be looking for travel and entertainment options. Five airline companies provide regular and charter air service between Palau and Japan, Korea, Taiwan, the Philippines, Australia (via Darwin), the Federated States of Micronesia (Yap, Chuuk and Pohnpei), and the U.S. (via Guam). These airline companies, Asian Spirit Airlines, Continental Airlines, EVA Airlines, Far Eastern Air Transport, and Japan Airlines, provide easy and reliable airline access from major Asian markets, the U.S., the European Union, and Australia. Palau has a current inventory of 1,253 rooms, up from 1,049 rooms in2003. Proposed hotel development projects under way will increase this room inventory in the next two to five years.

To improve and expand the tourism industry, diversification of the tourism base and tourism products is essential. Recently completed facilities, including the new Belau National Museum, Etpison Museum, the Agro-Tourism Project initiated by the Taiwan Technical Mission, the Ngara Amayong Cultural Center, the Palau Aquarium, and other private facilities such as the Dolphins Pacific all offer unique tourist activities. These new tourism products and Palau’s modern business services make Palau a viable destination for corporate meetings and conventions. Two large upscale hotel investment projects are under way and expected to boost Palau attractiveness as a high-end tourist destination. With its exquisite natural environment and extensive marine as well as land-based activities, Palau is an ideal cruise destination for specialty cruise line companies searching for new destinations ports with unique itineraries. Within the first quarter of 2007, at least two international cruise lines have visited and enjoyed the nature wonders of Palau. Almost all tourism infrastructures are concentrated on Koror. The new Babeldaob road will open opportunities for expanded tourism development, diversifying the tourism base. Transportation ease to the largest landmass in Palau will enable development opportunities for resorts and other tourism-related businesses in prime real estate. While the primary tourism business opportunities include resort and hotel investments and cruise line partnerships, ecotourism development distinguishes Palau as a true niche destination. The completed Babeldaob road provides easy access to unspoiled wilderness and extraordinary cultural and natural sites throughout Babeldaob. This in turn opens up opportunities for development of nature- and cultural-focused tourism products and activities, including eco-resort accommodations, culture-based attractions, and adventure tours to target niche and specialty tourism markets in the U.S., the European Union, and throughout Asia.
Specific private investment and business opportunities exist in ecotourism resort development, timeshare sales and marketing, convention and meetings venues, ecotourism business opportunities (scuba-diving, sport fishing, adventure/nature and cultural tour packages).

 

Film and Television Production

Palau’s natural beauty and its rich marine environment is what keeps visitors coming back to this wonderful destination. Its immaculate underwater archeology, colorful coral garden, vibrant marine life, historic sunken wrecks, white sand beaches, hidden lagoons, and moderate weather year-round make Palau an ideal location in the region for international film, television, and commercial productions. Several film producers from Asia, Europe, and the United States have chosen Palau as their filming locations for the past decade. The U.S.’s reality television show “Survivor: Palau” was filmed during 2004 and aired in 2005. Palau has also been chosen as a site for film and television production of several motion pictures, TV series, and television commercials by international organizations like the World Wildlife Fund, PBS, UNESCO, CNN, National Geographic Television and Film, SBS-Korea, GMA7-Philippines, and YLE-Finland. Palau’s other competitive advantages as a premier filming location includes its exclusive image, English-speaking local crews, small population (thus, offers high level of privacy), modern facilities for crews and emergency care, and high quality local film and TV production studios and companies who can provide any production assistance.

As part of its drive to diversify the economy away from tourism, the government of Palau passed the Ngardmau Free Trade Zone Act. The Ngardmau Free Trade Zone (NTFZ) opens opportunities for export-oriented businesses to locate their operations in Palau. With economic health, political stability, strong trade agreements, attractive tax system and incentives, government
support and investment, and airport infrastructure, Palau has the potential to establish a successful free trade zone. Under the Act, licensed industries benefit from the following incentives:

• Import tax exemption on equipment and raw materials
• Export tax or user fees exemption (up to 10 years)

Potential export-oriented ventures in Ngardmau Free Trade Zone include the assembly of specialized electronic equipment and components parts for re-shipment to the U.S., Asian markets, Australia, and the greater Pacific region. With added airline connections and regular shipping lines, such a venture may be profitable. There is also an opportunity for joint-venture projects with local entrepreneurs in the computer services industry to take advantage of the growing market opportunity.

The newly appointed Ngardmau Free Trade Zone Authority, the free trade zone’s administrative agency, is seeking investors and partners for the development of an appropriate free trade zone facility, within the free trade zone’s 14,130 square kilometer area.