And the Lessons from Pacific Island Trust Funds

Good governance:

• Independent operation. The trust fund committee must be able to withstand political pressure. In Kiribati, the Minister of Finance is the chair (in Palau, the President). In Tuvalu, while there is significant donor involvement, there is also considerable local involvement in decision-making.

• Local ownership and understanding. The fund should have locally-determined goals. Ideally, these are contained in legislation, which affords public debate. The public should also be updated regularly if the fund is on track to achieve its goals.

• Open and transparent operation. The trust fund should be subject to annual audits. Annual reports are essential, but the public should also have quarterly reports on the balances, income, and costs of the fund, along with a simple update of long-range forecasts from the last annual report.

Strong fiduciary practices:

• Robust fiscal controls. A fund should specify, at the outset, how its income will be spent, and an effective fiscal management system should be in place before withdrawals occur.

• Clear investment goals. The investment managers must be benchmarked against clear financial targets. To that end, an ideal policy statement clarifies the overall objectives, asset allocations, risk tolerance (including views on diversification, rebalancing, and liquidity), and the measurement of performance.

• Close scrutiny of costs and service providers. The committee should use only reputable providers, but also look for ways to minimize costs. This requires knowing what competitors charge; re-bidding contracts regularly; and enforcing contractual terms (firing poorly performing providers, if needed).

• Maintenance of the real per capita value of the fund. Irrespective of any other goals, a trust fund must be able to preserve its real per capita value. If not, then it will eventually be depleted.

Source; Federated States of Micronesia: Selected Issues and Statistical Appendix, p.10

For Discussion; Would a Trust Fund be an effective way to deal with global warming for these small pacific islands.