The second Compact Review Agreement initialed last week by Palau Chief Compact Negotiator Kaleb Udui Jr and U.S Special Envoy Joseph Yun is the “most significant since the first Compact relationship” with the United States of America said Palau’s legal advisor Jeff Farrow.

Jeff Farrow, who served as Palau’s legal advisor during the first Compact negotiation in the 1980s and the first Compact Review Agreement negotiation in 2010, said that this 2nd Compact Review “fundamentally changed the arrangements” between the United States and Palau under the Compact.

The position of the United States during the first negotiation of the Compact was to give Palau a certain amount of money to use for 50 years and have Palau sign over its defense rights in perpetuity. After 50 years, Palau should be self-sufficient, and the United States will no longer provide funding, according toFarrow.

This has been the United States’s position approaching the negotiations in the first CRA negotiation and this second CRA negotiation, said Farrow.

The position changed when President Surangel Whipps Jr. insisted that the United States negotiate with Palau equitably.

Farrow said Blinken was shocked when Palau President Whipps refused to negotiate based on the initial offer made by the United States in 2020 of US$430 million and insisted on starting anew.

“They (U.S) made every effort to force President Whipps to resume negotiations that started in 2020,” Farrow revealed.

Whipps’s position was that “as long as Palau plays a vital role in keeping Indo-Pacific free, U.S has the responsibility to Palau.” This, Farrow said, “fundamentally changed the arrangements.”

“If it has to be good for the U.S, it should be good for Palau. It shouldn’t be one way,” insisted Whipps.

As a result, the United States approved the appointment ofJoseph Yun, the Special Envoy appointed to head negotiations with countries with Compacts of Free Association.

The United States also approved the automatic renewal of this CRA after 20 years, removing the threat of a fiscal cliff built into the Compact Agreement.

This was possible, Farrow said, because President Whipps had the “wisdom, courage, and strength” to tell the top U.S officials the truth.

Farrow added that it was the right time to make demands because of the geopolitics. “In politics, timing is everything, and we benefited from the right time.”

When the first Compact Review Agreement was negotiated in 2010, the United States and China were not at odds, and Russia was no longer perceived as a threat as seen in the early 1980s.

There is economic competition with China and an effort to keep the Indo-Pacific free and open. “It is the right time to make demands,” expressed Farrow.

The Compact Review Agreement (CRA) spells out the financial package and supporting programmes offered to Palau by the United States. Not all the details in the CRA are available, but the Memorandum of Understanding signed on 10 January, 2023, showed the total financial package to be US$890 million, covering 20 years, starting October 2023.

“If approved by the U.S Congress, the assistance will be made available a year earlier, this October 2023,” said Chief Negotiator Kaleb Udui Jr of the additional feature negotiated in the CRA. The negotiating team requested the earlier disbursement because of Palau’s financial challenges in recovering post-covid.

Udui reported that the US$890 million package includes US$20 million in annual financial assistance for government operations, US$5 million in infrastructure, and US$5 million in maintenance funds. US$100 million will be paid into a new trust fund. The payment will be made in two installments of US$50 million each in the first two years. Each year, US$10 million will be paid for six years to cover debts acquired to assist Palau during the pandemic.

Unlike the original Compact Agreement and the CRA of 2010, this CRA has built into it an estimated two percent inflation rate, to be calculated and added every year to the amount of each specified funding. President Whipps said Palau would receive US$20 million for operations, and by year 20, it would receive about US$29 million.

The two percent inflation factor is included in the US$890 million financial package.

Other negotiated benefits in the Agreement include the removal of the fiscal cliff after year 20 and allowing for annual economic review, “much like the JCM,” said President Surangel Whipps Jr. referring to bi-annual Joint Committee Meetings between Palau and the United States over security matters.

Although the CRA is expected to be signed next week, Chief Negotiator Udui said the negotiations would continue to include U.S federal service eligibilities for Palauans, such as Veterans program, scholarships, and removal of mandate to obtain work permit requirements for Palauans working in the United States.

After the signing of the Compact Review Agreement, it will need to be passed by the U.S Congress into law before it takes effect.