22 June 2017

Join La’o Hamutuk at the Timor-Leste Studies Association

Mai Akompaña La’o Hamutuk iha Asosiasaun ba Estudu sira Kona-ba Timor-Leste

The biannual Timor-Leste Studies Association is a vital event for Timorese and international researchers, including those from civil society and from academia, to share findings and learn from each other. It’s also a useful opportunity for building networks and exploring future collaboration.
Timor-Leste Studies Association ne’ebé hala’o tinan rua dala ida mak eventu esensiál ida ba peskizadóres Timor oan no internasionál sira, inklui sira ne’ebé mai husi sosiedade sivíl no akadémia, hodi fahe rezultadu estudu sira ba malu no troka koñesimentu entre sira. Ida ne’e oportunidade di’ak ida atu hamoris ligasaun no buka posibilidade ba kolaborasaun iha futuru.

La’o Hamutuk would like to invite all TLSA and VU conference participants to a reception at our office in Bebora on Monday, 3 July from 4:00 pm on for snacks and informal discussion.
La’o Hamutuk hakarak konvida partisipante TLSA no VU sira hotu atu mai tuir resepsaun ida iha ami nia servisu fatin iha Bebora, iha loron segunda, 3 Jullu, tuku haat lorokraik, ba snak no ko’alia malu informálmente.

The TLSA conference schedule is at http://tlstudies.org/ and is updated regularly. Researchers from La’o Hamutuk will give seven presentations, summarized below. We hope you will participate in some of our sessions; please confirm rooms and times on the final schedule.
Oráriu konferénsia TLSA nian bele hetan iha http://tlstudies.org/ no atualiza regulármente. La’o Hamutuk nia peskizadór sira sei fahe aprezentasaun hitu. Ami hein katak ita boot sira sei mai tuir sesaun balun husi ami nia aprezentasaun hitu ne’e; Keta haluha konfirma fila fali fatin no oras hotu iha oráriu final nian.

Oil, Debt and Sustainability: Timor-Leste’s Borrowing Plans and their Implications for the Future

By Niall Almond. Session 2, Room E
In 2012, Timor-Leste began borrowing from international institutions to finance infrastructure projects, and since then it has signed twelve loan contracts. The country’s petroleum resources are almost depleted, and the non-oil economy has not substantially improved, with most growth fuelled by government spending of oil money. Advisers and other independent observers have warned the government about taking on debt given the current economic outlook; however, the 2017 State Budget plans to borrow more than ever before. This paper will examine Timor-Leste’s current and future borrowing, the projects that are being prioritised, and the dangers this poses to Timor-Leste’s economic sustainability. It also discusses other countries which found themselves unable to pay large loans, and suggests how Timor-Leste can avoid the same fate.

As Bayu-Undan Dries Up: Challenges and Opportunities

By Charles Scheiner. Session 3, Room C
Revenues from petroleum may no longer be able to feed Timor-Leste’s economy and state finances, and the nation must find other nutrition. For the first 14 years of independence, money from oil and gas exports – primarily the Bayu-Undan field – nourished the creation of democratic state institutions and helped people emerge from a generation of brutality, war and devastation. But the oil era is ending: 97% of the expected revenue from developed fields had been received by the end of 2016, and prospects for additional extractive income are uncertain. This paper will explore the history of oil and gas in Timor-Leste, possibilities for additional revenues, and the recurring dream of external sources of wealth. It will also touch on some more sustainable alternatives based on the country’s human and renewable resources. 

Malisan Rekursu iha Timor-Leste: Hosi Jestaun Fundu Petrolíferu no polítika orsamentál Timor-Leste

Husi Juvinal Dias. Session 4, Room A   
Iha 2005, Timor-Leste estabelese Fundo Petrolíferu nudár meius investimentu finanseiru atu jere nia rendimentu Petrolíferu bai benefísiu jerasaun ohin no futuru nian. Fundu ne’e iha nia regra hodi investe iha forma asoens no títulu estadu. Nune'e mós estabelese prinsipiu sustentabilidade nudár matadalan bainhira halo levantamentu ba Orsamentu Jerál estadu tinan-tinan. Fundu sai tiha fontes prinsipál ba Timor-Leste nia ekonomia. Iha levantamentu lubuk Fundu liu Rendimentu Sustentável Estimativa (RSE) ne’ebé sei fó impaktu ba sustentabilidade Timor-Leste. Levantamentu sira ne’e maiór parte atu finansia mega projetu sira ne’ebé Governu deside ona iha nia Planu Estratéjiku Dezenvolvimentu Nasional. Peskiza ida ne’e sei sukat oinsá jestaun Fundu Petrolíferu no polítika fiskál hadalan malisan rekursu mai Timor-Leste, oinsá ho futuru Fundu, retornu investimentu no planu levanta RSE liu dala tolu kada tinan hosi 2018-2021. 

Dezenvolvimentu Projetu Infrastrutura Sira no Dezafiu ba Implementasaun Lisensamentu Ambientál iha Timor-Leste

Husi Adilsonio da C. Junior. Session 5, Room A
Timor-Leste nia konstrusaun infrastrutura fíziku sira iha mudansa ne’ebé signifikante hafoin hetan nia independénsia iha 2002. Mudansa ba implementasaun projetu infrastrutura sira ne’e lori risku oin-oin ba ita niameiu-ambiente, balada fuik sira no mós sosiedade afetadu sira nia moris ba tempu naruk. Iha nivel pratika, projetu na’in sira dala ruma viola tiha atu implementa enkuadramentu legal sira kona ba lisensamentu ambientál ne’ebé governu estabelese ona hodi regula kona ba atividade projetu no sai pratika di’ak ne’ebé implementador projetu infrastrutura sira tenke kumpre. Estudu ida ne’e sei fornese dadus no informasaun importante ne’ebé instituisaun interesadu oin-oin bele utiliza ba dezeña sira programa no mós sai informasaun baze ba peskizadór sira seluk atu halo programa peskiza iha futuru oin mai.

Dezafiu ba Indústria Ki’ik Prosesamentu Produtu Agríkola iha Timor-Leste

Husi Maxi Tahu. Session 5, Room E
Peskiza kona-ba dezafiu no oportunidade indústria ki’ik prosesamentu produtu agríkola ne'e buka atu komprende fatór tékniku no polítika sira ne'ebé sai dezafiu ba kreximentu indústria ki’ik prosesamentu produtu agríkola iha Timor-Leste. Peskiza ne'e mós halibur informasaun kona-bá poténsia indústria sira ne'e nian no halo analiza kona ba fatór sira ne'ebé sai obstákulu ba poténsia sira ne'e. Rezultadu husi peskiza ne'e sei oferese dadus nesesáriu atu kria polítika públiku ne'ebé akomoda kreximentu setór indústria ki’ik iha rai-laran. Peskiza ne'e uza metodolojia kualitativa ho kombinasaun entrevista individual no diskusaun grupu, hodi rona esperiénsia no ideas sira husi parte sira ne'ebé durante ne'e diretamente halo prosesamentu ba produtu agríkola no parte sira ne'ebé involve indiretamente liu husi sira nia apoiu ba produtór sira. Respondente sira ba peskiza ne'e mak produtór ki’ik sira ne'ebé halo produsaun nudár grupu no mós kompañia privadu sira ne'ebé halo prosesamentu ba produtu agrikultura nian.

Bainhira Bayu-Undan sei Maran: Dezafiu no Oportunidade sira

Husi Charles Scheiner. Session 8 Room A
Rendimentu husi petroleum dala ruma labele ona kontinua atu apoiu Timor-Leste nia ekonomia no finansas estadu nian, no nasaun ida ne’e tenke hetan ai-han seluk. Durante tinan 14, osan husi esportasaun mina no gas – liu liu kampu Bayu-Undan, fasilita kriasaun instituisaun estadu nian, no ajuda povu atu sai husi periodu brutalidade, funu no estraga la halimar. Maibé mina rai sei remata lalais: ita simu ona 97% husi reseita husi projetu petróleu dezenvolve ona, no laiha serteza kona ba reseita tan. Aprezentasaun ida ne’e sei esplika istória peskiza no esplorasaun mina no gas iha Timor-Leste, posibilidade atu hetan rendimentu tan husi petróleu ka mineiras, no mehi nafatin atu hetan rikeza husi li’ur. Aprezentasaun mós diskute alternativa sira prátiku no sustentável liu, bazeia ba Timor-Leste nia riku soin umanu no renovavel.

Mina, Deve no Sustentabilidade: Timor-Leste nia Planu Empréstimu no nia Implikasaun ba Futuru

Husi Niall Almond. Session 8 Room A
Iha 2012, Timor-Leste komesa empresta osan husi instituisaun internasionál hodi finansa projetu infrastrutura sira, no dezde tempu ne’ebá Timor-Leste asina ona kontratu empréstimu sanulu-resin-rua. Timor-Leste nia rekursu petrolíferu besik hotu ona, no ekonomia naun-petrolíferu seidauk iha mudansa boot - maioria kreximentu ekonómiku dezde independénsia akontese de’it tanba governu gasta osan mina no gás barak, la’ós tanba atividade produtívu. Ajénsia no observadór independente fó ona avizu katak Governu tenke kuidadu bainhira atu foti deve tan, tanba situasaun ekonómiku sei fraku hela. Maske nune’e, Orsamentu Estadu 2017 iha planu atu empresta osan barak liu kompara ho uluk. Paper ida ne’e sei analiza Governu Timor-Leste nia deve agora no iha futuru, projetu sira ne’ebé hetan prioridade, no impaktu ba Timor-Leste nia sustentabilidade ekonómiku. Paper sei diskute mós  nasaun seluk ne’ebé foti deve ne’ebé boot no ikus liu sira la bele selu fali, no paper mós fó sujestaun lubuk ida atu oinsá mak Timor-Leste bele evita destinu aat hanesan ne’e.

20 June 2017

Timor-Leste’s oil wealth: financing government, building for development and providing for its people

Presentation to the Conference marking 25 Years of the International Platform of Jurists for East Timor

By Charles Scheiner, Researcher, La’o Hamutuk.  Lisbon, 29 May 2017. Link to PDF or PowerPoint version of the presentation, or to a PDF of this article  for printing.

In 1991, IPJET joined the people of Timor-Leste in struggling for their legal right to self-determination. At the same time, people in the U.S. formed ETAN, the East Timor Action Network. After the Timorese people restored imminent independence in the 1999 referendum, we both asked our friends there what they needed from international solidarity.

Many had similar answers – “we’ve been isolated and focused on our struggle against Indonesia, and haven’t had the chance to learn about the world. Our country is being flooded with institutions we know little about — and they all tell us what’s best for our people. We know enough not to believe everything they say – but please help us understand what they want, who they serve, what they have done in other places, and how we can ensure that their presence supports the Maubere people.”

Seventeen years ago last week, La’o Hamutuk was formed in response to that request, as an independent, small, local civil society organization. We began to analyze and report on international organizations active in Timor-Leste. We encouraged them, and later Timor-Leste’s own government, to strengthen political sovereignty (including the maritime boundary with Australia), legal accountability (including ending impunity for crimes against humanity committed during the Indonesian occupation), environmental protection, and sustainable, equitable economic development.

Today I’m going to talk a little about the last point – the implications of Timor-Leste having been one of the most petroleum-export-dependent countries in the world, and possible consequences and adaptations as that era comes to an abrupt end.

As we heard earlier, the independence struggles of both Western Sahara and West Papua are also entangled with non-renewable resources, and I hope Timor-Leste’s experience can provide some lessons for them as well.

Moving away from petroleum dependency

Although oil companies have explored Timor-Leste for oil and gas for more than a century, large-scale extraction activities began in the Timor Sea in the late 1990s.  Since then, Timor-Leste’s government has received about US $21 billion in oil revenues from Elang-Kakatua, Kitan and Bayu-Undan – and only about $0.4 billion more remains.

Timor-Leste has wisely invested most of its oil income in its Petroleum Fund, whose investments have earned more than $3.8 billion. Timor-Leste’s government has spent nearly $9 billion of the money from oil and investments, and about $16 billion remains in the Fund, whose balance peaked about two years ago and has begun to decline. Between 2002 and 2016, oil money paid for 83% of all government spending. The Ministry of Finance expects the Petroleum Fund to finance 75% of state activities during the next five years, although oil and gas income in 2016 was only one-eighth of its 2012 peak.

If you consider the Petroleum Fund as part of the state, Timor-Leste went into deficit in 2015, and the funding gap will increase significantly after this year. All of the numbers I have used so far come from government reports, but the government does not release projections more than five years into the future. Therefore, La’o Hamutuk made our own estimates, and we expect that the Petroleum Fund could be entirely empty within a decade if the state pays for all the things it intends to build.

Where the money goes

Ten years ago, oil revenues began to surge, a new government was elected, and Timor-Leste’s state budget became the second-fastest growing in the world. Expenditures increased ten-fold between 2005 and 2012.

Although budget escalation has moderated since then, spending continues to go up and, since 2014, recurrent spending has been far more than the sustainable income from the Petroleum Fund. The government expects this to continue through at least 2021.

Timor-Leste’s leaders say that their priorities are health, education, agriculture and water supply. Unfortunately, all four of these together will get only one-fifth of state spending this year. More money goes for roads and other physical infrastructure, veterans and other pensions, and the machinery of government.

Half of the people in Timor-Leste are under 20 years old, and 60% make their livelihoods as farmers, but appropriations for education and agriculture have been dropping during the last four years. Education spending has been cut by 20%, even as the number of school-age children went up by 10%. Child malnutrition is among the highest in the world, yet spending on health is lower than it was in 2014 – and is less than half of the norm for developing countries.

Time does not allow a detailed discussion of other programs which consume state resources but may not provide social or economic returns greater their financial, social and environmental costs. The Tasi Mane project, the Oecusse special zone and three international airports will absorb billions of dollars without benefitting most people. In addition, Timor-Leste is borrowing more than a billion dollars to build infrastructure, which will have to be repaid after the Petroleum Fund is gone. La’o Hamutuk estimates that basic services, already far below what people deserve, may have to be slashed by 85% in about ten years.

Oil money and the economy

If Timor-Leste can develop a strong, diverse economic base, this austerity will not be necessary. Unfortunately, the so-called ‘non-oil economy’ is still not strong enough to sustain the country.

About half of the ‘non-oil’ economy is fueled by state spending of oil money, as exemplified by construction and public administration. After adjusting for population growth and inflation, the productive sectors of agriculture and manufacturing have shrunk during the fifteen years since independence.

La’o Hamutuk believes that GDP gives a misleading picture of how an economy serves its people, especially when more than 40% live below the poverty line. We think it is more appropriate to count people, not dollars.

Only about a quarter of the working-age population are in the formal economy – the rest are subsistence farmers or fishers, not working for income, or students. Of those who work for dollars, roughly equal numbers work for the government, the private sector, and very small family businesses. Although this picture shows that there is tremendous under-utilized human potential, it also shows the challenges of expecting private companies, such as foreign investors or the oil industry, to build the country’s economy.

The post-war baby boom is reaching working age, and the potential labor force will increase by about 19,000 this year and even more in the future. Projects like Heineken, TL Cement and Tasi Mane will each employ fewer people than join the labor force in a single month. A more holistic approach to economic development is clearly needed, concentrating on agriculture and production for local consumption.

Another way to look at Timor-Leste’s economy is to examine the money flowing in and out of the country. We import more than $500 million worth of goods each year, and about the same amount of services. Non-oil goods exports, almost all coffee, are around $20 million. As the red line in the graph shows, our non-oil trade deficit is about a billion dollars each year, and hasn’t changed much since 2013. The green line shows the balance after oil revenues and returns from investing the Petroleum Fund are added in. This first fell below zero two years ago, and will converge with the red line as the Petroleum Fund is depleted. Although the deficit may decline after Timor-Leste has no more money to pay for imports, the effects on people will be disastrous if local production has not significantly improved.

What does the future hold?

Bayu-Undan is almost empty, with less than a half-billion dollars more expected. Although petroleum sector officials raised public hopes last week by announcing that the government has approved ConocoPhillips to drill more wells in that field, this is not something to celebrate. The cost of these wells, which are necessary to extract the last puddles of oil and gas from the nearly-exhausted reserve, will come out of Timor-Leste’s revenues.

Development of the Greater Sunrise oil and gas field, which is somewhat larger than Bayu-Undan, has been delayed due to disagreements with Australia about maritime boundaries and disagreements with the oil companies about where to liquefy the natural gas. The government has recently awarded no-bid contracts to national oil company TimorGAP to explore onshore and offshore for new fields, but prospects are limited. It would be foolhardy to pin Timor-Leste’s future on the faint possibility that deposits were missed during more than half a century of exploration.

While talking about economic diversification, policymakers continue to dream of wealth obtained without facing the daunting challenges of developing Timor-Leste’s workforce and productive sectors. Parliament is discussing a mining law, and government is proposing to create a state-owned Mining Company and a Minerals Fund, although Timor-Leste’s limited reserves of non-precious minerals have nowhere near the value of already-exploited petroleum fields.

In addition, tax holidays and a new private investment law and policy hope to attract foreign investors, who will take more money out of Timor-Leste than the capital they bring in. A huge new container port will make it harder for local products to compete with imports, as will free trade agreements that come with ASEAN membership.

La’o Hamutuk is hopeful about the future of Timor-Leste, provided that policy-makers change course soon and prioritize renewable sectors which involve many people and are realistically sustainable. These include:
  • Food production, primarily for local consumption
  • Agricultural processing, so that more of the money from our crops stays in the country
  • Light industry, to manufacture products used locally and to reduce imports
  • Eco-tourism which makes use of the country’s unique advantages and potential markets, rather than trying to divert business from Bali’s luxury resorts
  • Remittances from Timorese workers who are temporarily overseas, while encouraging them to come home and contribute more to the development of the nation.
The struggle for sustainable, equitable economic sovereignty – building a diversified economy which can fulfill the economic and social rights of the poorest and most vulnerable – is more complex and difficult than overcoming the Indonesian occupation. Without a common enemy like Indonesia, it is harder to unify people, especially when a small part of the population is doing well from public money, either as contract brokers or implementers, or as advisors or pensioners paid by the state.

Timor-Leste’s greatest resource is its people, and history has proven that they can endure tremendous hardships while achieving victory against overwhelming odds. The country would not be independent today except for their persistence and the support of IPJET and other international friends.

We each need to encourage our own governments, including the one in Dili, to prepare for the end of oil, and to leverage what’s left of Timor-Leste’s limited natural resource endowment to invest in a country, economy and society which build on their own strengths to provide for all of Timor-Leste’s people.

Time is running out.

16 June 2017

Private investment isn’t a panacea

We need investments which benefit Timor-Leste’s people, not only investors.


Since 2015, Timor-Leste has been revising its Private Investment Law as part of a series of reforms designed to improve the economy and comply with ASEAN, WTO and UN standards. The Council of Ministers approved a draft and sent it to Parliament in July 2016. The Parliamentary Committee on Economy and Development recommended not approving the Law before the 2017 State Budget and separate tax legislation were passed; Parliament waited for the budget but not the tax law, and unanimously approved the Private Investment Law in April.

La’o Hamutuk agrees that private investment which creates jobs and sustainable industries is important to help develop Timor-Leste’s economy, generate state revenue and improve our people’s lives. However, investors are not charities -- their objective is to maximize their profits, partly by paying as little to government as possible. Therefore, Timor-Leste’s people and economy will only benefit if investments are properly regulated, and if our laws oblige them to share their profits.

The government web site recently declared that the “New Private Investment Law is favorable for investors.” The Investment Law should favor Timor-Leste’s people first and foremost, and investors should not be given special treatment just because they have money. In this blog, La’o Hamutuk draws attention to aspects of the Law that we feel undermine the public interest, and offers suggestions which can help private investment be a benefit to Timor-Leste rather than a burden.

‘Good’ investment vs ‘bad’ investment

Many people see private investment as essential to achieving economic growth and thus, development. However, while some investments result in increased GDP, the costs and benefits of growth are often unequally distributed. This is especially true in countries which have attracted investment in extractive industries, many of whom have experienced environmental destruction and pollution, increased corruption, armed conflict and human rights abuses over control of the resources, and increased poverty as people lose their land and livelihoods. Politicians and economists promote activities such as mining and logging because they may bring investment and GDP growth; however, after all the minerals are extracted and trees cut down, investors leave with most of the profits, while local communities and states bear the brunt of the costs and the clean-up.

The Timor-Leste Government hopes to attract investment in mining, and has created a national mining company,  while Parliament is discussing a new Mining Law and Minerals Fund. However, La’o Hamutuk believes that it is unwise to promote mining in Timor-Leste, as it comes with many social and environmental risks.  Also, local mining jobs are frequently poorly paid, dangerous and unsustainable, and state revenues are often minimal as a result of tax holidays and the inability (or unwillingness) of weak governments to manage powerful foreign companies.

Instead of promoting extractive industries, Timor-Leste should develop sectors which create decent local employment, generate substantial revenues for the state, and improve local skills and technological capabilities. They should produce socially beneficial goods such as medicine, clothing and other manufactured products for everyday use, to diversify Timor-Leste’s economy and reduce our unsustainable import dependency.

Developing agriculture should be the Government’s main priority, as it employs most Timorese people, provides essential food and can be environmentally sustainable. However, low productivity and systemic institutional and human factors mean that – for now – private investors are unlikely to be interested in anything other than producing cash-crops like coffee or candlenut for export, which won’t improve food sovereignty and fails to reduce import dependency. Therefore, Timor-Leste needs to work harder to improve agricultural productivity and make farming more attractive to people through training, education, scholarships, technology upgrades and improved infrastructure for transport and storage.

Timor-Leste also has the potential to develop other sectors such as food processing, manufacturing, sustainable forestry, livestock and dairy, and eco-tourism. However, passing a new Law will not automatically bring investors – the Government needs to improve health care, education, water supply and rural roads, which will make our people healthier and more productive, as well as making Timor-Leste more attractive to investors promoting long-term, sustainable projects.

The Law offers investors tax holidays

Articles 24(b) and 24(d) of the Law grant automatic exemptions for up to ten years on income, sales, services and import taxes for all investors. However, La’o Hamutuk believes the Law should not offer tax holidays for several reasons, including:
  1. Tax holidays alone may not attract investors to Timor-Leste, as there are other important factors which determine investor decisions, including worker skill and education, physical infrastructure and market size; temporarily lower taxes may not outweigh these other challenges.
  2. Even if tax holidays attract some investors to Timor-Leste, they may not stay. Investors who come to take advantage of the tax holiday could simply leave when the tax-free period ends and they realize the low quality of ‘local factors’ is making their business unprofitable. Countries with higher-skilled workers and good infrastructure have been able to use tax holidays to their advantage because investors stay for longer periods, and the initial loss of tax revenues is made up for by the long-term benefits from the investments.
  3. Tax holidays will affect the Government’s Fiscal Reform plans, and they may undo the gains in domestic revenue that the reforms aim to achieve. Since those Laws are still being drafted, we agree with Parliamentary Committee D that the Investment Law should not have been approved until tax reform legislation has been finalized.
Parliament has already approved the Law, and we encourage the new President of the Republic to review the tax holidays and other problematic provisions in the Law, and to send the Law back to Parliament if he agrees with our critique.

Investors can take Timor-Leste to an international tribunal

Article 38(a) allows foreign investors to sue Timor-Leste at an international tribunal if they disagree with the state, a process known as investor-state dispute settlement (ISDS). A draft of the Law had allowed the Government or foreign investors to resort to Timor-Leste’s domestic courts first. This has been removed, and the Law now says that disputes which cannot be settled within 60 days can be resolved by arbitration under the International Convention for the Settlement of Investment Disputes (ICSID), which Timor-Leste joined in August 2016.

This means that investors who disagree with government actions can bypass Timor-Leste’s domestic courts and bring their case directly to international arbitration, leading to lengthy and expensive court cases. In many countries, investors have sued states for hundreds of millions of dollars in ‘damages’ for regulating activities such as tobacco or mining due to health or environmental concerns, causing some countries to review or end their participation in ISDS mechanisms like ICSID.

Even if the tribunal rules in our favor, the state will have to pay expensive international legal firms to defend the case, further impacting our limited finances. The threat of being sued could also deter Timor-Leste from strengthening economic, environmental or health legislation or policies. Therefore, the capacity of Timor-Leste’s courts needs to be improved so that they can resolve investment disputes. Otherwise, an unaccountable panel of foreign investment lawyers will decide whether Timor-Leste has to pay millions of dollars to overseas companies.

Special investment agreements are open to abuse and corruption

Article 30 of the Law says that the State may negotiate a special investment agreement (SIA) “by defining special conditions for investment projects which, due to their size or nature or their economic, social, environmental or technological impact, may be of great national interest, within the framework of the Strategic Development Plan.” Article 22 allows SIA holders to lease “state property” for undetermined periods, and Article 30 allows “other specific non-fiscal benefits to be negotiated with the investor.”

La’o Hamutuk is concerned that these provisions could be used by politicians to push pet projects which they deem to be “of great national interest” by offering investors even more benefits, in the form of longer tax holidays, free use of ‘state’ land or infrastructure, or exemption from environmental or labor laws, opening a door to potential corruption and political interference. In addition, the articles dealing with SIAs do not indicate whether investors are required to abide by the other provisions in the Private Investment Law, Labor Code or any of Timor-Leste’s other Laws.

Conclusion – invest in sustainable sectors and in our people

La’o Hamutuk believes that Timor-Leste could benefit from private investment if it is directed towards sustainable sectors to create employment for our people, improve human and technological capacity, provide revenues to the state, and protect our natural environment. We should be wary of investors who seek to exploit our natural resources and weak regulatory capacity for their own profit.

Therefore, Private Investment Law should clearly state what favors investors can receive. At the same time, policy makers should identify which sectors should be prioritized for private investment based on the needs of Timor-Leste’s people, not of investors. This will help to create new, socially beneficial and environmentally sustainable industries, while avoiding those that produce quick profits for foreign companies but come with many costs to Timor-Leste’s people.

Meanwhile, we shouldn’t wait for foreign investors to solve all Timor-Leste’s problems – for now, the state has enough resources to improve schools, hospitals and basic infrastructure, all of which are essential for our people’s well-being and encouraging the investors who will contribute the most to our country’s development. If we really want private investment which benefits our people, we have to do this first, otherwise we will end up like so many other countries have – losing our natural resources with little benefit to our people, increased corruption and social conflict, and even less economic development, diversification and sustainability.

23 May 2017

Observations for the Conference on SDGs and the 2030 Agenda

On 21-23 May, the Government of Timor-Leste brought leaders from g7+  countries, Timor_leste officials and others together for a 'Global Conference on the 2030 Agenda: A roadmap for SDGs in Fragile and Conflict-affected States (conference website). In an effort to make the discussions more substantive and productive, La'o Hamutuk distributed observations to participants in the conference.  The following is a slightly abridged version, with links added. You can download the original as a PDF file. Click on any graphic in this blog to see it larger.

La’o Hamutuk is a Timor-Leste non-governmental organization which has analysed and advocated for equitable, sustainable development for 17 years. We are gratified that the Timor-Leste Government is embracing the Sustainable Development Goals (SDGs), the global framework for achieving sustainable, equitable and peaceful social and economic development. Timor-Leste’s National Strategic Development Plan (SDP) contains many admirable targets in health, education and other areas, and we believe that harmonizing those parts of the SDP with the SDGs is a useful step towards achieving these objectives.

Timor-Leste faces many challenges, from enduring effects of occupation and war, young institutions, limited fiscal and human resources, poor infrastructure and widespread poverty and malnutrition, and meaningful progress toward the Sustainable Development Goals requires political will, wise and strategic policies, careful planning and concrete action on the part of policy makers, public servants, development partners and all Timorese citizens. Decision-making must also include civil society, youth and marginalized groups, in order to pursue an equitable development process, and their concerns and needs should be incorporated into all development programs.

The Government’s programs and those of its international partners should be realistically achievable and based on evidence, understanding Timor-Leste’s current context and aimed at improving people’s well-being and incomes in the short term, and equitable economic development and environmental sustainability in the medium- and long-term. Therefore, La’o Hamutuk offers this analysis of Timor-Leste’s economic reality and current government policies, along with some suggestions that we believe can help use the remaining money from our limited petroleum resources to improve all our people’s lives, and achieve lasting peace, stability and prosperity.

Achieving sustainability requires updating our priorities.

La’o Hamutuk congratulates the Timor-Leste Government on successfully pushing for the inclusion of SDG number 16, ‘Peace and Justice and Strong Institutions,’ which aims to “promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels.” Peace is an essential element of sustainable, equitable development, and the people of this country made tremendous sacrifices to achieve it.

We also note that Timor-Leste and the g7+ have committed to meet 19 targets from several SDGs, including reducing extreme poverty and infant mortality, reducing violence, improving food security and increasing access to education, water and electricity.

La’o Hamutuk agrees that Timor-Leste needs to make its state institutions even more effective, and we appreciate that the other selected indicators address many of the profound challenges our people currently face. However, there are other important areas which have more immediate impacts on people’s lives, such as endemic malnutrition and disease, dysfunctional healthcare and education systems, and poor quality infrastructure, particularly in rural areas, but are not expressly addressed by any of the selected indicators.

The SDP contains targets for many of these areas, and we understand that the Government plans to implement the SDGs according to the objectives outlined in the SDP; however, the SDP is an aspirational document, not a realistic plan, and does not include cost estimates or timelines. Furthermore, some aspects of the SDP – such as the Tasi Mane petroleum infrastructure project, airports and ports – do little to address the urgent needs of the majority of our people, and the country has limited resources with which to carry out these large projects.

The Prime Minister’s office carried out a review of the SDP in 2016, but the results have not yet been released. When La’o Hamutuk was consulted during this process, we were told that the main objective of the review was to evaluate SDP implementation to date, rather than revising and adjusting it according to new information and circumstances. The plan was developed in 2009-2011, when many people incorrectly believed that Timor-Leste’s oil revenues would last for decades.

Six years later, Timor-Leste has received nearly all of the revenues we will get from developed oil and gas fields. This requires a major rethink of our national programs and priorities, to reduce near-term spending to sustainable levels and evaluate the costs and likely benefits of the most expensive projects. Continuing down the current unsustainable course could lead Timor-Leste into severe financial difficulties within a decade, without a diversified economy or strong human resources to overcome them.

Therefore, we call on Timor-Leste and its friends to seriously reassess the development strategy, analysing all major projects, with the goal of building a diversified non-oil economy to move us toward long-term sustainability. The SDGs can be a reference, but the most important guide should be the needs of the majority of our people.

Petroleum revenues will effectively end next year.


In order to design sustainable, realistic plans for the future, Timor-Leste’s policy makers first need to recognize the imminent end of petroleum revenues. The projections in the 2017 State Budget show revenues falling to $80 million in 2018, or less than one-twentieth of what they were in 2014; by 2021, they will be zero. As of today, Timor-Leste has already received 98% of the total expected revenues from Elang-Kakatua, Bayu-Undan and Kitan.

Thus, Timor-Leste now depends on returns on investing its Petroleum Fund (PF) to finance state activities. However, even though yearly withdrawals are supposed to be limited to the ‘estimated sustainable income’ (ESI) the Government  withdraws more than that almost every year. In addition, the PF’s investment returns have been lower than the 5.7%  projected by the Ministry of Finance, earning less than half of what was predicted during 2015 and 2016. As this graph shows, the state’s overall financial flow has been negative since 2015 and large deficits are projected from 2018 on.

The combination of excess withdrawals, dwindling oil revenues and lower  investment earnings has caused the balance of the PF to fall from its $17 billion peak two years ago, and the 2017 State Budget expects that the Fund’s total value will fall to around $12 billion by 2021. (La’o Hamutuk calculates that it will drop even further if all the government’s current proposals are implemented.) At the same time, most of the growth in ‘non-oil’ GDP is driven by state spending (of oil money). Without a large and rapid increase in non-oil revenues, the State will run out of money as soon as a decade from now.

Although it is possible that Timor-Leste will achieve additional revenues from Greater Sunrise or other gas and oil fields, or from mining, the likelihood is remote, and this will not be significant for many years, if ever.  It would be foolhardy to gamble the country’s future on imaginary quantities of hypothetical non-renewable resources that may appear someday. Even if they do materialize, they will not provide as much revenue as Bayu-Undan already has, and will only prolong non-sustainable resource dependency for a little longer.

Megaprojects and extractive industries undermine sustainable development.

The Government is withdrawing non-sustainable amounts from the PF partly because recurrent expenditures on wages, goods and services, fuel, and social security programs, are steadily increasing; in fact, recurrent spending alone has been much more than ESI since 2014.

The bigger drain on the Petroleum Fund is the ‘front-loading’ policy which involves high spending on physical infrastructure, ostensibly to build foundations for future development. However, the bulk of the infrastructure spending so far has been for national roads, bridges, electricity, airports and ports, while other areas like water, sanitation, schools and hospitals have been under-served. Increased access to electricity and improved roads has benefited people; however, water, sanitation, health and education are more fundamental to people’s lives, and should receive more resources and attention.

In addition, the Tasi Mane petroleum infrastructure project absorbed more than $200 million between 2011 and 2016. The 2017 budget allocates $65 million more for it, about as much as Timor-Leste has allocated for health this year.

Between 2017 and 2021, the Government plans to spend more than $1.1 billion on just the three largest projects, or almost a third of total capital expenditure, and billions more after 2021 to complete the projects. However, the Budget only includes a few smaller components of Tasi Mane – Suai airport, the Suai Supply Base and part of the south coast ‘highway’. The other two (much larger) projects – the petrochemical refinery at Betano (which requires two oil pipelines) and the Sunrise gas pipeline and LNG processing plant in Beaçu – are left out. La’o Hamutuk’s rough estimate of total cost is $15 billion – the entire Petroleum Fund – if private investors continue to avoid the project.

Space does not permit a detailed analysis of the Tasi Mane project, but La’o Hamutuk agrees with most independent analysts that it is not economically or socially justifiable. Uncertainties about markets, raw materials, procurement processes, economic analysis, environmental risk, maritime boundaries, investor and consumer confidence and managerial experience put the entire project into question – especially as it is diverting financial and policy resources from more realistic, achievable and sustainable development. It is time to stop pouring good money after bad.

During the last three years, the Oecusse special economic zone (ZEESM) has received almost $500 million in public funds, with no significant private investment, no public cost/benefit/risk analysis, and little transparency or accountability. Future expenditure projections for ZEESM have not been released, but it could receive billions more in public funds, especially if other investors continue to stay away.

We are therefore deeply concerned that these projects will waste a large proportion of Timor-Leste’s people’s money, while taking up valuable agricultural land, evicting people from their homes and farms, and causing increased poverty, social conflict and environmental destruction. Although dubious new airports in Oecusse and Suai are already under construction, the planned expansion of Dili airport – which is expected to cost up to $400 million – is also difficult to justify, given the limited numbers of flights, airlines and passengers. Last year, the government created a public-private partnership for a large container port west of Dili which is also questionable, given the country’s overwhelming import dependency and plausible traffic projections.

Around $400 million in loans has already been contracted, mostly for roads, and the Government hopes to borrow almost $1.3 billion more over the next five years, around $900 million of which is for Dili airport, Suai Supply Base and the south coast highway. None of Timor-Leste’s current creditors (Japan, World Bank, and ADB) will finance these projects as they believe they are not viable, and we worry that less scrupulous lenders could exploit our precarious position to purloin our petroleum savings or infringe on hard-won national sovereignty.

When the oil money is gone, Timor-Leste will probably be unable to repay those loans without cutting essential services. Therefore, taking on so much debt is a threat to the next generation.  We should learn from the experience of other countries who took on unsustainable debt, only to become trapped in a debt-cycle which continues to this day.

While Government policies have neglected agriculture, tourism and other sustainable industries, they are giving more attention to new extractive activities. National Parliament is debating a new Law to invite mining in Timor-Leste, which threatens our environment, our people’s health, and will usurp arable land. In addition, the Government recently awarded a contract to conduct onshore exploration for petroleum over an area of around 200,000 hectares in southwest Timor-Leste.

Most of Timor-Leste’s people live as subsistence farmers who depend on the earth for their livelihoods, but there is limited land which is suitable for agriculture. The largest area of arable land is on the south coast, but petroleum and mining industries could make it unavailable or unusable. Also, many livelihoods depend on the sea, and fishing and tourism could potentially become important sources of revenue. Unfortunately, these sectors have not been prioritized by the Government, and are instead being endangered by the promotion of extractive industries.

Prioritize healthcare, education, basic infrastructure and sustainable economy.

Access to certain services has improved in some areas, such as electricity, water and sanitation, and malaria appears to be under control. However, malnutrition and stunting, especially for young children, are among the highest in the world and could permanently damage their lives and future economic development. Small-scale rural infrastructure continues to be underfunded and mismanaged, and more work is needed to combat waste and corruption in public services and infrastructure projects. However, the biggest barrier to progress is the continued prioritization of megaprojects and development of offshore and onshore extractive activities, which diverts the state’s time, energy and money away from these basic services and infrastructure.

Therefore, in addition to evaluating all projects and cancelling those without clear benefits, Government efforts need to be refocused towards the key areas with the most immediate impact on people’s lives, including healthcare, education, basic infrastructure and agriculture and other sustainable economic activities. This requires not only increased budget allocations, but improved planning and management in the state institutions in charge of these sectors.
The SDGs contain many useful targets that can strengthen Timor-Leste’s national development plan. We suggest a few targets which are possible to achieve and which would improve all  Timor-Leste’s people’s lives.
  • SDG #1 – ‘No Poverty’ – contains targets for social protection systems, equal rights to economic resources, and pro-poor and gender sensitive national policy frameworks.
  • SDG #2 – ‘Zero Hunger’ – contains targets for reducing malnutrition, and increasing food productivity, farmer incomes and investment in technology and training for agricultural development.
  • SDG #3 – ‘Good Health and Well-being’ – includes targets such as achieving universal access to quality healthcare services, medicines and vaccines, reducing maternal deaths, universal access to reproductive healthcare services, combating tuberculosis, hepatitis and water-borne diseases, and increasing health financing and the recruitment and development of the health workforce.
  • SDG #4 – ‘Quality Education’ – includes targets for early childhood development, building and upgrading education facilities and increasing the number of qualified teachers.
  • SDG #5 – ‘Gender Equality’ – calls for recognition of unpaid domestic work through the provision of public services and social protection policies, ensuring universal access to sexual and reproductive rights, and ending violence and discrimination against women and girls.
  • SDG#6 – ‘Clean Water and Sanitation’ – contains targets for achieving adequate sanitation and hygiene for all, reducing pollution and dumping into water sources, and protecting water-related ecosystems.
  • SDG #9 – ‘Industry, Innovation and Infrastructure’ – aims to develop quality, sustainable infrastructure for economic development and human well-being, increase small-scale industries’ access to credit, enhance scientific research and technological capacity in developing countries.

Conclusion

In order to achieve a truly sustainable, equitable society and economy in line with the Sustainable Development Goals, the Government of Timor-Leste should objectively assess which aspects of its plans will advance sustainable development. If certain projects are found to be unreasonably expensive, lacking in clear returns or not compatible with the principles of sustainability or equity, they should be cancelled.

The Government’s road map for the implementation of the SDGs echoes the SDP’s aspirations about improving Timor-Leste’s human resources, infrastructure and institutions, and eliminating poverty and diversifying the economy by 2030.  While these are laudable goals, they will be extremely difficult to achieve while policy makers’ energy is focused on promoting megaprojects and searching for investors in extractive industries. Without the distractions of Tasi Mane, ZEESM and other boondoggles, the Government will have more resources to allocate to the areas that are essential for improving ordinary people’s lives. Cancelling these megaprojects will make state spending more sustainable, and supporting agriculture and small industries while reducing extractive activities will also protect people’s livelihoods and the environment.

While it is probably impossible for Timor-Leste to meet every SDG target, we can reduce poverty, improve basic services, build and fix infrastructure and grow our economy by increasing focus on key areas, and improving the planning and implementation of state programs. Timor-Leste has limited resources, and we face many obstacles to achieving our objectives. However, if we base our policies on evidence, make plans that are realistic, and put the basic needs of our people first, we will be able to make Timor-Leste the equitable, peaceful and sustainable country that Timor-Leste’s people deserve. Hamutuk, ita bele!

These observations were written before the conference.  At the conference, a road map poster and brochure were distributed, and a post-conference press release summarized the event. La'o Hamutuk was disappointed at how little discussion there was about actions which could benefit more people than those who are working in the institutions of governments and donors.