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Asia-PacificOctober 2 2005

Oil money made to work for all

Prime Minister Dr Mari Alkatiri tells The Banker how the world’s newest nation will handle its burgeoning economy.
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Since independence in May 2002, Prime Minister Dr Mari Alkatiri has been at the forefront of efforts to develop Timor-Leste’s oil and gas reserves. Key pieces of legislation have been passed to provide a framework for the industry. At the same time, Dr Alkatiri has led negotiations with Australia on developing offshore petroleum fields that lie between the two countries. He spoke to The Banker about the talks and his economic vision.

Q What is the current progress on the oil and gas negotiations with Australia? Some negotiators have talked up the possibility of an imminent deal.

A I believe we are close to a deal but we still don’t have it yet, as the Australian side has been saying. This is the reason why we keep talking with them. There are some technical details that for us are very important to make sure we are not giving up our claim on the area.

Q Is there a revenue-sharing formula in place? Will the offshore gas be piped to Australia or Timor-Leste?

A This is already more or less agreed. Revenues is one thing, the other is how to keep the overlapping claims [on sea boundaries] open during the time of exploration and exploitation of resources. I’m also optimistic on having the downstream plant and pipeline to Timor-Leste. Technically it’s feasible. It’s not much more expensive. It’s feasible commercially. We’ve been talking with the joint venture of Sunrise [the largest gas field]). There are some issues to be worked out, but I’m sure it’s possible.

Q Why are you placing so much emphasis on the downstream industry?

A Everybody knows that if we don’t have the downstream here, we are only going to receive royalties and taxes, and that’s all. The multiple effects of a downstream industry in an economy like Timor-Leste will be very big. With the downstream we will have the possibility to create a pool of development, particularly along the southern coast. On the other hand, we can also develop our own industry in the oil and gas sector. That’s very important to our country. Our policy is to have a state oil company, but one that operates commercially, not one that is subsidised by the state budget.

Q How will you invest your savings from oil and gas?

A We have a formula for what we consider the sustainable expenditures for fiscal policy. It means that the fund will only pay for the budget in a sustainable way. Now we are starting the fund with at least $200m. This is the current balance. We will invest in US bonds for the time being. But once our capacity is well developed, we can use part of this fund to invest in equities and in other bonds. We are getting advice from Norway who has experience in this field, also from the IMF and other institutions.

Q Do you look to Brunei as a model for the future?

A Not at all. Our model is closer to Norway’s example. But this country still needs a lot of investment in infrastructure, in schools, in a better health system. We still need to develop the country first. That’s why we need a balance between saving money for future generations and development.

Q How strong is the private economy and what are the growth prospects?

A We need to push up the private sector, it’s very weak. The main activity is in micro-enterprises. We are living on imported goods. We are spending more than $130m on imports and exporting $7m-$8m. It’s an unbalanced economy. We need to invest to change this situation, slowly. We have to invest in agribusiness, in tourism, in services. It’s a small economy. We cannot compete with China.

Q Do you fear that oil wealth could be a curse, not a blessing?

A This is why we have set up the petroleum fund as a way to manage the macroeconomic issue in such a way so as not to convert a blessing into a curse. The fund is an institution that is a base for good management for oil revenues. Above all, you need a culture of good management and transparency. As in Norway, every government that comes in has to maintain the policy of saving money – but even there, the government is under pressure to spend money.

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Read more about:  Asia-Pacific , East Timor