Six years ago, the people of East Timor voted overwhelmingly for independence from Indonesia after 24 years of occupation. The ensuing mayhem gripped the world’s attention and prompted the intervention of UN peacekeepers. Now, three years after its formal independence from UN auspices in 2002, Timor-Leste, as the world’s newest nation is now called, is starting to reap the rewards of its offshore oil and gas reserves.
Revenues from two gas fields currently in production in the Timor Sea that lies between Timor-Leste and Australia contributed $244m in the budget year ending July 2005. But that is a drop in the ocean compared to the potential profits and downstream economic benefits that could eventually accrue to Timor-Leste, which ranks as Asia’s poorest country with a per-capita GDP of $366.
The challenges are great. Despite a huge aid effort since the 1999 vote for independence, the World Bank estimates that per-capita incomes are falling due to a post-conflict baby boom that is likely to double the current population of 925,000 within two decades. More than 50% of Timorese are under 15, and urban youth unemployment is over 40%. The country’s biggest export crop is coffee that fetches around $7m a year, leaving a gaping trade deficit.
Hopes are high, though, that petroleum wealth will be the motor that drives Timor-Leste in the decades ahead. Bankers believe that the funds, properly invested, can secure the nation’s future by providing a firm basis for economic independence and long-term investment in promising sectors such as agribusiness, fisheries and tourism.
The offshore energy reserves, including the disputed Sunrise gas project, could be worth $50bn. Initial exploration in Timor’s own waters has yielded promising discoveries that will be put out to tender shortly.
Several rounds of talks between Australia and Timor-Leste to delineate sea boundaries and jointly develop shared reserves appear close to completion, raising hopes that production can start soon.
Lessons learned
However, Timorese leaders are cognisant of the fact that oil wealth has proven to be a mixed blessing in many developing countries. Jose Teixeira, an Australia-trained lawyer who is vice-minister for natural resources, says Timor-Leste is determined to learn from the mistakes of other nations that squandered their petroleum money.
“Being oil rich doesn’t mean that development is achieved and we have learned that lesson. There are many examples of oil-rich nations that have failed to use those resources for their national development,” he said.
To guard against this risk, Timor-Leste has created a Petroleum Fund that will receive all royalties and taxes from onshore and offshore petroleum activities. Expenditures will be channelled through the budget process, to prevent leakage, and will be subject to parliamentary oversight and spending limits.
Much of the wealth is to be invested offshore to provide a savings cushion for the future.
“Our Petroleum Fund will permit us to spend a sustainable amount of that wealth while not squandering those savings for future generations as well,” said Mr Teixeira.
Initial investments will be restricted to the safe haven of US Treasury bills, though the prime minister, Dr Mari Alkatiri, has aired the possibility of inviting international banks to manage a portion of the fund with a view to boosting returns. He told The Banker: “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.”
Too much too soon
Given the tiny private sector in Timor-Leste and the nascent state of its public bodies, officials say it would be unwise to pump too much money into the domestic economy. The nation’s capital, Dili, already suffers from a distorted dual-economy created by the international aid operation spawned by UN intervention. A recent survey of international expatriates found that threadbare Dili ranked above gleaming Singapore in terms of costs, despite its obvious development gap.
Timor-Leste’s banking sector is a reflection of its colonial past and its geography. The largest player with a national branch network is Banco Nacional Ultramarino (BNU) of Portugal, the former colonial power. Two other banks are operating in Dili: ANZ Bank of Australia and Indonesia’s largest lender Bank Mandiri.
Loan growth has been rapid, led by BNU with a portfolio of $60m to around 10,000 borrowers.
Bankers say the expanding local economy offers room for growth, while foreign direct investment may hold the key to future expansion. State-owned BNU is proving the most aggressive in building its branch network and training staff to lead the expansion.
It is already well known to older Timorese as the bank that, since UN intervention in 1999, began processing pension claims for former employees in the Portuguese colonial administration.
“There are not many big businesses here yet. We’re working with small businesses, and we think there is much to do. But we hope foreign investors will come to Timor-Leste, especially in the tourism sector where we see many possibilities,” said Correira Pinto, country director of BNU.
Reaching out
Microcredit schemes are also taking off. Four specialised lenders and several credit co-operatives have joined a micocredit association that serves an estimated 20,000 low-income customers.
But economists warn that there is still a huge gap in providing credit to rural areas where agricultural production is antiquated and inefficient. One in three households in Timor-Leste are outside the formal economy and rely solely on subsistence farming for their income.
This poverty, and the tantalising promise of petroleum wealth, has raised expectations among some quarters of government handouts.
Understandably, many Timorese see the billions in potential revenue as a quick chance to lift their nation out of grinding poverty. Government officials have spent the last few years fanning out across the half-island, which borders Indonesian West Timor, to explain that the money is being invested and managed to ensure long-term benefits and sustainable investment.
Francisco Da Costa Monteiro, a New Zealand-trained geologist and adviser to President Xanana Gusmao, says the message has been getting across. “People have a sense of responsibility when we say that the petroleum money is for future generations and they accept this idea. Our people think it’s important to give the future generations a better way of life,” he said.
Corruption vigilance
However, the government’s critics take a sanguine view of such promises, pointing to examples of other poor nations where promised oil riches have gone astray.
Campaign groups are pushing for greater transparency in monitoring payments from offshore oil companies to the government, as well as checks on potential corruption at home.
Timor-Leste has joined the UK-backed Extractive Industries Transparency Initiative that promotes accountability and good governance in such sectors. Vice-minister Teixeira proudly points to national legislation on managing petroleum income as going beyond the guidelines of the voluntary initiative.
Advisers from Norway’s Petroleum Directorate have guided the formation of the fund and supported training of civil servants to regulate the sector.
Guarding against graft in the oil sector is likely to challenge Timor-Leste’s nascent state institutions, including its new ombudsman office that has already taken up dozens of alleged corruption cases. Campaigners hope that public pressure on leaders to avoid dipping into the coffers, combined with scrupulous bookkeeping will allow their nation to learn from the mistakes of other oil-rich countries.
“Fighting this corruption is so important [so] that the money coming from oil and gas will be used for the interests of the people. Without fighting this corruption which is emerging now, it will be difficult to guarantee how [it] will be spent,” said Christopher Samsen, founder of anti-corruption watchdog Labeh.
