Strategic Development Plan raises problems

For a more extensive, more up-to-date version of this post, including graphics, click here.

After working on it for several months, Prime Minister Xanana Gusmão presented a summary of his Strategic Development Plan 2011-2030 to the Development Partners meeting in April. Although the plan summary is entitled "From Conflict to Prosperity," the cover was re-labeled "On road to Peace and Prosperity" when it was revised and posted on the Government website in English and Portuguese a few weeks later.

The full version of the Strategic Development Plan has not yet been circulated. However, La'o Hamutuk has read the English "Final Draft" which was given to a few state leaders. It has more than 400 pages, nearly 80 tables, and more than 60 figures.

Unfortunately, the content is not as impressive as the appearance. The Summary presents an "inspirational outlook" of a prosperous Timor-Leste in 20 years, with no illiteracy; water supply infrastructure, primary health care and secondary education for all; national wireless broadband, and no poverty. But the draft plan itself, which is often inconsistent with the Summary, gives scant specifics about how Timor-Leste will achieve this inspiring vision.

On 19 April, the Prime Minister began "consulting" Timorese people across the country about the plan, promising to go to every subdistrict.

Although the Prime Minister's journey has stimulated much excitement and debate, the plan itself has received little analysis. La'o Hamutuk hopes that this web page helps people understand its contents and decide whether they are desirable and achievable, given Timor-Leste's current situation and the human and material resources available.

This page discusses some of the most important issues in the plan:

1. Underestimating Timor-Leste's dependency on Petroleum Revenues - honesty in describing non-oil revenues
2. Burning natural gas, and selling it too - using Sunrise gas to generate a gigawatt of electricity
3. Riches beyond imagining - is Timor-Leste's "wealth" more than Indonesia or Malaysia?

We welcome suggestions about how to make this more accurate, relevant and useful.

1. Underestimating Timor-Leste's dependency on Petroleum Revenues

As La'o Hamutuk has often written, Timor-Leste is by far the most petroleum-dependent country in the world. This is not because we have a lot of oil and gas, but because the rest of our economy is so small. In our submission on the 2010 General State Budget, La'o Hamutuk explained that Domestic Revenues for 2010 will actually be less than $46.1 million, rather than the $87.2 million projected by the Government. The difference is largely because the Government counts as revenues taxes paid by one ministry to another, gross income from selling rice which the government purchased at a higher price than it is sold for, and gross revenues from the electricity and ports agencies which operate at a loss. If these losses are taken into account, the actual domestic revenues projected in the 2010 budget are negative $18.2 million. However, the discussion which follows uses the Government's inflated numbers -- Timor-Leste's dependency on petroleum is so severe that this makes little difference.

The first diagram in the Strategic Development Plan shows the components of State Revenue from 2002 through 2009. However, it uses a "logarithmic" vertical axes which distorts the relationship between small and larger numbers, making large numbers appear smaller, and small numbers appear larger.

The second figure, drawn by La'o Hamutuk based on the same data, uses a more understandable linear scale. In this case, every dollar adds the same height to each bar, regardless of the total size of the bar. The non-petroleum revenue components are so small as to be almost invisible.

The linear graph more accurately shows Timor-Leste's dependency on Petroleum Revenues, which comprised 94% of total state revenues during the first eight years of independence. We hope that policy-makers will understand the urgency of strengthening Timor-Leste's non-petroleum economy, which will result in increased domestic revenues, before the oil runs out in 15 years or less.

2. Burning natural gas, and selling it too

La'o Hamutuk believes that Timor-Leste should get the maximum benefits from the oil and natural gas in the Greater Sunrise field, which may involve bringing it to our South Coast by a pipeline, even though the international petroleum companies with the contracts for that field prefer to liquefy the gas at a floating LNG facility, rather than piping it to either Timor-Leste or Australia. . The Strategic Development Plan, however, assumes that the Sunrise gas will be brought to Timor-Leste, and we make the same assumption for the purposes of this discussion.

Page 15 of the Summary says

"Timor-Leste will develop a modern power grid linking the entire country with at least 1 Giga-Watt, 1GW (1,000 megawatts) of installed power capacity by 2020. The power grid will connect all districts, and will draw on the country’s natural gas resources to power much of the national system."

If Timor-Leste intends to use gas from Sunrise as fuel to supply a gigawatt of electrical generation capacity, this will consume nearly two-thirds of Timor-Leste's share of the Sunrise upstream project. Gas which is burned to generate electricity is not available to be liquefied and exported to generate revenue.

Under the CMATS Treaty, Timor-Leste receives its share of project profits as dollars, not as natural gas. For the purposes of this discussion, we are assuming that Australia and the companies agree that Timor-Leste can take most of its share as gas, as is envisioned in the Strategic Development Plan. This would also enable Timor-Leste to use some of the gas as feedstock for local industries and other activities.

Operating a gigawatt of electric generating capacity at 50% capacity for 30 years will require 0.87 trillion cubic feet (tcf) of natural gas.

Woodside estimates that Greater Sunrise contains 5.13 tcf of recoverable natural gas. According to La'o Hamutuk's analysis of the economics of the upstream project,  Timor-Leste will receive 1.33 tcf.

If this gas was exported and sold, it would bring in about $15 billion to Timor-Leste from the upstream Sunrise project. However, if we use 0.87 tcf of the gas to generate electricity, that reduces our revenues by nearly $10 billion.

The Strategic Development Plan assumes that petroleum revenues will "rise to $2 billion per year by 2030" with very optimistic assumptions about oil fields yet to be discovered. However, if we burn most of the natural gas from Sunrise, how can this be possible?

You can't have your cake and eat it too.

Planning for one gigawatt of electrical generating capacity for Timor-Leste raises another question. Assuming 50% utilization, divided among two million Timorese citizens in 2030, indicates electric use of 2,200 kwh/person/year, which is about the same as Brazil, Thailand or China. It is four times as much as Indonesia and twice as much as Fiji, Ecuador or Cuba.

If Timor-Leste did generate this much electricity and sold it at current EDTL rates of 12.5c/kwh, the average six-person Timorese household would have to pay $137/month for electricity.

3. Riches beyond imagining

Page 5 of the Strategic Development Plan describes Timor-Leste's "Economic Potential:" "Timor-Leste’s proven wealth per capita is now $55,660 (2005), higher than Indonesia ($13,350) and Malaysia ($55,326)." This implausible figure is footnoted to the World Bank's Country Environmental Analysis for Timor-Leste, published in July 2009.

A closer look at that document sheds some light. The figures listed the Strategic Development Plan come from the table at right, taken from page 5 of the World Bank report. We can see that 85% of Timor-Leste's wealth is non-renewable petroleum resources, which can be used only once. Timor-Leste lags far behind Indonesia and Malaysia in renewable wealth such as farmland and forests, and especially in "produced capital" (infrastructure and industry) . The World Bank report explains this in the text which accompanies this table, abridged as follows:

2.2 National Wealth

Timor-Leste total wealth per capita is among the highest in the region. Natural resources can be valued by taking the present value of resource rents over an assumed lifetime and calculating the net present value of such rents using a discount rate—in this case, 4 percent). Using this method, Timor-Leste’s total wealth per capita ($56,000) is more than three times higher than the average for the region and is comparable to upper middle-income countries like Malaysia.

The Timorese wealth is mainly composed of nonrenewable natural resources wealth. The definition of total wealth used in this report includes not only produced capital, but also natural and intangible capital. Timor-Leste wealth is mainly composed by oil and natural gas reserves (85 percent). Forest land and agricultural land correspond to 3 percent and 2 percent of total wealth respectively.

The management of nonrenewable natural resources represents a significant challenge for the country. Since most of the wealth consists of natural assets and mainly nonrenewable natural resources, this represents a peculiar challenge for the country economic management. In order to sustain and increase per capita consumption levels over time, it is necessary to have nondeclining wealth. From a practical perspective, this calls for natural resource rents to be invested rather than consumed. The Petroleum Fund established in 2005 has this very objective, as it allows oil wealth to be transformed into financial wealth and preserves the value of Timor-Leste’s petroleum wealth for future generations.

La'o Hamutuk agrees that Timor-Leste's leaders should project an optimistic vision for this nation's future. However, that vision, especially when it is described by a national plan offered as a "Bible" for current and future governments, needs to be grounded in reality. If we confuse analysis with public relations, future generations will suffer from broken promises, built on sand.