- The Petroleum Fund Law has served Timor-Leste well over the last five years, and there is no pressing need to revise it. It should provide policy continuity and protect our oil and gas wealth for future generations, and not only support current activities.
- It's too soon to put half the Fund in the stock market. The proposal is to increase the amount allowed in equities from 10% to 50%, even though the Ministry plans only 25% equities and the Investment Advisory Board (IAB) recommended a 40% maximum. Since Timor-Leste's experience with equities began only last month, we suggest that the current 10% limit continue for at least two years, while our managers, leaders and people gain experience and familiarity with the ups and downs of stock prices.
- Diversification can be helpful, but it is not gospel. It can include bad as well as good investments, and must be managed carefully. Diversification also applies to advice (getting more inputs and consultation) and productive sectors (not depending only on petroleum for revenues).
- Alternative instruments are dangerous. The proposal is to allow up to 5% of the Fund ($330 million) to be invested in real estate, private equities or other items not traded on regulated markets. This could include scams like Asian Champ Investments, or the kind of speculation that brought Nauru from the richest country in the world (per capita) to one of the poorest.
- Can leaders elected for five years successfully implement the long-term investment strategy necessary to maximize the return on equities investments? This is how Warren Buffet became rich, but political and short-term pressures from a country with tremendous needs may make it impossible.
- The Investment Policy defined in these revisions should be a public document, with legal force and approval above the Minister of Finance.
- Don't weaken the sustainable income rule. The proposal is to change the "detailed explanation" to a "justification" when the Government wants to spend more than 3% of Timor-Leste's petroleum wealth in one year. This could be a single sentence of political intention. Although the current guideline has not worked well in recent years, we do not believe it should be made easier to violate, and have proposed changes which will make it more effective in protecting the nation's nonrenewable wealth.
- Keep the Banking and Payments Authority as Operational Manager. The BPA has worked well as a professional, nonpartisan, independent state institution and has built its capacity and experience during the last five years of managing the Petroleum Fund. We believe that the proposal to replace it with an undefined agency "accountable to the Government" will reduce checks and balances and professionalism, endangering the security of the Fund.
- Maintain the independence of the Investment Advisory Board. The proposal is to remove voting powers from the BPA and Treasury representatives, to have all IAB members appointed by the Prime Minister (instead of the Minister of Finance), and to reduce the protection against conflict of interests. These are dangerous steps which will make the board more subject to political pressures.
08 November 2010
As we wrote a few weeks ago, the Ministry of Finance circulated draft revisions to the Petroleum Fund Law and asked for comments by 5 November. La'o Hamutuk made a 7-page submission (also available as PDF) advocating against many of the proposed changes. Our main points are: