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| Juvinal Dias and Charles Scheiner testify to Committee C |
La’o Hamutuk made a previous submission to
Parliament’s Agriculture and Natural Resources Committee (also Tetum). This
current submission to the Economics Committee explores some issues we discussed earlier more deeply. In addition, it contains new sections on
- The proposed revision of the Petroleum Fund Law threatens fiscal sustainability.
- The national electric project is much more expensive than it appears.
- Parliament and the public must have access to full information.
The following is an abridged version of our submission. See the web version for graphics and links, or download the PDF version (also
Tetum) for printing. Click for more information on the budget, including documents and analysis (also Tetum).
Spending at this level is unwise and unsustainable.
The proposed budget would expend $985 million of Timor-Leste’s money next year, including $734 million to be transferred from the Petroleum Fund during 2011 and $141 million to be carried over from unspent 2010 budget funds, nearly all of which came from the Petroleum Fund. In other words, 89% of this budget is financed by exporting Timor-Leste’s non-renewable oil and gas wealth.
In tables 5.8 and 5.9 of the Revenue chapter of Budget Book 1, future balances in the Petroleum Fund and the Estimated Sustainable Income (ESI) are projected assuming that the Government will only withdraw the ESI amount every year. The Government makes overly optimistic predictions about future world market oil prices, and assumes that the investments from the Petroleum Fund will earn 4% more than inflation. In this scenario, the amount in the Petroleum Fund gradually increases, reaching $14.6 billion by the end of 2015 and $31.7 billion by 2035.
We believe that the 2013-2015 numbers come from an excessively simplistic approach to budgeting. The Ministry of Finance appears to base them on a model of fixed annual percentage increases, rather than on actual program and project plans and costs. We do not believe that they will prove to be accurate, but have included them in this graph below because they represent the Government’s thinking. We have extended their model beyond 2015, based on the Government’s assumptions to see how it impacts on Timor-Leste’s future.
In the graph at left, the dashed single red line (right-hand axis) indicates the amount withdrawn from the Petroleum Fund every year if ESI is respected as table 5.8 says, and the solid single red line (left axis) shows the balance remaining in the Fund.However, table 4.2 in the Expenditure chapter explains that the Government plans to withdraw $418-$526 million more than ESI from the Fund every year starting in 2012 (dashed double green line), settling down to a 3.5% annual increase in withdrawals after the 2012 election. In this case, the balance in the Fund (solid double green line) is $12.6 billion at the end of 2015 and begins to decline in 2025. The Petroleum Fund will be totally used up by 2035 if no new oil or gas projects come on-line.
The 2013-2015 expenditure projections come from a simplistic approach to budgeting. The Ministry of Finance appears to base them on a model of fixed annual percentage increases, rather than on actual program and project plans and costs.
The budget makes imprudent assumptions about oil prices.
In the proposed 2011 budget, the Government assumes that future world market oil prices will be about 50% higher than they assumed in the 2010 budget, an assumption that La’o Hamutuk believes violates the Petroleum Fund Law’s requirement that “all assumptions made shall be prudent.” These high price assumptions are used in the two scenarios discussed above. If one re-calculates the data based on the oil prices assumed in the 2010 budget, with the level of expenditures in the 2011 budget, the balance in the Petroleum Fund is only $10.5 billion at the end of 2015, and the fund will be entirely exhausted by 2030 (triple purple line).
The oil prices assumed in the 2011 Budget increase every year after 2011, reaching $114 per barrel in 2025, leading to an 2011 Estimated Sustainable Income of $734 million. La’o Hamutuk believes it would be better to continue to use the price assumptions in the 2010 budget, which would produce a 2011 ESI of $527 million according to the Government’s other assumptions.
The proposed revision of the Petroleum Fund Law threatens fiscal sustainability.
The Government is current proposing to revise the Petroleum Fund Law to facilitate faster spending, more risky investments, fewer checks and balances, and politically-directed management of the Fund. La’o Hamutuk has already explained to the Ministry of Finance why we think these proposed changes endanger Timor-Leste’s future, primarily because
- It’s too soon to put half the Fund in the stock market.
- Don’t weaken the sustainable income rule.
- Keep the Banking and Payments Authority as operational manager of the Fund.
- Maintain the independence of the Investment Advisory Board.
We encourage Committee C to look at other evaluations of Timor-Leste’s current and future economic situation, rather than just accepting the Government’s politically-influenced projections, or those the Government has requested from the World Bank. An IMF team visited Dili last month for their Article IV, and has shared their preliminary forecasts.
[After we made this submission to Parliament and circulated it publicly, the IMF asked La'o Hamutuk to remove these figures, although we had believed we had permission to use them. We will add the final numbers when they are available.]
The Infrastructure Fund undercuts Parliamentary authority.
When Parliament approved the Budget and Financial Management Law last year, you probably didn’t expect that more than a third of the state budget would be moved into “Special Funds.” These funds carry over from year to year, and the Council of Ministers can change what they are allocated for, provided that Parliament is informed. In short, Parliament will have surrendered your power to enact and oversee much of the state budget.
The Infrastructure Fund is intended to facilitate the National Strategic Development Plan (PEDN), which may eventually be submitted to Parliament for approval. The Government has not yet released a draft of the PEDN, and the Prime Minister discussed only its objectives during his subdistrict socializations, with no information about implementation, cost or timing. It is too early for Parliament to approve hundreds of millions of dollars to execute the PEDN.
These are major decisions with long-term impacts on Timor-Leste’s people, and should not be taken in haste. After the PEDN has been amended and approved by Parliament, the Government can ask that the Infrastructure Fund to be created, and a budgetary allocation could be made for it in the 2012 General State Budget.
The proposed General State Budget Law for 2011 may be the only opportunity for Parliament to exercise its competence with regard to the Infrastructure and Human Capital Development Funds. Once they have been created, all authority will go to the Ministers. We urge you not to approve the Infrastructure Fund until you have received the following:
- Estimates of the total cost of each project to
be implemented, including design, construction, operation and maintenance,
broken down by year. Article 3.3 of the Budget and Financial Management Law
requires that such information be provided for 2011 and 2012, but the budget
documents provide it only for 2011.
[One day after this submission was discussed in Committee C, the Ministry of Finance provided Budget Book 6 to Parliament, including a list of capital projects and a breakdown of multi-year expenditures.] - Timetables for design, construction and completion of every multi-year project.
- Detailed, factual, comprehensive and current information on the Heavy Oil electricity project and national power grid, including changes in design, contractor, schedule and cost.
- A legally-binding commitment that the projects promised to Parliament in the budget documents will be built unless Parliament approves a reallocation of funding.
- A promulgated Parliamentary Law approving the National Strategic Development Plan.
- A promulgated Decree-Law establishing the National Development Agency (ADN).
- A promulgated law describing the procurement process which will be used for the very lucrative, complex Infrastructure Fund projects, including detailed Terms of Reference, open and transparent tenders, and publicly announced contract awards.>
The national electric project is much more expensive than it appears.
The largest part of Infrastructure Fund spending for 2011 is $166 million for the troublesome heavy oil power plants and national electric grid, which have been through numerous design changes, contract revisions, and supplier reassignments since the project started in 2008. Timor-Leste spent nearly $100 million for this project in 2008-2010. Although the original contract price with Chinese Nuclear Industry Construction Company No. 22 (CNI22) was $367.1 million, this has grown to $628.7 million and is likely to escalate further.
Budget Book 1, says “This project is costed at $166 million and will provide reliable access to electricity across the country, with capacity to support industry, particularly in the northern coast from Batugade to Tutuala.” The actual project cost will be at least four times this figure, and the power grid along the north coast extends only from Liquica to Laga, with lines inland to Maliana and Los Palos.
In September a contract was signed with the Indonesian company Puri Akraya Engineering to replace CNI22 in building the generating stations at Hera and Betano – increasing the contract cost of the stations from $91,038,377 to $352,569,123. Since only 1.2% of the towers for the national grid were erected by September, the Government is also looking to re-assign most of it to Indonesian companies, further increasing the cost.
The delays, cost overruns, redesigns, poor planning, lack of local jobs, environmental negligence, deficient safety protection, legal violations and conflicts with local communities have been far worse than La’o Hamutuk and others predicted. If the Infrastructure Fund is established, the limited ability of Parliament to approve funding and to oversee this project will be nearly totally ended.
We encourage Parliament to think carefully before allocating unlimited funding to this challenged project, or even the $166 million requested for 2011, and to insist that the Government keep Parliament informed in detail about progress and plans. You should not approve the Infrastructure Fund until you have received all contractual, re-tendering and design changes now and later, as well as revised schedule and cost projections for the completion and operation of the entire project.
The Heavy Oil power project has not only wasted Timor-Leste’s money, but it carries an “opportunity cost” by delaying the use of cleaner, more sustainable and less expensive forms of energy. In 2008, Timor-Leste hired the Portuguese company Martifer to do an in-depth study of alternative energy potential in Timor-Leste, to be finished by May 2010, but it has not yet been published. Parliament should ask for this study and make a well-informed determination whether available renewable energy sources can serve our energy needs more reliably, more rapidly and less expensively than pouring more money into the heavy oil sinkhole.
The “Tasi Mane” project is a troublesome foot in the door.
This budget allocates $36 million from the Infrastructure Fund for the “Tasi Mane” south coast petroleum infrastructure corridor, but that is only the initial payment, primarily for designs and studies. Like other multi-year projects in the Infrastructure Fund, no information has been provided about the total cost, including construction, operation and maintenance, which could be in the many hundreds of millions of dollars.
Furthermore, nothing is said about how many jobs these projects will provide for Timorese workers, how much land they will take from agriculture and fishing, how many people will be displaced, or how much revenue they will generate. Detailed designs will be required to give precise projections, but preliminary estimates are essential to deciding whether they should be undertaken at all. If Parliament does not receive such information, we urge you not to give the Government a “blank check” for a project which may turn out to be useless or have negligible benefits.
Projects like those envisioned for “Tasi Mane” are often undertaken by private investors and industries because they can be profitable. Government support is appropriate to encourage private investors and to ensure that they don’t encounter regulatory difficulties, and some public money may be needed to attract private companies to a marginal project. However, if these projects were expected to make money, investors would be implementing them already.
We are also concerned about the amount of Timor-Leste’s money being spent on studies related to a possible onshore LNG plant for Greater Sunrise. The 2010 rectified budget included $3.1 million “for studies in Beaçu by marine specialists”, and last month the Council of Ministers awarded a contract to Toke-EGS for this work. The proposed 2011 budget allocates $23.6 million for “oil and gas infrastructure” to be spent from the Infrastructure Fund during 2011, including $5.8 million for “Detail site survey, design, and supervision of southern cost development of Beaçu” and another $3.5 million for “pipeline route analysis.”
If these are approved, Timor-Leste will spend at least $12.4 million for a project that may never happen. Although the Timorese public and Government want Sunrise gas to be piped to an onshore LNG plant in Beaçu, the project’s operator (Woodside Petroleum, working under contracts signed in 2003 and several international treaties) is uncooperative. Woodside remains committed to a mid-sea floating LNG plant. It seems unlikely that additional information (including vituperative press releases) from Timor-Leste will change Woodside’s view that a Timor-Leste onshore LNG project would earn the companies $2 billion less than a floating project. If Woodside is not persuaded, the project will remain stalled, and Timor-Leste’s $12.4 million or more will have provided work for foreign consultants and contractors, but no benefits for our people.
The Government often discusses the need to move Timor-Leste’s economy away from our overwhelming dependence on oil and gas. The “Tasi Mane” project, however, is still in the oil and gas sector, and will become useless when our finite petroleum reserves have been used up in 15-40 years. Timor-Leste’s future economic growth would be better served if major infrastructure projects directly benefited our population, rather than providing services for international oil companies who will be here for only a few decades.
If the main objective of the “Tasi Mane” project is to provide jobs for Timorese workers (even if it loses money), shouldn’t those jobs contribute directly to the lives of Timorese citizens by improving health care, education, rural roads and water systems, electricity, housing, food production and other services that people across our country desperately need?
The PETRONATIL national oil company is dangerous and problematic.
The proposed 2011 Stage Budget includes a $2 million transfer from the SERN budget to establish PETRONATIL, Timor-Leste’s state-owned oil company. The decree-law for this new entity is currently being considered by the Council of Ministers.
We believe that PETRONATIL should be created by Act of Parliament, not by decree-law, and that its budget should be approved by and overseen by Parliament. Unfortunately, the draft decree-law will exempt this agency from Parliamentary oversight, while giving it powers to take out loans; invest in overseas projects; spend petroleum revenues (bypassing Petroleum Fund and Parliamentary budgeting); ignore civil service, procurement and salary rules; and open opportunities for corruption and abuse of power. By taking on huge financial obligations which could later burden the state, PETRONATIL could undermine the responsibility of Parliament to enact state budgets.
>Since this may be Parliament’s only opportunity to participate in the decision to establish PETRONATIL, we urge you to use “the power of the purse” to encourage a more transparent, accountable, democratic, responsible and less risky state-owned oil company.
The budget may include initial capital for the Institute of Petroleum and Geology (IPG), a new autonomous agency which the Government will create soon by decree-law. Perhaps its funding (as well as the subsidy for the National Petroleum Authority) is concealed in the $4.3 million of SERN public transfers or the $1.2 million SERN will spend on “professional services.”
La’o Hamutuk feels that the draft IPG decree-law is unnecessary and risky. We support the establishment of an effective state organ to manage information about Timor-Leste’s geology, but it should be done through normal government structures, subject to standard processes for hiring, salaries, procurement and contracting. It should not be empowered to take out loans or enter partnerships with private companies.
The Human Capital Development Fund prioritizes the state over our citizens.
An educated population is essential to developing Timor-Leste’s economy, as well as to improving the functioning of state institutions and the lives of our people. But short-term quick-fixes, such as trainings and scholarships for state employees, will not accomplish this goal. We find it unconscionable that the proposed 2011 budget allocates twice as much money for scholarships to send a few students abroad as it does for the entire National University of Timor-Leste.
The great majority of scholarships are for public servants, and we hope that their expensive education will improve the functioning of state institutions in the short-term, reducing reliance on foreign advisors and national consultants. But in the medium- and long-term, Timor-Leste’s own educational system, from primary school through university, must give our people the understanding, knowledge and skills to work for state institutions, the private sector, foreign investors or their own small businesses. This was the key to developing Singapore and is the only way to develop Timor-Leste.
Timor-Leste will have oil money to spend on expensive, elite overseas education for only a few years. Who will provide the workers for the many industries and agencies envisioned in the National Strategic Development Plan, or to start and run industries which can substitute for imports and add value to our agricultural products? Where will the next generation of leaders come from, once those who get scholarships or were educated in Indonesia or in exile during the Indonesian occupation have retired?
Parliament and the public must have access to full information.
The Government often states that Timor-Leste is a world leader in budget transparency, but we believe the claims contradict the reality. Unfortunately, critical information is often concealed from the public and from Parliament, reducing the effectiveness of democratic and legislative processes.
Many international agencies have issued disturbing assessments of Timor-Leste’s financial management, transparency and ability to control corruption. There are not mentioned in Government press releases, but we would like to bring them to Committee C’s attention so that you can help the Government improve. Among those published in the last few months are:
- The International Budget Partnership’s 2010 Open Budget Index rated Timor-Leste at 34 out of 100: “Provides minimal information to the public in its budget documents during the year.”
- The IMF “Report on Observance of Standards and Codes—Fiscal Transparency Module” and “Public Financial Management—Performance Report” contain numerous observations about limitations in transparency, planning and budget management. The IMF found that “Planning and budgeting are largely unconnected, and a medium-term perspective is just starting. Strategic planning is largely absent.” La’o Hamutuk has written the authors explaining how things have gotten worse. [On 5 January, the IMF wrote back.]
- The U.S. Government’s Millennium Challenge Corporation recently published its annual ratings for Timor-Leste. Timor-Leste did worse on 11 criteria compared with last year and improved on four. On the key “control of corruption” indicator, Timor-Leste fell from 21% to 10%, worse than 28 other lower-middle-income countries, better only than Angola, Iraq and Afghanistan.
- The World Bank’s 2011 Doing Business report paints a grim picture of the business climate here, ranking Timor-Leste 174th of 183 countries in “ease of doing business.”
Key state institutions must continue to grow.
No information is provided about staffing levels for 2011, but Budget Book 1 says that new recruitment will be frozen for all ministries and agencies except PNTL, F-FDTL and the Civil Service Commission. We believe that this is a mistake.
Current levels of service in key sectors such as education, health and agriculture are inadequate, and additional public servants are needed to meet the needs of our growing population. It seems absurd to allocate half the budget to foreign companies to provide infrastructure which benefits hardly any Timorese citizens, while not providing salaries for more Timorese workers to address people’s daily lives.
We do not agree that hiring 600 more soldiers for F-FDTL next year will serve the national interest better than hiring teachers, nurses, agricultural extension workers, engineers, managers to maintain infrastructure, or other public servants to meet any of the urgent needs of our citizens.
Recommendations
- Keep spending within sustainable levels, based on prudent projections of oil prices. The massive budget increases proposed for 2011 and 2012 should be curtailed, and future withdrawals from the Petroleum Fund should not exceed the Estimated Sustainable Income.
- Emphasize that expenditures are connected with revenues, and that the current surge in petroleum-related income is only temporary. Insist that the Government provide expenditure projections after 2010 based on actual plans, rather than econometric models.
- Consider the budgetary implications of the pending revision of the Petroleum Fund Law, and use more accurate and realistic data than the Government.
- Refuse to establish the Infrastructure Fund until complete and detailed annual cost, employment and schedule information is provided for each project, and until Parliament has approved the National Strategic Development Plan, with necessary oversight processes, organs and laws. Do not surrender Parliamentary authority to oversee one-third of the budget.
- Do not approve more money for the Heavy Oil project and national electric grid until the Government has provided accurate, comprehensive information about the project’s problems, and until adequate consideration has been given to renewable sources of energy.
- Insist on accurate and detailed cost information and revenue and employment projections for the full cycle of the Tasi Mane projects, so that Parliament can decide if they are a reasonable investment of state resources.
- Evaluate whether spending large amounts of public money to prepare for a possible LNG plant is worthwhile, since the company with decision-making power refuses to consider that option.
- Prioritize development of a strong non-oil economy, primarily based on agriculture, to replace transient oil revenues and industry.
- Reject funding for the national oil company until it has been established by Parliamentary law with adequate safeguards, accountability and transparency, and for the Institute of Petroleum Geology except within the structure of SERN.
- Insist that the budget give priority to education of Timor-Leste citizens in Timor-Leste, rather than sending a few public servants overseas for expensive schooling.
- Make budgetary decisions based on facts, rather than on political propaganda, and encourage the Government to provide accurate information about our economy rather than campaign promises.
- Insist on unrestricted access by Parliament to the FreeBalance financial information system.
- Allow hiring of additional personnel for key sectors like health, education and agriculture, and to manage and maintain new infrastructure, rather than expanding armed forces only.
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