31 August 2011

Thoughts for the regional EITI Conference in Dili

On 25-26 August, the Government of Timor-Leste hosted a regional conference of the Extractive Industries Transparency Initiative (EITI), attended by civil society, government representatives, oil companies and development partners from Asia, the Fragile States, and elsewhere. For more information on EITI and the conference, click here.

La'o Hamutuk observed that much time was given to appreciation and congratulations, with little discussion of the hard work needed to avoid the "resource curse," or of recent developments in Timor-Leste which make it more likely that our finite, non-renewable petroleum wealth may be misused. We distributed some thoughts to participants near the end of the conference -- click here for our 5-page statement in Tetum or English or continue for an edited version, with links and graphics.

Thoughts from La'o Hamutuk for the EITI Conference
26 August 2011

Firstly, we would like to congratulate the state of Timor-Leste, as a nation which became EITI-compliant last year, for organizing this regional EITI conference. This conference demonstrates Timor-Leste's momentum to show itself as a success story in managing and using natural resources transparently.

The coalition of Government, civil society and oil companies is proud of what Timor-Leste has achieved. La'o Hamutuk would like to strongly appreciate the work of the State of Timor-Leste to comply and promote transparency in petroleum management in Timor-Leste. 

However, we feel that this is not yet enough to ensure that petroleum revenues will benefit all our citizens today and in the future. Therefore, we hope that this EITI conference can develop good ideas to help our Government and people make wise decisions about revenue management.

This document offers our perspectives on some key issues.

Timor-Leste is enchanted with the sweet song of our new momentum.

When the EITI international secretariat declared Timor-Leste EITI-compliant on 1 July 2010, the Government proudly declared that this is an "important signal for Government, Civil Society and Extractive Industries, had come from long, hard work in collaboration with the Government led by Prime Minister Xanana Gusmao."

We think this is an important step, but its benefits will be limited if the success doesn't continue with good governance and transparency in all state programs. Transparency should not be just a slogan, but must be implemented to hold all public institutions accountable and earn maximum confidence from the people. Because if transparency is only a slogan, corruption will grow, devaluing our democracy and reducing the legitimacy of the state.

Timor-Leste's Government has launched the Transparency Portal, which is a good step, but it needs to be more accessible and incorporate public education to be effective.

In addition, many agencies hide information from the public, with little access to national and district procurement processes, such as changes in contracts and public works tenders which don't follow proper procedures -- including Pakote Referendum implementation, the heavy oil power stations, the Hera port, the Behau port, and other projects.

Unfortunately, newspapers, radio and television, pamphlets and banners which boast that Timor-Leste is a leader in EITI ignore policies which support secrecy in Timor-Leste. We observe Compliant Countries focused on the transparency targets they have achieved. Too much attention is given to the EITI process itself, and not enough to risks from current policies which threaten transparency.

In addition, petroleum companies everywhere, including here, often don't take transparency seriously, but keep exploiting legal and human weaknesses to maximize their profits, even as they say they follow EITI principles to pay and publish their obligations. A few years ago, ConocoPhillips tried to illegally recover costs from the Firebird test well in the Timor-Sea, although we are lucky that our state was able to finally collect this money last year. Until today, Woodside and ConocoPhillips refuse to publish the contracts for Greater Sunrise and Bayu-Undan.

Click for notes on this graphic.
Revising the Petroleum Fund Law is an obstacle to good governance of petroleum revenues.

Timor-Leste is extremely dependent on petroleum. This year alone, $1.19 billion of the $1.31 billion state budget comes from the Petroleum Fund.

Today, many nations who depend on petroleum fall into civil war, corruption and escalating poverty. These states fail when there is no good system for managing petroleum receipts. Many countries rich in oil end up poorer, because their state only thinks about spending the oil money as it comes in, and eventually nonrenewable resources become only a story from past generations. Leaders tend to see money as the solution to all challenges, spending more on short-term activities instead of investing for the long term. For example, Timor-Leste's 2011 State Budget allocates twice as much money for overseas scholarships as for the national university, which would develop our own education system to reach many more students.

Fortunately, Timor-Leste established its Petroleum Fund in 2005 to "contribute to prudent management of the Petroleum Fund for the benefit of current and future generations." Therefore, we should reinforce the provisions of this law about good governance, transparency, accountability and Governments responsibility for annual spending. 

Unfortunately, the Government recently revised the Petroleum Fund Law, and Parliament approved these amendments last Tuesday. We are distressed that the revision weakens essential articles which safeguard our petroleum resources, allowing half the fund to be invested in financial markets (increasing the risk of losing money), using the Fund as collateral for borrowing, and weakening the sustainable spending rule. It undercuts the roles of the Investment Advisory Board and the Banking and Payments Authority, concentrating power in the Minister of Finance.

The revision allows the state to endanger future generations' rights for short-term opportunism. This decision reduces transparency, and holding this EITI conference is a diversion to distract people from this reality.

In the last few weeks, the global economy has been in turmoil: oil prices have plunged, the U.S. economy is fragile, S&P downgraded U.S. treasury bonds, and the stock market fluctuates wildly. Investors all over the world are worried and uncertain. Therefore, we suggest that the Government act slowly and carefully before implementing the changes from the revised Petroleum Fund Law. If we guess wrong, we will no longer be proud of our system for managing petroleum revenues.

The ANP, TimorGAP,E.P. and BPA have non-transparent budgets.

Today, everybody considers Timor-Leste's extractive industry revenue management as excellent. The World Bank, EITI Secretariat and our Government hold up Timor-Leste as an example for other countries. But when we look at what really happens here, we don't yet have strong enough processes to guarantee transparency in the petroleum sector for our people's benefit. Our state and other institutions should be courageous enough to recognize this situation, and not conceal reality behind sweet words.

Article 6 of the 2005 Petroleum Fund Law states that all petroleum revenues must be deposited in the Petroleum Fund. But unfortunately, not all this money goes into the fund. The budgets of the National Petroleum Authority (ANP), the Banking and Payment Authority (BPA), and the imminent TimorGAP national oil company are not included in the State Budget. They are partly financed by direct payment from oil companies for activities in the JPDA or money for managing the fund, undercutting transparency in the petroleum sector and the constitutional power of Parliament to approve and audit the peoples' money.

The ANP is a Timor-Leste Instituto Publico, and should be financed through normal state processes, not as a separate state within the state. We believe that the state is obligated to create legal accountability for ANP -- otherwise we only talk transparency, but don't practice it. However, we appreciate the voluntary transparency in the publish-what-you-pay pages on the ANP website, which is better (more disaggregated) than the Government's reports.

We are not raising this issue to discredit Timor-Leste's National Petroleum Authority. We do not doubt the ANP's integrity, capacity, independence and professionalism to manage and regulate oil industry activities in Timor-Leste. But when we establish a better and more effective model of transparency, resolving this should be a priority.

The Heavy Oil Project is being carried out without transparency.

In addition to the problems discussed above, today's policy of using petroleum revenues in the state budget endangers Timor-Leste's transparency model. The huge national heavy oil electricity project begun three years ago will cost nearly a billion dollars, and is done with no transparency. According to the Transparency Portal, more than half of all state expenditures during the first half of 2011 went for this project.

There was no public consultation, cost/benefit analysis, or legally-required environmental impact analysis. The tendering process, contract changes, design changes, budget opacity and mammoth cost overruns belie transparency. The public doesn't know how this project will impact their lives --  there is no explanation of risks of acid rain and to the ground water, and no public plan to mitigate or avoid these impacts. The Betano-Same community has protested the generating station in their area; the Behau port was built in a protected area -- more examples of the lack of transparency around this project.

The Resource Curse is happening here.

In many countries with oil and gas, including Timor-Leste, most benefits go to a few individuals and companies. Petroleum earnings often don't support the citizens, but become a devil which brings poverty to the true owners of the resources.

In many countries in Africa, the Middle East, Asia and Latin America, development of nonrenewable resources often brings a curse: war, fragility, dictatorship, repression, militarization, corruption, environmental destruction, inflation and poverty. This situation happens faster in countries with weak democracy which depend on exporting oil and gas -- they don't diversify their domestic economy while oil revenues are high, and have leaders who would find it easier to spend than to increase productivity.

Timor-Leste has already caught this curse. Petroleum income dominates state activities, and state activities dominate our entire economy. If policies don't change this situation, our people -- especially those in poverty -- will not get the quality of life they deserve. Socio-economic injustice and conflict are likely to increase.

The flood of petroleum revenues causes the state to ignore other sources of money. The Strategic Development Plan (PEDN) the Government launched last month envisions Timor-Leste  depending on oil revenues for decades. It prioritizes the Tasi Mane oil and gas processing project, allocating twice as much money this year for its feasibility studies as for the entire Ministry of Agriculture and Fisheries.

This year's budget doesn't allocate enough to sectors like agriculture, health, education, tourism and fisheries -- but spends the lion's share on the problematic electricity project.

In addition, Timor-Leste's balance of trade shows that we depend on imports for almost everything. The National Statistics Department reports that in 2010, we spent $289 million on goods imports and exported only $17 million, 96% of which was coffee.

This is not good for our future, because we have much less oil and gas wealth than other countries. Bayu-Undan will provide income only until 2023 -- one more decade. Although we optimistically hope that the Greater Sunrise oil and gas field will be developed, that reserve will provide revenues for only 30 years more, and not enough to provide a good life for all our people.

If we haven't developed our non-oil economy before our petroleum is used up, Timor-Leste's people will not enjoy our rights to health, education, and other development. Our people will go hungry when we have no petroleum money to import rice. We will no longer be able to buy university education from overseas, or to pay foreign experts, or teachers or doctors.

In summary, we think that this EITI conference should focus more on ways to prevent or rescue oil-export-dependent countries from the resource curse, to reduce dependency on oil, not only on the EITI process.

Borrowing increases risk for the future.

So far, Timor-Leste has no external debt. Although we began nationhood in 2002 with an uncertain economy, Timor-Leste resisted pressure from the ADB and World Bank -- the same institutions which support EITI -- to take out loans to finance state spending.

In 2006, Timor-Leste began receiving large petroleum revenues. Since 2007, oil revenues dominate the state budget. Unfortunately, this condition has not reduced the temptation to borrow.

In 2009, the Government began looking for loans to finance infrastructure projects, and has enacted several laws to enable borrowing, including the 2009 Budget and Financial Management Law. Just this week, Parliament approved revisions to the Petroleum Fund Law and enacted a new Public Debt Law.

Borrowing is unwise. Experience shows that many nations who borrow end up failing. Petroleum-export-dependent countries are often tempted to use their oil as collateral for borrowing. Many countries borrowed against their oil wealth in the 1970s and 1980s, when IFIs and rich countries gave big loans to oil producers. Indonesia, Congo, Ecuador, Nicaragua, the Philippines, Argentina and others collapsed when debt became unsustainable -- the loans had provided benefits for a few dictators and cronies, but most people were still poor.

Timor-Leste enters risky territory by weakening Article 20 of the Petroleum Fund Law to allow use of part of the Fund as collateral. We all agree that investing money to develop human resources, education, health and agriculture can help bring Timor-Leste out of poverty, but we are unhappy that the Government wants to borrow billions of dollars only for physical infrastructure.

Therefore, we urge Timor-Leste to think carefully before borrowing. Even if interest rates are low, we will have to repay the principal after our oil wealth is spent. Repayments may obligate the state to reduce expenditures for public assistance, health, education and other essential services.

Finally, we conclude that EITI is a good first step, but there are problems relating to skills, dissemination and human resources which need serious attention from all of us. La'o Hamutuk remains ready to work with Government, civil society, oil companies, international financial institutions, Parliament, political parties and especially Timor-Leste's people to help this nation improve and promote transparency, to benefit all our people.

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