Key issues in the 2012 State Budget

This page is condensed from a fuller discussion on La’o Hamutuk’s website, which links to the budget documents and includes more information and graphics. 
On 21 October, La'o Hamutuk presented a submission on the State Budget to Parliament's economics committee.

Last week, Timor-Leste’s Government presented Parliament with a proposal to spend $1.76 billion during 2012, including $1.56 from the Petroleum Fund and $33 million in foreign loans.Timor-Leste's proposed 2012 budget is 35% larger than 2011, and is more than five times as large as the 2008 budget proposed four years ago. According to the IMF, Zimbabwe (with runaway inflation) is the only country in the world whose state budget grew faster during this time; Congo (DRC) places third with an increase of 3½ times.

The budget violates the principles of sustainable use of the Petroleum Fund, although it explains that Bayu-Undan oil and gas production is declining. The projected 2013 budget will spend as much from the fund as oil revenues will bring in.This year's Estimated Sustainable Income (ESI) is $665 million. This is $69 million lower than last year's, because the Government overspent the ESI during 2011 and because ConocoPhillips expects higher Bayu-Undan operating costs and lower future production. However, every state budget since 2009 has broken the 3% sustainable spending rule, which has more to do with public relations than with policy.

The proposed budget includes $33 million in loans for water and roads during 2012, with more in future years. This is the first time the Government has asked Parliament to approve borrowing.  The budget proposal "does not show repayment because most of the loans have a ten year grace period."  Over the next four years, the budget anticipates borrowing $447 million dollars. This is a small fraction of what will probably be needed to implement the Strategic Development Plan, but full information is not given. We urge the Government to provide information on the full costs of mega-projects like the Suai-Beacu highway before Parliament approves the budget and the loans, rather than repeating the mistakes of the Heavy Oil project.

In the 2012 budget, capital expenditures for electricity are $282 million (down from $447 million in 2011), although the new power plants require more money for generator fuel, from $46 to $89 million. Notwithstanding the increases in generating capacity and prepaid meter installations, EDTL gross revenues only to go up a little, from $14.5 to $16.1 million, requiring a $73 million subsidy (not including hundreds of millions in capital costs).

The Infrastructure Fund allocates $163 million to the Tasi Mane south coast petroleum infrastructure project. More than half of this is to build the Suai supply base for offshore oil operations, which is budgeted at $329 million between 2011 and 2014. The Government has just appointed Eastlog Holdings PTE to construct the supply base, which will become the property of the new TimorGAP national oil company. Another $45 million is allocated during 2011 for the Suai-Beacu highway, which is budgeted to absorb $547 from the Infrastructure Fund and $220 million in loans between now and 2016.

Timor-Leste 2012 State Budget continues to neglect Timor-Leste's human resources essential to economic development and quality of life. Only 6.3% of state expenditures will go for education, and only 2.9% for health. UNDP recently pointed out that countries making progress toward the MDGs spend about 28% of their budgets on education and health, concluding that “not enough priority is being accorded to education and health. If Timor-Leste is to move faster in achieving the MDGs in these areas, then the share of social services in the budget will have to be virtually doubled.” The 2012 budget moves in the opposite direction, reducing the budget allocation for these social services from 9.6% of the 2011 budget to 9.2% for 2012.

The Decree-Law establishing a state-owned investment company went into force two weeks ago, and the Timor-Leste Investment Company (CITL) will be capitalized with $200 million from the 2012 State Budget. CITL is intended "promote the development of investment opportunities and national wealth growth, leading important strategic projects with significant commercial impact." Like Singapore’s Temasek, “CITL is a state owned enterprise with profit seeking objectives. It is owned by the Government but functions on a commercial basis." CITL is empowered to incur debt by issuing bonds; it can also purchase shares in other companies.

The 2012 Budget gives examples of possible CITL projects:

• An undersea internet cable to another country “which could make Timor-Leste a world leader in internet access.”
• Hotels and other projects “to commence the beginning of tourism.”
• A high-rise office building to offer below-market rents to private and Government tenants.
• A “Shopping complex of high quality to stimulate tourist potential.”  Timor-Leste’s “nearly duty free (status) will allow lowest cost prices in the region, which will compete for tourists seeking high quality products.”

La'o Hamutuk believes that these CITL projects have negligible benefits for most of Timor-Leste's people, and do not merit $200 million -- more than the total 2012 expenditure for health, education and police.

Last year Timor-Leste appropriated $45 million for the MDG-Suco program to build 11,855 houses (five in each Aldeia) in 2011, which is to be repeated for five years. When the first year’s pre-fabricated houses was put up for bid in June, the lowest bid was $10,800 per house, more than twice the budgeted $4,000. The Government offered a $100 million contract to Carya Timor-Leste and Jonize Construction to import 9,237 houses. The 2012 budget repeats the unrealistic price estimates. It allocates $55 million for 2012 and $45 million annually for 2013-2015, but still plans to build 11,855 houses every year.

We welcome discussion and information on all aspects of the 2012 State Budget. The first Budget Book describes the motivations and assumptions underlying the budget, and all six books are downloadable from the La'o Hamutuk or Ministry of Finance websites.