Private investment isn’t a panacea

We need investments which benefit Timor-Leste’s people, not only investors.

Since 2015, Timor-Leste has been revising its Private Investment Law as part of a series of reforms designed to improve the economy and comply with ASEAN, WTO and UN standards. The Council of Ministers approved a draft and sent it to Parliament in July 2016. The Parliamentary Committee on Economy and Development recommended not approving the Law before the 2017 State Budget and separate tax legislation were passed; Parliament waited for the budget but not the tax law, and unanimously approved the Private Investment Law in April.

La’o Hamutuk agrees that private investment which creates jobs and sustainable industries is important to help develop Timor-Leste’s economy, generate state revenue and improve our people’s lives. However, investors are not charities -- their objective is to maximize their profits, partly by paying as little to government as possible. Therefore, Timor-Leste’s people and economy will only benefit if investments are properly regulated, and if our laws oblige them to share their profits.

The government web site recently declared that the “New Private Investment Law is favorable for investors.” The Investment Law should favor Timor-Leste’s people first and foremost, and investors should not be given special treatment just because they have money. In this blog, La’o Hamutuk draws attention to aspects of the Law that we feel undermine the public interest, and offers suggestions which can help private investment be a benefit to Timor-Leste rather than a burden.

‘Good’ investment vs ‘bad’ investment

Many people see private investment as essential to achieving economic growth and thus, development. However, while some investments result in increased GDP, the costs and benefits of growth are often unequally distributed. This is especially true in countries which have attracted investment in extractive industries, many of whom have experienced environmental destruction and pollution, increased corruption, armed conflict and human rights abuses over control of the resources, and increased poverty as people lose their land and livelihoods. Politicians and economists promote activities such as mining and logging because they may bring investment and GDP growth; however, after all the minerals are extracted and trees cut down, investors leave with most of the profits, while local communities and states bear the brunt of the costs and the clean-up.

The Timor-Leste Government hopes to attract investment in mining, and has created a national mining company,  while Parliament is discussing a new Mining Law and Minerals Fund. However, La’o Hamutuk believes that it is unwise to promote mining in Timor-Leste, as it comes with many social and environmental risks.  Also, local mining jobs are frequently poorly paid, dangerous and unsustainable, and state revenues are often minimal as a result of tax holidays and the inability (or unwillingness) of weak governments to manage powerful foreign companies.

Instead of promoting extractive industries, Timor-Leste should develop sectors which create decent local employment, generate substantial revenues for the state, and improve local skills and technological capabilities. They should produce socially beneficial goods such as medicine, clothing and other manufactured products for everyday use, to diversify Timor-Leste’s economy and reduce our unsustainable import dependency.

Developing agriculture should be the Government’s main priority, as it employs most Timorese people, provides essential food and can be environmentally sustainable. However, low productivity and systemic institutional and human factors mean that – for now – private investors are unlikely to be interested in anything other than producing cash-crops like coffee or candlenut for export, which won’t improve food sovereignty and fails to reduce import dependency. Therefore, Timor-Leste needs to work harder to improve agricultural productivity and make farming more attractive to people through training, education, scholarships, technology upgrades and improved infrastructure for transport and storage.

Timor-Leste also has the potential to develop other sectors such as food processing, manufacturing, sustainable forestry, livestock and dairy, and eco-tourism. However, passing a new Law will not automatically bring investors – the Government needs to improve health care, education, water supply and rural roads, which will make our people healthier and more productive, as well as making Timor-Leste more attractive to investors promoting long-term, sustainable projects.

The Law offers investors tax holidays

Articles 24(b) and 24(d) of the Law grant automatic exemptions for up to ten years on income, sales, services and import taxes for all investors. However, La’o Hamutuk believes the Law should not offer tax holidays for several reasons, including:

1. Tax holidays alone may not attract investors to Timor-Leste, as there are other important factors which determine investor decisions, including worker skill and education, physical infrastructure and market size; temporarily lower taxes may not outweigh these other challenges.
2. Even if tax holidays attract some investors to Timor-Leste, they may not stay. Investors who come to take advantage of the tax holiday could simply leave when the tax-free period ends and they realize the low quality of ‘local factors’ is making their business unprofitable. Countries with higher-skilled workers and good infrastructure have been able to use tax holidays to their advantage because investors stay for longer periods, and the initial loss of tax revenues is made up for by the long-term benefits from the investments.
3. Tax holidays will affect the Government’s Fiscal Reform plans, and they may undo the gains in domestic revenue that the reforms aim to achieve. Since those Laws are still being drafted, we agree with Parliamentary Committee D that the Investment Law should not have been approved until tax reform legislation has been finalized.

Parliament has already approved the Law, and we encourage the new President of the Republic to review the tax holidays and other problematic provisions in the Law, and to send the Law back to Parliament if he agrees with our critique.

Investors can take Timor-Leste to an international tribunal

Article 38(a) allows foreign investors to sue Timor-Leste at an international tribunal if they disagree with the state, a process known as investor-state dispute settlement (ISDS). A draft of the Law had allowed the Government or foreign investors to resort to Timor-Leste’s domestic courts first. This has been removed, and the Law now says that disputes which cannot be settled within 60 days can be resolved by arbitration under the International Convention for the Settlement of Investment Disputes (ICSID), which Timor-Leste joined in August 2016.

This means that investors who disagree with government actions can bypass Timor-Leste’s domestic courts and bring their case directly to international arbitration, leading to lengthy and expensive court cases. In many countries, investors have sued states for hundreds of millions of dollars in ‘damages’ for regulating activities such as tobacco or mining due to health or environmental concerns, causing some countries to review or end their participation in ISDS mechanisms like ICSID.

Even if the tribunal rules in our favor, the state will have to pay expensive international legal firms to defend the case, further impacting our limited finances. The threat of being sued could also deter Timor-Leste from strengthening economic, environmental or health legislation or policies. Therefore, the capacity of Timor-Leste’s courts needs to be improved so that they can resolve investment disputes. Otherwise, an unaccountable panel of foreign investment lawyers will decide whether Timor-Leste has to pay millions of dollars to overseas companies.

Special investment agreements are open to abuse and corruption

Article 30 of the Law says that the State may negotiate a special investment agreement (SIA) “by defining special conditions for investment projects which, due to their size or nature or their economic, social, environmental or technological impact, may be of great national interest, within the framework of the Strategic Development Plan.” Article 22 allows SIA holders to lease “state property” for undetermined periods, and Article 30 allows “other specific non-fiscal benefits to be negotiated with the investor.”

La’o Hamutuk is concerned that these provisions could be used by politicians to push pet projects which they deem to be “of great national interest” by offering investors even more benefits, in the form of longer tax holidays, free use of ‘state’ land or infrastructure, or exemption from environmental or labor laws, opening a door to potential corruption and political interference. In addition, the articles dealing with SIAs do not indicate whether investors are required to abide by the other provisions in the Private Investment Law, Labor Code or any of Timor-Leste’s other Laws.

Conclusion – invest in sustainable sectors and in our people

La’o Hamutuk believes that Timor-Leste could benefit from private investment if it is directed towards sustainable sectors to create employment for our people, improve human and technological capacity, provide revenues to the state, and protect our natural environment. We should be wary of investors who seek to exploit our natural resources and weak regulatory capacity for their own profit.

Therefore, Private Investment Law should clearly state what favors investors can receive. At the same time, policy makers should identify which sectors should be prioritized for private investment based on the needs of Timor-Leste’s people, not of investors. This will help to create new, socially beneficial and environmentally sustainable industries, while avoiding those that produce quick profits for foreign companies but come with many costs to Timor-Leste’s people.

Meanwhile, we shouldn’t wait for foreign investors to solve all Timor-Leste’s problems – for now, the state has enough resources to improve schools, hospitals and basic infrastructure, all of which are essential for our people’s well-being and encouraging the investors who will contribute the most to our country’s development. If we really want private investment which benefits our people, we have to do this first, otherwise we will end up like so many other countries have – losing our natural resources with little benefit to our people, increased corruption and social conflict, and even less economic development, diversification and sustainability.