Information keeps coming ... Enjoy the holidays!

As we near the end of 2010, La'o Hamutuk has posted several interesting new documents, which we are sharing with our holiday wishes for all citizens and supporters of Timor-Leste.

On 15 December, we asked Parliament not to approve the new Infrastructure Fund in the 2011 budget  without receiving a list of proposed annual expenditures for multi-year capital projects. The next day, the Ministry of Finance provided a list to Parliament, and we scanned and translated it (also Portuguese) and added it to our web pages on the 2011 state budget. Unfortunately, it raises more questions than it answers.


We asked Parliament to delay approving the Infrastructure Fund until they had debated, amended and enacted the National Strategic Development Plan. Although the plan itself is still under wraps (we published a leaked draft last May), we recently obtained the $3 million contract with PT DSI Makmur Sejahtera for "Strategic Development Plan Consulting Services" which the PM signed in September 2009 and paid last August (invoice). We added this contract to our web page on the Plan, as well as the contract's Terms of Reference and job descriptions for Key Personnel.

Finally, our recent exposure of the huge delays and cost overruns of the heavy oil power plants and national electricity grid provoked public interest and official dishonesty, as described on our just-updated web page.  We just posted the next monthly report from the supervising consultant. It shows that the project fell further behind in October, when only 11 towers were erected. At that rate, it will take until 2027 to finish. The consultant is alarmed by poor quality work and slow performance by Chinese Nuclear Industry Company No 22 (CNI22).  Although the Government ordered CNI22 to subcontract the construction of the Hera and Betano power plants to Puri Akraya Engineering (the contract was signed on 15 September, increasing the project cost by $250 million), Puri Akraya hadn't started work by the end of October, while they waited for advance payment.

The revised payment schedule obliges Timor-Leste to pay CNI22 and PAE $380 million in 2011 alone, a figure which will increase more when the transmission lines are subcontracted and "additional works not originally foreseen in the contract such as the Jetty to unload and pump the Heavy Fuel Oil to the tanks and all administrative buildings" are included.  However, the budget the Government submitted last month appropriates only $166 million during 2011. Nevertheless, the Government paid CNI22 on schedule throughout 2010, even as the work lags further and further behind.

Boas Festa Natal no Haksolok Tinan Foun!

LH Submission to Finance Comm. on 2011 State Budget

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).

Heavy Oil project delayed, over budget, unsafe and ill-managed

Since 2008, Timor-Leste’s Government has pursued the dream of cheap, reliable electricity for the entire nation. The construction of heavy oil-fueled generation stations and a nation-wide high-voltage transmission lines is by far the most expensive project Timor-Leste has ever undertaken. The Government promised to provide 24-hour electricity in all district capitals by the end of 2009, and now hopes to achieve this by the end of 2011. But it is not happening.

From the beginning, this project has been characterized by bad planning, dubious procurement procedures, incompetent contractors, illegal practices, poor oversight, and lack of transparency and accountability. La’o Hamutuk has written about this many times, and we are sad to report that reality is even worse than we had feared.

La'o Hamutuk has obtained the confidential September 2010 Monthly Progress Report from the Italian joint venture Electroconsult and Bonifica, SpA” (EB) which the Government hired in July 2009 to supervise Chinese Nuclear Industry Company No. 22 (CNI22). The Government had contracted CNI22 six months earlier, but they were implementing the project without any clear specifications, valid tender, environmental impact analysis or public consultation. In response to criticism that the government was not managing the project effectively, Timor-Leste began paying EB $2 million per year as a consultant to oversee the project.

The report describes an escalating disaster in performance, implementation, environment and safety, and reveals that the Government has already re-assigned responsibility for the power stations to another company, nearly doubling the cost of the entire project. Here are a few of the most important issues:

The project is way behind schedule, and EB is very frustrated with the slowness and unresponsiveness of CNI22. EB says it “does not spare any effort” to press the Chinese company to speed up progress which they say is “below the satisfactory level required” to meet the 31 December 2011 completion date.

The power plants have been removed from CNI22’s responsibility, at great expense. During September, the only work done on the Hera generating station was applying asphalt on the area where oil tanks will be place. Virtually nothing has been done at Betano, although the project timeline says work was to have begun in June 2010.

The Government decided to “cancel" the Hera and Betano power plants "from CNI22’s contract.” Construction of these generating stations was re-contracted to “the Indonesian company Puri Akraya Engineering Limited” on 15 September 2010. La’o Hamutuk’s internet research on “Puri Akraya” turned up only that the name was newly registered with the Hong Kong Companies Registry on 4 August 2010. Five weeks later, Timor-Leste awarded them this huge contract to “do the supply, installation, commissioning and operation of 15 Generating Sets manufactured by Wartsila of Finland.”

Reassigning the contract for the generating stations, together with design changes, quadruples their cost from $91 million to $353 million. EB’s estimate of total project cost is now $629 million, nearly double the original $367 million CNI22 price. If schedule slippages continue and most of the transmission lines are also subcontracted, the costs will be far higher.

Construction of the national electric grid is going extremely slowly, with only 1.2% of the towers having been erected so far, nearly all between Hera and Dili. EB notes “As discussed many time, the Contractor must, in every single calendar day, complete a minimum of” four excavations, four concrete foundations, and four tower erections “including tightening of bolts.” Most of the routes have not even been surveyed, and land disputes have caused a number of problems.
.

Segment	Kilometers	Towers needed	Towers erected	Concrete foundations poured	Earth excavated	Status
Hera-Dili	10	30	23	27	28	Construction underway
Dili-Liquica	37	87	0	2	24	Excavation underway
Hera-Manututo	41	92	7	40	51	Construction underway
Manatuto-Baucau	50	131	0	24	46	Foundations underway
Baucau-Viqueque	64	96	0	0	0	Survey in process
Baucau-Lospalos	53	118	0	0	0	Survey being finished
Liquica-Maliana	63	112	0	0	0	Survey done, design in process
Maliana-Suai	n.a.	n.a.	0	0	0	Field survey started
Suai-Cassa-Betano	n.a.	n.a.	0	0	0	No work done
Betano-Viqueque	n.a.	n.a.	0	0	0	Survey done, design in process
Viqueque-Lospalos	n.a.	n.a.	0	0	0	Starting field survey
Total	630	2,400	30 (1%)	103 (4%)	149 (6%)

The Government directed CNI22 to find other companies to build the most problematic parts of the national grid. CNI22 hoped to sign a contract in early October with the DCP company from Surabaya for the Liquica-Maliana-Suai segment. CNI22 was also talking with PT Karya Logam Agung from Jakarta about Suai-Cassa-Betano-Viqueque, and the Government has asked them to find a third subcontractor for Viqueque-Lospalos.

Only one substation is being worked on. Although the foundation for the Dili substation is 80% complete, virtually no construction has been done on the substations planned for Manatuto, Baucau, Lospalos, Liquica, Maliana, Suai, Cassa and Viqueque.

Hardly any Timorese workers are employed. In January 2009, the Prime Minister told Parliament that “this project will in itself create over 20,000 jobs already in 2009,” but by 28 May 2010, CNI22 had hired only 155 Timorese workers. The Government is “very unhappy” about this and has threatened to stop issuing visas to Chinese workers and to require CNI22 to employ four Timorese workers for every Chinese. CNI22 has asked EDTL to recruit local workers to be trained and employed by CNI22.

The company is not taking adequate measures to safeguard health, safety and environment, endangering both project workers and the local communities. EB observes that “the quality of workmanship is deteriorating” when EB is not on site, and that CNI22 does “no cohesive planning,” “safety practices are far below regulations” and acts with “environmental negligence.” EB’s September report lists 14 serious “issues of concern” and eight more “problems/issues,” but their recommendations to CNI22 are rarely implemented. Nothing is said about Government awareness or involvement in trying to improve the situation.

In March 2009, during the tender process for the consultancy that EB later received, La’o Hamutuk asked, “What authority will the Consultant have to compel compliance?” We warned that “the Government will be more effective in securing the Contractor’s commitment [to implement mitigation measures] than a Consultant will be.”

Legally required environmental clearances, right-of-way access permissions, environmental baseline survey and tree-cutting permits have not been done. CNI22 has not prepared a single monthly environmental report, although they have been required to do so since January 2010. Timorese workers receive less safety equipment than Chinese, and Chinese workers live in unsanitary, unsafe conditions. CNI22’s Health/Safety/Environment and Site Emergency plans “lack essential operational details” and need to be revised. The company has no formal process for complaints, has not replanted cleared areas, has no Solid Waste Management Plan, has not established buffer zones between residential and project areas, and has not complied with requirements for silt containment, oil and grease traps, sanitation facilities or waste treatment.

On 18 November, the Prime Minister misled Radio Timor-Leste listeners [listen to unedited Tetum] by telling them that La'o Hamutuk's information that the Government had cancelled CNI22's contract was incorrect, and then talked about transmission towers. The journalist talked about the purchase of Finnish generators weighing 250 tons (which should have been 250 megawatts generating capacity), but neither he nor the Prime Minister mentioned that the Government had taken the generating station contract away from CNI22 and assigned it to Puri Akraya Engineering two months earlier.

La’o Hamutuk is distressed that our dire predictions are being fulfilled, especially while the electricity situation in Dili and across the country becomes increasingly frustrating, and that public officials are concealing the extent of the project’s problems. Once again, we reiterate our call for transparent and accountable procedures consistent with law, public information, effective management and oversight, and well-considered planning and budgeting. When such practices are not followed, Timor-Leste not only wastes money and time, but loses opportunities to create infrastructure and develop our economy to improve our people’s lives.

Update 1: On 21 December, we posted the EB report for October, and wrote a new blog entry with some of the highlights.  Our web page includes media reactions and disinformation which emerged after this original posting, as well as a summary of project costs and the inconsistency between contractual obligations ($380 million in 2011) and the proposed 2011 State Budget ($166 million). 

Update 2: In January, Parliament increased the appropriation for this project in the 2011 State Budget to $447 million, raising questions about the sustainability of Timor-Leste's rapidly escalating expenditures. An order was placed with the Finnish company Wartsila for generators, and EB's November report highlighted scheduling and environmental problems. La'o Hamutuk will keep updating our web page to track ongoing developments.

Update 3: March 2011 - Heavy Oil project collapsing under its own weight

Update 4: June 2011 - Audit confirms problems with electricity project

Production Sharing Contracts now on-line

Oil and gas exploration activities in the Joint Petroleum Development Area (JPDA) and in Timor-Leste Exclusive Area (TLEA) are conducted under Production Sharing Contracts (PSCs) between the companies and the National Petroleum Authority or its predecessor, the TSDA. Under the 2005 Petroleum Act and the Interim Petroleum Mining Code, PSCs are public documents.

PSCs signed in 2006 were posted to government websites which have been allowed to die. Since these very important documents are no longer on the internet, La'o Hamutuk has posted them to our website. We encourage the government to implement their legal obligation for transparency.

Making the oil companies pay what they owe

Timor-Leste is the most petroleum-export-dependent country in the world. Oil money pays for about 90% of everything the Government does. But the oil companies cheat – they pay as little as they can get away with. After six years, Timor-Leste is beginning to scrutinize their tax returns, and has discovered what should have been expected – that companies have not paid all that they owe.  We have already collected tens of millions in back taxes and penalties from ConocoPhillips and other companies, and further investigation is likely to reap much more.

La’o Hamutuk has posted an article to our website explaining the tax system and some of the difficulties and irregularities Timor-Leste has encountered, as well as some recent successes. This blog entry is a greatly abridged version of that 4-page article.

When taxes are calculated, the oil companies are entitled to deduct the expenses of operating the project through a process called cost recovery. This means that Timor-Leste effectively reimburses the company for expenses related to the project. There’s a lot of room for cheating. 

In November 2010, after several months of investigation, Timor-Leste sent a $32.4 million bill to ConocoPhillips (USA) and its joint venture (JV) partners Santos (Australia) and Inpex (Japan) for a cost the companies wrongly recovered from the Bayu-Undan project in 2005.

The illegitimate cost was for an exploratory well named Firebird (sometimes called Phoenix, the red circle on the map). In 2003 ConocoPhillips reassessed old data and concluded that there could be a valuable natural gas field west of and under the Bayu-Undan field.

Under their contracts, oil companies are required to give back parts of the contract area that they no longer want to explore, and they were supposed to relinquish the  pink area in 2004. The companies asked the Timor Sea Designated Authority (TSDA) regulator for time to drill one more well at Firebird, which they thought might contain 1.4 tcf of gas, about ¼ as much as Bayu-Undan.

The TSDA granted the extension in February 2004, but told the companies not to charge Firebird costs against Bayu-Undan revenues. They would only be able to recover these exploration costs if Firebird became a commercial project.

The Firebird well drilled at the end of 2005 found only small amounts of gas, and the well was plugged and abandoned. The companies relinquished the area.

Contrary to their agreement with TSDA, the companies charged the $32 million cost of the well against Bayu-Undan revenues, reducing their tax payment by $9.7 million.

Timor-Leste reopened this issue this year. On 24 November 2010, Timor-Leste ordered ConocoPhillips, Inpex and Santos to pay $32.4 million, including $9.7 million in back taxes, as well as a 100% penalty for gross negligence and 1% per month interest and penalties for late payment.

In early December, Inpex paid $7.1 million, Santos paid $5.1 million, and ConocoPhillips has agreed to pay $19.5 million (although the companies could still appeal within the Ministry of Finance).

Oil companies often buy and sell their ownership in different projects. If they get more for selling their shares than they spent on developing them, they have to pay capital gains tax, which is 30% in Timor-Leste. Although several such sales have occurred in the JPDA, the companies have not paid this tax. Current investigations are likely to produce payments for overdue taxes from Woodside, Santos and other companies, which is discussed in more detail on our website.

In December 2010, Timor-Leste’s National Directorate of Petroleum Revenues will begin to audit Bayu-Undan tax returns since 2005, the first time Timor-Leste has audited petroleum tax returns. External audits have turned up nothing, which is not surprising since the auditor has been paid by the companies. Timor-Leste has recently obliged the companies to keep copies of records in Timor-Leste, which will make audits possible.

Timor-Leste is the owner of the oil and gas in the ground, and it writes the contracts and the laws. For our people’s sake, we are glad that they are finally being enforced more effectively.

Submisaun husi LH kona-ba OJE 2011 ba Komisaun D, Parlamentu Nasional

Iha loron 26 Novembru, La'o Hamutuk hetan konvite atu partisipa iha audiensia Komisaun D (Agrikultura, Floresta, Rekursu Naturais no Ambiente) Parlamentu Nasional, atu fahe hanoin kona-ba orsamentu. Tuir mai, ami hakerek submisaun ida ba Komisaun D (mos Ingles).

Ami nia submisaun rekomenda katak:

1. Mantein nafatin gastus iha nivel sustentavel, bazeia ba projeksaun presu mina-rai iha futuru ne’ebe prudente. Proposta orsamentu ne’ebe sai maka’as ba 2011 no 2012 tenke limita, no atu foti osan husi Fundu Petroleu iha tinan oin mai labele liu Rendimentu Sustentavel Estimadu.
2. Halo klaru katak gastus tenke iha koneksaun ho rendimentu, no rendimentu mina-rai ne’ebe sae iha relasaun ho rendimentu estadu ne’e sei akontese temporariu deit.
3. Fo fundus adisional ba Ministeriu Agrikultura no Peskas no enkoraza nia atu implementa politika ida ne’ebe bele hatan ba nesidade agrikultor lokal.
4. Insiste ho klaru kona-ba kustu informasaun no rendimentu no projeksaun kampu servisu ba siklu projeitu tomak iha projeitu Tasi Mane, hodi nune’e Parlamentu bele deside karik projeitu sira ne’e razoavel atu halo investimentu rekursu estadu nian.
5. Evalua katak gastu ho montante boot husi osan povo nian atu prepara planta LNG iha Beacu sei iha valor no vantazem, tamba kompania ho poder atu halo desizaun lakohi atu konsidera opsaun ida ne’e.
6. Prioritize dezenvolvimentu ne’ebe maka’as ba iha seitor ekonomia naun-petroleu, ba dala uluk ba agrikultura, atu troka industria mina no rendimentu petroleu temporariu.
7. Rejeita alokasaun orsamentu ba kompania mina-rai nasional PETRONATIL to kompania ne’e estabelese husi lei Parlamentar ida ho salvaguarda ida ne’ebe adekuadu, iha akuntabilidade no transparansia.
8. Rejeita alokasaun orsamentu ba Institutu Petroleu no Geologia nudar institutu autonomu, maibe alokasaun nafatin iha strutura SERN.
9. Rejeita atu estabelese Fundu Infraestrutura to’o kustu annual nian kompleta no deitalhadu. Kampu servisu, informasaun orariu ba kada projeitu, no to’o Parlamentu aprova ona Planu Estratejiku Dezenvolvimentu Nasional, ho Lei no orgaun ne’ebe nesesariu.
10. Insiste katak orsamentu tenke fo prioridade ba edukasaun sidadaun Timor-Leste iha Timor laran duke haruka funsionariu publiku balun ba eskola iha rai liur ne’ebe karun teb-tebes.
11. Permite atu aumenta funsionariu sira ba ministeriu xave sira hanesan saude, edukasaun no agrikultura, no mos atu jere no taumatan ba infraestrutura foun ne’ebe foin haluan ba. 

Bele hetan informasaun tan kona-ba proposta Orsamentu Estadu 2011, inklui dokumentu sira, relatoriu ezekusaun no komentariu ruma iha http://www.laohamutuk.org/econ/OGE11/10OJE2011Te.htm.

LH Submission on 2011 Budget to Committee D

On 26 November, La'o Hamutuk was invited by Timor-Leste's National Parliament Committee D (Agriculture, Forests, Natural Resources and Environment) to share perspectives about the proposed General State Budget for 2011. After the hearing, we prepared a 10-page submission for the Committee (also Tetum).

Our submission made these recommendations

1. Keep spending within sustainable levels, based on prudent projections of future oil prices. The proposed massive budget increases for 2011 and 2012 should be limited, and withdrawals from the Petroleum Fund in future years should not exceed the Estimated Sustainable Income.
2. Emphasize that expenditures are connected with revenues, and that the current surge in petroleum-related income is only temporary.
3. Provide additional funding to the Ministry of Agriculture and Fisheries and encourage it to implement policies which address the needs of local farmers.
4. Insist on clear cost information and revenue and employment projections for the full project cycle of the Tasi Mane projects, so that Parliament can decide if they are a reasonable investment of state resources.
5. Evaluate whether spending large amounts of public funds to prepare for a possible Beaçu LNG plant is worthwhile, since the company with decision-making power refuses to consider that option.
6. Prioritize development of a strong non-oil economy, primarily based on agriculture, to replace transient oil revenues and industry.
7. Reject funding for the PETRONATIL national oil company until it has been established by Parliamentary law with adequate safeguards, accountability and transparency.
8. Reject funding for the Institute of Petroleum and Geology (IPG) as an autonomous institute, but provide for it within the structure of SERN.
9. 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 organs and laws.
10. Insist that the budget give priority to education of Timor-Leste citizens in Timor-Leste, rather than sending a few public servants for expensive schooling overseas.
11. Allow hiring of additional personnel for key ministries like health, education and agriculture, as well as to manage and maintain newly expanded infrastructure. 

More information on the budget, including budget documents, execution reports and analysis, is available at http://www.laohamutuk.org/econ/OGE11/10OJE2011.htm.

TL falls in MCC annual ratings

Every year, the U.S. Government's Millennium Challenge Corporation evaluates countries for their eligibility to receive large grants under the MCC program. Countries which fall below certain levels can receive "Threshold" funding to help bring their scores up, and Timor-Leste entered this category in 2007, after its scores fell from previous years. Click here for more information about MCC and Timor-Leste.

MCC just released its scores for 2011. Timor-Leste did worse on 11 criteria compared with the previous year, and improved on 4, with two unchanged. Timor-Leste fell from 21% to 10% in the key "Control of Corruption" indicator, continuing a downward trend since 2006.

MCC uses a pass/fail (green/red) system. To pass, Timor-Leste must be better than at least half of the low-moderate income countries rated. To become fully compact-eligible, (as we were in 2005-6),a country must be "green" for Corruption and the majority of scores on each line of the chart at right. Timor-Leste needs to pass Corruption, and at least two additional indicators in the "Investing in People" category, and one more in the "Economic Freedom" category to return to Compact Eligibility, which will be re-evaluated in a year or two, after the threshold program is implemented.