07 October 2011

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.


  1. This is some good analysis. However, there could be a lot of missing information based on off-budget donor funding.

    The total amount spent in the country be development partners may be on the decline. So, there may not be the significant increases in net expenditures as shown in the graph as the government takes on more of the spending burden. Of course, the donor off-budget funds may have remained the same, so the analysis holds true.

    It's not clear whether you are using budget plan data or budget execution data. The government has not fully executed the budget in the past.

    The reduction in education and health spending should be of concern. But, is there donor off-budget spending in these sectors? Perhaps donors have reduced the security spending and moving to these sectors.

  2. Thanks, Doug. There's much more information on our web site than we put in this blog entry. Regarding development partner funding (Budget Book 5), donors have committed $188.9 million in ODA for 2012, which is less than 10% of the combined sources budget of $1,952 million. This has declined somewhat over the past few years (it's $84 million less than for 2011), but nowhere near as much as the expenditures of state funds has increased ($457 million since last year).

    As the graph at the top of the blog explains, we use budget execution data for years through 2010, and planned figures for 2011 and 2012, as they haven't been executed yet. The just-published RDTL report to the Fragile States conference next month says "Significant improvements have been made in budget execution in recent years. In 2006/2007 the Government had a budget execution rate of 48.9% on a budget of USD 328.6 million. In 2008 the rate rose to 79%, an increase of 30%. In 2009, results again improved in line with administrative reforms. The budget execution rate across government as of January 29, 2010 was 89%" (the more up-to-date Budget documents say 91% for 2010). If this trend continues, there will not be much difference between budgeted and executed figures in 2011 and 2012, so the distinction is less important.

    Regarding donor spending on health and education, Budget Book 5 indicates that donors REDUCE their support for these sectors between 2011 and 2012: Education fell from $43.2 million to $29.6 million, while health dropped from $21.0 million to $16.8 million. Part of this decrease is probably because some donors have not reported their complete 2012 plans yet. Also, Cuba's significant and essential support for health is not included in the government's reporting of donor spending.

    La'o Hamutuk encourages people interested in the budget to read the documents, rather than speculate about what they might contain.

    -- Charlie Scheiner, La'o Hamutuk

  3. Keep up the good work in analyzing available information. Visualization is first class and presents your point of view effectively. The public policy discussion from your organization is valuable, in my opinion. It shows the positive effects of civil society using data and analysis to influence policy. In particular, your analysis about results/outcomes is the kind of work that we rarely see in developed countries.

    Nevertheless, there are some areas from the blog entry and your response that needs more analysis.

    The budget documents do not answer the question that I asked (your last line). I'm not speculating on what the budget document might contain because off-budget funding is not part of the budget. Off-budget funding can skew any analysis of budget information. There is all sorts of speculation, as you know, about the funds spent off-budget in Timor-Leste. Your answer is as speculative as my question. Let's hope that IATI and other elements of aid transparency, like the Aid Transparency Portal (developed by Development Gateway) gives us better information than we have now.

    Maybe I'm reading more into the comments than I should. I'm concerned about the notion that it is somehow bad fiscal discipline that governments spend close to 100% of their budget. Yet: this is considered a good practice as demonstrated by PEFA assessment criteria.

    1. Hi, Doug -

      Thanks for your response, although I'm not sure how useful it is to continue to discuss a preliminary analysis of the 2012 State Budget we wrote eight months ago. We subsequently wrote a detailed submission to Parliament; the budget has been amended and enacted; and the year it applies to is half over, with $534 million having been spent to date.

      We haven't looked into off-budget funding; in any event it will be much smaller than the GSB, as donor support is less than 15% of the combined sources budget in 2012. I'm not sure what speculation you're referring to. If you mean money which was allocated in the budget for one thing being spent on something else, this certainly does happen, but is beyond the scope of this blog posting. We were writing about the Government's budget that had been proposed to Parliament the week before, not about the entire state finances process.

      Regarding your last paragraph, we think budget execution is an in appropriate measure of state performance, whether high or low. If something stupid was put into the budget, it shouldn't be executed. Nor should money be wasted or stolen in an effort to achieve a 100% execution score. Service delivery and results are much more useful measures.

      In any event, our web page on the 2012 state budget now includes much more information, including links to the full-year 2011 and first-quarter 2012 budget execution reports published by the Ministry of Finance. It also has updated versions of the graphs that prompted the original discussion, based on executed rather than budgeted numbers for 2011. Check it out at http://www.laohamutuk.org/econ/OGE12/10OJE2012En.htm.

      As you may be aware, the public window (Budget Transparency Portal) into Freebalance's system was out of service for months (it appears to be fixed today, but I haven't yet explored it in depth), and the Procurement Portal is dead in the water. Do you know what the problem is? See http://laohamutuk.blogspot.com/2012/05/lh-urges-more-effective-tl-transparency.html.

      Keep in touch,