20 April 2016

Private investment is a road, not a destination

Many in Timor-Leste see private investment – people or companies putting their money into projects with the intention of earning a return in the future -- as the key to Timor-Leste’s future economic development. They expect Foreign Direct Investment (FDI), where the money comes from other countries, to accelerate economic development in Timor-Leste, resulting in jobs and other benefits for our people. Unfortunately, this does not happen automatically, but needs careful planning, guidance and regulation.

Because Timor-Leste has not yet attracted many significant foreign investors, the Ministry of State Coordinating Economic Affairs (MECAE) is revising Timor-Leste’s Private Investment Policy and Law (replacing the 2011 law currently in effect), citing the need to comply with ASEAN and United Nations Convention on Trade and Development (UNCTAD) guidelines. La’o Hamutuk wrote a submission to MECAE on the draft Private Investment Law and another submission on the summary of the draft Private Investment Policy – and here we summarize some of our main points.

Private investment is a means to an end, not an end in itself, and the policy and law should describe how private investment can promote human development in Timor-Leste, rather than assuming that this will happen automatically. Conversely, the policy should analyze potential negative impacts from private investment which Timor-Leste could avoid. In many developing countries, foreign investments – particularly in extractive industries, palm oil plantations and logging – damage local livelihoods, destroy the environment, take land away from citizens and from food production, increase corruption and deplete natural resources.

La’o Hamutuk is disappointed that the draft investment policy only mentions export-oriented agriculture as having potential for investment, while ignoring the wide variety of food crops grown by most people. We should prioritize investment in organic agriculture and food processing for domestic consumption which would improve productivity, employment, incomes and nutrition. Manufacturing and tourism are other key sectors outlined in the Strategic Development Plan which should be invested in to diversify Timor-Leste’s economy and reduce dependency on imports.

Timor-Leste does not need to adopt ASEAN’s Comprehensive Investment Agreement (ACIA) before we join ASEAN; instead, we should keep space to negotiate exceptions or delays to ASEAN investment and importation rules, as most members do. (Current regrets over signing CMATS in 2006, when our leaders agreed to delay maritime boundaries for fifty years, is a lesson in the importance of not giving up bargaining power.) Also, if Timor-Leste follows ACIA’s mandate and gives investors from ASEAN ‘national treatment’, Timorese investors would have to compete with large companies from Singapore, Malaysia or Indonesia, which could effectively exclude local businesses.

MECAE wants to enact these rules by this September; we think this is too rushed. Other legislation, such as tax reform and land laws should come first, because they are fundamental both to people’s lives and to economic development, including investment. This draft investment policy needs significant improvement, which will take deeper discussion and thought than the current schedule envisions.

La’o Hamutuk has doubts about some assumptions about ‘free enterprise’ and ‘market principles’ which appear to underlie this law and policy. Although private investment is one aspect of economic development, an “open economic model, based on market principles and led by the private sector”  is not necessarily the most effective way to improve the lives of our people. Private investment is just one avenue among many -- instead of regurgitating free market dogma, our laws and policies should consider all viable alternatives that can foster economic development.

Both the policy and law envision special favors to attract investors and expedite investment applications. However, improved bureaucratic efficiency and rule of law would benefit all of Timor-Leste’s citizens, as well as increasing investor confidence. Everyone has the right to fair and equal treatment -- giving privileges to investors just because they have money undermines this principle and opens a door to corruption.

Finally, we recommend that policy makers evaluate the actual factors that have deterred people and companies from investing in Timor-Leste. Low-hanging fruit like slashing business taxes (2008) and simplifying business registration (2013) were unsuccessful in attracting investors. We believe Timor-Leste needs to confront more challenging obstacles – human resources, land titles, contract enforcement, and reliable, sustainable infrastructure. Overcoming these problems will not only attract investment, but will also improve all citizens’ lives. If we don't do this and simply make special rules to bypass broken or inefficient processes, less scrupulous investors who seek to exploit our resources and limited experience may come, while legitimate investors will not want to do business in an environment of patronage and favoritism.

Private investment policy can bring benefits for Timor-Leste’s people, but if managed poorly it also can create damage and increase inequality. La’o Hamutuk appreciates MECAE’s willingness to take this issue to public consultation, and we encourage citizens and civil society organizations to engage in the process as the Private Investment Law moves through the Council of Ministers, Parliament and the Presidency.

La'o Hamutuk's submissions on the Investment Policy and the Private Investment Law  discussed other topics, including:
  • FDI in developing countries: advantages and disadvantages
  • How can Timor-Leste benefit from foreign direct investment?
  • Constitutional obligations and international treaties
  • Investors should follow the same laws as everyone else.
  • Special arrangements and dispute settlement mechanisms
  • Investment policy neglects informal workers
  • The Investment Law should not provide pathways to corruption.

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