La'o Hamutuk: Comments to the Development Partners Meeting

For the first time since 2012, no Civil Society speakers were included
in the agenda of the annual donors conference. Therefore, La'o Hamutuk
distributed a written commentary to participants, which follows below.
You can download this submission (including many graphics) as a PDF
from
http://www.laohamutuk.org/econ/16TLDPM/LHCommentTLDPM4Jul2016en.pdf in
English or
http://www.laohamutuk.org/econ/16TLDPM/LHCommentTLDPM4Jul2016te.pdf in
Tetum.

For other documents from the 2016 Timor-Leste and Development Partners
Meeting, see http://www.laohamutuk.org/econ/16TLDPM/16TLDPMindex.htm.
If you have a relevant document which we have not yet included, please
send it to charlie@laohamutuk.org.


Comments from La'o Hamutuk to the 2016 Timor-Leste and Development
Partners Meeting 4 July 2016

La'o Hamutuk is a Timor-Leste civil society organization which has
monitored and analyzed the nation's development process for a decade
and half. We undertake this work to promote development which is
sustainable, equitable and adequate for all of Timor-Leste's people.

La'o Hamutuk, the NGO Forum and other Timorese CSOs have participated
in Timor-Leste Development Partners Meetings since 2001. For the last
three years, we have been invited to speak on the Economic Strategic
Sector. We regret that no presentations or observations from civil
society are included in the agenda for this year's meeting.

Therefore, through this comment, we would like to continue to share
our thoughts with you as a perspective which may help you support our
government to engage in development which benefits our entire
population.

Timor-Leste's state budget and economy are not yet sustainable.

Since before Timor-Leste restored its independence, our economy and
public finances have been dominated by contributions from development
partners and revenues from non-renewable oil resources, rather than
domestic income from non-oil economic activities. Timor-Leste
established its Petroleum Fund ten years ago, and since 2007 oil and
gas revenues have financed nearly all economic and state
activities. During the last ten years, donors have steadily reduced
their support for Timor-Leste, and in 2016 donors will contribute less
than 10% of the Combined Sources Budget.

In 2016, 82% of the State Budget will come from the Petroleum Fund,
but only a small amount from domestic revenues. Furthermore, 61% of
Timor-Leste's 2014 Gross Domestic Product (GDP) was petroleum sector
activities. This figure has fallen from the peak of 76% in 2012
because petroleum GDP has dropped by half since then, although the
non-oil economy only grew 9% from 2012 to 2014.

The just-published National Accounts 2000-2014 report shows that
Timor-Leste's total GDP in 2014 was 28% less than in 2013. This is
because of falling oil and gas production, exacerbated by the collapse
of global oil prices in 2014. Our reserves are almost used up. During
the first five months of 2016, production averaged 4.2 million barrels
per month, down from 6.2 million barrels/month extracted during
2012. Today, only about 6% of our producing reserves remain to be
extracted. All of it is in Bayu-Undan which has only five years left;
Kitan was exhausted and closed last year.

The above figures show that Timor-Leste's economy is still on an
unsustainable path. Development of the Greater Sunrise field is
stalled by the maritime boundary dispute between Timor-Leste and
Australia and by disagreements with the companies about the best place
to liquefy the natural gas. Therefore, when Bayu-Undan runs dry in
2021, our economy and state activities will have to rely on the
Petroleum Fund, whose success depends on the global stock market and
state spending policies. At the end of May 2016 the balance in this
Fund was $16.6 billion, the same as in June 2014. The Fund reached its
peak of $17.1 billion a year ago, and we are drawing down our savings
to pay for state activities.

In the 2016 State Budget, the Government continues to violate the
sustainability rule in the Petroleum Fund Law by spending more than
the Estimated Sustainable Income (ESI). However, our Government says
that this is to continue the infrastructure development strategy which
will promote economic growth and improve people's living conditions.

In the 2016 State Budget, ESI is $545 million, but we regret to say
that Government plans to take $1.28 billion from the Petroleum Fund.
This amount is more than 7% of Timor-Leste's total petroleum wealth,
the highest percentage in the history of the Fund.

Unfortunately, the largest part of the 2016 Budget will be spend on
infrastructure projects with dubious return, which will primarily
benefit foreign companies, rather than Timor-Leste's people, betraying
the principle that the Petroleum Fund is intended to benefit both
current and future generations.

Since 2015, Timor-Leste's Government has discussed achieving the
2015-2030 Sustainable Development Goals (SDGs), an objective shared by
development partners. La'o Hamutuk suggests that these goals can only
be met by adopting more sustainable policies to diversify
Timor-Leste's economy by investing in agriculture, fishing, tourism,
light industry and other sources of non-petroleum economy which can
replace oil revenues and help the country develop a sustainable
economy.

We believe that Timor-Leste cannot achieve sustainable development if
our fiscal policies do not also follow a sustainable path. Development
Partners can help by encouraging Government to take this approach by
providing advisors on sustainable economic management, not just advice
on politicians' designs which will deepen our petroleum dependency or
spend money carelessly on programs which benefit only a select few,
rather than the greater population.
 
About five years after oil and gas income ends in 2021, Timor-Leste
may have spent all the money we have saved in our Petroleum
Fund. Unless policies have changed drastically, Government will have
to cut the state budget by about 90%.  With annual spending of less
than $300 million (2016 dollars), how will we provide essential
services for 1.4 million citizens?

We must invest in our people to eliminate poverty.

In Timor-Leste, more than half of the population lives in extreme
poverty, and the number continues to increase.  The biggest cause of
poverty in Timor-Leste is the failure to invest in the rural majority,
most of whom live by subsistence agriculture.  Still today, about
11,200 children under five die every year from preventable causes – yet
we neglect health care, public health education, water, sanitation and
nutrition.

If the Government doesn't change its policies and invest in our own
people, the level of poverty will escalate. This year, nearly 30,000
young people will reach working age, but work opportunities are very
limited, and this number will swell further when babies born after
2002 reach working age in three or four years, after Bayu-Undan
revenue ends.

We think that the Government and development partners must invest in
creating large numbers of sustainable jobs, not just temporary work
which depends on government projects or short-term spending.

We encourage you to support creating small industries which produce
for Timor-Leste's people's daily needs. Such industries can source
materials from our farmers and fisherpeople to help keep our money
circulating in rural areas, avoiding growing inequality as money flows
to the cities.

Another way to reduce poverty is to fix our social protection system,
making it more sustainable and balanced for everyone. Today, the
Government allocates a lot of money to veterans, widows, politicians'
pensions and subsidies for vulnerable people. Unfortunately, this
social protection system doesn't yet promote principles of economic
and social justice, and it is not sustainable because it depends on
the state budget. The political elite and their families get much more
luxurious social protection than ordinary people receive.

We suggest that more equitable and sustainable social protection would
be to continue free health care at hospitals and clinics throughout
Timor-Leste, which should be open 24 hours, fully equipped with
equipment and medicines, and staffed with enough skilled, effective
health professionals.

In addition, the education system must be improved through building
schools with facilities such as water, sanitation, laboratories,
dedicated teachers and enough hours of learning. Today, many children,
especially from poor families in rural areas, have inadequate access
to education because of shortages in school facilities, books and
teachers, while the number of hours of instruction continues to
decline. We are heartened by the new primary school curriculum, and
hope that the Government and development partners will ensure that it
is widely and effectively implemented.

Therefore, we encourage Development Partners to support the
development of education, health and agriculture, as well as creating
small industries, to reduce social inequality and strengthen
Timor-Leste's economy for the long term.

Timor-Leste has to transform our consumption.

Timor-Leste continues to depend on imported things. In 2014, our
non-oil good and services trade deficit totaled $2,080 million. In
2015, we had a $562 million deficit in goods alone, and our non-oil
exports were only $16 million, of which 95% was coffee.

Import dependency makes Timor-Leste poorer, because a large part of
our money doesn't circulate in our own economy, but flies overseas to
the countries we import from. Although most Timorese people's
livelihoods are in agriculture, we continue to import rice and other
foodstuffs. In 2015, we spent nearly $100 million to import food,
including $26 million worth of rice and other cereals and $30 million
worth of beverages.

Although many factors influence Timor-Leste to import food, reducing
domestic agricultural production, the Government does not motivate
farmers to produce, does not prioritize agriculture, and reallocates
arable land to non-agricultural mega-projects. Furthermore, many
consumers do not prioritize local products in their diets and buying
patterns, preferring imported processed food which is usually less
nutritious than local products. Timor-Leste's economic nationalism has
not kept pace with our desire for political sovereignty.

We suggest that imports must be decreased to develop our own
industries to produce basic necessities, and we encourage the state,
private sector, and development partners to invest much more in
agricultural production and processing. We believe that the
agriculture sector is essential for sustainable economic
development. Unfortunately, some development partners' agricultural
projects have undermined these development principles by promoting
non-organic seeds, fertilizers and pesticides.

Therefore, La'o Hamutuk recommends that both development partners and
government encourage sustainable agriculture to produce organic
products, implement agro-ecological practices, promote organic inputs,
and build a labor-intensive agriculture sector. This can reduce
unemployment by providing a beneficial work environment for
small-scale producers, while ensuring that small producers can access
services such as productive land, water, local seeds and other basic
materials. We also support ways to improve respect for Timorese
agriculture in the broader society, such as the school gardens
program, to improve the social and economic position of farmers and
encourage young people to continue the vocations of their farming
parents.

Infrastructure should be sustainable and provide a public benefit.

Physical infrastructure gets 44% of the 2016 state budget, the largest
piece, and the proposed budget revision will make it even larger. The
components of the Tasi Mane Project and others related to ZEESM
continue to get more resources, especially compared with water and
sanitation. Yet, since the beginning, these projects have raised
concerns about their financial, social and environmental impacts, as
well as their economic viability.

The Tasi Mane Project will depend on the Greater Sunrise
field. Unfortunately, the maritime boundary dispute between Australia
and Timor-Leste, and our Government's determination to build an
on-shore LNG plant (which the companies say will reduce revenues and
profit), make its future uncertain. Nevertheless, people working in
Timor-Leste's petroleum sector continue to claim that Timor-Leste's
oil will not run out, promoting unrealistic optimism to encourage the
government to spend more of the people's money on this nonrenewable,
capital-intensive, unsustainable sector. In addition, Government has
allocated $218 million for the ZEESM project in Oecusse this year,
with no public information about future expenditures or the project's
economic, social or environmental plans.

Although the people managing these projects are still making political
claims to persuade political leaders and the public, La'o Hamutuk's
projections show that projects like these will weaken the country's
fiscal sustainability, especially when the oil runs out. We have yet
to see an objective market and economic analysis which justifies the
financial, social, land and environmental costs and risks in
comparison with the benefits and returns these projects will bring to
Timor-Leste's economy, finances and people.

The recent cancellation of the Suai Supply Base contract stemming from
an invalid procurement process opens an unexpected opportunity to
re-evaluate the entire Tasi Mane Project, potentially saving more than
ten billion dollars in unproductive expenditure.

From another angle, donors push Timor-Leste's government to implement
various other costly infrastructure projects. One kind is the
Public-Private Partnership (PPP) promoted by the International Finance
Corporation (IFC, part of the World Bank Group) since 2012.

Timor-Leste just signed a PPP contract with the French company Bolloré
to construct and operate a new container port in Tibar. La'o Hamutuk
is concerned about how the company and the state will share risk and
profit, as the Government could have to underwrite Bolloré's profit if
the port's traffic (which may not have been realistically projected)
is too little to generate enough revenues to cover the state's and
company's investments.

Other projects promoted by development partners require the government
to borrow to build infrastructure. Although we agree that Timor-Leste
needs adequate infrastructure, we are concerned that financing
projects with loans is not a wise policy. As we have described above,
Timor-Leste's only producing oil and gas field will be dry in five
years. Therefore, debt repayment will come from our Petroleum Fund's
earnings and domestic revenues, the only resources we have and which
will not last long unless Government changes its direction. If the
plans in the 2016 State Budget to borrow more than a billion dollars
are followed, in ten years we will be paying $100 million in debt
service every year, close to one-fourth of domestic revenues.

We continue to urge Development Partners not to promote policies which
will squander Timor-Leste's wealth, threatening future
generations. The development goals many of you promote today will move
Timor-Leste deeper into poverty, hunger, and political and social
crisis tomorrow.

Support our right to sovereignty in the Timor Sea.

As everyone who follows Timor-Leste knows, today Timor-Leste's
government is working to reaffirm its sovereign rights in the Timor
Sea under international law. The decades-long occupation is
perpetuated by Australia, our neighbor which also continues as the
largest donor in Timor-Leste.

Recently, the Movement Against the Occupation of the Timor Sea (MKOTT)
-- a popular force including students, activists, civil society
organizations and former resistance fighters -- organized thousands of
people in front of the Australian embassy to ask the Australian
government to return the right of Timor-Leste's people which Australia
has used its political and economic power to take from this land.

We believe that a genuine partnership is based on mutual respect for
each other's sovereignty, and on rights based on the principles of
international law. Therefore, we take this opportunity to continue to
ask all development partners, especially the Australian government, to
listen to the people's cries, respect the sacrifices people made to
build this nation, and blood and bones of nearly 200,000 people, and
the trauma and torture suffered by countless others in this long
conflict.

This concludes our comments, and we hope that the policies of donors
and Timor-Leste's Government will reflect this perspective, to secure
development which is truly sustainable.

Thank you for considering our ideas, and we would be glad to provide
additional information about any of the issues we discussed. There is
already a lot of information on our website, www.laohamutuk.org.

Sincerely,
         
Juvinal Dias, Charles Scheiner, Adilson da Costa Junior, Marta da
Silva, Celestino Gusmão, Niall Almond Researchers on Economy and
Natural Resources

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