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In August 2005 the Government of Timor-Leste, then led by Mari Alkatiri, established a Petroleum Fund Law following a period of extensive consultation with the community. The Law was passed unanimously by the Parliament of Timor-Leste (not just Fretilin) and promulgated by the then President of Timor-Leste, Xanana Gusmão (now Prime Minister). The institutions and mechanisms of petroleum revenue management thus established were intended to avoid the problems encountered by other natural resource-rich poor countries, such as Nauru and Nigeria, and were evidently widely supported across Timor-Leste's political landscape.
Timor-Leste's Petroleum Fund Law establishes two mechanisms of note - a guideline for withdrawals from the Petroleum Fund known as Estimated Sustainable Income (ESI), and a Petroleum Fund Consultative Council. ESI is the amount of revenue that can be withdrawn from the Fund such that the same amount could be withdrawn every year thereafter. If an amount greater than ESI is withdrawn on a regular basis it is possible that Timor-Leste's petroleum revenue could be exhausted before future generations can make use of it. The Petroleum Fund Law requires that Parliament is informed of the value of Estimated Sustainable Income prior to making its decision about how much revenue should be withdrawn from the Petroleum Fund. The Alkatiri Government withdrew revenue from the Petroleum Fund but those withdrawals never exceeded an amount greater than ESI.
Responding to wide support for civil society to have a role in petroleum revenue management decision-making, in addition to consulting on the development of the Petroleum Fund Law, the Alkatiri Government established a Petroleum Fund Consultative Council. The Law proposes that the Consultative Council should advise Parliament on appropriations from the Petroleum Fund (when they exceed the value of ESI) and, as part of the budget process, whether the Fund withdrawal is being used effectively for the benefit of current and future generations. In the interests of transparency and accountability, prior to the elections in June 2007, the Parliament had always sought the opinion of the Consultative Council in making a decision to withdraw from the Petroleum Fund.
Following the June 2007 elections, Timor-Leste's government changed, effectively putting the previously majority party, Fretilin, in opposition to an alliance of smaller parties with Xanana Gusmão as their Prime Minister. In the lead-up to the parliamentary elections Xanana Gusmão announced that he would 'unlock' the revenue from the Petroleum Fund, suggesting that withdrawals from the Petroleum Fund would exceed those that Fretilin had made. Such a policy does not heed the problems of budget execution that exist, regardless of which political party is in power.
In September 2007, the new government proposed a transitional (six month) budget that reportedly required a US$40 million withdrawal from the Petroleum Fund. Despite the budget being of shorter term, the Petroleum Fund withdrawal proposed was far less than that which Fretilin withdrew in the Fund's first full year of operation (US$260 million) and much less than the value of ESI for that period (US$133 million). With just three months of the proposed budget term to go, this small withdrawal plan was wise, but not in-line with Gusmão's campaign promises. The new government would be wise to pursue this conservative fiscal management into the new budget cycle (now following the calendar year).
However, the Parliament of Timor-Leste approved the budget and the withdrawal from the Petroleum Fund without seeking the advice of the Petroleum Fund Consultative Council and the President Jose Ramos-Horta has since promulgated the budget law. The Alkatiri government was widely criticised for not responding to the people, yet this example of the new government's lack of consultation sets a poor example for the future of transparent and accountable management of Timor-Leste's petroleum revenue. In an effort to preserve the mechanism of the Petroleum Fund Consultative Council, some of its members wrote to the President of the Parliament, but without reply.
Timor-Leste wants to tread where most natural resource rich poor countries have not - along the path to sustainable development. However, the actions of the new government remind us that a Petroleum Fund can only support wise fiscal management if the intentions of the decision-makers support good governance. All of the state's institutions are responsible for the wise management of its natural resource wealth and upholding the rule of law - the Council of Ministers, the Government bureaucracy, the Parliament, and the President. Similarly, civil society must assume the task of monitoring those institutions and holding them to account. The petroleum revenue management institutions that were established by the previous government are potentially strong, but remain untested. Whether the new government can do a better job of managing Timor-Leste's natural resource wealth or whether those institutions will be eroded remains to be seen.
WATCHPOINT: Timor-Leste's natural resource wealth is currently invested conservatively, entirely in US federal bonds. The temptation to invest the revenue in a wider range of instruments of potentially greater return, yet also greater risk, exists but this is how countries like Nauru ruined their good fortune. The world waits to see what changes the new government will make in managing Timor-Leste's natural resource wealth.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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