Timor-Leste gained official independence in 2002. While it remains one of the world's poorest countries—ranking 120th on the Human Development Index (UNDP 2010) and 134th by GDP per capita adjusted for purchasing power (IMF 2009)—it is one of the richest in terms of oil and gas wealth per capita. Based on proven reserves and an assumed oil price of US $80/barrel, Timor-Leste's untapped petroleum wealth equals approximately $36,920 per citizen. This does not include significant natural gas and mineral wealth. In contrast, non-oil nominal per capita GDP is $391 per year.
The legal framework in Timor-Leste is in large part an artifact of the Portuguese and Indonesian regimes that ruled nearly continuously from the late 18th century until 1999. Budget information is opaque and access to information remains a significant challenge; Timor-Leste ranked 34/100 in the 2010 Open Budget Survey, as a country that provides access to "minimal information." In response to the country's legacy and to recent natural resource discoveries, successive post-independence governments have introduced policies that seek to improve transparency and management of the country's considerable natural resources.
The Secretariat of State for Natural Resources, for example, publishes a regular Extractive Industries Transparency Initiative (EITI) report, detailing revenues by type of payment, and on a company-by-company basis. In July 2010 Timor-Leste became the third country to be designated EITI Compliant by the EITI International Board.
While Timor-Leste has been successful providing revenue information to enable public monitoring efforts, the country's public sector and institutions remain weak, and the government has a limited ability to be transparent or accountable in the national budgeting and execution process Given the constraints and continual shifts in regulatory regimes, the future of transparency and public sector management in this oil-dependent country is still uncertain.
Revenue Transparency
Timor-Leste's EITI report and other oil revenue disclosures indicate that the Government collects extractive sector revenues using a number of fiscal tools. A mix of license fees, royalties, income taxes, withholding taxes, profit taxes and windfall taxes are paid directly to the government, partly through the National Petroleum Authority (NPA).1
The Petroleum Fund Act of 2005 requires that all petroleum revenues accruing to the government be deposited in the Petroleum Fund, which is held with the Banking and Payments Authority (BPA), an embryonic central bank. This sovereign wealth fund acts as both a stabilization fund to reduce macroeconomic volatility and a savings fund to smooth consumption over the generations. By law, the Fund cannot be used as collateral on sovereign debt and at least 90% of its assets must be invested in low-risk bonds. As of September 2010, the Fund held $6.6 billion.
Withdrawals from the Fund are based on a calculation of Estimated Sustainable Income (ESI), measured as 3% of the net present value of oil and gas wealth (i.e., the country's commercial reserves). In any one year, the Government may withdraw funds up to ESI for budgetary purposes. The Government must provide a detailed justification to Parliament for withdrawals in excess of ESI, and this request process has been used in recent years to increase the amounts withdrawn.
In order to promote transparency and accountability, the Petroleum Fund is overseen by the Petroleum Fund Consultative Council (PFCC), consisting of the President, members of parliament, NGOs, religious groups, and former Presidents, Prime Ministers and Finance Ministers. The BPA is also required to publish quarterly reports on Petroleum Fund investments, return on investments, risk profile, management costs, outflows and inflows, detailing the type of payments made to the Fund.
With a score of 70.5/100, Timor-Leste ranks particularly high on the Revenue Watch Index 2010, which measures government disclosure practices in the extractive sector. The Timorese government provides substantial amounts of information about natural resource revenues and tends provide to disaggregated data. The government has enacted detailed legislation governing the extractive sector and, through the BPA, publishes disaggregated reports on oil and gas revenues every three months, showing the types of payments made to the Petroleum Fund. In addition, the Secretariat of State for Natural Resources reports revenues by type of payment, as well as on a company-by-company basis, in its EITI reports. Timor-Leste received poorer Index scores on access to information, specifically as relates to contract transparency, internal audits and parliamentary oversight.
As of January 2011, the Government is considering revisions to the Petroleum Fund Act. The proposed changes would introduce an option to remove the BPA as operational manager and would increase the share of petroleum revenues that could be invested in equity, thereby potentially increasing both the Fund's return on investment and its risk profile. The proposed changes would also reduce parliamentary oversight requirements for withdrawing funds in excess of ESI and, in line with proposed changes to the risk profile, add safeguards against conflicts of interest and modify the ESI formula.
Expenditure Transparency
The Government of Timor-Leste publishes an annual budget which includes revenues and non-donor funded expenditures. Over the past few years, growth in budget revenues has been financed mainly out of growth in ESI, which has increased with new oil and gas discoveries and, more recently, with changes to the calculation formula.
Government expenditures have grown significantly each year since independence as well, from just over $200 million in 2003 to $985 million planned for 2011, excluding donor-supported projects. The proposed 2011 State Budget allocates 44% to domestic investment and 17% to direct transfers to citizens, mainly to veterans and survivors of the conflict with Indonesia. While petroleum funds are not explicitly earmarked, they account for 89% of the budget, so Timor-Leste effectively operates a direct distribution scheme through cash transfer programs.
The Open Budget Survey 2010 ranks Timor-Leste below average in terms of budget transparency and reporting on financial activities with a score of 34/100. According to the International Budget Partnership, the Government failed to publish a pre-budget statement, an enacted budget, budget highlights, a mid-year review, or a public audit prior to 2010. Timor-Leste does not yet have a supreme audit institution, and budgets that have been released fail do not include disaggregated expenditures, such as information on extra-budgetary funds (e.g., foreign aid), quasi-fiscal activities, tax expenditures, assets or liabilities.
Contract Transparency
Under the Petroleum Act (2005), all oil and gas contracts signed after the effective date must be publicly disclosed. As a result, the vast majority of Timor-Leste's Production Sharing Contracts (PSCs) have in fact been published. However, there is no formal mechanism to request these contracts from the government (see "Freedom of Information" below) and as of January 2011, they could not be found on any government websites. The contracts can currently be found on the La'o Hamutuk NGO website.2
For contracts signed before 2006, the PSCs for the Bayu-Undan and Elang-Kakatua oil and gas fields have been released by the operating partners (ConocoPhillips, ENI, Santos, INPEX and the Tokyo Electric and Gas Company), although several paragraphs have been censored. Partners in the Greater Sunrise joint venture (Woodside, Shell, ConocoPhillips and Osaka Gas) have refused to publicly release their PSCs and the government has not requested public disclosure.
Freedom of Information
Article 40 of Timor-Leste's Constitution prohibits censorship of any kind and declares that "every person has the right to freedom of speech and the right to inform and be informed impartially." However, the government has yet to pass legislation providing access to public information. Thus, there is currently no process for requesting or disseminating government documents. Public disclosures are generally made ad hoc or not at all.
The Constitution also explicitly protects media and press freedom, including freedom of opinion and access to information. While the press is generally unencumbered by government regulation in Timor-Leste, poor access to information and weak media capacity has hindered wide coverage or dissemination of government information.
Access to information is further complicated by the use of multiple languages in the workplace. Government documents may be produced in any one of four languages–Bahasa Indonesian, English, Portuguese and Tetum–some of which are only spoken by a small fraction of the population.
1 Secretariat of State for Natural Resources (Government of Timor-Leste), Timor-Leste Extractive Industries Transparency Initiative (TL-EITI), 2008, www.laohamutuk.org/Oil/EITI/EITI08En.pdf.
2 www.laohamutuk.org
