Timor-Leste Looks to Use Oil Revenues to Kick-Start Economy and Development

June 23, 2010

By Sam Polk

The president of Timor-Leste, José Ramos Horta, was in Canberra yesterday to inaugurate what the BBC calls a “gift embassy” – the new Embassy of Timor-Leste to Australia was entirely financed through charitable contributions through the government of Australia. But the five-day visit comes amid strained relations between the eight-year-old nation and Australia, its largest aid donor. A bitter standoff between Timor-Leste’s government and an Australian oil company has reinvigorated debate over how best to use the country’s petroleum wealth to fuel development, and the role outsiders play in the country’s affairs.

Timor-Leste remains in dire need of infrastructure development, and health and education have suffered under Portuguese colonial rule and then Indonesian occupation, and from the civil strife in the years since the 1999 referendum on independence from Indonesia. Photo by Conor Ashleigh

The subject of the dispute – which follows on years of acrimonious negotiations over access to petroleum found beneath the Timor Sea – is the potential location of a liquefied natural gas (LNG) processing plant. But behind the mundane details of cost estimates, seabed studies, and the other arcana of the oil industry, is the question of how to boost a fledgling economy and enhance the welfare of the Timorese people.

The stakes are certainly high: by the end of March 2010, the “Petroleum Fund” into which Timor-Leste’s oil revenues are deposited held $5.8 billion, and the country’s revenues from the yet-to-be exploited Greater Sunrise oil and gas field are expected to reach $13 billion over the course of the field’s estimated 30-year lifespan. That’s no paltry sum for a country of 1.1 million people with a non-oil GDP estimated at just $606 million.

Timor-Leste’s challenge is to determine what types of investments are likely to set into motion a virtuous cycle that sees sustainable job growth, rising standards of living, and increased opportunities for the population, nearly half of which is currently under the age of 15. The country remains in dire need of infrastructure development, and health and education have suffered under Portuguese colonial rule and then Indonesian occupation, and from the civil strife in the years since the 1999 referendum on independence from Indonesia.

The current dispute between the government and Australia-based Woodside Petroleum – which has featured negotiators storming out of meetings, an angry back and forth in the press, and blockage of the airport to prevent oil executives from leaving the country – highlighted the government’s plans for fast-tracking development. Woodside maintains that a floating LNG processing plant provides the lowest possible capital costs and technical risks and greatest economic benefits to both Timor-Leste and Australia, which will split taxes and royalties from the Sunrise field 50-50.

Timorese government officials, however, have stated their willingness to sink the entire project if the processing plant is not built on Timor’s southern coast. They claim that an onshore LNG processing plant would bring needed jobs, infrastructure, and eventually petrochemicals and other industry to the country’s southern coast – leading to secondary economic benefits five to 13 times greater than the taxes and royalties alone. Moreover, after years of seeing the geopolitical and economic interests of major powers trump those of the Timorese people, they say they are determined to ensure that Timor-Leste’s citizens – not an international oil company – get to enjoy the country’s resource wealth.

Attempting to spur economic growth by building capital-intensive industry over the course of the gas field’s lifespan signals an ambitious vision for transforming a country in which over 80 percent of the population currently depends on subsistence agriculture for their economic livelihoods. In a detailed report on a potential Timorese LNG processing plant, the local NGO La’o Hamutuk pointed out that reaping benefits from an onshore plant would require a concerted government effort to prepare Timorese workers for the complex and technically demanding skills needed in the petrochemical industry, as well as major related infrastructure investments to ensure the plant is connected to the rest of the Timorese economy.

Timor-Leste’s leadership remains undaunted, however, and the push for an onshore processing plant is but one part of a major government effort to speed development. The “Strategic Development Plan” that Prime Minister Xanana Gusmão has been promoting on a nationwide tour envisions the eradication of illiteracy and extreme poverty, as well as the development of a modern telecommunications infrastructure and universal secondary education – all within the next two decades.

Toward that end, the government is championing an aggressive spending plan to use existing oil revenues to kick-start the non-oil economy. Among the proposed uses of that state money are transfers to veterans of Timor-Leste’s independence struggle, provisions for Timorese students abroad, and a so-called decentralized development package that includes a raft of small infrastructure projects meant to aid the development of local Timorese businesses and to boost economic development outside of Dili, the country’s aid agency-dotted capital. To pay for the plan and other spending priorities, the government aims to withdraw $309 million from the petroleum fund beyond the fund’s estimated sustainable income level.

In its assessment of the government’s budgetary plans, La’o Hamutuk questioned both the ethics and efficacy of dipping deeper into petroleum revenue to finance current spending. In particular, they allege a lack of transparency regarding how all of the $838 million appropriated for the 2010 budget will be spent, and questioned the capacity of the economy to absorb spending that amounts to 138 percent of GDP, pointing to the government’s failure to spend all of the funds allocated in previous budgets.

For its part, the government contends that drawing down the petroleum fund (currently socked conservatively into U.S. treasury bonds with low rates of return) in favor of investments that energize productive sectors of the economy will bring tangible returns for future generations; far greater benefits than modest interest on bonds sitting in another country. Spending money now on basic necessities like clean water, roads, and schools, the thinking goes, will lay a foundation essential for future development.

Moreover, many believe that an increase in local investment is critical to maintaining the civil peace that has held since an eruption of violence displaced approximately 150,000 people in 2006. In his funding request to parliament, the prime minister wrote that increased spending is necessary to reduce poverty, “the cause of social discontent which is easily used by internal or external political actors, that ultimately could lead to national instability.”  The emphasis on small-scale projects and transfers to vulnerable groups appears aimed at delivering near-term, tangible improvement in living conditions for the Timorese people.

When all is said and done, it is the voices of the Timorese people that are most important in the debate over how best to employ the available natural resource wealth in building the country. The national elections slated for 2012 will provide a window of opportunity for those voices to be heard.

Sam Polk is a graduate student at Princeton University’s Woodrow Wilson School of Public and International Affairs, and is currently working with The Asia Foundation in Dili, Timor-Leste.

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