Current Law 9/2005 | Proposed alteration | Initial LH Comments |
Article 2: Definitions 1. In this Act, unless the context requires otherwise: | Article 2: Definitions 1. In this Act, unless the context requires otherwise: | |
(d) “Exchange of Notes” means: (i) Exchange of Notes Constituting an Agreement between the Government of Australia and the United Nations Transitional Administration in East Timor, of 10 February 2000; or (ii) Exchange of Notes Constituting an Agreement between the Government of Timor-Leste and the Government of Australia, of 20 May 2002. | a) “Exchange of Notes” means i. Exchange of Notes Constituting an Agreement between the Government of Australia and the United Nations Transitional Administration in East Timor, of 10 February 2000; or ii. Exchange of Notes Constituting an Agreement between the Government of Timor-Leste and the Government of Australia, of 20 May 2002. | |
(e) “Fiscal Year” means the period of twelve (12) months from 1st July to 30th June; | b) “Financial Year” means the twelve (12) month period from 1st January to 31st December | Technical correction, this change has already been implemented in practice. |
(f) “Independent Auditor” means an internationally recognised accounting firm appointed for the purpose of auditing the Government accounts as set out in the Timor-Leste law until the administrative, tax and audit courts is established, or thereafter an internationally recognised accounting firm appointed pursuant to Article 34; | c) “Independent Auditor” means an internationally recognised accounting firm appointed for the purpose of auditing the Government accounts as set out in the Timor-Leste law until the hierarchy of the administrative, tax and audit courts is established, or thereafter an internationally recognised accounting firm appointed pursuant to Article 34. | |
(m) “Petroleum Authorisation” means: (i) an access authorisation, a petroleum contract, a prospecting authorisation or a seepage use authorisation, or any agreement made in respect of such an authorisation or contract, granted or entered into under the Petroleum Act; or (ii) an authorisation or production sharing contract, or any agreement made in respect of such an authorisation or contract, granted or entered into under the Code; | d) “Petroleum Authorisation” means: i. An access authorisation, a petroleum contract, a prospecting authorisation or a seepage use authorisation, or any agreement made in respect of such an authorisation or contract, granted or entered into under the Petroleum Act; or ii. An authorisation or production sharing contract, or any agreement made in respect of such an authorisation or contract, granted or entered into under the Code; | |
(a) “Central Bank” means the authority to be established under Section 143 of the Constitution of the Republic or, until such authority is established, the Banking and Payments Authority; | e) “Central Bank” means the authority to be established under Section 143 of the Constitution of the Republic or, until such authority is established, the Banking and Payments Authority; | |
(b) “Code” means the Petroleum Mining Code and the Interim Petroleum Mining Code agreed and adopted by Timor-Leste and Australia under Article 7 of the Treaty, as amended, varied, modified or replaced from time to time, and regulations made and directions given under it; | f) “Code” means the Petroleum Mining Code and the Interim Petroleum Mining Code agreed and adopted by Timor-Leste and Australia under Article 7 of the Treaty, as amended, varied, modified or replaced from time to time, and regulations made and directions given under it; | |
(n) “Petroleum Fund” means the Petroleum Fund for Timor-Leste established under Article 5; | g) “Petroleum Fund” means the Petroleum Fund for Timor-Leste established under Article 5. | |
(g) “Investment Manager” means the Central Bank and any person appointed as external Investment Manager under Article 12; | h) “Investment Manager” means the Operational Manager or any other person designated as external financial manager under Article 12; | |
| i) “Operational Manager” means the Central Bank or any other public entity established by the National Parliament to manage and operate the Petroleum Fund; | Part of enabling an Operational Manager other than the BPA. We believe that the BPA should continue. |
(l) “Petroleum Act” means the Petroleum Act, as amended, varied, modified or replaced from time to time, and regulations made and directions given under it; | j) “Petroleum Act” means the 2005 Petroleum Act, as amended, varied, modified or replaced from time to time, and regulations made and directions given under it; | |
(h) “Minister” means the Minister in charge of finances; | k) “Minister” means the Minister in charge of finances; | |
(p) “Petroleum Operations” means authorised activities under a Petroleum Authorisation; | l) “Petroleum Operations” means authorised activities under a Petroleum Authorisation; | |
(q) “State Budget” means the State Budget referred to under Section 145 of the Constitution of the Republic; | m) “State Budget” means the State Budget referred to under Section 145 of the Constitution of the Republic; | |
(j) “Payer” means any entity on whom there is an obligation pursuant to this Act to make a payment into the Petroleum Fund; | n) “Payer” means any entity on whom there is an obligation to make a payment into the Petroleum Fund; | |
(i) “Parliament” means the National Parliament of Timor-Leste; | o) “Parliament” means the National Parliament of Timor-Leste; | |
(k) “Petroleum” has the same meaning given to it in the Petroleum Act; | p) “Petroleum” has the same meaning given to it in the Petroleum Act; | |
| q) “Investment Policy” means a public statement on the risk profile and the allocation of the Fund’s assets, investment criteria and universe, principles associated with investment, investment options and other issues related with the general investment policy; | Added to allow more flexible and diverse investments. The processes of approving and publishing this statement need to be specified. |
(o) “Petroleum Fund Receipts” has the meaning given to it in Article 6; | r) “Petroleum Fund Receipts” has the meaning given to it in Article 6; | |
(r) “Tax Revenue” means any tax or duty imposed under Timor-Leste law; | s) “Tax Revenue” means any tax, fee or duty imposed under Timor-Leste law; | |
(c) “Estimated Sustainable Income” for a Fiscal Year means the amount determined in accordance with the formula set out in Schedule 1; | t) “Estimated Sustainable Income” for a Financial Year means the amount determined in accordance with the formula set out in Schedule I; | |
(s) “Timor-Leste” means the Democratic Republic of Timor-Leste; and | u) “Timor-Leste” means the Democratic Republic of Timor-Leste; and | |
(t) “Treaty” means the Timor Sea Treaty between the Government of Timor-Leste and the Government of Australia signed on 20th May 2002, as amended, varied, modified or replaced from time to time. | v) “Treaty” means the Timor Sea Treaty between the Government of Timor-Leste and the Government of Australia signed on 20th May 2002, as amended, varied, modified or replaced from time to time. | |
2.2 All terms in the present Act that are defined in the Timor-Leste law on budget and financial management have the same meaning given to it in that law. | 2. All other terms in the present Act that are defined in the Timor-Leste law on budget and financial management have the same meaning given to it in that law. | |
Article 3: Material Scope of the Act This Act shall provide for the establishment and management of the Petroleum Fund, and the procedural rules relating thereto. Article 4: Inconsistencies For the purposes of this Act, in the event of any inconsistency between the provisions of the Act and the provisions in the law of Timor-Leste on budget and financial management, or between the provisions of the Act and the terms of a Petroleum Authorization, the provisions of the present Act shall prevail. Chapter II – The Petroleum Fund for Timor-Leste Article 5: Petroleum Fund for Timor-Leste 5.1 There is hereby established a fund known as the Petroleum Fund for Timor-Leste. 5.2 The Petroleum Fund shall have an earmarked receipts account, held by the Central Bank in compliance with Articles 14 and 15, into which the Petroleum Fund Receipts set out in Article 6 are credited. 5.3 Transfers from the Petroleum Fund shall be made only in accordance with Articles 7 to 10. 5.4 The details concerning the account referred to in Section 5.2, and the State Budget account referred to in Section 7.1, shall be made public through the publication of the operational management agreement to which Section 11.3 refers. Article 6: Petroleum Fund Receipts 6.1 The following amounts are Petroleum Fund gross receipts: (a) the gross revenue, including Tax Revenue, of Timor-Leste from any Petroleum Operations, including prospecting or exploration for, and development, exploitation, transportation, sale or export of petroleum, and other activities relating thereto; (b) any amount received by Timor-Leste from the Designated Authority pursuant to the Treaty; (c) any amount received by Timor-Leste from the investment of Petroleum Fund Receipts; (d) any amount received from direct or indirect participation of Timor-Leste in Petroleum Operations; and (e) any amount received by Timor-Leste relating directly to petroleum resources not covered in paragraphs (a) to (d) above. 6.2 In the event that Timor-Leste participates in Petroleum Operations indirectly, as provided for in paragraph 6.1(d), through a national oil company, the receipts of the Petroleum Fund shall include the following: (a) any amount payable by the national oil company as tax, royalty or any other due in accordance with Timor-Leste law; and (b) any amount paid by the national oil company as dividend. 6.3. From the amount received in accordance with Section 6.1, the Central Bank shall be entitled to deduct, by direct debit of the Petroleum Fund account, any reasonable management expenses, as provided for in the operational management agreement referred to in Section 11.3. Article 7: Transfers 7.1 Subject to Section 6.3, the only debits permitted to the Petroleum Fund are electronic transfers made in accordance with this present article, as well as Articles 8 to 10, to the credit of a single State Budget account. 7.2 The total amount transferred from the Petroleum Fund for a Fiscal Year shall not exceed the appropriation amount approved by Parliament for the Fiscal Year. 7.3. Subject to Article 8 to 10, transfers from the Petroleum Fund by the Central Bank in the Fiscal Year, shall only take place after publication of the budget law, or any subsequent changes thereto, in the Jornal da República, confirming the appropriation amount approved by Parliament for that Fiscal Year. Article 8: Requirements for Transfers No transfer shall be made from the Petroleum Fund in the Fiscal Year unless the Government has first provided Parliament with reports: (a) specifying the Estimated Sustainable Income for the Fiscal Year for which the transfer is made; (b) specifying the Estimated Sustainable Income for the preceding Fiscal Year; and (c) from the Independent Auditor certifying the amount of the Estimated Sustainable Income in paragraphs (a) and (b) above. | unchanged except "Central Bank" becomes "Operational Manager" | |
Article 9: Transfers Exceeding the Estimated Sustainable Income No transfer shall be made from the Petroleum Fund in a Fiscal Year in excess of the Estimated Sustainable Income for the Fiscal Year unless the Government has first provided Parliament with: | Article 9: Transfers Exceeding the Estimated Sustainable Income No transfer exceeding the Estimated Sustainable Income shall be made from the Petroleum Fund in a Financial Year unless the Government has first provided Parliament with: | |
(a) the reports described in paragraphs 8.(a) and 8.(b); | (a) The reports indicated in paragraphs (a) and (b) above; | |
(b) a report estimating the amount by which the Estimated Sustainable Income for Fiscal Years commencing after the Fiscal Year for which the transfer is made will be reduced as a result of the transfer from the Petroleum Fund of an amount in excess of the Estimated Sustainable Income of the Fiscal Year for which the transfer is made; | (b) A report estimating the amount by which the Estimated Sustainable Income for the following Financial Years will be reduced as a result of transferring from the Petroleum Fund an amount exceeding the Estimated Sustainable Income of the Financial Year in which the transfer is made; | |
(c) a report from the Independent Auditor certifying the estimates of the reduction in Estimated Sustainable Income in paragraph (b) above; and | (c) A report from the Independent Auditor certifying the estimated reductions in the Estimated Sustainable Income indicated in Article 9 (a) and (b); | |
(d) a detailed explanation of why it is in the long-term interests of Timor-Leste to transfer from the Petroleum Fund an amount in excess of the Estimated Sustainable Income. | (d) Justification as to the reasons why it is in the long term interest of Timor- Leste to transfer an amount exceeding the Estimated Sustainable Income. | This is a significant weakening of this provision, and is a bad idea. A justification could be “so that my party will be re-elected and continue to implement good policies.” |
Article 10: Transfers for Purposes of Refund of Tax If required under the law of Timor-Leste, transfers from the Petroleum Fund are exceptionally permitted for purposes of refund of tax, in the event of overpayment of tax under paragraphs 6.1(a) and 6.2(a). This amount represents a reduction of the Petroleum Fund Receipts, and shall not be considered as part of the appropriation approved under Section 7.2. Chapter III – Petroleum Fund Investment and Protection | unchanged | |
Article 11: Management of the Petroleum Fund 11.1 The Government is responsible for the overall management of the Petroleum Fund. | Article 11: Management of the Petroleum Fund 1. The Government is responsible for the overall management of the Petroleum Fund. | |
11.2 The Minister shall not make any decisions in relation to the investment strategy or management of the Petroleum Fund without first seeking the advice of the Investment Advisory Board in accordance with Article 16. | 2. The Minister shall not make any decisions in relation to the investment policy or management of the Petroleum Fund without first seeking the advice of the Investment Advisory Board in accordance with Article 16. | The minister could make individual investment or strategy decisions without consulting the IAB, as long as they’re consistent with the established policy and management. We think more consultation is wise. |
11.3 The Minister shall enter into an agreement with the Central Bank for the operational management of the Petroleum Fund and the Central Bank shall be responsible for the operational management of the Petroleum Fund. | 3. The Minister shall enter into an agreement with the Operational Manager, which shall be accountable to the Government, for the operational management of the Petroleum Fund. | Reduces the independence of the BPA or other operational manager, making checks and balances less effective. This also contradicts the BPA’s legal foundation, which states that it is independent of the Government. |
11.4 The Petroleum Fund shall be managed prudently in accordance with the principle of good governance for the benefit of current and future generations. | 4. The Petroleum Fund shall be managed prudently in accordance with the principle of good governance for the benefit of current and future generations. | |
Article 12: External Investment Managers 12.1 The Central Bank may propose to the Minister, either of its own motion or at the request of the Minister, the appointment of one or more external Investment Managers to be responsible for managing the investment of amounts in the Petroleum Fund. | Article 12: External Investment Managers 1. The Operational Manager may propose to the Minister, either of its own motion or at the request of the Minister, the appointment of one or more external Investment Managers to be responsible for managing the investment of amounts in the Petroleum Fund. | |
12.2 The Central Bank may select and appoint an external Investment Manager proposed under Section 12.1 only if the Minister is satisfied that: (a) the external Investment Manager is a legal person with sufficient equity capital and adequate guarantees and insurances against operational risks; (b) the external Investment Manager has a sound record of operational and financial performance; and (c) the references and reputation of the external Investment Manager in the field of fund management are of the highest standard. | 2. The Operational Manager may select and appoint one or more external investment managers under Article 12.1 only if the Minister is satisfied that: (a) The external Investment Manager is a legal person with sufficient equity capital and adequate guarantees and insurances against operational risks; (b) The external Investment Manager has a sound record of operational and financial performance; and (c) The references and reputation of the external Investment Manager in the field of fund management are of the highest standard. | Consistent with current practice. |
12.3 The Central Bank shall be responsible for the tendering procedures required for any appointment made pursuant to Section 12.1, as well as for the contracting of any other professional services under the operational management agreement referred to in Section 11.3, and shall in doing so comply with the substantive provisions of Timor-Leste law. | 3. The Operational Manager shall be responsible for the tendering procedures required for any appointment made pursuant to Article 12.1, as well as for the contracting of any other professional services under the operational management agreement referred to in Article 11.3, and shall in doing so comply with the substantive provisions of Timor-Leste law | |
12.4 The procedures for terminating a contract with an external Investment Manager shall be laid down in the operational management agreement referred to in Section 11.3. | 4. The procedures for terminating a contract with an external Investment Manager shall be laid down in the operational management agreement referred to in Article 11.3. | |
12.5 The duty of the Investment Manager is to maximise the return on the Petroleum Fund investments having regard to appropriate risk as indicated by the investments permitted under Articles 14 and 15, any subsidiary legislation under this Act, any instructions by the Minister and the operational management agreement referred to in Section 11.3. | 5. The duty of the Investment Manager is to maximise the return on the Petroleum Fund investments having regard to appropriate risk as indicated by the investments permitted under Articles 14 and 15, any subsidiary legislation under this Act, any instructions by the Minister and the operational management agreement referred to in Article 11.3. | |
Article 13: Quarterly Reports on the Petroleum Fund 13.1 The Central Bank shall present to the Minister quarterly reports on the performance and activities of the Petroleum Fund no later than twenty (20) days after the end of each quarter. 13.2 The Central Bank shall provide for the publication of its reports no later than forty (40) days after the end of the quarter. 13.3 The Central Bank shall ensure that in releasing, or allowing access to, such reports measures are taken to prevent the disclosure of confidential information. | Article 13: Quarterly Reports on the Petroleum Fund 13.1 The Operational Manager shall present to the Minister quarterly reports on the performance and activities of the Petroleum Fund no later than twenty (20) days after the end of each quarter. 13.2 The Operational Manager shall provide for the publication of its reports no later than forty (40) days after the end of the quarter. 13.3 The Operational Manager shall ensure that in releasing, or allowing access to, such reports measures are taken to prevent the disclosure of confidential information. | |
Article 14: Investment Rules 14.1 Not less than ninety per cent (90%) of the amounts in the Petroleum Fund shall be invested only in qualifying instruments described in Article 15. 14.2 Not more than ten per cent (10%) of the amounts in the Petroleum Fund may be, in accordance with all procedures laid down in this Act, invested in financial instruments other than those mentioned in Section 15.1, provided that such instruments are: (a) issued abroad; (b) liquid and transparent; (c) traded in a financial market of the highest regulatory standard. 14.3 The range of instruments included as qualifying instruments in Section 15.1 shall be reviewed by the Government, and approved by Parliament, at the end of the first five (5) years of the Petroleum Fund existence, having regard to the size of the Petroleum Fund and the level of institutional capacity. | Article 14: Investment Policy 1. The Minister shall establish the investment policy for the Petroleum Fund that shall apply the principles of diversification with the objective of maximising the riskadjusted financial returns of the Petroleum Fund after taking into account the purposes for which the Fund is established, the constraints under which it operates, and Timor-Leste’s ability to bear risk. 2. The investment policy must provide sufficient liquidity in the portfolio to ensure that funding is available whenever required for transfers to the State Budget or for rebalancing investments within the policy exposure. 3. The Minister and the Operational Manager shall develop and maintain policies, systems and procedures to ensure that the risks associated with the implementation of the investment strategy are identified, monitored and managed. 4. The management of the Petroleum Fund shall be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which investments are made. 5. The Minister shall present a summary of the proposed investment policy of the Petroleum Fund to the parliament in the Annual Report of the Petroleum Fund each year and prior to decisions on major asset allocation changes. The Annual Report shall also include a statement setting out how the provisions of Articles 14 and 15 have been applied during the year. | Articles 14 and 15 are totally rewritten. The new Article 14 authorizes the Minister, with IAB advice, to establish general investment policy, looking for diversification and considering risk, but with no constraints. The investment policy should require approval beyond the Minister of Finance. It should be a public document when it is put into effect, not given as a summary in the Annual Report long after it has been implemented. |
Article 15: Qualifying Instruments 15.1 Subject other provisions of this present article, a qualifying instrument is: (a) a debt instrument denominated in United States Dollars that bears interest or a fixed amount equivalent to interest, that is: (i) rated Aa3 or higher by the Moody's rating agency or rated AA– or higher by Standard & Poor’s rating agency; and (ii) issued by or guaranteed by the World Bank or by a sovereign State, other than Timor-Leste, provided the issuer or guarantor is rated Aa3 or higher by the Moody's rating agency or rated AA– or higher by Standard & Poor’s rating agency; or (b) a United States Dollars deposit with, or a debt instrument denominated in United States Dollars that bears interest or a fixed amount equivalent to interest issued by: (i) the Bank for International Settlements; (ii) the European Central Bank; or (iii) the Central Bank of a sovereign State, other than Timor-Leste, with a long-term foreign currency rating of Aa3 or higher by the Moody’s rating agency or AA– or higher by the Standard & Poor’s rating agency; (iv) a bank designated by Moody’s rating agency with a long-term foreign currency rating of Aa3 or higher or designated by Standard & Poor’s rating agency with a long-term foreign currency rating of AA– or higher. 15.2 The Investment Manager shall dispose of an instrument if it ceases to be a qualifying instrument because of a change in the rating of the instrument or the issuer of the instrument within one month of the instrument ceasing to be a qualifying instrument. 15.3 The average interest rate duration of Petroleum Fund qualifying instruments under Section 15.1 shall be less than six (6) years. 15.4 A derivative instrument is a qualifying instrument only if: (a) it is solely based on instruments that satisfy the requirements of Section 15.1; and (b) its acquisition reduces the financial exposure to the risks associated with the underlying instrument or instruments. | Article 15: Investment Rules 1. In order to qualify as an eligible investment under this Article an investment must be issued or situated abroad in an internationally recognised jurisdiction. 2. Not less than 50 per cent of the amounts in the Petroleum Fund shall be invested in eligible investments in the form of deposits or debt instruments that bear interest or a fixed amount equivalent to interest, provided that: (a) The debt instruments are determined to be of investment grade, or (b) The deposits are held with financial institutions with a rating corresponding to investment grade. 3. Not more than 50 per cent of the amounts in the Petroleum Fund shall be invested in eligible investments in the form of listed equities, provided that: (a) The equities are traded in a regulated financial market, and (b) No holding shall exceed five per cent of the issued capital of the issuing company. 4. No more than 5% per cent of the amounts in the Petroleum Fund may be invested in other eligible investments provided that: (a) The Minister has included the asset class to which the eligible investments belong in the proposed asset allocation presented to Parliament in accordance with Article 14.5, and (b) The policies and criteria for selecting, managing and valuing individual financial instruments within the asset class have been approved by the Minister and published. 5. The exposure of the Petroleum Fund: (a) To any one company or issuer, except for a sovereign state, in the form of eligible investments, shall not exceed three per cent of the total value of the Petroleum Fund; (b) To any one asset class shall, on a net basis, be positive. 6. Notwithstanding the provisions of subarticles 20.1 and 20.2, charges arising in the course of market transaction management or participation in security lending programs that are of a short-term nature and consistent with prudent asset management principles shall not be regarded as encumbrances in the course of investing amounts in the Petroleum Fund by the Investment Manager. 7. A derivative instrument shall qualify as an eligible investment only if: (a) It is used for the purpose of reducing the risk to the Fund from the underlying instrument or instruments or to facilitate the efficient implementation of asset exposure; and (b) The risk from the derivative instrument is not larger than that which could be had by direct exposure to the underlying assets in accordance with this law; and (c) The Minister has established conditions with respect to the operational use of the derivative instrument. 8. The Minister shall determine the period within which Investment Managers shall dispose of instruments if they cease to be eligible investments because of a change in the rating of the financial instruments or the issuer of the instruments. | The requirement that investments be outside Timor-Leste is maintained. The former requirement that 90% be invested in USD-denominated bonds has been reduced to 50% in fixed-interest investments in any currency. The IAB had suggested keeping at least 60% in bonds, but the MoF reduced this to 50%. Of the remaining 50%, most can be in traded equities, but up to 5% can be in virtually anything consistent with the Minister’s investment policy, which could make possible the kinds of speculation that got Nauru into trouble. There are limits on how large a share of a particular company the PF can hold, and on how much of the PF can be invested in one company. These are good, but they are not enough to make such investments truly safe. The addition of derivatives as possible investments is extremely dangerous; this is what led to the collapse of the U.S. housing market and the global financial crisis in 2008. |
Article 16: Investment Advisory Board 16.1 There is hereby established an Investment Advisory Board that is responsible for: (a) developing for the Minister performance benchmarks of desired returns from, and appropriate risks of, the investments of the Petroleum Fund; (b) advising the Minister on the investment instructions that the Minister shall provide to the Investment Managers of the Petroleum Fund appointed pursuant to Article 12; (c) advising the Minister on the performance of the external Investment Managers and making recommendations to the Minister on the appointment or removal of external Investment Managers; and (d) advising the Minister on the need for changes in the overall investment strategy or management of the Petroleum Fund, including the making of recommendations as to such changes. 16.2 Subject to Article 18, the Minister shall seek the advice of the Investment Advisory Board before making a decision on any matter relating to the investment strategy or management of the Petroleum Fund. 16.3 Any advice given by the Investment Advisory Board on investment strategy or management of the Petroleum Fund shall take into account: (a) the overall objective that the Petroleum Fund be a fund of income from the exploitation of non-renewable petroleum resources for the benefit of current and future generations; (b) the current conditions, opportunities and constraints in investment markets, and the constraints under which the Central Bank and other key institutions in Timor-Leste operate; and (c) the need to ensure that sufficient amounts are available when needed for transfers referred to in Article 7. 16.4 The Investment Advisory Board shall determine the rules of procedure under which it operates. | unchanged | |
Article 17: Organisation of the Investment Advisory Board 17.1 The members of the Investment Advisory Board shall be: (a) the Director of Treasury; (b) the Head of the Central Bank; (c) two persons appointed by the Minister [of Finance] with significant experience in investment management; and (d) one other person appointed by the Minister. | Article 17: Organization of the Investment Advisory Board 1. There shall be 5 or more members of the Investment Advisory Board to be appointed by the Prime Minister, on the advice of the Minister, at least 3 of who shall possess significant experience in investment management. The Director of Treasury and a representative of the Operational Manager shall be entitled to participate in meetings of the Investment Advisory Board, without the right to vote. | The responsibility for appointing the IAB has been shifted from the Minister of Finance to the Prime Minister. Although this allows the Board to be more independent of the Ministry of Finance, it makes it far more political. The two professionals in the system, the head of the BPA and the Director of Treasury within the Ministry, have lost their right to vote on the IAB, even though they can still participate in meetings. The Board has also been enlarged. |
17.2 The Central Bank shall provide the secretariat for the Investment Advisory Board and any support required by the board to carry out its functions. | 2. The Operational Manager shall provide the secretariat for the Investment Advisory Board and any support required by the board to carry out its functions. | |
17.3 The Minister shall provide, in accordance with Timor-Leste law: (a) a person to sit on the secretariat of the Investment Advisory Board; and (b) appropriate remuneration for the members of the Investment Advisory Board appointed under paragraphs 17.1(c) and 17.1(d). | 3. The Minister shall provide, in accordance with Timor-Leste law: (a) A person to sit on the secretariat of the Investment Advisory Board; and (b) Appropriate remuneration for the members of the Investment Advisory Board appointed under paragraph 17.1. | |
17.4 The members of the Investment Advisory Board shall, on occasion of taking and vacating office, submit a declaration concerning their assets and income from property and capital, including information relating to their bank accounts. | 4. The members of the Investment Advisory Board shall on the occasion of their appointment and as appropriate when providing advice to the Minister signify in writing an affirmation that their appointment or advice does not present a conflict with any of their other interests. The Minister may request members of the Board, as necessary, to submit a declaration concerning their assets to avoid any conflict of interest. | This makes the requirement for a declaration of assets subject to the Finance Minister’s decision. Although the earlier version was poorly drafted (it should require annual declarations), the new one is weaker. The MoF says that the IAB won’t often provide advice on individual investments, but that is exactly what they did on the Asian Champ Investment attempted scam. |
Articles 18-23 | unchanged | |
Article 24: Information Contained in the Annual Report 24.1 The Annual Report for the Petroleum Fund shall be prepared in a manner that makes it readily adaptable for public information, and shall contain in particular the following information for the Fiscal Year for which the Report is prepared: | Article 24: Information contained in the annual report 1. The Annual Report for the Petroleum Fund shall be prepared in a manner that makes it readily adaptable for public information, and shall contain in particular the following information for the Financial Year for which the Report is prepared: | |
(a) audited financial statements certified by the Independent Auditor, comprising: (i) an income and expenditure statement; (ii) a balance sheet, including a note listing the qualifying instruments of the Petroleum Fund, valued at market value; (iii) details of all appropriations and transfers from the Petroleum Fund; and (iv) notes to the financial statements, as appropriate; | (a) Audited financial statements certified by the Independent Auditor, comprising: i. An income and expenditure statement; ii. A balance sheet, including a note listing the qualifying instruments of the Petroleum Fund, valued at market value; iii. Details of all appropriations and transfers from the Petroleum Fund; and iv. Notes to the financial statements, as appropriate; | |
(b) a report signed by the Minister describing the activities of the Petroleum Fund in the year, including all advice provided by the Investment Advisory Board, any reports prepared by the Independent Auditor under Article 35 and drawing attention to particular issues or matters that may be of concern or interest to Parliament; | (b) A report signed by the Minister describing the activities of the Petroleum Fund in the year, including all advice provided by the Investment Advisory Board, any reports prepared by the Independent Auditor under Article 35 and drawing attention to particular issues or matters that may be of concern or interest to Parliament; | |
| (c) A report on the investment policy under Article 14.6; | The policy should be published in full when it is approved and any time it is revised. It should not have to wait for the annual report. |
(c) a statement by the Director of Treasury drawing attention to any accounting issues or practices arising from the Report that may materially affect the interpretation of amounts or activities shown within it; | (d) A statement by the Director of Treasury drawing attention to any accounting issues or practices arising from the Report that may materially affect the interpretation of amounts or activities shown within it; | |
(d) the income derived from the investment of Petroleum Fund assets during the Fiscal Year compared with the income of the previous three Fiscal Years; | (e) The income derived from the investment of Petroleum Fund assets during the Financial Year compared with the income of the previous three Financial Years; | |
(e) a comparison of the nominal income on the investment of Petroleum Fund assets with the real return after adjusting for inflation; | (f) A comparison of the nominal income on the investment of Petroleum Fund assets with the real return after adjusting for inflation; | |
(f) a comparison of the income derived from the investment of Petroleum Fund assets with the benchmark performance indices provided to the Minister pursuant to Section 16.1; | (g) A comparison of the income derived from the investment of Petroleum Fund assets with the benchmark performance indices provided to the Minister pursuant to Article 16.1; | |
(g) a comparison of the Estimated Sustainable Income for the Fiscal Year with the sum of transfers from the Petroleum Fund for the year; | (h) A comparison of the Estimated Sustainable Income for the Financial year with the sum of transfers from the Petroleum Fund for the year; | |
(h) in the event of Government borrowings, the liabilities shall be reflected in the presentation of Petroleum Fund accounts so as to give a true representation of the past and expected future development of the Government’s net financial assets and rate of savings; and | (i) In the event of Government borrowings, the liabilities shall be reflected in the presentation of the Petroleum Fund accounts so as to provide a true demonstration of the expected future development of the Government’s net financial assets and rate of savings; and | |
(i) a list of persons holding positions relevant for the operation and performance of the Petroleum Fund, including: (i) the Minister; (ii) the Director of Treasury; (iii) the members of the Investment Advisory Board; (iv) the external Investment Managers; (v) the Head of the Central Bank; and (vi) the members of the Petroleum Fund Consultative Council. | (j) A list of persons holding positions relevant for the operation and performance of the Petroleum Fund, including: i. The Minister; ii. The Director of Treasury; iii. The members of the Investment Advisory Board; iv. The external Investment Managers; v. The Head of the Operational Manager; and vi. The members of the Petroleum Fund Consultative Council. | |
24.2 The sources of the information described in Section 24.1, whatever their form, and including all reports and statements, shall be annexed to the Annual Report in unedited form. | 2. The sources of the information described in Article 24.1, whatever their form, and including all reports and statements, shall be annexed to the Annual Report in unedited form. | |
Articles 25-49 | unchanged | |
Schedule 1: Calculating Estimated Sustainable Income for a Fiscal Year I. Estimated Sustainable Income for a Fiscal Year is the maximum amount that can be appropriated from the Petroleum Fund in that Fiscal Year and leave sufficient resources in the Petroleum Fund for an amount of the equal real value to be appropriated in all later Fiscal Years as determined in accordance with the formula in paragraphs II and III below. II. Estimated Sustainable Income for a Fiscal Year is calculated according to the following formula: r × Petroleum wealth where: r is the estimated average real rate of return, or real interest rate, on Petroleum Fund investments in the future and, for the purposes of these calculations, shall be 3.0%. III. In this Schedule, “Petroleum wealth” is calculated according to the following formula: V + present value (R0, R1,…, Rn) = where: V is the estimated value of the Petroleum Fund at the end of the prior Fiscal Year R0,R1, etc. are the published budget projections for expected annual Petroleum Fund Receipts minus investment returns for that Fiscal Year (R0) and future Fiscal Years (R1, etc.) i is the estimated nominal yield on a U.S. government security, averaged over the years in which Petroleum Fund Receipts are expected n is the number of years until no further Petroleum Fund Receipts are projected to be received. | Schedule I: Calculating Estimated Sustainable Income for a Financial Year I. Estimated Sustainable Income for a Financial year is the maximum amount that can be appropriated from the Petroleum Fund in that financial year and leave sufficient resources in the Petroleum Fund for an amount of the equal real value to be appropriated in all later financial years as determined in accordance with the formula in paragraphs II and III below. II. Estimated Sustainable Income for a financial year is calculated according to the following formula: r × petroleum wealth where: r is the estimated real rate of return on Petroleum Fund investments in the future and, for the purposes of these calculations, shall be 3.0%. III. In this Schedule, “Petroleum wealth” is calculated according to the following formula:
Where: V is the estimated value of the Petroleum Fund at the end of the prior financial year R0 R1, etc. are the published budget projections for expected annual Petroleum Fund receipts minus investment returns for that financial year (R0) and future Financial years (R1, etc.) i is the long term estimated nominal yield for the current investment portfolio, according to the terms of the mandate. n is the number of years until no further Petroleum Fund receipts are projected to be received. Petroleum Wealth is to be calculated from the start of the financial year, assuming that receipts are received in the middle of the year. | The redefinition of “I” as the estimated long-term yield of the current investment portfolio brings makes this a blue-sky prediction rather than an estimate grounded in facts. We agree that it is relevant to consider yield after the petroleum revenues stop, but this needs to be specified more precisely. |
IV. All assumptions upon which the calculations made pursuant to paragraphs II and III above are based shall be clearly identified and explained, and any changes made in these assumptions in subsequent calculations shall be clearly pointed out. V. All assumptions made shall be prudent, reflect international best practice and be based upon internationally recognized standards. VI. The amount determined in accordance with the formula in paragraphs II and III above shall be certified by the Independent Auditor. | IV. All assumptions upon which the calculations made pursuant to paragraphs II and III above are based shall be clearly identified and explained, and any changes made in these assumptions in subsequent calculations shall be clearly pointed out. V. All assumptions made shall be prudent, reflect international best practice and be based upon internationally recognized standards. VI. The amount determined in accordance with the formula in paragraphs II and III above shall be certified by the Independent Auditor. | |
