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2009-2011 Background and history from La'o Hamutuk 4 December 2009, updated 5 March 2012 Pajina ida ne'e iha Lingua Tetum. This page is about events in 2009-2011 which paved the way for Timor-Leste to borrow. Click here for current information. During the last few months of 2009, Timor-Leste's Government began a number of legislative, diplomatic and financial actions to move the country toward borrowing money from foreign governments and institutions, which is likely to happen in 2012, as described on a separate page on this web site. La'o Hamutuk believes that this would bring huge risks to this country, especially to future generations. We are providing these links and analysis to help ensure that the decision is made with as complete information as possible. Contents
The people of many undeveloped countries have found, to their horror and suffering, that previous governments signed contracts committing public funds to repay loans. Money flows out of the country to foreign governments or international financial institutions (IFIs), while at the same time the state cannot afford adequate levels of essential services for its citizens. The loans, which primarily benefited rich people or foreign companies, failed to support the people or to develop the economy. Even when loan interest rates are "concessional" (less than market levels), the legal obligation to repay the principal before spending money on local needs deprives people of health, education and security. This led to "debt crises" in the 1980s and 1990s, with some loans being cancelled and some reforms, but the basic dangers and economic injustice still exist. Future generations of poor people are obligated to pay for the financial and political benefits of the current generation of policy-makers. Although Timor-Leste was fortunate to begin life as a sovereign state without owing anything to anybody, the nation was encouraged to borrow in 2004 to meet a predicted "gap" between oil revenues and necessary public expenditures. The Prime Minister at that time resisted the pressure, and the "gap" never occurred. Today, the Government is planning to borrow to pay for its dreams, such as highways, airports and centralized electrical generation. Although these mega-projects built by foreign companies could make our leaders and people proud, there is no magic connection between building them and increasing the strength of the local Timorese economy. Petroleum-dependent countries like Timor-Leste are particularly likely to borrow, as the state already receives money without much effort or planning. But they are also especially endangered, as petroleum revenues may decline while loans are still being paid back. When Timor-Leste's oil revenues run out in 15 years, and debts still must be repaid, our children and grandchildren will suffer the consequences. The 2005 report Drilling into Debt: An Investigation into the Relationship Between Debt and Oil (download executive summary or full report (1MB)) by OilChange International discusses how these risks and consequences have affected other countries. Timor-Leste should learn from their unfortunate experiences.
Budget and Financial Management Law On 21 October 2009, Timor-Leste published a new Budget and Financial Management Law, (also Port.), Law No. 13/2009, replacing UNTAET regulation 2001-13 which had defined budgetary processes for the last eight years. The UNTAET regulation previously in effect did not authorize Timor-Leste to borrow, because UNTAET did not want to burden the future independent state with debts incurred during the UN transitional administration. However, in the new law, Article 20 describes how the State can borrow, and Article 21 creates a process for the State to make loans to people or businesses. While the draft law was being debated in Parliament, La'o Hamutuk and other NGOs suggested improvements (also Tetum). Regarding borrowing, the NGOs recommended the following, although most of our suggestions were not incorporated in the law:
While the draft BFM law was being discussed, the World Bank prepared a comparison of it with the UNTAET regulation. When it was nearly enacted, the IMF wrote a summary of its highlights. Neither of these documents has been publicly circulated; La'o Hamutuk is providing them to help people understand the implications of this new legislation.
Repaying loans from Petroleum Revenues Article 20 of the Petroleum Fund Law (also Portuguese) says that the Petroleum Fund cannot be used as collateral for borrowing. As all petroleum revenues to Timor-Leste must be deposited into the Petroleum Fund, some have interpreted this to mean that debts cannot be repaid from petroleum revenues. Unfortunately, this is incorrect. Once money has been transferred from the Petroleum Fund to the Treasury, it can be used for any purpose included in the General State Budget. Since 98% of Timor-Leste's state income comes from petroleum revenues, and since debt repayments have the first claim on the Budget, it is inevitable that money transferred from the Petroleum Fund will be used to repay debts. To put it another way, who would expect Timor-Leste to be able to repay $3 billion dollars if we didn’t have any oil resources?
When the Petroleum Fund Law was being debated five years ago, La'o Hamutuk made the suggestions at right. Unfortunately our advice wasn't followed, and any nation or IFI considering lending money to Timor-Leste knows that the money in the Petroleum Fund will pay off the loan, after being transferred to the state. If Timor-Leste fails to repay and goes into default, the lender might not be able to take money directly out of the Petroleum Fund, but neither would the Government of Timor-Leste, as the lender would be able to seize any money transferred into the Treasury. The Ministry of Finance plans to revise the Petroleum Fund law during 2010. One reason for this is to enable a riskier investment strategy which could produce a higher return on investing the Petroleum Fund, but once the law is open for revision, any part of it could be changed. If this revision process is undertaken, we hope that Government and Parliament will incorporate the suggestions La'o Hamutuk made in 2005. However, we are concerned that the current Government appears more interested in spending money rapidly than in protecting the long-term interests of Timor-Leste's people, and hope that they will not weaken the already limited protections of the Petroleum Fund Law.
2010 State Budget In October 2009, Timor-Leste's Government presented its proposed General State Budget for 2010 for Parliamentary approval. This is the first budget to be enacted under the new Budget and Financial Law, and the first to include a chapter on Financing, reproduced at right. The budget does not include authorization for Timor-Leste to borrow, but indicates that Government will present a mid-year "budget rectification" to revise the budget. The rectification proposed at the end of May 2010 does not include borrowing, although it does increase state expenditures by $177 million for the year, and authorizes withdrawing $811 million from the Petroleum Fund. The 2010 State Budget drastically reduces the appropriation for the Heavy Oil Electricity Generation and national distribution network, from $375 million to $73 million over the life of the project. At the same time, the Prime Minister has made several "corrections" to the project which will significantly increase its cost. It seems likely that at least half a billion dollars of proposed borrowing will be a loan from China which will be used to pay Chinese Nuclear Industry Construction Company No. 22 for the ill-conceived heavy oil project. La'o Hamutuk's submission to Parliament on the 2010 State Budget explained our concerns about borrowing, including the following: The proposed 2010 State Budget does not ask Parliament to approve Timor-Leste taking out a loan, but it implies that such approval has already been granted, and that only a “directive” is required before the Government can borrow. It also discusses an already-signed MoU with Portugal which would “arrange and pay for agreed infrastructure projects” to be “repaid at a later date” but which “would not be part of the General Budget of the State.” Another paragraph says that the Government will “seek approval” from Parliament when it decides how much to borrow, which is expected to be around $3 billion over a project life of several years. It makes no sense to take out a loan while oil revenues are coming in, only to have to repay it after the oil is used up. Although Article 9 of the Budget and Financial Management Law pays respect to equity between current and future generations, the borrowing that it enables does the opposite – wasting our children’s future to pay for current-day whims. It undercuts the basic objective underlying the Petroleum Fund – to use today’s non-renewable resources for lasting benefit, rather than squandering them now and imposing the burden of loan repayments on our grandchildren. The important question is not how to borrow, but why:
Even at concessional interest rates, repaying a loan will permanently lower the amount of money Timor-Leste has to use from the Petroleum Fund. For example, suppose we borrow $3 billion in 2010 at 2% interest, and pay it back over 30 years. When the loan is fully repaid in 2044, we will have paid back $4.14 billion. We will have depleted our Petroleum Fund, reducing the long-term ESI by $125 million every year after that. In other words, Timor-Leste will be deprived of another $3 billion in ESI revenues every 24 years forever, as shown in the following graph (click on it to see it larger): On 21-22 October 2009, Parliament Committee C held a workshop on Central Bank, Government Borrowing and Lending, and General Budget of the State 2010. Speakers from the World Bank, Banking and Payments Authority, the Japan International Cooperation Agency (JICA) and others encouraged Timor-Leste to, in the Bank's words, "Assess options for creating fiscal space and financing the budget deficit, ensuring quality of expenditure." Only La'o Hamutuk (also Tetum) reminded participants that the important question is not how to borrow, but why. Several presenters argued that Timor-Leste should borrow because the interest rate might be low, but even a zero-interest loan has to be repaid. Nobody discussed the paradox of borrowing when oil revenues are high, only to have to repay when they are low or zero. On 11 November 2009, the Asian Development Bank (ADB) gave a similar pitch to parliament, which they repeated during the visit of ADB Vice President Larry Greenwood in April 2010. La'o Hamutuk does not have access to private conversations between the IFIs, other nations, and Timor-Leste's Government. But we imagine that what they say in private is similar to what they say in public, and that technocratically-oriented economists are pushing Timor-Leste to go into debt. Long after these highly-paid "experts" have gone home, generations of Timor-Leste citizens will suffer from the consequences of their advice, which serves their employers rather than this country.
Ecuador, November 2009 Ecuador has put on hold its plans for a USD 1 billion credit from China due to disagreements over conditions of the deal, Ecuador's Economic Policy Minister Diego Borja said last week. “They were asking for unacceptable conditions, such as import guarantees,” Borja told reporters. “Ecuador does not accept impositions, not from China, not from the IMF, not from anyone.” (Reuters, Dow Jones)
Africa, November 2009 "There have been allegations for a long time that China has come to Africa to plunder its resources and practice neo-colonialism. This allegation, in my view, is totally untenable." -- Wen Jiabao, China’s premier, following a pledge of USD 10 billion in cheap loans to Africa over the next three years, The loan pledge for Africa was double a USD 5 billion commitment made in 2006. Wen said eight new Chinese policy measures aimed at strengthening relations with Africa were "more focused on improving people's livelihoods," underlining what he called Beijing's "selfless" engagement in Africa, the Washington Post reported. The IMF has expressed concern about African governments taking on too much debt from Chinese lenders. But Wen said China would write off some loans it had made to the poorest and most heavily indebted countries. African heads of state, including Zimbabwe's Robert Mugabe and Sudan's Omar Hassan al-Bashir, lauded China's support. But others said African nations needed to devise their own development plans to take full advantage of Chinese finance. Last year, European Union lawmakers assailed China for courting “oppressive” African governments, such as Sudan, to satisfy its soaring demand for oil and raw materials. The pattern of trade -- raw materials going to China and Chinese finished goods flooding Africa -- has angered some Africans. “We are sick and tired of the old model, where China comes to Africa and extracts raw materials and goes back to China,” Zimbabwean Deputy PM Arthur Mutambara said in the Zimbabwe Times in September. “We are not now interested in that.” (Global Development Briefing)
Philippines, 2007-8 One of the most high-profile private sector corruption cases in 2007/8 involved the National Broadband Network (NBN) project. The NBN deal involved contracting a China-based telecommunications company to set up a broadband network connecting government offices throughout the country. On 21 April 2007 the US$329.5 million NBN contract was signed between the Department of Transportation and Communications and ZTE, funded by the Export-Import Bank of China. Controversy began to surface when Representative Carlos Padilla disclosed in a privilege speech on 29 August 2007 that the then chairman of the Commission on Elections, Benjamin Abalos, had allegedly served as a broker for the Chinese company, playing golf and meeting with ZTE executives several weeks before the NBN contract was signed in China. Abalos admitted to travelling to China and playing golf, but he denied playing middleman for the firm. ... In the meantime, the fallout from this case has been dramatic. In recognition of the growing public unease, in September 2007 the president set up the Chinese Projects Oversight Panel to oversee Chinese projects. Nevertheless, in February 2008, former Senator Jovito Salonga filed a criminal complaint against the president in relation to her involvement in the case. In response, in February 2008, the president halted all ‘fresh borrowings from China and other lenders of big infrastructure projects’. As a result, alternative sources of funding would have to be sought for the eleven outstanding projects for which no contract had yet been signed. This case illustrates how the involvement of foreign companies, often supported by state loans and guarantees, can pose substantial corruption risks. Although it is encouraging that the Philippines has conducted extensive investigations into the allegations of bribery, it is disconcerting that the company at the centre of this debacle has not been held accountable for its part in the activities. When funding is sought from abroad and foreign companies are used in contracts, this apparently decreases the Philippines’ ability to manage its affairs openly and transparently. (Transparency International Global Corruption Report 2009)
In December 2009, the Japanese aid agency JICA completed a Study on Support for Development Fund Planning in the Democratic Republic of Timor-Leste, which identified 19 "key issues" for the Government and donors to address before implementing external borrowing. In mid-2010, the list was narrowed to nine key actions:
JICA finalized their 77-page "Timor-Leste: An Assessment of Macroeconomic Prospects, Future Borrowing Capacity and Debt Sustainability" in October 2010, before the 2011 State Budget was available, and it underestimates future Government spending plans. (La'o Hamutuk does not yet have permission to post the report on this website.) After discussing and forecasting the country's economic situation in depth, JICA concluded that Timor-Leste could be eligible to borrow, but suggested that limits of $40-$45 million per year "may be considered appropriate from the viewpoint of safeguarding debt sustainability." The report also identified key challenges for Timor-Leste, including "improve absorptive capacity, strengthen public expenditure management, establish public debt management policies and institutions, introduce policies to expand the non-oil revenue and export bases, and expeditiously implement the structural reforms required for a vibrant private sector." In early 2010, the Government advised it is considering concessional borrowing for investment projects envisioned in the Strategic Development Plan, which normally would be from the bilateral donors and the multilateral banks. Before the multilateral banks will finance large projects, Timor-Leste would need to be reclassified from a grant-receiving country to a mixed (grant and loan) receiving country. For the World Bank and Asian Development Bank, this would require Timor-Leste to undergo a process that would include establishing that it is credit worthy -- that it can manage loans well and will be able to repay them. Bilateral donors have similar processes. The Government of Timor-Leste asked for such a reclassification in mid-2010, which is expected to be completed by the end of the year. In September 2010, the process of revising the Petroleum Fund law accelerated, and in mid-October the Council of Ministers discussed removing the prohibition on using the Fund as collateral for loans. This was not included in the draft circulated for public consultation, but the revision as enacted in August 2011 allows up to 10% of the Fund to be used as collateral, further weakening safeguards against Timor-Leste falling into the resource curse. More traditional lenders, such as the World Bank, IMF, ADB, Japan and other nations, are also attracted by Timor-Leste's petroleum wealth, inexperience, and appetite for mega-projects. However, the World Bank's International Development Association (IDA) won't make any loans to Timor-Leste before July 2011, with the situation to be re-examined at that time. Some potential bilateral lenders have concerns about whether Timor-Leste will be able to manage and repay the debt. In April 2010, Timor-Leste NGOs expressed their thoughts in a joint statement to the annual Timor-Leste and Development Partners Meeting: "We are concerned by the Government’s plans to borrow billions of dollars later this year, to pay for centralized physical infrastructure and other projects. Although revenues from our only producing oil and gas field will end by 2024, debt repayment will continue. It will be difficult to provide education, health and other services to our growing population when debt service will have first claim on our smaller revenues." IMF/World Bank Debt Sustainability Assessment The debt sustainability assessments (DSA) of the International Monetary Fund and the World Bank are an important guide as to whether a country is credit worthy. A DSA is based on assessment of whether key debt thresholds will be met over time. Key thresholds relate to the ratios of public external debt to GDP, government revenue, exports, and of debt servicing costs to exports and government revenue. The levels of the thresholds are linked to results of the Country Policy and Institutional Assessment (CPIA) undertaken by the World Bank. This is undertaken annually and evaluates the strength of a country's policy and institutional environment using a questionnaire that is the same across all countries (link to 2007 background and questionnaire for CPIA). A country with a low score against the CPIA has lower thresholds, meaning it should borrow less as it has less capacity to repay debt. Timor-Leste undergoes an annual assessment by the International Monetary Fund, usually in June and July. The 2010 assessment wasn't released until March 2011, and includes a DSA exploring whether Timor-Leste meets international standards of credit worthiness. Although this appears to be an objective statistical process, Timor-Leste's unique situation (oil income four times larger than non-oil GDP, new and fragile state institutions, no borrowing/repayment history, large Petroleum Fund), as well as the need to estimate not-yet-discovered oil reserves, means that opinions will strongly influence the outcome. If the DSA and CPIA support Timor-Leste's request to borrow, loan processing could begin 2011. The IMF published their December 2010 IMF/WB Debt Sustainability Analysis in March 2011. They summarized: "The medium-term fiscal path for Timor-Leste is subject to uncertainties regarding spending commitments and income prospects from petroleum, which complicates the Debt Sustainability Analysis (DSA). The baseline macroeconomic scenario assumes a significant scaling-up of public spending, future petroleum income only from fields with approved development plans, and a moderate borrowing envelope. Under this scenario, the external low income country DSA indicates a low risk of debt distress. The public DSA suggests that overall public sector debt dynamics are sustainable in light of a gradual approach of moderate borrowing and substantial savings in the Petroleum Fund." The IMF/WB analysis assumes that Timor-Leste will borrow less than $1 billion, which could be repaid from the Petroleum Fund. They concluded: In February 2012, the IMF/WB updated their Debt Sustainability Assessment (see below). Borrowing Law passed by Council of Ministers, approved by Parliament At its 3 June 2011 meeting, the Council of Ministers approved (also Tetum or Portuguese) a Public Debt Policy to establish a basis for foreign loans to Timor-Leste "to supplement the financing needs of the first five years of the impending Strategic Development Plan." The Policy includes the following:
As the same meeting, the Council of Ministers approved a proposed Law on the Constitution, Issuance and Management of Public Debt which was sent to Parliament three weeks later with a request for urgent approval. In an attempt to manage debt in a balanced and efficient way, the proposed law adopts some principles:
The proposed law and an explanatory memorandum (also Portuguese) were presented to Parliament on 28 June. Committee C scheduled a public hearing for 6 July, but it was delayed in the rush to approve legislation before the Development Partners Meeting. In early August, the ADB posted information on its website about a proposed $8.15 million loan (later revised to $9.15 million) to Timor-Leste to upgrade the national road network, which we understand is the initial part of hundreds of millions of dollars in projected ADB loans for road construction. Soon thereafter, Parliament held a quick discussion on the proposed law, approving it in an extraordinary plenary session on 24 August with 31 votes in favor, 4 against, 2 abstentions and 28 not voting or absent, with one minor change to the Council of Ministers version. Law No. 13/2011 (also Port.) was published on 28 September 2011. During the same week, Parliament also approved revising the Petroleum Fund Law to allow 10% of the Fund to be used as collateral for borrowing. Two days after that, La'o Hamutuk distributed some thoughts to the EITI conference (PDF), suggesting more careful deliberation: So far, Timor-Leste has no external debt. Although we began nationhood in 2002 with an uncertain economy, Timor-Leste resisted pressure from the ADB and World Bank -- the same institutions which support EITI -- to take out loans to finance state spending. In 2006, Timor-Leste began receiving large petroleum revenues. Since 2007, oil revenues dominate the state budget. Unfortunately, this condition has not reduced the temptation to borrow. In 2009, the Government began looking for loans to finance infrastructure projects, and has enacted several laws to enable borrowing, including the 2009 Budget and Financial Management Law. Just this week, Parliament approved revisions to the Petroleum Fund Law and enacted a new Public Debt Law. Borrowing is unwise. Experience shows that many nations who borrow end up failing. Petroleum-export-dependent countries are often tempted to use their oil as collateral for borrowing. Many countries borrowed against their oil wealth in the 1970s and 1980s, when IFIs and rich countries gave big loans to oil producers. Indonesia, Congo, Ecuador, Nicaragua, the Philippines, Argentina and others collapsed when debt became unsustainable -- the loans had provided benefits for a few dictators and cronies, but most people were still poor. Timor-Leste enters risky territory by weakening Article 20 of the Petroleum Fund Law to allow use of part of the Fund as collateral. We all agree that investing money to develop human resources, education, health and agriculture can help bring Timor-Leste out of poverty, but we are unhappy that the Government wants to borrow billions of dollars only for physical infrastructure. Therefore, we urge Timor-Leste to think carefully before borrowing. Even if interest rates are low, we will have to repay the principal -- after our oil wealth is spent. Repayments may obligate the state to reduce expenditures for public assistance, health, education and other essential services. In early September, more than 100 Timorese and international organizations issued a statement urging debt-free Timor-Leste not to borrow. They concluded their statement: "The Democratic Republic of Timor-Leste began life in 2002 without owing money to anyone. For the sake of an equitable, prosperous, and environmentally sound future for today’s and tomorrow’s children Timor-Leste should remain debt-free. We urge Timor-Leste’s leaders and international institutions to use other ways to finance the country’s much-needed development." They are following up with a global internet petition, which you can read and sign here. 2012 Budget will start borrowing with $160 million, including $43 million in 2012 As presented to Parliament on 30 September 2011, the proposed State Budget for 2012 will spend $33.1 million in borrowed money for Dili sanitation and national roads during 2012, with more in future years. This is the first time the Government has asked Parliament to approve borrowing. Budget Book 1 contains less than a page about borrowing and doesn't mention the lenders or the terms of the loans, explaining that the budget "does not show repayment because most of the loans have a ten year grace period." The memorandum explaining the Budget Law says that for "the first time in the history of Timor-Leste, the Government is proposing a ceiling to the National Parliament to authorize the Government to contract loans, which by legal obligation must be intended only for the construction of strategic infrastructure development the country." However, the proposed budget law indicates only how much borrowed money will be spent in each year, rather than how much will be borrowed, which is inconsistent with Article 20.1 of the Budget and Financial Management Law. The table at right, revealing a plan to borrow $477 million over the next four years, is much less than the Government thinks will be needed to implement the Strategic Development Plan. For example, a consultant recently submitted a design for the Suai-Beacu highway which could cost more than the $220 million in loans and $547 million in Timor-Leste's money listed in the budget documents. We hope that the Government will provide full project cost information, rather than repeating the cost overruns of the heavy oil power plants and the MDG-suco housing project. The Parliamentary plenary debate on the proposed 2012 State Budget began on 9 November 2011, and many MPs spoke about borrowing. On the morning of 14 September, Parliament voted down an amendment which would have removed the authorization to borrow $33.1 million, and proceeded to increase the amount to be borrowed in 2012 to $43.1 million by financing the Maubisse-Ainaro/Same road in 2012 instead of 2013. Following a heated debate on how much borrowing Parliament should approve, the budget law was amended at the Government's request to authorize $160 million in 40-year loans. Although the opposition walked out for the vote on the debt amendment, Parliament passed the budget on 25 November and the President promulgated it in late December. Promulgated 2012 Budget Law, Article 5 1. In order to meet the financing needs related to the construction of strategic infrastructure for the development of the Country , the Government is authorised under Article 20 of Law no. 13/2009 of 21 October and Article 3 of Law no. 13/2011 of 28 September, to resort to concessional external borrowing to the maximum amount of $160 million, with a maximum term of 40 years. 2. Without prejudice to the above provision, in 2012 the financing derived from borrowing shall not exceed $43.1 million. On 19 November, Parliament Committee C organized a conference with representatives from international institutions to discuss ways to finance Timor-Leste's development, with presentations from UNMIT, the IMF on Fiscal Strategy, the World Bank on borrowing and the ADB on Public-Private Partnerships (also Tetum). The IMF recently interviewed commercial bankers operating in Timor-Leste, finding that "Nonperforming loans in Timor-Leste are very high, even compared with other Less-Developed Countries." They suggested that Parliament consult with the banks to see if there is a culture of non-repayment which could make it more difficult for the state to manage borrowed funds. The ADB and the Ministry of Infrastructure are moving rapidly to lend and spend the borrowed money. In late November, the Ministry invited submissions of Expression of Interest for the Consulting Services for the Feasibility Study, Design and Supervision of the Proposed Loan for Road Network Upgrading (Sector) Project for the loan-financed Dili-Liquica, Tibar-Ermera and Manatuto-Natarbora roads. The ADB had approved "advance action for procurement" in late September, and bids from international engineering companies were due by 5 January 2012, with work expected to begin in the second quarter of the year. By the beginning of 2012, Timor-Leste's Government had established the legal framework and plans to borrow from international lenders. Click here for information and analysis on developments from 2012 onward.
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The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk) |