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Timor-Leste's Private Investment Law and Policy
30 March 2016.  Updated 4 May 2017

Many in Timor-Leste see private investment, particularly from outside the country, as an essential element of economic diversification and growth. In March 2016, the Ministry of State Coordinating Economic Affairs (MECAE) conducted workshops on a draft investment policy paper (also Portuguese) and a revision (also Portuguese) to Law No. 14/2011 on Private Investment (official Portuguese). They said that the revision is needed to 'modernize' the legislation, especially in view of the ASEAN Comprehensive Investment Agreement (ACIA) and the UNCTAD Investment Policy Framework for Sustainable Development.

La'o Hamutuk received the draft Private Investment Law on 28 March, and we participated in the workshop on 29 March. As the draft raised a number of concerns, we made a submission on the law to MECAE that night which is abridged below, with added links:

MECAE advisors encouraged La'o Hamutuk to write comments on the draft summary of the Private Investment Policy, and we made a second submission (download here) to them on 14 April, which discusses:

  • ‘Free markets’ and the primacy of foreign investment

  • How can Timor-Leste benefit from foreign direct investment?

  • FDI in developing countries: advantages and disadvantages

  • Constitutional obligations and international treaties

  • Analysis of Timor-Leste’s context

  • Special arrangements and dispute settlement

  • Investment policy neglects informal workers

The most important issues in these two submissions are summarized in our blog Private investment is a road, not a destination.

In June, government hosted the Timor-Leste International Investment Conference (program) to promote foreign direct investment.

In August, the Monash University Centre for Development Economics and Sustainability wrote about some challenges for Private Sector-driven Development in Timor-Leste.

On 19 July 2016, the Council of Ministers approved a revised version of the Private Investment Law and sent it to Parliament. The following month, the President promulgated Parliament's June resolution for Timor-Leste to join the World Bank's International Centre for Settlement of Investment Disputes (ICSID).

In November, Timor-Leste stepped up efforts to join the World Trade Organization, which granted observer status in December. La'o Hamutuk analyzed the implications of acceding to the WTO.

Parliament Committee D on Economy and Development held hearings on three laws -- Commercial companies, Export promotion and Private Investment -- and sent a unanimous report (Portuguese original) to the Parliamentary Plenary on 20 October. They recommended that the Private Investment Law not be rushed through at that time, but should wait until after the 2017 State Budget is approved and tax incentives are clarified in other legislation.

On 5-7 April 2017, Committee D discussed the law again, proposing 29 amendments to the Parliamentary plenary. On 25 April 2017, Parliament unanimously approved the Private Investment Law (Portuguese), as announced by the government. President Taur Matan Ruak has less than a month to promulgate it before he will be replaced by Lu-Olo.

In June, La'o Hamutuk published another blog: Private investment isn’t a panacea: We need investments which benefit Timor-Leste’s people, not only investors.


La'o Hamutuk submission on proposed Private Investment Law

29 March 2016

La’o Hamutuk appreciates this opportunity to share our thoughts. We only received the draft law (also Portuguese) yesterday, and are rushing to make this submission because we understand that MECAE will finalize its proposal tomorrow. We believe that there are critical deficiencies in the current draft, and hope that our comments will help remedy them at this early stage.

Take more time and do it right.

We were told that MECAE will send the draft law to the Council of Ministers next week and to Parliament in two weeks, to be enacted before the end of June. We believe that such haste is inappropriate, especially since Timor-Leste first enacted a Private Investment Law in 2005, and extensively revised it in 2011 (also Portuguese).

This proposed law is closely related to other pending legislation – especially the land laws and the tax reform law – which is more fundamental and relevant to most Timorese people’s lives. It should not be pushed to the head of the queue. Furthermore, if the Private Investment Law is not finalized until after the other laws have been adopted, it would not have to guess at their content or include the confusing transitional provisions in Article 37.1.

Furthermore, the underlying Policy Paper on Private Investment (also Portuguese) has not been finalized. Although we appreciate that MECAE has distributed a summary of this paper, it contains factual errors, misperceptions and mistaken priorities. Does it really make sense to pass a new Investment Law when the policy it is intended to implement is not finished?

The undue haste surrounding this law is echoed in Article 36, which requires that implementing regulations be enacted within 60 days of the law coming into force. Although we share the concern that nearly five years after enacting the last version of the Private Investment Law its implementing regulations have still not been written, a mandatory deadline is not the solution. It would be better to draft new regulations now, before this proposed law is approved, so that they could be part of the consultation and deliberative process. Once the new law is in force, they can be expeditiously enacted.

Remember the public interest.

Under Article 6 of the RDTL Constitution, the primary objectives of the State are to safeguard and improve the well-being of its citizens, guaranteeing fundamental rights and freedoms and democracy. Article 40, on investments, states that they must “take the national interest into consideration.”

Investment is a means to an end, not an end in itself. Private foreign and domestic investment are valuable to the extent that they help strengthen our economy and improve people’s standards of living. However, their impact on the public is paramount – if they do not make Timorese lives better, they have no value and should not be promoted (or perhaps even permitted) by the State.

The General Principles in Article 4 should include other goals, such as employment, economic diversification, sustainability, reducing poverty and inequality, increasing state revenues and producing products that Timorese people need and desire. They should not be mere ideological statements about “free enterprise” or “protection guarantee,” but should advance the interests of all citizens of this Democratic Republic.

To that end, Article 4 should also refer to commitments made by RDTL. Much of this law relies on an UNCTAD document and ASEAN investment guidelines, but other instruments are legally binding – Constitutional guarantees of human rights, the International Covenant on Economic, Social and Cultural Rights, the International Covenant on Civil and Political Rights, and the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families. Timor-Leste is proud to have helped write the new Sustainable Development Goals (SDGs), and these (in addition to the five-year-old Strategic Development Plan and current Government Program) should inform the policy and law.

Investors should follow the same rules as everybody else.

Rule of law in Timor-Leste is a work in progress, as is public administration. Nevertheless, every investor and every citizen has the right to expect that laws will be obeyed, contracts will be honored, courts will be fair and impartial, bureaucracies will function efficiently and everybody will be treated equally under the law. Improving these systems will make everybody's lives easier.

However, this draft law attempts to circumvent such challenges by allowing investors (that is, people with money) to bypass normal systems or to receive favors from the State which are not available to ordinary citizens. Such favoritism undermines the principles of democracy and should not be offered. Here are a few examples:

  • Article 20.2 “automatically authorizes” three work visas for newly approved investment projects, bypassing the Visa Law. Rather than giving investors special treatment – especially when this could potentially expose Timor-Leste to people with criminal histories – the visa process should be made more efficient for everyone. For investors, a one-stop-shop could apply for visas simultaneous with registering an investment, but the applications should still be vetted by the Ministry of Justice and Department of Immigration.

  • Article 34.4 allows disputes to be appealed to the RDTL court system only when both parties agree. In other words, a foreign investor can reject Timor-Leste courts, opting for a final ruling by the World Bank's International Centre for Settlement of Investment Disputes (ICSID) (Article 34.3).  ICSID has created problems around the world -- indeed, Indonesia, Brazil, South Africa and other countries are looking to reduce its role. Jurisdiction of the Timorese courts should not be optional, and the RDTL Supreme Court (or Court of Appeals for now) should have the final word.

  • Article 16, which is new in this law, encourages violation of human rights of communities and workers. Timor-Leste’s penal code already criminalizes wanton injury to persons and destruction of property, and the security forces are responsible to enforce it. The State should never dispatch “law and order forces” for extra-legal “protection” of investors’ perceived interests. This article recalls widespread past repression to defend business operations which has been eliminated in most democratic societies, and it should be removed. Furthermore, when a community or labor force is aggrieved to the extent that an investor feels threatened, the first response should be to engage discussion, mediation or dispute resolution processes to explore the causes and possible solutions.

  • Article 15 protects investors against expropriation, as well as requiring fair compensation. Such protections should be in the land laws and apply equally to all landowners and leasers, including communities, individuals and companies. If these systems are dysfunctional, fix them for everyone.

  • Article 23 allows investors to lease State land, which is appropriate. But it must be assured that the land indeed belongs to the State, and not to the community of people who live on and near it. This sort of uncertainty is creating problems in Oecusse, and underscores the importance of enacting the Land Laws before this Investment Law.

  • Article 26.3 and others require that bureaucracies work in an efficient and timely manner. We agree, but this should be a goal for all public services, not only for those which deal with investors. Some (such as visas, electricity, roads, courts) will also help investors, and others (schools, health care, water supply) are the right of every citizen. These inefficiencies are a major reason that Timor-Leste scores poorly on the World Bank’s Doing Business reports, and they should be addressed across the public service.

The Investment Law should not provide pathways to corruption.

In particular, the Special Investment Agreement (SIA, Articles 3(d) and 27) has the potential to invite corruption, collusion and nepotism. If such a provision is warranted, it should be carefully designed to ensure that it is not open to abuse:

  • Applications for SIAs should be made public, with an opportunity for prior public comment or consultation.

  • SIAs which have been issued should be publicly disseminated, and those which have been denied should have the reasons publicly announced.

  • The automatic issuance of an Investor Certificate to an SIA recipient (Article 27.3) should not bypass the normal checks and requirements to get an Investor Certificate under Article 26.

The law should incorporate other transparency provisions, including:

  • Company annual reports (Article 25.2(c)) should be public.

  • The Company list (Article 33) should be public.

  • Disclosure (Article 38) should be to the entire public, not exclusively to potential investors.

A public blacklist should be maintained of investors and companies which are internationally blacklisted or have violated Timor-Leste law, and such companies and individuals should not be allowed to receive Investor Certificates. This process should have appropriate transparency and appeal mechanisms to protect companies’ rights and avoid abuse.

Other concerns

La’o Hamutuk suggests several other improvements in the law:

  • Article 3 includes new definitions of “Special Economic Zones” and “(duty-)Free Zones.” Timor-Leste slashed taxes in 2008 in an effort to increase foreign investment, but it did not work. We hope that any foregone revenues are more than balanced by other economic benefits to Timor-Leste.

  • Unlike the 2011 investment law, this one will cover the oil, gas and mining sectors. However, Timor-Leste has several special laws and regimes for these sectors and is currently developing more. We wonder if their integration with this law has been well thought-out, including areas “reserved for the state” or on the list of “negative investments” in Article 8.

  • The concept of “equal treatment” (Article 12) of Timorese and foreign investors may undermine the national interest. Domestic investors’ investments and profits are more likely to remain in Timor-Leste, supporting the economy, job security and sustainability. Timorese investors are also likely to have a stronger commitment to the people and laws of the country than foreigners, who come to obtain profits or other material benefits.

  • The state should be able to identify sectors for Special Investment Agreements according to current priorities, rather than being locked into the 2011 Strategic Development Plan (Article 27.1).

  • Even though Timor-Leste has decided to join ASEAN, many discussions and negotiations lie ahead, especially regarding workers, trade and investment. These may include asking for waivers and/or phased implementation of various ASEAN guidelines to protect and nurture Timor-Leste’s nascent economy. As with other countries who join ASEAN, allowances will be made for our particular situation, and Timor-Leste will not have to immediately adhere to every rule. For example, Timorese workers could be given preference or Timorese products could be protected against cheap imports, at least for a decade or two. Although the ASEAN Comprehensive Investment Agreement (ACIA) guidelines may eventually constrain Timor-Leste’s policies, implementing them now will make it much more difficult to negotiate exceptions after we join ASEAN. Our position will be stronger if we defend our national interests, rather than making concessions even before negotiations begin.

Conclusion

In closing, we note that the law has no definition for investment other than the circular “any direct investment…” (Article 3(n)). Our understanding is that investment means money or goods which are spent with the expectation of receiving a return larger than the amount originally disbursed. Although the State also considers social returns from its investments (such as in education, nutrition or preventive health care), private investors are only interested in financial returns. That is, they expect to take out more than they have put in.

Although foreign and domestic investment can be important tools for developing Timor-Leste’s economy, they do not produce anything by themselves. Investment must be combined with human and material resources, entrepreneurial creativity, hard work and competitive advantage to generate returns. Serious investors will conduct cost-benefit-risk analysis to determine if the likely return justifies the investment. We encourage Timor-Leste authorities to undertake similar analyses – to determine whether a particular proposed investment will produce a net benefit for Timor-Leste’s people – before providing incentives for a project.

A decade of “easy” oil income has infected many in this country with a rent-seeking attitude – looking for money to appear from afar without having to work or make difficult choices. Private investment -- when combined with creative project design, diligent labor, careful management, well-functioning infrastructure and effective public services -- can help Timor-Leste emerge from poverty and dependency on oil and gas. As our oil revenues dwindle, we cannot afford to waste resources or opportunity cost while waiting for more manna from heaven.

Legitimate investors are essential and should be courted – but illegitimate ones, taking advantage of our weak regulatory system, engaging in corrupt practices, or exploiting loopholes to obtain land or launder money – can inflict lasting damage on Timor-Leste’s reputation and economy.

We hope that our suggestions help improve this law so that it can better support Timor-Leste’s economic development.

 

The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua D. Alberto Ricardo, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
email: 
info@laohamutuk.org    Web: http://www.laohamutuk.org    Blog: laohamutuk.blogspot.com