Timor-Leste's Private Investment Law and Policy
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.
The most important issues in these two submissions are summarized in our blog Private investment is a road, not a destination.
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.
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.
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.
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.
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:
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:
The law should incorporate other transparency provisions, including:
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.
La’o Hamutuk suggests several other improvements in the law:
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)