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Jose Ramos Horta:
'Resource curse' holds no fears for newest petro-economy

16 August 2004

EAST Timor, with a population of about 800,000, runs on a national budget of $100million a year. That works out at about $125 per head of population to operate schools, hospitals, the police - all our government services.

This financial year we were forced to cut this tiny budget by 5 per cent because of a sudden delay in receipts from the Bayu-Undan oil and gas project in the Timor Sea - our economic lifeline. Rather than borrowing or running down our oil fund savings, we made spending cuts equivalent to a $10billion cut in the Australian federal budget. We did this with help from Australian advisers who have provided tremendous assistance in establishing our economic and taxation institutions. While our national struggle has for a generation focused on achieving independence, we have learned a great deal since May 2002 about the importance of achieving economic independence.

Having managed a small budget in difficult circumstances, I believe we have demonstrated that we are capable of managing more substantial oil and gas revenue. My government has a policy of remaining debt free. We will not borrow from international institutions or any other institution - despite having received many attractive offers of late.

And having lately become the world's newest petro-economy, we are already fully apprised of the dangers of the "resource curse", the need to manage these resources in an open and accountable way. We have saved about a quarter of the receipts from Timor Sea oil and gas developments in an account with the US Federal Reserve under a temporary policy, and we plan to be even more ambitious under a permanent petroleum fund that will be established this financial year. The resources that will flow to East Timor under a fair settlement with Australia will help make our nation a viable, independent and prosperous neighbour of Australia. Many analysts, including the World Bank and Oxfam/Community Aid Abroad, have warned that East Timor will be a marginally viable nation under the $5billion revenue that will come, over the coming decades, as a result of the temporary Timor Sea Treaty signed in May 2002.

This is why it is important that East Timor gains a fair and just settlement in negotiations with Australia, which I hope will now proceed well following last week's meeting. We estimate revenue of about $15billion over the coming decades under a settlement that delivers to East Timor the resources that would belong to it under a permanent boundary. A settlement on these terms would enable us to address our overwhelming poverty and underdevelopment, not to forget the trauma that remains after a generation of brutal occupation.

Some might consider East Timor's potential petroleum wealth a great blessing - something that will help solve all our problems. However, it is not the intention of my government to make East Timor a petroleum-dependent country. It is dangerous to be a petroleum-dependent country.

Gaining access to the resources that belong to East Timor under international law is only half the battle of putting our national development and reconstruction on the right footing. The rest is up to us. Our development will only succeed if we manage our petroleum wealth responsibly and prudently - for the benefit of this generation and those in the future. Our petroleum fund policy recognises that these resources also belong to future generations.

What we are looking for in managing these resources is using them to develop other sectors of economy, so that we have a broadly based development path. We want economic development that will be sustainable for our people so that they are not dependent on non-renewable resources. This is why I have accepted the advice of the International Monetary Fund to establish a permanent Timor-Leste Petroleum Fund which will retain, on average, half the revenue from oil and gas. We are modelling this fund on Norway's petroleum fund, but we plan to have more stringent accountability and transparency measures.

Much has also been said of East Timor's potential to become another Nauru. Indeed, Nauru set up a trust fund as well, but this suffered from poor management and investment decisions. A trust fund is not a panacea for good economic management. It will only work if it is accompanied by responsible economic management - something I argue strongly that East Timor is already practising. Of greater relevance in assessing our ability to manage our resources is the recent recognition by the World Bank that East Timor's regulation of its petroleum sector and management of its petroleum revenues already constitutes international best practice.

Our aim is to establish a stable regime for the development of our sector that investors can rely on. We have not varied tax rates on projects, and nor will this happen in the future.

In February this year the first $US1.8billion ($2.5billion) phase of the Bayu-Undan oil and gas project went into production. This is a great milestone in our national development, coming less than two years after independence. It is also a great achievement for both our nations, as it is located in the joint development area. I look forward to many more joint developments that will reflect the sound economic management being practised by both nations.

Jose Ramos Horta is Foreign Minister of East Timor

The Timor-Leste Institute for Development Monitoring and Analysis (Lao 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
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