Draft Background Paper
There has been a steady increase in tax and non-tax revenues of the government to $42.1 million last fiscal year – equivalent to 12.2 percent of non-oil GDP. This revenue performance is only marginally lower than the average for low income developing countries around the world.
Petroleum revenues rose sharply last year to $265 million as a result of rising production from the Bayu Undan field and higher world prices for petroleum.
Table 3: Whole of Government Financial Accounts on Combined Sources Basis
Domestic tax and non-tax revenues
Petroleum royalties and taxes
Autonomous agency revenues
Donor funded recurrent outlays
Donor funded capital outlays
Current and capital transfers (net)
United Nations contributions
Budget support by donors
Direct donor funding
Change in cash balances (increase -)
Domestic revenues as % non-oil GDP
CFET recurrent as % total recurrent
CFET recurrent as % non-oil GDP
CFET capital as % non-oil GDP
Total combined sources expenditure
Cash & trust acc't balances (end year)
Non-oil GDP at current prices
The second issue relates to measures needed to build capacities within the country for management and implementation of this much larger public investment program. The Government is well aware that the existing capacities of public sector and the domestic construction industry are not sufficient to implement such a large program in a timely manner. In recognition of this fact, work is underway on a number of fronts to address the problem of implementation capacity. It will likely involve several major new initiatives, including for example:
• Given the limited supply of skilled labor within the country, the large build up in public works will inevitably require temporary heavy use of skilled labor from other parts of East Asia and elsewhere. The Government would, however, ensure that there are adequate arrangements in place for a greatly expanded program of skills development for Timorese nationals to allow an early transition from dependence on imported skilled labor. Such a program will be required not only for the public investment program, but also for the development of near-shore and onshore petroleum resources over the next 5-7 years. This program will also have large requirements, especially in the construction phase, for a wide range of semi-skilled and skilled workers.
Petroleum sector development. The Government has launched an ambitious program for the further development of the petroleum sector. While it is premature to make judgments on the likely economic impact of this program, the broad outlines of various possibilities are already emerging. In assessing these prospects, it is useful to distinguish between near-term, medium-term and longer term activities in the industry.
|In the near term (2006 and 2007), the emphasis is on further seismic work related to near-shore and onshore resources. Most of the near-shore activity will be concentrated around maritime vessels involved in the seismic work, although there will likely be some domestic economic impact as operators establish bases in Dili and elsewhere for refueling, maintenance, chandlering and related activities. Onshore exploration may begin some time next year. The expectation is that the transition to the production phase could occur quickly, perhaps in a year or less after exploration begins. Due to the high quality of the expected crude production onshore, very little refining will be required for the domestic use of the resource. The prospect therefore is that a series of mini-refineries could meet most of the nation’s requirements for petroleum products within a relatively short period of time. Domestic production and refining would replace most of the $40 million of petroleum products that are currently being imported.|
|In the medium-term (2008 to 2010), the initial near-shore exploration drilling phase will begin. This will very likely result in increased levels of transportation from onshore bases to near-shore drilling units. Apart from the impact of increased personnel on domestic service industries such as housing, medical services, schools, hotels and restaurants, a range of possibilities are expected to open up from the creation of onshore supply bases for the drilling operations. The multiplier effects of these offshore operations are likely to be significant. (Norway’s experience with offshore development suggests that each offshore job creates about five onshore jobs.)|
|In the longer term (2010 onwards), the commercial development of near-shore resources would begin. This phase would require development of a wide range of domestic services, including for example, engineering services, maintenance, fuel supply, catering and accommodation, and transportation. Development of LNG facilities and related pipelines will require fabrication, installation and maintenance. The fabrication would very likely be done in other countries, but installation and maintenance will create substantial employment opportunities for skilled and semi-skilled Timorese workers.|
These prospects highlight the importance of an early start on the development of skills in the labor force so that the domestic impact of the industry on employment is maximized. There will be a need for people with advanced training in engineering, geology, accounting, finance and economics. Much of these requirements could perhaps be carried out under production sharing contracts. There will also be need for substantial numbers of welders, pipe-fitters, electricians, plumbers, plant and machinery operators, drill-floor workers, derrickmen, mechanics and so on. Domestic capacities for this type of training will need to be developed as a matter of priority so that there can be an early transition from the expected initial heavy dependence on expatriate workers.
Table 19: Non-Oil Gross Domestic Product by Industrial Origin
(US$ millions at 2000 constant market prices)
Growth rate (% p.a.)
Food, livestock fisheries
Non-farm private sector
Public construction & utilities
Non-oil GDP (at current prices)
Non-oil GDP per capita ($)
Non-oil GDP deflator (2000=100.0)
Part D: Role of Fiscal Policy and Donor Assistance
Petroleum Fund and Domestic Resource Mobilization
The Government has reiterated on many occasions the importance that it attaches to avoiding the mistakes made by other resource rich countries that have led to macroeconomic instability and worse. As mentioned elsewhere in this report, the Government is well aware that macroeconomic stability is required for sustained strong growth that can reduce poverty. Consistent with this commitment to sound management of the country’s rich resource endowment, the Government has adopted a savings policy that aims to ensure effective management of petroleum revenues. To implement this policy, a Petroleum Fund was established in September 2005, following promulgation of the Petroleum Act on August 3, 2005. All revenues from petroleum production are paid into the Petroleum Fund. The Fund will act to accumulate large amounts of savings from petroleum revenues and will provide a buffer to fund budget expenditures should there be any temporary shortfall in petroleum revenues. The Act provides for the transfer of revenues from the Petroleum Fund to the budget. The key to the savings policy of the Fund is that transfers to the budget should adjust over the medium-term to the sustainable level of expenditure. This sustainable level of transfers to the budget is based on estimated current and future petroleum revenues. It is the level of expenditure that can be sustained indefinitely, after allowing for inflation. In this way, withdrawals from the Petroleum Fund can fund stable and sustainable levels of expenditure even though petroleum revenues may fluctuate considerably from year to year. Four key principles have shaped the design of the Fund.
|The Petroleum Fund should accumulate significant levels of savings to benefit future generations of Timorese.|
|The Petroleum Fund savings should generate significant interest income, particularly when petroleum revenues have ceased.|
|Temporary fluctuations in world oil prices will have little effect on expenditure, as savings will fluctuate instead.|
|Permanent changes in revenue will change the estimated sustainable level of expenditure by the Fund, and this will result in adjustments of expenditure over the medium-term, so as to minimize disruptive changes in expenditure plans.|
The Petroleum Fund builds on international best practice and reflects the circumstances of Timor- Leste with additional accountability, transparency and public information features. The Act requires that the Petroleum Fund be prudently managed, investing securely in low-risk financial assets abroad.
The revenue position of the Government has undergone a major change in the past year, largely as a result of increased production from the Bayu Undan field in the JPDA and high international prices for petroleum. The prospect is for substantial further increases in these revenues. As a result, the sustainable level of funds that can be transferred from the Fund to the budget at the present time is about $260 million. Based on current forecasts of future production and international prices for oil, the sustainable income of the Fund that can be transferred is projected to rise to about $370 million by FY2014/15.
There has been steady improvement in the revenue performance of the National Government in the past four years. In FY2000/01, tax and non-tax revenue collections were equivalent to only 4% of non-oil GDP; but by FY2004/05, collections had risen to the equivalent of 10% of non-oil GDP. With the prospect of substantial increases in petroleum revenues flowing into the Petroleum Fund, the central policy issue for Government is future levels of domestic tax and non-tax revenues, as judged from two distinct vantage points:
|What is the likely impact of the existing tax regime on the poor and on efforts to reduce poverty?|
|To what extent does the present tax regime promote or deter private investment by local or international business?|
The Government is examining the current tax regime from these perspectives to determine whether further changes would facilitate progress towards the over-arching objective of poverty reduction.
Table 24: Revenues for Whole of Government
Direct and indirect taxes
Autonomous agency revenues
Timor Sea revenues
First tranche petroleum royalties
Transfer from Petroleum Fund
Domestic tax & non-tax revenues
As % non-oil GDP
Sustainable petroleum income
Transfer as % sustainable income
Non-oil GDP at current prices
The scenario for revenue mobilization set out in Table 24 is based on the assumption that tax and non-tax collections will remain at about 10% of non-oil GDP. In other words, the Government would look to transfers from the Petroleum Fund rather than increasing tax collections relative to non-oil GDP. A low tax regime that is simple to administer may improve the attractiveness of Timor-Leste as a designation for local and international investors. However, the revenues of autonomous agencies would continue to increase in line with the growth of these services and continued adherence to the principle that users of the services should pay for them.
Appendix Table 7: Financial Asset Accounts of Whole of Government
CFET reserves account balance
Change in cash balance
Transfer out of account
Cash balance (end year)
Closing balances (end year)
First tranche petroleum fund
Transfers out of account
Closing balance (end year)
Transfer from CFET reserve acc't
Transfer from FTP fund
Transfer to Government account
Closing balance (end year)
Total investment account balance
The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)