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Timor-Leste's big spending: a brave way to tackle economic crisis or just reckless?

The Guardian (Australia) - May 25, 2017

Helen Davidson in Oecusse and Dili – In Timor-Leste's Oecusse province, a band of children wash in the river beneath a multimillion-dollar bridge, yet to open. On a freshly paved road towards a US$9m-plus irrigation project, a young girl hauls a bucket of water out of a ground well.

Across the road from the construction site of a three-star hotel, a young family lives in a small hut from which they operate a store. Augustina, 15, has learned some English and says she wanted to become a doctor.

They are among 70,000 people living in this Timor-Leste community, a remote coastal enclave surrounded by Indonesian West Timor, where the Portuguese landed more than 500 years ago. Like all of Timor-Leste, it was devastated by the Indonesian occupation and the violent withdrawal of forces at the end of last century.

Today, the Oecusse special economic zone hosts one of several Timor-Leste infrastructure projects of breathtaking scale, which the government is hoping will bring economic sustainability before its current lifeline of oil and gas reserves dries up.

Timor-Leste has a very short window in which to achieve its goal. More than 90% of its US$1.3bn-1.4bn ($1.75bn-$2bn) annual budget comes from the petroleum fund – a sovereign wealth reservoir of more than US$16.2bn drawn from the Bayu-Undan oil and gas field which is expected to stop producing in the next few years. An ownership dispute with Australia over further reserves in the Timor Sea is in arbitration in the Hague.

The government says tight legislation around the use of the petroleum fund ensures its stability, but also acknowledges the 3% annual spending has been frontloaded to 2022 in order to "improve capabilities" in government and "resolve bottlenecks".

Among other projects around the country, almost $500m in public funds have already been poured into Oecusse's bridge, irrigation dam, a port and what will be Timor-Leste's largest international airport, in the name of economic diversification.

"No development around the world is without risk," says former prime minister and now head of the Oecusse project, Mari Alkatiri. "I do believe that if you don't take a risk you will never have anything."

But observers are concerned about the Hail Mary pass, and watchdog groups have criticised a lack of transparency and accountability, saying there has been no public cost-benefit or risk analysis, and no significant private investment to boost the public funds.

Dili-based organisation Lao Hamutuk has accused the government of focusing on roads, bridges and airports over water, schools and hospitals. Former deputy prime minister Mario Carrascalao, who passed away last Saturday, also criticised the government's big spending before addressing healthcare and social needs for "the small people".

The government says it is doing both. Standing next to the US$9m-plus dam, where shrieking children play in the irrigation channels, Arsenio Bano, the regional secretary for education and social issues in Oecusse, says the administration's initial focus is on basic infrastructure, including roads, water, and electricity, to lift the living standards of the people.

He says electricity has been brought to more than 80% of households already, and 2,000 homes have solar power. The irrigation project will deliver water to 1,100 hectares of rice paddy fields and the homes on them, in an aim to reduce rice imports by 50%.

It is also creating jobs. At the Oecusse store Ruban Lanos, 24, says he is happy because the project has brought employment to the people of Oecusse.

The major construction projects are largely Indonesian-run and Portuguese-supervised with about 70% local workforce, Alkatiri says, but a lack of skilled labour has been an issue and has caused delays.

Lao Hamutuk has visited Oecusse and is sceptical about the 70% figure – finding most sites to be primarily staffed by Indonesians and Chinese workers.

An unknown number of families have also been forcibly evicted, according to Dr Silverio Pinto Baptista, the provedor for human rights and justice.

While people benefit from the spread of electricity and water, sanitation and industry, and employment, the investments are primarily to draw foreign investors from the finance, agribusiness, and tourism sectors. "If I open the door tomorrow, I will have investors," says Akatiri in Dili.

Alkatiri says agreements have been signed with Singaporean and Swiss training institutions, and he tells the Guardian there have already been applications from foreign investors and joint ventures to the tune of $100m-$350m, but won't detail what they are.

He later says some airlines have expressed interest, and suggests a casino also, but that would not likely be approved because "people were not ready".

Timor-Leste is already offering attractive incentives to foreign investors – including a 10% corporate tax and a "no profit no tax" promise.

Alkatiri says Oecusse offers the comfort of better governance and efficiency than in Dili, without corruption, and Bano says land lease deals could further sweeten the deal to draw companies to Oecusse instead of Dili. Bano predicts the region is five years away from welcoming mass tourism and it needs to be making money within 15 years.

Government leaders look to places such as Bali, and hope Oecusse's future tourism industry emulates it. A number of government bureaucrats and diplomats tell the Guardian that Australia's high-risk travel warning against the country is a particular roadblock.

But the Guardian hears of instances of rushed spending, including the planned rebuild of a monument to the Portuguese arrival. An unfinished amphitheatre sits next to the main statue which is surrounded by parklands. Bano says work has stopped because they don't like how it has turned out and will redo it all, at a cost of $500,000 to $700,000.

Civil society groups have pointed to a lack of transparency around the project, including the far lower reporting requirements for the administration's spending compared with other government departments.

Niall Almond, researcher on natural resources and economy at Lao Hamutuk, says there have been questions around the project since the early stages. "Initially very few details were being published in the state budget about how money was being allocated," he says.

"It's gradually improved in terms of the proposal for spending – there is now detailed information about theoretically how the money will be spent but there's not transparency in terms of actual spending."

The government "transparency portal" website gives little beyond top-line figures of money pledged and received.

"We're basically pushing for public cost-benefit analysis, increased transparency so people can actually track where the money is going, and an emphasis on more public consultation than has been done in the past."

Alkatiri says "of course" there was economic analysis done but "the decision is mine" in the end. "I'm not an economist, I don't use Excel paper. I'm using my feelings," he says. "This is a holistic development of a territory. It's going to be a reference for the country."

Alkatiri dismisses the criticisms of civil society groups such as Lao Hamutuk, as coming from groups "unfamiliar with these kinds of things".

Alkatiri says he has had "no time" to release the economic analysis of the project which they were requesting, but insists such work was completed. When asked if he could instead release reports, Alkatiri says yes, but Timorese people didn't like to read.

At a G7+ conference in Dili on Monday, delegates from conflict-affected countries discussed how their respective nations could move from "fragility to resilience", with a particular focus on the Sustainable Development Goals.

UN officials privately express their support for the host nation's plans, given the desperate context. Timor-Leste is the second most oil-dependent country in the world, but its current reserves will run out first. They must try anything to diversify.

And so the level of ambition – and cash – thrown at projects such as Oecusse is sometimes seen as more brave than reckless, especially by other nations also trying to rebuild after being torn apart by conflict.

With little to no tax for corporations, Timor-Leste may find success as a financial hub or a tax haven. With world-class reefs and beaches – both in Oecusse and Timor-Leste main – it would be unsurprising if a tourism boom approaches.

In the meantime it treads a fine line between lifting up the more than one third of the population living in post-conflict poverty, and securing the nation's economic future.Topics

Source: https://www.theguardian.com/world/2017/may/25/timor-leste-spending-big-economic-crisis