Thursday, February 23, 2006

East Timor takes steps to avoid pitfalls of oil wealth

"Asia's newest nation, East Timor, is also its poorest, with about 40 percent of its one million inhabitants living in poverty. But its prospects are brightening, at least for now.

Rumbling deep below the Timor Sea, between the nation's southern coast and Australia, are billions of dollars of untapped oil and gas reserves. East Timor, which is in the early stages of drawing on those resources, is expecting a huge windfall over the next few decades.

Celebrations, however, have yet to begin. Oil wealth in developing countries has often turned out to be more an affliction than a cure, especially in places where corrupt officials siphon off the revenue.

Seeking to safeguard the nation's new oil wealth, the East Timorese Parliament followed the advice of foreign donors and passed legislation last year to establish a petroleum fund to manage the flow of revenue and discourage corruption.

The move was hailed as a positive step, one that could help the country avoid the pitfalls of Chad, where a petroleum fund intended for poverty alleviation fell to pieces last month. There, against the wishes of the World Bank, the government amended laws giving Chad's officials more freedom to spend their oil money in any manner they wanted. Last month the bank suspended $124 million in payments to Chad.

In East Timor, the proceeds from oil have the potential to take care of the country's infrastructure, schools and health needs, said Elisabeth Huybens, World Bank country manager. "One cannot underestimate how important this is," she said, adding that there was a "fairly solid set of arrangements" to protect the sanctity of the oil fund.

The East Timorese legislation requires all revenue from oil and gas to be deposited into a single account. It allows the government to spend only a small fraction of that revenue, an amount dependent on gains made by the fund's investments. The bulk of the money is to be invested in low-risk bonds. When oil and gas reserves run out, there should still be substantial amounts left for future generations, Huybens said.

The law establishes several monitoring organizations to supervise the management of the fund, and the monitors are required to publish findings periodically to the public. But whether the money will remain safe is open to question, said Charlie Scheiner, a researcher with Lao Hamutuk, a local non-government organization in East Timor. Like Chad, the government could easily amend the fund law to gain more power over the money, he said. "The fund is not well protected," he said. "The law doesn't require any special resolution or justification for alterations to the fund."

Expectations for development are now growing as oil money begins to flow. One of East Timor's smaller deposits, Bayu-Undan, began production in February last year and the government's budget has increased from $80 million to almost twice that in 2006.

The Bayu-Undan field is expected to generate roughly $250 million annually over its projected 20-year life span, about $5 billion in all.

In addition, East Timor and Australia signed an agreement last month to share revenue from another area of oil and gas deposits known as Greater Sunrise. The two countries will divide the revenue evenly, giving East Timor an additional $10 billion, depending on oil prices, over the development's projected 30-year life, said Geir Ytreland, a Norwegian adviser to the East Timor government.

On March 17, East Timor will begin selling 11 oil and gas contract areas situated near its southern coastline that are entirely under East Timor's jurisdiction. Ytreland said these deposits could generate revenue similar to the Greater Sunrise development.

East Timor became independent in 2002 after 24 years of Indonesian control and several years of United Nations administration. After East Timor voted for independence in 1999, Indonesian militias led a scorched-earth campaign killing more than 1,000 civilians, burning an estimated 70 percent of the country's infrastructure and displacing three-quarters of the population.

These days East Timor continues to struggle. According to the World Bank, unemployment has reached 20 percent in urban areas. Life expectancy is in the mid-50s, 1 in 10 children die before the age of 5 and 40 percent of the population cannot read or write. One in five people live on less than $1 a day.

The government and multilateral donors are depending on the oil and gas deposits to improve all this. The donors say they expect that these petroleum reserves will supplant their assistance.

Foreign donors and local officials are optimistic that the provisions in the petroleum fund legislation will prevent the government from spending irresponsibly. Revenue from the Petroleum Fund spent by the government must be accounted for in the national budget, and cannot be spent in any other way, said Ytreland, the Norwegian adviser.

In addition, an independent external audit will be done annually by an internationally recognized accounting firm, while the Banking and Payments Authority, which will operate the fund, will make quarterly public reports, available on the Web. The law also calls for creating a council to monitor investments.

Ytreland said East Timor's adoption of the fund and its apparent commitment to transparency gives it a good chance of beating the odds that have plagued other developing countries."


Source: International Herald Tribune (from UNOTIL Public Information Office, Daily Media Review)
Category: Timor-Leste (East Timor)

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