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How Timor-Leste has organised its oil revenue from the Timor Sea.
By Stefan Koomen
1|P a g e
(Office of the Prime Minister. It forms a crucial component of the national budget. para. underlines the magnitude of the Timor Sea oil wealth. p. 68). 1)’. 10). and is considered the catalyst to transforming Timor-Leste towards a more prosperous and sustainable economic future (Lundahl and Sjöholm. In economic parlance. 5). higher than Indonesia ($13. para. 2009. p. and is the basis around which successive governments have developed their strategic plans.350) and Malaysia ($55. 2010. This cursory glance at Timor-Leste’ keys development indicators and expectations. oil is the nation’s current comparative advantage within an integrated global economy. and the importance of effectively organising its flow-on revenue.660 (2005). p.Introduction Oil revenue from the Timor Sea generates significant income for the fledgling nation of Timor-Leste. Despite its status as one of the poorest nations. ‘Timor-Leste’s proven wealth per capita is now $55. Such an income injection is anticipated to propel TimorLeste to upper-middle income nation status by 2030 (Office of the Prime Minister. 2010. 2|P a g e . ‘ranking 158th of 179 on the UN’s Human Development Index and with half the population living on less than a dollar a day (AsiaPacific Aid Effectiveness Portal.326). 2008. 4)’ This perplexing circumstance exists due to the $30 billion that the current productive oil fields are expected to provide treasury over the next 20 years (De Jesus. 2011.
25). by insulating the Government. 2009. p. and the economy. At this point all royalties were deposited into a specific account and spent within the domestic budget (Drysdale. 2010. 81). 2009.Oil Revenue Organisation Timor received its first petroleum payment as a sovereign nation in October 2000. ‘aims to stabilise the flow of revenue. the Petroleum Fund Act was passed with unprecedented unanimous support from parliament. largely due to low institutional quality at the outset of resource production (Barma. (Drysdale. and the strictures surrounding transfers to the State budget (Drysdale. 29). p. from revenue shocks that arise from the unpredictable nature of resource extraction and petroleum prices. after active public consultation. providing approval for the establishment of the Timor-Leste Petroleum Fund (TLPF) (Barma. Two potential pitfalls that 3|P a g e . These challenge are often amplified in post-conflict and developing nations. Estimated Sustainable Income (ESI) Significant resource wealth can present unique governance difficulties. As new oil fields came into operation the government began to generate significant revenues and recognized the need to manage this finite wealth for the long-term benefit of the nation. 2010. The funds structure. The TLPF is a sovereign wealth fund in which all surplus petroleum and gas income is deposited by the Timor-Leste government. p. 2009. 85)’ The Petroleum Fund Act establishes the parameters for the collection and management of petroleum revenue. based on the highly acclaimed Norwegian petroleum fund model. Petroleum Development Fund On 20 June 2005. 100). p. p.
The ESI only acts as a guide.commonly inflict resource rich nations are corruption and mismanagement. 5). 168). This mechanism provides fiscal restraint by calculating an annual sustainable amount which incumbent governments can draw down to supplement non-oil revenues in the annual budget (Doraisami. is revised each year and once calculated must be approved by the parliament (De Jesus. p. Timor-Leste is one of only three countries fully compliant with the Extractive Industries Transparency Initiative. 2009. 2011. The ESI figure. and the Revenue Watch Institute and Transparency International has placed Timor-Leste in the group of countries most transparent with government revenues (De Jesus. and help mitigate potential corruption and mismanagement. The structure of the sovereign wealth fund has been internationally heralded for its open transparency and accountability measures. calculated using a formula based on the current balance of the Fund and the present value of future oil revenues. designed to safeguard against such dangers. These attributes can be considered crucial to preventing the misuse of public money. 11). p. One concern is the absence of defined withdrawal ceilings or limits to prevent excessive withdrawals and safe-guard desired inter-generational benefits (Drysdale. para. 97). para. the TLPF’s technical composition has not escaped criticism. 2009. Organisational Weaknesses Technical Mechanisms Despite the praise surrounding its transparency and fiscal prudence. and its calculation is dependent 4|P a g e . Recognising these concerns the architects of the TLPF included an Estimated Sustainable Income (ESI) function. 2011.
4). para. These spending measures have arguably been successful in fasttracking the stabilisation of the situation. However. corruption and the inflationary impact such spending was having on the economy. 2009. 22) suggests that ‘some of the institutional safeguards and quality initially designed into the petroleum sector architecture are potentially on the verge of unravelling. p. p. and maintaining a sustained peace (De Jesus. 3).’ Political Pressures The emergence of such frailties can be identified in contemporary Timorese political discourse and the changing withdrawal patterns since the TLPF’s establishment. para. historical expenditure patterns and new resource discoveries (Drysdale. To this point. 69). para. 98). including claims that the country is suffering the “resource curse” and that continued withdrawal of such large amounts would deplete the TLPF without providing lasting benefits to the Timorese people (The Economist. significantly increasing Petroleum Fund withdrawals and doubling the state budget (The Economist. Barma (2010. so too does the amount of funds available to government (Lundahl and Sjöholm. 2009. and varies in accordance with.on. 5|P a g e . the volatility of oil prices. Such criticisms highlight the scope for manipulation of the withdrawal and spending parameters set out in the Petroleum Fund Act. the newly elected Gusmao-led coalition government reversed the conservative spending patterns of the previous FRETLIN administration. concerns have been expressed surrounding waste. 2011. 2009. 2). In the wake of the 2006 conflict. As the expected future net value of resources vary. 2008. p.
The demands of an adversarial political system creates electoral pressure for populist spending. the resource curse that haunts many oil dependent states will prove difficult for the young nation of Timor-Leste to ward off. exposing the tensions between meeting and balancing both current and future needs. 6|P a g e . Whilst an analysis of the funds framework suggests that Timor-Leste has taken prudent technical steps towards sustainable fiscal management of oil revenues from the Timor Sea.
April 2010. 7|P a g e . De Jesus. Timor Leste .gov.economist. viewed 10 June 2011.com/home_files/Publications_files/Petroleum_Governance_ Fragility_final_April2010.inquirer. Asia-Pacific Aid Effectiveness Portal. 14 May. 2009. 2009. 2008. <http://naazneenbarma. Barma. E.Sustainable Development Or Resource Cursed? Saarbrücken: VDM Verlag.tl/?p=1&apub=1&m=4&lang=en>. viewed 10 June 2011. <http://www. viewed 15 June 2011. 2009.86. Petroleum.2030. Doraisami. Natural resource wealth management Philippine Daily Inquirer. A. Fiscal Policy Challenges in Timor Leste: Is the Resources Curse on the Horizon? ASEAN Economic Bulletin 26 (2):164-173. <http://opinion. 7 April. 2010.aideffectiveness. Office of the Prime Minister. viewed 18 July 2011. J. 2010. F. 2009.html>. 2011. A young nation ponders what it has to celebrate.net/inquireropinion/columns/view/20110514336392/Natural-resource-wealth-management>.References Asia-Pacific Aid Effectiveness Portal. 27 August. <http://timor-leste. M. The Economist.com/node/14323096>. The oil resources of Timor-Leste: curse or blessing? The Pacific Review 21 (1):67 . NH. Lundahl. and Sjöholm. On road to Peace and Prosperity: Timor-Leste's Strategic Development Plan 2011 . Governance. and Fragility: The Micro Politics of Petroleum in Post-Conflict States. Timor-Leste Aid Effectiveness.pdf>.org/Country-Timor-Leste. Drysdale. viewed 10 June 2011. Office of the Prime Minister. <http://www. The Economist.