EAST TIMOR'S ROAD: TO RICHES OR RUIN?

By Aubrey Belford

BUSINESS & ECONOMICS | March 19, 2012

East Timor’s people are desperately poor but its government is swimming in cash. Is the country buying its way out of poverty, or into economic disaster?

The stretch of road along East Timor's north coast from Dili to Baucau and back is a dramatic, beautiful and terrifying mess. Heading east, the road clings to temperamental, undulating hills. Periodically, it plummets through mangroves and flooded rice fields, and then rises again through forest.

By motorbike in the daytime it's dangerous enough. Every curb holds the threat of a truck-sized pothole, a slick of mud or a deep pool of water. At night, in near total darkness, it becomes an obstacle course of goats, buffaloes, dogs, crabs and people, who suddenly shimmer out of the darkness like apparitions.

Gripping onto the handlebars, your eyeballs darting around for threats, there's small comfort to be gained from one fact: this is one of the country's better roads.

The government of East Timor, one of Asia's poorest countries, says this is all about to change. After years as a neglected Portuguese colony, a warzone under brutal Indonesian occupation, and then an aid-dependent ward of the international community, East Timor is standing on its own. The country is sitting on a well-performing USD9.3 billion sovereign wealth fund, made up of revenues flowing in from oil and gas in the Timor Gap, and is spending big. The country has budgeted more than USD1.67 billion to spend in 2012, a 28 per cent increase over the year before. The biggest chunk of it is on much-needed roads, electricity and other infrastructure.

The government of Prime Minister Xanana Gusmao says all this is part of an ambitious strategy to move the country from deep poverty, growing at or near double digits every year until it reaches a level pegging with some of Southeast Asia's more successful "upper middle income"countries by 2030.

It's also no coincidence that the country has just started a long season of elections - culminating in a parliamentary poll in June. If everything goes smoothly, a United Nations stabilisation mission and about 460 Australian and New Zealand troops should finally leave, after six years on the ground. The huge surge of cash has appeared, so far, to prevent the country falling into the sort of violence that has threatened to derail it in the recent past.

Politics has so far been peaceful, but still it has been raucous. President José Ramos-Horta was kicked out of office in the first round presidential voting on Saturday. The second round, later this year, will be a runoff between Francisco Guterres, from the opposition Fretilin Party, and Taur Matan Ruak, a former rebel commander and military chief, who was backed by Gusmao after the prime minister abandoned his earlier alliance with Ramos-Horta.

But as money sloshes into Dili, there also is growing concern that the country is falling into the same trap as legions of impoverished countries before it: too much resource money, far too quickly. Critics say the country is experiencing worrying signs of a wild binge - massive projects rushed through at ballooning costs, millions of dollars disappearing into administrative holes, the rise of a tiny, well-connected elite, and surging prices for everyday goods.

While both sides of politics accuse the other of pandering and waste, foreign analysts mostly agree that everyone in the political class shares part of the blame. And when the binge ends, Australia could end up with another basket case on its doorstep.

"Timor-Leste is in a bubble right now because they've got higher oil revenues, but they're already dropping and they're not going to last that long," says Charles Scheiner, a researcher at La'o Hamutuk, a Timorese watchdog nongovernmental organization (NGO). "And when the bubble breaks that's a very different reality to
what's happening at the moment."

With more than 90 per cent of government revenue coming from oil and gas, East Timor is the world's second most resource-dependent country, after the newly independent South Sudan, according to Scheiner. Most of that money is being spent on roads and electricity, in particular a massive national grid that has exploded in cost from an originally planned amount of less than USD400 million to more than double that. Inflation is 15.4 per cent (and 17.7 per cent in Dili), according to government figures. In 2010, East Timor imported nearly USD288 million in goods, and exported just USD16 million of coffee. Apart from some agricultural products and a smattering of handicrafts, almost nothing on sale is locally produced. Focusing too much on oil and gas, East Timor is also neglecting the future development of other industries, La'o Hamutuk argues.

The group also says East Timor is spending well beyond its means. Even on the most optimistic oil revenue projections - including from the Greater Sunrise field, which is yet to become a reality thanks to a dispute between the Timorese government and Australian company Woodside ­ East Timor can only afford to spend USD1.88 per person per day over the next 40 years, Scheiner says. Currently, he claims it's spending about double that.

If new sources of petroleum don't come online and the government keeps increasing spending at the same rate, East Timor will be unable to finance its budget in less than a decade, Scheiner argues. And then the problems will really bite. According to Scheiner, projections of double-digit growth are a "pipe dream". Right now, his best rough guess is that only about a hundred well-connected Timorese businessmen and women are making serious money, either in government procurement contracts or lines of business closely linked to servicing them. And the future looks similarly inequitable.

"It's what happens in most countries where you don't have enough resources to go around, rich people get armed guards and build walls around their houses and poor people starve," he says. "It's not a very pretty picture."

The rub is, East Timorese desperately need the money, and, particularly in an election year, they are clamouring for their share.

In the countryside, most people eke out a living in subsistence farming. Throughout the country, about half of all children under five are malnourished and 41 per cent of the population lives on less than the local poverty line of USD 0.88 a day. Much of the infrastructure dates from Portuguese and Indonesian times and is in terrible condition.

In Manatuto, a district on the road east of Dili, the spectacle of a 50-metre stretch of
road turned into a knee-deep, watery mire last week showed just how slapdash the flow of money is.

Standing with about two dozen others and watching as motorbikes, trucks full of voters and police four-wheel-drives struggled through the morass, Jorge da Cunha, a 38-year-old local, explained the asphalt was washed away here a year ago. No work had been done until heavy rains came down the night before, threatening to cut off much of the east of the country just when thousands of voters needed to head home to vote. And so an urgent order came from the local government: smash open the retaining wall, and let the water out.

"Our government has a big budget, but there's something wrong with implementing things," he said, taking a break from trying to smash a hole in the wall with a metal rod and a large rock; it's work he says he's doing with others in return for cigarette money. "We've got a big budget but small results."

Further along, in the district's main town, the complaints are the same. By the beach, near the shells of homes torched by pro-Indonesian militia after the 1999 UN-backed referendum that won East Timor its independence, men sit staring out at the sea. Natalino da Costa, a single, 28-year-old man who lives off farming and fishing, says life has barely improved, and work is sporadic.

Since December 2011, electricity has run 24 hours in town, but there has been little other benefit, da Costa says. The price of the fish he sells has stayed static, but the cost of goods at the market - a row of rusty, corrugated tin shanties - has shot up. Except for a few fruits and vegetables, everything - cooking oil, sugar, drinks, rice, candles - is imported, mostly from Indonesia, China and Vietnam. Market vendors here complain that another road from deeper in the countryside has been cut by a landslide, forcing people trying to get vegetables to market to stop on one side, cross the gap by foot, and load goods into waiting trucks and minibuses.

"If you ask me, they're misusing the money," da Costa says. "They're spreading it out but we're not satisfied. They really should be building houses here. That's what the people want."

It's this mix of dissatisfaction and demand that the government says it has to contend with.

Sitting in her office, the finance minister, Emilia Pires, acknowledges the government is spending its money quickly, but she argues that it has no real choice. In 2006, fighting among factions of the security forces killed 37 people, displaced more than 100,000 people, and raised the specter of national collapse. Over the years, the international community kicked in billions of dollars in aid, Pires says, with too few tangible results.

Now, with money to spend, the government

is buying stability. Pires can't remember off the top of her head how much the government has spent since taking office in 2007, so she gets on to her computer, looks up national expenditure figures on the government's transparency website, and adds them together using a pen and paper. The figure is about USD3.2 billion - enough, she says, to have already rescued East Timor from becoming a "failed state".

"As a finance person I used to think like that: black and white. It's not black and white. You are managing a country getting out of conflict. Do you realise what that means? Now, when you're giving electricity to the people, people are starting to move on. There'll be more participants in the economy because now anybody in Timbuktu can turn on some thing and start doing their little business," she says.

"So they're not sitting on the beachfront, doing nothing, waiting for someone to make trouble, so they go into trouble mode."

Pires's argument is this: Yes, expenses have blown out, but people are demanding change quickly, and that means paying contractors a premium. And without roads and electricity, no other parts of the economy can develop. She says criticisms of East Timor's oil and gas dependence are overblown - pointing to a draft national account on her desk, as yet unreleased, saying it only makes up 79 per cent of government revenue, as opposed to the more than 90 per cent figure used in La'o Hamutuk's analysis (Pires's says the account is only for 2010 - East Timor is still trying to play catch-up with its books.)

The minister also blames the Fretilin opposition for a big part of the splurge, after it raised objections in parliament to government plans to set up the national grid with second-hand Chinese generators. The cost explosion came when the government was pressured into buying expensive, brand new equipment from Finland.

"Parliament went berserk - mostly the opposition - wanting a brand new thing," she says. "Because they said that the other one is second-hand, nobody likes China, neh neh neh, all that stuff, which we thought was unreasonable but, hey, parliament overrules us."

That argument does not fly with the opposition. East Timor's electricity grid "has been a fucking nightmare. It's been a procurement disaster," says Jose Teixeira, a Fretilin Member of Parliament and adviser to Guterres.

"It's just your classic example of a country that is just so dumfounded full of money that people are just spending it because it's there, without taking the most fundamental bit of care about doing proper feasibility studies or without doing proper procurement, for that matter," he says.

The "resource curse" is a classic trap, and one East Timor was meant to avoid. Since its separation from Indonesia, East Timor has become a laboratory of sorts for the international development industry of NGOs, UN agencies, multilateral institutions and foreign advisers. For a decade, Dili has been a town of cafes and beach bars largely populated by foreigners on pay scales that range from the altruistic to the astronomical.

Putting the petroleum money away in a special sovereign wealth fund, modeled on Norway, has been the international community's favoured cure for the curse. The idea was to grow the money and spend slowly - and avoid corruption, inflation and maladministration.

But since the fund's establishment, East Timor's parliament has continually voted to scoop out far more than the original, conservative speed limit set for yearly withdrawals, only three percent of estimated future petroleum income. In order to get a better return to pay for this spending, parliament amended the law governing the fund last year to allow as much as half the fund to be moved from US dollar government bonds to riskier equities, from an earlier 90-10 split.


The international development world has, for the most part, been surprisingly quiet about the government's profligacy.

The reason for this is a question I ask around town, and I usually get the same answer: in these early days, at least, foreigners don't want to lose their access in a country that is becoming increasingly self-confident as it loses its reliance on foreign aid.

In one of Dili's popular expat cafes, Teixeira simply gestures to a Westerner at the next table, who he calls a "classic example" of a government adviser unwilling to give contrary advice to his employers. "They don't care. You know why they don't care? Because they're getting paid here more than they'd ever get paid in their own countries," Teixeira says.

The country chief of one prominent international NGO, who did not want to be named in order to maintain a good working relationship with the government, tells me a similar thing.

"For foreign advisers there's a symbiotic relationship, or cooptation," he says. And for most international organisations, "I think there's a certain amount of self-censorship here," he says. "To really step outside of that and call it like it is, is really difficult."

It's not that the government and international organisations have completely overlooked the risks that come with spending big on development. The country has recently set up, among other institutions, an anti-corruption commission and an agency for overseeing major infrastructure projects, the National Development Agency, or ADN.

Visiting the agency's office in the dark, winding corridors of Dili's colonial era Palácio do Governo at 8.30 in the morning is a shock: the staff are actually there, and working hard.

The director, Samuel Marçal, readily acknowledges East Timor's spending is "lavish" and that millions are disappearing into poorly planned projects or into the hands of shady contractors. He says his office saved the government about USD60 million last year by cancelling dodgy contracts. But, like Pires, he says infrastructure is badly needed, and that much of the cost has come because of the need for emergency repairs, particularly for roads and irrigation washed away by rains in 2010.

Those who say the government is falling victim to the resource curse "are criticising us but they're not thinking critically," he says. "On one [hand] they're saying 'Don't, don't, don't spend the money.' But then they're saying, 'The community is poor, they're lacking this and that.' And [it is] protests like that that force the government to fulfill them."

East Timor's road to development is proving messy, Marçal says. But that's just the way it has to be.

"We have to fall down, get up, fall down again," he says. "It's a process and everyone has to understand this."

Aubrey Belford has also been looking at the political road ahead for East Timor. Read East Timor's Test here.