Subject: AFR: The Way Forward, E Timor Budget Gaps

Australian Financial Review 
May 14, 2002

The way forward

Tim Dodd

The infant Government of East Timor is supposed to have a car registration system and, indeed, there are plenty of vehicles on the road sporting the new TLS plates standing for Timor Loro Sae, as the country is known in the local Tetum language.

But there is one car in Dili whose number plate says "OH SHIT!" and another which reads "I LOVE KOALAS" as well as plenty of vehicles with no plates at all.

The oddities of car registration are just some of the ways in which the Government of the Chief Minister, Mari Alkatiri, which takes full control from the United Nations when East Timor becomes independent at midnight on Sunday - does not yet have a firm grip.

These and other shortcomings cost the Government money which it can ill afford to lose. For example, there is widespread smuggling of food, fuel and retail goods from Indonesia to avoid customs duty, as well as big holes in the levying of consumption taxes.

How much is being lost is anybody's guess, but Kirk McManus, the manager of the Dili supermarket Hello Mister, judges from the prices that goods are sold for in Dili that imposts are being widely evaded. McManus calculates that, including transport, duty and taxes, it would cost him $US10 ($18.30) to land each 24-can case of Indonesian-manufactured Coke even if imported by the container load. But down in Dili's market he sees a case being sold for $US8 to $US9.

The Government's electricity billing system is another expensive problem. Indonesian troops and local militia wrecked Dili's power station along with other key infrastructure when they pulled out in September 1999 and an early priority of the interim UN Government was to restore power which, in a city which lacked meters, was distributed for free.

Two-and-a-half years later the problem is to make people pay for it. Inevitably it is larger businesses, such as Hello Mister, which are asked to bear the brunt of the cost in a system where bill evasion is widespread. But the high cost, nearly US25¢ per kilowatt hour, along with an unreliable supply is causing businesses to rely on generators which only compounds the cash flow problem for the government-run utility. The operating cost of his generator is 70 per cent of the price of city power, McManus says.

Increasing revenue is the key issue for the Alkatiri Government, which is already under heavy international pressure to become more financially self-reliant. East Timor faces a three-year revenue gap from independence until the expected arrival of substantial revenue from the Timor Sea gas deposits. The shortfall is the main issue at a meeting in Dili starting today at which donor nations and international organisations will commit money to bridge the gap.

After the last East Timor donor meeting in Oslo five months ago it was estimated that the new nation would need between $US154 million and $US184 million over the next three years to close the budget gap. Since then the international community has decided to accept higher estimates of East Timor's Government revenue which reduce that figure "substantially", according to the World Bank's East Timor country director, Sarah Cliff.

This optimistic view suits the world community which has Afghanistan, and other major nation building challenges, to find money for. But essentially it is a gamble that the new Government will succeed in improving tax collection, electricity billing, car registration and other revenue measures. But there is a risk that the reduced donations will leave East Timor struggling, forcing it to return asking for more.

There is no likelihood of an unexpected boost from economic growth. The country's economy is predicted to struggle for the next couple of years as high spending UN and foreign aid workers pull out.

The funding gap is not the only major challenge East Timor faces. The other major issue is land title which is a confusing amalgam of the pre-1975 Portuguese system and the 1976-1999 Indonesian one, now overlaid by land use permits and leases granted by the UN transitional Government.

Except for sovereign land - once owned by the Portuguese Government, then inherited by the Indonesian Government and now passing to the new independent Government - there is zero certainty in the system and, with many competing claims, the issue is a monster problem. The UN administration did not even attempt to defuse this powder keg and it is now the biggest barrier to investment in the new country.

The ANZ Bank, which with Portugal's Banco Nacional Ultramarino constitutes East Timor's banking system, has about $US30 million in deposits at its single branch in Dili, equivalent to more than 10 per cent of the country's $US290 million GDP (a figure which excludes UN-originated services which will soon be withdrawn). But none of the ANZ's deposits are invested in East Timor because, without a land title system local lending on any scale is impossible.

"There is no title, no land act, no such thing as a mortgage," says Gary Ayre, an ANZ manager who recently spent a month running the East Timor branch.

The problem is not limited to uncertain title. Under East Timor's new constitution (adopted last year) foreigners, including banks, are not permitted to own land.

As a consequence a foreign bank such as ANZ cannot take possession of land pledged as security in the event of a failed loan. Other countries get around this problem by allowing foreigners to take long-term leases on land but East Timor has yet to deal with the issue.

With commercial lending impractical, ANZ has plans only to make small personal loans of up $US1,000, but must first expand its facilities in Dili to cope with the expected rush of loan customers.

The lack of land security and the absence of a leasehold system is also a major barrier to foreign investment, particularly in tourism, where East Timor has prospects of developing a modestly profitable industry.

Will the new Government be able to cope with these hurdles? It is immediately handicapped by a desperate shortage of expertise. Few top-level bureaucrats from the Indonesian period remain and not many overseas East Timorese want to return and work for a local salary. Only about half the senior positions in the new civil service have been filled, says Colin Stewart, the UN transitional Government's main political adviser.

To cover the gap, the UN is funding 100 foreign expert advisers to continue working in the Government after independence and is asking donor countries to fund 200 more positions.

Then there is the question of whether newly independent East Timor has the ability to maintain the fiscal discipline necessary to avoid falling into debt and wasting the windfall it will receive from Timor Sea gas. Right now the Alkatiri Government is telling the World Bank and the International Monetary Fund the right things.

It intends to keep the energy revenue on budget, where it is open to public scrutiny, and put a portion of it into a trust fund or something similar, to ensure it is not recklessly spent.

But Alkatiri's Fretilin party, which holds a majority in the Parliament elected last August, is still untested and its economic instincts are "dirigiste", says a foreign official in Dili who has observed the progress of the country since the referendum in August 1999, which chose independence. Already, money is being spent on expensive symbols of nationhood which East Timor could do without for now. For example, the Indonesian state-owned airline Merpati Nusantara says it has been approached to co-operate in building a national airline for East Timor, the sort of ambitious venture which has sunk many small South Pacific countries.

"In a technical sense they are not ready [for independence]," the official says. "But you can't run the political calendar on that."

And things could be much worse. While there are doubts about the economy, the new country's security outlook is good - a remarkable thing given the destruction caused by its big neighbour only two and a half years ago.

Relations with Indonesia are now cordial and the president-elect, Xanana Gusmao, in particular, has been developing friendships with his former foes.

Ten days ago on a visit to Jakarta, he not only saw President Megawati Soekarnoputri and her key ministers, but also had a private meeting with former general Wiranto who, as armed forces commander at the time, is widely held to be one of the key people responsible for Indonesia's campaign of destruction in East Timor.

Now, finally, it is up to the East Timorese to make their own future.

see For a Debt-Free East Timor page for links to national budge

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