Subject: Small business still suffering in East Timor

Small business still suffering in East Timor

Updated September 18, 2008 19:43:15

A new report by the World Bank shows it's no easier to run a business in East Timor now than it was a year ago, despite the government's efforts. The survey shows small businesses have trouble getting lines of credit and foreign investors still face many hurdles.

Presenter: Stephanie March

Presenters: Rainer Venghaus, Country coordinator for international finance Corporation; Mario Mendes, director general of BNU; Joao Gonsalves, Minister for Economy and Development; Jose Teixeira, Fretilin opposition MP.

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MARCH: A key priority for the AMP coalition government led by Xanana Gusmao is to develop the private sector.

Tax cuts came into effect on July 1 and new investment legislation is expected to go before the Council of Ministers in coming weeks. But the recent Doing Business survey by World Bank agency the International Finanace Corporation or IFC says there's still a long way to go. The annual survey rates the ease of doing business in 181 economies and this year's it shows East Timor failed to improve on it's 2008 rank of 170. Country coordinator for the corporation Rainer Venghaus says it has been working with the government and private sector to develop possible reforms.

VEBGHAUS: And one message we got was to have a clear mapping exercise to know what is happening and how to actually register a business, how to get a license, how to pay taxes. And we are in that process now which I think shows quite a sign where the problems already start, or to put it positively where we can have fairly quick improvement.

MARCH: But for small entrepreneurs in East Timor even getting to the stage of registering a business is proving to be a challenge. Following the 1999 referendum violence and bloody political crisis in 2006, many borrowers defaulted on their loans due to loss of income or assets. Mario Mendes is the director general of BNU, the largest of East Timor's three commercial banks. He says it's a huge risk to lend to small businesses.

MENDES: But the risk? It's a big risk.

MARCH: There are a handful of small microfinance organizations in East Timor, but to get lenders and small entrepreneurs back on track, Economy and Development Minister Joao Gonsalves is asking groups like the World Bank and the IFC to help start a National Development Fund.

GONSALVES: That we can use and then negotiate with the three commercial banks some terms and conditions that would involve low interest rates and certain mechanisms that can support. I believe the private sector need this initiative to try to improve and develop because this is one of the biggest problems. We have a weak private sector but I think the main problem they face is access to finance.

MARCH: Rainer Venghaus from the IFC says the idea needs to be scrutinized, and could be problematic.

VENGHAUS: What we find, and that is not just IFC, generally the finding from other agencies is that a national development bank the experience is not very favorable.

MARCH: Fretilin opposition MP Jose Teixeira agrees.

TEXEIRA: Providing state funds, government funds, for loans is fraught with danger because people will see it as money they don't necessarily have to pay back because it is theirs any way.

MARCH: He says the problem for entrepreneurs in East Timor is not about a lack of available money.

TEXEIRA: There is a law for licensing banks, but yet you have very few banks applying for it. That is because there are still problems with enforcing contracts, there are still problems with getting securities registered, and of course you still have uncertainty about security situation. All of these things are what contribute to a lack of credit and access to credit. It is not the absence of money itself.

MARCH: Along with investment and tax reform, the government is working on a nation-wide project to establish a formal land titling system, to increase foreign investor confidence. Minister Joao Gonsalves says he is not worried about the results of the Doing Business survey, as next year's survey would more accurately reflect the impact of AMP government reforms.

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