The approach will be backed by strong legislation, which will provide quite limited discretionary powers to Ministers to adjust legislated flows of finances either into or out of the Fund. In the first instance all funds received are likely to be deposited offshore.
The legislation is likely to contain principles to apply to the collection and draw down of funds, with close integration with the budget processes. Some flexibility will need to be built into the principles to allow for changing circumstances and particularly during the early years, to allow for some draw down of capital until such time that the fund reaches its peak capital and earnings level. However, all significant matters affecting the flows of funds are expected to require legislative backing.
After peak capital levels are achieved, a central principle is likely to be that the real capital value (value adjusted for price and currency movements) of the offshore fund will be at the very least maintained (hopefully it will grow) over time.
Thus amounts drawn into the budget will be at levels that are sustainable in terms of maintaining the real capital value of the Fund. At the same time the aim will be to draw down amounts in a consistent and regular fashion each year, to allow medium term management of expenditures and the budget in smooth and predictable ways, without abrupt changes from year to year. Appropriate management of expenditures and the total budget from year to year will be critical for successful management of oil revenues.
Offshore investments will be managed by a diversified range of AAA Grade Investment Funds. Regular monitoring of investment performance of individual Managers and the Total Fund will occur by the MoF and the BPA.
The Timor Gap Authority (which regulates licensing, production sharing and other matters in joint areas of the Timor Sea) will maintain high standards and will be staffed only with people of high international standing, so as to fulfil properly its licensing and regulatory functions and also to undertake the important role of monitoring collection of tranche 1 and tranche 2 oil payments to East Timor.
|The Revenue Service will be strengthened to ensure proper administration of the collection of oil revenues, using the highest international standards. Where necessary international technical assistance and the international contracting out of particular tasks will be undertaken. Regular and complete tax audits of oil operators will be a common feature of future tax administration.|
8.41 Important elements of the financial outlook for Bayu Undan Project (both liquids and gas phases) are as follows:
a) Total of 370 million barrels of condensate and LPG and 3 trillion cubic feet of gas over the 20-year life of the project.
b) Estimated total revenue (from all sources) to East Timor of approximately US$3.2 billion over the course of the project (at current prices).
c) Recent modelling by both the Government and the IMF under quite conservative assumptions of the build up of the offshore savings fund indicate:
|That the fund will achieve peak level in excess of US$1.3 billion (2000/2001 constant prices) in the early 2020s.|
That beyond this peak the Fund should be able to support regular drawings of around US$60 to US$70 million per year (2000/2001 values, but to be adjusted annually to approximately maintain the real value of drawdowns).
Provided there is solid growth over time in the Non Oil domestic revenues to around 10 to 12% of GDP, the budget should be able to maintain annual total expenditures of around 25% of GDP (US$ 97 million in 2001 values), without recourse to CFET debt financing (though capital and technical forms of donor assistance are still sought over the longer term). This total level of expenditure is broadly equivalent to current plan estimates (where total CFET expenditure in 2006 / 07 levels out at around 25% of GDP – Appendix Table 3).
In the event that the Bayu Undan phase-2 gas component did not eventuate a somewhat lower level of expenditures would be needed to sustain the real value of the offshore fund in perpetuity.
d) To the extent that oil prices are significantly above US$18 a barrel or that Sunrise Troubador and other prospective sites are developed at a later stage, then the situation presented would be even more promising. In these circumstances it is likely that the peak capital size of the Fund would increase sharply beyond the currently projected levels and that there would be scope for either higher annual levels of capital and development expenditures through the budget than are currently planned or for higher levels of savings for future generations, or a combination of both.
13.19 The key development indicators for each sub-sector are the following.
Establishment of a database on mining, minerals, oil and gas resources.
Trained cadré of East Timorese to deliver all services to the sector.
Development, promulgation and implementation of legislation and regulations for mining, oil and gas.
Survey and mapping of the minerals, oil and gas resource base in East Timor.
13.21(d) Department of Natural and Mineral Resources will develop a suitable database, inventory of resources and resource mapping to support management of minerals, oil and gas and to develop promotional material for the sector. These materials will be in place by June, 2003.
13.22(c) DNMR will identify and join regional and global natural and mineral resources networks, develop strategic alliances that facilitate the appropriate exploitation of East Timor's mineral and natural resources, and promote the minerals, mining, oil and gas resources of the nation to the world.
DEPARTMENT OF NATURAL RESOURCES AND MINERALS
13.24 The Department's development activities are driven by an overarching goal to plan, design and implement an efficient, effective and economic mining, oil and gas sector management and regulatory regime in East Timor. The following three programs will be implemented by the DNMR.
13.27 Indonesian mining and gas laws, technically, remain effective in East Timor. In reality they are, however, redundant as neither the organisational structure nor the sanctioning authorities are in place to enforce those laws. This comprises a substantial constraint on development in the sector, and one that discourages investors because of the uncertainty it implies. Assistance is needed to develop an appropriate legal and regulatory framework, with UNDP and ESCAP committing to providing such assistance. Once a legal and regulatory framework is established, management systems and procedures will be developed and implemented.
13.28 Reliable information about mining, oil and gas resources in East Timor is lacking. Consequently, the main activities in this program relate to surveying, mapping and the construction of an inventory of the nation’s minerals, oil and gas resources. A reliable resource inventory is needed to: (1) allow the Government, through DNMR, to understand the likely stock of resources and, therefore, be able to manage that stock in the best interests of the nation; and (2) allow potential investors to plan and assess opportunities in East Timor. Furthermore, the proposed remote sensing and GIS based survey and database development forms the main building block of the sectoral development and promotion strategy. Donor support will be sought for this program.
Excerpt from East Timor Government Budget
The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)