Presented at May 2002 Donors' Conference
At Oslo, the Government outlined its commitment to the development of policies to promote sustainable public finances in three main areas:
The Government has made significant progress in delivering on these commitments. The new revenue measures are discussed in Part 5.
East Timor needs a sound saving and investment strategy to maximise the benefits to the East Timorese people of the significant Timor Sea revenue expected over the next twenty years.
Current policy is to save part of the revenue from the Timor Sea. All First Tranche of Petroleum (FTP) revenue that is expected to amount $42.2m in the next three years ($1.1m in 2002-03, $8.8m in 2003-04 and $32.3m in 2004-05) will be saved. This demonstrates the commitment of the Government to strong saving and investment policies.
In accordance with this objective, the Government is committed to the creation of an oil fund, to encourage the wise investment of oil savings. Such a fund will also serve as a vehicle to save revenue for future generations, to insulate the non-oil economy from the adverse effects associated with natural resources windfalls, and smooth the Government expenditure.
To establish the fund the Government has approved the following principles to be adhered to:
A Government fund’s assets management strategy and the legislation for creation of the fund will be developed by the Ministry of Finance with technical assistance from the International Monetary Fund.
The original Timor Sea revenue forecast presented in the 2001-02 Mid-Year Update has been revised to reflect the change to a number of factors that have a material impact on the project, namely:
The Bayu-Undan Understandings have greatly improved East Timor's revenue prospects in the medium and long term by enabling the production of gas (and not only liquids) and installation of infrastructure that may trigger other Timor Sea developments. In the early years of production, however, the Understandings will cause a reduction in the amount of revenue compared with the revenue from the liquids alone without taking into consideration the changes to tax and production-sharing. This is a good outcome for the long-term benefit of the people of East Timor. The revised oil revenue forecasts are presented in Table 5.3.
The significant downward revision of $137.6m of Timor Sea revenue in 2005-06 is based on the assumption that the "full" gas project will go ahead. The reduction is to some extent offset by better than previously forecast revenue from an earlier commencement of the Bayu-Undan production and higher tax revenue during the construction phase.
The Ministry of Finance has prepared a “central” forecast using a consensus level oil price based on the forecasts from the companies, IMF and the World Bank. “Central” means that there is an approximately equal chance that the out-turn could be better or worse. The forecast uses a long-term price equivalent to about US$ 18.70 per barrel (Brent).
Following the careful consideration of the downside risk factors and upside potential, the Government has adopted a prudent approach to revenue projections and endorsed a 4-year revenue forecast based upon a 25% reduction from the central forecast developed by the Ministry of Finance.
Table 5.3: Oil Revenue Central Forecast
Table 5.4 represents the total estimate budget revenue comprising both domestic and Timor Sea revenue estimates for the period 2002-05. The revenue estimates (excluding FTP) for the next three years of $161m exceed the 2002-03 Mid-Year Update estimates by $5m. This largely reflects the impact of the Governments’ revenue measures as the revision to Timor Sea revenue forecasts mainly impacts on the profile of the revenue stream over the three years.
Table 5.4: Total Budget Revenue Forecasts
The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)