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The La’o Hamutuk Bulletin Vol. 8, No. 3: September 2007

English PDF Format   Bahasa Indonesia PDF Format

Table of contents:

La'o Hamutuk Proposes Changes in Petroleum Decree-Laws

Link to La'o Hamutuk index page on these decree-laws with texts, analyses, submissions, etc.

Last April, La'o Hamutuk was the only Timor-Leste NGO to make a submission to the RDTL Ministry of Natural Resources, Minerals and Energy Policy regarding three proposed decree-laws which would restructure how Timor-Leste manages petroleum projects, establish a national oil company and create a National Council on Energy Policy. The June 2007 La'o Hamutuk Bulletin summarizes the laws and our April submission.

The two-week public consultation was too short to allow thorough analysis of these complex decree-laws. In response to public concerns, the Government wisely extended the time for submissions, postponing enactment until after the elections. The mandate for the bi-national Timor Sea Designated Authority (TSDA) has been extended until January 2008, removing one pressure for hasty creation of new regulatory mechanisms.

A new government has taken power since this process began, with some changes in current structure and in its vision for how to develop Timor-Leste's petroleum resources. Two of the three draft decree-laws -- Regulatory Authority and National Oil Company -- will be included in a "Petroleum Optimization Law" which will be drafted soon by the State Secretariat for Natural Resources. Responsibility for a National Council on Energy Policy goes to a new Secretary of State for Energy Policy.

Brazil is the model for much of what was proposed for Timor-Leste in these draft laws, but their Energy Minister was fired in May, and 50 of his staff were arrested. São Tomé has one of the world's best regimes for managing petroleum revenues, but a corruption scandal surfaced there in June. These sad experiences should cause Timor-Leste to try even harder to develop laws which are not only among the best in the world, but which will keep our nation from falling into the same trap.

With help from international experts, La'o Hamutuk submitted more than twenty pages of additional commentary on the proposed decree-laws in July, which is summarized below. The complete submission is available on our website or from our office.

These should be Parliamentary Laws, not Decree-Laws passed by the Council of Ministers.

International experience shows that the petroleum sector, especially in countries which depend on it for most of their revenue, is particularly vulnerable to mismanagement, corruption and abuse of power. Therefore, we should use the strongest, most transparent, most democratic, most inclusive and most deliberative process to establish stable foundations for future petroleum development and regulation.

Parliament operates in public, with participation from many political parties, unlike the Council of Ministers which meets in secret and includes only people chosen by the Prime Minister. As with the unanimous parliamentary passage of the 2005 Petroleum Fund Act, an open and extensive public consultation and parliamentary debate can help ensure that the whole society supports the decision. Especially with a coalition government, a law passed openly by elected representatives is more durable than a secretly-debated decision by the government of the day. Such stability is attractive to international petroleum companies, purchasers of our petroleum product exports, and others concerned about transparency, accountability, corruption and long-term, sustainable economic development.

Three laws cannot fill a legal vacuum.

A comprehensive legal framework should be in place before these specific laws are enacted, as they do not fit easily into our mixed Timor-Leste/UN/Indonesian legal regime. In particular, overall statutes on transparency, environmental protection and review, dispute resolution, and conflicts of interest should be enacted first. If these draft laws are passed without that foundation, there will be legal confusion. Many of the structures used in them do not exist in Indonesian law, which applies in areas where Timor-Leste has not yet passed a new law.

Some related laws are already in effect, including the Petroleum Act, the Petroleum Fund Act and the law on Public Companies. These new laws must be consistent with them. Contradictions and gaps in legislation create loopholes which could enable corruption or worse; they also make it hard for the laws to be administered by officials or enforced by a court. Before these laws are passed, Parliament should pass an organic law for the Ministry of Natural Resources, Minerals and Energy Policy, as it has done for other ministries. This organic law would make parts of these decree-laws unnecessary.

Petroleum exploration and distribution are different.

The draft laws create a National Regulatory Authority on Natural Gas and Biofuels (ARNP), Timor-Leste National Petroleum Company (PETROTIL) and a National Council on Energy Policy (CNPE). Each new agency has authority over the entire petroleum process, from exploration and production (upstream), to refining, gas liquefaction, marketing, distribution, and retail sales (downstream). This is a significant expansion of the 2005 Petroleum Act, which only covers upstream activities. The purpose of upstream operations is to provide revenue for the State treasury, while downstream, from a national government perspective, is to ensure energy availability to the people of Timor-Leste. It is unreasonable and inefficient to put them under the same regulators, who will inevitably prioritize certain concerns and neglect others.

Centralized power can lead to corruption.

Decision-making power, appointments and access to information are too centralized in the Minister of Natural Resources, Minerals and Energy Policy (MNRMEP). Checks and balances, consultation, and transparency are necessary within Government, with other state institutions (President, Parliament, Provedor and judiciary) and with non-governmental actors (business, civil society, local communities).

(The structure of the AMP government created in August divides the functions of the MNRMEP among two Secretaries of State; this is a welcome step toward decentralization but raises concerns about the lower profile given to managing the petroleum sector.)

Transparency and public information are essential tools to help prevent corruption, collusion and nepotism. Timor-Leste needs a comprehensive, government-wide, legally-binding policy of public information based on the principle that everything should be public unless there is a compelling reason for it to be concealed, but these laws lack basic provisions for transparency. In particular, the secretive instincts of petroleum companies, often claimed as "commercial confidentiality," should not override the right of citizens to understand the exploitation of our resources and the performance of our public servants.

No country would need laws if everybody was well-intentioned and performed their tasks flawlessly -- the purpose of legislation is to ensure that human greed or fallibility do not cause serious consequences for the people and the State. Unfortunately, conflicts of interest are permitted by many articles in the proposed laws, which contain little to hold wrong-doers accountable for their actions.

Timor-Leste should have a government-wide conflict of interest code which applies to all decision-makers. In addition to prohibiting involvement with businesses whose interests overlap with their regulatory duties, such a code should require them to declare their assets before beginning service, every year and when their service is completed.

National Regulatory Authority on Natural Gas and Biofuels

The proposed legislation creates the ARNP as a semi-autonomous agency, rather than a normal government department (such as the current National Directorate of Petroleum and Gas (DNPG)), to manage the State's oil and gas resources for the benefit of our people. We believe that this role is too important to be removed from the democratic process, and should include Parliamentary oversight and appropriate public consultation. In addition, the ARNP budget should be part of the State budget, and its revenues should come from Parliamentary appropriations. Petroleum-related revenues should go through the legally-required Petroleum Fund process, rather than directly to the ARNP. People who work for the ARNP should have the same rights, responsibilities and benefits as other public servants.

Petroleum development in countries similar to Timor-Leste often brings a resource curse. Some of this arises from mismanagement or theft of revenues, but it also results because commercial companies are formed to benefit their shareholders, rather than the people of the countries where they operate. Commercial companies will watch out for their own economic desires, but who besides Timor-Leste's Government will safeguard the needs and well-being of Timor-Leste citizens?

The proposed legislation prioritizes short-term commercial concerns over long-term public interests. Regulation must include protecting the environment from leakage, accidents and waste; providing for sustainability and inter-generational equity; safeguarding worker health and safety; preventing violations of land rights and human rights; developing alternative energy; maximizing spin-off to Timor-Leste businesses and workers; and minimizing climate impact. These are mostly ignored in the draft mandate of the ARNP, which also omits the need to consult communities and the public before approving activities which would affect them.

The entire ARNP Board of Directors would be chosen by the Minister for Natural Resources. We suggest that they be appointed by different officials and confirmed by Parliament. In addition, this Board should be internally democratic and transparent. The compliance officer (Single Auditor) should be independent, and his/her reports should be published.

The scope of activities regulated by ARNP would be extremely broad, and everyone who trades in petroleum products has to register with ARNP and receive authorization. As proposed, this includes every shop which sells kerosene or exchanges LPG bottles, every kiosk which sells petrol, every street vendor who sells butane cigarette lighters.

Timor-Leste National Petroleum Company (PETROTIL)

La'o Hamutuk supports the creation of a strong, well-managed, citizen-owned national oil company for Timor-Leste. Such an institution can help develop our resources and our capacity to manage them, as well as maximizing income to Timor-Leste. In addition, a transparent, accountable, democratically-controlled national oil company will respond to our own people, rather than to overseas investors. It will prioritize Timor-Leste's long-term interests, rather than daily share prices or quarterly dividends.

However, in other countries national petroleum companies are often a path to disaster. They can be used to evade responsibility for pollution caused by foreign companies (such as Texaco selling its interests in Ecuador to Petroecuador), or to enable flouting laws about safety or communication with local people (such as NNPC in Nigeria). If not carefully regulated, a national oil company is more dangerous than a privately owned one which has to answer to regulators in countries where its stock is traded. Timor-Leste's Government alone will have the responsibility to keep PETROTIL honest, responsible and transparent, and this is a critical and difficult task.

PETROTIL should he held to a standard of transparency and accountability as high as a rich democracy applies to a publicly traded, investor-owned oil company.

Good corporate governance should be explicit and mandatory for all PETROTIL operations, including prohibitions of conflicts of interest, compliance with international transparency standards, parliamentary oversight, public and community consultation, periodic published independent audits, and governmental and public reporting. Unfortunately, the draft PETROTIL statute contains none of these requirements, and it therefore endangers Timor-Leste.

A multi-sectoral Consultative Council, similar to the one for the Petroleum Fund, could help improve oversight and accountability.

The draft PETROTIL statute requires PETROTIL to distribute profits to its own employees and directors and links workers' wages to PETROTIL's profits. This is an open invitation to corruption and violates the RDTL Constitution, which says that petroleum resources belong to Timor-Leste, not to a select appointed few. MNRMEP minister José Teixeira claimed that profit-sharing is necessary to attract qualified personnel in the highly-paid oil industry. We believe it is more likely to attract greedy people tempted by the chance to steal our resource entitlement.

PETROTIL profits should go through the Petroleum Fund, like all other petroleum revenues. When PETROTIL employees take a share, this is a dangerous precedent. Should tax collectors be paid a percentage of the revenues they collect or purchasing agents receive a percentage kickback for the contracts they award? PETROTIL workers should be covered by the same labor code and salary system as other public employees.

PETROTIL's international staff and their families would be exempt from import taxes on personal items undermining the rule of law. Other parts of the draft law also create a corruption-friendly atmosphere, such a "simplified" tender process, centralized appointments and no requirement for an outside audit.

Draft Law on Regulation of Petroleum Activity

This law sets up a National Council on Energy Policy (CNPE), which is empowered to propose policies to the Council of Ministers. This indicates that it is an advisory body, without real decision-making powers or legal responsibilities. We concur with this, but other commentary on the CNPE describes it as an oversight or regulatory organ. The law also mandates CNPE to recommend approval of the budgets and financial reports of energy regulators, but it's unclear if the CNPE itself can approve (or reject) such reports.

Like the other proposed decree-laws, this one is very weak on decentralizing authority, transparency, sustainability, preventing conflicts of interest and intergenerational equity. In addition to energy security, the CNPE should consider building the capacity of the RDTL labor force, increasing the absorptive capacity of our economy, long-term planning, minimizing global environmental damage, and protecting Timor-Leste's land, communities, and existing activities (such as fishing and agriculture).

The CNPE is responsible to help shape energy policy for the entire nation, and it should be expanded to include representatives of labor, rural communities and consumers. Six of the ten proposed members are ministers or their designees (three of the remaining four are appointed by the Minister of Natural Resources), and Government ministers already have a large influence on policy. A Council like this one should incorporate diverse perspectives, and should involve civil society, agents and consumers.

Conclusion

These laws were poorly thought through before they were circulated for public consultation and would have seriously damaged Timor-Leste if they had been passed. We are encouraged that the previous Government responded to public and internal criticisms and the new Government is undertaking a more deliberate process. We hope that the final versions of each of these laws (which can each be enacted separately) will be part of the best possible legal regime to manage this dominant, lucrative and perilous aspect of Timor-Leste's future.


Gareth Evans Must Apologize to the People of Timor-Leste

Statement from the Timor-Leste National Alliance for an International Tribunal
during former Australian Foreign Minister Gareth Evans' visit, 4 August 2007

Gareth Evans comes to Timor Leste for the first time since Timor-Leste's independence. We believe that he should recognize his complicity in the suffering of the Timorese people during the 24-year Indonesian occupation. Indeed, he should apologize before he sets foot in this country.

Gareth Evans does not visit at a good time, because now Timor-Leste is politically unstable, with Australia continuing to pressure Timor-Leste as it has many times in the past.

Looking back, at the time of the 1991 Santa Cruz Massacre, Gareth Evans was the Foreign Minister of Australia, and he tried to convince the international community that the Santa Cruz Massacre was "an aberration, not an act of state policy." This shows that Gareth Evans contributed to suppressing the truth about the violence that was being perpetrated against Timor-Leste.

When Gareth Evans' party was in opposition, it adopted policies against the Indonesian occupation of Timor-Leste and to limit Australian military assistance to Indonesia. But when they came into power he changed these policies, acting as if Timor-Leste had no problems and no human rights violations. His Labor Party changed its policy, and continued negotiating with Indonesia about Timor Gap oil reserves. In December 1989, Gareth Evans signed the Timor Gap Treaty with Indonesian Foreign Minister Ali Alatas. This Treaty was how Australia and Indonesia stole Timor-Leste's oil and continued their illegal occupation of Timor-Leste, which killed 250,000 people.


Foreign Ministers Gareth Evans (Australia) and Ali Alatas (Indonesia) celebrate signing the Timor Gap Treaty in an airplane flying over the Timor Sea, December 1989. The treaty assigned half of illegally occupied Timor-Leste's offshore oil resources to Australia and the other half to Indonesia.
Gareth Evans debates with Timorese demonstrators during his first visit to independent Timor-Leste, August 2007. He told them he has nothing to apologize for.

Gareth Evans continues to avoid justice for the Timor-Leste people. Now, when Timor-Leste's political and security situation is unstable, he comes to visit as if he had never done anything against our people. Therefore, once again we urge him to recognize his sins, the political manipulation he committed, and ask forgiveness from the people of Timor-Leste.


Editorial: Timor-Leste Content Should Meet Timor-Leste's Needs

Link to La'o Hamutuk index page on Local Content with texts, commentaries, submissions, etc.

As La'o Hamutuk has often written, petroleum development is essential for Timor-Leste's government income and economy, and will be for about two generations. But if petroleum revenues are to benefit the people of Timor-Leste, they need to be managed well. In addition, our resources and the income they produce must be utilized to develop other sectors of our economy, so that it will be strong even after all our oil and gas has been sold. This is a crucial aspect of moving Timor-Leste beyond a petroleum-dependent, rent-seeking economy toward a more diversified, sustainable one.

One way to do that is to ensure that foreign companies involved in petroleum operations maximize their use of Timorese workers, goods and services, providing training and support to develop new skills and business which can serve other sectors as well. The portion of oil company expenditures which comes into Timor-Leste's economy is called "local content" or "Timor-Leste Content."

In June 2007, the Timor-Leste Government circulated a decree law for public consultation establishing "Policy and guidelines for administration and monitoring of Timor-Leste Content." This decree-law builds on ideas from the 2005 Petroleum Act and sets up a Timor-Leste Local Content Committee, criteria for projects to qualify as local content and a process for proposals and approval of such projects.

Unfortunately, the National Department of Petroleum and Gas (DNPG, within the Ministry of Natural Resources, Minerals and Energy Policy) circulated the proposal only through their website and in their office, and allowed only three weeks for commentary. As a result, La'o Hamutuk and two oil companies made the only submissions.

To increase public awareness and participation in this process, La'o Hamutuk met with DNPG advisors and participated in a public meeting organized by the NGO Forum with the Eni oil company from Italy, which has exploration contracts for several offshore blocks in Timor-Leste. We also organized a public meeting to help the government explain the concept, and most of the people who attended had not heard about local content or the draft decree-law.

The Petroleum Act requires oil companies to include a proposal for Local Content when they make their bid prior to receiving an exploration or production contract from the government of Timor-Leste. The draft regulation explains how that proposal will be implemented, setting up a Timor-Leste Content Committee (TLCC) to evaluate specific proposals for Local Content projects, and make recommendations on whether they benefit the development of Timor-Leste, in accordance with principles of transparency and good governance. The TLCC would be under the Minister for Natural Resources, Minerals and Energy Policy, who selects its membership: a chair, two members with knowledge of human resources development or the petroleum industry, and representatives from an NGO, an educational institution and the local business forum.

On 26 June, La'o Hamutuk submitted our analysis and recommendations to the Government. Since then, a new government has come into office, with a Secretary of State for Natural Resources replacing the Ministry which had a broader mandate. The new government views Local Content as part of "Social Responsibility" to be included in a new Petroleum Optimization Law. Some specifics of this legislation will change, but the issues in our submission are still relevant, and a summary follows:

Local Content is one way to diversify our economy.

Money from petroleum development often does not meet people's expectations, which is one component of the "resource curse." Local content requirements, carefully planned over decades, can reduce this problem by helping to diversify Timor-Leste's economy away from dependency on petroleum revenues.

Investments in the petroleum sector are very large, generating high expectations among our people, but much of the money is spent outside Timor-Leste because the capacity of our economy to absorb this money is limited. Timor Leste has seen this with international assistance over the past eight years. The international community has spent close to three billion U.S. dollars on Timor-Leste, but it has not developed our local economy. Timor-Leste still imports many things because we do not yet have the businesses, the manufacturers, the infrastructure or the experienced workforce to supply most needs of foreign companies in our country.

We encourage a long-term strategy to use local content to develop our economy. Petroleum development in Timor-Leste will continue for several generations, and our human, agricultural, infrastructure and manufacturing capabilities will grow.

In many countries, oil projects actually increase poverty, as foreign oil companies exploit the public's resources for their shareholders' profit, leaving little benefit for the people of the country. Therefore, the State must create mechanisms to protect the people's interests.

Like other petroleum-dependent nations, Timor-Leste needs to reduce our dependency and diversify our economy. So far, Timor-Leste receives high revenues from petroleum, but the industry has provided few opportunities for employment or to develop the non-petroleum sector. This regulation gives legal power to the government so that it can direct companies who exploit our resources to consider our local needs.

Local Content projects should not be paid for from public revenues, and oil company public relations should not substitute for government programs.

It is important to understand that expenditures related to implementing Local Content policies are often paid for by Timor-Leste. Much of the money spent on Local Content by a company with a Production-Sharing Contract (PSC) will be cost-recoverable under the PSC, which means that it will be subtracted from the revenue that the government receives. As a result, Local Content projects and procurement are not paid for by the companies, but by Timor-Leste's people.

It is better for the companies to spend money in Timor-Leste rather than overseas, and for them to hire Timorese workers in preference to foreign workers. But La'o Hamutuk does not want this money to be wasted, or only to promote the company's image, since it comes out of Timor-Leste's treasury (albeit circumventing the Petroleum Fund and budgeting processes).

In June, the Eni oil company briefed local NGOs in Dili about "Local Content and Sustainable Development." They discussed Eni's "engagement" in other countries: agriculture in Nigeria, malaria control in Azerbaijan, AIDS awareness in Africa, education in Venezuela, a medical center in Libya, rice cultivation in Congo, etc. These are not related to petroleum development, but are intended to reduce criticism and make the people whose resources Eni is profiting from feel better about the company.

Some of the NGOs attending became eager for a share of the $9.5 million Eni has promised for Local Content. Very little will be spent on purchasing goods and services, which means that most of it will be given to organizations for projects they propose. However, Eni did not mention that the money would be taken from Timor-Leste's revenues until they were directly asked.

In July, National Director of Petroleum and Gas Amandio Gusmão told La'o Hamutuk's public meeting that only some expenditures will be recoverable, although Eni told their meeting that they expect Local Content projects they fund to be included as recoverable costs. The Local Content Policy needs to be clear about this.

Our government should not pay foreign oil companies to select and manage non-oil projects that should be handled by through normal budgetary and administrative processes. Oil companies do not make decisions openly and democratically, do not prioritize the public interest, and are not development professionals. Such projects should be run by Timor-Leste's Government or international development agencies, whose mission is to reduce poverty or provide services.

La'o Hamutuk believes that petroleum company public relations should not be cost recoverable. Expenditures which would not be made if the company had to pay for them out of their profits, or whose primary purpose is public relations, should not be recoverable or considered Local Content. Rather, Local Content should apply to decisions which the company makes in the course of its exploration and production: what goods to buy, which employees to hire, what subcontractor to use, etc. In these decisions, Timor-Leste goods, services and employees should receive priority.

"Timor-Leste content" should really come from Timor-Leste.

Local Content can stimulate local economic, social and infrastructure development, and we must ensure that these investments provide sustainable benefits to Timor-Leste. In addition to stimulating future development and growth, local content can be an immediate mechanism to inject money into Timor-Leste's economy and to create jobs, helping to reduce our crisis-level rate of unemployment.

This requires "local content" actually to come from Timor-Leste workers, not from importers from foreign manufacturers, which does not significantly benefit the Timorese economy. For example, a chair could be bought from a Timorese carpentry workshop or from an importer of furniture mass-produced in Indonesia. The former helps develop our economy and provide jobs; the latter does not.

We suggest that a "Timor-Leste content" purchase be at least 50% produced in Timor-Leste, and that at least 50% of the dollars paid for work and services relating to a Local Content project be paid to Timor-Leste citizens.

The Local Content Committee should be effective, transparent and accountable.

We support the idea of the Timor-Leste Content Committee (TLCC) to oversee the execution of the Local Content regulation. However, the draft regulation needs to be clearer about appointments, require transparency of information, include safeguards against conflicts of interest, and protect against corruption. Public consultation and open tender processes should be required for local content project awards and procurement. The regulations should also include mechanisms and sanctions if companies violate the regulation or provide false or incomplete information.

Access to the internet is difficult for nearly all Timorese people, and we suggest that DNPG establish a publicly accessible information center, where proposals could be read and comments accepted. This information center could also facilitate public awareness on other aspects of petroleum development and public tenders, as well as helping people understand these issues critical to our national economy.

The Local Content regulation derives from the 2005 Petroleum Act, which requires that applications for production-sharing contracts include proposals for training and preferential employment of Timor-Leste nationals and for acquisition of goods and services from Timor-Leste. La'o Hamutuk previously recommended that companies' proposals in these areas should be published before contracts are awarded, but they are not required to be public at all. This makes it difficult for the Local Content process to be transparent, as the public cannot know what the company has promised to do.

Women and children should not be ignored.

We believe that the Local Content regulation needs to give attention to vulnerable groups, such as women and children, the future of our nation. In this patriarchal society trying to move toward gender equality, it is important to focus on women in every aspect of our nation's life.

When large investments come into other countries, they usually don't benefit women or children but reinforce the dominant position of men in the society. Many women work in their homes, and many children leave school to seek work. Some companies exploit children, making them do heavy work. With many highly-paid foreign male workers, women may be coerced into prostitution.

We therefore recommend to include gender equity and impact in the project requirements and selection criteria.

The public consultation mechanism still needs improvement.

Public consultation is a mechanism to facilitate public participation, and this public consultation has been slightly more accessible than past consultations on petroleum legislation. Although the available languages have improved, the Government publicized this consultation only through email and internet, which most people find difficult to access. At La'o Hamutuk's public meeting, many participants expressed unhappiness with the consultation process, including the lack of available information.

Future consultations should use additional media and hold public hearings at national, district and sub-district levels. The people who will produce the goods and services, or will seek training or employment in the industry, as well as those who live in communities where petroleum development may come, should have an opportunity to participate.