Vol. 9, No. 3: November 2008
Ligasaun ba versaun Tetum/Bahasa Indonesia
High-Resolution (1.3MB) English PDF Format | Tetum/bahasa Indonesia PDF Format
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Issue foci: Jatropha agrofuels project, state budget
Table of contents:
Jatropha: Jobs for farmers or fuel for foreigners?
In February 2008, the company Enviroenergy Developments Australia signed a contract with the Timor-Leste government to develop a multi-million dollar jatropha bio-diesel processing facility in Baucau district. The proposed facility could become the largest non-oil private investment in Timor-Leste, with the government claiming that it will create 30,000 rural jobs. La’o Hamutuk decided to find out more about the facts and future implications of the project.
What is Jatropha?
Of the approximately 175 types of jatropha plants, shrubs and trees, two grow across Timor-Leste: Jatropha curcas, (known as ‘ai oan mutin’ in Tetum), and jatropha gossypifolia (‘ai oan metan’). They are poisonous and cannot be eaten by animals or humans, although jatropha curcas is used in medicines. Jatropha seeds contain a lot of oil, which can be released by crushing them.
Jatropha probably comes from Central America and Mexico, and the Portuguese introduced jatropha curcas to Timor-Leste to use in oil lamps. Jatropha is rarely used as firewood as it burns rapidly, and in Timor-Leste it is mainly used in 'living fences' to keep animals out. Both these types of jatropha are considered weeds in many countries; some governments, including Australia's Northern Territory, ban planting or importing jatropha seeds.
Jatropha as Fuel
Petroleum is being used up worldwide, and burning other non-renewable fuels releases harmful carbon into the air, causing climate change. Therefore, the world needs to supply and use energy more sustainably (see La’o Hamutuk Bulletin Vol. 9 No. 2 August 2008). Some suggest using agriculture to grow fuel which would replace petroleum, which is called ‘agrofuels,’ a form of ‘biofuels’ (see box below).
Oil from jatropha seeds can be used directly (such as in lamps), or processed to make a motor fuel called biodiesel. Jatropha oil can be processed in large centralized factories, or in small community-level presses. Although factories can extract more oil from each seed than small presses, they use more energy in transport, construction and maintenance. Jatropha biodiesel burns best at high temperatures and is often used in electric generators or automobile engines. Biodiesel is usually mixed with petroleum diesel (5-10% biodiesel), although engines and generators can be adjusted to take larger portions of biodiesel. When jatropha biodiesel is produced, byproducts can be made into pellets which can be burned to create electricity or used as a fertilizer. These pellets are poisonous to livestock, but the toxins can be extracted so that it can be used to feed livestock; it is unclear if this can be done profitably. The process also produces glycerine, which can be used to make soap. Jatropha curcas plants begin producing seeds of good oil quality after 3-5 years, and will produce seeds for agrofuel for 35-40 years.
EDA plans to produce biodiesel from jatropha curcas in Timor-Leste, mostly with seeds imported from South-East Asia, they will then export the biodiesel overseas. Large-scale growing of jatropha is new, and it remains unclear if this cash crop is a positive development for poor countries.
Plans for a Jatropha Processing Plant
On 13 February 2008, the RDTL Government and EDA signed a contract for EDA to develop a jatropha processing plant at Carabela, between Vemasse and Baucau, approximately 120km east of Dili. This plant would convert jatropha seeds imported from overseas or grown in Timor-Leste into biodiesel and produce pellets from byproducts.
The Government agreed to issue relevant licenses and sell or rent land to EDA at the Government Industrial Land Zone at Carabela. It also agreed to provide tax concessions. However, the 2008 “tax reform” law slashed taxes and import duties for all businesses, (see Editorial, LH Bulletin Vol. 9, No. 2), so that there are few taxes left to concede to EDA. In addition to the Industrial Land Zone, the government also agreed to provide access to other land such as the port at Carabela on the north side of the Dili-Baucau road. They also offered to mediate between the company and private land owners if EDA wishes to buy land.
EDA promised to start construction by mid-2009. While EDA estimated it would invest $550 million over ten years, it did not commit to spend any minimum amount of money. This is different from agrofuel projects in countries such as Mauritius, where government incentives are calculated each year based on how much money a company has invested.
The processing plant at Carabela will be on 59 hectares (about 120 football fields in area) of ‘Industrial Land’ bordering the eastern side of the Vemasse River south of the Baucau-Dili Rd. According to the contract, it includes privately owned land. (The Chefe de Suco of Carabela told La’o Hamutuk that nine hectares of this land was previously rice paddy, with the owners given tractors as compensation.) EDA would also use land north of the road along the shore; this would include EDA adapting the Carabela Port to the company’s needs.
The currently unused port was built during the Indonesian occupation by the Timor Cement company, which closed after 1999. According to the Chefe de Suco, the port land was owned by the community before Indonesia invaded.
As of August 2008 the Carabela community had not received any information about the processing plant or development. The EDA-RDTL contract says that land was to have been rented or purchased by 1 June 2008.
The contract requires EDA to apply the same ‘development standards’ as if the plant were built in the Northern Territory, Australia. It refers to environmental and safety requirements, oil storage, seed and general storage, emission standards, fire protection and building standards. This attempts to address the currently confusing legal framework in Timor-Leste, where Indonesian, UNTAET and/or RDTL laws can apply. However, Timor-Leste does not yet have the capacity to enforce rigorous standards and lacks the appropriate licensing agencies, codes of practice, inspectors and, functioning legal systems. As Timor-Leste continues to enact its own laws, a contract referring to Australian laws will be increasingly uncertain and illegal.
Biodiesel processing plants bring various serious health and safety concerns, as they involve transport and storage of methanol and other dangerous and toxic chemicals which can easily catch fire or poison people. Workers will work with hazardous chemicals and waste products from water desalination and sewage, which must be carefully managed to safeguard people living near the Industrial Land Zone and the Carabela port. In other countries, people are not allowed to live in heavily industrial areas because of concerns of noise, pollution and possible accidents such as chemical spills. Water pollution could also affect marine life (and the people who eat it).
The contract does not define who will pay for environmental, social or safety management of the processing plant. The Government might have to pay for monitoring and managing health and safety operations and protecting the local marine environment, as well as containing emergencies such as chemical spills. Until public servants develop the necessary skills, the government may have to hire contractors. If the government does not fulfill these functions, there could be negative consequences for local health, tourism, travel and the communities. In order to deliver jatropha from local farmers, the Government may have to upgrade roads and other infrastructure.
EDA is not required to manage or rehabilitate the quarry they will use, or to make the industrial site clean, safe and suitable for other uses when the company leaves. Waste products would also have to be managed through landfill, recycling, isolating waste from the environment, or other mechanisms. It is possible the government could inherit all these costs.
Even if the government can monitor and manage impacts adequately, it has little capacity to enforce standards. Either EDA or the Government can cancel the contract if the other party does not meet its obligations, but the Government cannot cancel it because EDA fails to meet health, safety or environmental standards. If the contract is cancelled, Timor-Leste will be left to clean up the mess.
How much will farmers get?
Under the 2008 contract, EDA agrees to buy seeds from farmers on the same terms as a previous 2005 agreement with Daba Loqui. The earlier agreement was to buy unrefined jatropha oil (not seeds), with the price linked to the international price of crude oil if the price of crude oil goes up, the price for jatropha oil also increases. However even with oil prices much higher today than in 2005, the price offered is still very low.
La’o Hamutuk has tried to estimate the amount farmers will receive for growing jatropha, but exact calculations are impossible. International information on the cost of processing and the yield of jatropha seeds per tree or hectare varies widely. Companies which sell seeds have an interest in claiming high yields, and there is little independent research to confirm their figures. Fertilizer, irrigation and pruning can also increase yields, while growing jatropha on poor quality soil with little water will yield fewer, poorer quality seeds.
As jatropha curcas has never been domesticated in Timor-Leste nobody knows how many seeds it will yield or how vulnerable it will be to viruses or pests which emerge in monoculture plantations. In other countries, rain-fed jatropha produces approximately 1000 kg of seeds per hectare although this varies from place to place based on soil quality, inputs and local rainfall.
Creating unrefined jatropha oil requires the following processes which would be costed in the EDA price providing seeds and cuttings to farmers; waiting 3 5 years to establish seeds with a good oil content; harvesting jatropha pods; washing and hulling pods to reach the seeds; transport to an oil extraction facility and extracting the oil. In the 2005 contract the cost, labor and other resources required for this process was shared between farmers and the processor, Timorese company Daba Loqui. However, to what extent this process still applies is unknown as EDA no longer partners with Daba Loqui and now plans to use byproducts in its operations.
Under the current contract EDA would pay for a metric ton of unrefined jatropha oil 2.22 times the world market price of a barrel of crude oil. If the crude oil price is $100, this is 20¢ per liter of oil, which uses 3.5 kg of seeds. The farmer and processor would share 6¢ for a kg of seeds.
This price is consistent with the 10¢ per kg Daba Loqui said they were offered by EDA for jatropha seeds. The company told La’o Hamutuk that 10¢ per kg was not enough to meet their costs, so they asked for 50¢ per kg. They said the disagreement over price was one of the reasons their partnership broke down. Even in a best case scenario with a processor and farmer sharing income equally, farmers would receive only 3¢ per kilogram of seeds.
La’o Hamutuk estimates that a one hectare farm planted entirely with jatropha will earn only $30 per year.
If farmers needed or demanded a significantly higher price, the project would not be commercially viable, Timorese farmers would also need to compete with EDA’s imports of seeds from Southeast Asia. In other countries, jatropha yields may be higher or more cost effective by using large company plantations: they may have more money to invest in hybrid seeds, intensive pruning and developing irrigation. Often, these plantations are on good quality soil with good rainfall, as farmers have no longer been able to afford to stay on the land.
Food Security and Farmers
Farmers in Venilale (Baucau) and Ossu (Viqueque) who were approached to grow jatropha in 2005 and 2006 told La’o Hamutuk they have not yet received any money from the jatropha they planted.
In Fatu Lia (Venilale), the Chefe de Suco told us that although Daba Loqui and EDA had asked the village to use communal land, they never approached the suco administration. Many farmers said they agreed to grow jatropha because they trusted Timor-Leste’s Consul General to Australia, Abel Guterres, who accompanied representatives of Daba Loqui and EDA on their visit to the community. The companies had made verbal commitments to buy jatropha, but when there was a subsequent falling out between Daba Loqui and EDA, no-one had come to buy their harvested pods. Farmers are reluctant to replace the jatropha plants as they take several years to reach optimum production, and the farmers hope the problem can be resolved.
Farmers in both areas told La’o Hamutuk they were encouraged to replace food crops with jatropha, that farmers would receive more money per kilogram if they grew more jatropha. They replanted fields where they had been growing food, such as corn and mung beans, with jatropha. Some farmers also planted jatropha on land which was no longer used to farm food because monkeys and rats had destroyed previous crops.
Daba Loqui taught farmers how to plant jatropha, including spacing jatropha wide enough to grow corn in between. The farmers said that the corn grew well in the first year, but after that its quality dropped. Venilale farmers said that jatropha from cuttings grew faster than from seeds, and that they harvested pods from these plants in 2007 and 2008. People who pulled out their jatropha plants when no one came to buy seeds said that they had not observed any difference in soil quality.
When farmers grew jatropha on poor quality land with little access to water, some jatropha died while others produced few seeds, of poor quality. A farmer from Builale (Ossu) explained “this seed came from Liquiçá where there are different temperatures and more water.” Jatropha seed from Liquiçá was used because it had a high oil content. Communities told us EDA and Daba Loqui representatives visited several times and encouraged them to plant more jatropha. Farmers and the community at Carabela did not know whether the jatropha project was run by an NGO or private companies. Farmers in Venilale said that a local NGO had offered them 40¢/kg to plant candlenut and they were frustrated that they had not received any money from jatropha. They said jatropha had become a source of conflict in their community.
Timorese jobs and investment
In 2005 EDA’s parent company the MPI Group stated that a 100 million liter/year oil extraction plant would create 20,000 jobs if 40,000 hectares were planted with jatropha in Timor-Leste. In 2008 the government said the new contract would create 30,000 jobs. Secretary of State for Energy Policy Avelino Coelho told La’o Hamutuk that 20,000 of these jobs would be produced by farming 20,000 hectares one job per hectare. Since growing an acre of jatropha will earn about $30 per year, this ‘job’ would pay about 8¢ a day.
The Carabela plant will be built in stages, based on ‘commercial conditions,’ and EDA will decide whether to expand the plant based on how well their business is going. In 2005 EDA agreed to start by processing 100,000 tons of jatropha oil per year only 4% of the possible future expansion to the ‘ultimate capacity’ of 2.5 million tons/year it mentioned this year. It is unclear if this ‘capacity’ is production capacity (based on the infrastructure they will build) or site capacity (how large a processing plant could be built on the land at Carabela).
In Australia, biodiesel factories producing about 100,000 tons of oil per year are estimated to employ 100 or fewer people, including short-term construction jobs (but not farmers). The EDA-RDTL contract does not guarantee any jobs for Timorese people, and it is unclear if skilled foreign workers will take some of its best-paying positions.
The processing plant will be built with imported parts and will supply its own energy, water and construction materials, so it will require few goods or services from local businesses.
Based on the contract, La’o Hamutuk believes that this project will not produce any significant new employment for Timorese people or revenues to the RDTL government:
La’o Hamutuk believes that this contract should be cancelled because it violates Timor-Leste’s constitution, which prohibits foreign companies or people from buying land. It also relies on ‘Northern Territory development standards’ which are legally unenforceable here. Many areas of law which would apply to this project such as land titling or health and safety regulations, are either underdeveloped, or the capacity to implement and monitor laws is not yet in place. This means that contracts should carefully consider how companies operating industries can be expected to follow specific, enforceable requirements for health, safety, emergency response, environmental management, decommissioning and many other areas and ensure that companies will be accountable to new laws and regulations as they are developed. The agreement to grant all relevant licenses contained in the contract also fails to meet administrative and legal processes for the relevant ministries. These kinds of problems often occur when a government signs contracts in secret, without adequate public information or consent and without a transparent tender process (see Other Agrofuel Agreements in Timor-Leste).
La’o Hamutuk agrees with the decentralized energy planning strategy of the State Secretary for Energy Policy, but we strongly disagree with many of the plans for unsustainable energy projects that have emerged (see Heavy Oil Plant). In countries which waste a lot of energy, people are trying to reduce energy use and shift to renewable energy sources. Entrenched special interests are forcing many of these countries to continue to depend on polluting, outdated coal and petroleum.
Timor-Leste is fortunate not to be in this situation; our low current usage and lack of pro-petroleum lobbyists puts this country in a perfect position to develop a sustainable energy infrastructure. Countries which use a lot of energy are promoting agrofuels as a way to provide energy to maintain their lifestyles, while taking land away from people in poor countries who would otherwise use it for food or other needs.
Timor-Leste should develop a sustainable, decentralized energy policy based on the specific local resources and circumstances of communities. Projects should use locally maintainable resources to meet current and future local needs, and may incorporate a combination of sources. Timor-Leste already has experience with solar power, wind, mini-hydro and biogas. Decentralized energy systems should be developed together with the community and local authorities. In the long term, local, sustainable energy systems are much cheaper and cleaner, and will and ensure that people can always access energy, protected from the rising global costs of petroleum, coal and agrofuels.
We welcome further information or experiences of farmers with jatropha, sugar cane, corn or other agrofuels in Timor-Leste.
What are Agrofuels?
Agrofuels refers to growing crops for fuel, often in large-scale monocultures, where only a single crop is planted. The resulting fuel is exported out of the local ecosystem.
Two types of agrofuels are currently used:
Some people refer to agrofuels as biofuels, which describes many different processes. Biofuels can also refer to the small-scale use of plant and animal products (such as husks and dung) for energy. These products are often used for energy together with alternative uses as animal feed or enriching soil, with the community making decisions about balancing their agricultural and energy needs.
Agrofuels may also be called biomass, living and recently dead plant material that can be used for fuel or industrial production.
Biogas, methane gas produced by the biological breakdown of organic matter such as cow manure, is one form of biofuel currently being used in Timor-Leste.
Agrofuels and Land Rights
La’o Hamutuk is concerned that the Carabela facility may violate the Timor-Leste Constitution by allowing foreign companies to buy land. Under the Constitution only citizens of Timor-Leste can own land. This ensures that the Timorese people retain the primary control and benefit from our natural resources.
Other agrofuel agreements allow companies to use government land on 30-50 year leases. Timor-Leste’s land laws and titling are incomplete, so it is not yet clear which local communities and families have rights to this land.
The government has offered to help mediate between companies and private landowners if a company would like to purchase or lease private land. However, the government should only get involved in buying private land when it is to be used by the government to build public infrastructure, such as a road or a school. Our Government should not help foreign companies take land from Timorese citizens.
If all the undeveloped land in the world was used for agrofuels, it would not satisfy the energy needs of industrialized countries, which is why land now used for food and housing is being converted to agrofuel production.
Other Agrofuels Agreements in Timor-Leste
The Government has given La’o Hamutuk three Memoranda Of Understanding (MOU) it has signed with overseas companies:
In October 2008 the Provedor for Human Rights and Justice made a finding on the GTLESTE Biotech MOU that highlighted some principles for agrofuels agreements: those which affect many ministries cannot be undertaken by a single minister alone and agreements affecting land in Timor-Leste should not be confidential. He also highlighted that the land lease arrangement proposed in the GTLESTE Biotech MOU has the potential to violate human rights.
Climate Justice, Now!
The increase in spending is only possible because the Petroleum Fund continues to enjoy the benefits of recent petrol price increases, which have resulted in the sustainable revenue increasing in a few months by more than $100 million per annum.
— Prime Minister Xanana Gusmão budget message, June 2008
The Government held no public discussion or consultation on this budget, keeping it secret until it was given to Parliament on 23 June, one week before it was to take effect. The rectified budget includes a new $240 million Economic Stabilization Fund to subsidize imported food, fuel and construction materials. It also includes the first $10 million for a heavy oil power plant and electric distribution system expected to cost $390 million over the next four years (see article below). Although the cars for each Member of Parliament have drawn public attention, including demonstrations, they are only 0.3% of the budget ($2.3 million, including $0.9 million approved last December). We encourage people to give more attention to some of the larger items in future budgets.
One of the most common ways to bring on the resource curse is to spend a lot when oil income is high, starting programs which cannot be maintained when oil revenue drops because world oil prices fall or reserves are used up. Timor-Leste created its Petroleum Fund precisely to protect against this dangerous temptation, which often leads countries into debt, default and disaster.
According to the Petroleum Fund Law, the amount of money spent from the Petroleum Fund each year should be no more than the Ministry of Finance calculates as the “Estimated Sustainable Income” (ESI), 3% of the total of the money in the Petroleum Fund added to the value of Timor-Leste’s oil and gas reserves. The ESI guideline is intended to protect against oil price changes and to ensure that Timor-Leste continues to receive revenues after all our oil and gas has been extracted and sold.
Revenue sources for the 2008 mid-year budget
Unfortunately, the mid-year budget defies these precautions, and will spend $687 million from the Petroleum Fund, far above sustainable levels. In December 2007, the Ministry of Finance calculated an Estimated Sustainable Income (ESI) of $294 million, which was the basis for the original 2008 budget. In June 2008, they increased the ESI by $102 million to $396 million, assuming future oil prices $18/barrel higher than had been projected six months earlier. However, the Government wanted to spend even more money, so the mid-year budget takes an additional $291 million from the Petroleum Fund. Spending beyond the ESI reduces the ESI for all future years. This mid-year budget will cost Timor-Leste $9 million each year from 2009 onwards, an amount which could pay for the Ministry of Foreign Affairs.
This spending spree was rationalized by momentary high oil income, but the record-high global oil prices while the budget was being enacted have already fallen by 57%, to May 2007 levels. The Ministry of Finance estimated world oil prices for 2008 at $86/barrel, and for 2009 at $76, but prices in early November were around $60 and falling. In addition, Bayu-Undan (which supplies all of Timor-Leste’s current oil income), has passed its historic peak of production, and will be completely used up in 16 years. If the Sunrise project goes ahead, Timor-Leste’s oil wealth (the oil and gas in the ground ready to be extracted under an existing contract and development plan, which is included in the ESI calculation) will approximately double, but all of it will be exhausted in about 50 years. That is within the lifetime of many people living today, but by that time Timor-Leste will have about five million people, and even the current minimal level of government services will cost at least five times as much as today.
As Government and Parliament considered this budget, they received advice from a range of experts: the NGO Core Group on Transparency, World Bank, La’o Hamutuk, the International Monetary Fund, the Petroleum Fund Consultative Council, the United States Ambassador and many others. Without exception, they warned against spending Timor-Leste’s oil wealth so quickly, but the Government chose to ignore their wise counsel. Many of their analyses are on La’o Hamutuk’s website or available from our office.
In November, the Timor-Leste Court of Appeals ruled that this budget’s spending more than the ESI from the Petroleum Fund is illegal because it violates the 2005 Petroleum Fund Act. The Court emphasized that future generations are entitled to benefit from Timor-Leste’s natural resources, and that the Government did not give Parliament the legally required detailed explanation of why it is in Timor-Leste’s long-term interest to take more than the ESI at this time.
The Government did not withdraw any money from the Petroleum Fund during the first half of 2008, but transferred $140 million between July and September. The Fund contained $3.74 billion at the end of September. The Government withdrew $80 million in October and asked for another $80 million in November, and is authorized by the budget to take $387 million more in 2008, although the Court ruling would limit this to only $92 million more.
However, if the policies begun by this mid-year budget continue for the next three years (see below), the Petroleum Fund will become smaller, the ESI will be reduced by about $48 million every year, and the resource inheritance of Timor-Leste’s future generations will have been squandered.
One of the issues raised by people worried about the large increase in planned expenditures is budget execution, that governments of Timor-Leste don’t spend all the money they have budgeted. Politicians debate numbers and percentages, and ministers challenge public officials with a fruit rating system, encouraging them to be high-spending durians instead of low-spending bananas.
Timor-Leste’s people need roads, water, electricity, jobs, housing, health care, security and education, and measuring performance by money spent rather than by services delivered misrepresents government’s role. If office-holders just handed out money to friends and families they could achieve 100% budget execution, but our people would still be unemployed, unhealthy, illiterate and without water or power.
We find it distressing that the Prime Minister proudly told Parliament in July “We have already executed $153 million out of the $348 million that was approved. Which means the budget execution rate achieved up to 16th July 2008 equates to 81%...” Not only does this miss the point, but it distorts reality. Government execution statistics include money promised to contractors (“Outstanding commitments/obligations”) even if the contractor has not done the work.
Budget Execution, January-September 2008 (without autonomous agencies)
from RDTL Ministry of Finance
In October, the Government published the above summary of budget execution during the first nine months of 2008. It shows that future commitments are much larger than actual payments (except for Salaries and Goods & Services). In the categories of Minor Capital (cars, computers, furniture) and Capital & Development (infrastructure, roads, buildings) actual payments are less than one-quarter of what was budgeted, while transfers (payments to individuals and families) fall in between. It is relatively easy to pay salaries and buy things, but infrastructure projects are difficult to carry out, and this is where both past and current Governments have not met their promises.
Expenditures authorized by 2008 Mid-Year Rectified Budget
The budget rectification includes $132 million in transfers (up from $15m budgeted for 2007), including $41m for veterans, $35m for IDPs, $17m for the elderly, $8m for petitioners, and smaller amounts for the Church, children, vulnerable groups and pensions for former office-holders.
The rectification also appropriates $240 million for a new Economic Stabilization Fund to subsidize imports of rice, construction materials and fuel. This could flood Timor-Leste with foreign rice, increase possibilities for corruption and strangle local agriculture. It is unclear which transfers and subsidies will continue after 2008, but other countries have learned to their sorrow that stopping such programs often provokes civil unrest.
In November, the Appeals Court ruled that the Economic Stabilization Fund violates the Constitutional prohibition of secret budgets. The Court also said that the lack of detail, reporting and accountability for the Fund makes it impossible for Parliament to exercise its Constitutionally mandated oversight responsibilities. The Court ordered the Government to stop the Fund’s operation when the ruling was given to Parliament, that is on 13 November.
The mid-year budget increases Capital & Development expenditures authorized for 2008 from $61m to $105m, even though only $8.7m was actually spent on this during the first nine months of 2008 (and less than one million in the last half of 2007). The mid-year budget also includes $548m in multi-year capital projects for 2009-2011, five times the amount appropriated in December 2007 for those three years. Most of this is for heavy oil power plants and electricity distribution (see below).
Transparency and consultation
Like everyone in Timor-Leste outside of Government, (including Parliamentary leaders and the Petroleum Fund Consultative Council), La’o Hamutuk could not get concrete information about the proposed budget increase until the Council of Ministers submitted the 205-page, Portuguese-language document to Parliament a week before it was supposed to be in force. Although the mid-year adjustment process normally only re-allocates money which is already appropriated, this proposed rectification more than doubled the budget.
When the Government finally made documents available, they were internally inconsistent, poorly organized, and lacking important information. Although capacity limitations in the Ministry of Finance are partly to blame, we wonder if some of the missing totals and confusing structure are intentional. La’o Hamutuk circulated information about the budget and discussed it with many journalists, Parliamentarians, NGOs and members of civil society, and we sadly observe that hardly anyone understands either the technical details or the implications of this budget.
Parliament debated the budget for more than a month, holding several public hearings. The deputados considered more than 100 amendments before approving a $788 million budget on 30 July. They made only two changes: increasing pensions for veterans by $20 million and deleting the $5 million initial payment for heavy oil power plants. The power plant amendment contained a technical mistake, and Government re-interpreted it to cut funds for roads and flood control, although that was clearly not Parliament’s intention.
President José Ramos-Horta questioned the constitutionality of the Economic Stabilization Fund, and he asked the Court of Appeal to rule before he promulgated the budget. However, due to mistakes in the President’s office while he was overseas, the budget was promulgated on 5 August, before the Court had time to decide. The Ministry of Finance is implementing it.
In late August, sixteen Members of Parliament from Fretilin, PUN and Kota asked the Appeals Court to rule that the rectified budget violates Timor-Leste’s Constitution. On 13 November, the court ruled that the Economic Stabilization Fund is unconstitutional because it violates the ban on secret budgets, and that spending more money than the Estimated Sustainable Income from the Petroleum Fund is illegal because it violates the principles and procedures of the Petroleum Fund Act. The impact of the ruling is not yet clear.
In the hope of making the 2009 and future budgets more democratic, effective, sustainable and in the public interest, La’o Hamutuk offers the following suggestions for the budgetary process:
Before undertaking major new programs like the Economic Stabilization Fund or the Heavy Oil power plants, Government should obtain informed consent from the public, Parliament, and people who will be directly affected. Both of these projects involve more money than the entire Gross Domestic Product (GDP) of Timor-Leste during the six months this budget applies, yet there has been negligible public information and no public consultation about what they are, who will manage them, how they will be conducted, or their economic, environmental, political and social impacts in the short and long term. Huge initiatives like these should not be buried in a rushed “rectification.”
To avoid squandering the birthright of current and future generations of Timorese citizens, Government should stay within sustainable levels of expenditure from the Petroleum Fund, and not fall into the trap of high spending when oil income is high, which leads to debt when income drops. The Sustainable Income should be re-estimated using more realistic, conservative oil price and interest rate projections, rather than having it fluctuate with the volatile world oil market.
Transfers and subsidies cannot be continued indefinitely, and they make it harder to develop Timor-Leste’s own economy, employment and capacity. Government should minimize such expenditures, which are often intended to buy off problematic constituencies. Rather, the main priority of both public and private sectors should be longer term, sustainable, domestic economic development which can advance food and energy sovereignty and prepare Timor-Leste for the inevitable move away from depending on transitory oil revenues.
Budget execution is not an appropriate measure for government effectiveness. Rather, the Government should evaluate its service delivery and economic development.
All the expertise and perspectives available in Timor-Leste should be utilized to develop future state budgets. The Government should:
Slow down and open up a more deliberative budget-making process.
Disseminate complete, timely, understandable and comprehensive public information, including ESI estimates, ministerial drafts and proposals before decisions are made by the Council of Ministers.
Build for Parliamentary and societal consensus rather than overriding opposition groups.
Involve civil society, the Petroleum Fund Consultative Council, Parliament, and others throughout the process.
Respect the Constitution, legal processes, and separation of powers by the Government, President and Constitutional Court.
Cancel the heavy oil power plants and pursue cleaner, decentralized, more reliable and more sustainable energy technologies.
Make honest, objective projections and encourage open discussion about future implications of budget decisions.
The mid-year budget includes $105 million to be spent from 2008 to 2011 for two heavy oil electric power plants, as well as $285 million over the same period for a national electricity distribution system. A 120 megawatt power plant will be built on the north coast in Manatuto, and a 60 megawatt one on the south coast in Manufahi.
The “Construction of Nationwide Electrical Power Grid and Power Plant and its Facilities” is by far the largest project ever undertaken in Timor-Leste, an order of magnitude more than any contract the Government has ever awarded.
The Ministry of Finance circulated the request for tender in June and signed a contract with the Chinese Nuclear Industry 22nd Construction Company on 24 October. The Government promises electricity 24/7 in every district in 2009 and in all subdistricts by the following year. It is very difficult for a project of this magnitude to be done with any quality in this timeframe. On the other hand, the payments for the project are spread out over four years, with only $10 million in 2008. Although the rectified budget includes this project, the $380 million for 2009-2011 is not included in the Government’s predictions of those years’ budgets (see below).
These power plants will burn “heavy oil,” also known as “heavy fuel oil” or “residual fuel oil.” This cannot be made from oil and gas found in Timor-Leste or the Timor Sea, but will have to be imported. Heavy oil is the carcinogenic residue left over from refining crude oil after gasoline, diesel and other lighter fractions have been removed. It will require ports for oil tankers, heated storage tanks, waste heat dissipation systems, and safe storage and disposal of pollutants and residues. Heavy oil is an extremely dirty fuel, already phased out in many countries for environmental reasons, and burning it emits large amounts of sulfur, fly ash, carbon dioxide and other pollutants. Timor-Leste’s has ratified the Kyoto Protocol on climate change, and this project undermines it. At this stage, Timor-Leste does not have the legal framework, the human resources, the enforcement mechanisms, or the Environmental Impact Assessment capacity to keep such a plant operating, let alone to ensure that it runs cleanly and safely.
The power plants are intended to generate 180 megawatts, more than the 109 MW the ADB estimates to be Timor-Leste’s electricity needs in 2025 and much more than we use now. The heavy oil plants are base-load plants and cannot be operated at lower power levels. They would make currently planned hydroelectric projects unnecessary, as well as pending agrofuel, biogas, gas seep, wind and other alternative energy sources.
Because of these concerns, Parliament passed an amendment (also Portuguese original) to delete this electricity generation project from the mid-year budget, but the Government is ignoring Parliament’s decision.
The budgeted $105 million is significantly lower than the usual cost of such power plants. This, together with the short timeframe and other information we have received, leads La’o Hamutuk to believe that the Chinese company made a secret deal with Timor-Leste officials before the tender was circulated or anybody outside Government knew about this project. The tender invitation does not specify that the power plants must be new; perhaps the company will dump used equipment in Timor-Leste that would otherwise be garbage. It also does not specify whether the responsibility to build ports and other infrastructure lies with the company or with the Government, so costs are likely to increase.
La’o Hamutuk agrees that Timor-Leste needs power generating and distribution facilities to supply the entire country. However, we believe that this unrealistic, unreliable project will not meet those objectives. In addition to depleting the country’s finances and subverting honest tender and budgeting processes, it will block development of more feasible and beneficial alternatives and damage our environment.
La’o Hamutuk will continue to follow this issue, and we welcome information and suggestions as to how to help Timor-Leste pursue a cleaner, safer, more dependable electricity system.
Although the rectified 2008 mid-year budget will withdraw $291 million more than the re-Estimated Sustainable Income from the Petroleum Fund during 2008, the budget document promises to stay within sustainable levels in future years. La’o Hamutuk believes that this will be impossible, based on decisions in this budget.
In the document explaining the $788 million mid-year budget for 2008, the Government expects expenditures to be reduced to $373 million in 2009, $350 million in 2010, and $354 million in 2011. This is pure fantasy. If spending policies in the mid-year budget are considered realistically, they will put this country into deep deficits, making it impossible to use the Petroleum Fund sustainably in the future and eventually forcing Timor-Leste to borrow money.
The following are some of the areas not included in the Government’s budget projections. La’o Hamutuk has included them in our estimates, and both sets of results are shown in the graphs on the next page. These projections and policies do not consider the Appeals Court ruling against the Economic Stabilization Fund and exceeding the Estimated Sustainable Income, but are based on the Government’s policies as expressed in the budget. The Court’s decision could help bring budgets closer to sustainability, but these factors must also be considered.
Timor-Leste’s population grows about 3.5% every year, and the need for public services grows even faster than our population, as large numbers of children will enter primary school. Government spending on salaries, goods and services, and minor capital will have to increase with the population to maintain the same level of services.
Prices continually increase from inflation; in October 2008 in Timor-Leste they are 12% higher than one year ago. Expenditures, including salaries and pensions, must keep up with rising prices to purchase the same goods and services. Turmoil in world financial markets could cause the dollar to fall even faster, with higher price increases, but La’o Hamutuk has projected 10% inflation for 2009-2011.
Although transfers to IDPs and petitioners will stop after 2008, transfers to old people, veterans and others will increase over the next few years. The budget as presented to Parliament projected transfers at $37 million/year for 2009-2011, but the promulgated budget raised the projections to about $91m/year (more than the $20m Parliament added as pensions to veterans). La’o Hamutuk believes that the latter is a more reasonable projection, but we have corrected it for inflation and population growth.
Multi-year Capital & Development projects (including the power plant and patrol boats) are budgeted at only $17 million in 2008, and not listed in the promulgated budget rectification for 2009-2011. When the budget was presented to Parliament, these were given as $170m, $133m and $120m for 2009-2011. We have used the latter figures, which are in Annex IV of the budget law.
The budget as published assumes no spending for minor capital in 2009-2011. A more realistic assessment is to continue this year’s level of $32 million, increased for inflation and population growth.
The budget as published assumes that single-year Capital and Development projects will decline from $82 million in 2008 to $54, $42 and $31 million by 2011. It also assumes that no new multi-year projects will start after this year. Neither of these is realistic, so we have tried to make conservative assumptions based on current policies.
The budget as published assumes that the $240 million expenditure for Goods and Services for the Economic Stabilization Fund will end after five months (although government revenues from selling subsidized rice are projected to continue in future years). Once subsidies have started, they are almost impossible to stop without causing hardship. The Government might have to phase them out gradually to avoid civil unrest; we estimate decreases from $40 million/month in 2008 to $20m/month in 2009, $10m/month in 2010 and zero in 2011.
Falling global oil prices may cause Timor-Leste’s future oil income to be lower than current projections. In addition, drastic reductions in global interest rates caused by the financial crisis will reduce investment income into the Petroleum Fund, making the current ESI formula (based on 3% annual yield above inflation) unsustainable. We have not included these factors in our calculations (which only consider expenditures), but they should not be forgotten.
The proposed 2009 budget has not been released at press time, but La’o Hamutuk has heard that it will be close to one billion dollars. If the Government proposes to spend that much money, the deficits will be even larger than our projections on the next page.
The first two graphs on this page show the mid-year rectified budget and projections as passed by Parliament and promulgated by the President. The left-most column is the 2008 Budget passed in December 2007.
Before the Court decision, the deficit for 2008 was to be filled by spending $291 million more than the Estimated Sustainable Income from the Petroleum Fund, but future expenditures are under-calculated so as not to require deficit spending in later years.
La’o Hamutuk believes this is incorrect, and has re-calculated spending levels as described on above, shown in the next two graphs. These assume that programs continue at levels envisioned in the mid-year budget; if the reports of major new government projects are true, the budgets (and deficits) for 2009 and following years will be even larger.
These graphs indicate budget projections if current policies continue, with reasonable assumptions and everything included as described on the previous page. It will be necessary to exceed the sustainable income by more than a billion dollars during the next three years to pay for the expenditures resulting from the mid-year rectified budget passed in July 2008.
This projection will reduce the ESI by $48 million every year in the future; if rumors of an even larger 2009 budget come to pass; the reductions will be greater.
If such trends continue and oil prices stay near current levels, Timor-Leste could be a debtor nation in less than 10 years.
We are always looking for motivated, qualified people to join La’o Hamutuk’s staff. In addition to learning a lot and working on interesting issues, you will have a strong influence in helping Timor-Leste develop in a sustainable way which benefits all our people. If you are interested, follow this link, contact our office at +670-3325013, email email@example.com, or visit us behind the HAK Association office in Farol, Dili.
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La'o Hamutuk staff: Shona Hawkes, Yasinta Lujina, Inês Martins, Odete Moniz, Adino Nunes, Charles Scheiner, Viriato Seac, Tibor van Staveren, Maximus Tahu, Nawri Yuliana Ulbadru
Translation for this Bulletin: Nuno Rodriques, Joao Sarmento, Magdalena Capricornia
Executive board: Joseph Nevins, Pamela Sexton, Adérito de Jesus Soares, Justino da Silva, Oscar da Silva
La’o Hamutuk ("Walking Together" in English) is a Timor-Leste non-governmental organization that monitors, analyzes, and reports on the principal international institutions present in Timor-Leste as they relate to the physical, economic, and social reconstruction and development of the country. La’o Hamutuk believes that the people of Timor-Leste must be the ultimate decision-makers in this process and that this process should be democratic and transparent. La’o Hamutuk is an independent organization and works to facilitate effective Timor-Leste participation. In addition, La’o Hamutuk works to improve communication between the international community and Timor-Leste society. La’o Hamutuk’s Timor-Leste and international staff have equal responsibilities, and receive equal pay. Finally, La’o Hamutuk is a resource center, providing literature on development models, experiences, and practices, as well as facilitating solidarity links between Timor-Leste groups and groups abroad with the aim of creating alternative development models.
La’o Hamutuk welcomes reprinting articles or graphics from our Bulletin without charge, but we would like to be notified and given credit for our work.
In the spirit of encouraging greater transparency, La’o Hamutuk would like you to contact us if you have documents and/or information that should be brought to the attention of the Timor-Leste people and the international community.
The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)