Prime Minister, Government of Timor-Leste
Media Release 23 September 2005
See Background Notes below on Design and Management of the fund.
A fund for the prudent, transparent and long-term management of Timor-Leste’s (East Timor’s) petroleum revenues has now become fully operational with an initial balance of nearly US$250 million.
Prime Minister Mari Alkatiri, who pioneered the establishment of the Timor-Leste Petroleum Fund three years ago, said: “This is an historic moment for Timor-Leste because there is nothing more important to the future of our new nation than sound and fully-accountable management of our petroleum wealth.
“Good management of petroleum revenues is absolutely critical for ensuring sustained economic growth, the alleviation of poverty and a stable political future for the people of Timor-Leste. This policy will enable us to increase spending considerably while saving for the future. Equity between this generation and those in the future is the central principle underpinning the creation of the Fund.”
The Prime Minister said creation of the Petroleum Fund followed broad consultations with civil society and other interested parties, including meetings with village chiefs and other community leaders in all 13 districts.
After the Government submitted the draft Petroleum Fund law to Parliament, all political parties and members of Parliament carefully considered the Government’s proposal and came to the conclusion that it is the best model for managing the nation’s petroleum receipts for the benefit of this generation and those in the future.
“The National Parliament voted unanimously to approve the Petroleum Fund law. Achieving community consensus on the management of our petroleum revenue is critically important to the future of our nation.
“The Petroleum Fund builds on international best-practice, but our model has additional transparency and accountability safeguards. It is crucial that we avoid the experiences from many other countries, where petroleum has been a curse instead of a blessing.”
By contributing to a sound budgetary policy, the Petroleum Fund will help deliver on a sustainable basis strong economic growth and improved public services. The Government’s policy of spending only the sustainable income from petroleum means that Timor-Leste will both save for the future and be able to afford a large increase in public expenditure. Current estimates based on conservative oil price assumptions show that the fund could grow to more than US$5 billion over the next 20 years, thereby generating a significant permanent income stream for the nation.
Prime Minister Alkatiri said: “Increased spending must be used wisely to invest in key government services and infrastructure, which can deliver stronger economic growth and contribute to poverty reduction. This policy will at the same time ensure that sufficient financial savings are deposited in the Petroleum Fund, so that in later years we are able to maintain the same level of expenditure.”
The Petroleum Fund’s assets are invested by the Timor-Leste Banking and Payments Authority in low-risk US Government Bonds. In time the Government will look at a more diversified investment policy.
The initial balance includes petroleum revenue accumulated since 2000 that was invested and managed under an interim policy. This revenue was transferred into the fund by the Government this month. The balance also reflects revenue paid monthly by companies into the fund since July 1 this year.
The Petroleum Fund’s formation follows the approval by Parliament and promulgation by the President of the Petroleum Fund Act. The Act is the result of a broad process of preparations and consultations, including a discussion paper on key policy issues that was released by the Government in October 2004, submissions received during the ensuing period of public consultations, the draft Petroleum Fund Act that was released by the Government for public comments in March 2005, subsequent comments that were received on that text, and the draft Petroleum Fund Act that the Government submitted to Parliament in April 2005.
In addition to the Petroleum Fund Act, the other important regulatory framework for the Fund is the Operational Management Agreement between the Minister for Planning and Finance and the Banking & Payments Authority.
Information about the Petroleum Fund can be found on a new website dedicated to petroleum transparency, www.transparency.gov.tl and on www.mopf.gov.tl.
The design of the Petroleum Fund is based on the following key principles:
The Petroleum Fund shall be a tool that can contribute to the wise management of Timor-Leste’s petroleum resources, for the benefit of both current and future generations.
The Petroleum Fund builds on international best practice and reflects the circumstances of Timor-Leste. It is based on the petroleum fund established in Norway, one of the few models internationally that is generally seen to function well and contributes to sound management of the petroleum wealth. The proposed model for Timor-Leste is currently referred to as the ”Norway Plus” model, reflecting additional accountability, transparency and information features that are judged appropriate for Timor-Leste’s circumstances.
The Petroleum Fund builds on the Constitution. The Petroleum Fund Act lays down the key parameters for the operation and management of the Fund in accordance with article 139 in the Constitution. According to this provision, petroleum resources shall be owned by the State, shall be used in a fair and equitable manner in accordance with national interests, and that the petroleum extraction should lead to the establishment of mandatory financial reserves. The Petroleum Fund builds on the constitutional framework, giving to the Parliament and the Government the powers that correspond to their competencies.
The Petroleum Fund allows for a strengthening of the responsibilities, powers and capacity of key public sector institutions, such as Parliament, the Government, the Ministry of Planning and Finance and the Central Bank. There will be an Investment Advisory Board advising the Minister of Planning and Finance to enhance the quality of advice preceding decision-making. There will also be an independent Consultative Council to advise Parliament on the operations of the Fund.
The Petroleum Fund is to be a tool that contributes to sound fiscal policy, and thereby helps deliver on a sustainable basis strong economic growth and improved public services. The design of the Petroleum Fund acknowledges that good planning and execution of public sector budgets are key to avoiding the resource curse found in so many petroleum-producing countries. The Petroleum Fund is to be coherently integrated into the budget process, supporting a fiscal policy framework that strikes the right balance between current consumption, investing in physical assets (infrastructure and human development) and investing in financial assets.
The Petroleum Fund is to be prudently managed, invested securely in low-risk financial assets abroad.
The management of the Petroleum Fund shall be carried out with the highest standard of transparency and accountability. This is a key element in building public confidence and support for a wise strategy of managing the petroleum resources. This can allow Timor-Leste to avoid the negative experiences found in so many petroleum producing countries, where petroleum has proved to be a curse instead of a blessing.
Based on the principles described above, the Petroleum Fund Act has the following key features:
The Petroleum Fund’s income: all revenues emanating directly or indirectly from Timor-Leste’s petroleum resources will flow into the Fund, as well as the return on the Fund’s investments (net of management expenses). All the income of the Fund shall flow into an ‘earmarked receipts account’, which will be held with The Federal Reserve Bank of New York.
The Petroleum Fund’s expenditure: transfers from the Fund can only be made to a designated State Budget account, and the sum of all transfers in a fiscal year can not exceed a ceiling set by Parliament when approving the State Budget. This ceiling will as a general rule correspond to the amount necessary to finance the deficit on the State Budget excluding petroleum revenues.
The Government has separately adopted a savings/expenditure policy of maintaining the real value of the petroleum wealth, which will serve as a reference to determine the amount of money that should flow out of the Fund. This policy translates to spending the estimated sustainable income from petroleum, which is the amount that can be spent each year forever and therefore can be said to strike a good balance between the interests of current and future generations. The estimated sustainable income is calculated as 3 per cent of the petroleum wealth, where the petroleum wealth is the sum of the net present value of future petroleum revenues and the value of financial assets in the Petroleum Fund. On current calculations, this policy allows for a significant increase in Government spending in the medium term. The Timor-Leste Government is demonstrating that it is working hard to overcome capacity constraints. State Budget expenditure is expected to increase by over 35 per cent in 2005-06, and further increases are intended for the years beyond.
Specific reporting requirements are imposed on the Government and the Consultative Council if the State Budget proposes to withdraw from the Petroleum Fund more than the estimated sustainable income from petroleum. While there at times may be good reasons to spend more than the estimated sustainable income, the provisions in the Act should contribute to making sure that such decisions are subjected to a full set of transparency and accountability safeguards.
The management of the Petroleum Fund: The Government has responsibility for the overall management of the Fund, and the Minister of Planning and Finance will exercise key functions and competences. The operational management is delegated to the Central Bank in accordance with a management agreement. The Fund is invested through The Federal Reserve Bank of New York in USD denominated low-risk fixed income securities, at first exclusively US Government bonds.
The Investment Advisory Board is composed of five people, between which the Director of the Treasury, the head of the Central Bank and specialists in investment management will advise the Minister of Planning and Finance on the management of the Petroleum Fund.
The investment of the Petroleum Fund: The Fund’s savings will from the beginning be invested securely in low-risk financial assets abroad. The management agreement makes clear that the Fund’s investment will predominantly be in government bonds, which means that the financial risk is seen to be limited and the expected investment return moderate. The investment strategy shall be reviewed within five years, when a larger Fund and improved institutional capacity may suggest a different asset allocation.
There will be independent, external audits carried out by an internationally recognized accounting firm to bolster confidence that money going to, from or remaining in the Petroleum Fund is not misappropriated. The external auditor will also certify the calculation of the estimated sustainable income, and prepare a report on payments made by companies as Petroleum Fund receipts.
There will be an independent Consultative Council. The mandate of the Council is to advise Parliament on the operations of the Fund, observing the operations and contributing to an informed public debate and a sound management of the petroleum wealth.
There are accountability, transparency and information features to contribute to a wise management of the petroleum wealth. There will be a high degree of transparency of operations, including comprehensive and accessible reporting requirements – both on the management of the Fund and on whether the spending of petroleum revenues is consistent with long-term considerations. There are also information requirements on payments made by companies as Petroleum Fund receipts, which is a core element of the Extractive Industries Transparency Initiative. The Government has also established a separate transparency website (www.transparency.gov.tl ), which includes important documents relating to the petroleum sector, the Petroleum Fund and the State Budget.
The Petroleum Fund’s opening balance is the accumulated First Tranche Petroleum (royalty) payments. Since the organizational structure under the Petroleum Fund Act is not yet fully completed, such as appointments to the Investment Advisory Board and Consultative Council, the Government is not planning to withdraw any money from the Petroleum Fund in the 2005-06 fiscal year. This means that the Fund is expected to grow substantially this fiscal year.
Timor-Leste’s commitment to prudent and transparent management of its petroleum wealth has already won accolades around the world.
In March 2005 the UK Minister for International Development, Hilary Benn, told the EITI conference in London: “Timor Leste which, as the youngest country in the world, is demonstrating a foresight that we can all learn from. May I say, Prime Minister [Alkatiri], that I commend you for your effort, your determination and that of your government to avoid the pitfalls of resource wealth that have afflicted many of your neighbours, and to harness your vast mineral wealth for the benefit of this and future generations is an inspiration to the rest of the world.”
Timor-Leste achieved independence in May 2002, but is already being recognized as one of the best-managed economies in the Asia-Pacific.
Recent highlights include:
Non-oil GDP is forecast to grow at 6 per cent in the 2005-06 fiscal year
Subdued consumer price inflation near 2 per cent
A Budget surplus of 21 per cent of GDP for 2004-05 (reflecting the Government’s savings policy). The Budget surplus is expected to remain above 10 per cent of GDP over the next four fiscal years
A trend reduction in direct donor assistance, from $139 million in 2004-05, to $68 million in 2005-06, and further declines to about $7 million in 2008-09
Increased capacity to manage the State Budget, with outlays forecast to increase more than 35 per cent to around $110 million in 2005-06
23 September 2005