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Revising the Petroleum Fund Law

24 May 2010. Updated 13 July 2012

Liga ba pajina ida ne'e iha lian Tetum.

Link to La'o Hamutuk submission (mos Tetum) on the Ministry of Finance's proposed revisions.


For the last five years, Timor-Leste's Petroleum Fund has served our country well. Since it was created, both oil revenues and the state budget have grown beyond expectations. With ambitious future plans, the Government is revising the Fund's investment strategy and amending the Law which created it. La'o Hamutuk believes that this has major implications for current and future generations, and should done carefully, with wide public discussion of all issues and decisions. On this web page, we summarize information about the Fund, with links to more detail. We also describe the changes being considered, some of which have been publicly announced and others about which the Government has not yet begun public consultation.

We encourage people to learn about these proposed changes and to engage actively in the discussion. In 2005, the Petroleum Fund Law was enacted with a unanimous vote of all parties in Parliament, and we hope that any changes this year will also receive support from across Timor-Leste's political and social spectrum. To do so, they should serve the long-term national interest, rather than the current priorities of a particular group.


Timor-Leste's Petroleum Fund contains $6.6 billion U.S. dollars and provides the funding for nearly all of Timor-Leste's state activities. The Government withdrew $512 million from the Fund in 2009, which was 86% of all revenues the government received. In the original 2010 budget, the Petroleum Fund was expected to supply 87% of state revenues, a number which increased to 97% ($811 million) in the mid-year budget rectification.

The Petroleum Fund provides a buffer which allows the Government to allocate an expenditure level based on the needs of the people, rather than fluctuating up and down with changes in petroleum revenues, which vary depending on world oil prices and local petroleum production. It is also designed to preserve some of Timor-Leste's oil and gas wealth for future generations. Our non-renewable petroleum deposits will be used up in one or two generations, and we will have to rely on our non-oil economy to provide for state and personal needs after that. It will be difficult to increase Timor-Leste's non-oil economy enough, and it will take time. Therefore, both justice and practical economics require that that the current generation not spend all of our undersea and underground wealth, but keep some of it to benefit future generations.

In 2005, following extensive public consultation, Timor-Leste enacted its Petroleum Fund Law (also Portuguese), which has been seen as one of the best in the world, both in terms of the content of the law and in how it has been implemented during the past five years. La'o Hamutuk reviewed the Fund's law and processes in our March 2007 Bulletin.

The Petroleum Fund law limits the amount which should be spent from the fund every year to an Estimated Sustainable Income, calculated as 3% of the total value of the money in the Fund and the expected future revenues from oil and gas fields which are already being developed. The Ministry of Finance calculated the ESI for 2010 as $502 million, and ESI from previous budgets are shown in the bar graph at right.  In addition to growing in size, the ESI has weakened in Government thinking  over the years, from a "limit" to a "guideline" to a "benchmark."

The law allows the Government to spend more than the ESI if they provide a detailed explanation to Parliament why it is in the country's long-term interest, and Parliament agrees. The Government tried to do this in 2008, but the Appeals Court ruled that the explanation did not meet the requirements of the law and that the Government was not allowed to spend over the ESI. (In the end, difficulties with executing the budget forced the Government to comply with the court ruling, as the court curtailed the amount allocated to the Economic Stabilization Fund to subsidize rice imports.)

In 2009, the Government overspent the ESI by $104 million. The original 2010 budget stayed within the re-estimated $502 million ESI, but the mid-year Budget Rectification exceeds it by $309 million. The proposed 2011 budget recalculates ESI at $734 million by assuming higher future prices for oil and gas sales.

The ESI calculation is based on an expectation that the return (interest) earned from investing the Petroleum Fund will, in the long term, produce income 3% higher than inflation. If that turns out to be true, an amount of money equal to the ESI can be withdrawn from the Fund every year for ever.  Although this will not keep up with the expenditures necessary to provide health, education and other services necessary for Timor-Leste's rapidly growing population. This is shown in the graph at right, where the dashed line indicates how much money the ESI would allow for each citizen per year. Even if Sunrise and other oil and gas fields are developed, which could double the ESI, the amount available per person by 2050 will be only about one dollar per day. In March 2009, La'o Hamutuk analyzed the "sustainability" of the Estimated Sustainable Income.

Discussing revisions

During the last five years, the Fund's investment earnings have been about 2% above inflation, and the current investment strategy of 95% U.S. government Treasury Bonds produced better results than any other strategy would have during 2005-2010. However, the return has been less than the 3% assumption which underlies the ESI calculation, leading the Minister of Finance to call it the "unsustainable sustainable income." In an effort to increase the return on the Fund, the Government is exploring modifying its investment strategy to include stocks (equities) and eventually other forms of investment. They are also discussing other revisions to the Petroleum Fund law, which currently limits investments in instruments other than government-issued bonds to 10% of the fund's total (see box below). The Ministry of Finance has retained the Hong Kong-based investment advisory company Towers Watson, to provide advice on investment strategies.

In June 2009, La'o Hamutuk published a short article "Diversify Petroleum Fund Investment? Not Now (also Tetum).  We believe that this topic should be approached carefully. Because  none of the Fund has yet been invested in equities (the current law allows 10% equities), we believe that Timor-Leste should stay within this limit until it has had a few years of experience with the risk and volatility of the stock market, where the principal as well as the interest can go up or down. As the diagram at right shows (click on it to see it larger), today's prices for U.S. equities are the same as they were when the Fund opened five years ago.

On 6 March 2010, the Ministry of Finance hosted a "mini-seminar" for Parliament and Civil Society with presentations from:

On 4 May, the Timorese NGO Luta Hamutuk organized a seminar “Vantazen no Dezafiu Diversifikasaun Investimentu Fundu Petroliferu” (Advantages and Challenges in Diversifying Petroleum Fund Investments). In addition to the presentations available below, former Prime Minister Mari Alkatiri and Parliamentary Finance Committee President Manuel Tilman also spoke:

Discussion Paper: "Review of the Petroleum Fund Law"

La'o Hamutuk has obtained a copy of a Discussion Paper circulating within the National Directorate of the Petroleum Fund within the Ministry of Finance, dated January 2010. Although this paper has not been publicly released and may not represent decisions already taken by Government, it does include thoughts from the Investment Advisory Board, consultants and staff on a range of possible revisions to the Petroleum Fund Law.

In September 2010, the Ministry released the Annual Report for the Petroleum Fund for 2009, which includes advice the Investment Advisory Board sent to Minister, including a December memorandum reviewing possible changes to Articles 14 and 15 on how the Petroleum Fund will be invested. 

La'o Hamutuk believes that people should know what is being considered, so we have summarized some of the options in the leaked Discussion Paper:

Current LawOptions for possible revision
The Banking and Payments Authority (BPA) is the operational manager of the Fund.

1. Transfer more operational responsibility to the Ministry of Finance, including appointing external managers and taking on more authority in the future.

2. Allow Parliament to assign operational management to another entity.

External investment managers are appointed by the BPA.External managers are appointed by the Minister of Finance.
The Investment Advisory Board includes people not appointed by the Ministry of Finance and it's secretariat is the BPA.

IAB members must declare their assets, property and capital income, and bank accounts when taking office.

Remove the heads of the BPA and Treasury Department as members of the IAB; all members to be appointed by the Prime Minister on the advice of the Minister of Finance.

Transfer the IAB secretariat to the Ministry of Finance.

IAB members must declare they have no conflicts of interest. If the Minister requests, they must declare their assets.

Investment strategies are established by the Ministry of Finance, consistent with the rules in the Petroleum Fund law and taking advice from the IAB.The Minister establishes an Investment Policy which diversifies the Fund investments and balances risk and expected return. Under that Policy, the Minister is free to make investment decisions. A summary of the Policy is provided to Parliament, although the wording in the Discussion Paper does not require that the Policy itself be made public.
The fund must be invested 90% in U.S. government bonds, which minimizes the risk of short- or long-term losses in the value of the Fund's principal.

1. At least 60% in bonds (including those not issued by governments), up to 40% in equities, 5% in other instruments, including derivatives (suggested by the IAB). The discussion paper suggests that 25% investment in equities in 1-2 years could provide the 3% real return hoped for by the ESI formula.

2. No restrictions on investments, provided that they are within the investment policy guidelines.

Estimated Sustainable Income is 3% of the petroleum wealth: the total of the money in the Fund and the oil in the ground. Remove the 3% figure from the law, to be replaced with a "range of 3% to 5%" to be determined by the Government based on budgetary requirements, rather than on the "estimated average real rate of return" on investments as specified in the current law.
Spending more than the ESI requires a specific detailed explanation and Parliamentary approval.Spending up to 5% would not require explanation.
All transfers from the fund must be authorized in the budget approved by Parliament.If the budget is not approved on time, the Government can withdraw money from the fund for "temporary appropriations" without Parliamentary approval
The fund cannot be used as collateral for borrowing.Add "except as otherwise provided by law" which makes the clause meaningless, as borrowing would be provided for in other laws.
The Petroleum Fund law is has stronger force than many other laws (per decision of the Tribunal Rekursu, 27 October 2008)When the Budget and Financial Management Law or other petroleum-related laws contradict the Petroleum Fund Law, the PF Law may be overruled.
Anyone may lodge a complaint with the Provedor for Human Rights and Justice.Although not discussed in the Ministry's Discussion Paper, Article 45 of the PF Law should be amended to include the Anti-Corruption Commission.

On 10-11 May, the RDTL Ministry of Finance hosted an international seminar about Managing the Petroleum Fund, with several international speakers addressing many subjects. The Ministry has made their presentations available:

Several speakers outlined the Roles and Duties of various agencies involved in managing Timor-Leste's Petroleum Fund:

The discussion paper and seminars devote much attention to how Timor-Leste can determine what "level of risk" it will tolerated, and argue for undertaking riskier investments in the hope of earning greater return in the long term. There was little consideration that their are different risk tolerances between officer-holders and the public, young and old, city and rural, rich and poor. The difficulties of sticking to a long-term investment strategy when decision-makers face election every five years were hardly mentioned.

Although such seminars are helpful in increasing understanding by Government, Parliament and civil society, they are not a substitute for genuine public consultation and dialogue. We encourage the Ministry of Finance to publicly circulate all the revisions to the Petroleum Fund law that they are considering, and to invite submissions and hold public hearings across the country. Before a draft law is submitted to the Council of Ministers, a formal public consultation process should be held, and Parliament should also hold one before revising and approving the Government's proposal. This is the only way to preserve the national consensus and Parliamentary unanimity that was achieved when the Petroleum Fund law was passed five years ago.

The Petroleum Fund Consultative Council commissioned Australian economist Dr. Tim Anderson to write a report on management issues related to The Petroleum Fund and Development Strategy in Timor-Leste to stimulate broader and more informed discussion among Timorese leaders and civil society. Dr. Anderson made a presentation and distributed a draft version of the paper to the NGO Forum on 13 July. It provides a different perspective than the presentations above from Government conferences, and covers the following topics:

  • The Petroleum Fund: management issues

    • Founding principles and current challenges
    • Particular risk factors for Timor-Leste
    • Sovereign Wealth Funds and development
    • Fund investment reform options
    • Institutional implications
  • Development Strategy in Timor-Leste
    • Development strategies globally and in Timor-Leste
    • Strategy, debate and the neglected sectors

In June 2010, the Government submitted a "budget rectification" to Parliament which undercuts the principles of the Petroleum Fund law, and La'o Hamutuk made a submission explaining that it would be better to amend the law than to violate it. Although Committee C agreed with La'o Hamutuk's recommendations, the Parliamentary plenary made a political decision and approved the rectification largely unchanged. It will withdraw $811 million from the Petroleum Fund during 2010, $309 million more than the Estimated Sustainable Income. The ESI has conceptually weakened from a "rule" to a "guideline" to a "benchmark" over the last five years, and the Government doesn't need to revise the Petroleum Fund law to spend beyond it every year.

On 16 August 2010, IMF economist Alistair Watson presented to civil society on Timor-Leste Fiscal Regimes and ESI calculation at the invitation of the Ministry of Finance.

Revision process picks up in September 2010

In September 2010, the Investment Advisory Board released a Statement of Investment Beliefs and Principles. The Board's mission "is to provide advice to the Minister of Finance so that the investment of the Petroleum Fund assets will benefit current and future generations of Timor-Leste’s citizens by maximizing the long-term value of the savings from Timor-Leste’s non-renewable resources through the prudent investment of those savings." The paper, which develops ideas presented at the Ministry's seminar last May, encourages diversification into equities (stocks) as well as bonds, using external managers.

On 23 September, La'o Hamutuk released information about an attempt the previous year to scam the Petroleum Fund out of more than a billion dollars. The rejection of this attempt underscores the importance of strong laws to ensure transparency and safeguard against illegitimate "investments."

On 28 September, Parliament approved the Government's request (Tetum) to revise the 2009 Budget and Financial Management Law to delay the process for General State Budget for 2011 by a month. The budget will now be proposed to Parliament by 15 November, largely because budget execution has been very slow, even prior to the mid-year increase.

On 29 September, the Council of Ministers received a "Presentation on diversification of Petroleum Fund Investments", described as "Taking into account that the investment flexibility allowed by the current Petroleum fund Law has already been exhaustingly explored, it becomes necessary to make alterations to said law, so that diversification may continue to exist in the investment strategy of profit obtained from oil exploration, in order to give sustainability to the income. A working group from the Ministry of Finance has developed proposals to change the Law, having consulted the Investment Consulting Council, as well as external advisors. The proposal will be presented to the Council of Ministers soon." The Council also "discussed the plan for diversifying investment from the Petroleum Fund and the process for the future development of the Funds management and investment strategy."

The Council of Ministers continued this discussion two weeks later because the law needs to be amended to allow diversifying investments. On 13 October, the Ministry of Finance working group unveiled their proposed amendments. Changes are proposed regarding the investment policy and risk profile, transfer/withdrawal rules, the use of the Petroleum Fund as collateral for loans, Operational Management and the composition of the Investment Advisory Board.

On 18 October, the Minister of Finance and the Director of the BPA announced the appointment of the British company Schroders Investment Management Ltd. as an external manager for 4% of the Petroleum Fund, about $260 million. Schroders is investing this money in equities (stocks) listed on stock exchanges of developed countries. In her presentation, the Minister of Finance explained that, although this is the first investment of the Petroleum Fund in equities, the full flexibility of the current Petroleum Fund Law has been exhausted. Therefore, the Council of Ministers is discussing a revision which will increase the amount allowed in listed equities, and also allow up to 5% of the Fund to be invested in private equities, real estate and infrastructure. She expects Parliament to approve the changes by the first quarter of 2011.

The Council of Ministers received a "Presentation on Markets and Return of Investment" on 20 October, with "the objective of improving comprehension regarding the existing options, for the Government and State, overall, of the maximization of investment profits, resulting in a larger investment margin of the estimated Sustainable Income." A similar presentation was given to a public "Mini-seminar on Fund Management and Changes to Petroleum Fund Law" three days later.

At the mini-seminar, the Ministry of Finance distributed a draft law revising the Petroleum Fund Law (also Portuguese), and gave a presentation on its main points. The Ministry asked for written comments delivered to the Minister's office or emailed to Filipe Nery Bernardo at by Friday 5 November. La'o Hamutuk produced a radio program on the proposed revisions the following week.

La'o Hamutuk filed a submission (also Tetum) to the Ministry with four main points, which we summarized on our blog):

  1. It’s too soon to put half the Fund in the stock market.

  2. Don’t weaken the sustainable income rule.

  3. Keep the Banking and Payments Authority as Operational Manager of the Fund.

  4. Maintain the independence of the Investment Advisory Board.

Other submissions were made by Luta Hamutuk (Tetum), the Banking and Payments Authority and the World Bank.

The proposed General State Budget for 2011 was passed by the Council of Ministers on 11 November and by Parliament at the end of January. It  as started $985 million in expenditures and calculates an increased ESI of $734 million, based on higher assumed oil prices, but Parliament added $321 million to expenditures, all of which will come from the Petroleum Fund. La'o Hamutuk's submission on the budget on 15 December encouraged Committee C to consider the impact of revising the Petroleum Fund Law on fiscal sustainability.

At a three-day meeting between 31 January and 2 February 2011, the Council of Ministers discussed many things, including revisions to the Petroleum Fund Law. Their press release reported:

   "With this diploma, the Government intends to correct the investment principals and rules defined in Articles 14 and 15, having in view the maximization of the return adjusted to the risk, taking into account the finality of the Fund and Timor-Leste’s capacity to support such risk. The Law proposal ensures reasonable flexibility to develop a strategy set on the principle of diversification to seek a larger exposition and to avoid excessive risks, without prejudice of solid and internationally recognized principals of operational control and risk management.
   "Besides this, it is intended to clarify the requirements that the Government should fulfil in case of a withdrawal, from the Petroleum Fund, of more than the Estimated Sustainable Income, and provide flexibility in regards to the responsible entity for the Operational Management of the Fund."
[as the gov't's translation is poor, click here for the Portuguese original.]

On 3-4 March, the Ministry of Finance brought Towers-Watson consultant Peter Ryan-Kane back to Dili for a series of workshops on a Roadmap for Petroleum Fund Strategic Asset Allocation. The one for civil society and others was opened by Minister Emilia Pires, and included this presentation. The revision of the Petroleum Fund Law was expected to be approved by the Council of Ministers and sent to Parliament by the end of March, but as March ended, the target was moved to June.

The following week, the IMF released their annual analysis of Timor-Leste's economy. Regarding revisions of the Petroleum Fund Law, the IMF "welcomed that planned revisions to the PF Law leave its basic principles—transparency, accountability, and inter-generational equity—intact. However, some specifics as to what “justifies” withdrawals from the PF in excess of the ESI, such as financial or social returns, would be helpful to focus the public debate. Also, ambiguity as to who will be the manager of the PF is likely to create uncertainty."

At their 6 April meeting, the Council of Ministers continued discussing this issue, as reported in their press release (also Portuguese or Tetum, links added) "The Petroleum fund Law determines a revision after five years of the Petroleum Fund’s constitution. This diploma intends to change the investment rules and principles, allowing for a greater flexibility in the diversification of the application portfolio, in a way as to increase, in the future, the return of investment, clearly defining the limits for risk exposure. Additionally, the law clarifies the requirements to be fulfilled by the Government, in case it’s necessary to carry out a transfer, to the State Budget, above the Estimated Sustainable Interest, promoting, in the future, a greater flexibility regarding the entity directly responsible for the Operational Management of the Fund. The rules for the appointment of the members of the Advisory Committee for Investment are also changed.
     "One of the main documents considered during the revision of the current law was produced by the International Working Group for: Sovereign Wealth Funds: Generally Accepted Principles and Practice, also designated as: Santiago Principles. These Principles represent an international cooperation effort for the identification of better management practices for these funds, particularly, in the governance and investment policy areas, thus the Government has proposed the current revision of the Petroleum Fund Law according to these principles, with the objective of ensuring that Timor-Leste continues to be a example of best international practice for managing these type of Funds."

Council of Ministers and Parliament approve revision of the law

On 3 June 2011, the Council of Ministers approved (also Tetum or Portuguese) the proposed law to amend the Petroleum Fund Law, which will go to Parliament for approval. The description of the law is in the 6 April press release quoted above.  The proposed Law (original in Portuguese), together with an explanatory memorandum (original in Portuguese), was submitted to Parliament on 28 June. Committee C scheduled a hearing for 6 July, but it was changed due the urgency of other legislation.

The law proposed to Parliament is almost identical to the draft circulated by the Ministry of Finance in November 2010, to which La'o Hamutuk made a submission (also Tetum) In addition to our main points at that time (see above), two dangerous provisions have been added:

  1. The encumbrance of up to 10% of the fund as collateral for borrowing is an unnecessary risk which undercuts the principle of intergenerational equity which is fundamental to the Petroleum Fund.

  2. The waiver of standards contracted External Investment Managers who are Timorese nationals is a "license to steal" which should be sharply limited if it is to be included at all. Timor-Leste's recent experiences with substandard local infrastructure projects assigned to local contractors makes it illogical and self-destructive to repeat this practice.

On 11 July, the Banking and Payments Authority sent a 23-page submission to Parliament (also Tetum), reiterating many points La'o Hamutuk had made. The BPA noted that the revisions could "significantly increase the influence and authority of the Minister of Finance ... at the expense of institutional checks and balances."

On 23 August, Parliament approved the law with 34 votes in favor, three against and two abstentions. Except for revising the preamble, only very minor changes were made to the Council of Ministers version (final text in English and Portuguese) before the law was sent to the President for promulgation. Three days later, La'o Hamutuk distributed some thoughts to the EITI conference (PDF), urging caution:

Timor-Leste is extremely dependent on petroleum. Money from petroleum revenues dominates our entire economy and state activities. This year alone, $1.19 billion of the $1.31 billion state budget comes from the Petroleum Fund, which Timor-Leste established in 2005, to “contribute to prudent management of the Petroleum Fund for the benefit of current and future generations.” Therefore, we should reinforce the provisions of this law about good governance, transparency, accountability and Government’s responsibility for annual spending.

Unfortunately, the Government recently revised the Petroleum Fund Law, and Parliament approved these amendments last Tuesday. We are distressed that the revision weakens essential articles which safeguard our petroleum resources, allowing half the fund to be invested in financial markets (increasing the risk of losing money), using the Fund as collateral for borrowing, and weakening the sustainable spending rule. It undercuts the roles of the Investment Advisory Board and the Banking and Payments Authority, concentrating power in the Minister of Finance.

The revision allows the state to endanger future generations' rights for short-term opportunism. This decision reduces transparency, and holding this EITI conference is a diversion to distract people from this reality.

In the last few weeks, the global economy has been in turmoil: oil prices have plunged, the U.S. economy is fragile, S&P downgraded U.S. treasury bonds, and the stock market fluctuates wildly. Investors all over the world are worried and uncertain. Therefore, we suggest that the Government act slowly and carefully before implementing the changes from the revised Petroleum Fund Law. If we guess wrong, we will no longer be proud of our system for managing petroleum revenues.

On 19 September, the President promulgated the law, which was published in the Jornal da República (also English) as Law No. 12/2011 on 28 September 2011.

In early 2012, the Government took advantage of the revised law, announcing plans to increase the amount invested in equities to 20% by mid-year and signing contracts for external borrowing. To follow subsequent activities and events, see La'o Hamutuk's overall web page on the Petroleum Fund.

On 1 June 2012, Prime Minister Xanana Gusmão expanded the Petroleum Fund's Investment Advisory Board by appointing two new members, as allowed by Article 17 of the revised Petroleum Fund Law. Dispatch No. 016/GPM/2012 (original) names Francisco Monteiro (President and Director of TimorGAP, E.P.) and Gualdino da Silva (Present of the National Petroleum Authority, I.P.) as new members of the board. A few weeks later, a recorded conversation embarrassed IAB President Olgario de Castro. The ramifications are discussed in our blog Wading deeper into an oily swamp.


The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
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