From Ethical Corporation on-line magazine, July 2005

Asia Pacific: Timor-Leste tests revenue transparency

James Rose in Brisbane
26 Jul 05

Pressure on extractive industry companies to disclose their business transactions in Timor-Leste is failing to extract answers

Oil companies not keen on Timor transparency
Oil companies not keen on Timor transparency
Extractive industries have long felt a need, rightly or wrongly, to justify themselves in developing economies. Part of this has been a relatively new strategic approach to corporate responsibility. The latest spin-off from this branch of activity has been the Extractive Industries Transparency Initiative. An early test case has been East Timor, or Timor-Leste, and its success or failure carries a lot of weight in the way mining companies are seen to be approaching corporate responsibility.

Timor-Leste, about 500 miles off Australia’s north coast, is one of the world’s newest countries. Emerging only in the late 1990s from decades of authoritarian occupation by Indonesian forces, the country also has the bonus, or the curse, of having access to significant resources assets within its marine boundaries. These offshore fields, rich in gas and oil, considered potentially among the world’s major resource zones, have been the focus of tortuous negotiations since the 1950s, as Timor-Leste’s maritime boundaries have been complicated by first Portuguese then Indonesian colonial rule, and now by its independence since 2002.

The role of Australia has been a complicating factor in the process. In 1989, the Australian government signed the Timor Gap Treaty with the Indonesians. This allowed the two countries to decide on the carve-up of Timor’s resource reserves, even though the legality of the Indonesian military occupation since 1975 was never recognised by any major international body. The treaty itself was lambasted and informed legal commentators argued at the time that it failed to conform to standard international laws. An attempt to have this tested at the International Court of Justice failed when Australia refused to show up.

Since Timor-Leste’s independence, new talks between the Australians and the Timorese have been underway. The focal points are many and often overlapping, reflecting the movements of various occupiers and exploiters.

Potential for strife

It is fair to say, then, that the Timor Sea reserves are about as messy as they come. Since at least 2002, major exploration zones have been in a legal limbo, and remain there to this day. It is estimated by the Timor-Leste government that the Timor Sea fields will yield resources to the value of $15 billion. Already, even as much of resources remain untapped, taxes on one of the larger fields, Bayu-Undan, make up Timor-Leste’s single major source of revenue.

With heavyweights like Shell and Conoco-Phillips waiting in the wings, and with a recent surge in energy demand driven largely by China’s economic boom, the pressure has been on local officials to make some big decisions.

It is a given that in such an environment, bribery and corruption potentially have a large role to play. Early in 2004, for example, Conoco-Phillips became embroiled in a legal wrangle over claims made by a smaller competitor, Oceanic Exploration, that the Houston-based company had bribed high-ranking Timorese officials to gain favourable treatment on concession rights.

Enter the EITI

The Extractive Industries Transparency Initiative emerged from campaigns such as Publish What You Pay, initiated by Global Witness among others around the turn of the century. Since then, the EITI has received the backing of the UK government and has become an increasingly significant global transparency initiative. From early on, Timor-Leste was looked at as a possible test case for the EITI’s agendas.

The EITI principles are based on obliging governments in those countries where mineral extraction is taking place to publicise all transactions between them and extracting companies. Initially, there was also a move to mandate for mining companies to report all transactions, but this agenda appears to have faded.

This latter issue poses some problems in relation to Timor-Leste, of which more later.

The Timorese for their part have embraced the principles enthusiastically. At an EITI conference in London this year, Timor-Leste prime minister Mari Alkitiri outlined an extensive course of legislative and administrative measures to ensure that, as he put it, no stone was left unturned in the search for transparency and integrity in public administration.

This programme orbits around three legislative devices: the Petroleum Mining Law, the Petroleum Tax Law and the Petroleum Fund Law, all of which carry a range of means by which the government can ensure arms-length relations with mining companies. These legal models operate under a Production Sharing Contract system, whereby all agreements between Timor-Leste’s government and mining companies are not separately negotiated. Signature bonuses are outlawed. All royalties and other payments are published and are held in a separate fund, and are not, therefore, absorbed into the national budget for potentially politically driven spending purposes. Withdrawals of any funds by government administrators are enforced by stringent legislative checks.

Potential for strife, still

Despite Timor-Leste’s eager take-up of the EITI principles, the limited pressure that can be placed on mining companies leaves even the prime minister a little cold. He has called for legislative measures to compel companies to publish what they pay. But, he accepts: “There is reluctance on their part with respect to the potential loss of commercial proprietary and confidential and sensitive information.”

It is an issue that has been picked up in a report by Save the Children UK, which featured in the May issue of Ethical Corporation. At the London EITI conference this year, Mike Aaronson, Save the Children’s director general, expressed surprise that mining companies are not embracing mandatory disclosure. “So many companies,” he said, “talk about the need for a level playing field and the only way to secure a level playing field is to have a global [disclosure] standard that is enforced.”

The theme was picked up from a Timor-Leste perspective in an address in London earlier this year from a member of the East Timor Institute for Reconstruction Monitoring and Analysis [La'o Hamutuk], a local non-government group.

The speaker, unnamed in the conference documents, took issue with the EITI’s inability to push companies to adopt open disclosure policies. “We need mandatory controls on petroleum companies and petroleum-producing economies,” the conference was told.

The reason for this was given as largely the demonstrated inability, in spite of concerted efforts, to administer the relatively tough laws. The institutions commissioned with the task of monitoring the process are impeded by structural problems and lack of resources, the speaker said. One such core body, the Banking and Payments Authority, has been apparently operating unconstitutionally for years, as it has never had enough members to form a quorum.

So, this leaves functional gaps for the companies to fill. Specifically, this means four major operators, which are in the pole position on the significant known assets to date: Conoco-Phillips (US), Woodside (Australia), Shell, (The Netherlands/UK), which owns 34% of Woodside, and Osaka Gas (Japan).

Ethical Corporation contacted all four companies and asked each whether they would publish all transactions in Timor-Leste and would support moves to make such reporting mandatory. Only two, Shell and Osaka Gas, responded. Neither offered convincing answers, with the response from both being support for generic disclosure, minus any firm commitment to the Timor-Leste situation.

Work to do

A failure to address the problem in Timor-Leste amounts to a slap in the face for the much-vaunted EITI as well as for the Timorese. Without a firm monitoring or mandated disclosure regime, the evidence suggests that, while the Timor-Leste government may be working hard to be transparent, some of the major companies drawing significant revenue from the region might be a little tardy in reciprocating their commitment.

For all the enthusiasm surrounding Timor-Leste’s long-awaited independence, it looks like global realities are now settling in. The EITI has some work to do in Timor-Leste if it wants to be taken seriously.

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