Table 3: Whole of Government Financial Accounts on Combined Sources Basis
(US$ millions)

The second issue relates to measures needed to build capacities within the country for management and implementation of this much larger public investment program. The Government is well aware that the existing capacities of public sector and the domestic construction industry are not sufficient to implement such a large program in a timely manner. In recognition of this fact, work is underway on a number of fronts to address the problem of implementation capacity. It will likely involve several major new initiatives, including for example:

…

• Given the limited supply of skilled labor within the country, the large build up in public works will inevitably require temporary heavy use of skilled labor from other parts of East Asia and elsewhere. The Government would, however, ensure that there are adequate arrangements in place for a greatly expanded program of skills development for Timorese nationals to allow an early transition from dependence on imported skilled labor. Such a program will be required not only for the public investment program, but also for the development of near-shore and onshore petroleum resources over the next 5-7 years. This program will also have large requirements, especially in the construction phase, for a wide range of semi-skilled and skilled workers.

Petroleum sector development. The Government has launched an ambitious program for the further development of the petroleum sector. While it is premature to make judgments on the likely economic impact of this program, the broad outlines of various possibilities are already emerging. In assessing these prospects, it is useful to distinguish between near-term, medium-term and longer term activities in the industry.

These prospects highlight the importance of an early start on the development of skills in the labor force so that the domestic impact of the industry on employment is maximized. There will be a need for people with advanced training in engineering, geology, accounting, finance and economics. Much of these requirements could perhaps be carried out under production sharing contracts. There will also be need for substantial numbers of welders, pipe-fitters, electricians, plumbers, plant and machinery operators, drill-floor workers, derrickmen, mechanics and so on. Domestic capacities for this type of training will need to be developed as a matter of priority so that there can be an early transition from the expected initial heavy dependence on expatriate workers.

Table 19: Non-Oil Gross Domestic Product by Industrial Origin
(US$ millions at 2000 constant market prices)

The sectoral composition of growth in the medium-term is set out in Table 19. Successful implementation of this growth strategy would raise non-oil GDP to around $635 million (at 2000 constant prices) – a 90% increase over the current level. In nominal terms, non-oil GDP per capita would approach $700 by 2015. After taking account of income flows from the petroleum industry, Gross National Income (GNI) may be in the range of $1,500 per capita by 2015.

Part D: Role of Fiscal Policy and Donor Assistance

Petroleum Fund and Domestic Resource Mobilization

The Government has reiterated on many occasions the importance that it attaches to avoiding the mistakes made by other resource rich countries that have led to macroeconomic instability and worse. As mentioned elsewhere in this report, the Government is well aware that macroeconomic stability is required for sustained strong growth that can reduce poverty. Consistent with this commitment to sound management of the country’s rich resource endowment, the Government has adopted a savings policy that aims to ensure effective management of petroleum revenues. To implement this policy, a Petroleum Fund was established in September 2005, following promulgation of the Petroleum Act on August 3, 2005. All revenues from petroleum production are paid into the Petroleum Fund. The Fund will act to accumulate large amounts of savings from petroleum revenues and will provide a buffer to fund budget expenditures should there be any temporary shortfall in petroleum revenues. The Act provides for the transfer of revenues from the Petroleum Fund to the budget. The key to the savings policy of the Fund is that transfers to the budget should adjust over the medium-term to the sustainable level of expenditure. This sustainable level of transfers to the budget is based on estimated current and future petroleum revenues. It is the level of expenditure that can be sustained indefinitely, after allowing for inflation. In this way, withdrawals from the Petroleum Fund can fund stable and sustainable levels of expenditure even though petroleum revenues may fluctuate considerably from year to year. Four key principles have shaped the design of the Fund.

The Petroleum Fund builds on international best practice and reflects the circumstances of Timor- Leste with additional accountability, transparency and public information features. The Act requires that the Petroleum Fund be prudently managed, investing securely in low-risk financial assets abroad.

The revenue position of the Government has undergone a major change in the past year, largely as a result of increased production from the Bayu Undan field in the JPDA and high international prices for petroleum. The prospect is for substantial further increases in these revenues. As a result, the sustainable level of funds that can be transferred from the Fund to the budget at the present time is about $260 million. Based on current forecasts of future production and international prices for oil, the sustainable income of the Fund that can be transferred is projected to rise to about $370 million by FY2014/15.

There has been steady improvement in the revenue performance of the National Government in the past four years. In FY2000/01, tax and non-tax revenue collections were equivalent to only 4% of non-oil GDP; but by FY2004/05, collections had risen to the equivalent of 10% of non-oil GDP. With the prospect of substantial increases in petroleum revenues flowing into the Petroleum Fund, the central policy issue for Government is future levels of domestic tax and non-tax revenues, as judged from two distinct vantage points:

The Government is examining the current tax regime from these perspectives to determine whether further changes would facilitate progress towards the over-arching objective of poverty reduction.

The scenario for revenue mobilization set out in Table 24 is based on the assumption that tax and non-tax collections will remain at about 10% of non-oil GDP. In other words, the Government would look to transfers from the Petroleum Fund rather than increasing tax collections relative to non-oil GDP. A low tax regime that is simple to administer may improve the attractiveness of Timor-Leste as a designation for local and international investors. However, the revenues of autonomous agencies would continue to increase in line with the growth of these services and continued adherence to the principle that users of the services should pay for them.

When combined with domestic tax and non-tax revenues, the financing capacity of the Whole of Government is currently estimated to be in the range of $320 million a year, rising to about $380 million by FY2009/10, and almost $500 million by FY2014/15. As the discussion in Part A indicated, in recent years total public spending on a combined sources basis has been stable at about $235 million a year, well below the current funding capacity of the Government. The major challenge that now faces the Government is building national capacities for effective implementation of a much larger program of development that can accelerate growth, improve the amount and quality of basic services, and reduce poverty.

The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)
Institutu Timor-Leste ba Analiza no Monitor ba Dezenvolvimentu
Rua D. Alberto Ricardo, Bebora, Dili, Timor-Leste
P.O. Box 340, Dili, Timor-Leste
Tel: +670-3321040 or +670-77234330
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