RDTL General State Budget for 2012
3 October 2011. Updated 18 September 2012
Liga ba pajina ida ne'e iha lingua Tetum. Link to index pages on 2011 state budget, 2012 mid-year budget or 2013 state budget.
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Contents of this page
Timor-Leste's General State Budget has grown very rapidly since the country began to receive large petroleum revenues in 2007. The enacted budget for 2012 is no exception -- a 28% increase over the 2011 budget, as shown on the graph at right. Click for notes on graphic at right or here for notes on the even larger budget the Government proposed to Parliament.
At an extraordinary meeting on 16 September, the Council of Ministers approved (also Tetum, Portuguese) a proposed budget of $1.763 billion, including these expenditures:
The election-year budget projects $2,259 million in revenues from all sources:
Although the Government says it "remains committed to take action to transform the oil-based economy into a non-oil based economy and attract investment, essential for Timor-Leste’s development and growth," this budget moves the country deeper into the Resource Curse.
On 25 November, Parliament approved a revised budget totaling $1.674 billion in expenditures, including $1.495 billion from the Petroleum Fund. Although the MPs eliminated $200 million for the Timor-Leste Investment Company, they added $111 million in new expenditures, so the total enacted budget is $89 million less than the Government had proposed. See below for more details.
On behalf of the Government, interim Prime Minister Jose Luis Guterres and acting Minister of Finance Rui Hanjam delivered the budget documents to Parliament on Friday, 30 September. With Parliament's permission, the Ministry of Finance posted them on their website the following Monday morning.
After presentations from the Minister of Finances to the Parliamentary Plenary on 10-11 October, Parliamentary Committees will hold hearings on proposed 2012 Budget Law No. 54/II from 12 to 26 October (download schedule). The Parliamentary plenary will receive the Appeals Court's report on 2010 state accounts on 21 October and discuss it starting on 3 November. Debate on the budget in Generality began on 9 November with a final vote on 25 November.
We appreciate the efficient coordination between the Parliament and the Ministry to publish the documents online quickly, improving transparency to make them more accessible than in recent years. We understand that it was motivated partly because Ministry officials wanted to pre-empt La'o Hamutuk's website as the "go-to" place for information on the state budget, as it was during 2011 and 2010.
Unfortunately, the Ministry website is cumbersome to access and some of the budget files are unnecessarily large. Therefore, we are posting the draft budget documents here (see below for the final books as enacted). Each file is smaller than two megabytes except where noted.
Parliamentary Committees held hearings on the Budget during October, and the Plenary discussion opened on 9 November. Prime Minister Xanana Gusmão (also Tetum and Portuguese) presented the budget, followed by the reading of a summary of the 75-page Report from Committee C (Portuguese original).
After two days of vigorous debate, the Parliament approved the budget in generality on 11 November, with 37 voting for, 19 against, 3 abstentions and 6 not voting. The Government website contains summaries of the first and some other days of the debate; most of the issues discussed on the third day had been raised by La'o Hamutuk in our submission two weeks earlier.
On 14 November, Parliament started ten days of discussion on specific budget items. On the first Monday morning, after heated debate, the Deputies voted 18-32 to reject a proposed amendment to remove authorization for the Government to borrow $33.1 million in 2012. In the afternoon, Parliament approved an amendment to increase borrowing by $10 million for a road from Maubisse to Ainaro. On the second day, Parliamentarians engaged in a heated debate about $3.6 million to buy cars for each MP (which remained in the budget), as well as issues relating to the use of state funds to support Church and civil society projects. La'o Hamutuk is not writing detailed summaries of each day's debate, but the Ministry of Finance website includes daily reports with more details.
On 17 November, Fretilin proposed to add $1.5 million to the Foreign Ministry budget as a Timor-Leste contribution to UNESCO, to show solidarity for the organization following the cut-off of U.S. funding to the agency that followed its admission of Palestine. The Government accepted this proposal, and the amendment passed.
On 18 November, MPs from PD, Fretilin, PUN and PSD (Mario Carrascalao) introduced amendments to remove the $200 million allocated as seed money to the not-yet-formed Timor-Leste Investment Company. After heated debate, Parliament deferred voting until Monday morning, when they voted 30-26 to remove this allocation from the budget.
The final budget was passed on the night of 25 November, with a total of $1.674 billion in expenditures, $1.495 billion of which will be revenues from exporting oil and gas wealth channeled through the Petroleum Fund. Prior to the final vote, the Minister of Finance asked Parliament to authorize around $160 million in multi-year borrowing, stimulating heated debate and a walkout by the opposition, which also voted against approving the final budget. Nevertheless, the budget was approved 39-20-1, with the following expenditures:
Parliament Committee C worked on incorporating the Parliamentary changes into the budget law until the middle of December, when they sent it to the President for promulgation. The President told journalists that he would study it carefully before deciding whether to sign it. In December, La'o Hamutuk wrote to the President (also Tetum) to encourage him to evaluate whether this proposed budget will benefit Timor-Leste’s people today and tomorrow before deciding whether to promulgate or veto.
The President soon promulgated the budget, although he expressed concern that it will be difficult to spend this much money with most political leaders preoccupied with the election during much of 2012. The Budget was published in the Official Gazette (Portuguese) on 21 December, although a technical error makes some of the tables unreadable in the electronic version. See this extract from Final Budget Book 1 for readable tables.
The 'final' budget books, as enacted into law, were posted to the Ministry of Finance website in late January 2012. We shrunk a few of the files and re-posted them all here for ease of access:
Unfortunately, the "final" budget books had an important mistake in Budget Book 1. The Ministry increased its predictions for spending in 2013-2016 by about $100 million every year (tables 2.2 and 2.4), based on Parliament's amendments to the 2012 budget, but they forgot to deduct this money from the Petroleum Fund when analyzing its future balance and Estimated Sustainable Income (tables 5.8 and 5.10). After La'o Hamutuk called this error the Ministry's attention on 22 February 2012, they quickly and quietly published revised versions of Book 1 (also Portuguese) on their website. The revised projections reduce the balance in the Petroleum Fund at the end of 2016 by $499 million, which will reduce the amount of money which can be withdrawn sustainably each by $15 million in every subsequent year. Click for our article If you spend $400 million dollars, you don't have it any more.
On 21 October, La'o Hamutuk made a submission to Parliament Committee C (also Tetum) on the proposed budget, together with the NGO Forum (Tetum) and Luta Hamutuk (also Tetum). Our submission discussed the following key issues and made 21 recommendations:
On 28 October, Parliament Committee C held a hearing with the Minister for Finance about the Opinion of the Appeals Court on the audited General State Accounts for 2010 (also Port.) and invited La'o Hamutuk to participate. We wrote a letter to Committee C (also Tetum) with some of our observations and concerns.
As Parliament's discussion began, La'o Hamutuk published two Tetum-language articles in local newspapers: 2012 State Budget attaches the Resource Curse to Timor-Leste (Tetum) and Timor-Leste Investment Company: Investing or spilling money? (Tetum). At the same time, the Government issued a Budget Made Simple (also Portuguese) press release.
Our analysis of the 2012 budget documents has raised several interesting aspects below, most of which are also discussed in our submission. Committee C's report incorporated many of our ideas. We continue to research and analyze the implications of the budget, and to update the section above on the Parliamentary debate.
Expenditure growth is nearly a global record.
In nominal terms, the enacted 2012 budget is 28% larger than 2011, nearly five times the original 2008 budget. According to the IMF World Economic Outlook, Zimbabwe is the only country in the world whose state budget grew faster during the last four years. Congo (DRC) places third with an increase of 267%. Even after adjusting for inflation, Timor-Leste's 2012 budget is 19% larger than last year's and has grown 245% since 2006.
The budget defies sustainable use of the Petroleum Fund.
During the last few months, Parliament and Government have given much attention to revising the Petroleum Fund Law, including weakening the 3% guideline for Estimating the Sustainable Income. However, this budget ignores that rule entirely, spending $1.495 billion from the Petroleum Fund, which is more than double the "Estimated Sustainable Income" of $665 million. Every projected budget through 2016 repeats this pattern, as has every budget the Government has proposed since mid-2008. On 23 September 2011, the Prime Minister told the UN General Assembly of the Petroleum Fund's $8.9 billion balance, taking pride in "our good governance and prudent use of revenue" and promised that investing half the fund in equities would "guarantee long term sustainability so that future generations will benefit in the same way as the current post-war generation."
If only it were true. Bayu-Undan production is beginning to decline while budgets continue to grow, and the projected 2013 budget will spend almost as much from the fund as oil revenues will bring in. In 2014 Timor-Leste hopes to spend $180 million more than the income from petroleum in that year.
This year's ESI is calculated as lower than last year's $734 million, partly because the Government overspent the ESI during 2011, and partly because of revised projections from ConocoPhillips which increase Bayu-Undan operating costs and lower the amount of oil and gas which they expect to extract. Nevertheless, we continue to believe that the assumptions of future oil prices -- which have the biggest effect on the estimate -- are imprudently optimistic. For 2011, they estimate a price of $88/barrel, based on prices through July, although prices fell below $76 in early October.
Is it time for Timor-Leste to become a debtor?
The proposed budget includes $43 million in loans for Dili sanitation and national roads during 2012, with more in future years. This is the first time the Government has asked Parliament to approve actual borrowing, now that the Deputados have approved all the required legislation over the last few months. Budget Book 1 contains less than a page about borrowing, without identifying the lenders or the terms of the loans, and "does not show repayment because most of the loans have a ten year grace period." The memorandum explaining the Budget Law explains that for "the first time in the history of Timor-Leste, the Government is proposing to National Parliament a ceiling that the Government is authorized to contract loans, by a legal obligation which must only intended for the construction of strategic infrastructure development the country."
The table at right, indicating plans for a half-billion dollars in loans during the next four years, is a fraction of what the Government has in mind to implement the Strategic Development Plan. We understand that it shows how much borrowed money will be spent in each year, rather than the amounts to be borrowed. This is inconsistent with the proposed 2012 Budget Law, which reads:
Proposed 2012 Budget Law, Article 5
In order to meet the financing needs related to the construction of strategic infrastructure for the development of the country, the Government is authorized under Article 20 of Law No. 13/2009 of 21 October, and the Public Debt Regime, to resort to external borrowing to the maximum amount of $33.1 million, with a maximum term of 30 years.
Law No. 13/2009, Article 20
1 – In the annual public revenue and expenditure estimates submitted to the Parliament, the Government shall specify the amount it expects to receive from borrowings and grants during the financial year, in order to fund State expenses.
The Government is thinking big -- a consultant recently submitted a design for a 156 km Suai-Beacu dual carriageway which may cost even more than the $220 million in loans and $547 million from the Infrastructure Fund listed in the budget documents. We encouraged the Government to provide information on the full costs of this mega-project before Parliament approves the budget and the loans, rather than repeating the mistakes of the Heavy Oil project. However, the relevant ministers failed to answer Parliament's questions on full project costs.
On the last evening of the Budget Debate, the Government asked Parliament to authorize $160 million in borrowing, to enable negotiation with lenders for multi-year loans, as La'o Hamutuk had suggested above and in our submission. A heated debate followed, with Fretilin walking out, before approving the following:
Promulgated 2012 Budget Law, Article 5
1. In order to meet the financing needs related to the construction of strategic infrastructure for the development of the Country , the Government is authorised under Article 20 of Law no. 13/2009 of 21 October and Article 3 of Law no. 13/2011 of 28 September, to resort to concessional external borrowing to the maximum amount of $160 million, with a maximum term of 40 years.
2. Without prejudice to the above provision, in 2012 the financing derived from borrowing shall not exceed $ 43.1 million.
Electricity continues to dominate the infrastructure sector.
Last year's 2011 budget allocated $497 million for electricity, including $447 for the national electricity project. Most of this is partial payment on the three largest contracts in Timor-Leste history, $406 million for Puri Akraya Engineering to build the power plants, $298 million to Chinese Nuclear Industry Construction Company #22 to build the national high-voltage distribution grid, and $30 million to China Shandong International to upgrade the Comoro power station.
In the 2012 budget, capital expenditures for electricity are $282 million, while running the new power plants will increase the appropriation for generator fuel from $46 to $89 million. However, the proposed 2012 budget shows no increase in salary allocation for EDTL staff (although they plan to begin installing prepaid meters in the districts), and a reduced allocation for equipment maintenance. Notwithstanding the large increases in generating capacity and paying customers, EDTL gross revenues are only projected to go up slightly, from $14.5 million in 2011 to $16.1 million in 2012, requiring a $73 million subsidy (not including hundreds of millions in capital costs) for this autonomous agency.
Several recent reports have revealed that some large customers are not paying for electricity. The budget hints that this might change: "It is also possible that the rates charged, which were revised in August of 2011, may be further modified as better-off clients could be asked to accept less of a subsidy for their electricity, and such changes could boost these revenues further."
Tasi Mane petroleum project overwhelms future planning.
Although electricity gets the biggest piece of the Infrastructure Fund during 2012, $163 million is allocated to the Tasi Mane project to build petroleum infrastructure on the south coast. Most of this, $100 million, is for construction of the supply base in Suai for offshore petroleum operations, which has a total budgeted project cost of $329 million between 2011 and 2014. In September, the Government appointed Eastlog (Portuguese) to direct the supply base construction, and it will become the property of the new TimorGAP national oil company.
Another $45 million is allocated during 2011 for the Suai-Betano-Beacu highway, which is budgeted to absorb $547 from the Infrastructure Fund and $220 million in loans between now and 2016. We believe that this project will extend beyond 2016, and encourage more transparency about the total costs of this highway and other components of the Tasi Mane project.
Human infrastructure needs more resources.
Sadly, Timor-Leste 2012 State Budget continues to lack sufficient attention to Timor-Leste's human resources which are the foundation of economic development, as well as essential to our people's quality of life. Only 6.3% of state expenditures will go for education (including the Ministry and scholarships), and only 2.9% for health. As the graph shows, this is slightly less than last year's percentage and much less than other developing countries. Although Timor-Leste is spending a few more dollars on education and health than in past years, other parts of the budget have grown much faster.
Last May, the UNDP National Human Development Report pointed out that countries making progress toward the MDGs spend about 28% of their budgets on education and health, concluding that “not enough priority is being accorded to education and health. If Timor-Leste is to move faster in achieving the MDGs in these areas, then the share of social services in the budget will have to be virtually doubled.” The 2012 budget moves in the opposite direction, reducing the budget allocation for these social services from 9.6% of the 2011 budget to 9.2% for next year.
The new Timor-Leste Investment Company (CITL) was proposed to get $200 million in start-up capital (but Parliament cancelled it).
The Council of Ministers (also Portuguese) approved Decree-Law 41/2011 (also Portuguese) establishing this entity on 3 June 2011, and it became effective when it was published in the Jornal da Republica on 21 September. The Government says that the CITL/TLIC will "promote the development of investment opportunities and national wealth growth, leading important strategic projects with significant commercial impact." On 11 June, the Government celebrated TLIC as being "born to attract foreign direct investment by providing commercial incentive, through which the Government and the People have ownership. Similar to Singapore’s Temasek Holdings, a domestic, Government owned Investment Corporation, TLIC will target sector investment aligned to need and return and invest accordingly on a strictly commercial basis to accelerate development. TLIC can partner to build hotels, factories or other commercial pursuits. The TLIC mandate, unlike the Petroleum Fund, is to invest in Timor-Leste, in this phase of development."
The Strategic Development Plan calls it the Timor-Leste Investment Agency, and has little information. Budget Book 1 and the Decree-Law and Statutes give a little more, although TLIC/TLIA is not mentioned in 384 pages of Ministry Action Plans for 2012. The Budget allocates the $200 million capital injection under "Whole of Government;" the following is an abridged version of its explanation:
La'o Hamutuk has not yet looked at this in detail, but the projects envisioned have negligible benefits for the vast majority of Timor-Leste's people. We wonder whether this is a good use of two hundred million dollars -- more than the entire annual allocations for health, education and police combined. Is it good for Timor-Leste to open windows for unprofitable investment and corruption, while shutting doors to transparency and Parliamentary oversight?
The MDG-Suco budget line is inconsistent with recent experience.
The 2011 State Budget appropriated $44.6 million for the MDG-Suco program, to build five houses in every aldeia in 2011, a goal which was to be repeated every year through 2015. The National Procurement Commission issued a tender in June (bidding documents) to import and build 11,855 prefabricated houses, allocating $4,000 per house.
However, no suppliers could be found at that price, and on 8 September the NPC announced its intention to award the contract to Carya Timor Leste and Jonize Construction for more than double the budget allocation. At $10,800 per house, the bidder asked for $144 million to build the requested number of houses, but the Procurement Commission limited the contract to $100 million, reducing the number of houses to 9,237 “due to a budget shortfall faced by the Government.”
The proposed 2012 budget ignores the$55 million budget overrun for this project during 2011 (estimating the 2011 expenditures for this project at $50 million). The Government asks to spend $54.6 million in 2012 and $44.6 million annually from 2013-2015, but still plans to build 11,145 houses per year for this money.
Sustainability analysis, March 2012
By March 2012, La'o Hamutuk was able to obtain more information about execution and revenues of the 2011 state budget, Petroleum Fund earnings, the final 2012 budget, and plans for borrowing. We used this information to explore what recent trends indicate for Timor-Leste's future. Our model, based on much more optimistic assumptions than recent reality, shows that Timor-Leste's Petroleum Fund could be empty by 2022, as in the graph at right. Our blog discusses this in more detail.
Bayu-Undan oil production has passed its peak, Petroleum Fund investments are returning less than we had hoped, the private-sector economy remains tiny, prices and population are rising, and we are taking out foreign loans. If we continue on this path, our Petroleum Fund will be empty in a decade, our oil will be almost exhausted, we will be repaying the principal on infrastructure loans, and twice as many young people will be entering the work force as today. Our non-oil economy may be larger than it is in 2012, but it will almost certainly not be able to provide revenues to cover our expenses.
Timor-Leste is heading toward financial disaster. With the conservative assumptions in the graph, we will be spending more than we receive from petroleum and investment income in two years, and will have used up the entire Petroleum Fund in ten. How will we able to pay for public services like education, health care, local infrastructure, police, courts and public administration? How will old people and veterans live when there is no money for cash transfers?
The graph at left shows the model's results with assumptions closer to recent history: annual budget increases of 30%, annual increases in domestic revenues of 22%, Greater Sunrise further delayed and 3.6% return on Petroleum Fund investments. The Petroleum Fund will be used up four years sooner, in 2018. By 2025, we will have accumulated a deficit of $162 billion!
Nobody is likely to lend Timor-Leste that much money, since we will have shown that we cannot manage it. A more likely scenario is that in 2018 the state will be unable to cover its budget and pay back existing infrastructure loans, and we will be forced to drastically cut education, health care, public sector salaries, infrastructure maintenance, and all other services. Poverty will increase, we will not have money to import our everyday needs, and people will starve.
If we do not change our direction soon, we will end up where we are headed.
La’o Hamutuk is sad that Timor-Leste is using up its nonrenewable wealth so quickly. We hope we made a mistake in this analysis, and we encourage people to test this model with their own assumptions. Please download the spreadsheet that generated these graphs and tell us where we went wrong.
Although the July 2012 Parliamentary Election returned Prime Minister Xanana Gusmão and Finance Minister Emilia Pires to office, the new Fifth Constitutional Government has some structural changes, including new Government agencies. To finance these agencies, the Council of Ministers proposed a revision of the 2012 State Budget. The revision does not change the total size of the budget, but would shift about $50 million from the Infrastructure Fund to the Consolidated Fund which supports government operations.
La'o Hamutuk's analysis shows that infrastructure spending is lagging far behind budgeted appropriations, especially for infrastructure other than electricity, and we hope that the reallocation of some of this money will improve government effectiveness. From the beginning of 2012 until 26 July, only 9% of the $475 million appropriated to the Infrastructure Fund in 2012 for non-electricity projects had been spent, as shown on the graph at right adapted from the Government's Transparency Portal. During all of 2011, only 30% of the $150 million appropriated for non-electricity infrastructure was spent (see LH blog article).
For more information and documents on the mid-year budget rectification (Orsamentu Rektifikativu) and the submission and approval of the audited state accounts for 2012, click here.
Links to related topics on La'o Hamutuk's website
The Timor-Leste Institute for Development Monitoring and Analysis (La’o Hamutuk)