Energy-dependent East Timor faces succession dilemma – Nikkei Asian Review

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Former British Prime Minister Tony Blair and Mari Alkatiri, previously Prime Minister of East Timor, meet in Dili on October 9

Former British Prime Minister Tony Blair and Mari Alkatiri, previously Prime Minister of East Timor, meet in Dili on October 9 (Photo: Simon Roughneen)

HALIDOLAR, East Timor — Three years ago, Maximiliano de Sosa had neither electricity nor basic farm machinery. Now, there is power around the clock and a tractor that de Sosa can rent to plow his small plot of land about 40 minutes’ drive from Dili, the capital.

Perched on a 30cm ridge between de Sosa’s mustard crop and a neighbor’s spinach plants, an electric pump sucks water from a 12-meter borehole, making it easier to irrigate crops during the searing dry season. “If we don’t have electricity, we have to carry water half a kilometer and then water the crops by hand,” said de Sosa.

Providing electricity to rural areas such as Halidolar is a major achievement for East Timor, also called Timor-Leste. The country lost much of its infrastructure during a 24-year fight against Indonesian occupation that culminated in secession in 1999, followed by formal independence three years later.

Farmer at work close to the main Dili-Baucau road

Farmer at work close to the main Dili-Baucau road (Photo: Simon Roughneen)

Natural advantage

With more than 100,000 dead, 70% of buildings destroyed and 75% of the population displaced, the future of the former Portuguese colony looked deeply uncertain. The international community feared the new country would become a failed state without significant outside support.

However, East Timor has one big advantage. Half the size of Belgium, and situated in the Indonesian archipelago about 700km northwest of Darwin across the Timor Sea, it has benefited hugely from exploitation of oil and gas reserves in its offshore waters.

Two years after independence, the government budget was just $74 million, and the country depended on financial support from the United Nations and other donors. But oil and gas revenues have soared since the mid-2000s, allowing a huge increase in government spending, with $1.5 billion earmarked for 2015.

Unprocessed coffee beans in Gleno, in the heart of East Timor's coffee country

Unprocessed coffee beans in Gleno, in the heart of East Timor’s coffee country (Photo: Simon Roughneen)

Royalties from offshore production totalled $1.1 billion in the first half of 2014, swelling the country’s Petroleum Fund, which holds assets derived from hydrocarbon revenues. The fund now stands at more than $17 billion, according to its latest quarterly report.

The broader economic outlook is also bright, with the Asian Development Bank (ADB) projecting growth in non-oil gross domestic product to reach 8% for this year and next. GDP per capita has jumped from $521 in 2002 to $4,835 — higher than Indonesia’s $3,557, according to the U.N.

Some of this growth is due to business-friendly regulatory reforms. The World Bank, in its annual report on the ease of doing business, published on Oct. 29, said startup procedures in East Timor were the most improved of the 189 economies it studied, pushing the country up 73 places in the global ranking to 96th.

The country’s overall ranking rose only two places, to 172nd, because of continuing problems in areas such as contract enforcement, insolvency resolution and property law. But it did well on electricity availability, remaining in 15th place.

Electricity generation became a major priority after economic growth began to take off in the mid-2000s. “One of the early wins for the government was a huge investment a few years ago of $800 million, increasing [electricity] coverage by 200%,” said Shane Rosenthal, the ADB’s East Timor representative.

Recycling scrap metal in Dili

Recycling scrap metal in Dili (Photo: Simon Roughneen)

Dispute over oil

Yet the GDP numbers overstate the prosperity of the country, especially among the estimated 70% of the population living in rural areas. “You’d be hard-pressed to find many farmers who could make $100 a month,” said Samuel Bacon, an adviser to the Ministry for Agriculture and Fisheries.

“A normal corn farmer, if they sell at [about] 30 cents a kilo, might be getting, say, 1.5 [metric] tons off their hectare-[sized plot], so might be making $500 from their big annual crop.”

There is also growing uncertainty about the long-term prospects for oil and gas revenues, with existing fields likely to be depleted by the mid-2020s. Conoco-Phillips, the U.S. oil company, says its Bayu Undan field will be dry within six years.

The untapped Greater Sunrise field in the Timor Sea is estimated to have a market value of up to $40 billion, but development has been stymied by interlocking disputes over maritime boundaries and production rights with the Australian government and several international energy companies.

The looming financial crisis is so serious that Prime Minister Xanana Gusmao, a charismatic former guerrilla leader during the independence campaign, has reversed a 2013 pledge to resign before his term ends in 2017. That decision was welcomed by Dili’s business community.

“I just think it was maybe a bit too soon [for Gusmao to leave office],” said Tony Jape, executive director of Timor Plaza, Dili’s main shopping mall, which opened in 2011. “The economy has been going well.”

Father and son looking for seashells on Dili harbour (Photo: Simon Roughneen)

Father and son looking for seashells on Dili harbour (Photo: Simon Roughneen)

Diversification needed

Nevertheless, experts agree that East Timor urgently needs to develop its non-oil and gas economy, which accounts for just 20% of GDP. Assessing the country’s longer-term prospects, the International Monetary Fund said on Oct. 22: “The key to inclusive and sustainable growth is fostering potentially job-rich sectors in line with Timor-Leste’s fundamentals, such as agriculture, tourism and energy niches.”

East Timor also hopes to develop its woefully underdeveloped tourism industry. Despite its white-sand beaches, coral reefs and sublime mountain valleys, the country received only 78,000 visitors in 2013. It also exports small amounts of coffee. But the sector suffers from a lack of investment and is hampered by poor roads that make transport slow and expensive.

Playing football in the shadow of East Timor's new Finance Ministry (Photo: Simon Roughneen)

Playing football in the shadow of East Timor’s new Finance Ministry (Photo: Simon Roughneen)

There is some interest from international businesses. Dutch brewer Heineken has applied to open a plant in East Timor, while Denmark’s Carlsberg has held discussions with the government about expanding operations in the country. In late 2013, Be’e Mor — the first locally based drinking water provider — started producing bottled water at a small Dili factory.

Be’e Mor is run by Liu Bailing, who moved to East Timor from China a decade ago. Liu said he hoped to increase the company’s share of the drinking water market from 10% to 70% in a year. “We can sell more cheaply than [Indonesian] competitors because we do not have shipping or import costs,” Liu said. About 40% of East Timorese do not have access to clean tap water.

Opposition withheld

In addition to economic uncertainty, East Timor also faces potential political difficulties. Gusmao, prime minister since 2007 after a five-year term as president — a largely ceremonial office — has patched-up factional rivalries that exploded into near civil war in 2006 and drove 10% of the population from their homes.

Gusmao and opposition leader Mari Alkatiri, head of the Revolutionary Front for an Independent East Timor (Fretilin) party, have agreed to collaborate until the next election, due in 2017, to tackle the task of setting up an ambitious economic zone in the impoverished Oecusse enclave.

Hard-won political consensus has provided a foundation for economic growth, which in some recent years has reached double-digit levels. However, critics say the government’s deal with Alkatiri has deprived the country of an effective opposition, and that Gusmao wields too much power. There have also been corruption allegations against ministers and other senior officials.

“He [Gusmao] has appointed people without integrity,” said Juvenal Dias, a researcher with the Timor-Leste Institute for Development Monitoring and Analysis, an independent think tank. Dias pointed to accusations against Finance Minister Emilia Pires, who has been indicted on graft charges, and former Justice Minister Lucia Lobato, who was jailed for corruption but later pardoned by President Taur Matan Ruak.

The president, a former army chief seen as a potential future prime minister, has criticized Gusmao for awarding infrastructure contracts, such as rural road repair jobs, to independence campaign veterans who also receive pensions — an outlay that the parliamentary opposition has not questioned.

The parliament also passed a restrictive press law, unopposed by Fretilin, a development seen as another example of the opposition’s subservience to Gusmao.

Then, in a closed-door parliamentary session, lawmakers voted in late October to sack all foreigners working in the justice system. The vote is linked to a $236 million tax dispute between Dili and energy companies, including Conoco-Phillips, the biggest foreign investor in East Timor. The government has lost most of the tax cases to date.

Among those affected by the outcome are foreign prosecutors working on the case against the finance minister, one of whom was expelled from East Timor on Nov. 6.

All but three of Fretilin’s 25 MPs voted against the parliament’s move, which the party criticized as unconstitutional — suggesting that there are limits to the opposition’s support for the prime minister.

Speaking before the parliamentary vote, Alkatiri said he wants his rival-turned-partner to see out his five-year term. “I hope he [Gusmao] will stay on till 2017,” Alkatiri told the Nikkei Asian Review. “The question here is to consolidate stability and peace.”

Asked by NAR on Nov. 6 if he had changed his opinion, Alkatiri merely said that “it is for the president of the republic now to intervene in this case,” referring to the expulsion of foreign justices.

Alkatiri’s support is not wholly altruistic, however. Fretilin could benefit at the polls in 2017 if more politicians linked to Gusmao are convicted of corruption offenses, and if the prime minister fails to conclude a favorable deal over the Timor Sea that voters believe protects East Timor’s rights.

There are concerns, however, that divisions within the country may prove hard to control for a less-charismatic leader after the election. As the Jakarta-based Institute for Policy Analysis of Conflict put it: “Gusmao had the personal authority to keep these issues under control; his successor may have a harder time.”

Sunset at Areia Branca, a popular beach outside Dili (Photo: Simon Roughneen)

Sunset at Areia Branca, a popular beach outside Dili (Photo: Simon Roughneen)

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