'Timor-Leste will soon be running on fumes', a response to Charles Scheiner

A response to Charles Scheiner's article:?Timor-Leste will soon be running on fumes – https://devpolicy.org/timor-leste-will-soon-be-running-on-fumes-20211021/?(21 October 2021)

Thank you, Charles, for your analysis of Timor-Leste's economic situation. You highlight some critical points for the next few years, and as you say, time is short, and there are many pressing issues.

The Government, through its foresight, is creating new opportunities, and there are many politicians with a vision for Timor-Leste. We now have a 2022 Budget that supports the modernisation and growth of Timor-Leste's economy across human capital, housing and social inclusion, agriculture, tourism, environment, and connectivity. Spending in these areas will assist in developing the much-needed diversification in the economy and support the ongoing improvement of standards of living across the country. And recently, the post-COVID Economic Recovery Plan outlines how to deal with the challenging period ahead.

Being mindful of these documents and the?Strategic Development Plan, there are a few topics I would like to add to the discussion.

To provide some context to my comments below, I believe a brief overview of my connection with Timor-Leste would be useful for readers. Whilst I am not Timorese, my heart is and I wish for the country to prosper and achieve the goals set out in the various planning documents.

I began a small business in Timor-Leste more than 20 years ago, and we are now in the country’s top 10 taxpayers. Over those years, I have come to know a thing or two about Timor-Leste, its people and economic situation, and its successes and challenges. Although I now live in Australia, I remain the Director of the business. I hear about my almost 200 staff daily, so I believe I am in a position to share my informed opinion and contribute to the debate to further uplift the country.

My company operates in the retail, food, and hospitality sectors, giving us a good sense of what is going on in Timor-Leste. I have seen first-hand what a vital role the commercial sector plays in helping to improve the community and economy. I have watched the struggles in recent years and know first-hand how eager so many Timorese are to advance their lives. Quite a few of my staff have left to begin their own business, making me immensely proud. However, so many others across the country have not had this opportunity.

My comments below are given with the wish that with the correct Government actions and policies, more Timorese will have the opportunities that they desire to advance their lives.

Economic diversity

Governments worldwide may continue to fumble over policies for the move from non-renewables to renewables. The corporate world has long seen the reality that the move is essential and inevitable – even over the weeks since Glasgow, we have seen promising developments.

Bountiful fossil fuel income from the past has undoubtedly left successive Timor-Leste Governments struggling to find an incentive to develop other sectors. Now, TimorGAP's depreciation of the Greater Sunrise project, from $673 million to zero, puts immense and immediate pressure on future budgets.?

I think everyone would agree this development is particularly unfortunate for the country's economy and society.

Nations go through tax reform from time to time, adjusting to new realities and developing new sectors as per strategic plans. As the country now faces a deep revenue loss, it is not enough to rely on increasing taxes for existing businesses to make up for the shortfall from oil and gas. With such an urgent and dramatic shift required, the Government needs to find ways to make the country more attractive for new business investment so they can generate?new?incomes streams. Their priority must be to develop Timor-Leste into a vibrant place of interest for business and build a robust and diverse economy.?

Oil and gas revenues account for 80% of Timor-Leste’s revenues. This has little changed in a decade and over this time we have seen a string of disasters: 2 years of COVID-19, floods, 2 years of monthly budget finances not being released – that's 4-5 years of turmoil. How any country takes these blows and still functions is a miracle, and Timor-Leste is certainly still functioning. It may not be at the desired levels, but they have survived, and those in authority deserve praise for this result.?

But it is crunch time. There is great human potential in Timor-Leste. As you note, Charles, in your?Timor-Leste economic survey?report, two-thirds of the population of c.1.3 million people are of working age – and growing. However, we are currently seeing rising unemployment – much due to these recent disasters.

The enthusiastic and hard-working Timorese want to see their country succeed. To assist this, I would like to see implemented a reward-based employment incentive scheme, where companies that create more direct, full-time salaried positions are given an employment tax concession or a rebate to support and encourage their actions.

To implement such a scheme requires the usual due diligence by the government to vet companies to ensure they deliver on commitments and are not using convoluted formulae to boost revenue or employment numbers to obtain funding.

South Africa has implemented such an incentive (Employment Tax Incentive). Under this scheme, employers receive a financial incentive to contribute more to the county's development through increased direct salaried positions. The New South Wales Government in Australia has a similar incentive scheme, but they offer rebates for companies that increase their total number of new direct salaried positions.?A reward-based employment incentive such as this offers multiple benefits:

• Provides?the Government with a new reporting line of positive employment figures
• Boosts?business confidence
• Increases?business diversity
• Creates?an attractive environment for foreign investment in manufacturing
• Increases?employment opportunities
• Helps?build long-term sustainable tax revenues across a range of sectors, important?to the economy's growth.

To build a more secure broad-based economy, the?Government must encourage and support the creation of long-term stable?employment at companies investing in Timor-Leste because, put?simply: it makes?good business sense.

Tax treaties

The Government also needs to make establishing a business in the country more streamlined and straightforward and have the processes and policies in place to make operating there, financially viable.

A significant aspect of this is to protect businesses from double taxation by negotiating tax treaties with other countries, to increase cross-border trade and investment incentives.

Timor-Leste has built a great deal of international diplomatic and political capital. I am sure that the many countries they have been friends with for decades, such as Australia, China, Indonesia,?

Japan, Malaysia, Portugal, South Korea, and Singapore could be a start. From there, they could grow treaties with other countries.

I am aware that treaty negotiations began many years ago. What has happened to this? I urge the Government to revisit or continue this process and not to give up. It is crucial to businesses.

Level playing field

Suppose the Government decided to support the development of new businesses. The goal would be to create a level playing field on which all companies could operate successfully and independently over the long term.

This could transform the economy. But to do it successfully, the Government would need well-conceived time-bound investment and employment commitments at the application stage and transparent reporting at key milestones. These practices would ensure that companies do not take advantage of the scheme and use the funding to bolster corporate coffers based on fantastical income and employment projections. The Government could not continue to support businesses over the long term that did deliver on their original commitments.

Such a scheme would provide a wonderful incentive for companies looking to move operations to the country or for entrepreneurs wishing to start their own businesses. It would also provide confidence for businesses already operating in Timor-Leste, knowing they were part of a growing economy that was based on fair policies and taxes.

However, it concerns me that without suitable checks and balances from day one, an uneven playing field could be created that risks alienating promising entrepreneurs when they are needed most.

Furthermore, if the Government provided incentives to companies without strong controls, they risk losing money at both ends of the equation. At one end, they will see the new manufacturers paying lower excise/taxes because they import fewer goods, they will see reduced tax revenues from these Government-supported new players, reduced job creation, and a reduction in all other downstream taxes. At the other end, they will see existing businesses lose sales to subsidised new entrants, resulting in reduced excise/taxes due to fewer imports from these existing companies, increased unemployment, and the reduction in all other downstream taxes here, as well.

An ill-conceived funding arrangement for a heavily Government-supported manufacturer has the potential to devastate the overall market. It could push existing local suppliers out of a market altogether. This would leave the new entrant to control the supply of a particular product to the entire country, creating a monopolistic sector, where wholesalers and retailers would be forced to buy from one supplier. Eventually, they would lose the power to negotiate on price, margins, and credit terms.

The profitability and sustainability of other local businesses would ultimately be squeezed, leading to reduced credit in the market, inefficiency, loss of innovation, and other broad negative economic impacts.

So, incentive schemes are not without risk for a Government, which could be quite easily seen as the goose that lays the golden egg for acquisitive, territory-hungry corporates. Over the long term, the Government's responsibility is to protect all businesses operating in its territory, regardless of size or profile, and create a sustainable business community.

Land reform

The final and ongoing issue is that the country still has no land tenure laws. Aspirational Timorese are eager to build their lives and businesses in their country. But most find it difficult to access capital at attractive rates without land tenure laws because they have no security for bank loans.

A land tenure system will provide liquidity, lower interest rates, and generate economic activity in the country so the Timorese can participate in its development, achieve individual prosperity, and unlock their great potential.

Until this issue of land ownership is resolved, the Timorese people will live with uncertainty and fear about their future, and businesses will not invest in Timor-Leste. It is perhaps the single most significant hurdle to prosperity and increased foreign investment and, as such, must be a priority.

As an elder Timorese statesman said to me recently, that this is easier said than done. I have great respect for the complexity of issues that the Government faces and the need to make good decisions. However, there will never be a perfect time to implement a perfect policy or execute a perfect strategy. The important thing to take into account is that in a time of need, good enough is better than nothing. Looking into the abyss of fast-declining oil and gas revenues, I think we could all say that now is certainly?a time of need.

As the Government's?Economic Recovery Plan says:?

"For [non-oil] sectors to become strong enough and serve as alternative sources of revenue in the future, the Government needs to have ambition on the economic side, to allocate adequate investment to help them grow and expand, thus allowing for a sustained increase in decent employment and wages."

And as the Minister of Finance noted in his speech for the launch of the?Public Expenditure Review 2021, now the challenge is to:

"convert the petroleum wealth into prosperity for all citizens". (1)

There is the understanding and ambition in black and white. The Government knows what to do. The next step is to take the plunge and implement.

Kind regards

Sakib Awan

Chair, East Timor Trading Group

Reference:

Charles Scheiner has been a researcher at La’o Hamutuk, the Timor-Leste Institute for Development Monitoring and Analysis, where he investigates the impacts of petroleum extraction on Timor-Leste’s economy and politics

(1) Opening Remarks by the Minister of Finance, Rui Augusto Gomes on the Occasion of the Official Launch of Timor-Leste Public Expenditure Review 2021, distributed by ETAN News list, 17 November 2021.

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