Doing business with East Timor

Since 1999, much of the attention for nations interested in East Timor has been on rehabilitation and reconstruction. More remains to be done in those areas but it is clear that East Timor faces great economic challenges and these must increasingly become the focus of our attention.

The future of East Timor will largely be determined by the extent to which the private sector takes up opportunities to advance the new nation’s development and economic progress.

Australia, East Timor and the world.

Australia welcomed East Timor's independence on 20 May. Being there to witness the celebrations, as part of the Australian delegation led by the Prime Minister, was one of the highlights of my political career.

However, we all know that the role of the international community in East Timor is not yet finished.

For the immediate future, the United Nations will remain in East Timor. The mandate for the new UN Mission of Support in East Timor was adopted by the UN Security Council on 17 May.

Australia played a key role in achieving this outcome. And we will continue to play a key role in the post-independence UN Peacekeeping Force, just as we did in INTERFET and in the United Nations Transitional Administration in East Timor.

Internal security and law and order will be challenges for the new nation of East Timor. Australia is working actively with the UN, including through our Australian Federal Police contribution to UN Civilian Police, to ensure East Timor reaches its potential as a stable, peaceful nation. And the Australian Defence Force is also helping to establish and train the East Timor Defence Force.

East Timor will remain dependent on international donor support for at least the next three years, prior to Timor Sea revenues coming on stream in full.

Australia’s commitment to the new nation is underlined by our multi-year pledge of assistance worth A$150 million, over four years from 2000-01. Key sectors for Australian assistance are health, water supply and sanitation, agriculture and rural development, and education and governance.

Already, this assistance has made a substantial contribution in helping the people of East Timor prepare to meet the challenges of independence.

Australia will continue to work closely with East Timor towards sustainable economic development. We are prepared to provide significant assistance to East Timor as long as it continues to demonstrate sound financial management and development policies.

The Timor Sea Treaty

An important symbol of our joint efforts was achieved on 20 May when the Prime Minister and his East Timor counterpart, Dr Mari Alkatiri, signed the Timor Sea Treaty.

The Treaty and related documents – which consist of an Exchange of Notes on provisional arrangements until entry into force of the Treaty and a Memorandum of Understanding on an International Unitisation Agreement for the Greater Sunrise field – will open the way for major oil and gas developments in the Timor Sea.

These developments will underpin the economic future of an independent East Timor. The agreements will provide the necessary legal and commercial certainty for companies to exploit the tremendous resource potential of the Timor Sea, to the benefit of both East Timor and Australia.

The treaty establishes a comprehensive regulatory framework covering all the matters you would expect to see, ranging from development and production to health and safety of workers to the application of taxation and criminal law.

I want to stress that the negotiations which led to the Treaty, although tough at times, were conducted in a spirit of cooperation and goodwill which augurs well for the future of our bilateral relationship.

It is a fair treaty, under which 90 percent of the revenue from petroleum production will flow to East Timor. In agreeing to that formula, Australia was conscious of the need for East Timor to have a sound economic base.

The revenue derived from the agreements will underpin East Timor's viability as a national economy. We look forward to early implementation of all aspects of the Treaty, including our joint commitment to early conclusion of a unitisation agreement for the Greater Sunrise field.

Early stage development of the Bayu-Undan field has already commenced. This field will be able to provide East Timor with substantial revenues from as early as 2003. The gas will be processed onshore in Darwin for export, providing substantial downstream benefits for Australia.

Australia and East Timor have agreed to proceed expeditiously with the action in each country that is necessary to bring the Treaty into force. In the meantime, the Exchange of Notes continues the arrangements for the Timor Sea that were in place on 19 May this year. Upon entry into force, the Treaty will be applied retrospectively to 20 May 2002.

Australia is determined that the Timor Sea should be a unifying factor between our two nations. The outcome we have achieved makes practical good sense, in both political and economic terms.

It is also a blueprint for very close cooperation between Australia and East Timor, binding us to work together, as equals, for our mutual benefit over the longer term. Thus, it will be a cornerstone for the development of a strong and deep bilateral relationship.

East Timor’s economic development

Increasingly, trade and economic development will be an important focus in Australia’s relationship with East Timor.

There is no doubt that East Timor faces significant economic challenges. In 2001, GDP per capita was US$478, and more than 40 percent of the population lives below a poverty line set at 55 US cents a day. Literacy is around 40 percent, and life expectancy is 57 years.

Agriculture offers low earnings to the mass of the population, while a service economy is growing in the cities. The largest sector by value is public administration, which accounts for more than one quarter of GDP.

East Timor has come a long way economically since the destruction of 1999. Impressive annual average GDP growth in excess of 15 per cent in the last two years has brought GDP close to 1998 levels.

But growth is expected to slow sharply in 2002-2003 as Dili’s UN and reconstruction-fuelled economic bubble deflates, and UN staff depart. Indeed, zero growth is predicted over this period of economic transition. However, as East Timor’s economy returns to a more realistic pattern, growth is expected to resume.

Australia is keen to assist East Timor to develop its economic relationships and to lay the groundwork for private sector activity.

I have congratulated the independent East Timor on its first budget, which was a responsible and realistic one. Budget projections for East Timor suggest that it will be critically important to broaden and deepen the economic base, and develop an environment for the private sector that promotes growth and investment.

We also welcome East Timor’s forthcoming membership of international financial institutions (World Bank, IMF and ADB) and the decision that the World Bank should play a central role in East Timor’s budget mechanism.

East Timor needs to establish a planning framework to strengthen and diversify the economic base. The new nation needs substantial investment in infrastructure, and in expanding the capacity of the productive sectors of the economy. It requires a clear and stable regulatory environment. Above all, it needs consistent investment in people, in their health, education and skills.

With Australia’s support, East Timor’s Planning Commission has formulated East Timor’s first national development plan. Subject to its approval by the national Parliament, the plan sets out the funding priorities and programs that the country will pursue for the five years till 2007.

To enable continuing economic growth, it is essential the new East Timor Government act early to put in place an institutional and legislative framework conducive to investment and economic growth over the longer term.

East Timor’s future depends ultimately on establishing a thriving private sector that can generate output, savings, private investment, trade and new jobs.

Public policy must foster an environment in which the private sector can expand. There is an urgent need for East Timor’s new government to develop an action plan to encourage foreign investment.

The need for legislation on property rights and on land, and for a sound commercial and regulatory framework, is most pressing. Critical policy issues concerning land ownership disputes must be resolved.

Australia has provided significant capacity-building technical assistance to East Timor’s Finance Ministry and its Land and Property Unit through our bilateral aid program.

Over the past two years, our support has helped build the capacity of the East Timorese administration to manage all aspects of government and private property.

Business opportunities

Australia’s trade and economic relationship with East Timor is still at an early stage in its development. There are estimated to be some 347 Australian businesses with offices in East Timor. Many of these are small, privately owned concerns.

While some of these businesses can be expected to move on as the UN presence decreases over time, there is already a real basis for developing a mutually beneficial business relationship between our two countries in the future.

Much of the focus of the past three years has understandably been on the rehabilitation of the physical and administrative infrastructure of East Timor to pre-1999 levels. Reconstruction will continue to provide opportunities for Australian business in the foreseeable future.

But there is scope for growth in other sectors too, including tourism and agricultural processing. Such growth will be dependent on substantial new investment.

The coffee industry is likely to be East Timor’s leading non-oil/gas export earner for some time. At this stage, productivity is low and costs are high. Investment is needed in replanting, infrastructure, transport and marketing to increase yields and help East Timor ensure that more of its production reaches the niche market for high-quality organic coffee.

Given the current low global coffee price, East Timor is looking into the development of new cash crops. One promising new option is vanilla. High prices for this crop have encouraged more farmers to plant it.

East Timor also has a large fishery potential, with many valuable varieties. It is estimated that less than one percent of the potential fisheries output is currently harvested. Future income from fisheries can be boosted by increasing investment in the national fishing capacity and by licensing foreign vessels.

There is relatively little manufacturing industry in East Timor. In 1996, manufacturing accounted for only 3.5 per cent of GDP, most of which employed people in weaving traditional cloth (tais) and furniture. The immediate potential for manufacturing is limited, but may improve over the longer term.

Australia is committed to doing what we can to help develop a competitive, export-oriented business sector in East Timor. Given its developing country status, East Timor qualifies for preferential tariff rates of up to 5 percent under the Australian System of Tariff Preferences (ASTP).

Already, most products of immediate interest to East Timor, including coffee, its most viable export, either face no duty, or very low rates.

Of course, we are conscious of more immediate responsibility on the part of Australia to help secure a sustainable economic future for East Timor and its people.

I hope to be in a position to announce, later this year, that Australia will offer duty-free tariff treatment of all goods of East Timorese origin.

Conclusion

In conclusion, I wish to reaffirm Australia’s commitment to helping East Timor reach its full potential as a peaceful, prosperous and independent nation.

Despite the many trials and tribulations that East Timor has experienced, and the negative effects these have had for its economic development, this new nation will provide opportunities for business, both now and in the future.

All of us must work together to do what we can to ensure that those opportunities are firmly grasped in the years ahead.