Challenges for the Xanana alliance

However in 2007 Xanana bypassed the PD, attracting some of their support into his new CNRT. As a result, PD's vote only increased a little over that of 2001 (from 9 per cent to 11 per cent). PD was offered just two ministries in the new government, plus the Presidency of the Parliament for PD leader Fernando “Lasama” de Araújo. Many PD members are dissatisfied with this outcome. Lasama seems to have gained little influence, remaining dependent on Xanana.

In sum, Timor Leste has acquired a weak and disparate government, dominated by a Presidential-style Prime Minister, with few policies. Its vulnerability to external pressures is plain.

What are these pressures? First, the struggle with Australia over energy resources, having reached some form of compromise over royalties in the shared JPDA zone, is likely to move on into issues of gas processing and new explorations.

The Fretilin-led government was developing plans and finance for onshore LNG processing and has allocated some new exploration contracts. There is more money in gas processing than gas royalties; and the benefits from new fields are likely to be substantial.

The immediate Australian pressure on Xanana's AMP government will be to abandon the plan to divert and process gas from the Greater Sunrise Field in Timor Leste, and allow it all to be piped to Darwin. Canberra will also seek to exclude new, non-Australian energy development partners. The failure to conclude proper maritime boundaries has already allowed Canberra to play on that ambiguity, suggesting Australian consent for new exploration is required. Nevertheless, the Indian Reliance group begins drilling in 2008.

The World Bank (WB) is similarly positioning itself to influence the new administration. In August the World Bank together with the Asian Development Bank (ADB) - bodies which function as effective lobby groups for private foreign investors - produced a report called Healing the Nation. This report reinforced several themes of importance to foreign investors.

In the absence of clear, independent policies to defend national assets and build public institutions, the development banks and their privatisation agendas will have greater influence. Reinforcing this position, two senior ministers in the new cabinet have worked for the World Bank and the ADB.

On the question of prudent use of the Petroleum Fund, the World Bank and Fretilin were in agreement, albeit for different reasons. The World Bank wants limited government expenditure so as to maximise the opportunities for private investment; the Fretilin-led government simply accepted the need for cautious and sustainable fiscal policy.

This is one area where Xanana has proposed a policy departure, through more rapid use of petroleum revenues. However the expanded budget, increased aid and the fact that parliamentary approval is required to draw extra revenue from the Petroleum Fund might help modify Xanana's position.

On the other hand, the World Bank and Fretilin leaders clashed on questions of capacity building and, in particular, public institutions.

In 2000 the World Bank (and AusAID) opposed the use of aid moneys for reconstructing East Timor's rice industry, and opposed public grain silos and public abattoirs. They also pushed for privatisation of Agricultural Service Centres and the newly created Microfinance Institution.

In Healing the Nation the World Bank comes out strongly against any new public banking facilities, arguing for reliance on the established private banks, such as the ANZ. This is probably a reference to discussions around a possible Rural Bank, or at least a regulated line of credit from the private banks to farmers. Privatisation of the Microfinance Institution of East Timor (MFIET) also remains on the ADB's agenda.