Subject: Bloombg: East Timor's Independence Won't Mean Self-Sufficiency -- Yet

East Timor's Independence Won't Mean Self-Sufficiency -- Yet

By Adam Majendie

Dili, East Timor, May 17 (Bloomberg) -- At midnight on Sunday, the eastern part of the island of Timor, 500 kilometers north of Australia, ends four centuries of foreign rule to become the world's newest country. It gains independence only in name.

As former resistance leader Xanana Gusmao is sworn in as president of East Timor, he will lead the poorest country in Asia. Devastated by the retreating Indonesian army in 1999, it is almost entirely dependent on United Nations troops and international aid for funding, expertise and security.

The challenge is to prepare for a $7 billion windfall from oil and natural gas fields between East Timor and Australia that will begin to flow in the next five years. Used wisely, the money could boost education and services and develop agriculture and tourism to lift the country's 800,000 people from poverty before the wells run dry in two decades.

``We are lucky not to have the oil and gas revenue now,'' Gusmao said in an interview. ``If we had it now, it might be a disaster.''

The Timorese have waited a long time for the chance. When a new left-wing government in Portugal brought an end to four centuries of colonial rule in 1975, some Timorese declared a republic. Ten days later, the Indonesian army invaded, forcing most of the people to flee to the mountains and beginning a 24 year military occupation.

After 78 percent of East Timorese voted for independence in 1999, militias backed by the withdrawing Indonesian army carried out a campaign of death and destruction. A third of the people fled to the mountains. Another third ended up in refugee camps in the neighboring Indonesian province of West Timor.

Coffee

Other than international aid, East Timor has few ways to earn money to rebuild its shattered economy other than royalties and taxes from Phillips Petroleum Co., Royal Dutch Shell Group and other oil companies that are developing the Timor Sea fields.

East Timor's traditional export industry, coffee, was subsidized by Indonesia and needs investment in processing equipment, education and marketing to stem a decline in revenue. Two cargoes of East Timor coffee beans bought by private traders were rejected by U.S. buyers last year because of poor quality.

Tourism, another government investment target, may take decades to develop. A rival to Bali in the early 1970s, the country has white sand beaches, spectacular mountain scenery and some of the region's best dive sites. Yet unsettled land rights, poor air and road links, lack of power and clean water and disease mean development may be slow.

Tourism Fever

``To generate a lot of income and jobs from tourism, you need investors to come in with large sums of money and you need to make sure that tourists don't end up with dengue fever after seven days,'' said Finn Reske-Nielsen, the UN Development Programme's representative in East Timor. ``It's going to take years.''

The country also needs to show investors and potential visitors it's stable and safe after the destruction of 1999.

The militias burned four in every five schools and clinics. They killed or stole half the country's livestock, cut most of the 12,000 telephone lines and destroyed about half the electricity generators. They torched and looted almost all government buildings and shops, according to a UNDP report.

``They burned everything,'' said Tjong Hau Jang, who fled to Indonesia in 1999 and returned this year to the blackened shell of his television shop in Dili. ``I'm rebuilding bit by bit.''

Oil Agreement

The destruction means East Timor will rely on international aid until oil and gas revenue begins to flow. Under an agreement between Australia and East Timor brokered last year by the UN that will be signed on Monday, the new state will get 90 percent of the royalties from the Bayu-Undan field being developed by Phillips and Shell.

Still, oil and gas will bring almost no jobs or businesses to East Timor, because the production is offshore and the gas will be piped south to a processing plant in Australia. Moreover, few developing countries have been able to absorb large injections of petroleum revenue, moreover, without fuelling corruption and inflation.

``We have to be careful we don't create a situation with no return,'' Chief Minister Mari Alkatiri said in an interview. ``We need to avoid being a petroleum-dependent country.''

To broaden the economy, the government is working on laws for foreign investment, property and tax it hopes will encourage money to flow into other parts of its nascent economy.

Foreign investors will be required to meet a minimum threshold for investment, but won't be forced to form joint ventures with local companies or the government, said Jose Teixeira, an adviser to the government.

``It will be transparent,'' he said. ``If you meet the conditions, you'll get a license.'' Teixeira expects parliament to pass the law within a few weeks.

Still, impediments remain such as the problem of who owns land. Records were burned in 1999 and many properties have conflicting claims, including some abandoned by Indonesian owners in 1999.

``I think most investors will say, `let's see how it goes,''' said the UNDP's Reske-Nielsen.

Little will dampen the spirits of East Timorese, however, as they celebrate their freedom.

``We have nothing, but we're happy,'' said Donato Salsinita, an agricultural officer in Ermera District. ``We have an opportunity for our children and our grandchildren.''


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