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Part 1
On 23 July 2002, East Timor became the newest member country of the Asian Development Bank (ADB), which was established in 1966. The ADB is the only multilateral lending agency to work exclusively on Asia and the Pacific. It tries to foster economic growth in the region and to contribute to the economic development of the Asian and Pacific developing countries.Historically the ADB has focused on funding and implementing large-scale infrastructure projects such as the construction of highways in Thailand or large hydropower projects in the Mekong river region. However, in 1999, in response to pressure from donor countries, the ADB changed its focus to "poverty reduction." Currently all objectives and operations are "pursued in ways that contribute most effectively to poverty reduction." This consists of promoting local economic growth, social development and good governance.
The ADB, like the International Monetary Fund (IMF) and the World Bank, supports the liberalization and deregulation of economies and promotes the expansion of the private sector. All current ADB member countries are also members of the IMF and the World Bank. In East Timor the ADB has a Memorandum of Understanding with the World Bank and is joint administrator of the Trust Fund for East Timor (TFET). It has been involved in East Timor since 1999.
The ADB now has 61 members, 44 from Asia and 17 from Europe and North America. Some member countries receive the ADB's services and others do not. The recipients, Developing Member Countries (DMCs) are all from the Asia/Pacific region. (See graph.)
Each country makes a contribution based on an assessment of the country's wealth and becomes a shareholder. They are represented on the Board of Governors, which is the highest decision making body within the ADB. The Board of Governors elects the 12-member Board of Directors, of whom eight are regional and four non-regional.
The size of a country's contribution determines its share of the vote and its level of representation on the Board of Directors (see graph). Powerful countries like Japan, China and the U.S. contribute enough money to designate their own Directors. Other countries form a constituency and share a representative on the board. Japan, like the US, owns 15.9% of the shares, which gives its Director 13.1% of the total number of votes. In contrast, East Timor's financial contribution is 0.01% and has just over 0.3% of the total vote. At present East Timor is not represented on the Board of Directors, although this will be negotiated with other member countries who have formed a constituency.
The number of staff from each member country is determined in the same manner as the voting rights. This means that people from Japan and the U.S. are more than one fourth of the ADB's professional staff, including key positions. Since its creation the President has always been Japanese and a former official of the Japanese Ministry of Finance. Other key positions held by Japan include Directors of Strategic Planning, Budget and Personnel and Program Departments. The U.S. also holds very senior positions and has traditionally occupied the office of the General Counsel. There are currently four East Timorese nationals working in the ADB's Special Office in East Timor.
The ADB provides loans and technical assistance to governments and private companies in Developing Member Countries. The ADB makes money available from five separate areas. The largest is the ADB's Ordinary Capital Resources (OCR). The others are the Asian Development Fund (ADF), the Technical Assistance Special Fund (TASF), the Japan Special Fund (JSF) and the Japan Fund for Poverty Reduction (JFPR).
The OCR consists of contributions from the member countries, reserves, and money borrowed from capital markets. Loans from the ADB's OCR comprise over 80% of all lending and are made to countries of a higher level of development, who are therefore more able to repay the debt. These loans are non-concessional: significant interest rates are charged (over 5% per annum) and they are repaid over a 15-25 year term, but they are not subject to any ADB conditions.
The ADF comes from member country donations made every three years. The largest donors are Japan and the United States. Loans from the ADF are made to the poorest Developing Member Countries, which the ADB defines as having a "low debt repayment capacity." The loans are concessional; there is a minimal interest rate and a grace period of eight years included in an overall repayment term of 32 years. However the ADB is able to impose conditions. For example, a loan may be given in installments, each installment being dependent on policy changes, or on certain legislation being passed. Conditions can promote reform or privatization of sectors like energy production, transportation, communications and industry. For example, in 2000 in the Philippines, an ADB loan was conditioned on reform and privatization of the National Energy Corporation.
The TASF is made up of donations from member countries and surplus money from interest paid to the ADB's OCR. The TASF is used for grants to pay for Technical Assistance provided by the ADB to support its projects. Technical Assistance is also used to promote the policy and legal changes imposed by the ADB in a concessional loan. Technical Assistance payments very frequently go to teams of mostly foreign consultants, often from developed countries.
The JSF and JFPR are separate funds for technical assistance provided by Japan. All disbursements from the JSF are subject to approval from the Japanese government. In effect, it is an extension of Japanese bilateral aid.
The ADB's promotion of large-scale infrastructure like roads, bridges, dams and power stations has had importantimplications for Developing Member Countries and the people who use the services provided. Large-scale infrastructure projects cost huge amounts of money, more than can be mobilized by a Developing Member Country's government and international donors. The ADB has promoted programs called "Build Own Transfer" schemes whereby a Developing Member Country's government contracts with private companies to finance, build and operate a utility such as a power station for a set period of time, usually between 25 and 50 years. The companies, usually foreign, receive all the profits for the period and then transfer ownership of the utility to the Developing Member Country's government.
The recipient Developing Member Country has to contribute as well, by providing capital or providing rights to its natural resources. Normally, the ADB lends money for such projects through non-concessional loans and facilitates the arrangements with private sector, local and multinational companies agreeing to co-finance the project.
In order to encourage private participation in such projects the ADB has promoted conditions which minimize risks for private investors. For example, "take or pay" guarantees whereby the Developing Member Country's government agencies agree to purchase a certain amount of the output, such as water or electricity, for a fixed price. Private investors often insist on high prices for the output in order to make back their investment as quickly as possible.
This has had serious effects. In the early 1990s, the Philippines National Energy Corporation guaranteed payments in U.S. dollars to independent power producers in a Build Operate Transfer scheme. The 1997 financial crisis devalued the Philippine peso against the dollar, leaving the government owned National Energy Corporation having to pay the difference. In addition, much less electricity was needed due the slowdown in the economy, but the National Energy Corporation still had to purchase the agreed amount.
In 1997, the ADB promoted the construction of the Thu Duc Water Supply plant in Ho Chi Minh City, Vietnam, through a Build Own Transfer scheme. Investors required "take or pay" guarantees and fixed water prices in their 25-year contracts. This has raised the price of water for people in Ho Chi Minh City, and the government-owned water supplier has to find buyers for the water it contracted to purchase.
The ADB's more recent "poverty reduction" strategies focus less on large scale infrastructure projects and more on improving social services (health, education and social welfare, environmental management) and agriculture/rural and urban development. However, these are new areas for the ADB, and its projects in these areas have had very low success rates. Moreover in 2000 a draft Asian Development Fund report to donors stated that "few projects have been designed specifically to address" the poverty reduction objective.
The ADB operates in Asia, but its membership makes it a global institution. It has offices in Frankfurt (Germany) and Washington. Its priorities reflect the interests of its largest shareholders rather than its developing member countries who have much smaller voting rights and are poorly represented on the staff.
The ADB in East Timor
Shortly after the 1999 referendum, contributions from individual governments created the Trust Fund for East Timor (TFET), which has the World Bank as the overall trustee. The Trust Fund is jointly administered by the World Bank and the ADB: the ADB is in charge of infrastructure, water and sanitation and microfinance. The World Bank manages other TFET projects, in fields such as agriculture, private sector development, and community empowerment. Table 2 gives a brief overview of ADB-managed TFET projects, and the article below looks more closely at the microfinance project.
In addition to the TFET projects, the ADB has provided Technical Assistance (TA) grants over the last 3 years from its own funds, totaling about US$8.6 million. TAs are often supplements to TFET projects, but some also cover broader planning and capacity building areas.
Much of the TFET funds, which donors give for the benefit of the East Timorese people, end up in the hands of expensive foreign companies and consultants. For example, as of January 2003 over 30% of the funds distributed under the ADB's Emergency Infrastructure Rehabilitation Project 1 and over 40% of Water Supply and Sanitation Rehabilitation Project 2 (WSSRP 2) funds have gone to foreign consultants. In fact, over 80% of WSSRP 2 funds have been contracted out to foreign consultants, companies and international NGOs.
Clearly East Timorese companies do not have the capacity to undertake all the projects by themselves. Nevertheless, the ADB should expand the use of joint venture companies and other alternatives to keep more of the funds in the country.
Since TFET funds are intended for the East Timorese people, all efforts should be made to ensure that the projects are done according to the will of the people, not according to foreign consultants. The projects should also remain under the control of the people, and not be left to the private sector under Build Own Transfer or other privatization-oriented schemes (see article).
Both the TFET funds and the TAs are grants which do not have to be repaid, but it is likely that the ADB will encourage loans in the future, as they do in other countries. To date, the government of East Timor has maintained a no-debt policy, not borrowing money from the ADB or elsewhere. The East Timorese government must be very careful with any future proposals that it enter into a loan arrangement. Such loans often carry onerous conditions. Furthermore, past evidence has shown that it is very hard to repay such loans from project profits, and that repayments have to be met from developmental budgets, often at the expense of the very poor.
|
ADB projects under TFET |
|
|
Emergency Infrastructure Rehabilitation Project 1 (EIRP 1) |
|
| Projected time frame:
April 2000-May 2002 (extended to June 2003) Amount allocated: $29.8m Amount disbursed: $26.3m |
The first EIRP dealt with emergency repairs on major roads throughout the country, rehabilitation of Dili port, and reinstating electric power. Given the urgent need to reestablish infrastructure after the 1999 destruction, projects were based on systems in use under the Indonesian occupation rather than taking the time to find more sustainable systems. Reinstating the power supply focuses on power stations in the districts but also includes some assistance for the Dili-Comoro power station and developing a power utility (EDTL) and financial management. This part is proceeding slower than the road and port rehabilitation, which were completed in mid-2002. There is general agreement that there are serious problems with the overall provision and management of electricity. Although other institutions involved in developing the electric sector also bear responsibility for these problems, in particular UNDP, UNOPS, and the Portuguese and Japanese governments (see LH Bulletin Vol. 3 No. 6 and Vol. 3 No. 8), the ADB has been the most involved with overall coordination. According to the ADB, they have had "mixed results" in the electricity sector, and "consulting services have been evaluated by ADB staff as unsatisfactory." |
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Emergency Infrastructure Rehabilitation Project 2 (EIRP 2) |
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| Projected time frame: May 2002-December 2003
Amount allocated: $9.0m Amount disbursed: 0 |
A follow-up to the first EIRP, it aims to build sustainable roads that require less annual emergency rehabilitation and to establish a road maintenance regime. The project includes detailed engineering services, project management services and training. |
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Water Supply and Sanitation Rehabilitation Project 1 (WSSRP 1) |
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| Projected time frame:
August 2000-December 2001 Amount allocated: $4.5m Amount disbursed: all |
This project included a Quick Response Facility to support urgent repairs and rehabilitation to water supply and sanitation systems for Dili and the 13 districts. The project also focused on establishing Water Supply and Sanitation sector management and planning under ETTA. It included capacity building and institutional development to prepare policy, legislative and regulatory frameworks, and standards and guidelines for the department. |
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Water Supply and Sanitation Rehabilitation Project 2 (WSSRP 2) |
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| Projected time frame:
August 2001-April 2003 Amount allocated: $4.5m Amount disbursed: $1.7m |
This project largely continues the activities of WSSRP 1, with added emphasis on upgrading technology and communications, urban sanitation and implementing a tariff system. The water supply system being developed is a system of government-operated urban services, and community-operated rural services, with NGOs often contracted to establish the rural systems. Although public funds from TFET are being used for ADB efforts to reestablish public infrastructure, such as water supply and electric power, the institution often advocates putting these public services under private control through privatization schemes (see article). |
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Microfinance Development Project |
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| Projected time
frame: December 2000-Dec. 2003
Amount allocated: $4m Amount disbursed: $2.8m |
See article. |
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Hera Port Fisheries Facilities Rehabilitation Project |
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| Projected time frame: Nov 2001-March 2003 Amount allocated: $1m Amount disbursed: $0.6m |
ADB involvement with Hera Port (just east of Dili) dates back to the Indonesian occupation, with a $50 million loan to the Indonesian government in 1984 for the Indonesia-wide Fisheries Infrastructure Sector Project, completed in 1994. The ADB acknowledges that under this project Hera Port was poorly built, hence the current need to rebuild. A 1997 ADB report finds that the Fisheries Infrastructure Sector Project greatly overestimated the private sector growth that would result from improving such port facilities, which actually did little to generate employment or increase availability and quality of fish. The project was also shown to have significantly damaged costal and marine environments. The current Hera Port Fisheries Facilities Rehabilitation Project is similar, although on a much smaller scale. The project is actually a sub-component of a World Bank-administered TFET project, Agriculture Rehabilitation Project II, but since it deals with infrastructure the ADB is implementing it. Aimed at developing Hera Port for use by relatively large offshore fishing vessels, the project focuses on repairing and reinforcing port infrastructure such as breakwater structures and wharves. Although the ADB estimates only 24 boats of the type for which the port is being rehabilitated currently exist in the country, it expects that more will be provided by the private sector when improved facilities are available. Although the ADB acknowledges that the relatively poorer East Timorese in the fishing sector are only involved in onshore fishing, they assume that more offshore fishing by the relatively rich will take strain off inshore fishing, and provide more affordable fish to the general population. This assumption might be true only if the fish cannot be sold more profitably in a foreign market. |
The Asian Development Bank is responsible for managing the Microfinance Development Project, which is funded by the Trust Fund for East Timor (TFET). The aim of the project is to provide credit and savings services in East Timor. There are two components to the project, the rehabilitation of credit unions and the creation of a microfinance bank.
Credit Unions are groups of people who pool their savings together in order to make loans. The ADB has provided training and financial support to rehabilitate individual credit unions and the Federation of Credit Unions. The ADB has provided training in financial management, auditing and savings management. It also provided administrative subsidies, which have been reduced as credit unions have been able to cover their own administrative costs. After the destruction in 1999 there were eight credit unions. Presently there are 16. Credit Union clients are predominantly males with some money to save.
Donors initially pledged US$7.72 million for the Microfinance Development Project, but the project was delayed until UNTAET enacted legislation for banking activities in December 2001. Eventually only $4 million was given for the project, $2 million of which went to the Microfinance Institute of East Timor (MFIET), the minimum amount of capital required to register a bank in East Timor.
In order to register a bank with the Banking and Payments Authority the bank needs to have an owner. The ADB created the Foundation for Poverty Reduction in East Timor in order to receive the grant and be the temporary owner of MFIET. (See diagram.)
The ADB set up a Project Management Unit to manage the TFET grant on behalf of the ADB and the World Bank. The Project Management Unit did all the designing, developing, recruiting, training and managing tasks of MFIET.
Initially the Project Management Unit was comprised of five foreigners and five East Timorese, but now has been reduced to one foreign and two East Timorese consultants.
The Foundation for Poverty Reduction is governed by a Board of Trustees. The members are the ADB Representative in East Timor who is also the chairperson, Head of the ADB's Special Liaison Office (an ex-officio member), and representatives from AusAID and the Portuguese Development Support Agency. The ADB advocated donor, rather than local, control of the Board of Trustees to ensure the MFIET remains "faithful to its original objectives" and to "resist political pressures." Due to requests from East Timorese leaders, two East Timorese were added to the Board, but the majority are foreigners. There are two East Timorese members, a representative from the private sector in East Timor and a representative from the government.
The Board of Trustees appoints the Board of Directors, which officially governs MFIET. At the moment the Board of Directors is the same as the Board of Trustees with the addition of the Head of the Project Management Unit and the Administrative and Finance Officer of the ADB's office in East Timor. The Board of Directors does not function independently, and all tasks designated for the Board of Directors have been carried out by the Project Management Unit. See next page for a diagram of management structure.
By December 2003, the Foundation for Poverty Reduction and MFIET will be transferred to East Timorese hands, a process the ADB refers to as "divestment." The present Boards of Trustees and Directors will be replaced and the Project Management Unit will be disbanded. The new Board of Trustees will appoint a new distinct Board of Directors, which will assume all the management tasks of MFIET.
What is Microfinance?
Microfinance is a process of providing loans and savings services to poorer
segments of society who are unable to access such services from a normal
bank. The theory is that with access to credit people can increase their
household incomes and build businesses.
Microfinance operators lend to groups and individuals. Individuals in a
group are equally responsible for repaying the loan.
Microfinance loans are relatively small and repaid over short periods of
time. People borrow a small amount first and are able to borrow more once
they have repaid the previous loan. For example, the first loan might be for
a US$100 repaid over four months, then $150 and $200 and so on.
Microfinance operators try to make enough income to pay operating costs so
they can be sustainable. To do this they charge administrative fees and
interest on their loans. Most microfinance operators say they need to earn
over 30 percent annual interest on the money they lend in order to be
sustainable. This is much higher than a normal bank. Microfinance
operators usually lose money for the first five to six years. This is
because there are high start up-costs, such as establishing branches and
training field staff. It takes time for borrowing groups to become
established and initially loans are small so the profit is small.
How this process is to take place is yet to be decided. Neither the ADB Special Representative in East Timor nor the head of the Project Management Unit was able to give La'o Hamutuk any definite information about the future of MFIET. There have been concerns that it might be privatized. Ownership could be transferred to the government of East Timor, who would then perform the functions of the foundation and appoint the Board of Directors. However, the International Monetary Fund, the World Bank and the ADB are strongly opposed to the government owning a state bank. The divestment process is going to be subject to a study funded by an ADB technical assistance grant later this year.
On 4 December 2002, during the student protest which became violent, the MFIET building opposite Comoro market was ransacked but not burned down. It was attacked because it was believed to be associated with the Prime Minister. During the attack computer equipment and office furniture was brought of the building and burned on the street. MFIET did not lose banking transaction records as all the computers had been backed up during the day. MFIET moved briefly to a temporary office. It has had to replace all the furniture and computer equipment and has now moved to an office on Sebastiao Da Costa near the Tais Market. MFIET hopes to be provided with an unused government building where it could relocate the Dili main branch and the head office.
Although the US$2 million TFET grant was paid to MFIET on 18 January 2002, the MFIET head office and the Main Branch in Dili did not open until 13 May 2002. The two district branches in Gleno and Maliana opened in September and November. MFIET has 1,533 borrowers and has distributed $236,800 of the $2 million starting capital in loans.
Loans and Services
MFIET provides loans and savings services. The focus is on providing loans: services in savings are not advertised due to the inability of MFIET to deal with an anticipated large number of clients wanting to make deposits. All borrowers have a service account, which comes with the loan. The service account is to monitor repayments. Passbook savings accounts are available to the general public, offering interest if over $50 is deposited.
MFIET offers different types of loans to different groups, including urban or rural poor; microfinance NGOs, cooperatives and credit unions; market vendors; farmers; and micro-enterprises (small businesses). Typically a client or group takes out a small loan and once they have repaid it they can take out a larger loan. The smallest loans are $80 and the largest are $10,000, which are only available to other microfinance operators. MFIET takes a 5% service charge on each loan, in addition to the interest. (See table.)
Different groups have different repayment schedules. For example, market vendors repay their loans on a daily basis whereas a group of rural/urban women taking out a loan repay them on weekly or bi-weekly bases. Farmers who take out a seasonal crop loan only pay the interest every month and make a lump sum payment when the term of the loan is finished.
Interest rates are around 0.35% weekly or 1.5% monthly. Interest is charged differently depending on the size and term of the loan. Salaried individuals and groups who can provide collateral can borrow $500 or more. These loans are repaid in monthly installments and interest is charged on the remaining balance. This means that interest is only charged on the amount not paid back yet, so as the loan is repaid, the monthly payment decreases.
Smaller loans are paid back over a short period of time. The interest is always charged on the principal, the amount initially borrowed, no matter how much has already been paid back or if it is repaid early. This is to reduce confusion and administration so the clients repay the same amount every installment, but it also means MFIET charges more interest for smaller loans than larger loans.
Table 3: Examples of different loans and repayment rates
|
Type |
Target Group |
Amount |
Schedule |
Service Charge |
Interest |
Annual Interest |
|
Microfinance group loan |
Rural and urban |
$80 to $250 |
112 days/repaid weekly |
5% |
0.35% weekly on the principal |
35% |
|
Market vendor loan |
Stall holders |
$200 to 500 |
91 days/repaid daily |
5% |
0.35% weekly on the principal |
38% |
|
Microenterprise loan |
Small business |
$2,000 |
One year/repaid monthly |
5% |
1.5% monthly |
14% |
|
Payroll loan |
Employed people. |
$1,000 |
One year/repaid monthly |
5% |
1.5% monthly |
14% |
For example, in a microfinance group loan for income generating projects such as a small kiosk, the loan is taken out by a group of five people who share responsibility for the repayments. Initially they can borrow $100, repaid in 16 weeks at 0.35% weekly interest. Including the service charge, a group taking out such a loan repays a total of $110.60 dollars. The combined interest and service charge on such a loan is roughly equivalent to 35% per year.
A market vendor loan can be taken out by an individual with a stall at one of the Dili markets. They repay the loan in 13 weeks with the same weekly interest and service charge. This equals 38% per year.
Interviews with clients
La'o Hamutuk interviewed MFIET clients in the Comoro and Taibesse markets as well as representatives from microfinance groups in Dato, Liquisa. Most borrowers said that the installments were difficult to repay and that the terms of the loans were too short.
Maria, a 28-year-old married woman with three children, said that the loan was enough for the operations of her small business to survive. She sells mainly coffee and sugar and was using the loan to invest in her stall. She had already received a second loan of $250. She is able to make the daily repayment of $2.20 if she has enough customers, although business is very competitive with many stalls selling coffee and sugar.
Bendita, a 40-year-old widow supporting seven children in school, has also taken out a market vendor loan. Before the loan she sold red beans and corn, and after borrowing she continued to sell the same products. She said she had to use the money to support the immediate needs of her children and was not able to invest the money in her small stall. According to her, MFIET sent people to look at her house, type of business and asked about her marital status. She was told that if she did not repay the loan she would be taken to court. According to an Institute official this is in the agreement with the client.
Domingos, 46, a former guerrilla fighter, was among the first people to borrow from MFIET and is now on his third loan from the institution. He first borrowed $200, then $350 and now $400. He sells a wide variety of household goods, particularly toiletries. Although his business is successful, he complains that the daily repayments of $4.60 are a difficult burden. Domingos said it must be an individual decision, but he would not recommend other people to take out loans from MFIET since sometimes it is difficult to sell enough to repay the daily installments.
Microfinance group loan borrowers Lucia, 41, and Ruben, 26, felt the loans given to them were too small and wanted to borrow more money. One member said that although each group should equal five members, MFIET would sometimes lend to smaller groups. He also said that members of the same family sometimes comprised one group, although the group loan should not be placed solely on one family. People said as a result of the loans there were too many small kiosks selling the same things, saturating the market. The members stated there were some groups incapable of making the weekly payments. They do not know if they will be brought to court.
In visits made to the borrowers, MFIET officials only asked questions relating to the type of business and financial capital. The officials sometimes went to see the house of the borrower but did not inquire beyond the family's economic condition. The Dato village chief felt he was inadequately consulted by is MFIET, which sometimes gave loans to those whom he felt were the wrong people.
The majority of borrowers that La'o Hamutuk met with expressed a strong interest in business training and financial management. When asked, none of the borrowers said they would recommend borrowing money from MFIET. They said it must be an individual decision, as it is a significant burden to repay the loan. Although clients said they did not like making the repayments and some found it difficult, many did appear to be benefiting from their loans. In Liquisa, people wanted savings services, with a nearby bank branch where they could make regular deposits and earn interest.
Conclusion
There are several other microfinance operations in East Timor, although most projects are much smaller than MFIET. Most other microfinance operators are NGOs working to provide financial services to the rural poor. Although one of the Microfinance Development Project's main objectives is to increase rural incomes and employment, MFIET is largely focused in Dili and has only recently opened offices in Gleno and Maliana. In these areas they have very few clients compared with other microfinance operators. One microfinance operator operating in the same area as MFIET reported that the people perceived MFIET to be for "wealthier" people and that there was very little crossover between their clients and MFIET's.
Concerns have to be raised over the efficiency of MFIET. In May 2002 the ADB aimed to reach 10,000 households with the starting capital of $2 million. At this time MFIET only has 1,533 borrowers, of whom 1,014 are in Dili. In order to become a sustainable institution it needs to lend more of its capital, which is otherwise being absorbed in operating costs.The Head of the Project Management Unit stated that the long-term plan is for MFIET to grow into a bank offering a variety of lending and savings services complete with ATM machines. This would involve considerably more capital than the present TFET grant of $2 million and it is unlikely that this will serve the rural poor. Where would this money come from? Will the ADB privatize MFIET to raise the capital? And will the ADB pass ownership of MFIET to the East Timorese people as a whole, or just a few privileged individuals?
by Tim Anderson
Dr. Tim Anderson is a lecturer in political economy at the University of Sydney. He has been monitoring international financial institutions in East Timor on behalf of the Australian organization Aidwatch. The views expressed are the author's and not necessarily those of
The Asian Development Bank (ADB) arrived in East Timor at the invitation of the UN and the Trust Fund (TFET) donor countries, and as the "little brother" of the World Bank. Both banks share the main goal of "poverty reduction," as well as a range of other nice-sounding policies.However, both banks share a single method of pursuing this "poverty reduction" - encouraging private foreign investment and lending, privileging exporters and facilitating privatizations (selling or giving publicly-owned facilities to private companies). Their real aim is to foster economic growth through private, profitable foreign investment. As part of this push, and in coordination with the World Bank, the ADB is set to promote large-scale privatizations in East Timor.
The two banks argue there must be a "happy marriage" of private profits and benefits for the poor - but unfortunately this "marriage" is not always so happy. The World Bank was heavily criticized in the past for pushing big infrastructure projects, but it now boasts that its priorities "have changed dramatically," pointing to a rise in finance for education and health, and a fall in finance for infrastructure (power, roads and dams). What the Bank does not mention is that in many countries, including East Timor, it has handed over responsibility for these controversial infrastructure projects to the ADB.
Elite technocrats, who usually have little connection to the people affected by the projects, dominate these large infrastructure projects. The projects became unpopular because they involved giant foreign construction companies which carried out forced relocations of people, damaged the environment and often delivered expensive services and dubious benefits to communities. Such Bank-funded projects invariably required privatization of management to the foreign company, and sometimes also a debt burden on the government, for construction of the project. When there was anger and protest at these privatizations (e.g. in the Philippines, India and Bolivia), the World Bank usually blamed the foreign company, or the way in which governments carried out their privatizations.
The ADB Plans Privatizations for East Timor
In East Timor the ADB has had responsibility for managing Microfinance and Infrastructure (roads, ports, aviation, electricity, water and sanitation) since 1999. In none of these areas have there yet been privatizations. But privatizations are coming. In some of these areas, despite political independence in May 2002, the ADB still has the major say.
For example the Foundation set up (with TFET donor money) to manage the Microfinance Institution of East Timor (MFIET) is now controlled by the ADB and some of the large donors. East Timorese only have a minority say on this Foundation. This may be significant if the ADB proposes turning the MFIET into a private profit making institution. With privatization, interest rates are likely to rise (to satisfy shareholders), the borrowers debts will be "sold" to the new owners and the institution will lose its community character. But who should determine the future of this new bank?In the areas of power and water, the ADB already has an agenda, including a schedule for privatizations (they are called "participations" and "partnerships"), even though such moves are not part of East Timor's National Development Plan. Privatizations may also breach some aspects of the country's new constitution, which seeks to maintain local ownership of land and "permanent sovereignty" over East Timor's wealth and natural resources.
The ADB's May 2002 Progress Report on East Timor sets out clear plans for water privatization. The ADB's theme paper Water in the 21st Century also makes it clear that the ADB is committed Asia-wide to moving water "from a public good to priced commodity." But what does this mean for poor people's access to water? And what political mandate does the ADB have to demand the privatization of water in East Timor?
In August the ADB received consultant reports on East Timor's power sector from Australia's Hydro-Electric Corporation (a organization responsible for Australia's notorious Franklin Dam project, which was stopped by protest and then legislation in 1983). Predictably, the HEC reports recommend privatization of power management, to introduce a billing system and deal with the recurrent blackouts in East Timor's towns. But why does East Timor need privatization and expensive electricity infrastructure? Local management should be given a chance to work, and East Timor has enormous oil and gas resources, which could be used for power in the future.
ADB-managed privatizations will be pushed in East Timor because they are good for big foreign investors, not because they are appropriate for East Timor. Yet East Timor's insecurity about its poor basic facilities will make it vulnerable to privatization arguments. The ADB is arguing that East Timor does not have the capital or the expertise to provide basic power, water and sanitation - but these arguments are misleading.
Managing Privatization Pressures
It is important to know that there are hidden dangers in and good alternatives to privatization; and that East Timorese people can manage the pressures for privatization.
The dangers of privatization include highly priced services (private monopolies almost always raise prices), even more unequal access to power and water, a loss of public complaints mechanisms (under East Timor's Constitution the Ombudsman can only deal with acts by "public bodies"), and a loss of transparency and accountability. Despite ADB and World Bank claims to increased transparency, "commercial in confidence" claims always go hand in hand with privatizations. This means that important financial and other data is no longeravailable to the public.Any proposals for privatized basic services in East Timor should therefore be subject to a formal inquiry process, set by the Parliament, to consider issues such as these:
After such examination, it might be decided that ownership and management of essential services are best kept in public hands, or at least in the hands of a joint venture - where the Government keeps at least 50% control, but shares ownership with a private company.
Experience elsewhere in the world shows that public facilities can be more efficient than private facilities. Researchers at the UK's University of Greenwich have demonstrated, for example, that Sweden's publicly owned water providers are far more efficient and provide cheaper water than England's privatized water providers. In poor countries there have been similar experiences. In Bolivia, development of the cooperative water supplier in Santa Cruz compares very favorably to the disastrous privatization undertaken in Cochabamba. In the latter case, huge price rises and protests led to a reversal of privatization. In 1994 Honduras chose to reject privatization of its national water supplier (SANAA), in favor of internal reorganization and efficiency measures. Billing, cost recovery and restructuring measures were pursued by SANAA, which the UN now considers a model public project. East Timor can learn from these experiences.
In the field of power, privatization is neither the only nor the best answer to the regular and frustrating blackouts in East Timor's cities and towns. Natural gas from the Bayu-Undan field could fuel small to medium sized gas turbines for the cities, while other small geothermal, solar and wind plants could maintain cheap and sustainable power for the villages.
In the field of microfinance, a community based, cost-recovery service can be maintained, without any recourse to privatization. The world's most successful microfinance operation, the Grameen Bank of Bangladesh, demonstrates this. Why not get expert advice on microfinance from Grameen, rather than the wholesale bankers at the ADB?
East Timorese people can manage the ADB's demands for privatization of these basic services if they draw attention to the problems, the alternatives and to indigenous initiatives. The new Constitution, the Parliament and the National Development Plan provide all the tools for this. East Timorese people can speak, and the ADB will have to listen.
Drawings for this Bulletin: Cipriano Daus
Translation for this Bulletin: Tomè Xavier Jeronimo
Executive board: Sr. Maria Dias, Joseph Nevins, Nuno Rodrigues, Aderito de Jesus Soares
La'o Hamutuk (Walking Together in English) is a joint East Timorese-international organization that monitors, analyzes, and reports on the principal international institutions present in Timor Lorosa'e as they relate to the physical, economic, and social reconstruction and development of the country. La'o Hamutuk believes that the people of East Timor must be the ultimate decision-makers in this process and that this process should be democratic and transparent. La'o Hamutuk is an independent organization and works to facilitate effective East Timorese participation. In addition, La'o Hamutuk works to improve communication between the international community and East Timorese society. La'o Hamutuk's East Timorese and international staff have equal responsibilities, and receive equal pay and benefits. Finally, La'o Hamutuk is a resource center, providing literature on development models, experiences, and practices, as well as facilitating solidarity links between East Timorese groups and groups abroad with the aim of creating alternative development models.
In the spirit of encouraging greater transparency, La'o Hamutuk would like you to contact us if you have documents and/or information that should be brought to the attention of the East Timorese people and the international community.
La'o Hamutuk, The East Timor Institute for Reconstruction Monitoring and Analysis
P.O. Box 340, Dili, East Timor (via Darwin, Australia)
Mobile: +(670)7234330; Land phone: +670-3325-013
Email: laohamutuk@easttimor.minihub.org; Web: http://www.etan.org/lh
