Letter to Parliament regarding the Timor-Leste Petroleum Fund Law

from Martin E. Sandbu, Columbia University, USA

to Parliament Commission C

7 June 2005

Please find below some comments on the latest draft of Timor-Leste's Petroleum Fund Law. These are my submission to the public record.

In general, there are some important changes that have been made from the draft on which I submitted comments in February of this year. This changes have mostly modified the text in the right direction, and I commend the drafters both on the substance of the changes and on the process by which they have shown themselves to be attentive to the reactions of the consulted parties.

Nevertheless, there remain certain serious problems with the law. I have attached my previous comments from February, many of which still apply (although some to a lesser extent than before). While steps have been taken in the right direction, the text is still problematic insofar as it

(a) does not explicitly prohibit conflicts of interests

(b) does not secure a general presumption of publicness, and

(c) does not go far enough in creating a balance of power on certain crucial decisions, in part by not securing a proper oversight mechanism of the executive branch

Specific comments:

1. Article 8 does not call for the report to Parliament to contain the Government's justification of its calculation of the estimated sustainable income. Schedule 1 mentions that the details of assumptions and calculations must be identified and explained, but it is not made clear that these explanations should be part of the public report. Moreover, an independent auditor will not be able to do what 8(c) postulates. It can at most certify the arithmetic and the correct use of sources for the chosen assumptions. It will not be in a position to "certify" the choice of assumptions or the choice of detail in the calculation.

2. Similar concerns apply to Article 9. Moreover, it does not seem like a budget appropriation that exceeds the ESI requires any special parliamentary motion - one may consider requiring a special vote for this. At the same time, given the subjective nature of the ESI calculations, there are strong incentives for the government to "adjust" the ESI to accommodate what it desires to spend.

2. Article 12.3: does the adequate legislation exist? Otherwise there should be a clause in the law stating what the requirements are for the public tender in the absence of appropriate legislation.

3. Article 13: Why delay publication? What could be of confidential nature in the management of public funds? I have addressed this point in the attached comments.

4. Article 17: The Investment Committee sits entirely at the mercy of the Minister. This creates undue incentives for patronage and reduces the independence of the Committee's advice.

5. Article 18 and 19: Why no presumption of publication?

6. Chapter IV: Article 24.2 is a welcome inclusion. It should, however, state explicitly that the annex shall be published. Moreover, why not publish at the same time as submission, and why not make all this information public as it becomes available? 24.1 should state that the published information "must include, but is not limited to ...".

7. Article 30: The Consultative Committee institution has been strengthened by the most recent changes in the draft law. However, it is still limited to examining how much of the Petroleum Fund is spent. It could also be given the role of overseeing that payments INTO the Fund are in conformity with the law - which includes oversight power over contracts, which should be public. If it is considered that this Committee is not the best-equipped body to do that, that responsibility should by this law be vested in some other independent body.

8. Article 32.5: why are the reports in articles 24 and 36 omitted?

9. Article 33 should require double disclosure: All payers should make their payments public. Article 35.3 - the disaggregated payments should also be made public.

10. Article 43: As has been pointed out by others, the magnitude of the fines is far too low to act as a deterrent.

11. Schedule 1. This language still gives the executive great leeway in defining the ESI according to political imperatives. See also my comment 1.

Yours sincerely,

Martin E. Sandbu