Firstly, I would like to commend the Government of Timor-Leste and Informa for their initiative in organising this conference.
I am honoured to have been asked to share some thoughts with you in such exalted company in this opening session.
In his address to the nation on 20 May this year commemorating the 14th anniversary of the restoration of independence, H E Taur Matan Ruak, President of the Republic said
The biggest challenge, the father of all other challenges, continues to be the need to transform the petroleum-based economy . . . into a diversified and sustainable economy to overcome poverty.
His Excellency continued
Timor-Leste needs to expand the national productive sector, valuing more our land’s wealth and the work of farmers and other Timorese workers.
He went on to make the point that Timor-Leste needs to attract investors and that
Entrepreneurs and society in general want stability, peace, and trust to be able to invest, produce, export and reinvest more profits into the country’s economy.
That puts it very well. It reminds us of the crucial link between private sector investment and economic development. The international evidence shows that growth of the private sector is the best path to development and to poverty reduction. Private sector investment is necessary to create employment opportunities that will enable more Timorese to make better lives for themselves.
It reminds us that if Timor-Leste is to overcome poverty and become a truly stable and prosperous country in which the benefits of development are shared, it needs entrepreneurs, Timorese and foreign, who will invest.
I would also like to quote The World Bank, which I think summarises neatly some of the key issues:
After 14 years of independence, Timor-Leste has achieved tremendous progress – drawing down money from the Petroleum Fund and channeling it through the budget to meet pressing needs. The effectiveness of this process is evident in the near-halving of infant and child mortality rates; significant gains in health and education; economic growth to rival regional neighbors; increasing citizen participation, and; the gradual strengthening of state institutions.
Ensuring Timor-Leste’s young people are educated, healthy, and productively employed are arguably the biggest development challenges facing Timor-Leste over the next decade. With 60% of the population under 25 years of age, Timor-Leste is one of the youngest countries in the world. Benefitting from high global oil prices, the country achieved lower middle-income status in 2011, but poverty remains high, particularly in rural areas, where the majority of the population lives.
To create job opportunities for youth, sustain inclusive growth, and prepare for a future of potentially declining natural resource returns, Timor-Leste needs to diversify its economy and sources of revenue, elevate the quality of health and education services, and equip the population with viable skills. These efforts must be underpinned by capable institutions with a strong and consistent focus on quality of spending and policies that nurture private investment.
These days in Dili it is of course not only The World Bank that is talking about economic diversification and sustainability. This is somewhat different to the situation at the time I arrived in Dili a little over two years ago. At that time, returns from the Joint Petroleum Development Area were much higher than they are today, or are likely to be in the immediate future, and there was very little willingness to consider seriously the prospect of a future without oil and gas.
Now, however, an increasing number of Timorese, within government and outside, have a fuller realisation that there is considerable risk in continuing to rely on oil and gas as almost the sole source of revenue. As is often observed, Timor-Leste is one of the most oil and gas dependent countries in the world. It is understandable that as the money has rolled in, it has been difficult to think about a more challenging future and position for it. This is not surprising – it is the case in most democracies, including Australia, most of the time. The temptation to postpone tough reform until it can no longer be avoided is often so strong that it proves to be irresistible.
However, Timor-Leste is taking action. Timor-Leste wants to develop its mineral sector. Australian companies and consultants are interested and have been providing advice, drawing on Australia’s extensive experience and expertise in this area.
There is also good news in manufacturing. We will hear later in the conference about TL Cement and Heineken.
On the revenue side, Timor-Leste’s Fiscal Reform Commission has been hard at work for some time in identifying ways to increase revenue. In a country where the majority of people rely primarily on subsistence agriculture, there will be obvious limitations to the scope for direct personal income taxation measures. Timor-Leste plans to introduce a value added tax. It will be interesting to see how this and other proposals Timor-Leste develops for indirect taxation and company tax will balance the need to raise more revenue while not increasing inequality or acting as a disincentive to investment and growth.
These are encouraging developments, but economic diversification and creating a business environment attractive to foreign direct investment will continue to be challenging. While governments have a crucial role in creating a business friendly environment, it is important to remember that it is the private sector, not government, that creates wealth.
Like Timor-Leste, Australia needs foreign investment. There are of course many differences between our two economies, but we share this fundamental characteristic. Throughout our history, Australia has welcomed and relied on the capital of others. It has certainly worked for us! Foreign investment creates growth. Foreign companies pay tax and employ locals. Jobs and growth – what any economy needs.
Timor-Leste knows this. Without foreign investment the oil and gas fields in the Joint Petroleum Development Area would not have been developed. In the early years following the restoration of independence, Timor-Leste did not have the financial means to invest in these fields and so, together with Australia, agreed the treaties and developed the regulatory regime that has delivered such benefits to both of our countries over the past decade.
The world is a very competitive market place. Australia and Timor-Leste are not the only countries keen to attract capital and know-how. It might have been Henry Ford I think who made the observation that the world does not owe us a living. Foreign investors, certainly those outside the resources sector, need good reasons to come to Timor-Leste. And they need to know that they are welcome.
I have at times sensed a qualified enthusiasm in some quarters about business in general and foreign business in particular. It is quite understandable in a young country like Timor-Leste that building the state is a priority. Building the state and strengthening its institutions are obviously important. Within this national priority, I would encourage Timor-Leste to continue to prioritise the commercial sphere as you develop and reform the state.
In this context, I would like to commend the Government of Timor-Leste for the work it is doing to improve the business environment. I would particularly like to acknowledge the leadership, vision and energy of H E Estanislau da Silva, Minister of State, Coordinating Minister of Economic Affairs and Minister of Agriculture. Australia has been delighted to accept His Excellency’s invitation to provide practical, policy support to his objectives.
What needs to be done and what is being done in this critically important area? In considering what the key priorities are, I recall a publication of the Asian Development Bank last year “Growing the non-oil economy: a private sector assessment for Timor-Leste”. There are all sorts of studies of course of what governments might do to attract investment and create a more business friendly environment, but this one puts proposals forward well in a Timorese context. I thought it might be useful to list the major recommendations. There is not time to consider them in detail this morning, but I consider that they provide a good framework and I commend the report to you. The eleven key recommendations are:
- Ensure public spending is sustainable and delivers quality infrastructure services
- Improve basic education outcomes
- Provide business with better access to skilled labour
- Increase women’s participation in the formal economy
- Introduce land legislation
- Strengthen contract enforcement and address other gaps
- Improve the financial system’s functioning and inclusiveness
- Refocus investment promotion
- Build agricultural markets
- Agree on practical steps to grow tourism
- Enhance dialogue on investment climate issues.
That’s quite a list! But effective action in these areas is important for Timor-Leste’s future. As a young country, Timor-Leste has the advantage of being able to look at what has worked and what has not worked across the world and draw on the experience of others, adapted to its own circumstances.
I would like to turn now to say a little about how the Australian Government is working with the Government of Timor-Leste, Timorese business people and civil society to help strengthen the economy and improve Timor-Leste’s attractiveness as a destination for foreign investment.
Australia is Timor-Leste’s major economic and leading development cooperation partner. While we may not be the major trading and investment partner in the traditional sense, as partners in the Joint Petroleum Development Area we work together very effectively to ensure Timor-Leste has the funds to finance its development. It is the success of this partnership that has attracted the quality foreign investment that has produced the income that has enabled Timor-Leste to achieve so much in its short history. Australia wants to continue to work closely and productively with Timor-Leste to ensure the best possible utilisation of the resources in the Timor Sea for both our countries.
In our development cooperation work we are always conscious of the need to reduce poverty and to promote sustainable economic development. We structure our support for Timor-Leste around three main pillars: improving livelihoods; investing in human development; and supporting effective governance. Looking at those eleven recommendations of the ADB, Australia is active in almost all of them.
Every working day my Timorese and Australian colleagues in the embassy are working creatively to support our Timorese partners in government, civil society and the private sector to achieve Timor-Leste’s objectives.
It’s not just about government. In addition to working with the Government, Australia helps directly to create and support the Timorese private sector. Through our Market Development Facility we invest in budding Timorese entrepreneurs to help them make their business dreams a reality. We have had a number of pleasing successes, including in agriculture, manufacturing and hospitality.
As many of you are well aware, there are many Australian companies and business people here in Timor-Leste contributing to the development of this fine country; creating wealth, creating jobs for Timorese.
These include major Australian public companies such as the ANZ Bank, WorleyParsons and Broadspectrum. The Japes of course are the prime example of a Timorese Australian family that has shown through its vision, energy and commitment what can be achieved in the private sector in Dili. As many of you will know, quite a few of the restaurants around town are Australian-owned. There are many other Australians who have shown their commitment to Timor-Leste with investments of long-standing in other parts of the services sector.
Looking to the future, there is one investment that is shaping up as transformative. I am referring to TL Cement. Last month, the Government signed an investment agreement with TL Cement. This will be a USD 500 million investment to build and operate a cement plant in Baucau. It will contribute significantly to Timor-Leste’s development. It will create wealth. It will create thousands of jobs for Timorese.
I would like to congratulate the Government and I would also like to congratulate Mr James Rhee, who leads this venture. James is a remarkable Australian business person with strategic vision, grace and persistence. I look forward to hearing from James later in the conference. Under his leadership, with the Government of Timor-Leste’s ongoing support, I am confident this venture will deliver great benefit to Timor-Leste.
Foreign investment in Timor-Leste’s oil and gas sector has produced the money that has enabled Timor-Leste to develop itself. The Petroleum Fund provides Timor-Leste with a buffer, giving it time in which to make good decisions. Timor-Leste will need investment in other sectors if it is to have a secure and prosperous future. I look forward to hearing more about the Government’s plans and those of business to bring this future into being.