MILLENNIUM CHALLENGE ASSESSMENT OF TIMOR-LESTE

UNCLAS SECTION 01 OF 02 DILI 000159 SIPDIS FOR EAP/MTS AND MCC E.O. 12958: N/A TAGS: EAID ECON PGOV TT SUBJECT: MILLENNIUM CHALLENGE ASSESSMENT OF TIMOR-LESTE ¶1. Summary: A senior team from the Millennium Challenge Corporation (MCC) visited Timor-Leste from 18 to 22 May 2008. The team met with a wide range of stakeholders during its visit, outlining the steps necessary for Timor-Leste to obtain compact assistance. Because Timor-Leste is currently under-performing on the compact eligibility indicators, the government needs to take concrete actions before the next MCC Board meeting at the end of 2008 to improve its indicator performance, particularly with respect to Control of Corruption. This will enhance Timor-Leste's chances of remaining eligible for compact assistance. Other measures the government can take to improve its chances of remaining eligible include conducting a broad consultation process to identify priorities for compact assistance and submitting a solid concept paper focused on a single project or sector, both before the next MCC Board meeting at the end of 2008. Given Timor-Leste's limited capacity, several stakeholders are looking toward a compact to provide a good model for outsourcing the management of key aspects of country's development in the short-term and enforce a high standard of accountability. End summary. ¶2. A senior team from the MCC visited Timor-Leste from 18 to 22 May 2008. John Hewko, Vice President for Compact Development, led the team, which also included Darius Nassiry, Country Director for Timor-Leste, and Richard Day, Managing Director for Technical Assessment. The visit was essentially a re-engagement mission; since the last MCC visit in March 2007, national elections were held, and a new government came into power. The visit provided the MCC an opportunity to meet the new government and other elements of Timorese society and outline the steps necessary to obtain compact assistance. The team also discussed the various risks confronting Timor-Leste as it pursues a compact with MCC and provided guidance on how Timor-Leste might minimize such risks. ¶3. The team met with a wide range of stakeholders during its short visit, including the President, Prime Minister, Deputy Prime Minister, various government Ministers, Parliamentarians, the leadership of the opposition FRETILIN party, the independent Ombudsman (Provedor),international and local NGOs, the local private sector, the international donor community, including the Special Representative of the UN Secretary General and his deputy, and several USAID implementing partners. Key interlocutors included Minister of Finance Emilia Pires and MCC Point of Contact Joao Saldanha. The team also took a one-day field trip to Maubisse to experience road conditions first-hand, visited two USAID-supported agribusiness projects to witness and discuss some of the challenges to conducting business in Timor-Leste, and met with local leaders along the way. Eligibility -------------- ¶4. The MCC team reviewed for its Timorese audiences the challenges that Timor-Leste faces in qualifying for MCC assistance. Although it remains eligible for compact assistance, Timor-Leste would not be eligible if indicator performance were the sole basis for eligibility. In particular, Timor-Leste currently does not pass the Control of Corruption indicator and the Investing in People category of indicators. Scoring at the 54th percentile on the Business Start-Up indicator, one of three indicators it passes in the Economic Freedom category, Timor-Leste is also dangerously close to passing fewer than half of the six Economic Freedom indicators. The lag in indicator data means performance largely reflects efforts undertaken two years ago. As such, it is highly unlikely that Timor-Leste will pass enough indicators in FY 2009 to objectively qualify. ¶5. The MCC team stressed that the government of Timor-Leste therefore needs to take a number of concrete actions before the next MCC Board meeting at the end of 2008 that are likely to improve indicator performance in the future, particularly with respect to the Control of Corruption indicator. In this regard, the various initiatives that are part of the Prime Minister's "Year of Administrative Reform" - creating an independent civil service commission, transforming the Office of the Inspector General into an Auditor General reporting to the Parliament, and creating an anti-corruption commission - are an encouraging start. ¶6. In discussions with the IMF, the MCC team learned Timor-Leste may soon end up exceeding the Gross National Income per capita threshold for low-income countries. Growth in 2007 and to date in 2008 has been remarkable due to the effects of record oil prices and continuing strong levels of natural energy production. Should Timor-Leste exceed the low-income threshold, it would need to compete with the significantly more advanced pool of lower-middle income countries for a much smaller pool of resources available for compacts. However, Timor-Leste exhibits profound levels of poverty that are more consistent with low-income countries than lower-middle income countries. Indeed, DILI 00000159 002 OF 002 it is the lowest ranked country in Asia on the UNDP's Human Development Index, and if Gross Domestic Product per capita was used as the benchmark rather than Gross National Income per capita, Timor-Leste would remain comfortably within the low-income category at less than $400 per annum. Compact Preparation -------------- ¶7. The previous government's compact proposal suffered from two major faults: first, it was not informed by a broad, substantive public consultation process, and, second, it proposed projects in three major sectors and two minor sectors and was therefore too large and complex given the government's limited management and implementation capacity. The MCC team advised the new government that it will need to conduct and document a good consultation process to identify priorities for compact assistance and strongly suggested that it consider submitting a concept paper focused on a single, major project or sector. Completing both before the next MCC Board meeting at the end of 2008 should improve Timor-Leste's chances of remaining eligible for compact assistance in FY 2009. ¶8. Meetings with local officials and other stakeholders suggested that roads, power, and water and sanitation may be high-priority sectors for compact assistance. While donors have funded some modest work in these sectors already, meetings revealed that feasibility studies and other pre-design work are largely non-existent. The Asian Development Bank, however, is in the process of helping the government of Timor-Leste develop a national road improvement strategy and investment plan, and the previous government's proposal included some work that could likely be built upon. The MCC team explained that there is a trade-off between moving quickly toward a compact and developing completely new projects, and speed is of the essence for Timor-Leste given the uncertainty of the MCC's budget and the fact that Timor-Leste will be competing with five other countries for compact assistance in FY 2009. Building on work that has already been started or identifying a project for which some of the feasibility studies and pre-design work have already been completed would be advantageous for Timor-Leste. The Role for MCC -------------- ¶9. With nearly $2.2 billion in the Petroleum Fund at the end of 2007 and the Fund's value rising by over $100 million per month, many questioned why Timor-Leste needs compact assistance at all. There is widespread agreement that money is not a problem in Timor-Leste; rather, the country's development is seriously constrained by the government's very low capacity to execute capital projects, such as infrastructure. Indeed, capacity is so thin that some have suggested the government should outsource the country's development in the short-term. Regrettably, outsourcing - conceptualized locally as international borrowing for project finance - has proven politically sensitive. ¶10. Key members of the government, as well as the opposition, believe Timor-Leste has little choice but to outsource and also see borrowing from multilateral or bilateral concessional lenders as a potentially valuable means of financing the country's development. These leaders view a compact with the MCC as a means of breaking the domestic ideological opposition to outsourcing project management and borrowing internationally to finance development projects. A compact would provide a good model for outsourcing accounting and procurement services, as well as project implementation, and enforce a high standard of accountability. If successful, the MCC model could encourage the Timorese themselves to finance project implementation using the MCC model and mechanisms. RECTOR