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2008-11-04 07:31:00
Embassy Dili
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DE RUEHDT #0281/01 3090731
P R 040731Z NOV 08
						UNCLAS SECTION 01 OF 08 DILI 000281 



E.O. 12958: N/A

DILI 00000281 001.2 OF 008





E.O. 12958: N/A

DILI 00000281 001.2 OF 008


1. Timor-Leste is Asia's poorest country and ranks among the
most impoverished nations of the world in terms of illiteracy,
maternal and child mortality, malnutrition, low income and other
indices of human development. Its infrastructure is shockingly
poor, from roads to schools, to telecommunications and power
generation. Timor-Leste's government is sharply aware of the
need for development. Since coming into power in August 2007,
it has established a record of maintaining stability in the face
of extraordinary challenges (including the attempted
assassination of both the president and prime minister in
February 2008), has undertaken administrative reforms to combat
corruption and improve the performance of the public service,
and has designated 2009 as the year of infrastructure, with
emphases on investment in public sector infrastructure, rural
development and human capital. These three factors - great
poverty, massive infrastructure needs together with a
determination to govern competently - should make Timor-Leste a
poster child for Millennium Challenge Corporation (MCC)
Eligibility and a Compact.

2. Timor-Leste's MCC FY 2009 scorecard, however, is red on the
crucial control of corruption indicator and in the category of
investing in people, as it was in FY 2008. Given the time lag
built into the MCC's indicators, the control of corruption
finding reflects conditions in Timor in early 2007, well before
the current government came to power, and well before it began
to design and implement policies to combat corruption.
Moreover, the data contained in Timor's indicators is very thin,
generating huge margins of error, great imprecision and low
confidence levels.

3. Another anomaly is Timor-Leste's Petroleum Fund, a sovereign
wealth fund that collects revenues from the exploitation of the
country's modest known natural resources, and represents the

nation's sole potential source of significant, self-generated
development finance. Now containing more than $3 billion, the
fund was deliberately and prudently established in 2005 to avoid
the "resource curse" that has befallen other poor developing
countries with the scourges of corruption, harmful resource
allocation and poor investment decisions. Even if Timor-Leste
chose to spend the modest sums in the Petroleum Fund now on
public sector infrastructure projects, it could not efficiently
or effectively do so given the absence of managerial, technical
and engineering capacity throughout the Timorese economy. The
nation is further hobbled by an ideological opposition to
international debt financing and outsourcing of project
management. An MCC Compact, therefore, provides Timor-Leste
with a critical opportunity to apply the highest standards of
project design and management skills to its infrastructure
needs, and to break the ideological barrier that prevents the
importation of skilled, foreign project management.

4. We discuss below in turn Timor-Leste's current state of
economic and social development, the Petroleum Fund and the
government's efforts since August 2007 to improve policy and
governance, particularly in the area of fighting corruption. We
strongly urge the MCC Board of Directors to again extend
eligibility to Timor-Leste and to permit the continuation of
work towards a possible MCC Compact. The impact of a MCC
Compact in Timor-Leste, both in terms of economic development
but also on U.S.-Timor bilateral relations, will be profoundly
positive. Conversely, the denial of eligibility will be a
significant blow to Timor's prospects for sustainable medium
term economic growth and seriously undermine the standing of the
U.S. as a partner in the country's development. End summary.


5. After six years of independence, Timor-Leste remains the
poorest country in East Asia. Revenue generated from oil and
gas reserves in the Timor Sea has nearly pushed Timor-Leste into
middle-income status (see below), but non-oil income per capita,
a more accurate measure of the plight of the average Timorese,
was estimated at only $440 in 2007. The most recent household
poverty survey was undertaken in 2001 and published in 2003. It
showed that 40 percent of the population lived below a poverty
line of $0.50 per day. Economic stagnation coupled with the
world's highest fertility rate - nearly eight children per woman
- led the UNDP to conclude in its 2006 Human Development Report
that poverty had most likely increased since independence.

DILI 00000281 002.2 OF 008

6. Poverty is more prevalent in rural areas, where nearly
three-quarters of the population lives; 44 percent live below
the poverty line in rural areas compared to 25 percent in urban
areas. With such a large rural population, it is not surprising
that nearly 85 percent of the labor force makes its living from
agriculture, yet agriculture only accounts for about 30 percent
of non-oil GDP, an indication that productivity is extremely
low. Indeed, according to the census published in 2004, over 45
percent of the population 15 years and older are subsistence
workers. Only one percent of Timorese workers is engaged in any
sort of "industry;" just four percent are employed in the
private services sector. The employment demographics are
frightening. Urban youth unemployment is estimated at forty
percent. 15,000 new job seekers enter the market yearly, but a
senior UNDP advisor recently estimated perhaps only 400 wage
paying jobs have been created annually in recent years. (Note:
World Bank representatives recently shared projections that
perhaps 5000 jobs may be generated in 2008 if the government's
budget is implemented as currently legislated; possibly 10,000
if a robust jobs program were instituted; and a strong shift to
capital investment projects would be needed to get employment
creation anywhere above 15,000.)

7. Income poverty is mirrored in other social indicators. The
under-five mortality rate is 83 per 1,000 live births, and the
maternal mortality rate is estimated to be between 420 and 800
per 100,000 live births, both of which are shockingly high.
Malnutrition continues to afflict approximately half of all
children under age five, a situation that has not improved since
independence. 54% of the population is judged to be stunted and
a quarter severely stunted. Cognitive skills throughout the
population are very low. According to the 2004 census, more
than half of the Timor-Leste's population aged six and older is
illiterate. Nearly half of all adults have never attended a
single day of school in their lives. Recent surveys indicate
that the numeracy of the average Timorese Finance Ministry
official is at the third grade level. Across the government,
the average public servant only completed the seventh grade.
Taken together, these indicators help explain Timor-Leste's
ranking of 150 out of 177 countries on the UNDP's Human
Development Index, the lowest of any country in East Asia.

8. Finally, the country's infrastructure in all sectors remains
woefully poor, whether it be transportation, energy,
telecommunications, financial services, water and sanitation,
health or education. Surveys indicate use of Timor's roads fell
slightly since 2001, despite growth in population, as
accessibility deteriorated with declining road quality. The use
of roads to either bring agricultural goods to market or to
purchase items fell significantly in the six years to 2007, by
29 percent and 25 percent, respectively. Electric power is
unknown in most parts of the country or available only for short
periods of the day. Only 1.5 percent of households have a
land-line telephone connection. Just 1.3 percent of households
use a bank and the market for insurance is non-existent. 72
percent of the population aged ten or above fetches water on a
weekly basis and less than fifty percent of households have
access to any type of installed sanitation facility. Fully
98.6% of households use wood for cooking and heating, and 67% of
the population over ten years of age fetches wood at least once
a week. Schoolhouses across the nation are renowned for their
poor physical condition, lack of water and sanitation, absence
of desks and books, and shortage of trained teachers.

Petroleum Fund

9. Timor-Leste's oil and gas resources offer an important means
to address the discouraging picture painted by its
socio-economic indicators. Current estimated petroleum wealth,
based on the only field in operation, Bayu Undan, is $13
billion. Production from Bayu Undan will peak in 2009 and be
exhausted by 2023. It is estimated that a natural gas field
(Greater Sunrise) could add up to $10 billion to state coffers
over the life of the project should production commence
(operational requirements have not yet been finalized with a
decision still pending over whether to pipe the gas to
Australia, Timor, or to process it on a platform at sea).
Potential revenue estimates of a recent discovery have not been
developed, nor is it clear that exploitation is commercially

10. One of Timor-Leste's greatest policy achievements to date

DILI 00000281 003.2 OF 008

was the creation of a Norwegian-style Petroleum Fund in 2005 to
create a patrimony and safeguard the country's economic
prospects when oil and gas reserves eventually run out. As
stated in legislation, the Fund's purpose is to "contribute to a
wise management of the petroleum resources for the benefit of
both current and future generations. The Petroleum Fund shall
be a tool that contributes to sound fiscal policy, where
appropriate consideration and weight is given to the long-term
interests of Timor-Leste's citizens." All oil and gas revenue
is deposited in the Fund, which takes a very conservative
approach to investment. The Fund currently invests its assets
entirely in U.S. Treasury bonds and custody is managed by a
leading U.S. bank. The value of the Petroleum Fund has risen
substantially with the record high oil prices seen in 2008. As
of 30 June 2008, its assets were valued at $3.2 billion, or over
six times non-oil GDP.

11. Transfers from the Fund to the state budget typically
finance upwards of 90 percent of planned Government expenditure,
with the remainder coming from domestic taxes and user fees and
charges. Such transfers are subject to a spending ceiling
contained in law, known as "estimated sustainable income" (ESI),
or interest income from estimated petroleum wealth. While the
calculation of ESI uses conservative production and price
projections, it, and, by implication, the Government's budget,
is quite sensitive to changes in the price of oil. For example,
a $10 per barrel drop in the price of oil would have resulted in
a $67 million, or 17 percent, reduction in ESI in 2008.
Further, because ESI is based entirely on production from the
only field currently in operation, a disruption at Bayu Undan
would have grave consequences for the state budget.

12. Should the Government wish to transfer more from the
Petroleum Fund to the state budget than ESI, parliamentary
approval, in the form of a majority vote, is required. The
Government had never sought to transfer more from the Petroleum
Fund to the state budget than ESI until the mid-year budget
revision in 2008, which proposed a transfer of $687 million, or
$291 million more than ESI. The centerpiece of the budget
revision was the creation of a $240 million Economic
Stabilization Fund to ensure political stability by cushioning
the impact of rising commodity prices, especially rice (rice
shortages in February 2007 led to political instability and
violence in Dili). While the budget revision, particularly the
Economic Stabilization Fund, initially raised a number of
concerns about its fiscal direction, the government, following
some disciplines imposed by the National Parliament in approving
the budget, proved to be transparent in explaining its
intentions. In fact, the government has exercised reasonable
restraint in tapping the Economic Stabilization Fund. As of 30
September 2008, less than $15 million of the Economic
Stabilization Fund had been spent, all on rice.

Executive capacity

13. It cannot be overstressed that Timor-Leste's development
has been hobbled primarily by its low level of executive,
managerial, technical, engineering and absorptive capacity, and
not by the constraints it has self-imposed through the creation
of the Petroleum Fund. Since independence, governments have
regularly been unable due to poor executive capacity to spend
appropriated budgets, especially on capital projects. In the
last fiscal year of the previous government, through summer
2007, the state spent only 16 percent of its capital budget, and
just 55 percent overall. Through September 2008, the current
government claims a higher spending achievement overall, but its
record on implementing the arguably modest 2008 capital budget
(equal to less than 20 percent of the budget) has remained weak,
with only 14 percent expended on a cash basis through September

2008. Poor executive, managerial and leadership skills,
mirroring Timor-Leste's low levels of educational attainment and
cognitive skills, are endemic throughout the economy. Senior
ministers regularly complain about the abject capabilities of
Timor's private contractors. If the government sought now to
spend a chunk of the Petroleum Fund on a large infrastructure
project using local contractors, the result would be disastrous.
Regrettably, political elites continue to cling to an ideology
that requires that Timor's wealth should only be spent on
Timorese. This has resulted in the country choosing not to take
on international debt to finance development, but also its
failure to acquire the foreign managerial, engineering and
technical expertise needed to implement major infrastructure
projects. This points to a potentially very beneficial outcome

DILI 00000281 004.2 OF 008

of an MCC Compact. The Finance Minister has openly discussed
the path-breaking role MCC financing can play in demonstrating
to Timorese the effectiveness of foreign management of a large
infrastructure project, and thereby undermining the ideology
that currently opposes project outsourcing.

FY 2009 MCA Scorecard

14. Timor-Leste's FY 2009 Millennium Challenge Account (MCA)
"scorecard" is not markedly different from its FY 2008
scorecard. While Timor scores better than the median on half of
the Ruling Justly indicators, it still does not pass the
critical Control of Corruption indicator. The addition of the
Natural Resource Management indicator in FY 2008 means it also
does not pass at least half of the Investing in People
indicators. The Immunization Rates, Girls' Primary Education
Completion, and Natural Resource Management indicators all tend
to be structural variables that do not adjust quickly to policy
changes, whereas Timor-Leste has consistently passed the two
indicators that measure policy effort, Health Expenditures and
Primary Education Expenditures. It is notable that data now
exists for the Girls' Primary Education Completion indicator,
and Timor-Leste's score is precisely at the median. Finally,
the addition of data for the Trade Policy indicator means
Timor-Leste now passes four of six Economic Freedom indicators.

15. As is well known, many of the MCA indicators suffer from
lags in the data that may not reflect current performance. This
is particularly true of the five indicators produced by the
World Bank Institute that record performance in 2007, including
the Control of Corruption indicator. In Timor-Leste, national
elections were held in June 2007, and the current government
only took office in August 2007. Prior to that, a caretaker
Government led the country following the political and security
crisis of 2006. As such, several of Timor-Leste's more
problematic indicators likely reflect the consequences of the
2006 crisis and the caretaker government's performance, rather
than that of the current government.

16. In addition, the five indicators produced by the World Bank
Institute are estimates that have large associated margins of
error due to the unavoidable uncertainty associated with
measuring perceptions of governance. As the producers of the
data note in the most recent edition of their data set, "a
useful rule of thumb is that when confidence intervals for
governance based on our reported margins of error overlap in
comparisons of two countries, or a single country over time,
this suggests that the data do not reveal statistically (or for
that matter practically) significant differences in governance."
On this score, there has been no meaningful change in
Timor-Leste's performance on any of the World Bank Institute
indicators between FYs 2008 and 2009, nor, for that matter,
since FY 2007, with the exception of a clear deterioration in
performance on the Rule of Law indicator. This includes the
Control of Corruption indicator, which Timor-Leste passed in FY

2007. Further, when one properly accounts for margins of error
(with 90% confidence levels), Timor-Leste's scores on the
Control of Corruption and Government Effectiveness indicators in
FY 2009 may, in fact, be well above the median.

17. The very large margins of error associated with the five
indicators produced by the World Bank Institute are a reflection
of these indicators' sensitivity to changes in some of the
underlying data sources, particularly in a data poor environment
such as Timor-Leste. For example, the reported drop in
Timor-Leste's performance on the Control of Corruption and
Government Effectiveness indicators appears to be wholly
attributable to one data source, the World Economic Forum Global
Competitiveness Survey (WEF-GCS). The WEF-GCS index used by the
World Bank Institute and incorporated in the FY2009 Timor-Leste
scorecard is based on a survey conducted in March-May 2007,
months before Timor's current government even came to power.
The World Economic Forum recently issued the results of its 2008
survey, which are not reflected in the indicators produced by
the World Bank Institute, and it suggests Timor-Leste may have
improved in a couple of areas that affect its performance on the
Control of Corruption indicator. For example, Timor-Leste's
rank on the criteria of "public trust of politicians" improved
from 86 out of 131 countries surveyed in 2007 to 71 out of 134
countries surveyed in 2008. Likewise, its rank on the criteria
"favoritism in decisions of government officials" improved from
111 out of 131 countries surveyed in 2007 to 84 out of 134

DILI 00000281 005.2 OF 008

countries surveyed in 2008.

Efforts to Combat Corruption
Corruption Investigations

18. For the period 1 January to 31 October 2008, the Office of
the Prosecutor-General initiated 23 new investigations into
allegations of corruption, a pace of investigation virtually
identical to 2007, when a total of 27 cases were initiated.
However, unlike 2007, two cases have thus far been taken to
court in 2008. An international prosecutor was recently hired
to focus on corruption cases, which should assist with case
processing. For its part, the independent Office of the
Provedor (Ombudsman) for Human Rights and Justice initiated 19
corruption investigations in 2008 through 30 September, whereas
14 investigations were initiated in all of 2007. The Provedor
has to date referred three corruption cases to the
Prosecutor-General for further action, one of which has resulted
in an indictment. The Government, too has taken some steps to
punish corruption, suspending eight national police officers for
90 days without pay for their roles in the disappearance of
$27,000. In August 2008, the Prime Minister dismissed two
senior civil servants in the Ministries of Health and
Infrastructure on grounds of corruption, referring the cases to
the Prosecutor General. There is an ongoing inquiry into the
Minister of Justice's possible role in referring no-bid
contracts to her husband's construction firm.

Year of Administrative Reform

19. The Government declared 2008 to be the "Year of
Administrative Reform." In practice, this meant the launch of
three new initiatives intended to combat corruption and
strengthen the integrity of the civil service. The first
initiative is the creation of an independent Anti-Corruption
Commission, a commitment the Prime Minister made in his
inaugural policy address in August 2007. Legislation creating
the Commission was sent to Parliament on 24 October 2008 for
consideration, and, expecting that it will become operational on
1 January 2009, the Government has included funds for the
Commission in its draft 2009 budget. The law establishing the
Commission repeals the Provedor's anti-corruption mandate and
provides the Commission with certain powers that the Provedor
currently lacks. These include the authority to freeze bank
accounts and other assets, restrict international travel, and
intercept communications (jointly with the Prosecutor-General),
among others. Like the Provedor, the Commission will report to
Parliament and, as such, be independent of the Government.
However, also like the Provedor, its budget will pass through
the Ministry of Finance, and it will be subject to the same
human resource policies and salary scales that apply to the rest
of the civil service.

20. Senior policy advisors to the Prime Minister recognize that
the Anti-Corruption Commission is only one piece of a
comprehensive national anti-corruption strategy and cannot
substitute for an overall environment of stability and effective
governance. That is why the Anti-Corruption Commission is
complemented by two other initiatives, the creation of an
independent Civil Service Commission and the establishment of an
external auditor, and why the Prime Minister has requested a
USAID advisor to assist with the development of a national
anti-corruption strategy. The Civil Service Commission will set
performance, training, and development standards for public
servants and be given the authority to appoint senior civil
servants. Like the Anti-Corruption Commission, the Civil
Service Commission will report to Parliament, though it too will
submit its budget request through the Ministry of Finance.
Legislation establishing the Civil Service Commission has been
sent to Parliament for consideration, and funds for a January 1,
2009, commencement are included in the draft 2009 budget.

21. The creation of an external auditor is the only one of the
three Year of Administrative Reform initiatives that has not
made significant progress. Initially, this was thought to be
the easiest of the three measures to implement; the Government
planned to transform its existing internal auditor, the Office
of the Inspector General, into an Auditor General reporting
directly to Parliament. However, the proposal was challenged by
the judiciary, which noted the constitution assigns the external
audit function to a High Audit and Tax Court. Though the Court

DILI 00000281 006.2 OF 008

does not yet exist, draft legislation is reportedly under
preparation by the Ministry of Justice.

22. Separately, the National Parliament took steps to boost the
country's anti-corruption effort, hosting in September 2008 a
public forum toward the goal of creating a nationwide
anti-corruption network. The featured speaker was the chair of
Indonesia's anti-corruption commission, and our ambassador
participated also. The national parliament will soon complete
debate on Timor's first comprehensive penal code, intended to
bring order to the overlapping and occasionally contradictory
Portuguese, Indonesian and UN criminal codes that are currently
in force. The draft penal code includes nine provisions on
corruption. According to the Prosecutor General, once passed
the penal code will give him substantially more legal clarity
and authority to bring indictments against public officials
accused of corrupt practices. And Mission Dili is doing our
bit: with USAID support, we are in the final stages of hiring an
advisor to work directly for the Prime Minister as he shapes his
anti-corruption policies and practices.

Internal Controls

23. In the absence of strong audit capacity in Timor-Leste, the
Ministry of Finance has taken the initiative to commission a
series of process reviews and audits by Deloitte using its own
budget. This reflects the view of the Minister of Finance that
some of the most effective anti-corruption measures that can be
taken are those that tighten internal controls. The first
review was a detailed examination of the procurement process,
and it led to a procurement reform strategy, which will
decentralize procurement to line ministries, properly train and
accredit civil servants involved in the procurement process, and
strengthen the oversight role of the central procurement unit
within the Ministry of Finance. The international accounting
firm Deloitte now has a contract to complete ten additional
reviews that generally target revenue-generating programs
managed by the Ministries of Education, Infrastructure, and

International Agreements

24. The Government of Timor-Leste recently approved the UN
Convention against Corruption and has sent it to Parliament for
ratification. In addition, Timor-Leste remains one of only two
countries in East Asia that has signed up to the Extractive
Industries Transparency Initiative (the other is Mongolia). The
disciplines surrounding the Petroleum Fund are the clearest
evidence of Timor-Leste's commitment to the Initiative. The
Fund was ranked fifth out of 34 similar sovereign wealth funds
from all over the world - and third in the category of
Accountability and Transparency - by the Peterson Institute for
International Economics in April 2008 for its adherence to
management best practices. In addition to the spending ceiling
on Fund assets (see above), the Banking and Payments Authority
(BPA), Timor-Leste's quasi-central bank which manages the
Petroleum Fund, is required to issue quarterly public reports on
the status of the Fund, and the Fund undergoes regular internal
(by BPA) and external (by internationally recognized accounting
firms) audits.

Overall Governance Performance

25. The current government came into power in August 2007 with
a five year mandate and the policy goals of administrative
reform, promoting the country's development and overcoming the
legacies of the 2006 crisis (when, precipitated by a mutiny in
its military by a group of 400 "petitioners," the government
eventually collapsed, the military and police engaged in open,
deadly combat on the streets of Dili and 15 percent of the
population became homeless in the violence and lawlessness that
ensued). The government faced an extraordinary challenge on
February 11, 2008, when both the president and the prime
minister came under gunfire, with the president critically
wounded. In response, Timor-Leste's institutions performed
well. In strict accordance with the constitution and law, and
in consultation with the national parliament and people, the
government imposed a state of emergency. It united the military
and police under a joint command that eventually compelled the
peaceful surrender of the 2/11 perpetrators. Since the first
half of 2008, the government has accelerated programs to close

DILI 00000281 007.2 OF 008

IDP camps and reintegrate families back into their communities.
It resolved the grievances of the petitioners. The government
introduced a pension program for veterans and the elderly.
Crime levels have fallen substantially. With U.S. support, the
government launched the drafting of a national security policy
that will provide the legal basis for a thorough reform of the
nation's security institutions. In recognition of the stability
that has been engendered, the Department of State in September
2008 lifted a travel advisory for Timor-Leste that had been in
place since May 2006. In October 2008, the Australian
government, also pointing to Timor-Leste's stability, announced
it would reduce its troop strength in Timor by 100, nearly a 15
percent reduction in force.

Working Toward an MCA Compact

26. The Government of Timor-Leste has clearly demonstrated its
commitment to obtain an MCA compact. It created a unit within
the Ministry of Finance, staffed with highly capable individuals
and allocated with a robust six-month budget of $750,000, to
monitor government policy that impacts the MCA indicators and
lead the Government's efforts to enter into a compact with the
MCC. Steps toward the latter included the preparation of a
rigorous constraints analysis, which employed state-of-the-art
growth theory and empirical techniques to identify the key
obstacles to economic growth; a substantive, two-month
consultation process that covered the entire country and
generally validated the results of the constraints analysis; and
the preparation of two concept papers for programs targeting
road infrastructure and vocational education (a third, requested
by the MCC targeting anti-corruption, is currently under
development and should be submitted by mid-November 2008). The
Government's MCA team was extremely diligent in meeting all of
the MCC's deadlines at each stage in the process and has been
allocated an additional $300,000 to commence feasibility studies
by the government.

27. Because the MCC identified the lack of a broad-based
consultation as a major shortcoming of the previous Government's
compact proposal (see Dili 109), some additional comments on the
recent consultation process are warranted. Over a three-month
period, the Government's MCA team organized consultations with
all elements of Timorese society, including various NGOs, youth
organizations, the religious community, women's groups, the
private sector, research institutions, and the international
community. Four regional sessions, grouping representatives
from two to four districts, and a dedicated meeting for the
isolated enclave of Oecusse, were held outside the capital.
Embassy officers, including the ambassador, participated in
several consultations. The Government's MCA team hoped to reach
1,500 people directly through the consultations and thousands
more through word of mouth and media events. In total, 1,309
people participated in consultations, of which over 800
participated through the regional consultations. Nearly 20
percent of participants were women, a reasonable share given the
dominance of men in village governance.

28. The most recent consultation took place on October 30 when
the MCA team, joined by the ambassador, held its third in a
series of meetings with the National Parliament. Fifteen
deputies attended (just short of a fourth of the entire body),
including representatives from every party, several party bench
chairs, the speaker of the parliament, and key commission
chairmen. One of the most notable things to emerge from the
consultation process was the public's interest in the issue of
corruption. The MCC scorecard has clearly served to stimulate
discussion down to the village level about the importance of
tackling corruption for the nation's development, a worthy
achievement for the MCC model. Another common refrain was a
plea for quality: if the MCC invests in a national road network,
many members of the public asked for assurances that the outcome
would be a well engineered and maintained system designed to
provide a lasting and qualitative improvement over the nation's
current road system - in open contrast to the patchwork of
occasionally poorly designed and implemented road projects the
government and other donors have funded. Timor-Leste's MCA team
intends to hold a second phase of consultations this month to
provide feedback to communities regarding the concept papers
submitted to the MCC.


DILI 00000281 008.2 OF 008

29. Despite its significant natural resource wealth,
Timor-Leste is the poorest country in East Asia. It has
commendably established an arrangement to protect its resource
wealth for the benefit of future generations in its
internationally recognized Petroleum Fund. An MCC program would
help the Government speed up implementation of much-needed
capital investments while perhaps reducing some of the pressure
to spend beyond its current capacity to execute sound
development programs. In addition, an MCC program will provide
a useful model to counter the widespread ideological opposition
to outsourcing project implementation until such time as the
Timorese are able to better develop their own internal capacity
(see Dili 159). In sum, the impact of a MCC Compact in
Timor-Leste, both in terms of economic development but also on
U.S.-Timor bilateral relations, will be profoundly positive.
Conversely, the denial of eligibility will be a significant blow
to Timor's prospects for sustainable medium term economic growth
and seriously undermine the standing of the U.S. as a partner in
the country's development.