TIMOR-LESTE: COURT OF APPEALS FINDS BUDGET ALLOCATION

UNCLAS SECTION 01 OF 02 DILI 000294

SENSITIVE
SIPDIS

MCC FOR VP HEWKO; STATE FOR EAP/MTS

E.O. 12958: N/A
TAGS: PGOV EFIN ECON TT
SUBJECT: TIMOR-LESTE: COURT OF APPEALS FINDS BUDGET ALLOCATION
ILLEGAL

DILI 00000294 001.2 OF 002



1. (U) Summary. Timor-Leste's Court of Appeals ruled on October
27 that the Government's allocation of monies from the Petroleum
Fund into a newly-created Economic Stabilization Fund (ESF)
violates the Constitution's provisions against secret budgets.
The Court also found that any transfers from the Petroleum Fund
to the state budget above USD 396.1 million in 2008 would be
illegal. Despite the opposition FRETILIN party's claims that
this creates an "institutional crisis," the reality is that the
ruling may be little more than a slap on the wrist, since it
only prohibits future spending from the ESF, and transfers from
the Petroleum Fund to the state budget to date are beneath the
legally established threshold. Moreover, the Court made several
serious procedural errors that are generating calls for
discipline of its three judges, only one of whom is Timorese.
Nevertheless, the ruling shows that the GOTL's fiscal actions
are subject to judicial constraints. While publicly stating
that it has not done anything wrong, the GOTL has indicated that
it will abide by the ruling, and is busy finding other sources
to fund rice imports, the only budget item directly affected.
End summary.


2. (U) On October 27, Timor-Leste's Court of Appeals found that
the GOTL acted unconstitutionally in allocating USD 240 million
to a new Economic Stabilization Fund (ESF). The ESF, part of
the GOTL's controversial supplementary budget passed last
summer, is a new measure intended to stabilize the economy by
providing subsidies for food staples, building materials, and
fuel. The Court of Appeals held that the allocation to the ESF
was not adequately justified and therefore violated the
Constitution's provisions against secret budgets. However, the
existence of the ESF per se is not illegal; it withstood a court
challenge filed by the opposition FRETILIN party last August.


3. (U) The Court also found that any transfers from the
Petroleum Fund to the state budget above USD 396.1 million in
2008 would be illegal since they would violate the Estimated
Sustainable Income (ESI) formula, a legal limit on withdrawals
from the Fund. According to the Petroleum Fund Law, transfers
above ESI to the state budget must be justified as being in
Timor-Leste's "long-term interests." ESI amounts to interest
income from estimated petroleum wealth, and petroleum wealth is
estimated using conservative price and production projections
based on the only field currently in operation. In its
supplemental budget, the GOTL calculated ESI as USD 396.1
million. However, we understand the GOTL's withdrawals from the
Petroleum Fund to date amount to USD 300 million, leaving an
addition USD 96.1 million the GOTL can legally withdraw in 2008.


4. (U) Finally, the Court also held that its decision would not
apply retroactively to expenditures to date, including the
roughly USD 14 million for rice subsidies from the ESF. It
will, however, prevent the GOTL from further spending from the
ESF. The ruling becomes effective once published in the
government's official gazette. As of November 19, that has not
occurred.

Government Accepts Ruling, But Angered By Procedural Snafus
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5. (SBU) The Vice Prime Minister (VPM) told us that the
government is currently assessing how best to cope with the one
real budgetary conundrum the ruling created: how to finance rice
imports through February 2009. He said an effort will be made
to tap other currently budgeted accounts rather than seek any
further legislative fixes in 2008. The draft 2009 budget is
scheduled to be submitted to Parliament the week of November 24,

2008. In any case, the Court's ruling will be respected, said
the VPM, although by doing so the government does not
acknowledge any misdeed. Indeed, the VPM emphasized, the Court
in its ruling committed several procedural errors. These
included failing to deliver a solicitation for information from
the Parliament directly to the Speaker of the Parliament and
instead dropping the summons with a clerk (note: the appeal and
the ruling largely deal with actions by the Parliament and not
the government; the Speaker of the Parliament separately issued
a sharp condemnation of the Court's failure to follow prescribed
procedure; the Speaker claims he never saw the summons because
his clerk failed to bring it to his attention). In addition,
the Court's own procedural requirements stipulate that it
physically meet in plenary when hearing a case against the
government. This time, no such plenary session occurred.
Instead, the court's ruling was prepared by the two
international judges present in Timor and hand-carried to

DILI 00000294 002.2 OF 002


Portugal to get the signature of the Chief Justice, reportedly
prone for the past three months on a Lisbon hospital sickbed.


6. (SBU) Due to these and other irregularities, president
Ramos Horta told us that he is convening a special meeting of
his judicial council (a five-person advisory body selected by
the President, Speaker and Prime Minister) on November 18, 2008.
The meeting is being held, said the President, to review the
procedures followed by the Court and to determine whether any
disciplinary actions are needed. The President predicted that a
likely "punishment" would be to not extend the contracts of the
two foreign judges currently sitting on the Court of Appeals
(one from Portugal, the other from Guinea-Bissau). He saw no
alternative but to accept the Court's ruling, however, as a
means of protecting the integrity of the constitution and its
checks and balances.


FRETILIN Piles On
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7. (U) Considerable confusion has arisen due to the fact that
the Court's decision has not yet been published in the official
Jornal da Republica. However, the opposition FRETILIN party
lost no time in attempting to leverage the decision against the
government, drawing on copies of the decision provided to the
National Parliament on November 13. On that date, FRETILIN
issued a press release claiming that the decision meant the
Alliance for a Parliamentary Majority (AMP) coalition government
headed by Prime Minister Xanana Gusmao now faced an
"institutional crisis" because the government no longer has any
money to spend from the budget. In a November 15 meeting with
PolOff, FRETILIN Member of Parliament Jose Teixeira echoed the
Court's findings concerning the ESF's lack of transparency. He
complained that that an explanation and justification by the
Government of Timor-Leste (GOTL) to the National Parliament was
needed for this legislation, "which was not done." Teixeira
went on to accuse the AMP government of "forcing through the
National Parliament in undemocratic fashion" the supplementary
budget last July. Specifically, he accused AMP Members of
Parliament of collaborating with the "government's agenda"
without pressing for a transparent debate or prodding for
explanations or justifications from the government. He
reiterated that the party has called for the Prime Minister and
Minister of Finance to appear before the National Parliament to
explain the government's budget execution to date.


8. (U) The AMP government responded on November 14, charging
that FRETILIN had manipulated the figures it cited; reminding
that the Court had held last August that the ESF was legal; and
stressing that the Court had specifically determined that
expenditures to date from the ESF were not illegal.


9. (U) Portuguese judge Ivo Nelson Rosa was the primary author
of the Court's decision. Rosa has stirred controversy in the
past, particularly when he clashed last year with President
Ramos-Horta over the issuance of an arrest warrant for military
renegade Alfredo Reinado and his followers, and his role in this
decision has irritated some Timorese. President Ramos-Horta
alluded to this in a comment to the press, noting he is
unsatisfied when internationals are standing in front and making
(problematic) decisions that obstruct (progress for) the
Timorese people.


10. (SBU) Comment: While not pretty, and not yet concluded,
the above saga suggests an earnest effort by Timorese actors to
honor the judgment of its highest court, a judgment that at its
core refers to the constitutional goal of full adherence to the
principle of government transparency in budget formation.
Further, it strongly reaffirms the disciplines contained in the
Petroleum Fund Law on use of its resources beyond the legally
established estimated sustainable income available to the
government for ongoing expenditures. Whether the judges on
Timor's court of appeal face sanctions for their alleged
procedural fumbles remains to be seen, as does whether this
episode leads to a personnel change in the court. Regarding the
integrity of the Petroleum Fund, however, as one senior official
told us, "although we can't say so publicly, we're pretty happy
with the decision." End Comment.
KLEMM