MAJOR PROJECTS AND GOVERNMENT PROCUREMENT IN TIMOR-LESTE

UNCLAS SECTION 01 OF 04 DILI 000323

SENSITIVE
SIPDIS

EAP DAS MARCIEL
MCC VP HEWKO
EEB/IFD/ODF
USAID FOR ANE
USTR EBRYAN

E.O. 12958: N/A
TAGS: PREL PGOV MCC ECON EFIN TT
SUBJECT: MAJOR PROJECTS AND GOVERNMENT PROCUREMENT IN TIMOR-LESTE

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1. (SBU) The poorest country in Asia, Timor-Leste faces large
gaps in public infrastructure, from roads to ports, electricity,
schools and hospitals. Early decisions after independence in
2002 to eschew international debt and to conserve most of the
country's future petroleum wealth constrained the financing
available for large-scale infrastructure. Even as the
government begins to enjoy greater fiscal flexibility due to
rising petroleum revenues, however, fundamental shortages of
planning, engineering and organizational skills in Timor's
public and private sectors have hindered improvements in the
implementation of even minor capital projects. Recent decisions
by Timor's government on the procurement of new patrol boats and
the installation of two power plants raised serious questions
regarding the transparency of Timor's procurement practices and
the quality of its decision-making. Reform is possible. Key
ministers now openly discuss the former taboos of taking on
concessional financing from sovereign lenders and outsourcing
project management. The Prime Minister sought assistance from
Australia on infrastructure planning, and the World Bank may
augment ongoing ADB-AusAID programs to develop procurement
capacity. The U.S. could assist through a possible future MCC
Threshold Program. End summary.


MAJOR GAPS IN SOCIAL INFRASTRUCTURE
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2. (U) Timor-Leste is burdened by zero international debt and
has more than $3.8 billion in its sovereign wealth fund due to
accruals from its modest oil deposits. These outcomes are the
consequences of a fiscal policy approach that until recently
emphasized the building up of savings, the avoidance of gross
corruption and other expressions of the "resource curse," and
self-reliance, including a reluctance to outsource project
management. This prudence has also resulted in astounding gaps
in social infrastructure. Timor-Leste is distinguished by a
poor national road network; inadequate telecommunications (less
than 1% of households has a landline telephone); a single,
increasingly congested seaport; an electricity grid that
supplies power to only a third of the country's households and
then only for short segments of the day; a health services
infrastructure barely able to cope with one of the world's
highest rates of maternal and child mortality; an education
system in which less than a fifth of schoolchildren have chairs
or desks, and more than half are without textbooks; poor water
and sanitation facilities (two-thirds of adults fetch water at
least once a week); and a single international airport that can
handle planes no larger than a Boeing 737.


3. (U) Poor executive capacity within the government also has
hamstrung efforts to invest in social infrastructure. Timorese
governments have consistently missed spending targets for
capital projects, regardless of the party (or parties) in power.
On a cash basis, the current government by the end of September
2008 had spent barely ten percent of the funds appropriated for
major capital projects in 2008.


4. (U) Timor-Leste's infrastructure needs are becoming an
increasingly animated topic of public concern and debate. The
Prime Minister has declared infrastructure to be one of the
country's three priorities in 2009, together with rural
development and human capital development. During the course of
2008, the government announced major procurements of power
generation and transmission facilities, and patrol boats
intended to protect Timor's fishing resources. Timor also
sought overseas financing for major expansions or improvements
of its road network, seaport and airport. The Prime Minister
publicly spoke of breaking the taboo on outsourcing of project
management and the Finance Minister privately indicated the
government's growing support for abandoning its denial of debt
to finance major infrastructure projects. Concurrently, the
boost in actual or potential infrastructure spending triggered
alarms of increased corruption, often expressed as brickbats
hurled by the opposition at the government.

POOR PROCUREMENT DECISIONS
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5. (SBU) Regrettably, a few of the government's recent
procurements likely added to public perceptions of corruption
and, even in the absence of any malfeasance, raise questions
about the quality of the government's decision-making. Common
elements to these procurements have been a reliance on
sole-sourcing and opaque decision-making among a very small
leadership group. Timorese businessmen, typically veterans of
the resistance to the Indonesian occupation and well-known to
the prime minister, serve as brokers between foreign firms and
senior government representatives. The consequences at minimum
include the purchase of inappropriate and possibly wasteful or
ecologically harmful technologies.


6. (SBU) A few examples follow. In April 2008, reports
emerged that the government had purchased two military patrol
boats from a Chinese firm to boost Timor's capabilities to
protect its maritime domain including its fishing resources.
The purchase was sole-sourced and the decision made by the prime
minister. Both the secretary of state for defense and the chief
of defense told an embassy officer that the purchase was made
without their input. A veteran of the liberation struggle
served as the primary broker with the Chinese firm. The
purchase remains controversial in Dili due to questions
regarding the vessels' capabilities, their compatibility with
current Timorese military equipment, and their national
provenance.


7. (SBU) In July 2008, news surfaced that the government would
purchase two large electricity generating plants from a Chinese
firm that would also be contracted to put into place a
nationwide transmission grid. On this occasion, the government
issued an international tender, although the widespread
understanding in Dili was that the purchase had been agreed
before the government announced the tender. Although observers
described the tender announcement as insubstantial and
technically inadequate, fourteen international firms submitted
bids. The decision to award the contract to the Chinese firm
again was made by the prime minister with very little
consultation with line ministers. The power plants are old
equipment (with some 40 years of service in China already behind
them) that will be dissembled, exported and refitted in
Timor-Leste. They will burn heavy oil that Timor will have to
import. Experts describe the contracted installation of a
national transmission grid within two years as a fantasy. The
World Bank reportedly has urged the government to cancel the
contract, absorb the penalty, and re-tender the project. There
is no indication that the government intends to follow this
advice.


8. (SBU) Another energy related incident has to do with the
sad recent history of the Dili power plant. A Canadian operator
took charge of the Dili generating facilities in September 2007
as a result of a contract signed with the previous government.
It arrived to find existing equipment in complete disrepair and
bought two new, large, top-of-the line generating units as
replacements, the first of which was installed in October 2007.
The new generator promptly went out of service, however, due to
a mechanical failure and Dili found itself in frequent
blackouts, with electricity on many days in late-2007 available
for only 8-10 hours. Inheriting this mess at the very beginning
of his term, facing sharp public criticism of incompetence, and
having lost confidence in the Canadian firm, the Prime Minister
acted. He purchased in late-2007 five medium-sized generators
manufactured by an Indonesian firm and had them shipped and
installed in the Dili power station on an expedited basis. The
purchase was again sole-sourced, brokered by a veteran and in
violation of the contract with the Canadian operator. The
equipment arrived speedily, but in poor condition and remains in
a constant state of fuel and lubricant leakage. The Canadian
firm under government instructions cancelled the purchase of its
second high-end, large generator. It is only now beginning to
repair relations with senior government leaders (the PM
continues to refuse to meet with the company) and warns that
Dili will again face serious blackouts by April 2009 due to
surging demand if sound procurement decisions are not made soon.


9. (SBU) Similar tales are told regarding the purchase of a
fleet of vehicles for members of parliament, acquisition of rice

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for a large food subsidy program, and the procurement of fuel
oil. The SUVs were funded only after vigorous legislative
debate and university student-led public protests, but their
delivery has been repeatedly delayed to problems with the
sole-sourced vendor. In the other cases, a relative of one
government minister or another is believed to have personally
profited by being selected as the supplier or supplier's agent.

LEGAL INFRASTRUCTURE SOUND
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10. (U) Timor-Leste has laws and regulations governing
official procurements that, when followed, provide full
transparency and enable sound decision-making. Indeed, the
procurement regime is so complex that it arguably has hindered
effective capital investment due to the relative low executive
capacity of both Timorese public authorities and private firms.
Consequently, there have been frequent efforts at reform
designed to decentralize and streamline procurements and
contracting, with bilateral and multilateral donors providing
substantial support in the form of technical assistance and
capacity building. Fundamentally, Timor's procurement rules
enshrine the principles of open international tendering and
discourage the use of sole-sourcing. And the country's
leadership regularly espouses an open, transparent procurement
system. The president generated controversy in mid-2007 after
he straightforwardly told a gathering of the local chamber of
commerce that he would never agree to quotas or set-asides of
government contracts for Timorese businesses.

BUT PRACTICE LESS SO
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11. (SBU) So why has practice been so divergent on occasion?
The prime minister reportedly has dismissed procurement
guidelines as a bureaucratic luxury and several in the
government have expressed doubt that international firms would
even be interested in doing business in small, faraway and
impoverished Timor. The inclination therefore is to do business
with the first apparently legitimate foreign firm that comes
along and makes an offer. When fourteen international firms
actually submitted serious bids for the power plant project,
ministers were simply astonished.


12. (SBU) Gaps in executive capacity throughout the capital
project lifecycle are substantial and bedevil every aspect of
public sector infrastructure development. An Asian Development
Bank (ADB) representative shared with us the broad array of
shortcomings, from the absence of engineering and planning
skills in the design phase of a project, to the dearth of
funding for, and skills to conduct, maintenance after a project
is completed. Ministries put forward and receive project
funding with only the sketchiest of design work completed, and
then offer these projects for tender with little refinement.
Companies selected for project implementation have only vague
specifications to meet and face little in terms of contractual
disciplines. Consequently, the government's record of
completing capital projects is poor and the amount of funds
carried over unspent from one fiscal year to another is high.
The equivalent managerial, technical and organizational
limitations of Timorese private firms also have hindered
progress, as the Prime Minister has bemoaned to the ambassador
on several occasions.


13. (SBU) Haste born of political pressure on the government
to speed economic development and protect the national interest
also has played a role. In the parliamentary election of 2007,
Xanana Gusmao campaigned on the message that he could bring
development and prosperity to Timor, including providing
electricity throughout the country, far more quickly and
effectively than Fretilin (the former governing, now leading
opposition party). An urgency to deliver on these pledges and
demonstrate the government's capabilities remains, including
undertaking big, highly visible projects with the promise of
raising standards of living, providing jobs and improving
stability. Indeed, senior government officials regularly cite
their anxiety regarding Timor's political stability as
justification for policy decisions, pointing to public

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discouragement with poverty, food insecurity and unemployment as
potential triggers for renewed conflict. A second source of
potential instability also generated ministerial anxiousness: a
possible collapse of the ruling coalition and a return to power
by Fretilin. Consequently, there was a whiff of panic about the
decisions to buy patrol boats, power plants and subsidize rice
imports. Ministers appeared to be motivated by a need to show
quickly and dramatically that their government can defend
Timor's interests and build the country, lest the people lose
confidence, riot in the streets, turn their backs on the
coalition, and opt for Fretilin's early return to power.

PROSPECTS FOR REFORM
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14. (SBU) There are signs of willingness to reform. The Prime
Minister has acknowledged to the World Bank and Australia that
he needs assistance in managing major projects and the
procurement process. He told the ambassador of his concern that
Timorese brokers are failing to add value to the projects they
tout, could be representing international firms of poor quality,
and are undermining the ability of legitimate Timorese firms
from developing needed experience and capacity. In August 2008,
Australian PM Rudd committed to help Timor-Leste develop a
medium term public infrastructure plan, to include a phased
strategy for the construction of key projects and potential
sources of financing. The Australian plan will be ready
shortly. Recognizing where the center of decision-making now
resides, the World Bank is considering financing the
establishment of a unit within the Prime Minister's office to
help shape, direct and make more transparent procurement policy
and practice. While preparing for a possible Millennium
Challenge Corporation (MCC) Compact, the Finance Minister
foresaw a partnership with MCC as providing an exemplar to
Timorese politicians and the public on outsourcing large-scale
public sector project management. The ADB, a co-partner with
AusAID of a project within the Ministry of Infrastructure to
improve government contracting, has agreed to make modifications
to improve its credibility and influence with the minister, and
build capacity in this critical area.

OPPORTUNITIES FOR THE U.S.
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15. (SBU) The decision to make Timor-Leste eligible for an MCC
Threshold Program also provides the USG with an opportunity to
improve the government's procurement practices. Programs to
enhance Timor's control of corruption will be a pillar of any
Threshold Program, and a concept paper developed by Timor's MCC
team includes the government's procurement practices as a key
area needing reform. To improve the government's effectiveness
in managing large projects, and the transparency of its
procurement practices, we may wish to explore coordinating with
the World Bank should it move forward with its planned
procurement unit in the PM's office. As major public sector
infrastructure projects inevitably require land, and decisions
regarding the government's use and allocation of public land
remain strikingly opaque and erratic, we should continue to urge
Timor to move expeditiously to introduce a land law into
parliament. Finally, we must continue to encourage the
country's leadership that transparent procurement programs
managed in accordance with international standards are key to
ensuring Timor receives the best value for its investments in
the country's future.
KLEMM