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2012 Investment Climate Statement - Timor-Leste


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Openness to and Restrictions Upon Foreign Investment

Independent since 2002, Timor-Leste is establishing legislative, executive, and judicial institutions, developing laws and regulations, and equipping government personnel with knowledge and skills. Private and public institutions are in the early stages of building institutional capacity while addressing the challenges of improving the nation's basic infrastructure and bolstering the human capital endowment. Although instability and periods of violent upheaval marked the early years of Timor-Leste's history, the country has taken advantage of an unprecedented period of domestic tranquility since 2008 to focus on its national priorities, which in 2011 were: infrastructure, rural development, accelerated human resources development, access to justice, social service delivery, good governance, and public security and stability. The United Nations Integrated Mission in Timor-Leste (UNMIT) peacekeeping operation and the International Stabilization Force (ISF) anticipate departing from Timor-Leste at the end of 2012.

Government of Timor-Leste policy welcomes foreign direct investment. It has contracted with foreign firms to explore for and develop offshore oil and gas deposits; royalties and taxes are deposited in a sovereign Petroleum Fund, which held over US$9.2 billion by late 2011. Outside the oil and gas sector, government spending, small-scale retail activity, and subsistence agriculture are primary sources of employment and contributors to Gross Domestic Product. With one of the world's most rapidly growing populations, Timorese authorities are interested in expanding private sector economic activity to provide employment for new labor market entrants.

Commerce is picking up in Timor-Leste as consumers' and business people's confidence in future political stability rises and growing government budgets fund a larger public service and more public works. In addition to oil and gas prospects, investment opportunities exist, particularly in the services, tourism, and agriculture sectors. Obstacles to investment include bureaucratic inefficiency; paucity of local financing options; absence of rules governing real property ownership and other essential legislation; uncertain implementation of government procurement procedures; significant skill shortages; perceptions of malfeasance; conflicts of interest; and corruption.

The legal system rests on a mix of Indonesian laws and regulations that have not yet been replaced. Some acts were passed by the United Nations Transitional Administration over a decade ago, and some are post-independence Timorese legislation. The country has two official languages, Tetun and Portuguese, and two working languages, Indonesian and English; all new legislation is enacted in Portuguese and based on the civil law tradition.

In September 2011, Parliament approved a new Private Investment Law to replace the Foreign Investment Law of 2005. The new law specifies the conditions and incentives for both domestic and foreign investment, and guarantees full equality for international investors. Other major laws affecting incoming foreign investment include the Companies Code of 2004, the Commercial Registration Code, and the Taxation Act of 2008. A government agency, TradeInvest Timor-Leste, reviews foreign investment applications and is tasked with helping applicants navigate licensing and registration procedures. All investors, both foreign and domestic, are required to obtain an Investor’s Certificate, which costs $500 for domestic investors and $2,000 for foreign investors. The International Finance Corporation is working with the Government of Timor-Leste to simplify business registration.

Foreign investors may invest in all sectors that are not specifically reserved to the State (such as postal services, public communications, protected natural areas, and weapons production and distribution) or otherwise restricted by law (such as criminal and immoral activities). Only Timorese nationals, either individuals or corporate entities, have the right to private land ownership; foreigners may conclude long-term (up to 50-year) leases. The lack of a land law complicates all ownership issues, and investors must often sort through competing claims from the Portuguese colonial administration, the Indonesian occupation era, and the post-independence period. As of early 2012, Parliament was considering a land law that would provide a mechanism to resolve these disputes and allow the grant of full legal titles. Foreign investments in natural oil and gas, minerals, wholesaling, and retailing fall outside the scope of the Private Investment Law and are handled through different mechanisms. In the case of foreign investments that are of particular value to the national development strategy, the option of a special investment agreement is available; such an agreement must be authorized by the Council of Ministers and provides the possibility of tax reductions or exemptions, customs incentives, leases of state property, and up to a 100-percent cost sharing in the training of employees.

Business organizations are allowed to take the form of general partnership, limited partnership, limited liability company, and joint stock company; foreign companies may also register as a local branch. Foreigners may serve as members of company boards, but at least one of a company's directors must live in Timor-Leste.

The justice system -- police, prosecutors, and courts -- is still evolving and reliant on international expertise for core functions. The authorities have targeted justice sector development as a priority and have continued to call upon significant numbers of foreign experts and advisors to augment local resources. UNMIT concluded the transfer of primary policing responsibility to the national police force in 2011. The Office of the Prosecutor General has continued to accumulate experience and to establish case management and other essential systems. Timor-Leste has established courts of first instance and courts of appeal. It will establish additional courts as foreseen in the Constitution and legislation. The U.S. Consulate General is not aware of major cases that have tested the courts on contract law or the issue of sanctity of contracts.


MEASURE

YEAR

INDEX/RANKING

TI Corruption Index

2011

2.4, 143/183

Heritage Economic Freedom

2011

42.8, 170/183

World Bank Doing Business

2012

168/183

MCC Government Effectiveness

2012

-0.35

MCC Rule of Law

2012

-0.28

MCC Control of Corruption

2012

-0.17

MCC Fiscal Policy

2012

302.8

MCC Trade Policy

2012

73.0

MCC Regulatory Quality

2012

-0.36

MCC Business Start Up

2012

0.922

MCC Land Rights Access

2012

n/a

MCC Natural Resource Mgmt

2012

45.8

Conversion and Transfer Policies

The U.S. dollar is the official currency of Timor-Leste. There are no official currency controls, although the Central Bank of Timor-Leste imposes reporting requirements for the importation or exportation of cash above certain amounts. Three foreign banks operate in Timor-Leste as branches of their home institutions. They require certain reporting for larger transactions to comply with home country anti-money laundering and related statutes, and Central Bank instructions. In December 2011, the Parliament passed anti-money laundering legislation. Bankers report that they have no difficulties meeting customer demand for foreign currency.

Expropriation and Compensation

Timor-Leste has not yet enacted a law on expropriation. However, Article 54 of the constitution states that requisitioning and expropriation of property for public purposes shall only take place following fair compensation in accordance with the law. The Private Investment Law of 2011 provides for the equal treatment of foreign and national investors. The law prohibits the adoption of policies of nationalization or land policies that deliberately target the property of investors, but does permit the expropriation or requisition of private property in the public interest, provided that just compensation is paid to the investor.

Dispute Settlement

Timor-Leste is party to the Convention on the Settlement of Investment disputes between States and Nationals of Other States (the ICSID Convention). It is not party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The Court of Appeals must recognize a foreign judgment or arbitral award for its enforcement in Timor-Leste.

Civil dispute cases are generally handled through the court system. The justice system is in transition and faces substantial capacity challenges. Parliament has not yet completed enacting a full a set of national legislation. Hence, the legal foundations are an uncertain and changing mix of Portuguese and Indonesian laws, United Nations interim administration regulations, and Timorese jurisprudence. New legislation is enacted in Portuguese. Many legislators, prosecutors, judges, attorneys, police officers, plaintiffs, and defendants lack the mastery of Portuguese to operate effectively in the new system. Justice system personnel are receiving training in all aspects of law enforcement, from investigations to forensic accounting.

Timor-Leste does not have a commercial code or bankruptcy law.

Performance Requirements and Incentives

To qualify as a foreign investment, a direct investment must meet certain conditions including: the transfer of freely convertible currency from overseas to a financial institution legally established in Timor-Leste, or the importation of goods and services purchased using overseas financial resources; the incorporation of a business or purchase of national assets; and a total value of transferred resources to exceed US$ 100,000. Timor-Leste does not impose performance requirements such as local partnering, gradual nationalization, domestic marketing obligation, domestic sourcing of inputs or technology transfer. An entity with foreign investor status may be 100-percent foreign equity. Specific conditions may apply to investments in specific sectors, such as the financial sector. The investment laws do not impose restrictions on the sale of investments by a foreign investor.

Timor-Leste is not a member of the World Trade Organization (WTO), so does not have any obligations under the WTO’s Trade Related Investment Measures provisions.

The Government of Timor-Leste offers investment incentives, including tax credits and import duty exemptions. In general, for domestic investments over $50,000 and foreign investments over $1.5 million, investors benefit from five years of exemption from income tax, sales tax, and services tax, as well as exemptions of customs duties for goods and equipment used in the construction or management of the investment. The period of exemption is extended to eight years for investments in Rural Zones (outside of the cities of Dili and Baucau) and to ten years for investments in Peripheral Zones (the exclave of Oecusse and the island of Atauro). Even after these periods have expired, investors may deduct from their tax obligations up to 100 percent of the costs of constructing or repairing transportation infrastructure.

The Private Investment Law guarantees the right of investors to contract foreign workers, in accordance with relevant immigration regulations.

Right to Private Ownership and Establishment

Foreign and domestic entities may establish and own business enterprises and engage in remunerative activity. Private entities may establish, acquire, and dispose of interests in business enterprises.

Protection of Property Rights

Timorese legislation provides for ownership and lease of real property; other forms of property rights established under Portuguese and Indonesian legislation have been in effect in Timor-Leste in the past and may still enjoy recognition. Competing claims on property arising from various occupancies during the Portuguese, Indonesian, and post-independence eras are common. Efforts are being undertaken to map properties and adjudicate conflicting claims. A Land Law is pending Parliamentary action. Only Timorese individuals and corporations may own land; foreign entities may lease. Due to the destruction of the property registry in 1999 and absence of authorizing legislation, it is not possible to register title deeds. Nonetheless, the notion of property ownership persists, properties are bought and sold, and the courts deal with real estate issues. Timorese law provides for pledges on corporate shares.

Timor-Leste is not party to major international agreements on intellectual property rights and does not have any domestic legislation protecting such rights.

Transparency of the Regulatory System

The regulatory system is still in its early formative stages. It appears that existing tax, labor, environment, health and safety, and other laws and policies do not particularly distort or impede investment. Uncertainty about the content of future regulation, uneven implementation, and non-enforcement are impediments to investment. An online Procurement Portal launched in mid-2011 provides information on government procurement contracts.

Bureaucratic procedures for establishing a new business are lengthy. Although some investors are able to comply with all requirements, new entrants report that the processes are unclear, inconsistently administered, and slow. It takes, on average, 103 days to register a business.

Parliamentary committees regularly hold hearings about and debates on proposed laws. For certain major legislation, the government holds public consultations.

Efficient Capital Markets and Portfolio Investment

The three foreign bank branches operating in Timor-Leste have modest loan portfolios. According to Central Bank data, commercial bank credits to the private sector totaled $128.5 million as of mid-2011, slightly over half to individuals and approximately one-third split between construction and trade/finance. The overall non-performing loan rate was 50.3 percent. The government and non-governmental organizations operate microfinance institutions that cater to very small Timorese entrepreneurs. In 2011, the government converted its microfinance institution into the National Commercial Bank of Timor-Leste (BNCTL) and expanded its mandate to include the provision of credit to small and medium-sized enterprises. The BNCTL is currently seeking international partners to meet its increased responsibilities.There are no capital markets yet.

Competition from State-Owned Enterprises

The Government of Timor-Leste has shares in one private company, Timor Telecom, the sole telecommunications provider. It owns 20.6 percent, while Telecomunicações Públicas de Timor (TPT), of which Portugal Telecom is the major shareholder, owns 54 percent. Timor Telecom has exclusivity on the fixed and mobile network until 2017. The government is considering liberalizing market access and has stated that other foreign companies have indicated their interest.

In mid-2011, the government established TimorGAP, a 100-percent state-owned petroleum company that will partner with international firms in exploration and development of Timor-Leste’s petroleum resources. TimorGAP is supervised by the Secretary of State for Natural Resources within the office of the Prime Minister, but is governed by an independent Board of Directors. Firms that partner with TimorGAP will receive a preference in tenders for petroleum projects.

There are several autonomous agencies, including Electricity of Timor-Leste (EDTL), the Dili Port Authority, and the National Aviation Authority. Postal and communications services may shift from the Ministry of Infrastructure to autonomous agency-status eventually. Other public sector institutions include Radio and Television of Timor-Leste (RTTL), the National Petroleum Authority (ANP, which regulates the oil and gas sector), and a lottery operated by the Ministry of Tourism, Commerce, and Industry.

Established in 2005, the Petroleum Fund is Timor-Leste's sovereign wealth fund. The Minister of Planning and Finance is responsible for its overall management and investment strategy; the Central Bank of Timor-Leste is responsible for its operational management, although the Minister of Finance has the authority to select a different operational manager. By law, all petroleum and related revenues must be paid into the Fund, with the balance of the Fund invested in international financial markets for the benefit of present and future generations of Timor-Leste citizens. Most of the Fund's receipts are invested in U.S. Treasuries, but recent changes to the Petroleum Fund Law permit the investment of up to 50 percent of the Fund in equities. The Petroleum Fund publishes monthly, quarterly, and annual reports on-line. At the end of 2011, Petroleum Fund assets stood at $9.2 billion. The law governing the Fund provides that there shall at all times be appointed an independent auditor, which shall be an internationally recognized accounting firm. In 2010, the Peterson Institute awarded the Petroleum Fund an 85 out of a possible 100 points for accountability, transparency, structure, behavior, and governance. The Petroleum Fund is the primary source of funding for the government budget, with a ceiling on annual withdrawals set by law at 3 percent of Timor-Leste's total petroleum wealth (defined as the current Petroleum Fund balance plus the net present value of future petroleum receipts). Recent budgets have exceeded the annual ceiling, with the approval of Parliament.

In July 2010, Timor-Leste became the third country in the world and the first in Asia to be certified as compliant with the Extractive Industries Transparency Initiative (EITI). EITI is a G-8 endorsed undertaking that involves a country's government, extractive-sector companies, and civil society in ensuring transparency of relevant payments and revenues. Timor-Leste is also part of the Energy Governance and Capacity Initiative (EGCI), a U.S. Department of State-led, U.S. interagency effort to assist governments of select countries that are on the verge of becoming the world’s next generation of oil and gas producers. EGCI’s core objective is to help these countries establish the capacity to manage their oil and gas sector revenues wisely and in a manner that maximizes the value of the resource development for the government.

Corporate Social Responsibility

Many firms, including leading foreign investors, support community activities from sponsoring the Tour de Timor and other high-profile events to investing in education and rural employment. A Chamber of Commerce and Industry has been established; there is an active Rotary Club.

Political Violence

Under an agreement between the United Nations, Portugal, and Indonesia, a popular consultation was held in August 30, 1999 to allow the Timorese to vote on whether to remain part of Indonesia or to become independent. The majority chose independence; Timorese militias organized and supported by the Indonesian military commenced a campaign of retribution. Approximately 1,300 Timorese were killed and as many as 300,000 people were forcibly relocated into West Timor as refugees. The majority of the country's infrastructure, including homes, irrigation systems, water supply systems, and schools, and nearly 100 percent of the country's electrical grid were destroyed. On September 20, 1999, the Australian-led peacekeeping troops of the International Force for East Timor (INTERFET) were deployed in the country, bringing the violence to an end.
 

Timor-Leste became a fully independent republic with a parliamentary form of government on May 20, 2002. In 2006, approximately 600 military personnel (from a total military strength of 1,400) petitioned the President to address their complaints of discrimination. The commander of the country's armed forces (F-FDTL) dismissed the petitioners, who reacted with a demonstration that flared into violence in April. In response to the escalating unrest, large numbers of people began to flee their homes for internally displaced persons (IDP) camps or the outlying districts. In late May, the violence mounted with a series of deadly clashes among the F-FDTL, dissident military forces, civilians, and some police. After these clashes, civil order collapsed.

With this full-scale collapse of civil order, the Government of Timor-Leste, in late May 2006, urgently requested police and military assistance from Australia, New Zealand, Malaysia and Portugal. In August 2006, the UN Security Council passed Resolution 1704, creating the United Nations Integrated Mission in Timor-Leste (UNMIT). UNMIT’s mandate was to assist in restoring stability, rebuilding security sector institutions, supporting the Government of Timor-Leste to conduct the 2007 presidential and parliamentary elections, and achieving accountability for crimes against humanity and other atrocities committed in 1999. Timor-Leste held free, fair, and largely peaceful presidential and parliamentary elections in 2007. Nobel Peace Prize Laureate Jose Ramos-Horta assumed the Presidency, while former guerilla leader and outgoing president Kay Rala Xanana Gusmao became Prime Minister.

In February 2008, followers of a fugitive former military police commander attacked President Ramos-Horta, who sustained gunshot injuries. Prime Minister Gusmao escaped unharmed in a separate attack against him the same day. The renegade commander was also killed in an altercation with the President’s security personnel during the attack. The government, with the approval of Parliament, imposed a state of siege that temporarily imposed a curfew, curtailed freedom of assembly, and gave security forces greater latitude for arrests and searches. These emergency measures were scaled back as conditions stabilized over the following weeks. The state of emergency was lifted completely when the remainder of the rebels surrendered to authorities in April 2008. Most of them were convicted in March 2010 for their involvement in the assassination attempt; the President commuted their sentences later that year. Since 2008, the government has succeeded in restoring relative calm and maintaining stability throughout the country. UNMIT and the International Stabilization Force anticipate departing from Timor-Leste after national elections in 2012.

Corruption

The Government of Timor-Leste has taken a multi-pronged approach to combating corruption. In 2010, the Anti-Corruption Commission (CAC), an independent agency, opened its doors. That year, the Office of the Prosecutor General also forwarded its first high-profile corruption case to the courts. Since then, the CAC has referred several cases to the Office of the Prosecutor General and has several ongoing investigations. The government is working to establish internal discipline and performance standards and offices. The U.S. and Timorese Governments have agreed on a Millennium Challenge Corporation Threshold Program that focuses on supporting anti-corruption efforts, including through procurement reform and training of personnel in agencies with important anti-corruption roles to play. Bribery is a crime, subject to up to four years of imprisonment. There are several corruption watchdog organizations active in Timor-Leste, both local and international. A recent survey on perceptions of corruption found that 57 percent of Timorese believe corruption is a serious and growing problem, although it ranked behind poverty and unemployment as the principal concerns of citizens.

The Government of Timor-Leste has signed and ratified the UN Convention against Corruption. Timor-Leste is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Bilateral Investment Agreements

Timor-Leste and Portugal have signed an Agreement on Mutual Protection and Promotion of Investment. Timor-Leste signed a Bilateral Investment Treaty (BIT) with Germany in 2005, but it has not entered into force. Timor-Leste does not have a BIT or bilateral tax treaty with the United States. Investors cannot deduct taxes paid in foreign jurisdictions on income earned in Timor-Leste from their local tax obligations.

OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) and the Government of Timor-Leste signed an Investment Incentive Agreement in 2002. OPIC is open for business in Timor-Leste and welcomes contact from potential U.S. investors (www.opic.gov). Potential U.S. investors and exporters are encouraged to contact the U.S. Eximbank (www.exim.gov) and the United States Trade and Development Agency (www.ustda.gov) as well.

Timor-Leste has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 2002. The International Finance Corporation (IFC) maintains an office in Timor-Leste, co-located with the World Bank Country Office in Dili.

Labor

The shortage of skilled labor is a significant constraint on private sector growth in Timor-Leste. Business executives report difficulties locating skilled tradespeople to undertake new construction projects. Public and private sector employers consistently encounter problems locating managerial, clerical, and other office staff. There is a surplus of young, inexperienced unskilled labor with 15,000 new entrants into the labor market each year in an economy with an estimated total of 75,000 formal sector jobs. The Government, donors, and employers place enormous emphasis on education and training in order to build local capacity.

The Government of Timor-Leste has acceded to many of the major international labor and human rights conventions, including: International Labor Organization (ILO) Convention No. 29 on Forced Labor; ILO Convention No. 87 on Freedom of Association and Protection of the Right to Organize; ILO Convention No. 98 on the Right to Organize and Collective Bargaining; ILO Convention No. 182 on the Worst Forms of Child Labor; the International Covenant on Civil and Political Rights; the International Covenant on Economic, Social, and Cultural Rights; and the International Convention on the Protection of All Migrant Workers and Members of Their Families.

Foreign Trade Zones/Free Trade Zones

There are no foreign trade zones or free trade zones in Timor-Leste.

Foreign Direct Investment Statistics

The major U.S. investor in Timor-Leste is ConocoPhillips; its Bayu-Undan gas condensate development is located in the Timor Sea joint petroleum development area (JPDA) between Timor-Leste and Australia. As operator, ConocoPhillips has a 57.2 percent share; its co-venture partners are Eni Australia, Santos, INPEX, Tokyo Electric, and Tokyo Gas. Other companies that are or have been active in the JPDA include Shell, Woodside Petroleum, BHP Petroleum, Marathon Petroleum, and Enterprise Oil. Eni commenced production at the Kitan field in the JPDA in 2011. Woodside Petroleum leads a consortium that seeks to develop the Greater Sunrise field, 20 percent of which lies in the JPDA.

Timor-Leste has also released acreage located in waters over which it has exclusive jurisdiction and is interested in pursuing onshore exploration.

Other major foreign investors in Timor-Leste include Portugal Telecom; it holds 76 percent of Telecomunicações Públicas de Timor (TPT), which owns 54 percent of Timor Telecom. Irish mobile phone operator Digicel has expressed interest in the Timorese market as it further develops its mobile communications network in the region. The media have reported that Indonesia's PT Telkomsel is also interested in entering the Timor-Leste telecommunications market. Private business partners from Singapore, China, Indonesia, and Australia are among investors in Timor-Leste, particularly in the hospitality, tourism, export-import, logistics, and consumer goods sectors.

The U.S. Agency for International Development actively promotes private sector development, including in the agriculture sector. Timor-Leste's second largest export after oil and gas is high-quality organic arabica coffee, much of it produced through the USAID-supported Cooperative Cafe Timor.



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