From mineral rights to human rights: the extractive industries and the WASH Sector in Timor-Leste
Many countries rich in natural resources are among the least developed and struggling to meet development and water, sanitation and hygiene (WASH) targets. John Garrett, WaterAid’s Senior Policy Analyst for Development Finance, presents a new report analysing Timor-Leste’s extractive industries’ contribution to national wealth, through the lens of funding for WASH.
Norway is consistently pointed to as a nation which has used a natural resource endowment (oil in this case) to enrich itself, funding domestic development and improving quality of life for its citizens. How can least developed countries (LDCs) with significant natural resource endowments of their own follow a similar trajectory?
To answer this question, at least through the lens of funding water, sanitation and hygiene (WASH) services, WaterAid and Oxford Policy Management have released a new report which analyses Timor-Leste’s extractive industries (EI) sector, tracks its contribution to government revenues and how this in turn has funded investment in the WASH sector.
A fuel economy
Timor-Leste has one of the most oil-dependent economies in the world, with oil and gas representing 99% of its export earnings, 80% of gross domestic product and 90% of total government revenue. Petroleum revenues are saved in the Petroleum Fund (PF), which holds around US$16 billion in investments, and funds are gradually released into the state budget through a strict fiscal rule (estimated sustainable income). Their correct management in terms of saving and spending is therefore a key issue in the medium- and long-term economic development of the country.
The PF has been the source of steady investment in the WASH sector, and, uncommonly for many LDCs, Timor-Leste is an example of successful mobilisation of predominantly domestic resources to fund increases in access levels and progressive realisation of these human rights. The graphs below show that a combination of the Government and households are responsible for the lion’s share of funding to the WASH sector, with donors and non-governmental organisations making more modest contributions, focused on rural and urban water supply.
Sources of WASH sector capital financing (2013-2015)
During the last few years of the Millennium Development Goal (MDG) period, government spending on WASH rose from $6.8 million in 2010 to an annual average of $31.7 million (2013-2015). This contributed to improvements for the population with access to drinking water rising from 54% of the population in 2000 to around 72% in 2015.
The country is still struggling to overcome the many challenges it faces, however. 70% of the infrastructure in the country was destroyed during the Indonesian occupation, and, although advances have been made in water supply and electricity coverage, other sectors are lagging. Only around 50% of the population has access to sanitation, one of the lowest levels in the Asia-Pacific region.1 The problems are also becoming more acute given the growth of the population, the rapid rate of urbanisation (over 5% a year) and the uncertain impacts of climate change.
Alternative revenue sources to fill the gaps
The report draws out several conclusions. More resources are needed to address financing gaps in the WASH sector and put the country on track for achieving SDG 6 by 2030. $50-60 million is likely to be needed each year through to 2030. Financing gaps are currently 20–25% of this, but may well increase due to the new challenges ahead and the expected downward trend in oil revenues.2
Therefore, the Government needs to find new ways of generating alternative source of revenues in order to sustain the development of the country in the near and medium future. The international community should also be ready to accelerate efforts on traditional Official Development Assistance (ODA) and climate finance. ODA flows to water and sanitation have averaged only $10-15 million in recent years.
More transparency needed
The report also shows how the Extractive Industries Transparency Initiative has supported a culture of transparency and good governance for the sector. This has underpinned successful domestic resource mobilisation from the EI, but there is continuing room for improvement: the indications are that the multinational petroleum companies and Australia have profited substantially from the Timor Sea reserves, and have shown minimal solidarity or concern beyond this to support Timor-Leste’s development. Many production sharing contracts (PSCs), particularly those signed before 2005, have either been censored, or are not available to the public. The multinationals in the Greater Sunrise joint-venture – Woodside, Shell, ConocoPhillips and Osaka Gas – refuse to make any parts of their PSCs public.
Petroleum tax audits over recent years have also identified large amounts of outstanding revenue payments from petroleum companies. In 2011, Timor-Leste initiated a series of tax audits covering the years 2005-2010 and yielded an outstanding $79 million in petroleum revenues in the first round. In 2012, the Minister of Finance reported receiving more than $362 million in audit-related activities. It also launched a legal action against ConocoPhillips for $200 million of unpaid taxes.3
Sums of this size are vitally important contributions to the PF, enabling increased investment in the Strategic Development Plan (SDP) and the water and sanitation sector. A satisfactory outcome for Timor-Leste in resolving its maritime borders is also likely to have a significant impact in terms of domestic resource mobilisation, and the international community should support the country in securing a just outcome in this process.
Future-proofing through diversification
Timor-Leste can also benefit from building on the processes underway to diversify its economy from its strong reliance on oil and gas. Diversification is relevant on several levels: to achieve a more balanced economy, sustainable public finances, as well as contributing to international efforts under the framework of Agenda 2030 and the Paris Agreement to accelerate the transition to a low-carbon global economy.
As a small island developing state facing the challenges of water scarcity, Timor-Leste’s Government is highly aware of its vulnerability to disaster and the negative impact of climate change. It is also a member of the Climate Vulnerable Forum which has committed to strive to meet 100% domestic renewable energy production as rapidly as possible. It is vital that the international community shows similar leadership in its support – financial and otherwise – for Timor-Leste so that it can continue to make progress in the delivery of its SDP, Agenda 2030, and, as well as its other development objectives, achieve universal access to water and sanitation by 2030.
John Garrett tweets as @johngarre
1. Access to improved drinking water in Timor-Leste rose from 54% of the population in 2000 to 72% in 2015, and currently half of the population has access to adequate sanitation facilities compared to 45% in 1995. This hides a rural–urban split, however, as in rural areas, access levels to sanitation have actually fallen.
2. One of the two oil provinces, Kitan, ceased production in 2015 and the other, Bayu-Udan, is expected to stop in 2021.
3. See Timor-Leste pursuing unpaid taxes from oil and gas producers (Platts) and Mapping risks to future government petroleum revenues in Kenya (Oxfam). The ConocoPhillips case was settled in a Singapore court with no transparency around the final settlement.