2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
Report

Openness to 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 2010 were infrastructure, food security, human resources development, access to justice, social services, good governance, and public safety and security. The United Nations Integrated Mission in Timor-Leste (UNMIT) peacekeeping operation and the International Stabilization Force (ISF) anticipate departing from Timor-Leste in 2012.

The Government of Timor-Leste 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$6.6 billion by late 2010. 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 additional 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 government procurement procedures, significant skills shortages, and perceptions of corruption.

The legal system rests on a mix of Indonesian laws and regulations that have not yet been replaced, some acts passed by the United Nations Transitional Administration a decade ago, and 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.

Major laws affecting incoming foreign investment include the Foreign Investment Law of 2005 and associated decrees; the Companies Code of 2004; the Commercial Registration Code; and the Taxation Act of 2008. As of early 2011, Parliament was considering a law on private investment to replace the Foreign Investment Law of 2005. A government agency, TradeInvest Timor-Leste, reviews foreign investment applications and is tasked with helping applicants navigate licensing and registration procedures. The U.S. Agency for International Development and the International Finance Corporation are 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 nationals, either individuals or corporate entities, have the right to private land ownership; foreigners may conclude long-term (up to 50-year) leases. Foreign investments in natural oil and gas, minerals, wholesaling, and retailing fall outside the scope of the Foreign 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.

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; at least one of a company's directors must live in Timor-Leste.

The justice system -- police, prosecutors, and courts -- is still weak and inefficient. 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 plans to conclude 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 and will establish additional courts as foreseen in the Constitution and legislation. We are not aware of major cases that have tested the courts on contract law and the issue of sanctity of contracts.


If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

MEASURE

YEAR

INDEX/RANKING

TI Corruption Index

2010

127/178

Heritage Economic Freedom

2010

164/179

World Bank Doing Business

2011

174/183

WEF Global Competitiveness Index

2010

133/139

MCC Government Effectiveness

2011

-0.77

MCC Rule of Law

2011

-0.91

MCC Control of Corruption

2011

-0.60

MCC Fiscal Policy

2011

328.3

MCC Trade Policy

2011

73.0

MCC Regulatory Quality

2011

-0.75

MCC Business Start Up

2011

0.928

MCC Land Rights Access

2011

0.138

MCC Natural Resource Mgmt

2011

64.83

Conversion and Transfer Policies

The U.S. dollar is the official currency of Timor-Leste. There are no official currency controls, although the Banking and Payments Authority 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 Timor-Leste's Banking and Payment Authority instructions. The Parliament of Timor-Leste is considering 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 Foreign Investment Law of 2005 provides for the equal treatment of foreign and national investors. The private investment bill before Parliament includes the principle of equal treatment for Timorese and non-Timorese.

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.

The justice system is in transition. 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, Indonesian, United Nations interim administration, 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. UNMIT is gradually transferring primary responsibility for policing to the national police as the latter develop the required infrastructure and procedures as well as acquire the necessary knowledge and skills.

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.

The Government of Timor-Leste offers investment incentives, including tax credits and import duty exemptions.

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; 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, it is not possible to register title deeds yet. 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.

Transparency of the Regulatory System

The regulatory system is still in 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.

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.

Parliamentary committees regularly hold hearings about and debates on proposed laws.

Efficient Capital Markets and Portfolio Investment

The three foreign bank branches operating in Timor-Leste have modest loan portfolios. According to the National Statistics Directorate of the Ministry of Finance, commercial bank credits to the private sector totaled US$ 107 million as of mid-2010, slightly over half to individuals and a further approximately one-third percent split between construction and trade/finance. The government and non-governmental organizations operate microfinance institutions that cater to very small Timorese entrepreneurs. The government is considering enlarging the mandate of its microfinance institution to include medium-sized enterprises. 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 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. Establishment of a national petroleum company was under consideration as of early 2011.

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 Banking and Payments Authority (the central bank equivalent) is responsible for its operational management. 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. The Petroleum Fund publishes monthly, quarterly, and annual reports on-line. 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 85 out of a possible 100 points for accountability, transparency, structure, behavior, and governance. With a ceiling on annual withdrawals set by law, the Petroleum Fund is the primary source of funding for the government budget.

In July 2010, Timor-Leste became the third country in the world 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 among 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) deployed to 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. The violence mounted with a series of deadly clashes among the F-FDTL, dissident military forces, civilians, and some police occurring in late May. After these clashes, civil order collapsed.

With this full-scale collapse of civil order, the Government of Timor-Leste in late May asked the Governments of Australia, Malaysia, New Zealand, and Portugal to send security forces to stabilize the country. 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 in conducting the 2007 presidential and parliamentary elections, and achieving accountability for the 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 the next round of 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 cases to the courts. 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.

The Government of Timor-Leste has signed and ratified the UN Convention against Corruption.

Bilateral Investment Agreements

Timor-Leste and Portugal have signed an Agreement on Mutual Protection and Promotion of Investment.

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 trades people to undertake new construction projects and public and employers consistently encounter problems locating managerial, clerical, and other office staff, for example. There is a surplus of young, inexperienced unskilled labor. 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. The bill on private investment before Parliament as of early 2011 contains provisions for special zones outside of the major cities of Dili and Baucau and for special peripheral zones in the enclave of Oecussi and on the island of Atauro. The bill provides for more generous investment incentives in the special zones.

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-venturers 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. 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. Currently, Reliance Industries (India) and ENI (Italy) are drilling in Timorese waters.

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. 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.

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