VZCZCXRO0729
PP RUEHDT RUEHLMC
DE RUEHDT #0159/01 1560858
ZNR UUUUU ZZH
P 040858Z JUN 08
FM AMEMBASSY DILI
TO RUEHC/SECSTATE WASHDC PRIORITY 4014
INFO RUEHLMC/MILLENNIUM CHALLENGE CORP PRIORITY
RUEHDT/AMEMBASSY DILI 3463

UNCLAS SECTION 01 OF 02 DILI 000159 
 
SIPDIS 
 
FOR EAP/MTS AND MCC 
 
E.O. 12958: N/A 
TAGS: EAID ECON PGOV TT
SUBJECT: MILLENNIUM CHALLENGE ASSESSMENT OF TIMOR-LESTE 
 
¶1. Summary: A senior team from the Millennium Challenge 
Corporation (MCC) visited Timor-Leste from 18 to 22 May 2008. 
The team met with a wide range of stakeholders during its visit, 
outlining the steps necessary for Timor-Leste to obtain compact 
assistance. Because Timor-Leste is currently under-performing on 
the compact eligibility indicators, the government needs to take 
concrete actions before the next MCC Board meeting at the end of 
2008 to improve its indicator performance, particularly with 
respect to Control of Corruption. This will enhance 
Timor-Leste's chances of remaining eligible for compact 
assistance. Other measures the government can take to improve 
its chances of remaining eligible include conducting a broad 
consultation process to identify priorities for compact 
assistance and submitting a solid concept paper focused on a 
single project or sector, both before the next MCC Board meeting 
at the end of 2008. Given Timor-Leste's limited capacity, 
several stakeholders are looking toward a compact to provide a 
good model for outsourcing the management of key aspects of 
country's development in the short-term and enforce a high 
standard of accountability. End summary. 
 
¶2. A senior team from the MCC visited Timor-Leste from 18 to 22 
May 2008. John Hewko, Vice President for Compact Development, 
led the team, which also included Darius Nassiry, Country 
Director for Timor-Leste, and Richard Day, Managing Director for 
Technical Assessment. The visit was essentially a re-engagement 
mission; since the last MCC visit in March 2007, national 
elections were held, and a new government came into power. The 
visit provided the MCC an opportunity to meet the new government 
and other elements of Timorese society and outline the steps 
necessary to obtain compact assistance. The team also discussed 
the various risks confronting Timor-Leste as it pursues a 
compact with MCC and provided guidance on how Timor-Leste might 
minimize such risks. 
 
¶3. The team met with a wide range of stakeholders during its 
short visit, including the President, Prime Minister, Deputy 
Prime Minister, various government Ministers, Parliamentarians, 
the leadership of the opposition FRETILIN party, the independent 
Ombudsman (Provedor), international and local NGOs, the local 
private sector, the international donor community, including the 
Special Representative of the UN Secretary General and his 
deputy, and several USAID implementing partners. Key 
interlocutors included Minister of Finance Emilia Pires and MCC 
Point of Contact Joao Saldanha. The team also took a one-day 
field trip to Maubisse to experience road conditions first-hand, 
visited two USAID-supported agribusiness projects to witness and 
discuss some of the challenges to conducting business in 
Timor-Leste, and met with local leaders along the way. 
 
Eligibility 
----------- 
 
¶4. The MCC team reviewed for its Timorese audiences the 
challenges that Timor-Leste faces in qualifying for MCC 
assistance. Although it remains eligible for compact assistance, 
Timor-Leste would not be eligible if indicator performance were 
the sole basis for eligibility. In particular, Timor-Leste 
currently does not pass the Control of Corruption indicator and 
the Investing in People category of indicators. Scoring at the 
54th percentile on the Business Start-Up indicator, one of three 
indicators it passes in the Economic Freedom category, 
Timor-Leste is also dangerously close to passing fewer than half 
of the six Economic Freedom indicators. The lag in indicator 
data means performance largely reflects efforts undertaken two 
years ago. As such, it is highly unlikely that Timor-Leste will 
pass enough indicators in FY 2009 to objectively qualify. 
 
¶5. The MCC team stressed that the government of Timor-Leste 
therefore needs to take a number of concrete actions before the 
next MCC Board meeting at the end of 2008 that are likely to 
improve indicator performance in the future, particularly with 
respect to the Control of Corruption indicator. In this regard, 
the various initiatives that are part of the Prime Minister's 
"Year of Administrative Reform" - creating an independent civil 
service commission, transforming the Office of the Inspector 
General into an Auditor General reporting to the Parliament, and 
creating an anti-corruption commission - are an encouraging 
start. 
 
¶6. In discussions with the IMF, the MCC team learned Timor-Leste 
may soon end up exceeding the Gross National Income per capita 
threshold for low-income countries. Growth in 2007 and to date 
in 2008 has been remarkable due to the effects of record oil 
prices and continuing strong levels of natural energy 
production. Should Timor-Leste exceed the low-income threshold, 
it would need to compete with the significantly more advanced 
pool of lower-middle income countries for a much smaller pool of 
resources available for compacts. However, Timor-Leste exhibits 
profound levels of poverty that are more consistent with 
low-income countries than lower-middle income countries. Indeed, 
 
DILI 00000159  002 OF 002 
 
 
it is the lowest ranked country in Asia on the UNDP's Human 
Development Index, and if Gross Domestic Product per capita was 
used as the benchmark rather than Gross National Income per 
capita, Timor-Leste would remain comfortably within the 
low-income category at less than $400 per annum. 
 
Compact Preparation 
------------------- 
 
¶7. The previous government's compact proposal suffered from two 
major faults: first, it was not informed by a broad, substantive 
public consultation process, and, second, it proposed projects 
in three major sectors and two minor sectors and was therefore 
too large and complex given the government's limited management 
and implementation capacity. The MCC team advised the new 
government that it will need to conduct and document a good 
consultation process to identify priorities for compact 
assistance and strongly suggested that it consider submitting a 
concept paper focused on a single, major project or sector. 
Completing both before the next MCC Board meeting at the end of 
2008 should improve Timor-Leste's chances of remaining eligible 
for compact assistance in FY 2009. 
 
¶8. Meetings with local officials and other stakeholders 
suggested that roads, power, and water and sanitation may be 
high-priority sectors for compact assistance. While donors have 
funded some modest work in these sectors already, meetings 
revealed that feasibility studies and other pre-design work are 
largely non-existent. The Asian Development Bank, however, is in 
the process of helping the government of Timor-Leste develop a 
national road improvement strategy and investment plan, and the 
previous government's proposal included some work that could 
likely be built upon. The MCC team explained that there is a 
trade-off between moving quickly toward a compact and developing 
completely new projects, and speed is of the essence for 
Timor-Leste given the uncertainty of the MCC's budget and the 
fact that Timor-Leste will be competing with five other 
countries for compact assistance in FY 2009. Building on work 
that has already been started or identifying a project for which 
some of the feasibility studies and pre-design work have already 
been completed would be advantageous for Timor-Leste. 
 
The Role for MCC 
---------------- 
 
¶9. With nearly $2.2 billion in the Petroleum Fund at the end of 
2007 and the Fund's value rising by over $100 million per month, 
many questioned why Timor-Leste needs compact assistance at all. 
There is widespread agreement that money is not a problem in 
Timor-Leste; rather, the country's development is seriously 
constrained by the government's very low capacity to execute 
capital projects, such as infrastructure. Indeed, capacity is so 
thin that some have suggested the government should outsource 
the country's development in the short-term. Regrettably, 
outsourcing - conceptualized locally as international borrowing 
for project finance - has proven politically sensitive. 
 
¶10. Key members of the government, as well as the opposition, 
believe Timor-Leste has little choice but to outsource and also 
see borrowing from multilateral or bilateral concessional 
lenders as a potentially valuable means of financing the 
country's development. These leaders view a compact with the MCC 
as a means of breaking the domestic ideological opposition to 
outsourcing project management and borrowing internationally to 
finance development projects. A compact would provide a good 
model for outsourcing accounting and procurement services, as 
well as project implementation, and enforce a high standard of 
accountability. If successful, the MCC model could encourage the 
Timorese themselves to finance project implementation using the 
MCC model and mechanisms. 
RECTOR