VZCZCXRO2303
PP RUEHCHI RUEHCN RUEHHM
DE RUEHDT #0281/01 3090731
ZNR UUUUU ZZH
P R 040731Z NOV 08
FM AMEMBASSY DILI
TO RUEHC/SECSTATE WASHDC PRIORITY 4128
RUEHLMC/MILLENNIUM CHALLENGE CORP PRIORITY
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBY/AMEMBASSY CANBERRA 1217
RUEHKO/AMEMBASSY TOKYO 0895
RHHMUNA/USPACOM HONOLULU HI
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLI/AMEMBASSY LISBON 1066
RUEHDT/AMEMBASSY DILI 3615

UNCLAS SECTION 01 OF 08 DILI 000281 
 
SIPDIS 
 
EAP DAS MARCIEL; MCC VP HEWKO; EEB/IFD/ODF; USAID PDELP/JLANG; 
USTR EBRYAN; TREASURY BPELTON 
 
E.O. 12958: N/A 
TAGS: PREL PGOV MCC ECON EFIN TT
SUBJECT: MCC ELIGIBILITY: THE CASE FOR TIMOR-LESTE 
 
DILI 00000281  001.2 OF 008 
 
 
Summary 
----------- 
 
¶1.  Timor-Leste is Asia's poorest country and ranks among the 
most impoverished nations of the world in terms of illiteracy, 
maternal and child mortality, malnutrition, low income and other 
indices of human development.  Its infrastructure is shockingly 
poor, from roads to schools, to telecommunications and power 
generation.  Timor-Leste's government is sharply aware of the 
need for development.  Since coming into power in August 2007, 
it has established a record of maintaining stability in the face 
of extraordinary challenges (including the attempted 
assassination of both the president and prime minister in 
February 2008), has undertaken administrative reforms to combat 
corruption and improve the performance of the public service, 
and has designated 2009 as the year of infrastructure, with 
emphases on investment in public sector infrastructure, rural 
development and human capital.  These three factors - great 
poverty, massive infrastructure needs together with a 
determination to govern competently - should make Timor-Leste a 
poster child for Millennium Challenge Corporation (MCC) 
Eligibility and a Compact. 
 
¶2.  Timor-Leste's MCC FY 2009 scorecard, however, is red on the 
crucial control of corruption indicator and in the category of 
investing in people, as it was in FY 2008.  Given the time lag 
built into the MCC's indicators, the control of corruption 
finding reflects conditions in Timor in early 2007, well before 
the current government came to power, and well before it began 
to design and implement policies to combat corruption. 
Moreover, the data contained in Timor's indicators is very thin, 
generating huge margins of error, great imprecision and low 
confidence levels. 
 
¶3.  Another anomaly is Timor-Leste's Petroleum Fund, a sovereign 
wealth fund that collects revenues from the exploitation of the 
country's modest known natural resources, and represents the 
nation's sole potential source of significant, self-generated 
development finance.  Now containing more than $3 billion, the 
fund was deliberately and prudently established in 2005 to avoid 
the "resource curse" that has befallen other poor developing 
countries with the scourges of corruption, harmful resource 
allocation and poor investment decisions.  Even if Timor-Leste 
chose to spend the modest sums in the Petroleum Fund now on 
public sector infrastructure projects, it could not efficiently 
or effectively do so given the absence of managerial, technical 
and engineering capacity throughout the Timorese economy.  The 
nation is further hobbled by an ideological opposition to 
international debt financing and outsourcing of project 
management.  An MCC Compact, therefore, provides Timor-Leste 
with a critical opportunity to apply the highest standards of 
project design and management skills to its infrastructure 
needs, and to break the ideological barrier that prevents the 
importation of skilled, foreign project management. 
 
¶4.  We discuss below in turn Timor-Leste's current state of 
economic and social development, the Petroleum Fund and the 
government's efforts since August 2007 to improve policy and 
governance, particularly in the area of fighting corruption.  We 
strongly urge the MCC Board of Directors to again extend 
eligibility to Timor-Leste and to permit the continuation of 
work towards a possible MCC Compact.  The impact of a MCC 
Compact in Timor-Leste, both in terms of economic development 
but also on U.S.-Timor bilateral relations, will be profoundly 
positive.  Conversely, the denial of eligibility will be a 
significant blow to Timor's prospects for sustainable medium 
term economic growth and seriously undermine the standing of the 
U.S. as a partner in the country's development.  End summary. 
 
Need 
------ 
 
¶5.  After six years of independence, Timor-Leste remains the 
poorest country in East Asia.  Revenue generated from oil and 
gas reserves in the Timor Sea has nearly pushed Timor-Leste into 
middle-income status (see below), but non-oil income per capita, 
a more accurate measure of the plight of the average Timorese, 
was estimated at only $440 in 2007.  The most recent household 
poverty survey was undertaken in 2001 and published in 2003.  It 
showed that 40 percent of the population lived below a poverty 
line of $0.50 per day.  Economic stagnation coupled with the 
world's highest fertility rate - nearly eight children per woman 
- led the UNDP to conclude in its 2006 Human Development Report 
that poverty had most likely increased since independence. 
 
DILI 00000281  002.2 OF 008 
 
 
 
¶6.  Poverty is more prevalent in rural areas, where nearly 
three-quarters of the population lives; 44 percent live below 
the poverty line in rural areas compared to 25 percent in urban 
areas.  With such a large rural population, it is not surprising 
that nearly 85 percent of the labor force makes its living from 
agriculture, yet agriculture only accounts for about 30 percent 
of non-oil GDP, an indication that productivity is extremely 
low.  Indeed, according to the census published in 2004, over 45 
percent of the population 15 years and older are subsistence 
workers.  Only one percent of Timorese workers is engaged in any 
sort of "industry;" just four percent are employed in the 
private services sector.  The employment demographics are 
frightening.  Urban youth unemployment is estimated at forty 
percent.  15,000 new job seekers enter the market yearly, but a 
senior UNDP advisor recently estimated perhaps only 400 wage 
paying jobs have been created annually in recent years.  (Note: 
World Bank representatives recently shared projections that 
perhaps 5000 jobs may be generated in 2008 if the government's 
budget is implemented as currently legislated; possibly 10,000 
if a robust jobs program were instituted; and a strong shift to 
capital investment projects would be needed to get employment 
creation anywhere above 15,000.) 
 
¶7.  Income poverty is mirrored in other social indicators.  The 
under-five mortality rate is 83 per 1,000 live births, and the 
maternal mortality rate is estimated to be between 420 and 800 
per 100,000 live births, both of which are shockingly high. 
Malnutrition continues to afflict approximately half of all 
children under age five, a situation that has not improved since 
independence.  54% of the population is judged to be stunted and 
a quarter severely stunted.  Cognitive skills throughout the 
population are very low.  According to the 2004 census, more 
than half of the Timor-Leste's population aged six and older is 
illiterate.  Nearly half of all adults have never attended a 
single day of school in their lives.  Recent surveys indicate 
that the numeracy of the average Timorese Finance Ministry 
official is at the third grade level.  Across the government, 
the average public servant only completed the seventh grade. 
Taken together, these indicators help explain Timor-Leste's 
ranking of 150 out of 177 countries on the UNDP's Human 
Development Index, the lowest of any country in East Asia. 
 
¶8.  Finally, the country's infrastructure in all sectors remains 
woefully poor, whether it be transportation, energy, 
telecommunications, financial services, water and sanitation, 
health or education.  Surveys indicate use of Timor's roads fell 
slightly since 2001, despite growth in population, as 
accessibility deteriorated with declining road quality.  The use 
of roads to either bring agricultural goods to market or to 
purchase items fell significantly in the six years to 2007, by 
29 percent and 25 percent, respectively.  Electric power is 
unknown in most parts of the country or available only for short 
periods of the day.  Only 1.5 percent of households have a 
land-line telephone connection.  Just 1.3 percent of households 
use a bank and the market for insurance is non-existent.  72 
percent of the population aged ten or above fetches water on a 
weekly basis and less than fifty percent of households have 
access to any type of installed sanitation facility.  Fully 
98.6% of households use wood for cooking and heating, and 67% of 
the population over ten years of age fetches wood at least once 
a week.  Schoolhouses across the nation are renowned for their 
poor physical condition, lack of water and sanitation, absence 
of desks and books, and shortage of trained teachers. 
 
Petroleum Fund 
------------------- 
 
¶9.  Timor-Leste's oil and gas resources offer an important means 
to address the discouraging picture painted by its 
socio-economic indicators.  Current estimated petroleum wealth, 
based on the only field in operation, Bayu Undan, is $13 
billion.  Production from Bayu Undan will peak in 2009 and be 
exhausted by 2023.  It is estimated that a natural gas field 
(Greater Sunrise) could add up to $10 billion to state coffers 
over the life of the project should production commence 
(operational requirements have not yet been finalized with a 
decision still pending over whether to pipe the gas to 
Australia, Timor, or to process it on a platform at sea). 
Potential revenue estimates of a recent discovery have not been 
developed, nor is it clear that exploitation is commercially 
feasible. 
 
¶10.  One of Timor-Leste's greatest policy achievements to date 
 
DILI 00000281  003.2 OF 008 
 
 
was the creation of a Norwegian-style Petroleum Fund in 2005 to 
create a patrimony and safeguard the country's economic 
prospects when oil and gas reserves eventually run out.  As 
stated in legislation, the Fund's purpose is to "contribute to a 
wise management of the petroleum resources for the benefit of 
both current and future generations.  The Petroleum Fund shall 
be a tool that contributes to sound fiscal policy, where 
appropriate consideration and weight is given to the long-term 
interests of Timor-Leste's citizens."  All oil and gas revenue 
is deposited in the Fund, which takes a very conservative 
approach to investment.  The Fund currently invests its assets 
entirely in U.S. Treasury bonds and custody is managed by a 
leading U.S. bank.  The value of the Petroleum Fund has risen 
substantially with the record high oil prices seen in 2008.  As 
of 30 June 2008, its assets were valued at $3.2 billion, or over 
six times non-oil GDP. 
 
¶11.  Transfers from the Fund to the state budget typically 
finance upwards of 90 percent of planned Government expenditure, 
with the remainder coming from domestic taxes and user fees and 
charges.  Such transfers are subject to a spending ceiling 
contained in law, known as "estimated sustainable income" (ESI), 
or interest income from estimated petroleum wealth.  While the 
calculation of ESI uses conservative production and price 
projections, it, and, by implication, the Government's budget, 
is quite sensitive to changes in the price of oil.  For example, 
a $10 per barrel drop in the price of oil would have resulted in 
a $67 million, or 17 percent, reduction in ESI in 2008. 
Further, because ESI is based entirely on production from the 
only field currently in operation, a disruption at Bayu Undan 
would have grave consequences for the state budget. 
 
¶12.  Should the Government wish to transfer more from the 
Petroleum Fund to the state budget than ESI, parliamentary 
approval, in the form of a majority vote, is required.  The 
Government had never sought to transfer more from the Petroleum 
Fund to the state budget than ESI until the mid-year budget 
revision in 2008, which proposed a transfer of $687 million, or 
$291 million more than ESI.  The centerpiece of the budget 
revision was the creation of a $240 million Economic 
Stabilization Fund to ensure political stability by cushioning 
the impact of rising commodity prices, especially rice (rice 
shortages in February 2007 led to political instability and 
violence in Dili).  While the budget revision, particularly the 
Economic Stabilization Fund, initially raised a number of 
concerns about its fiscal direction, the government, following 
some disciplines imposed by the National Parliament in approving 
the budget, proved to be transparent in explaining its 
intentions.  In fact, the government has exercised reasonable 
restraint in tapping the Economic Stabilization Fund.  As of 30 
September 2008, less than $15 million of the Economic 
Stabilization Fund had been spent, all on rice. 
 
Executive capacity 
---------------------- 
 
¶13.  It cannot be overstressed that Timor-Leste's development 
has been hobbled primarily by its low level of executive, 
managerial, technical, engineering and absorptive capacity, and 
not by the constraints it has self-imposed through the creation 
of the Petroleum Fund.  Since independence, governments have 
regularly been unable due to poor executive capacity to spend 
appropriated budgets, especially on capital projects.  In the 
last fiscal year of the previous government, through summer 
2007, the state spent only 16 percent of its capital budget, and 
just 55 percent overall.  Through September 2008, the current 
government claims a higher spending achievement overall, but its 
record on implementing the arguably modest 2008 capital budget 
(equal to less than 20 percent of the budget) has remained weak, 
with only 14 percent expended on a cash basis through September 
¶2008.  Poor executive, managerial and leadership skills, 
mirroring Timor-Leste's low levels of educational attainment and 
cognitive skills, are endemic throughout the economy.  Senior 
ministers regularly complain about the abject capabilities of 
Timor's private contractors.  If the government sought now to 
spend a chunk of the Petroleum Fund on a large infrastructure 
project using local contractors, the result would be disastrous. 
 Regrettably, political elites continue to cling to an ideology 
that requires that Timor's wealth should only be spent on 
Timorese.  This has resulted in the country choosing not to take 
on international debt to finance development, but also its 
failure to acquire the foreign managerial, engineering and 
technical expertise needed to implement major infrastructure 
projects.  This points to a potentially very beneficial outcome 
 
DILI 00000281  004.2 OF 008 
 
 
of an MCC Compact.  The Finance Minister has openly discussed 
the path-breaking role MCC financing can play in demonstrating 
to Timorese the effectiveness of foreign management of a large 
infrastructure project, and thereby undermining the ideology 
that currently opposes project outsourcing. 
 
FY 2009 MCA Scorecard 
------------------------------- 
 
¶14.  Timor-Leste's FY 2009 Millennium Challenge Account (MCA) 
"scorecard" is not markedly different from its FY 2008 
scorecard.  While Timor scores better than the median on half of 
the Ruling Justly indicators, it still does not pass the 
critical Control of Corruption indicator. The addition of the 
Natural Resource Management indicator in FY 2008 means it also 
does not pass at least half of the Investing in People 
indicators.  The Immunization Rates, Girls' Primary Education 
Completion, and Natural Resource Management indicators all tend 
to be structural variables that do not adjust quickly to policy 
changes, whereas Timor-Leste has consistently passed the two 
indicators that measure policy effort, Health Expenditures and 
Primary Education Expenditures.  It is notable that data now 
exists for the Girls' Primary Education Completion indicator, 
and Timor-Leste's score is precisely at the median.  Finally, 
the addition of data for the Trade Policy indicator means 
Timor-Leste now passes four of six Economic Freedom indicators. 
 
 
¶15.  As is well known, many of the MCA indicators suffer from 
lags in the data that may not reflect current performance.  This 
is particularly true of the five indicators produced by the 
World Bank Institute that record performance in 2007, including 
the Control of Corruption indicator.  In Timor-Leste, national 
elections were held in June 2007, and the current government 
only took office in August 2007.  Prior to that, a caretaker 
Government led the country following the political and security 
crisis of 2006.  As such, several of Timor-Leste's more 
problematic indicators likely reflect the consequences of the 
2006 crisis and the caretaker government's performance, rather 
than that of the current government. 
 
¶16.  In addition, the five indicators produced by the World Bank 
Institute are estimates that have large associated margins of 
error due to the unavoidable uncertainty associated with 
measuring perceptions of governance.  As the producers of the 
data note in the most recent edition of their data set, "a 
useful rule of thumb is that when confidence intervals for 
governance based on our reported margins of error overlap in 
comparisons of two countries, or a single country over time, 
this suggests that the data do not reveal statistically (or for 
that matter practically) significant differences in governance." 
 On this score, there has been no meaningful change in 
Timor-Leste's performance on any of the World Bank Institute 
indicators between FYs 2008 and 2009, nor, for that matter, 
since FY 2007, with the exception of a clear deterioration in 
performance on the Rule of Law indicator.  This includes the 
Control of Corruption indicator, which Timor-Leste passed in FY 
¶2007.  Further, when one properly accounts for margins of error 
(with 90% confidence levels), Timor-Leste's scores on the 
Control of Corruption and Government Effectiveness indicators in 
FY 2009 may, in fact, be well above the median. 
 
¶17.  The very large margins of error associated with the five 
indicators produced by the World Bank Institute are a reflection 
of these indicators' sensitivity to changes in some of the 
underlying data sources, particularly in a data poor environment 
such as Timor-Leste.  For example, the reported drop in 
Timor-Leste's performance on the Control of Corruption and 
Government Effectiveness indicators appears to be wholly 
attributable to one data source, the World Economic Forum Global 
Competitiveness Survey (WEF-GCS).  The WEF-GCS index used by the 
World Bank Institute and incorporated in the FY2009 Timor-Leste 
scorecard is based on a survey conducted in March-May 2007, 
months before Timor's current government even came to power. 
The World Economic Forum recently issued the results of its 2008 
survey, which are not reflected in the indicators produced by 
the World Bank Institute, and it suggests Timor-Leste may have 
improved in a couple of areas that affect its performance on the 
Control of Corruption indicator.  For example, Timor-Leste's 
rank on the criteria of "public trust of politicians" improved 
from 86 out of 131 countries surveyed in 2007 to 71 out of 134 
countries surveyed in 2008.  Likewise, its rank on the criteria 
"favoritism in decisions of government officials" improved from 
111 out of 131 countries surveyed in 2007 to 84 out of 134 
 
DILI 00000281  005.2 OF 008 
 
 
countries surveyed in 2008. 
 
Efforts to Combat Corruption 
------------------------------------ 
Corruption Investigations 
------------------------------- 
 
¶18.  For the period 1 January to 31 October 2008, the Office of 
the Prosecutor-General initiated 23 new investigations into 
allegations of corruption, a pace of investigation virtually 
identical to 2007, when a total of 27 cases were initiated. 
However, unlike 2007, two cases have thus far been taken to 
court in 2008.  An international prosecutor was recently hired 
to focus on corruption cases, which should assist with case 
processing.  For its part, the independent Office of the 
Provedor (Ombudsman) for Human Rights and Justice initiated 19 
corruption investigations in 2008 through 30 September, whereas 
14 investigations were initiated in all of 2007.  The Provedor 
has to date referred three corruption cases to the 
Prosecutor-General for further action, one of which has resulted 
in an indictment.  The Government, too has taken some steps to 
punish corruption, suspending eight national police officers for 
90 days without pay for their roles in the disappearance of 
$27,000.  In August 2008, the Prime Minister dismissed two 
senior civil servants in the Ministries of Health and 
Infrastructure on grounds of corruption, referring the cases to 
the Prosecutor General.  There is an ongoing inquiry into the 
Minister of Justice's possible role in referring no-bid 
contracts to her husband's construction firm. 
 
Year of Administrative Reform 
-------------------------------------- 
 
¶19.  The Government declared 2008 to be the "Year of 
Administrative Reform."  In practice, this meant the launch of 
three new initiatives intended to combat corruption and 
strengthen the integrity of the civil service.  The first 
initiative is the creation of an independent Anti-Corruption 
Commission, a commitment the Prime Minister made in his 
inaugural policy address in August 2007.  Legislation creating 
the Commission was sent to Parliament on 24 October 2008 for 
consideration, and, expecting that it will become operational on 
1 January 2009, the Government has included funds for the 
Commission in its draft 2009 budget.  The law establishing the 
Commission repeals the Provedor's anti-corruption mandate and 
provides the Commission with certain powers that the Provedor 
currently lacks.  These include the authority to freeze bank 
accounts and other assets, restrict international travel, and 
intercept communications (jointly with the Prosecutor-General), 
among others.  Like the Provedor, the Commission will report to 
Parliament and, as such, be independent of the Government. 
However, also like the Provedor, its budget will pass through 
the Ministry of Finance, and it will be subject to the same 
human resource policies and salary scales that apply to the rest 
of the civil service. 
 
¶20.  Senior policy advisors to the Prime Minister recognize that 
the Anti-Corruption Commission is only one piece of a 
comprehensive national anti-corruption strategy and cannot 
substitute for an overall environment of stability and effective 
governance.  That is why the Anti-Corruption Commission is 
complemented by two other initiatives, the creation of an 
independent Civil Service Commission and the establishment of an 
external auditor, and why the Prime Minister has requested a 
USAID advisor to assist with the development of a national 
anti-corruption strategy.  The Civil Service Commission will set 
performance, training, and development standards for public 
servants and be given the authority to appoint senior civil 
servants.  Like the Anti-Corruption Commission, the Civil 
Service Commission will report to Parliament, though it too will 
submit its budget request through the Ministry of Finance. 
Legislation establishing the Civil Service Commission has been 
sent to Parliament for consideration, and funds for a January 1, 
2009, commencement are included in the draft 2009 budget. 
 
¶21.  The creation of an external auditor is the only one of the 
three Year of Administrative Reform initiatives that has not 
made significant progress.  Initially, this was thought to be 
the easiest of the three measures to implement; the Government 
planned to transform its existing internal auditor, the Office 
of the Inspector General, into an Auditor General reporting 
directly to Parliament.  However, the proposal was challenged by 
the judiciary, which noted the constitution assigns the external 
audit function to a High Audit and Tax Court.  Though the Court 
 
DILI 00000281  006.2 OF 008 
 
 
does not yet exist, draft legislation is reportedly under 
preparation by the Ministry of Justice. 
 
¶22.  Separately, the National Parliament took steps to boost the 
country's anti-corruption effort, hosting in September 2008 a 
public forum toward the goal of creating a nationwide 
anti-corruption network.  The featured speaker was the chair of 
Indonesia's anti-corruption commission, and our ambassador 
participated also.  The national parliament will soon complete 
debate on Timor's first comprehensive penal code, intended to 
bring order to the overlapping and occasionally contradictory 
Portuguese, Indonesian and UN criminal codes that are currently 
in force.  The draft penal code includes nine provisions on 
corruption.  According to the Prosecutor General, once passed 
the penal code will give him substantially more legal clarity 
and authority to bring indictments against public officials 
accused of corrupt practices.  And Mission Dili is doing our 
bit: with USAID support, we are in the final stages of hiring an 
advisor to work directly for the Prime Minister as he shapes his 
anti-corruption policies and practices. 
 
Internal Controls 
-------------------- 
 
¶23.  In the absence of strong audit capacity in Timor-Leste, the 
Ministry of Finance has taken the initiative to commission a 
series of process reviews and audits by Deloitte using its own 
budget.  This reflects the view of the Minister of Finance that 
some of the most effective anti-corruption measures that can be 
taken are those that tighten internal controls.  The first 
review was a detailed examination of the procurement process, 
and it led to a procurement reform strategy, which will 
decentralize procurement to line ministries, properly train and 
accredit civil servants involved in the procurement process, and 
strengthen the oversight role of the central procurement unit 
within the Ministry of Finance.  The international accounting 
firm Deloitte now has a contract to complete ten additional 
reviews that generally target revenue-generating programs 
managed by the Ministries of Education, Infrastructure, and 
Justice. 
 
International Agreements 
------------------------------ 
 
¶24.  The Government of Timor-Leste recently approved the UN 
Convention against Corruption and has sent it to Parliament for 
ratification.  In addition, Timor-Leste remains one of only two 
countries in East Asia that has signed up to the Extractive 
Industries Transparency Initiative (the other is Mongolia).  The 
disciplines surrounding the Petroleum Fund are the clearest 
evidence of Timor-Leste's commitment to the Initiative.  The 
Fund was ranked fifth out of 34 similar sovereign wealth funds 
from all over the world - and third in the category of 
Accountability and Transparency - by the Peterson Institute for 
International Economics in April 2008 for its adherence to 
management best practices.  In addition to the spending ceiling 
on Fund assets (see above), the Banking and Payments Authority 
(BPA), Timor-Leste's quasi-central bank which manages the 
Petroleum Fund, is required to issue quarterly public reports on 
the status of the Fund, and the Fund undergoes regular internal 
(by BPA) and external (by internationally recognized accounting 
firms) audits. 
 
Overall Governance Performance 
---------------------------------------- 
 
¶25.  The current government came into power in August 2007 with 
a five year mandate and the policy goals of administrative 
reform, promoting the country's development and overcoming the 
legacies of the 2006 crisis (when, precipitated by a mutiny in 
its military by a group of 400 "petitioners," the government 
eventually collapsed, the military and police engaged in open, 
deadly combat on the streets of Dili and 15 percent of the 
population became homeless in the violence and lawlessness that 
ensued).  The government faced an extraordinary challenge on 
February 11, 2008, when both the president and the prime 
minister came under gunfire, with the president critically 
wounded.  In response, Timor-Leste's institutions performed 
well.  In strict accordance with the constitution and law, and 
in consultation with the national parliament and people, the 
government imposed a state of emergency.  It united the military 
and police under a joint command that eventually compelled the 
peaceful surrender of the 2/11 perpetrators.  Since the first 
half of 2008, the government has accelerated programs to close 
 
DILI 00000281  007.2 OF 008 
 
 
IDP camps and reintegrate families back into their communities. 
It resolved the grievances of the petitioners.  The government 
introduced a pension program for veterans and the elderly. 
Crime levels have fallen substantially.  With U.S. support, the 
government launched the drafting of a national security policy 
that will provide the legal basis for a thorough reform of the 
nation's security institutions.  In recognition of the stability 
that has been engendered, the Department of State in September 
2008 lifted a travel advisory for Timor-Leste that had been in 
place since May 2006.  In October 2008, the Australian 
government, also pointing to Timor-Leste's stability, announced 
it would reduce its troop strength in Timor by 100, nearly a 15 
percent reduction in force. 
 
Working Toward an MCA Compact 
-------------------------------------------- 
 
¶26.  The Government of Timor-Leste has clearly demonstrated its 
commitment to obtain an MCA compact.  It created a unit within 
the Ministry of Finance, staffed with highly capable individuals 
and allocated with a robust six-month budget of $750,000, to 
monitor government policy that impacts the MCA indicators and 
lead the Government's efforts to enter into a compact with the 
MCC.  Steps toward the latter included the preparation of a 
rigorous constraints analysis, which employed state-of-the-art 
growth theory and empirical techniques to identify the key 
obstacles to economic growth; a substantive, two-month 
consultation process that covered the entire country and 
generally validated the results of the constraints analysis; and 
the preparation of two concept papers for programs targeting 
road infrastructure and vocational education (a third, requested 
by the MCC targeting anti-corruption, is currently under 
development and should be submitted by mid-November 2008).  The 
Government's MCA team was extremely diligent in meeting all of 
the MCC's deadlines at each stage in the process and has been 
allocated an additional $300,000 to commence feasibility studies 
by the government. 
 
¶27.  Because the MCC identified the lack of a broad-based 
consultation as a major shortcoming of the previous Government's 
compact proposal (see Dili 109), some additional comments on the 
recent consultation process are warranted.  Over a three-month 
period, the Government's MCA team organized consultations with 
all elements of Timorese society, including various NGOs, youth 
organizations, the religious community, women's groups, the 
private sector, research institutions, and the international 
community.  Four regional sessions, grouping representatives 
from two to four districts, and a dedicated meeting for the 
isolated enclave of Oecusse, were held outside the capital. 
Embassy officers, including the ambassador, participated in 
several consultations.  The Government's MCA team hoped to reach 
1,500 people directly through the consultations and thousands 
more through word of mouth and media events.  In total, 1,309 
people participated in consultations, of which over 800 
participated through the regional consultations.  Nearly 20 
percent of participants were women, a reasonable share given the 
dominance of men in village governance. 
 
¶28.  The most recent consultation took place on October 30 when 
the MCA team, joined by the ambassador, held its third in a 
series of meetings with the National Parliament.  Fifteen 
deputies attended (just short of a fourth of the entire body), 
including representatives from every party, several party bench 
chairs, the speaker of the parliament, and key commission 
chairmen.  One of the most notable things to emerge from the 
consultation process was the public's interest in the issue of 
corruption.  The MCC scorecard has clearly served to stimulate 
discussion down to the village level about the importance of 
tackling corruption for the nation's development, a worthy 
achievement for the MCC model.  Another common refrain was a 
plea for quality: if the MCC invests in a national road network, 
many members of the public asked for assurances that the outcome 
would be a well engineered and maintained system designed to 
provide a lasting and qualitative improvement over the nation's 
current road system - in open contrast to the patchwork of 
occasionally poorly designed and implemented road projects the 
government and other donors have funded.  Timor-Leste's MCA team 
intends to hold a second phase of consultations this month to 
provide feedback to communities regarding the concept papers 
submitted to the MCC. 
 
Conclusion 
------------- 
 
 
DILI 00000281  008.2 OF 008 
 
 
¶29.  Despite its significant natural resource wealth, 
Timor-Leste is the poorest country in East Asia.  It has 
commendably established an arrangement to protect its resource 
wealth for the benefit of future generations in its 
internationally recognized Petroleum Fund.  An MCC program would 
help the Government speed up implementation of much-needed 
capital investments while perhaps reducing some of the pressure 
to spend beyond its current capacity to execute sound 
development programs.  In addition, an MCC program will provide 
a useful model to counter the widespread ideological opposition 
to outsourcing project implementation until such time as the 
Timorese are able to better develop their own internal capacity 
(see Dili 159).  In sum, the impact of a MCC Compact in 
Timor-Leste, both in terms of economic development but also on 
U.S.-Timor bilateral relations, will be profoundly positive. 
Conversely, the denial of eligibility will be a significant blow 
to Timor's prospects for sustainable medium term economic growth 
and seriously undermine the standing of the U.S. as a partner in 
the country's development. 
RECTOR