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UNCLAS SECTION 01 OF 02 DILI 000294 
 
SENSITIVE 
SIPDIS 
 
MCC FOR VP HEWKO; STATE FOR EAP/MTS 
 
E.O. 12958: N/A 
TAGS: PGOV EFIN ECON TT
SUBJECT: TIMOR-LESTE: COURT OF APPEALS FINDS BUDGET ALLOCATION 
ILLEGAL 
 
DILI 00000294  001.2 OF 002 
 
 
¶1. (U) Summary.  Timor-Leste's Court of Appeals ruled on October 
27 that the Government's allocation of monies from the Petroleum 
Fund into a newly-created Economic Stabilization Fund (ESF) 
violates the Constitution's provisions against secret budgets. 
The Court also found that any transfers from the Petroleum Fund 
to the state budget above USD 396.1 million in 2008 would be 
illegal.  Despite the opposition FRETILIN party's claims that 
this creates an "institutional crisis," the reality is that the 
ruling may be little more than a slap on the wrist, since it 
only prohibits future spending from the ESF, and transfers from 
the Petroleum Fund to the state budget to date are beneath the 
legally established threshold.  Moreover, the Court made several 
serious procedural errors that are generating calls for 
discipline of its three judges, only one of whom is Timorese. 
Nevertheless, the ruling shows that the GOTL's fiscal actions 
are subject to judicial constraints.  While publicly stating 
that it has not done anything wrong, the GOTL has indicated that 
it will abide by the ruling, and is busy finding other sources 
to fund rice imports, the only budget item directly affected. 
End summary. 
 
¶2. (U)  On October 27, Timor-Leste's Court of Appeals found that 
the GOTL acted unconstitutionally in allocating USD 240 million 
to a new Economic Stabilization Fund (ESF).  The ESF, part of 
the GOTL's controversial supplementary budget passed last 
summer, is a new measure intended to stabilize the economy by 
providing subsidies for food staples, building materials, and 
fuel.  The Court of Appeals held that the allocation to the ESF 
was not adequately justified and therefore violated the 
Constitution's provisions against secret budgets.  However, the 
existence of the ESF per se is not illegal; it withstood a court 
challenge filed by the opposition FRETILIN party last August. 
 
¶3. (U)  The Court also found that any transfers from the 
Petroleum Fund to the state budget above USD 396.1 million in 
2008 would be illegal since they would violate the Estimated 
Sustainable Income (ESI) formula, a legal limit on withdrawals 
from the Fund.  According to the Petroleum Fund Law, transfers 
above ESI to the state budget must be justified as being in 
Timor-Leste's "long-term interests."  ESI amounts to interest 
income from estimated petroleum wealth, and petroleum wealth is 
estimated using conservative price and production projections 
based on the only field currently in operation.  In its 
supplemental budget, the GOTL calculated ESI as USD 396.1 
million.  However, we understand the GOTL's withdrawals from the 
Petroleum Fund to date amount to USD 300 million, leaving an 
addition USD 96.1 million the GOTL can legally withdraw in 2008. 
 
¶4. (U)  Finally, the Court also held that its decision would not 
apply retroactively to expenditures to date, including the 
roughly USD 14 million for rice subsidies from the ESF.  It 
will, however, prevent the GOTL from further spending from the 
ESF.  The ruling becomes effective once published in the 
government's official gazette.  As of November 19, that has not 
occurred. 
 
Government Accepts Ruling, But Angered By Procedural Snafus 
--------------------------------------------- -------------- 
------------------- 
¶5.  (SBU)  The Vice Prime Minister (VPM) told us that the 
government is currently assessing how best to cope with the one 
real budgetary conundrum the ruling created: how to finance rice 
imports through February 2009.  He said an effort will be made 
to tap other currently budgeted accounts rather than seek any 
further legislative fixes in 2008.  The draft 2009 budget is 
scheduled to be submitted to Parliament the week of November 24, 
¶2008.  In any case, the Court's ruling will be respected, said 
the VPM, although by doing so the government does not 
acknowledge any misdeed.  Indeed, the VPM emphasized, the Court 
in its ruling committed several procedural errors.  These 
included failing to deliver a solicitation for information from 
the Parliament directly to the Speaker of the Parliament and 
instead dropping the summons with a clerk (note: the appeal and 
the ruling largely deal with actions by the Parliament and not 
the government; the Speaker of the Parliament separately issued 
a sharp condemnation of the Court's failure to follow prescribed 
procedure; the Speaker claims he never saw the summons because 
his clerk failed to bring it to his attention).  In addition, 
the Court's own procedural requirements stipulate that it 
physically meet in plenary when hearing a case against the 
government.  This time, no such plenary session occurred. 
Instead, the court's ruling was prepared by the two 
international judges present in Timor and hand-carried to 
 
DILI 00000294  002.2 OF 002 
 
 
Portugal to get the signature of the Chief Justice, reportedly 
prone for the past three months on a Lisbon hospital sickbed. 
 
¶6.  (SBU)  Due to these and other irregularities, president 
Ramos Horta told us that he is convening a special meeting of 
his judicial council (a five-person  advisory body selected by 
the President, Speaker and Prime Minister) on November 18, 2008. 
 The meeting is being held, said the President, to review the 
procedures followed by the Court and to determine whether any 
disciplinary actions are needed.  The President predicted that a 
likely "punishment" would be to not extend the contracts of the 
two foreign judges currently sitting on the Court of Appeals 
(one from Portugal, the other from Guinea-Bissau).  He saw no 
alternative but to accept the Court's ruling, however, as a 
means of protecting the integrity of the constitution and its 
checks and balances. 
 
 
FRETILIN Piles On 
------------------------- 
 
¶7. (U) Considerable confusion has arisen due to the fact that 
the Court's decision has not yet been published in the official 
Jornal da Republica.  However, the opposition FRETILIN party 
lost no time in attempting to leverage the decision against the 
government, drawing on copies of the decision provided to the 
National Parliament on November 13.  On that date, FRETILIN 
issued a press release claiming that the decision meant the 
Alliance for a Parliamentary Majority (AMP) coalition government 
headed by Prime Minister Xanana Gusmao now faced an 
"institutional crisis" because the government no longer has any 
money to spend from the budget.  In a November 15 meeting with 
PolOff, FRETILIN Member of Parliament Jose Teixeira echoed the 
Court's findings concerning the ESF's lack of transparency.  He 
complained that that an explanation and justification by the 
Government of Timor-Leste (GOTL) to the National Parliament was 
needed for this legislation, "which was not done."  Teixeira 
went on to accuse the AMP government of "forcing through the 
National Parliament in undemocratic fashion" the supplementary 
budget last July.  Specifically, he accused AMP Members of 
Parliament of collaborating with the "government's agenda" 
without pressing for a transparent debate or prodding for 
explanations or justifications from the government.  He 
reiterated that the party has called for the Prime Minister and 
Minister of Finance to appear before the National Parliament to 
explain the government's budget execution to date. 
 
¶8. (U)  The AMP government responded on November 14, charging 
that FRETILIN had manipulated the figures it cited; reminding 
that the Court had held last August that the ESF was legal; and 
stressing that the Court had specifically determined that 
expenditures to date from the ESF were not illegal. 
 
¶9.  (U) Portuguese judge Ivo Nelson Rosa was the primary author 
of the Court's decision.  Rosa has stirred controversy in the 
past, particularly when he clashed last year with President 
Ramos-Horta over the issuance of an arrest warrant for military 
renegade Alfredo Reinado and his followers, and his role in this 
decision has irritated some Timorese.  President Ramos-Horta 
alluded to this in a comment to the press, noting he is 
unsatisfied when internationals are standing in front and making 
(problematic) decisions that obstruct (progress for) the 
Timorese people. 
 
¶10.  (SBU) Comment:  While not pretty, and not yet concluded, 
the above saga suggests an earnest effort by Timorese actors to 
honor the judgment of its highest court, a judgment that at its 
core refers to the constitutional goal of full adherence to the 
principle of government transparency in budget formation. 
Further, it strongly reaffirms the disciplines contained in the 
Petroleum Fund Law on use of its resources beyond the legally 
established estimated sustainable income available to the 
government for ongoing expenditures.  Whether the judges on 
Timor's court of appeal face sanctions for their alleged 
procedural fumbles remains to be seen, as does whether this 
episode leads to a personnel change in the court.  Regarding the 
integrity of the Petroleum Fund, however, as one senior official 
told us, "although we can't say so publicly, we're pretty happy 
with the decision."  End Comment. 
KLEMM