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RUEHDT/AMEMBASSY DILI 3678

UNCLAS SECTION 01 OF 04 DILI 000323 
 
SENSITIVE 
SIPDIS 
 
EAP DAS MARCIEL 
MCC VP HEWKO 
EEB/IFD/ODF 
USAID FOR ANE 
USTR EBRYAN 
 
E.O. 12958: N/A 
TAGS: PREL PGOV MCC ECON EFIN TT
SUBJECT: MAJOR PROJECTS AND GOVERNMENT PROCUREMENT IN TIMOR-LESTE 
 
DILI 00000323  001.2 OF 004 
 
 
¶1.  (SBU)  The poorest country in Asia, Timor-Leste faces large 
gaps in public infrastructure, from roads to ports, electricity, 
schools and hospitals.  Early decisions after independence in 
2002 to eschew international debt and to conserve most of the 
country's future petroleum wealth constrained the financing 
available for large-scale infrastructure.  Even as the 
government begins to enjoy greater fiscal flexibility due to 
rising petroleum revenues, however, fundamental shortages of 
planning, engineering and organizational skills in Timor's 
public and private sectors have hindered improvements in the 
implementation of even minor capital projects.  Recent decisions 
by Timor's government on the procurement of new patrol boats and 
the installation of two power plants raised serious questions 
regarding the transparency of Timor's procurement practices and 
the quality of its decision-making.  Reform is possible.  Key 
ministers now openly discuss the former taboos of taking on 
concessional financing from sovereign lenders and outsourcing 
project management.  The Prime Minister sought assistance from 
Australia on infrastructure planning, and the World Bank may 
augment ongoing ADB-AusAID programs to develop procurement 
capacity.  The U.S. could assist through a possible future MCC 
Threshold Program.  End summary. 
 
 
MAJOR GAPS IN SOCIAL INFRASTRUCTURE 
--------------------------------------------- ------------------- 
 
¶2.  (U)  Timor-Leste is burdened by zero international debt and 
has more than $3.8 billion in its sovereign wealth fund due to 
accruals from its modest oil deposits.  These outcomes are the 
consequences of a fiscal policy approach that until recently 
emphasized the building up of savings, the avoidance of gross 
corruption and other expressions of the "resource curse," and 
self-reliance, including a reluctance to outsource project 
management.  This prudence has also resulted in astounding gaps 
in social infrastructure.  Timor-Leste is distinguished by a 
poor national road network; inadequate telecommunications (less 
than 1% of households has a landline telephone); a single, 
increasingly congested seaport; an electricity grid that 
supplies power to only a third of the country's households and 
then only for short segments of the day; a health services 
infrastructure barely able to cope with one of the world's 
highest rates of maternal and child mortality; an education 
system in which less than a fifth of schoolchildren have chairs 
or desks, and more than half are without textbooks; poor water 
and sanitation facilities (two-thirds of adults fetch water at 
least once a week); and a single international airport that can 
handle planes no larger than a Boeing 737. 
 
¶3.  (U)  Poor executive capacity within the government also has 
hamstrung efforts to invest in social infrastructure.  Timorese 
governments have consistently missed spending targets for 
capital projects, regardless of the party (or parties) in power. 
 On a cash basis, the current government by the end of September 
2008 had spent barely ten percent of the funds appropriated for 
major capital projects in 2008. 
 
¶4.  (U)  Timor-Leste's infrastructure needs are becoming an 
increasingly animated topic of public concern and debate.  The 
Prime Minister has declared infrastructure to be one of the 
country's three priorities in 2009, together with rural 
development and human capital development.  During the course of 
2008, the government announced major procurements of power 
generation and transmission facilities, and patrol boats 
intended to protect Timor's fishing resources.  Timor also 
sought overseas financing for major expansions or improvements 
of its road network, seaport and airport.  The Prime Minister 
publicly spoke of breaking the taboo on outsourcing of project 
management and the Finance Minister privately indicated the 
government's growing support for abandoning its denial of debt 
to finance major infrastructure projects.  Concurrently, the 
boost in actual or potential infrastructure spending triggered 
alarms of increased corruption, often expressed as brickbats 
hurled by the opposition at the government. 
 
POOR PROCUREMENT DECISIONS 
--------------------------------------------- ----- 
 
 
DILI 00000323  002.2 OF 004 
 
 
¶5.  (SBU)  Regrettably, a few of the government's recent 
procurements likely added to public perceptions of corruption 
and, even in the absence of any malfeasance, raise questions 
about the quality of the government's decision-making.  Common 
elements to these procurements have been a reliance on 
sole-sourcing and opaque decision-making among a very small 
leadership group.  Timorese businessmen, typically veterans of 
the resistance to the Indonesian occupation and well-known to 
the prime minister, serve as brokers between foreign firms and 
senior government representatives.  The consequences at minimum 
include the purchase of inappropriate and possibly wasteful or 
ecologically harmful technologies. 
 
¶6.  (SBU)  A few examples follow.  In April 2008, reports 
emerged that the government had purchased two military patrol 
boats from a Chinese firm to boost Timor's capabilities to 
protect its maritime domain including its fishing resources. 
The purchase was sole-sourced and the decision made by the prime 
minister.  Both the secretary of state for defense and the chief 
of defense told an embassy officer that the purchase was made 
without their input.  A veteran of the liberation struggle 
served as the primary broker with the Chinese firm.  The 
purchase remains controversial in Dili due to questions 
regarding the vessels' capabilities, their compatibility with 
current Timorese military equipment, and their national 
provenance. 
 
¶7.  (SBU)  In July 2008, news surfaced that the government would 
purchase two large electricity generating plants from a Chinese 
firm that would also be contracted to put into place a 
nationwide transmission grid.  On this occasion, the government 
issued an international tender, although the widespread 
understanding in Dili was that the purchase had been agreed 
before the government announced the tender.  Although observers 
described the tender announcement as insubstantial and 
technically inadequate, fourteen international firms submitted 
bids.  The decision to award the contract to the Chinese firm 
again was made by the prime minister with very little 
consultation with line ministers.  The power plants are old 
equipment (with some 40 years of service in China already behind 
them) that will be dissembled, exported and refitted in 
Timor-Leste.  They will burn heavy oil that Timor will have to 
import.  Experts describe the contracted installation of a 
national transmission grid within two years as a fantasy.  The 
World Bank reportedly has urged the government to cancel the 
contract, absorb the penalty, and re-tender the project.  There 
is no indication that the government intends to follow this 
advice. 
 
¶8.  (SBU)  Another energy related incident has to do with the 
sad recent history of the Dili power plant.  A Canadian operator 
took charge of the Dili generating facilities in September 2007 
as a result of a contract signed with the previous government. 
It arrived to find existing equipment in complete disrepair and 
bought two new, large, top-of-the line generating units as 
replacements, the first of which was installed in October 2007. 
The new generator promptly went out of service, however, due to 
a mechanical failure and Dili found itself in frequent 
blackouts, with electricity on many days in late-2007 available 
for only 8-10 hours.  Inheriting this mess at the very beginning 
of his term, facing sharp public criticism of incompetence, and 
having lost confidence in the Canadian firm, the Prime Minister 
acted.  He purchased in late-2007 five medium-sized generators 
manufactured by an Indonesian firm and had them shipped and 
installed in the Dili power station on an expedited basis.  The 
purchase was again sole-sourced, brokered by a veteran and in 
violation of the contract with the Canadian operator.  The 
equipment arrived speedily, but in poor condition and remains in 
a constant state of fuel and lubricant leakage.  The Canadian 
firm under government instructions cancelled the purchase of its 
second high-end, large generator.  It is only now beginning to 
repair relations with senior government leaders (the PM 
continues to refuse to meet with the company) and warns that 
Dili will again face serious blackouts by April 2009 due to 
surging demand if sound procurement decisions are not made soon. 
 
¶9.  (SBU)  Similar tales are told regarding the purchase of a 
fleet of vehicles for members of parliament, acquisition of rice 
 
DILI 00000323  003.2 OF 004 
 
 
for a large food subsidy program, and the procurement of fuel 
oil.  The SUVs were funded only after vigorous legislative 
debate and university student-led public protests, but their 
delivery has been repeatedly delayed to problems with the 
sole-sourced vendor.  In the other cases, a relative of one 
government minister or another is believed to have personally 
profited by being selected as the supplier or supplier's agent. 
 
LEGAL INFRASTRUCTURE SOUND 
--------------------------------------------- ----- 
 
¶10.  (U)  Timor-Leste has laws and regulations governing 
official procurements that, when followed, provide full 
transparency and enable sound decision-making.  Indeed, the 
procurement regime is so complex that it arguably has hindered 
effective capital investment due to the relative low executive 
capacity of both Timorese public authorities and private firms. 
Consequently, there have been frequent efforts at reform 
designed to decentralize and streamline procurements and 
contracting, with bilateral and multilateral donors providing 
substantial support in the form of technical assistance and 
capacity building.  Fundamentally, Timor's procurement rules 
enshrine the principles of open international tendering and 
discourage the use of sole-sourcing.  And the country's 
leadership regularly espouses an open, transparent procurement 
system.  The president generated controversy in mid-2007 after 
he straightforwardly told a gathering of the local chamber of 
commerce that he would never agree to quotas or set-asides of 
government contracts for Timorese businesses. 
 
BUT PRACTICE LESS SO 
----------------------------------- 
 
¶11.  (SBU)  So why has practice been so divergent on occasion? 
The prime minister reportedly has dismissed procurement 
guidelines as a bureaucratic luxury and several in the 
government have expressed doubt that international firms would 
even be interested in doing business in small, faraway and 
impoverished Timor.  The inclination therefore is to do business 
with the first apparently legitimate foreign firm that comes 
along and makes an offer.  When fourteen international firms 
actually submitted serious bids for the power plant project, 
ministers were simply astonished. 
 
¶12.  (SBU)  Gaps in executive capacity throughout the capital 
project lifecycle are substantial and bedevil every aspect of 
public sector infrastructure development.  An Asian Development 
Bank (ADB) representative shared with us the broad array of 
shortcomings, from the absence of engineering and planning 
skills in the design phase of a project, to the dearth of 
funding for, and skills to conduct, maintenance after a project 
is completed.  Ministries put forward and receive project 
funding with only the sketchiest of design work completed, and 
then offer these projects for tender with little refinement. 
Companies selected for project implementation have only vague 
specifications to meet and face little in terms of contractual 
disciplines.  Consequently, the government's record of 
completing capital projects is poor and the amount of funds 
carried over unspent from one fiscal year to another is high. 
The equivalent managerial, technical and organizational 
limitations of Timorese private firms also have hindered 
progress, as the Prime Minister has bemoaned to the ambassador 
on several occasions. 
 
¶13.  (SBU)  Haste born of political pressure on the government 
to speed economic development and protect the national interest 
also has played a role.  In the parliamentary election of 2007, 
Xanana Gusmao campaigned on the message that he could bring 
development and prosperity to Timor, including providing 
electricity throughout the country, far more quickly and 
effectively than Fretilin (the former governing, now leading 
opposition party).  An urgency to deliver on these pledges and 
demonstrate the government's capabilities remains, including 
undertaking big, highly visible projects with the promise of 
raising standards of living, providing jobs and improving 
stability.  Indeed, senior government officials regularly cite 
their anxiety regarding Timor's political stability as 
justification for policy decisions, pointing to public 
 
DILI 00000323  004.2 OF 004 
 
 
discouragement with poverty, food insecurity and unemployment as 
potential triggers for renewed conflict.  A second source of 
potential instability also generated ministerial anxiousness: a 
possible collapse of the ruling coalition and a return to power 
by Fretilin.  Consequently, there was a whiff of panic about the 
decisions to buy patrol boats, power plants and subsidize rice 
imports.  Ministers appeared to be motivated by a need to show 
quickly and dramatically that their government can defend 
Timor's interests and build the country, lest the people lose 
confidence, riot in the streets, turn their backs on the 
coalition, and opt for Fretilin's early return to power. 
 
PROSPECTS FOR REFORM 
--------------------------------------- 
 
¶14.  (SBU)  There are signs of willingness to reform.  The Prime 
Minister has acknowledged to the World Bank and Australia that 
he needs assistance in managing major projects and the 
procurement process.  He told the ambassador of his concern that 
Timorese brokers are failing to add value to the projects they 
tout, could be representing international firms of poor quality, 
and are undermining the ability of legitimate Timorese firms 
from developing needed experience and capacity.  In August 2008, 
Australian PM Rudd committed to help Timor-Leste develop a 
medium term public infrastructure plan, to include a phased 
strategy for the construction of key projects and potential 
sources of financing.  The Australian plan will be ready 
shortly.  Recognizing where the center of decision-making now 
resides, the World Bank is considering financing the 
establishment of a unit within the Prime Minister's office to 
help shape, direct and make more transparent procurement policy 
and practice.  While preparing for a possible Millennium 
Challenge Corporation (MCC) Compact, the Finance Minister 
foresaw a partnership with MCC as providing an exemplar to 
Timorese politicians and the public on outsourcing large-scale 
public sector project management.  The ADB, a co-partner with 
AusAID of a project within the Ministry of Infrastructure to 
improve government contracting, has agreed to make modifications 
to improve its credibility and influence with the minister, and 
build capacity in this critical area. 
 
OPPORTUNITIES FOR THE U.S. 
--------------------------------------------- 
 
¶15.  (SBU)  The decision to make Timor-Leste eligible for an MCC 
Threshold Program also provides the USG with an opportunity to 
improve the government's procurement practices.  Programs to 
enhance Timor's control of corruption will be a pillar of any 
Threshold Program, and a concept paper developed by Timor's MCC 
team includes the government's procurement practices as a key 
area needing reform.  To improve the government's effectiveness 
in managing large projects, and the transparency of its 
procurement practices, we may wish to explore coordinating with 
the World Bank should it move forward with its planned 
procurement unit in the PM's office.  As major public sector 
infrastructure projects inevitably require land, and decisions 
regarding the government's use and allocation of public land 
remain strikingly opaque and erratic, we should continue to urge 
Timor to move expeditiously to introduce a land law into 
parliament.  Finally, we must continue to encourage the 
country's leadership that transparent procurement programs 
managed in accordance with international standards are key to 
ensuring Timor receives the best value for its investments in 
the country's future. 
KLEMM