VZCZCXRO0647
OO RUEHDT RUEHLMC
DE RUEHDT #0132/01 1420804
ZNR UUUUU ZZH
O R 220804Z MAY 09
FM AMEMBASSY DILI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4395
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHBY/AMEMBASSY CANBERRA 1284
RUEHWL/AMEMBASSY WELLINGTON 1010
RUEHKO/AMEMBASSY TOKYO 0947
RUEHLI/AMEMBASSY LISBON 1124
RUEHLMC/MILLENNIUM CHALLENGE CORP
RUEHDT/AMEMBASSY DILI 3923

UNCLAS SECTION 01 OF 03 DILI 000132 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MTS AND EEB/IFD/OFD -  STATE PASS TO WORLD BANK US 
EXECUTIVE  DIRECTOR 
 
E.O. 12958: N/A 
TAGS: EFIN IBRD EAID ECON TT
SUBJECT: TIMOR-LESTE SEEKS WORLD BANK CONTRITION 
 
Summary 
 
------------ 
 
 
 
¶1.  Timor-Leste Minister of Finance Pires called in the 
Ambassador on May 21, 2009, to ask for U.S. support to resolve a 
dispute with the World Bank.  The conflict concerns a financial 
management technical assistance project that is both a flagship 
program for the World Bank in Timor-Leste, and a key element of 
the Finance Minister's effort to modernize and reform the 
Timorese government's financial management, accountability and 
effectiveness.  World Bank headquarters may have behaved badly 
and needlessly by in effect publicly scolding the Timorese 
without prior consultation and in the midst of a highly 
politicized debate in Dili.  The program in question is not 
without its blemishes: its consultants receive eye-popping 
salaries by Timorese standards and an ongoing review may reveal 
inappropriate political influence over employment decisions. 
Nevertheless, especially given the important advisory role the 
Bank provides in fiscal policy, we recommend at minimum that the 
Bank's leadership send a senior mission to Timor-Leste to better 
explain its actions.  End summary. 
 
 
 
¶2.  (SBU)  A major domestic challenge facing the government of 
Prime Minister Gusmao virtually from the day it took office in 
2007 has been the persistent accusation of corruption made by 
the leading opposition party, Fretilin, and others.  The nature 
of the allegations has evolved over time, but Fretilin's 
consistent drumbeat has been that the current government is 
misusing and misappropriating Timor-Leste's scarce financial 
resources.  The Prime Minister, in turn, has periodically and 
sharply riposted that corruption was far worse and more 
prevalent during the Fretilin-led governments of 2002-07.  An 
earlier fracas centered on subsidized imports of rice, with the 
government and Fretilin trading brickbats over which was more 
wasteful or fraudulent when importing one of Timor-Leste's 
staple foods.  The most recent dispute has been over a key World 
Bank technical assistance program in Timor-Leste, the Planning 
and Financial Management Capacity Building Program (PFMCBP). 
 
 
 
¶3.  (SBU) The PFMCBP supports the Ministry of Finance, its 
agencies, line ministries, and district entities involved in 
financial management.  It aims to strengthen planning, 
budgeting, public expenditure management, and revenue 
administration with emphasis on efficiency, effectiveness, 
accountability, integrity, service culture, and transparency. 
For all practical purposes, it is the only systematic effort 
currently underway to help the Government of Timor-Leste improve 
the management of its state finances.  Australia, New Zealand, 
Norway, Ireland, and the European Union are major donors. 
Although the U.S. has considered contributing to the program, we 
have no current financial stake.  As a potential donor, both the 
World Bank and the Finance Ministry has been in contact with the 
embassy and USAID regarding the ongoing dispute. 
 
 
 
¶4.  (SBU) Timorese public attention has been drawn to the 
salaries PFMCBP consultants are receiving.  An intrepid Timorese 
journalist broke the story several weeks ago and posted online 
the full recruitment and benefit dossiers of more than eighty 
World Bank consultants assigned to the Finance Ministry's 
project.  The remuneration being received by some World Bank 
consultants was eye popping - over $500,000 annually in a 
country where more than half the population survives on less 
than $0.88 a day.  Timorese attention also focused on the cases 
of three Timorese nationals employed in the program thought to 
be under-qualified, politically close to the Finance Minister 
and earning far, far in excess of regular Timorese civil 
servants.  One such Timorese reportedly is drawing an annual 
stipend of  $200,000, while public servant salaries here 
typically hover around several hundred dollars per month.  The 
opposition party Fretilin accused the government of a variety of 
sins, including corruption, nepotism and lavishing large sums on 
low quality advisors.  The cases generated sufficient public 
outcry that members of a party within the ruling coalition 
joined Fretilin in demanding that the finance minister appear 
before parliament to explain. 
 
DILI 00000132  002 OF 003 
 
 
 
 
 
¶5.  (SBU)  The Prime Minister held an extraordinary press 
conference on May 13 to support the government and the World 
Bank program.  He stoutly defended the practice of using foreign 
advisors as essential to improving the qualitative operations of 
the government and, in a deliberate bid to insulate the World 
Bank from criticism, described their salaries as determined by 
the international market.  The PM also asserted that not only 
did corruption occur more frequently under the old Fretilin 
government, but so did the practice of hiring expensive foreign 
advisors (indeed, the PFMCBP was begun by the Fretilin 
government, although substantially overhauled by the current 
finance minister).  In the middle of this domestic dispute, and 
after the Prime Minister's public defense of both the program 
and the World Bank, the latter released a press statement on May 
¶14.  Although carefully worded (it is available on the bank's 
website), it states the World Bank is reviewing contracts made 
between the Timorese government and consultants, notes concern 
about the level and cost of international technical assistance, 
suggests the PFMCBP has been too costly, and asserts the bank 
has raised the need to reduce the number of consultants with the 
Timorese government.   It is viewed, by both the Prime and 
Finance Ministers, as unfriendly, damaging and disloyal.  On May 
15, the prime minister instructed his government to halt all 
contact with World Bank staff. 
 
 
 
¶6.  (SBU)  Finance Minister Pires on May 21 told the Ambassador 
that she views the PFMPCB as core to her effort to reform her 
ministry's - and eventually the full government's - financial 
management and raise its ability to execute public programs. 
She described the controversial Timorese consultants as 
communications experts essential to her ability to convince 
Timorese stakeholders of the need for payments reform, as well 
as securing their acceptance of new disciplines.  She emphasized 
the Prime Minister's effort to insulate the World Bank from the 
domestic controversy, decried the reference in the Bank's 
statement to an ongoing review of the PFMCBP (the review had 
been agreed to a year ago), described the Bank's actions as a 
"betrayal" and an effort to "wash its hands" of a program in 
which, before May 14, it had been a full, uncomplaining and 
active partner. 
 
 
 
¶7.  (SBU)  The Finance Minister reported that she sent the World 
Bank president a letter asking the Bank to "undo the damage." 
She asked the ambassador for U.S. support in convincing the 
Bank's leadership that it must make an effort to fix the current 
situation, including offering an apology to Prime Minister 
Gusmao.  She summarized her view of the World Bank's May 14 
actions as "disrespectful," symbolic of the inherent imbalance 
in the relationship between an enormous international 
institution and a small nation such as Timor-Leste.  She also 
urged the U.S. to work to improve communications between the 
Bank and its office in the Dili (the local World Bank staff 
reportedly argued against the May 14 press release, but their 
concerns were overruled by headquarters). 
 
 
 
Comment 
 
------------- 
 
 
 
¶8.  (SBU)  On May 17, Prime Minister Gusmao told the Ambassador 
in regard to the dispute with the World Bank that, "since 1999, 
we've done everything they've asked us to do; now, when we need 
their help, they run away - it's unfair."  The PFMCBP is not 
without blemishes.  So far, it has added more international 
capacity than it has built Timorese skills.  And the ongoing 
review may well reveal poor hiring decisions including by the 
Finance Minister.  That said, a long-lasting rift with the World 
Bank would be harmful to U.S. goals in Timor-Leste as the Bank 
provides services, especially macroeconomic and fiscal policy 
advice, that no other donor has the resources or expertise on 
the ground to replace (especially with the imminent closure of 
the IMF representative office in Dili).  Nobody is more aware of 
the potential damage of a rupture with the Bank than the 
 
DILI 00000132  003 OF 003 
 
 
Timorese government.  Although the no-contact policy is formally 
in place, the Prime and Finance Ministers have reached out to 
both Washington and local Bank staff.  That said, the Bank's 
decision to release the May 14 statement without prior 
consultation with the Timorese leadership or clearance from 
major donors to the PFMCBP (Australia in particular is bruised 
on this point) appears to us as ill-conceived and, frankly, 
inexplicable.  Mission Dili requests the Departments of State 
and Treasury, through the U.S. Executive Director's Office at 
the World Bank, to encourage the World Bank to dispatch a senior 
official to Dili to explain its actions, apologize if necessary, 
and repair relations with the government of Timor-Leste. 
KLEMM