Report No. 61814-TP
Timor Leste
Expanding Near-Term Agricultural Exports
Diagnostic Trade Integration Study (DTIS)
prepared for the Integrated Framework
(In Two Volumes) Volume I: Main Report
June 2011
Poverty Reduction and Economic Management Sector Unit
East Asia and Pacific Region
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be used by recipients
only in the performance of their official duties. Its contents may not otherwise
be disclosed without World Bank authorization.
CURRENCY
US Dollar
FISCAL YEAR
July 1 – June 30
WEIGHTS AND MEASURES
Metric System
ABBREVIATIONS AND ACRONYMS
ACIA ASEAN Comprehensive Investment DRBFC Directorate of Roads, Bridges, and Flood
Agreement Control
ACP African, Caribbean and Pacific Group of States DSP Dezenvolve Sector Privadu
Adat Traditional Justice System DTIS Diagnostic Trade Integration Study
ADB Asian Development Bank EBA Everything-But-Arms
ADT Average Daily Traffic EC European Community
AEC ASEAN Economic Community EDF European Development Fund
AEO Authorized Economic Operator EDTL Electricidade de Timor-Leste
AFAS ASEAN Framework Agreement on Services EEZ Exclusive Economic Zone
AFTA ASEAN Free Trade Area EIB European Investment Bank
AFTA ASEAN Framework Agreement on Trade in EPAS Economic Partnership Agreements
TS Services
AIA ASEAN Investment Area ESI Estimated Sustainable Income
AMC ASEAN Member Countries EU European Union
APBS ASEAN Policy Blueprint for SME FDI Foreign Direct Investment
D Development
APG ASEAN Power Grid FFA Forum Fisheries Agency
APIP Agricultural Productivity Improvement FIAS Foreign Investment Advisory Service
Program
APOR Administracao dos Portos de Timor Leste FOB Free on board
TIL
APSC ASEAN Political-Security Community FP Focal Point
AQIS Australian Quarantine Inspection Service FTA Free Trade Agreement
ARPs Agricultural Rehabilitation Projects GATS General Agreement on Trade in Services
ASCC ASEAN Social-Cultural Community GDP Gross Domestic Product
ASEA Association of Southeast Asian Nations GOTL Government of Timor-Leste
ASYC Automated System for Customs Data GSPs Generalized System of Preferences
BA Biosecurity Australia GTZ Deutsche Gesellschaft fur Technische
Zusammenarbeit
BARD Bononaro Agricultural Development Project HAPUA Heads of ASEAN Power Utilities/Authorities
EP
BOP Balance of Payments HFO Heavy Fuel Oil
BPA Banking and Payments Authority HS Harmonized System
CCGT Combined cycle gas turbine IADE Instituto Apoio as Desenvolvimento
Empresarial
CCT Cooperative Café Timor IAS International Accounting Standards
CEM Macau Electricity Cooperation IF Integrated Framework
FOR OFFICIAL USE ONLY
CEPT Common Effective Preferential Tariff IFC International Finance Corporation
DF Donor Facilitator IFRS International Financial Reporting Standards
DNFP National Division of Vocational Training PACER Pacific Agreement on Closer Economic
IGA ASEAN Investment Guarantee Agreement PF Petroleum Fund
ILO International Labor Organization PICTA Pacific Island Countries Trade Agreement
IMF International Monetary Fund PIF Pacific Island Forum
IMfTL Instituicao de Microfinancas de Timor-Leste PPD Public Private Dialogue
IMO Maritime Organization PTA Preferential Trading Arrangement
INDM National Labor Force Development Institute RDP II Second Rural Development Programme II
IP Intellectual Property RDP IV Second Rural Development Programme IV
IPM Integrated Pest Management REER Real Effective Exchange Rate
IPR Intellectual Property Rights ROO Rules of Origin
ISPM International Standard Phytosanitary Measures SAPT Sociedade Agricola Patria e Trabalho
LDC Least Developed Country SEFOPE Secretariat of State for the Vocational
Training and Employment
MAFF Ministry of Agriculture, Forestry and Fisheries SOEs Suco Extension Officers
MED Ministry of Economy and Development SEZ Special Economic Zone
MFAC Ministry of Foreign Affairs and Cooperation SPS Sanitary and Phytosanitary
MFN Most-Favored-Nation Suco Clan and Timor-Leste Administrative Unit
MHI Manitoba Hydro SWOT Strengths, Weaknesses, Opportunities, and
Threats
MoF Ministry of Finance TA Technical Assistance
MoI Ministry of Infrastructure TIN Tax Indentification Number
MoJ Ministry of Justice TITL TradeInvest Timor-Leste
Mt Metric tones TLSLS Timor-Leste Survey of Living Standards
MTCI Ministry of Tourism, Commerce, and Industry TRGP Trans-ASEAN Gas Pipeline Projects
MU Memorandum of Understanding TRIMS Trade-Related Investment Measures
NCBA National Cooperative Business Association TRM Tuba Rai Metin
NDQB National Direcotorate of Quarantine and UNCDF United Nations Capital Development Fund
Biosecurity
NGO Non-Governmental Organization UNDP United Nations Development Programme
NH National Information Infrastructures UNTAET United Nations Transitional Authority for
East Timor
NITL National Insurance Timor-Leste USAID United States Agency for International
NIU National Implementation Unit VAT Value-Added Tax
NP National Priorities VCA Value chain analysis
NSC National Steering Committee VET Vocational Education and Training
NTB Non-Tariff Barriers WFP World Food Program
O-D Origin and Destination WIPO World Intellectual Property Organization
WTO World Trade Organization
Vice President James W. Adams, EAPVP
Country Director Ferid Belhaj, EACNF
Acting Sector Director Ivailo Izvorski, EASPR
Lead Economist Vivek Suri, EASPR
Task Team Leader Habib Rab, EASPR
This document has a restricted distribution and may be used by recipients only in the performance of
their official duties. Its contents may not be otherwise disclosed without World Bank authorization.
EXPANDING TIMOR-LESTE’S
NEAR-TERM AGRICULTURAL EXPORTS
Volume I – Main Report
TABLE OF CONTENTS
ACKNOWLEDGEMENTS
EXECUTIVE SUMMARY ………………………………………………………………….i
SECTION I: SOCIO-ECONOMIC SETTING, MACROECONOMIC MANAGEMENT
AND INTERNATIONAL TRADE.........................................................................................1
CHAPTER 1: INTRODUCTION ....................................................................................................... 2
CHAPTER 2: ECONOMIC PERFORMANCE, POVERTY, AND MACROECONOMIC
MANAGEMENT ................................................................................................................................ 4
A. Drivers of Economic Growth ..................................................................................................... 4
B. Macroeconomic Management and Competitiveness .................................................................. 6
C. Conclusion................................................................................................................................ 10
CHAPTER 3: INTERNATIONAL TRADE PATTERN AND TRADE POLICY REGIME .......... 11
A. Trends in Timor-Leste’s Foreign Trade ................................................................................... 11
B. Trade Policy Regime ................................................................................................................ 20
C. Institutional Aspects of Trade Policy ....................................................................................... 22
D. Trade and Foreign Direct Investment ...................................................................................... 25
E. Strengthening Regional and Global Trade Integration ............................................................. 27
F. Conclusion and Recommendations........................................................................................... 30
SECTION II: VALUE CHAIN ANALYSIS OF AGRICULTURAL EXPORTABLES AND
KEY SECTORAL CONSTRAINTS TO COMPETITIVENESS .…………………………....…33
CHAPTER 4: VALUE CHAIN ANALYSIS OF AGRICULTURAL EXPORTABLES ................ 34
A. Agriculture’s Strategic Role..................................................................................................... 34
B. Value Chains for Coffee, Cattle, and Mungbeans .................................................................... 40
C. Conclusion and Recommendations .......................................................................................... 54
CHAPTER 5: HORTICULTURE SUBSECTOR – FUTURE EXPORT OPPORTUNITIES ......... 57
A. Introduction .............................................................................................................................. 57
B. Horticulture Subsector.............................................................................................................. 57
C. Constraints and Problems ......................................................................................................... 62
D. Conclusion and Recommendations .......................................................................................... 64
CHAPTER 6: ACHIEVING SANITARY AND PHYTOSANITARY CERTIFICATION
CAPABILITIES ................................................................................................................................ 65
A. Introduction .............................................................................................................................. 65
B. Requirements for a Sustainable SPS System ........................................................................... 66
C. Strategy to Address Challenges................................................................................................ 68
D. Donor TA and Government Initiatives, especially MAFF ....................................................... 69
E. Conclusion and Recommendations .......................................................................................... 71
SECTION III: CROSS-CUTTING CONSTRAINTS TO EXPORT
COMPETITIVENESS ...........................................................................................................72
CHAPTER 7: ADDRESSING SKILLS DEFICITS, TRAINING, AND LABOR MARKET
CHALLENGES ................................................................................................................................ 73
A. Introduction .............................................................................................................................. 73
B. Nature and Impact of the Skills Gap ........................................................................................ 73
C. Measures to Address THE Skills Gap ...................................................................................... 77
D. Skills Gap, Low Productivity, and High Costs ........................................................................ 83
E. Conclusion and Recommendations .......................................................................................... 84
CHAPTER 8: ADDRESSING PROPERTY RIGHTS AND ACCESS TO LAND ......................... 85
A. Introduction .............................................................................................................................. 85
B. Land and Rural Development Challenges and Opportunities .................................................. 85
C. Conclusion and Recommendations .......................................................................................... 91
CHAPTER 9: IMPROVING BUSINESS ENVIRONMENT TO ENHANCE EXPORT
COMPETITIVENESS ...................................................................................................................... 92
A. Introduction .............................................................................................................................. 92
B. Business Registration and Licensing........................................................................................ 93
C. Contract Enforcement .............................................................................................................. 95
D. Access to Finance .................................................................................................................... 97
E. Conclusion and Recommendations ........................................................................................ 101
SECTION IV: TRADE FACILITATION ........................................................................102
CHAPTER 10: IMPROVING TRANSPORTATION AND TRADE FACILITATION ............... 103
A. Introduction ............................................................................................................................ 103
B. Road Transport ....................................................................................................................... 103
C. Ports........................................................................................................................................ 106
D. Customs.................................................................................................................................. 108
E. Trade and Supplier Distribution Network .............................................................................. 109
F. Conclusion and Recommendations......................................................................................... 111
SECTION V: IMPLEMENTATION ................................................................................113
CHAPTER 11: IMPLEMENTATION ............................................................................................ 114
A. Implementation Arrangements ............................................................................................... 114
B. Pre-requisites For Success ...................................................................................................... 116
C. National Validation Process ................................................................................................... 117
BIBLIOGRAPHY ................................................................................................................120
LIST OF TABLES
Table 3.1: Timor-Leste’s Merchandise Exports, 2004-2008 ................................................................ 11
Table 3.2: Non-Oil Merchandise Exports by Country of Destination, 2004-2008 ............................... 13
Table 3.3: Trade in Goods and Services, Current and Trade Account Balances, 2004-2008 ............... 14
Table 3.4: Import Duties in the External Markets Facing Timor-Leste’s Major Commodity Exports . 15
Table 3.5: Timor-Leste’s Merchandise Imports, 2004-2008 ................................................................ 16
Table 3.6: Trade Openness of Selected Countries, 2004-2008 ............................................................. 19
Table 3.7: Cross-Country Comparison- Various Economic Indicators, 2004-2008 ............................. 20
Table 3.8: Timor-Leste - Current Customs Duty Rate and Other Indirect Taxes on Imports............... 21
Table 3.9: Estimated Values of FDI Licenses Issued in Timor-Leste .................................................. 26
Table 4.1: Timor-Leste: Cross-Country Comparison of Crop Yields (Mt/ha), 2007 ........................... 35
Table 4.2: Current live cattle exports to Indonesia, Darwin FOB prices: ............................................. 52
Table 5.1: Summary of Production and Marketing Costs for Snow Pea Exports to Darwin ............... 58
Table 5.2: Changes in Shipping Rates between 2004 and 2007 .......................................................... 59
Table 8.1: Alienated Primary Industry Land in Timor-Leste by Tenure Status ................................... 86
Table 9.1: Timor-Leste’s Ranking for the 10 sub-indicators in the 2010 Doing Business Report ...... 92
LIST OF FIGURES
Figure 2.1: Real Non-Oil GDP by Sector (% change) ............................................................................ 5
Figure 2.2: Composition of Non-Oil GDP (excluding UN) .................................................................... 5
Figure 2.3: Composition of Industry and Services.................................................................................. 5
Figure 2.4: Annual PF Receipts ($ million) ............................................................................................ 6
Figure 2.5: PF Net Assets and Withdrawals ($ ‘000) ............................................................................. 6
Figure 2.6: Fiscal Trends (% of non-oil GDP)........................................................................................ 7
Figure 2.7: Budget Execution (% of budget) .......................................................................................... 7
Figure 2.8: Inflation (12-month % change) ............................................................................................ 7
Figure 2.9: Nominal and REER (2001=100) .......................................................................................... 7
Figure 2.10: Current Account Sustainability (% of non-oil GDP).......................................................... 9
Figure 3.1: External Trade Balance, Services Trade, Net Income (Oil &Gas Receipts), and
International Assistance (in % of Non-Oil GDP) ................................................................................. 16
Figure 3.2: Imports by Country of Origin (in % Shares of Total Merchandise Imports) ..................... 17
Figure 4.1: Proportion of Households Cultivating Some Land (%)...................................................... 36
Figure 4.2: Average Cultivated Area Among Cultivator Households (m2) .......................................... 36
Figure 4.3: Proportion of Cultivator Households Growing Coffee....................................................... 37
Figure 4.4: Proportion of Cultivator Households Growing Coffee....................................................... 37
Figure 4.5: Coffee Production and Rural Poverty................................................................................. 37
Figure 4.6: Average Quantity of Coffee Harvested (kg)....................................................................... 38
Figure 4.7: Average Quantity of Coffee sold (kg) ................................................................................ 38
Figure 4.8: Mean Production of Mungbeans per Household (kg) ........................................................ 38
Figure 4.9: Proportion of Households Owning Cattle (%) ................................................................... 39
Figure 4.10: Average Number of Cattle Owned per Household ........................................................... 39
Figure 4.11: Average Number of Cattle Owned per Household ........................................................... 39
Figure 4.12: Proportion of Households that Sold at least One Head of Cattle ..................................... 39
Figure 4.13: Timor-Leste: Coffee Value Chain .................................................................................... 43
Figure 4.14: Timor-Leste: Mungbean Value Chain .............................................................................. 48
Figure 4.15: Timor-Leste: Live Cattle Value Chain for Export and Domestic Market ........................ 52
Figure 7.1: Most Problematic Factors for Doing Business .................................................................. 74
Figure 9.1: Starting a Business and Time to Start a Business .............................................................. 93
Figure 9.2: Procedures and Time to enforce a contract ....................................................................... 96
Figure 11.1: Synergies with National Priorities Process in 2010/2011……………………………...116
LIST OF BOXES
Box 4.1: ELSAA Café, Gleno sub-district, Ermera district ................................................................. 44
Box 4.2: Notes on Public Extension Services ...................................................................................... 49
Box 7.1: Informal On-the-Job Training ................................................................................................ 82
Box 8.1: The Tyranny of Poor Infrastructure ....................................................................................... 87
Box 8.2: Contract Farming in Timor-Leste .......................................................................................... 88
Box 8.3: Trying to Invest in Agribusiness in Timor-Leste ................................................................... 91
ACKNOWLEDGEMENTS
The Timor-Leste DTIS was prepared in collaboration with the Government of Timor-Leste and in
consultation with private sector organizations, international agencies, development partners, and other
stakeholders. As the Timor-Leste IF Focal Point, Mr. Jose Guterres of the Ministry of Economy and
Development guided the DTIS team and helped coordinate two DTIS missions during 2009 and 2010.
The Government of Timor-Leste ran DTIS workshops at the start of the process. The DTIS team’s
preliminary findings and recommendations were presented at a workshop in November 2009 and
through mission reports in March 2010. The mission reports have also been shared with H.E. the
Prime Minister, distinguished Members of the National Steering Committee for the IF, and H.E the
Minister of Infrastructure. The draft final report and recommendations were presented in Dili in
October 2010 at four thematic workshops, a National Validation Workshop, and an Investment
Conference sponsored by the Government of Timor-Leste.
Habib Rab (Country Economist) led the DTIS team under the supervision of Vivek Suri (Lead
Economist), Linda Van Gelder (Sector Manager), and Vikram Nehru (PREM Director and Chief
Economist, East Asia and Pacific Region). Team members and their areas of specialization included
the following: Tercan Baysan (DTIS Lead Consultant: Trade Pattern and Trade Policy); Paul Young
(Consultant: ASEAN); Manohar Sharma (Senior Poverty Specialist: Poverty); Philip Young
(Consultant: Agriculture); Preben Larsen (Consultant: Value Chain Analysis of Agricultural
Exportables); Merle Menegay (Consultant: Horticulture and SPS); Bill House (Consultant: Skills
Deficit and Labor Market); Rod Nixon (Consultant: Property Rights and Access to Land); Don
Hertzmark (Consultant: Access to Energy); Barry Kolodkin (Consultant: Business Environment);
Vanessa Valentino (Consultant: Business Enabling Environment and Gender); Chen Chen (ADB:
Roads); and John Arnold (Consultant: Trade Facilitation). Habib Rab and Tercan Baysan drafted the
DTIS based on the team’s background reports. John Holdaway and Vanessa Valentino provided
research and editorial assistance, and Jose Mousaco provided operational support. Philip Schuler
(Senior Economist) and Soamiely Andriamananjara (Senior Economist) served as peer reviewers.
The IF Executive Secretariat and IF partners submitted useful comments and suggestions.
The DTIS team greatly appreciates the cooperation and hospitality received from the Government of
Timor-Leste, in particular H.E. the Minister of Economy and Development and H.E. the Minister of
Tourism, Commerce, and Industry. The DTIS team also thanks Antonio Franco (Country Manager);
Rainer Venghaus and Milissa Day (IFC); Shobha Shetty (Senior Economist); Frederic Asseline
(Senior Energy Specialist); Natasha Beschorner (Senior ICT Policy Specialist); Arno Wirzenius
(Consultant); Werner Schule and Tobias Rasmussen (IMF); Helio Tavares (Director, MTCI); Sari
Laaksonen (IF Secretariat); government counterparts; development partners; civil society
organizations; and private sector colleagues for all their time and guidance to the IF-DTIS process.
EXPANDING TIMOR-LESTE’S
NEAR-TERM AGRICULTURAL EXPORTS
EXECUTIVE SUMMARY
REMOVING CONSTRAINTS TO EXPANDING EXPORTS IN THE NEAR-TERM AND
PROVIDING THE FIRST STEP FOR A LONGER-TERM EXPORT STRATEGY
1. The Government of Timor-Leste (GOTL) is committed to the development of the non-oil
economy by enabling the diversification of domestic production and trade integration. The objective
of the Timor-Leste Diagnostic Trade Integration Study (DTIS) is to agree on priority actions to help
overcome constraints to expanding agricultural exports in the near-term. It supports the government’s
efforts to develop a broader international trade strategy, which may include strategic sectors such as
tourism and fisheries. The focus of the DTIS is on short-term results in areas with immediate export
potential. It therefore looks only at the agriculture sector.
2. Achieving export growth and diversification are essential for supporting overall economic
growth and employment generation. Non-oil export growth is critical in light of the external
sustainability risks of depending on exhaustible petroleum exports. Expanding output for domestic
consumption is also a priority and may help reduce dependence on imports. Policy actions to expand
exports will impact positively on domestic trade as well. Timor-Leste faces the challenge of having to
mostly create a non-oil export sector, rather than reviving one that is stagnant or destroyed because of
conflict. This context is quite unique even when compared to similar small-island or post-conflict
countries.
3. The DTIS covers five main areas. Section I looks at macro and trade policies as they relate to
external competitiveness and market access. Section II analyzes the export potential in the agriculture
sector. Section III looks at structural constraints to trade and recommends possible measures to help
improve productivity and reduce costs. Section IV examines the critical infrastructure needs to
facilitate trade. Section V looks at implementation arrangements and next steps.
MACROECONOMIC AND TRADE POLICIES HAVE BEEN CONSISTENT WITH
PROMOTING EXPORT COMPETITIVENESS
4. Timor-Leste is a small economy, where the macroeconomic environment has been bolstered
by rapidly rising petroleum revenue since 2004. A stable macroeconomic environment is critical for
export competitiveness, including low inflation and a competitive real effective exchange rate. The
government to date has implemented sound policies, which have helped to maintain macro stability
and are consistent with objectives of promoting export competitiveness. A cornerstone of the
government’s macro framework is Timor-Leste’s Petroleum Fund (PF). Fiscal expenditures have
expanded rapidly to meet pressing needs. But the PF has provided a robust instrument to promote
discipline and transparency in the use of natural resource earnings. The main challenge going forward
is using fiscal policy to promote productivity, competitiveness, and diversification in the non-oil
economy.
5. Trade policies in Timor-Leste are not a constraint to promoting export growth and
diversification. Protectionist policies (e.g. high tariffs and non-tariff barriers) or other distortionary
measures (e.g. export subsidies or taxes, import subsidies) can restrict market access and/or hamper
the growth of export industries. But Timor-Leste has one of the most liberal trade policy regimes in
the world. This will continue to support the country’s economic development needs by maintaining
low import prices, encouraging technology transfers, minimizing anti-export bias, and reducing
incentives for illicit flows across borders.
6. Market access has not been a major issue for Timor-Leste’s exports to date even though the
country is not a member of any multilateral or regional trading arrangement. As a Least Developed
Country (LDC), Timor-Leste will continue to receive preferential tariff treatment from major markets.
The GOTL has prioritized membership of the Association of Southeast Asian Nations (ASEAN).
More than 70 percent of Timor-Leste’s imports come from ASEAN countries, which provide markets
for more than a quarter of Timor-Leste’s exports. ASEAN membership seems a logical next step
towards greater international economic integration. It can also provide a stepping stone towards WTO
membership. The DTIS recommends to conduct an assessment of steps required to fulfill the ASEAN
Economic Community Blueprint and a study on WTO accession.
7. The institutional structure for developing and coordinating trade policy in Timor-Leste is still
at a nascent stage given capacity constraints and other more immediate priorities. Addressing trade-
related issues and developing an international trade strategy will require solid institutional
foundations. The responsibility for policies that impact on exports spans across the government. As
in other countries, agencies that are nominally responsible for international trade policy may have
little authority over the policies that are most important to trade. The DTIS recommends using the
Integrated Framework National Steering Committee as a forum for strengthening coordination around
trade policy; training selected civil servants across government on specialized trade-related topics
(trade policy analysis and negotiations); enacting the new Investment Law and related Decree Laws;
and strengthening the capacity and institutional status of the newly established Investe Timor-Leste.
DELIVERING ON THE POTENTIAL FOR SHORT-TERM AGRICULTURE EXPORTS
Subsectors with immediate export potential
8. The agriculture sector in Timor-Leste, which employs 80 percent of the active population, has
potential to both expand exports in the near-term and have a positive impact on poverty. Timor-Leste
has a wide range of improved crop and livestock production packages which are ready for nationwide
adoption, provided the technologies can be extended to farmers and markets developed. The DTIS
looked at three subsectors with potential for both substitution of existing imports and expansion of
exports:
9. Coffee has the greatest potential for both increasing export earnings and reducing poverty. In
2009, about 67,000 households grew coffee in Timor-Leste, with a large proportion being poor. With
improved technology for coffee farmers, gross margins could increase by an average of about $500
per hectare (ha) from only $120/ha. Returns per labor-day would increase from about $3.70 to $5.90.
Increasing production by four times from around 52,000 ha of coffee plantations could increase export
earnings by about $45 million per year. Aside from promoting improved technology, the DTIS also
recommends to further support the rehabilitation of coffee plantations and to start Integrated Pest
Management.
10. Grains and pulses (in particular mungbean) have export potential even though the impact on
poverty may be more limited than coffee. Pre-Independence production of mungbeans collapsed after
the departure of Indonesian traders. The 11,000 households growing mungbeans now are mostly
subsistence farmers. But there is commercial demand including for exports. Going from 0.25 ha of
crop per household to 0.50 ha could result in an incremental household gross margin of $340 per year
and returns per labor day of $5.90. Producing 4,000 Mt per annum valued at $700/Mt could generate
$2.8 million in exports. The DTIS recommends to expand donor programs and extension services to
mungbean farmers particularly along the south coast and to establish links with buyers in Indonesia.
11. Livestock (in particular cattle) has potential for increased exports to Indonesia where the
demand for beef is estimated to be growing at 6 – 8 percent per year, and imports are likely to have
supplied around 38 percent of their demand by 2010. Around 44,000 households are engaged in
ii
rearing cattle/buffalo. If a family fattened 2 heads of cattle per year, their net farm income would
increase by $280 per year. Export earnings could be around $4.5 million. The DTIS recommends to
update the livestock census to get a better idea of cattle populations and to evaluate options for a new
public or private abattoir near Dili.
Looking at medium-term possibilities for horticulture exports
12. Timor-Leste has recently seen a growth in the production and marketing of vegetables and
fruits for domestic markets. Expanding this for exports presents major challenges given the
perishable nature of the products, difficult transport linkages, and the distance from markets. The
DTIS looks at earlier feasibility studies and experimental trials to supply fresh fruit and vegetables to
markets in Australia. Horticulture is not recommended as a short-term priority for exports. But given
that these crops are labor intensive and can contribute to employment and income generation, the
DTIS highlights the possibility of conducting courses on safe pesticide use, establishing regulations
for pesticide safety, and exploring investment in small scale cold chain equipment.
Sanitary and Phytosanitary (SPS) Certification capacity: an immediate priority
13. Timor-Leste currently has very limited SPS certification capacity, which the Government has
started to address. Though SPS has not restricted exports to date, this has become an urgent issue.
The Government of Indonesia has indicated that imports from Timor-Leste will be banned from the
end of 2010 without the necessary SPS certification. There are a number of challenges to developing
and implementing an SPS system including the technical and financial resourcing of the National
Directorate of Quarantine and Biosecurity. Investments will need to be commensurate with the
volume of exports. The quarantine services in other countries provide services for large volumes and
year-round exports of a variety of commodities. The DTIS recommends to formulate a strategy for
SPS and to organize stakeholders not only to maintain existing exports but also to expand exports.
ADDRESSING THE STRUCTURAL CONSTRAINTS TO EXPANDING EXPORTS
14. The analysis of the different agricultural subsectors highlights several structural factors that
constrain exports. This analysis supplemented by discussions with the private sector highlighted three
major issues constraining export competitiveness and growth: the skills deficit; access to land; and the
business environment.
Addressing the skills deficit
15. Developing agricultural subsectors into profitable export and import replacement businesses
will require strengthened skills and experience of farmers and extension workers. Both pre- and post-
harvest crop losses are high, with farmers losing up to 33 percent of their crop. In addition, agro-
processing technologies are typically outdated and inefficient, preventing more commercial
production. There are existing technologies and approaches assisting both farmers and Suco
Extension Officers, which can potentially be replicated nationwide for coffee, horticulture, other
crops, and livestock. The DTIS recommends to build on these to strengthen the newly created
agricultural extension services and increase budget resources to agricultural research and extension.
16. Skills gaps at the level of the farmer and agro-processor are a binding constraint for short-
term productivity and growth. As these are addressed, there will be added pressure for skills along the
value chain. However, gaps penetrate the full extent of the skills spectrum. This is evident in the
large number of foreign workers in most sectors of the economy, who are currently providing a
critical input. Building domestic capacities and encouraging skills transfer to substitute imported
labor in the long-run is a high priority. In addition to foreign labor, Vocational Education and
Training (VET) and on-the-job training are helping to address the skills gap. The DTIS highlights a
iii
number of issues to strengthen VET and on-the-job training, including linkages between training
institutions and labor market demands; quality assurance, accreditation, and certifications; and
training of trainers. Some of this work is already under way through the Secretary of State for
Vocational Training and Employment and support from the ILO.
Improving access to land
17. The lack of formal property rights could be an important constraint to investment and export
growth. Around 97 percent of rural landholdings remain under customary tenure, which is land that
has (usually) never been titled. Ownership and user rights are typically regulated by customary (or
traditional) authority structures. This can contribute to low private investment in the agriculture
sector. Notwithstanding the production of coffee and, on a more limited scale, the production of other
cash crops including candlenut, peanuts, maize, mungbean, and copra, the majority of rural farmers in
Timor-Leste rely mainly on subsistence crops for their livelihoods. The draft land law includes
provisions intended to facilitate engagement between investors and community members and
safeguard the ‘common interests of local communities’. Although there has been some work on
property rights, particularly in urban and peri-urban areas, there has been little focus on expanding
land registration in rural areas. The DTIS recommends to evaluate the potential for expanding the Ita
Nia Rai land registration program over critical areas of primary industry land, including some areas of
coffee plantation.
Strengthening the business environment
18. In addition to the skills gap and land access issues, Timor-Leste has a very challenging
business environment, which can be a disincentive for investment and an impediment to generating
scale. Three issues in particular are highlighted:
19. Business start-up in Timor-Leste is a complex and time consuming process. Private
businesses end up operating informally or paying illegal fees to speed up the process. It also ends up
driving away potential investors. The Government has started to implement reforms to help
streamline the businesss registration process to only two days. The DTIS recommends to build
capacity for Ministry of Justice and Ministry of Tourism, Commerce, and Industry staff involved in
registration and licensing and create a one-stop shop for business start-up with a quick incorporation
and registration procedure and electronic sharing of information across ministries.
20. Contract enforcement capacity in the government is low, and there is limited use of contracts
in the first place. The general lack of alternative methods of dispute resolution also inhibits
investments. The DTIS recommends to: develop a commercial arbitration or mediation facility;
deliver training programs on commercial disputes for mediators and arbitrators; and build capacity of
Timorese businesses to use contracts. For smaller contracts, the DTIS recommends to look at
alternative dispute resolution mechanisms.
21. Access to finance is limited partly due to the lack of information on borrowers and the
weaknesses in the legal structure to protect borrowers and lenders. This has constrained the growth of
credit markets. There are efforts under way to try and address some of these challenges, including
institutional strengthening (e.g. risk management, credit information reporting system) and the
expansion of microfinance. A new regulation for non-bank deposit taking institutions was drafted to
provide formal status to Microfinance Institutions. The DTIS recommends to provide support to
evolving the credit information reporting system into a full-fledged credit bureau and enable the
provision of credit on the basis of contracts with reputable private sector companies.
22. These three issues along with challenges associated with access to land are clearly
interrelated. For example, the lack of clear land titles inhibits access to finance because land cannot
iv
be used as collateral for loans. Companies, foreign or domestic, cannot set up their businesses or
obtain capital if they cannot register. Export contracts will not have credibility if disputes cannot be
resolved.
INVESTING IN CRITICAL INFRASTRUCTURE TO FACILITATE
INTERNATIONAL TRADE
23. In addition to the above structural issues, the DTIS looks at critical infrastructure and
associated services that are needed to facilitate international trade, in particular the road transportation
network, the port of Dili, and the customs services. These areas are important for ensuring that goods
can move efficiently across borders from their source.
24. The road transport system in Timor-Leste is somewhat unusual in that the distances traveled
are short and the loads are small, but travel times are relatively long and costs are high, due primarily
to the terrain. Road links with potential to grow into a trade corridor should receive priority funding.
The DTIS looks at two corridors in particular. The first is the coffee corridor, which connects the
country's main coffee growing areas in Ermera district to the capital, where the commercial airport
and seaport are located. The second is the cross-border corridor, which connects Dili with the Mota
Ain border to Indonesia. The current traffic volume on the cross-border corridor is among the highest
in the country, but it is still fairly light in terms of traffic capacity.
25. The Port of Dili is used to handle both container and breakbulk cargo. It is a small facility
originally designed for breakbulk operations. Port capacity is limited not on the waterside but on the
landside. If the volumes continue to increase, congestion will become a severe problem. In order to
address this, it will be necessary to convert the port to a modern configuration. This would involve
block stacking of containers in designated slots to a maximum height of 4 boxes with rows 5 wide.
Such changes will allow the port to double its current capacity and continue operating without
congestion for another 6-8 years.
26. Customs in Timor-Leste is confronted with similar problems as other customs departments
attempting to modernize their procedures. There are some unique features in Timor-Leste: small
portion of total government revenues; relatively new cadre of customs staff; lack of reliable
communications limiting the effectiveness of ASYCUDA; use of scanners in the airport and seaport
still not clarified; and limited customs presence in the airport and land border crossings. Customs is
able to clear goods within 2-3 days. This would place it well ahead of most developing countries,
except that it has been accomplished because certain procedures have not yet been introduced. The
biggest challenge is to introduce a more rigorous system while maintaining the short clearance times
that currently allow Dili port to continue functioning. The government is already making efforts in
this area.
27. The recommendations set out in the study have been discussed as part of the National
Validation Process. As per the DTIS format, the analysis covers a broad set of issues, resulting in a
large number of recommendations. Clearly, there is a need to prioritize areas for action, taking into
consideration Timor-Leste’s priorities and capacity. The recommendations will be further refined as
part of the follow up process to the DTIS, which is being taken forward by the IF National
Implementation Unit based in the Ministry of Economy and Development and the Ministry of
Tourism, Commerce and Industry.
v
DTIS ACTION MATRIX
Issue Recommended Action Time-frame1
DEVELOPING A LONGER-TERM INTERNATIONAL STRATEGY
Coordination and capacity on Establish the Integrated Framework National Steering Committee as a Ministerial forum for strengthening coordination ST
international trade policy issues. around trade policy.
Train selected civil servants across government on specialized trade related topics (trade policy analysis and MT
negotiations).
Accession requirements for Undertake an assessment of the timeframe, resources, and actions required to meet the needs under each section of the ST
multilateral and regional ASEAN Economic Community Blueprint.
integration arrangements. Conduct a study to assess WTO accession for Timor-Leste. LT
Investment promotion for Enact the new Investment Law and related Decree Laws. Strengthen the capacity and institutional status of the newly ST
international trade. established Investe Timor-Leste including by developing an investment promotion strategy, business plan, vision, and
performance targets.
Conduct a tourism study to analyze the country’s prospects for developing a viable tourism sector. MT
DELIVERING ON THE POTENTIAL FOR AGRICULTURE EXPORTS IN THE NEAR-TERM
Exports of coffee. Plan, prepare, and implement the initial rehabilitation of coffee plantations. MT
Strengthen donor coordination for support to coffee, and promote transfer of improved technology and Integrated Pest ST
Management.
Domestic and international Expand existing donor programs and extension services to mungbean farmers, particularly along the south coast. MT
trade of grains and pulses
(mungbeans).
Domestic and international Update the livestock census to get a better idea of cattle populations, and evaluate options for a new public or private MT
trade of livestock (cattle). abattoir near Dili.
Sanitary and Phytosanitary Form a SPS Consultative Group including relevant stakeholders in the government and the international community to ST
(SPS) Certification capacity. develop and implement a strategy for the establishment of SPS capacity.
ADDRESSING THE STRUCTURAL CONSTRAINTS TO EXPANDING EXPORTS
Addressing the skills deficit. Build on support to be provided under RDP IV and Seeds of Life III to improve the newly created agricultural ST
extension service, and increase budget resources for agricultural research and extension.
Generate regular, reliable labor market data in order to better understand the scope of the skills gaps and better link MT
training programs to market demand.
Support efforts to improve the VET system, including initiatives to improve the professional development of trainers, LT
1
█ Short-term (ST)= within one year ; █ Medium-term (MT)= 1-3 years; █ vi
Long-term (LT)= more than 3 years
Issue Recommended Action Time-frame1
establish and implement the National Qualifications Framework, and adequately resource INDMO.
Improving access to land. Conduct a preliminary rural land tenure assessment which evaluates the nature of community ownership and use claims ST
over areas of coffee estate land.
Evaluate the potential for expanding the Ita Nia Rai land registration program over critical areas of primary industry
land, including some areas of coffee plantation.
Strengthening the business Business start-up: Build capacity for MoJ and MTCI staff involved in registration and licensing, and establish a one- MT
environment. stop shop for business start-up with a quick incorporation and registration procedure and electronic sharing of
information across ministries.
Contract enforcement: Develop a commercial arbitration or mediation facility, deliver training programs on LT
commercial disputes for mediators and arbitrators, and provide training to Timorese businesses on the use of contracts.
Access to finance: Provide support to evolve the credit information reporting system into a full-fledged credit bureau. MT
Enable the provision of credit on the basis of contracts with reputable private sector companies by developing an
awareness campaign and trainings for local financial institutions, coupled with the development of recourse
mechanisms in the event of default.
INVESTING IN CRITICAL INFRASTRUCTURE TO FACILITATE INTERNATIONAL TRADE
Improving road transportation Establish a trade activity monitoring mechanism to guide capital investment along trade corridors (Dili-Ermera and Dili MT
and maintenance along trade to Mota Ain), and implement road maintenance and safety measures.
corridors.
Congestion at Dili Port. Convert port to a modern configuration, and develop a new system of terminal management. LT
Efficiency and effectiveness of Delegate Customs as the lead border agency responsible for coordinating border control, and continue to implement MT
the customs service. reforms to reduce port dwell time.
vii
SECTION I:
SOCIO-ECONOMIC SETTING, MACROECONOMIC MANAGEMENT
AND INTERNATIONAL TRADE
1
CHAPTER 1: INTRODUCTION
1. The Government of Timor-Leste (GOTL) is committed to the development of the non-
oil economy by enabling the diversification of domestic production and trade integration. A
relatively large donor and security presence since the vote for independence in 1999 and a surge in
petroleum receipts since 2004/05 have opened up new opportunities and challenges for the economy.
Aside from gas and petroleum exports, Timor-Leste has a very small tradable sector. Diversifying
exports and sources of growth is a long-term process. Addressing this challenge early is critical to
promoting economic opportunities and mitigating the risks of adjustments related to volatile and finite
hydrocarbon income and the temporary international presence.
2. GOTL is using its rising petroleum receipts to address urgent needs, but the challenges
are enormous for a new nation emerging out of conflict. The country faces major infrastructure
bottlenecks, a serious shortage of skilled manpower, and a business environment that is still in its
nascent stage of development. Timor-Leste’s poverty incidence is very high, with an estimated 41
percent of the population below the national poverty line.2 The manufacturing sector, which is
dominated by small firms, is at its infancy and accounts for less than 4 percent of non-oil GDP. Since
1999 the international community has supported Timor-Leste’s efforts to develop democratic
institutions and strengthen the economy’s productive capacity.
3. In the short and medium-term the agriculture sector has the greatest potential to
expand exports whilst impacting positively on poverty alleviation. Employment is critical to
further consolidating peace and stability. Timor-Leste voted for independence in 1999, following
twenty five years under Indonesian occupation, preceded by four centuries as a Portuguese colony. It
became a sovereign state in May 2002 after two and a half years under the United Nations
Transitional Authority for East Timor (UNTAET). There have been major strides in restoring
security and stability after violent clashes in Dili in 2006 and the failed assassination attempts on the
country’s President and Prime Minister in February 2008. However, these crises act as important
reminders of the fragility of post-conflict recoveries.
4. Timor-Leste’s export potential is constrained by internal supply side factors and not
trade policies or external barriers. Supply side and structural constraints include issues around
factor inputs (land, skills, and critical infrastructure) and the business environment. These limit
productivity and scale and are further compounded by weak market linkages. Transportation and
trade facilitation costs are high due to transportation infrastructure bottlenecks and institutional
capacity limitations. Petroleum receipts also create new challenges for encouraging private
investment in the non-oil tradable sector due to potential Dutch Disease effects.
5. The objective of this Diagnostic Trade Integration Study (DTIS) is to agree on priority
policy actions to help overcome constraints to expanding agricultural exports in the near-term.
Achieving export growth and diversification can play a critical role to supporting overall economic
growth and employment generation. Non-oil export growth is also important in light of the external
sustainability risks of depending on exhaustible petroleum exports. Expanding output for local
consumption is also a priority and could help support higher growth and employment generation and
reduce dependence on imports. The DTIS complements other studies on domestic trade, and it does
not prioritize one over the other. Policy actions to expand exports will impact positively on domestic
trade. Timor-Leste faces the challenge of having to mostly create a non-oil export sector (and its
supporting institutions), rather than reviving one that is stagnant or destroyed because of conflict. The
context is quite unique even when compared to similar small-island or post-conflict countries.
2
World Bank, “A 2009 Update of Poverty Incidence in Timor-Leste using the Survey-to-Survey Imputation Method,”(World
Bank, 17 September, 2010)
2
6. The DTIS recommends ways to achieve short-term results whilst also providing a first
step to developing a longer-term trade strategy. The latter can potentially be implemented through
Tier 1 and Tier 2 projects under the Integrated Framework (IF). The DTIS was led by the World
Bank at the request of the GOTL. The study is based on two missions conducted in November 2009
and January 2010. It builds on the existing work and close consultations with government
counterparts, development partners, private sector, and civil society. Data limitations have
constrained some of the analyses. The draft final DTIS was presented in Dili at a series of thematic
workshops on 14-16 October 2010 at the World Bank; a National Validation Workshop on 19 October
2010; and an International Investment Conference on 21-22 October 2010 hosted by the Government.
7. The DTIS covers five main sections. Section I looks at the key drivers of economic growth,
trends in poverty, and macroeconomic policies as they relate to trade and external competitiveness. It
then analyzes the patterns of Timor-Leste’s international trade and its trade policy regime. Section II
of the DTIS analyzes the export potential in the agriculture sector. Section III analyzes how structural
issues pertaining to factor inputs and the business environment impact on the export sector, and it
recommends possible measures to help improve productivity and reduce costs. Section IV examines
the major transport and trade facilitation issues. Section V presents the implementation arrangements
for the DTIS.
3
CHAPTER 2: ECONOMIC PERFORMANCE, POVERTY, AND
MACROECONOMIC MANAGEMENT
A. DRIVERS OF ECONOMIC GROWTH
1. Timor-Leste has traditionally been an agricultural society with the public sector as the
main driver of economic activity. Even before Independence, over 50 percent of Timor-Leste’s
GDP was derived from agriculture and government services. Aggregate demand was driven by the
large provincial administration and public sector capital projects. Modern industrial activity was less
than 8 percent of non-oil GDP.3 Coffee was and remains the main non-oil export, though dependence
has increased as other exports such as sandalwood have declined.4 Timor was dependent on transfers
from Indonesia before 1999 and from Portugal before 1975 to finance its fiscal and external deficits.
2. Economic performance from Independence until the break out of violent clashes in Dili
in 2006 was mixed and dependent in large part on changes in international presence. The vote
for independence in 1999 was followed by widespread carnage and destruction. Seventy percent of
the country’s infrastructure was destroyed and the economy contracted by over 30 percent. The
economy started to recover in the following two years with increased agricultural output,
reconstruction activity, and consumption related to the growing international presence. Economic
activity, however, was (and remains) largely concentrated in Dili. It is estimated that 65 percent of
jobs created by the United Nations (UN) and half of non-oil GDP before 2005 were generated in the
capital.5 The 2004 census estimates that the population of Dili increased from 100,715 people in 1999
to 173,541 in 2004.6 The 2010 census and Labor Force Survey show that the population and
employment activity have further concentrated in Dili.7 By 2006, economic opportunities had
declined significantly, in part due to the scaling back of UN activities since 2004, exacerbated by
relatively low public spending in economic sectors since Independence. The number of unemployed
youth had increased.
3. Since 2004/05, Timor-Leste has gone from aid dependence to a rapid build-up of
domestic resources with oil and gas receipts coming on stream. After contracting in 2006 (- 5.8
percent), the economy started to recover with annual growth averaging around 11 percent between
2007 and 2009. This was driven by rapidly rising government expenditure and the relatively large
remaining international donor and security presence (Figure 2.1). Data on economic output is limited,
but indications are that demand is fuelled by increased private consumption and public investment in
infrastructure.
4. Private investment on the other hand is low, as are formal employment opportunities.
The agriculture sector over the past seven years has on average accounted for around 30 percent of
non-oil GDP (Figure 2.2). In industry and services, there has been quite rapid growth in private
construction, wholesale and retail trade, hospitality services, and transport and communications
(Figure 2.3).
3
World Bank, East Timor: Policy Challenges for a New Nation, Country Economic Memorandum (World Bank, 28 May
2002) paragraph 2.1.
4
The share of coffee in total exports has increased from between 58 percent and 82 percent (according to Fortuna (1971)
210, as quoted in World Bank, East Timor 3) to over 95 percent post-Independence.
5
M. Carnahan, et al., Economic Impact of Peacekeeping: Interim Report Phase I (UN Department of Peacekeeping
Operations, 2005).
6
Ben Moxham, State-Making and the Post-Conflict City: Integration in Dili, Disintegration in Timor-Leste, Crisis States
Working Papers Series No.2. (London: Feb 2008) 13.
7
National Statistics Directorate and SEFOPE, “Timor-Leste Labour Force Survey 2010,” (2010), and National Statistics
Directorate and UNFPA, “Timor-Leste Population and Housing Census 2010, Preliminary Results” (2010)
4
Figure 2.1: Real Non-Oil GDP by Sector (% change)
40
30
20
10
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-10 Est
-20
Agriculture, forestry, and fishery Industry and Services Public Sector
Source: IMF, Democratic Republic of Timor-Leste: Selected Issues and Statistical Appendix (IMF, Jun 2008)
5. As expected with post-conflict economic reconstruction, most of the expansion has been
in the non-tradable sectors. This has been driven by temporary inflows that tend to concentrate
economic activity geographically and sector-wise. As a result, tradable sectors like manufacturing
and agriculture have had relatively less investment, though they will benefit from the rehabilitation of
critical infrastructure and utility services over the medium to long-run. In addition, private sector
growth and investment in the near-term remains constrained by a cycle of low skills, productivity, and
competitiveness. Although the official unemployment rate was below 4 percent in 2010,8 more than
half of the population aged fifteen and over are classified as inactive. The formal private sector
employs only a small portion of the total labor force, which is expanding rapidly with around15,000
youth entering the labor force each year.
Figure 2.2: Composition of Non-Oil GDP (excluding UN) Figure 2.3: Composition of Industry and Services
100% 100%
90% 90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40% 30%
30% 20%
20% 10%
10% 0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0% Est Proj
Mining & quarrying (non-oil) Manufacturing
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Private construction Transport & communications
Agriculture, forestry, and fishery Industry and Services Public Sector Wholesale & retail trade Financial & other services
Source: IMF 2008 Source: IMF 2008
8
National Statistics Directorate and SEFOPE, “Timor-Leste Labour Force Survey 2010,” (2010).
5
B. MACROECONOMIC MANAGEMENT AND COMPETITIVENESS
6. Timor-Leste is a small open economy, where the macroeconomic environment has been
bolstered by rapidly rising petroleum revenue since 2004. If we leave aside the oil and gas sector,
however, external linkages through trade, investment, and financial markets are small. The country
has therefore been sheltered from the impact of the most recent global economic crisis. A prudent
policy for managing petroleum revenue has contributed to fiscal and external surpluses, the
accumulation of petroleum savings, and an important buffer against potential shocks.
7. Timor-Leste in 2005 established a Petroleum Fund (PF), which provides an important
instrument for ensuring transparency and accountability in petroleum revenue management.
All tax and royalty receipts from petroleum projects are paid into the PF. Withdrawals from the PF
are channeled through the national budget and annual withdrawals are guided by Estimated
Sustainable Income (ESI), which is the sustainable interest income from petroleum wealth.9 Using
ESI to inform annual fiscal envelopes helps to promote sustainable financing of the budget. But the
ESI framework needs to be complemented by careful expenditure planning. ESI is vulnerable to oil
price volatility, and it is important that this does not feed into the level of government spending.
Annual petroleum receipts have jumped from $140 million in 2004 to $1.66 billion in 2009 after
peaking at $2.2 billion in 2008 following the surge in oil prices (Figure 2.4). PF assets reached over
$7 billion by the first quarter of 2011 (see Figure 2.5 for PF assets from 2006-2009). Prudent
investment policies have protected Timor-Leste’s PF from the global economic crisis.
Figure 2.4: Annual PF Receipts ($ million) Figure 2.5: PF Net Assets and Withdrawals ($ ‘000)
2500 6000000
5000000
2000
4000000
1500
3000000
1000 2000000
1000000
500
0
0 2006 2007 2008 2009
2004 2005 2006 2007 2008 2009
-1000000
Taxes Royalties and profit oil Interest (net of management fee) Net Assets Transfers to State Budget
Source: Banking and Payments Authority
8. Since 2006/07 fiscal expansion has picked up pace rapidly, reflecting pressing needs and
the GOTL’s objectives of promoting social stability and growth. Government expenditures rose
from 32 percent of non-oil GDP in 2006 to over 100 percent in 2009 and 2010 (Figure 2.6). Budget
execution has increased significantly from 49 percent in 2006 to 80 percent in 2008 (Figure 2.7).
Annual government spending has gone from $180 million in 2006/07 to around $748 million in 2010
due to rapid growth in public transfers and infrastructure spending, which played a critical role in
promoting short-term stability and economic recovery. Withdrawals from the PF in 2009 and 2010
exceeded ESI.
9
ESI is calculated as 3% of petroleum wealth (assumed real rate of return), which is PF savings plus the net present value of
projected future receipts. Withdrawing up to ESI is expected to maintain the value of petroleum wealth constant in real terms
and is the amount that can be spent in perpetuity.
6
9. The government had indicated its intention to moderate spending growth in 2009-10 but
fiscal policy continues to be highly expansionary in response to development needs. Planned
spending in the 2011 budget is around 70 percent higher than actual spending in 2010. The
government is gradually strengthening non-petroleum receipts through increased compliance in tax
payments. This is critical given low non-oil revenue collection at around 11 percent of non-oil GDP.
Whilst this is not an issue in the short-term, a substantial non-oil fiscal deficit, which has increased
from 46 percent of non-oil GDP in 2007 to over 100 percent in recent years, may pose risks to future
sustainability. In particular, it may mean less flexibility for adjustments in the future given the
increase in non-discretionary spending such as: the wage bill (around 50 percent more than domestic
non-oil revenue); contingent liabilities including civil service pensions; and recurrent demands of
rising infrastructure spending.
Figure 2.6: Fiscal Trends (% of non-oil GDP) Figure 2.7: Budget Execution (% of budget)
700
100
600
500
50
400
300
0
2004 2005 2006 2007 2008 2009 200
Proj
100
-50
0
Budg Act Budg Act Budg Act Budg Act
-100 2006-07 2007 H2 2008 2009
Non-oil revenues CG expenditures Non-oil balance Non-petr. rev Rec expend Cap expend
Source: Staff estimates Source: Staff estimates
10. Inflation in Timor-Leste since Independence has been relatively low and largely
determined by external developments. Headline inflation rose to 8 percent in the year to December
2010. This was largely driven by the rise in international commodity prices. Food prices in Timor-
Leste rose by over 10 percent in the year to December 2010. The rise in fuel prices have contributed
to increased transportation costs (6 percent in the year to December 2010). Aside from exogenous
factors, however, rapid fiscal expansion including infrastructure spending is starting to put pressure on
domestic supply networks, which is contributing to increased costs in the construction sector.
Figure 2.8: Inflation (12-month % change) Figure 2.9: Nominal and REER (2001=100)
15.0 105.0
13.0 100.0
11.0 95.0
9.0 90.0
7.0 85.0
5.0 80.0
3.0 75.0
1.0 70.0
-1.0 65.0
Jun-04 Feb-05 Oct-05 Jun-06 Feb-07 Oct-07 Jun-08 Feb-09 Oct-09
-3.0 60.0
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
-5.0
Total Non-Food Food NEER 100.0 REER 100.0
Source: National Directorate of Statistics, Ministry of Finance Source: Banking and Payments Authority
7
11. Timor-Leste’s real effective exchange rate (REER) has fallen relative to Australia and
Indonesia since Independence.10 A falling REER means that the cost of purchasing goods and
services in Timor-Leste is declining compared to other countries, which in turn should impact
positively on the demand for exports.11 The REER depreciation was largely due to an appreciation of
the Australian Dollar against the US Dollar and lower inflation in Timor-Leste relative to Indonesia.12
REER appreciated sharply from mid-2008 to the first quarter of 2009 due to the appreciation of the
US Dollar but then fell back down to its original level in the second half of 2009. Although, in the
short-term, exports are constrained by other structural factors and supply side constraints as discussed
below (factor inputs and the business environment), it is critical that structural reforms are
complemented by a sound exchange rate policy and policies to maintain low inflation.
12. Adopting the US Dollar as its official currency in January 2000 has anchored Timor-
Leste’s economy to monetary policy in the US and helped to control inflation. It has also helped
to keep the real exchange rate under control in the face of a windfall in petroleum receipts. Under
these circumstances, an independent currency would put upward pressure on the nominal exchange
rate and on the relative prices of non-traded goods. This can have two effects: (i) increased
investments in the non-tradable sector at the expense of the tradable sector; and (ii) an appreciation in
the real exchange rate. This would exacerbate the negative impact on incentives to invest in the
existing export sector and in export diversification and therefore risk further impeding the growth of
the non-oil tradable sector in Timor-Leste.13
13. There is therefore no clear case for moving away from official dollarization in the short-
term, particularly given the increased dependence on the oil and gas sector. International
petroleum prices are quoted in US Dollars. Official dollarization helps to eliminate exchange rate
fluctuations as a source of volatility for oil revenues. An independent currency would likely need a
peg to establish credibility and manage inflation. This would be costly given Timor-Leste’s large
trade deficit. Capacity to implement prudent monetary policy is weak given that this is a new area.
An independent monetary and exchange rate policy would divert limited capacity away from other
priorities. Finally, even if Timor-Leste were to have an independent monetary policy, it is not clear
that it would reap the intended benefits because of other binding constraints to foreign investment and
export growth.
14. Sound policies have therefore helped to control inflation and REER, though this was set
against a high base level of prices and wages. This is because inflation in 1999 reached 140 percent
following supply disruptions and the influx of around 15,000 expatriates. This was an inevitable
situation because of the external support required to reestablish stability and start the reconstruction
process. Aggregate demand surged, which put a major premium in particular on the limited supply of
skilled Timorese. There was no downward adjustment in prices and wages after the scaling back of
international presence in 2004, which led to an increase in unemployment. Demand after 2006/07
picked up as a result of the partial return of international support and rapid fiscal expansion. This has
helped to shore up the price of non-traded goods and services (e.g. construction, hospitality services),
which is not unexpected when a country is going through massive reconstruction and rehabilitation.
As discussed earlier, this also means that there is relatively more investment in these areas compared
to the tradable sector.
10
REER is a weighted average of the nominal exchange rates of trading partners. Weights are based on the trade shares.
REER adjusts for inflation differentials with the countries whose currencies are included in the basket.
11
The nominal exchange rate here is the foreign currency price of domestic currency as used by the IMF (i.e. amount of
foreign currency that can be bought for one dollar), rather than the domestic currency price of foreign currency (i.e. amount
of dollars that can be bought for one unit of a foreign currency). Therefore, when computing REER, a decline means
‘depreciation’ of REER.
12
Tobias Ramussen, “Inflation and Competitiveness,” 2008 Article IV Consultation – Staff Report (IMF, 2008).
13
Through adoption of the US Dollar and control of inflation, Timor-Leste has not explicitly faced a Dutch Disease problem.
8
15. It is therefore important that ongoing efforts to control inflation are complemented by
fiscal policy that helps to increase productivity and competitiveness in the economy. This should
help to incentivize the private sector to diversify its investments. This will require careful
prioritization of government spending with adequate attention to quality so as to prevent diminishing
returns on growth and poverty reduction impacts. Continued investments in skills development,
critical infrastructure, and structural reforms, such as liberalization of telecommunications, will be
important for promoting productivity and competitiveness.
16. It is clear that government spending in the short-term is likely to be high, though this
will need to be aligned with absorptive capacity. Government spending will be critical to address
multiple challenges: massive deficits in public service delivery; social stability concerns; poor
infrastructure; and a nascent private sector. But fiscal expansion could create supply bottlenecks and
put upward pressure on prices in light of absorptive capacity constraints. These pressures are
contained to some extent by the import-intensity of government spending. But imports are also
dependent on domestic supply networks, which are facing increased pressures due to growing
demand.
17. In addition to its potential impact on productivity and competitiveness, fiscal policy is
also one of the main determinants of external sustainability. Timor-Leste’s external balances are
supported by petroleum receipts. In 2009, the current account surplus is estimated at 191 percent of
non-oil GDP.14 To maintain external sustainability, the government should keep spending on a
sustainable path, thereby managing the demand for imports and helping to control inflation and avoid
sustained REER appreciation. In this regard, the government’s current policy of saving the majority
of petroleum receipts in the PF will continue to provide an important buffer against external shocks.
Figure 2.10: Current Account Sustainability (% of non-oil GDP)
600
Current Account Sustainability: Baseline Scenario
500 (In percent of non-oil GDP)
400 Projections
300
200 Sustainable current account
balance
100
0 Actual current account
balance
-100
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: IMF 2009
18. An added consideration to external sustainability is the government’s plan to access
external credit. Timor-Leste currently has no external debt. However, the government has indicated
its intention to borrow to finance infrastructure projects. An updated Law on Budget and Financial
Management, approved by Parliament in November 2009, provides the legal basis for borrowing.
Government borrowing may make sense as an alternative to PF draw downs if foreign loans are on
concessional terms, include technical assistance (TA), and support sound projects.
14
IMF, Democratic Republic of Timor-Leste: 2009 Article IV Consultation–Staff Report (IMF, Jul 2009).
9
19. Debt management capacity and strategy would need to be built from scratch to assess all
terms and conditions and ensure proper coordination with macroeconomic policies.15 This is
critical to avoid risks of debt distress, particularly for small island countries like Timor-Leste.
Government expenditure in small states as a proportion of total economic activity is often larger
compared to bigger countries where the public sector benefits from economies of scale. This can also
be due to factors that are outside of government control, for example:16 (i) remoteness and lack of
external linkages, which lead to governments playing a bigger role in the economy and incurring
much higher unit costs for the delivery of social and infrastructure services; and (ii) lack of
diversification and vulnerability to shocks, leading to greater recourse to counter-cyclical spending.
These factors reinforce the need for thorough fiscal analysis that assesses the trade-offs of different
budget financing options and gives due attention to prioritization and quality of spending. Otherwise
pro-cyclical spending in a weak capacity environment could not only erode the real value of
petroleum wealth and future ESI but also increase recourse to external debt to respond to short-term
shocks.
C. CONCLUSION
20. The implementation of sound policies to date have helped to maintain macroeconomic
stability and contributed to external competitiveness. Fiscal policy has expanded rapidly to meet
pressing needs. This was facilitated by the rapid surge in petroleum receipts. The GOTL’s quick and
decisive responses have contributed to a marked improvement in security and economic recovery
from a very fragile post-conflict situation in 2006/07. Also, the policy of official dollarization has
helped to contain inflationary pressures.
21. The main challenge going forward is to effectively use fiscal policy to promote
productivity, competitiveness, and diversification in the non-oil economy. Continued adherence
to the principles of the PF will maintain transparency and accountability. This has to be
complemented by careful expenditure planning to promote discipline, prioritization, and quality. This
should provide the basis for assessing trade-offs between different budgetary financing options and
ensuring sustainability by avoiding the depletion of the PF or a situation of debt distress.
Macroeconomic policies aimed at promoting productivity and competitiveness in non-oil sectors are
critical. Unless these are tackled early, there are risks of sharp economic adjustments once these
resources are depleted (or the international presence has scaled back) because the economy is not able
to support its prior over-reliance on off-shore oil and gas.
15
World Bank, Debt Sustainability Analysis in Oil-Rich Developing Countries, PRMED Note (PREM Anchor, Jul 2005).
16
Stephanie Medina Cas and Rui Ota, “Big Government, High Debt, and Fiscal Adjustment in Small States,” IMF Working
Papers, WP/08/39 (Feb 2008).
10
CHAPTER 3: INTERNATIONAL TRADE PATTERN AND TRADE
POLICY REGIME
A. TRENDS IN TIMOR-LESTE’S FOREIGN TRADE
1. One of the objectives of this chapter is to provide background information and baseline data
on Timor-Leste’s foreign trade structure and its recent pattern. It will highlight Timor-Leste’s very
limited trade integration on the export side. This information and some cross-country comparisons of
trade performance of other small island economies will shed light on the scope of additional growth-
enhancing trade integration that could be achieved by tackling the key constraints to export
competitiveness. This chapter also assesses Timor-Leste’s trade policy regime with view to showing
that it is not a constraint to competitiveness. In addition, it examines the institutional aspects of trade
policy making, particularly in the area of policy coordination. In the last section, the government’s
high priority objective of accession to the Association of Southeast Asian Nations (ASEAN) is
examined with a focus on the key accession requirements that Timor-Leste needs to meet, and the
appropriate timing of Timor-Leste’s World Trade Organization (WTO) accession.
Exports, Imports, and Developments in International Trade Pattern
2. Timor-Leste’s commodity trade structure since the early part of the current decade
reflects the country’s current stage of development. The economy consists of a sizable subsistence
agriculture sector (about 30 percent of GDP), the construction sector (10-12 percent of GDP), a fairly
underdeveloped small-scale manufacturing sector (about 4 percent of GDP), and, as expected, a large
services sector (56 percent of GDP) dominated by the public sector.
Exports
3. This economic structure translates into a very narrow export base and an import
composition that is highly diversified in all major categories of imports. The principal (non-oil)
merchandise export item is green coffee (see Chapter 4 for details on the coffee subsector). Since
2004, the share of coffee in total merchandise exports fluctuated in the range of 86 to 99 percent
(Table 3.1). The remainder has included small quantities of vanilla, hardwood, candlenut, candlenut
oil, cattle, and handicraft exports.17
Table 3.1: Timor-Leste’s Merchandise Exports, 2004-2008
2004 2005 2006 2007 2008
(In millions of U.S. dollars)
/a /b
Merchandise Exports (fob): /* 7.8 8.1 9.0 7.0 12.7
Of which: Coffee 6.9 7.6 8.6 6.0 12.6
Other /** 1.0 0.5 0.4 1.0 0.1
Memo item:
Re-exports /1 98.0 36.2 52.2 na 36.5
1. Sources: The Timor-Leste authorities; IMF 2009, Table 5, 29.
2./a /b: Trade data for June-July 2006, February-March 2007, and August-December 2007 were not recorded (not even in the partners'
data). It is not known to what extent figures for these months of the relevant years were included in the subsequent months. Estimates of
export figures for 2006 and 2007 are taken from the IMF's 2009 Article IV Staff Report.
3. '/*: These figures exclude oil and gas receipts. The latter are recorded in the BOP under the income account. This is due to the lack of
detailed data on the oil and gas sector's production, trade, and service activities.
4. '/**: Includes small amounts of vanilla, hardwood, and some handicraft exports. Unrecorded informal exports of cattle to West Timor
(Indonesia) are taking place—a figure of 3000 head per year has been mentioned to the mission.
5.'/1: Re-exports include repatriated UN peace-keeping equipment, expatriate cars, and other durables.
17
For further details on exports, also see: IBM 29-30.
11
4. Timor-Leste’s domestic production structure is very narrow and, more importantly, it is
not competitive yet to achieve export growth and diversification. However, with the help of
sizable development assistance since the beginning of the current decade and petroleum receipts since
2004/05, economic activity is continuing to pick up (see Chapter 2 on macroeconomic performance).
The ongoing efforts (albeit slowly) aimed at improving the quality of business environment,
infrastructure upgrading, and human resources development should foster domestic and foreign
investment and help diversify Timor-Leste’s production base.
5. Some success in export growth and diversification is possible in the near-term without
waiting for the longer-term structural reforms to address all the key constraints to private
activity. Support programs that are designed to address some of the cross-cutting constraints in
targeted areas are already creating production responses and export potential. In the area of cash
crops in agriculture, coffee is such an example. With support from USAID, the Cooperativa Café
Timor (CCT) was established in 1994 with a view to helping farmers export their organic, quality
green coffee beans. By providing technical support, access to some credit and equipment, and
marketing services (collecting coffee from the farm gates, processing, and exporting), the CCT has
basically been addressing some of the key constraints facing poor farmers, including access to credit
and filling the agglomeration and skills gaps.18
6. From the outset, the strategy has been to target the organic coffee niche markets with the
involvement of Starbucks. The strategy has worked in attracting higher unit prices for better quality
green coffee beans. What is also important is that today coffee production, stimulated by exports,
provides livelihood to one quarter of farming families in rural Timor-Leste. Close to 22,000 members
of the cooperative are directly involved in organic coffee growing, plus indirect employment is being
created through backward and forward linkages.19 Expanding such focused efforts targeted at the
development of crops with export potential could have significant payoff in the near-term in terms of
export growth and diversification, employment generation, and poverty alleviation. Today, in
addition to the CCT, there are three private firms that also buy coffee cherries directly from the
farmers, process them, and export green coffee beans. For the whole economy, coffee is now a source
of livelihood for around 67,000 households, representing approximately 30 percent of the
population.20
7. Recent studies and interviews with traders indicate that there is significant scope for
increasing coffee yields and exports, and a similarly positive export outlook appears to exist for
several other agricultural products, some of which are already being exported. Using value
chain analysis (VCA), Chapters 4 and 5 (in Section II) provide more detailed analyses of
output/export growth potential of coffee and several agricultural products with export potential,
including mungbeans, cattle, and horticulture products. By way of proxy, the findings of these value
chain analyses will help identify some of the most critical constraints to export competitiveness of
other potential agriculture-based exportable products. In addition to these products, there are other
agricultural products that are already being exported. For example, a niche export market strategy is
being pursued for vanilla products through the organic production and certification approach. Cocoa
and cashew nuts are other cash crops which likely have export potential. If an early effort is made to
develop a credible sanitary and phytosanitary standards (SPS) capacity, export potential could be
created in other high value-added horticulture products, including fresh vegetables and fruits to
neighboring countries (details are discussed in Chapters 5 and 6).
18
Agglomeration of certain activities/services in one area or a center provides economies of scale and cuts business costs in
the provision of certain essential inputs, access to markets, retail/wholesale trading, and exporting. The CCT is providing
some of these advantages with a large number of coffee farmers as its members (see Chapters 4).
19
IBM 17.
20
MAFF, Directorates of Livestock and Agribusiness, Commodity Profile Series: No. 4 Version 1 – Cattle (Dili: MAFF, Feb
2008).
12
8. In the medium and long-term, the development of commercial fisheries and the tourism
sector could offer significant export potential with considerable employment generating
linkages to other activities. Assessment of these activities will not be carried out in this study since
the focus of the DTIS is on near-term opportunities.
9. The exclusion of oil and gas export proceeds from Timor-Leste’s merchandise export
figures, while dictated by the lack of detailed data, is perhaps preferable from the perspective of
strategic policy making. Merchandise export figures given in Table 3.1 above do not include oil and
gas exports from the Bayu Undan field in the Timor Sea. The main reason is the lack of detailed data
on the oil and gas sector’s production, trade, and service activities.21 Oil and gas exploration,
extraction, and export activities are carried out by an international consortium in the non-disputed
waters off the southern coast of Timor-Leste. Exporting from the latter field started in 2004, and
since then proceeds from oil and gas exports received by Timor-Leste has been steadily increasing in
tandem with the increases in international oil and gas prices and in export volumes. In 2008, the oil
and gas receipts reached $2,284 million (or 458 percent of non-oil GDP) —see Timor-Leste’s balance
of payments (BOP) presented in Statistical Appendix 1. In the current presentation, where oil and gas
proceeds (plus interest earnings from the PF) appear as ‘income’ in the BOP’s current account, non-
oil merchandise export figures strikingly demonstrate how narrowly-based, small, and slow growing
Timor-Leste’s non-oil exports are.
Table 3.2: Non-Oil Merchandise Exports by Country of Destination, 2004-2008
2004 2005 2006 2007 2008
(% share in Timor-Leste's exports) Average
Destination Countries: Shares /1
Australia 16.2 5.5 3.6 na 2.1 6.8
Germany 5.6 20.7 24.2 na 26.7 19.3
Indonesia 16.2 5.0 13.1 na 16.7 12.8
Portugal 7.5 12.0 2.1 na 4.5 6.5
Singapore 2.1 1.1 6.3 na 11.1 5.2
United States 45.4 49.1 40.4 na 26.6 40.4
Other 7.0 6.6 10.3 na 12.3 9.1
Total 100.0 100.0 100.0 100.0 100.0
Sources: The Timor-Leste authorities; IMF 2009, Table 5, 29.
'/ 1: Average of 2004, 2005, 2006, and 2008.
10. With respect to the direction of Timor-Leste’s non-oil merchandise exports, the US,
Germany, and Indonesia are the major destination markets for Timor-Leste’s exports (Table
3.2). In terms of four-year averages, the US appears to be the principal export market, followed by
Germany and Indonesia. In terms of regional shares, the European Union (EU) share in Timor-
Leste’s exports amounts to around 26 percent (when only Germany and Portugal are included), and
the ASEAN share is about 18 percent (Indonesia and Singapore).
11. Since the early years of the current decade, proceeds from Timor-Leste’s services
exports have significantly exceeded revenues from non-oil merchandise export in recent years
(Table 3.3). To a large measure, this is related to the presence of a large UN Mission and is not a
reflection of long-term trends developing in the economy. During 2006-2008, export of services
fluctuated in the range of $34 million and $63 million, with the receipts coming mainly from exports
of travel services (40 to 59 percent) as well as from ‘other services,’ including government services.22
The hotels and restaurants in Dili are generating exports of services for the international community
as well as for occasional tourists and businessmen. Exports of ‘transportation’ services have remained
below $1.0 million, which is not surprising given the small size of the transportation sector.
21
IMF 2009.
22
Source: Table 3.3; BPA.
13
12. In the medium and long-term, as the tourism sector develops, revenues from exports of
tourism services could potentially dominate all other non-oil exports. As noted earlier, an
assessment of Timor-Leste’s tourism potential is not within the scope of this study. However, this
DTIS recommends that a tourism study be carried out to analyze the country’s prospects for
developing a viable tourism sector, perhaps with a focus on niche tourism in the medium-term and
then a more diversified tourism activity in the long-term. Such a study also needs to cover the
enabling and environmentally responsible legal and regulatory framework for the sector.
Table 3.3: Trade in Goods and Services, Current and Trade Account Balances, 2004-2008
2004 2005 2006 2007 2008
(In millions of U.S. dollars)
Current Account (including international assistance) 64 260 540 1,177 2,021
Trade Balance: /a -115 -104 -91 -169 -339
Exports of goods /b 8 8 9 7 14
Of which: coffee 7 8 9 6 12
Imports of goods 122 112 101 176 353
Services (net): -187 -131 -199 -263 -407
Exports 47 37 34 63 61
Of which: Travel 19 21 20 26 25
Imports 234 168 233 325 468
Of which: UN and donor-related 201 137 204 286 369
Income (net) 151 363 645 1,331 2,415
Of which: Oil and gas receipts and interest 141 354 637 1,312 2,399
Current Transfers (net) 215 133 185 278 351
Of which: International assistance 215 133 184 281 355
(In percent of non-oil GDP)
Current Account 21 78 165 296 405
Trade balance -37 -31 -28 -43 -68
Services (net) -60 -39 -61 -66 -81
Income (net) 49 109 197 335 484
Current transfers 70 40 57 70 70
(In millions of U.S. dollars)
Memorandum items:
Non-oil GDP at current prices 309 332 327 398 499
Source: IMF 2009, Table 5, 29.
/a: With respect to merchandise import figures for years 2006 and 2007, there are differences between Timor-Leste’s recorded customs data
on imports and the IMF’s BOP import figures for the same years. This is because for some months of 2006 and 2007 import figures were
not entered in the Customs database. The IMF’s BOP data provide estimates of merchandise imports for 2006 and 2007.
/b: These merchandise export figures exclude proceeds of oil and gas exports from the Bayu Udan field. This is due to the lack of detailed
production/export data on the oil/gas sector.
13. Market access has not been a major issue for Timor-Leste’s exports to date even though
Timor-Leste is neither a member of the rules-based multilateral trading system governed by the
WTO nor a regional preferential trading arrangement such as the ASEAN. Developed and
major developing members of the WTO grant ‘most-favored-nation’ (MFN) treatment to the non-
member LDCs (least developed countries). In addition to such non-discriminatory tariff treatment of
their exports, LDCs are granted preferences for their exports from the major trading nations whether
or not they are members of the WTO or of any regional preferential trading arrangement (PTA). Such
preferential programs usually provide for duty-free and quota-free access for exports of LDCs —e.g.
the EU’s ‘Everything-But-Arms’ (EBA) program and the generalized system of preferences (GSPs)
granted by the US, Australia, Canada, New Zealand, and other developed and some of the emerging
economies. However, to benefit from such preferences, exports of LDCs usually must satisfy the
14
‘rules of origin’ (ROO) requirements23 of the importing countries as well as their stringent SPS
standards.
14. Being a LDC, Timor-Leste receives and will continue to receive preferential tariff
treatment from the EU, the US, Australia, and many of her other major trading partners under
various bilateral and regional preferences. Table 3.4 lists import tariffs facing Timor-Leste’s
coffee and propane gas and liquefied butane exports from the Bayu Undan field. Regarding coffee,
most destination countries have zero tariffs, and among the major trading partners, only Indonesia has
3 percent tariff, which is not very high.
15. Looking ahead, the most critical market access issue that Timor-Leste’s exports of
agricultural products and livestock will face is the animal, plant, and food safety (i.e. SPS)
standards of the importing countries. At present, Timor-Leste’s coffee and candlenut oil exports
receive their SPS certification in Singapore before they are shipped to their export destinations. The
Indonesian Government recently informed the GOTL that a SPS system must soon be in place if
Timor-Leste wants to continue exporting agricultural products to Indonesia (Chapter 6 below
discusses this critical ‘market access’ issue facing Timor-Leste’s agricultural and livestock exports).
Table 3.4: Import Duties in the External Markets Facing Timor-Leste’s Major Commodity Exports
Coffee, not roasted (HS 090111) Propane Liquefied (HS 271112) Butanes Liquefied (HS 271113)
Imports AVE Tariff Imports AVE Tariff Imports AVE Tariff
Market ($ '000) (%) ($ '000) (%) ($ '000) (%)
Australia 1,279 0 0 0 0 0
Canada 1,354 0 0 0 0 0
China 59 8 0 5 0 8
Germany 4,165 0 0 0 0 0
Indonesia 2,883 3 0 5 0 5
Japan 202 0 63,574 0 74,701 0
Malaysia 0 0 0 0 0 0
New Zealand 338 0 0 0 0 0
Portugal 606 0 0 0 0 0
Singapore 0 0 0 0 0 0
United States 0 0 0 0 0 0
Vietnam 0 30 0 8 0 8
World, total 11,616 63,574 74,701
Note: Based on partners' import data in 2008; ad valorem equivalent (AVE) tariffs are based on 2008/09 where data are available.
Sources: Based on UN COMTRADE Statistics (imports) and ITC/UNCTAD/WTO Market Access Map (tariff data).
Imports
16. Timor-Leste’s imports have dominated the country’s merchandise trade. This is a result
of the need to import a broad range of goods and services and the high import intensity of the
reconstruction efforts launched ten years ago. Low levels of goods exports have financed only 4.0 to
6.6 percent of goods imports (Table 3.3). During 2004-2008, the commodity trade deficit stayed in
the range of 28 to 68 percent of non-oil GDP. In the absence of extra-ordinary financing sources,
such large trade deficits could not have been sustained even for a shorter time period. For Timor-
Leste, relatively large inflows of development assistance—averaging $234 million annually during
2004-2008—and oil and gas receipts (plus interest earnings from the PF) more than offset the trade
deficit, leading to a sizable external current account surplus (see Table 3.3, Figure 3.1, and Statistical
Appendix 1). To a greater degree, the reconstruction activities supported by development assistance
since the early years of the current decade have impacted the level and composition of merchandise
imports (Table 3.5). As the reconstruction activity levels off significantly, the level and composition
of merchandise imports that will emerge will depend on the pace of growth of private and public
23
The ROO requirements of the importing countries refer to the restrictions that exports satisfy a minimum amount of
domestic value-added creation by the exporting countries benefiting from preferential tariffs. This is to prevent re-
exportation of third country products that are not granted preferential treatment.
15
sector activities,24 their changing roles, and also on the movements in international prices and
exchange rates.
Figure 3.1: External Trade Balance, Services Trade, Net Income (Oil &Gas Receipts), and International
Assistance (in % of Non-Oil GDP)
80 600
Current Transfers (Int.Assistance, net),
Oil & Gas Income(% of Non-Oil GDP)
Trade Balance, Services Trade (net),
60
500 Trade Balance
40
in % of Non-Oil GDP
20 400 Services Trade
0 (net)
2004 2005 2006 2007 2008 300
-20 Current
Transfers (net)
-40 200
Oil and Gas
-60
100 Income
-80
-100 0
Source: Statistical Appendix 1
Table 3.5: Timor-Leste’s Merchandise Imports, 2004-2008
Panel I: Composition of Timor-Leste's Imports (values)
2004 2005 2006 2007 2008
(In millions of U.S. dollars)
/a /b
Total Merchandise Imports (fob) 113.7 101.6 101.0 176.0 258.4
Consumer goods 30.5 26.5 na na 73.6
Cereals 8.2 4.7 na na 25.5
Other food products 9.7 9.6 na na 20.3
Beverages, alcohol, tobacco 3.9 3.7 na na 9.4
Clothing, apparel, textile products 1.6 1.8 na na 3.0
Pharmaceuticals 2.7 2.6 na na 8.1
Furniture & related products 1.2 1.3 na na 2.8
Other consumer goods 3.2 2.9 na na 4.5
Raw materials & manufactures 49.5 53.5 na na 99.9
Petroleum products 36.5 35.1 na na 72.3
Wood and paper products 1.8 3.2 na na 3.6
Textiles and fibres 0.1 0.1 na na 0.1
Construction materials 5.4 7.7 na na 12.5
Other raw materials & manufactures 5.7 7.4 na na 11.3
Capital goods 33.3 21.6 na na 85.0
Electrical machinery 9.8 5.5 na na 17.6
Transport equipment 16.2 7.6 na na 45.7
Other equipment 7.3 8.5 na na 21.7
Panel II: Composition Timor-Leste's Imports (% shares)
Consumer goods 26.81 26.11 na na 28.48
Raw materials & manufactures 43.55 52.63 na na 38.64
Capital goods 29.30 21.26 na na 32.88
Total imports (rounded) 100.0 100.0 na na 100.0
Sources: The Timor-Leste authorities; IMF 2009, Table 5, 29.
/a /b: Trade data for June-July 2006, February-March 2007, and August-December 2007 have not
been recorded. It is not known to what extent figures for these months of the relevant years have
been included in the subsequent months. Estimates of imports for 2006 and 2007are taken from the
IMF's 2009 Article IV Staff Report.
24
A portion of budgetary capital spending is partly financed by the transfers from the PF to the budget.
16
17. During 2004-2008, continued reconstruction of physical infrastructure, buildings, roads,
and bridges led to significant imports of construction materials and other raw materials and
manufactures, including petroleum products (Table 3.5). All of these accounted for 37 to 53
percent of Timor-Leste’s total merchandise imports. Capital goods (transport equipment, electrical
machinery, and other equipment) averaged for about 28 percent of imports while consumer goods
accounted for about 27 percent of total merchandise imports.
18. Not surprisingly, given the volume of reconstruction activities and the presence of the
UN in various capacities, the level of Timor-Leste’s services import has remained relatively
large. Increasing from $234 million in 2004 to $468 million in 2008. Imports of services stayed at
levels well in excess of merchandise imports in current US dollars terms during 2004-2008 (Table
3.3). This trend is unlikely to continue as imports of reconstruction material and of advisory support
services decrease.
Figure 3.2: Imports by Country of Origin (in % Shares of Total Merchandise Imports)
% Share in Timor-Leste's Goods Imports
80 Series1
69.2
70
60 Series2
47.4
50
40 Series3
30
15.1 15.0 Series4
20 11.1
5.4
10 4.6 1.4
0
Series 1: 2004 Series 2: 2005 Series 3: 2008 Series 4: Simple Average of Three Years
19. Proximity and traditional trade ties have made Indonesia the principal source of Timor-
Leste’s imports (Figure 3.2 and Statistical Appendix 2). Indonesia’s share in Timor-Leste’s total
merchandise imports averaged over 47 percent in recent years.25 Australia and Singapore are the next
important sources for Timor-Leste’s imports. Four larger members of the ASEAN —Indonesia,
Singapore, Thailand, and Vietnam—account for more than two-thirds of Timor-Leste’ imports26 (see
Statistical Appendix 2).
20. There are several data issues with the reliability of Timor-Leste’s recorded trade
figures. First, until the full adoption of the internationally used ‘Harmonized System’ (HS) of trade
data classification and coding in 2004, trade data collection and recording was not systematic,27 using
a classification system that did not conform with internationally used trade coding system. Recording
of the data on actual trade flows and tabulation were also incomplete. It is widely acknowledged that
until 2004 recorded import figures underestimated actual imports by a significant margin due to
underreporting. Also, informal/illegal imports of food items and beverages through the land-based
border with Indonesia and through Timor-Leste’s exclave Oecussi28 were taking place. Aside from
the traditional trade patterns with Indonesia, the incentives created by subsidized Indonesian rice and
other food items and Timor-Leste’s import taxes (including high excises on beverages) must have led
25
Over three years —2004, 2005, and 2008— for which data were available.
26
Out of a total of ten members
27
IBM 26-27.
28
Oecussi, which lacks an effective customs, is in the northern coast of West Timor, which is an Indonesian territory.
17
to considerable amounts of smuggled food imports29 in the first half of the last decade. But with the
introduction of a sizable rice subsidy by the GOTL in 2008, the direction of informal rice trade
through the land-border with Indonesia might have changed.
21. These problems with the official trade statistics do not appear to have ended with the
introduction, in 2003, of the widely used UNCTAD program of recording merchandise trade,
referred to as ‘Automated System for Customs Data’ (ASYCUDA).30 For example, in 2006, trade
data for June and July were not entered in the ASYCUDA. Again, in 2007, merchandise trade data
for February and March and August through December were not entered.31 This is due to a major fire
in the customs service, which destroyed records and infrastructure. Chapter 10 on ‘Transport and
Trade Facilitation’ below assesses the issues faced at Timor-Leste’s customs both in the clearance of
imports and in data entry/processing and makes recommendations on addressing these.
Timor-Leste’s Integration into the Global Economy: A Cross-Country Comparison
22. As elaborated above, Timor-Leste’s trade integration is heavily skewed to the import
side, and there is very limited trade integration on the export side. If we abstract from the
reconstruction-related imports, which do not necessarily reflect the economy’s underlying long-term
structural trends in external trade activities, and leave aside the oil and gas sector, Timor-Leste is not
deeply integrated with global markets. This is as expected since Timor-Leste is in the very early
stages of her economic development. Consequently, the economy is not yet well integrated into the
international markets, especially on the export side.
23. Despite the disadvantages of not being able to benefit from scale economies, small island
economies could achieve strong trade integration and growth performance. Such favorable
economic performance would be stimulated by sustained improvements in the key dimensions of the
investment environment, including in political stability; sound macroeconomic management; enabling
commercial laws and regulations; protection of private property; availability of skilled labor,
infrastructure services, and credit; and an effective law and order situation.
24. Fiji, Mauritius, and Seychelles provide examples of good economic performance stimulated
by the establishment of a competitive investment environment. These countries have achieved strong
trade integration and considerable growth in per capita incomes. They have attracted relatively large
amounts of foreign direct investment (FDI), which have in turn contributed to enhanced export growth
and diversification. In the case of the Maldives, a fairly liberal expatriate labor policy to fill the
serious skills gap,32 leasing of some islands for tourism within the framework of a phased program of
resort development, increased access to bank credit, and borrowing from the international tour
operators by the local/joint venture investors in the tourism sector have contributed to the growth of
the country’s tourism sector and steadily rising tourism revenues. Also, opening of the previously
restricted fishing and fish processing activities to the private sector has improved the efficiency of the
fisheries sector, which remains a strategically important source of employment, income, and foreign
exchange earnings as well as a critical source of protein.
29
A. Jenks, M. Leigh and P.M. Wijkman, A Future Trade Policy for Timor-Leste: A Pre-study, (Commissioned by SIDA,
2003) 29.
30
With the adoption of the HS of customs coding in 2003, ASYCUDA ++ has been in full use since 2004. This also explains
why the period 2004-2008 is selected in the tables presented earlier.
31
As noted earlier, in the tables presented above, the IMF’s BOP figures were used for the latter years.
32
That is ‘mode four’ type of supply of labor services by expatriate professionals and skilled workers; (under mode four,
independent services providers temporarily move to the host country to provide their services).
18
25. Tables 3.6 and 3.7 summarize the recent developments in trade and investment integration of
several small island economies and also provide information about levels of per capita income —
without claiming any direct causality.33 Successful reformers among these countries have diversified
their economies and expanded their exports of goods and services. Their trade openness (here
measured in terms of goods and services trade expressed as a percent of GDP) was in the range of 81
to 163 percent. Timor-Leste’s trade openness remained around 46-53 percent of non-oil GDP. The
contrast is much sharper when only exports of goods and services are considered: 15-17 percent of
non-oil GDP for Timor-Leste compared to a range of 62-131 percent of GDP for the other cited
countries. Strong export performance of some of the small island economies highlight the existence
of potential scope for improving Timor-Leste’s export performance over time if the most critical
structural constraints to private activity are addressed and the needed economic policy and
institutional reforms are implemented.
Table 3.6: Trade Openness of Selected Countries, 2004-2008
Country 2004 2005 2006 2007 2008
Merchandise Exports as % of GDP
Timor-Leste /a 2.5 2.4 2.8 1.8 2.5
Exports of Mechandise and Services (% of GDP)
Timor-Leste /a 17.7 13.6 13.1 17.6 14.8
Fiji 54.0 56.0 na na na
Maldives 92.0 64.6 83.7 80.8 77.1
Marshall Islands 23.9 25.5 22.9 23.3 24.0
Mauritius 55.0 57.0 60.0 62.0 62.0
Micronesia Fed.Sts. 15.7 15.9 15.6 na na
Papua New Guinea 72.0 73.0 82.0 90.0 90.0
Samoa 21.0 23.2 25.5 na na
Seychelles 98.0 81.0 89.0 109.0 131.0
Solomon Islands 31.0 34.0 36.0 43.0 39.0
Vanuatu 49.0 48.0 44.0 42.0 46.0
Total Merchandise Trade (X+M) as % of GDP
Timor-Leste /a 39.3 33.0 33.6 46.0 54.3
Fiji 78.0 78.0 79.0 76.0 91.0
Maldives 106.0 121.0 126.0 126.0 137.0
Marshall Islands 79.0 87.0 78.0 78.0 76.0
Mauritius 79.0 84.0 93.0 90.0 81.0
Micronesia Fed.Sts. 79.0 87.0 78.0 78.0 76.0
Papua New Guinea 108.0 102.0 115.0 123.0 113.0
Samoa 45.0 46.0 51.0 45.0 49.0
Seychelles 113.0 115.0 118.0 134.0 163.0
Solomon Islands 58.0 70.0 74.0 86.0 78.0
Vanuatu 50.0 51.0 48.0 46.0 52.0
Sources: The Timor-Leste authorities; IMF 2009, Table 5, 29; Small States Database, Commonwealth Secretariat/World
Bank ; IMF (Article IV Staff Reports).
/a: For Timor-Leste, openness ratios are calculated relative to non-oil GDP.
26. Even in the near-term, Timor-Leste could expand and diversify its agricultural exports.
There is broad agreement on this assessment in Timor-Leste, and this was repeatedly stressed during
direct interactions with private sector representatives, government officials, and staff of development
partners working on various agricultural projects under implementation. This DTIS is using a
product-specific approach —an integrated VCA— to identify some of the most critical constraints to
productivity growth in Timor-Leste’s agricultural sector and formulate specific action programs to
address these bottlenecks.
33
The data are from the Small States Database database and from the IMF. Not all indicators are available for all the
included countries.
19
Table 3.7: Cross-Country Comparison- Various Economic Indicators, 2004-2008
Country 2004 2005 2006 2007 2008
Agricultural Land (% of land area)
Timor-Leste ('08 popul. 1.1 mil.) 23.0 23.0 na na na
Fiji ('08 popu.: 0.8 mil.) 25.0 25.0 na na na
Maldives ('08 popu.: 0.3 mil.) 47.0 47.0 na na na
Marshall Islands ('08 popu.: 0.06 mil) 78.0 78.0 na na na
Mauritius ('08 popu.: 1.3 mil.) 56.0 56.0 na na na
Micronesia ('08 popu.: 0.11mil.) 44.0 44.0 na na na
Papua New Guinea ('08 popu.: 6.45mil.) 2.0 2.0 na na na
Samoa ('08 popu.: 0.18 mil.) 33.0 33.0 na na na
Seychelles ('08 popu.: 0.09 mil.) 13.0 13.0 na na na
Solomon Islands ('08 popu.: 0.51 mil.) 3.0 3.0 na na na
Vanuatu ('08 popu.: 0.23 mil.) 12.0 12.0 na na na
GNI per capita, Atlas method (current US$)
Timor-Leste 500 740 960 1,520 2,460
(Timor-Leste: per capita non-oil GDP) /1 332 347 331 390 474
Fiji 3,030 3,560 3,670 3,690 3,930
Maldives 2,580 2,580 2,980 3,220 3,630
Marshall Islands 3,100 3,170 3,140 3,190 3,270
Mauritius 4,670 5,250 5,460 5,610 6,400
Micronesia Fed.Sts. 2,280 2,330 2,300 2,280 2,340
Papua New Guinea 570 690 730 850 1,010
Samoa 1,960 2,240 2,460 2,750 2,780
Seychelles 8,240 9,680 10,740 11,060 10,290
Solomon Islands 860 900 950 1,050 1,180
Vanuatu 1,380 1,590 1,780 1,970 2,330
FDI, net inflows (BOP, mill.current US$)
Timor-Leste na na 8.5 8.7 37.8
Fiji 187.1 160.0 373.7 268.9 na
Maldives 14.7 9.5 13.9 15.0 15.4
Marshall Islands 4.1 6.5 6.2 12.2 /est 5.5 /proj
Mauritius 11.2 41.6 105.3 339.0 na
Micronesia Fed.Sts. na na na na na
Papua New Guinea 55.4 33.6 -6.9 95.8 na
Samoa 2.3 -3.0 20.7 2.5 na
Seychelles 38.0 85.9 145.8 249.3 na
Solomon Islands 6.0 18.6 18.6 42.4 na
Vanuatu 19.8 13.2 43.4 34.2 na
Sources: The Timor-Leste authorities; IMF 2009, Table 5, 29; Small States Database, Commonwealth Secretariat/World Bank
; IMF (Article IV Staff Reports).
/1: 3% population growth was assumed.
B. TRADE POLICY REGIME
Import and Export Policies
27. Timor-Leste’s trade policy regime is not a constraint to export growth and
diversification. Following the July 2008 reductions (by 50 percent) in customs duties and the sales
tax levied on imports, Timor-Leste has one of the most liberal trade policy regimes in the world
(Table 3.8);34 (see Annex 3.1 for the changes in Timor-Leste’s customs duties and in other levies on
imports since June 2000). A very low and uniform customs duty rate is a key positive feature of
Timor-Leste’s import policy regime. The sales tax is currently not collected on sales of domestically
produced goods. This makes it a protective tax, and thus it also violates WTO rules on ‘national
treatment’ in taxation.35 The two taxes together (2.5 percent each) add an additional cost of 5.1
percent to the landed value of imports,36 resulting in a fairly low nominal protection level. Compared
to the prevailing import tariffs in some of the ASEAN members on intra-ASEAN trade and on
imports from third countries, Timor-Leste’s nominal protection rates are considerably lower. There
are no quantitative barriers to trade and no taxes on coffee exports.37 As in most other countries, there
34
GOTL, Decree Law 8/2008 (2008).
35
GATT, Article III. It needs to be pointed out however that there is no domestic production of many manufactured
products in Timor-Leste.
36
The ‘landed cost’ of imports refer to c.i.f. value of imports, which include the cost of imports at the source plus insurance
and freight.
37
A ‘presumptive income tax’ was levied on f.o.b. (‘free on board’) value of coffee exports— at 5 percent— until the end of
May, 2001; source: IMF 2003, Table 19, 45.
20
are specific/ad valorem excise taxes on alcoholic beverages, tobacco products, and on imports of
vehicles.38
Table 3.8: Timor-Leste - Current Customs Duty Rate and Other Indirect Taxes on Imports
Tax Levies Tax Coverage and Tax Base Exemptions Tax Rates/Level
on Imports
I. Prevailing Tariff Schedule and the Rates of Other Levies on Imports (Effective From July 2008) /1
1.Import Applies to all imports at an ad Duty exempted imports include: 2.5 percent of ‘customs value’ /a
duty (i.e. valorem rate (except for i. When brought in by arriving
customs selective items) individuals for personal use:
duty) 200 cigarettes and 2.5 liters
of excisable beverages;
Non-commercial goods up
to a value of $300;
Household effects brought
in by returning former
residents, and other
accompanying personal
goods
ii. Imports by UN and Specialized
Agencies, and diplomats
iii. Re-imported goods
iv. Imported goods for which
import duty is $10 or less
2. Sales tax Sales tax is applicable to Sales tax does not apply to 2.5 percent of the total of: customs value of
imported and to domestically imports that are exempted the imported good plus the import duty
produced/sold goods and from import duty plus the excise tax payable
services.
The tax base for imports is the Because it is not collected on
sum of customs value plus sales of domestically produced
customs duty and the excise goods, the sales tax currently
tax when payable acts as a protective tax.
(The sales tax is 0% with
respect to the sale of
domestically produced
taxable goods and services)
3. Excise tax Excise tax is levied on alcoholic Tax rate:
beverages, tobacco, petroleum Beer $1.90/lt
products, motor vehicles, arms Wine, other fermented beverages $2.50/lt
and ammunitions, cigarette Other alcoholic beverages $8.90/lt
lighters, smoking pipe, private Tobacco & products 19.00/kg
yachts and aircrafts, Petroleum products $0.06/lt
Excise tax is levied at specific Small passenger vehicle:
and ad valorem rates 35% of the excise value
For imports, the tax base Arms and ammunitions
(‘excise value’) is the customs 200% of the excise value
value plus the import duty Cigarette lighters/smoking pipe
For excisable goods 12% of excise value
produced by a registered Pleasure boats, private aircraft
manufacturer in Timor- 20% of excise value
Leste, the excise value is the
‘fair market value’ of the
goods at the time of removal
of goods from
manufacturer’s warehouse.
/1: Source: Decree Law 8/2008; (see Annex 3.1 for the changes in import tariffs and other taxes on imports since June 2000); /a: ‘Customs
value’ refers to the c.i.f. value of imports.
38
The latter tax is a ‘Pigouvian’ tax in that those imports with negative externalities are taxed at higher rates.
21
28. Such low and uniform tariffs39 will continue to serve Timor-Leste’s economic
development needs well by:
Not raising the cost of imported capital goods, construction material, and consumption
goods, thus fostering investment in machinery/equipment, physical infrastructure,
housing and other construction, and by making low cost imported food products available
for the poor;
making domestic markets more competitive, thus promoting technical and allocative
efficiency in input use by the existing and new firms and, thereby, boosting productivity
and export competitiveness;
minimizing the anti-export bias of the trade policy and thus encouraging export growth
and export diversification; and
reducing incentives for misclassification of imports, corruption, and smuggling and
easing the administrative burden of customs clearances.
29. Given Timor-Leste’s current trade policy regime, there are several areas where policy
actions (and policy discipline) to support export competitiveness may be warranted. As
discussed in Chapter 2, maintaining a competitive REER40 is crucial, ceteris paribus, for not
undermining export competitiveness and for promoting export diversification. Sustained appreciation
of REER could offset the positive impacts of the structural drivers of export competitiveness. Finally,
preparations for the introduction of a ‘generalized sales tax’ (with plans to an eventual move to a
value-added tax (VAT) subject to capacity) would provide the needed revenue cushion to offset the
revenue losses that would result from further reduction of import tariffs associated with the targeted
accession to the ASEAN and joining the ASEAN Free Trade Area (AFTA). The rate of the (uniform)
generalized sales tax or uniform VAT can be set in a manner that would help offset the cited revenue
losses or generate even larger tax revenues, taking account of the level of transfers from the petroleum
fund. However, not to undermine their competitiveness, exports should be zero-rated.41
C. INSTITUTIONAL ASPECTS OF TRADE POLICY
Trade-Related Policymaking and Coordination
30. As noted earlier, the GOTL has substantially reduced import duties, thus removing
virtually all ‘border barriers’ to trade on the policy side. However, on the domestic front, there
are a host of areas where GOTL policies impact trade performance and enhanced coordination
is required. Policy coordination is needed to establish a coherent policy framework that strengthens
export competitiveness and trade’s positive impact on growth and employment generation. Timor-
Leste’s institutional structure for the formulation of consistent trade-related policies is still in the early
stages of development. Limited institutional capacity and a general lack of background in trade
policy analysis should be addressed as part of capacity development efforts. Occasional
39
There is a significant amount of literature on the economic merits of uniform tariffs. Learning from the lessons of failed
import substitution policies of the past, most developing countries have been reforming their import tariff structures towards
a low and uniform tariff rate system. Chile was one of the first countries to adopt a low and uniform customs duty rate in
1979. For a detailed discussion on this topic and references to other papers on the subject, see: David G. Tarr, “Arguments
for and Against Uniform Tariffs,” Development, Trade, and the WTO: A Handbook, Eds. B. Hoekman, A. Mattoo and P.
English (World Bank, 2002) 526-534.
41
The introduction of a duty/tax rebate program is a standard policy implemented in most countries to enable
producer/exporters duty-tax free access to inputs in order not to undermine their export competitiveness. This is a measure
that the Government may want to consider when the tax system is further developed and tax revenues as share of non-oil
GDP increases. In the meantime, since the existing tariff rate and other indirect taxes are fairly low, the adverse impact on
the competitiveness of exports is likely to be small. Furthermore, the implementation of a duty/tax rebate system at this time
may strain the Government’s already stretched institutional capacity.
22
reorganizations in the government structure42 are taking place partly to improve coordination in
economic policymaking. The government’s declared objective of membership in ASEAN point to the
need for stronger efforts to strengthen the capacity of civil servants in the relevant ministries in trade
policy formulation and in negotiation techniques and also for continued advisory services.
31. Timor Sea Office. In the oil and gas sector, which is a major source of foreign exchange
revenue for the country (and for the budget), the Timor Sea Office is attached to the Prime Minister’s
Office. The unit has been advising the Prime Minister on the oil and gas sector, particularly on the
negotiation strategy pertaining to the Greater Sunrise oil and gas field in the Timor Sea.
32. Ministry of Tourism, Commerce, and Industry (MTCI). The MTCI leads on trade
policy,43 and it is also responsible for the formulation, implementation, coordination, and evaluation
of the policies approved by the Council of Ministers in the areas of industrial development and
promotion of tourism.
33. Ministry of Economy and Development (MED). Legal mandates of the MED include the
“design, execution, and assessment of policies, approved by the Council of Ministers, for the
development of microfinance schemes and cooperatives and for the protection of the environment.”
Before it was restructured, the MED was instrumental in the preparation of the draft External
Investment Law (i.e. FDI) and the Domestic Investment Law, which were promulgated in June 2005.
The two sets of associated regulations were also published as decrees in late June 2005.44 More
recently, the MED has worked on a new (unified) investment law, in consultation with other line
ministries, with a view to ensuring similar treatment of FDI and domestic investment and introducing
enhanced investment incentives (see Section D below on ‘Trade and Foreign Direct Investment’).
34. Ministry of Agriculture, Forestry, and Fisheries (MAFF). MAFF is responsible for
strategically important sectors of the economy, which offer significant scope for export growth and
diversification in the near-term. At present, the coffee and forestry subsectors are under the
jurisdiction of the Vice Minister, and the Secretary of State is responsible for the fisheries subsector.
There are established policies pertaining to the key activities that are included in the MAFF's
portfolio, but there are also major gaps in the policy framework and capacity. The MAFF’s
Directorate of Quarantine is the authority45 responsible for carrying out quarantine services and
control of food products of plant and animal origin, in line with the requirements of the WTO’s SPS
agreements (see Chapter 6).
35. With respect to the fisheries sector, Decree Law 6/2004 (of April 2004), which establishes the
general legal and institutional framework46 for fisheries and aquaculture activities, states that a
‘competent authority’ be established within the Directorate of Quarantine Services. Such an entity
has not yet been established due to the lack of financial resources and capacity constraints, and no
progress has been made towards developing a ‘fisheries resources management regime.’ The hitherto
untapped fisheries sector could become an important source of export earnings, employment, and
42
The GOTL has 12 ministries and 13 Secretaries of State. The Prime Minister is the Head of the Government and also
chairs the Council of Ministers. The ministries are responsible for the formulation of policies and drafting of laws in their
portfolio areas. These area/sector-specific policies and laws are then approved by the Council of Ministers; the legal advice
on the draft laws is provided by the Ministry of Justice. For a detailed coverage on the government structure and the
portfolios of various ministries in Timor-Leste, refer to: www.timor-leste.gov.tl and IBM 52 -57.
43
In broad terms, the MTCI’s mandate is defined as: “The Ministry of Tourism, Trade and Industry is the Government’s
main body responsible for the design, execution, coordination and assessment of the policies defined and approved by the
Council of Ministers for the areas of tourism and economic, commercial and industrial activities”; see: www.timor-
leste.gov.tl.
44
Further details on these two investment laws that were promulgated in June 2005 are available in: World Bank, Timor-
Leste: The Business Regulatory Environment (World Bank, 2006) 10-11.
45
Under the ‘Joint Ministerial Instruction’ dated December 13, 2002. For details, see: IBM 56.
46
Referred to as ‘General Bases of the Legal Regime For the Management and Regulation of Fisheries and Aquaculture.’
For details, see: IBM 56.
23
protein. However, an appropriate policy environment and the institutional capacity (including a
marine resources research unit) need to be developed in accordance with the conditions of the country.
Perhaps a ‘rights-based’ regime taking account of the ‘historical rights’ of the local fishing
communities could be developed, with ‘territorial use rights’ being granted to the local fishing
cooperatives. Of course, an enforceable and realistic ‘monitoring, control, and surveillance’
mechanism will be needed to support sustainable fishing and to control licensed foreign fishing
vessels in Timor-Leste’s exclusive economic zone (EEZ). Finally, to develop export potential in the
fisheries sector, stringent SPS standards and the capacity to implement these standards would be
needed. In view of the potential importance of the fisheries sector and the complexities of the policy,
legislative, and resource management issues involved, a separate study on the sector appears
warranted.
36. Ministry of Foreign Affairs and Cooperation (MFAC). In the MFAC, the National
Directorate for International Cooperation and Regional Integration is responsible for carrying out
negotiations to join regional and global trading arrangements.47 The GOTL prioritized ASEAN
membership as a key step in strengthening Timor-Leste’s regional trade integration. To this end, an
ASEAN Secretariat has been established in Dili to coordinate the government’s preparations for
ASEAN accession, focusing on the formulation of Timor-Leste’s strategy for the membership process
around the ASEAN Community’s three pillars: (i) ASEAN Political-Security Community (APSC);
(ii) ASEAN Economic Community (AEC); and (iii) ASEAN Socio-Cultural Community (ASCC).
Notwithstanding the human and financial costs of membership, being part of ASEAN could lead to
net economic benefits in the medium-term if Timor-Leste succeeds in boosting export competiveness.
Furthermore, membership in ASEAN will help lock-in the significant liberalization effects in Timor-
Leste’s import policy regime and shield the government from future pressures for protection. It is
also worth highlighting that given Timor-Leste’s very low nominal import protection rates, the
economy should not face adverse ‘trade diversion’ effects from ASEAN membership (see Section E
below).
37. There is scope to improve coordination in formulating trade-related policies, especially
in those areas that impact the quality of business environment, agricultural productivity,
untargeted subsidies that distort market incentives, and inflows of FDI. Effective policy
coordination will help avoid conflicting policy initiatives. This requires the establishment of
economically sound principles to guide policymaking on trade. This would require, for example,
closer interaction among the key ministries, including MTCI, MED, MAFF, and Ministry of Finance
(MoF). Just to give an example, the existing consumption subsidy on imported rice adversely impacts
the effectiveness of extension services and investment in irrigation infrastructure aimed at boosting
agricultural yields. It also increases budgetary imbalances. Instead of using distortionary and costly
food price subsidies, food support programs targeting the poor would be a preferable policy in times
of upward shocks in international food prices. Developing SPS capacity is another policy area
requiring enhanced coordination. The effectiveness of interventions aimed at increasing productivity
of potential agricultural exports is undermined when there is limited attention given to the
development of much needed SPS capacity. Closer coordination is also warranted between the MTCI
and Ministry of Justice (MoJ) to improve business start-up (discussed in detail in Chapter 9). The IF
National Steering Committee (NSC) appears to be a suitable forum, under the leadership of Prime
Minister, to strengthen coordination among the ministries that make policies affecting trade. The
NSC could be turned into a permanent policy coordination body in the government.
47
GOTL, Organic Law of the MFAC: Decree no.1/2003 of July 2003 (2003).
24
D. TRADE AND FOREIGN DIRECT INVESTMENT
38. The GOTL introduced the country’s first FDI law (Law No. 5/2005) and its regulations
(Decree No. 6/2005) in 2005.48 FDI brings with it positive spillover effects through technology
diffusion, modern production processes, links to international marketing networks, and modern
management skills. Recognizing the critical importance of the positive synergies for Timor-Leste’s
economic development, the law provides for incentives —in the form of tax holidays and exemptions
from import duties on imports of capital goods and raw materials to be used in new investments — to
compensate for wide-ranging business environment constraints. There are also no TRIMS (‘trade-
related investment measures’) such as ‘domestic content’ requirements imposed on FDI inflows (or on
joint ventures with domestic investment). 49
39. To promote FDI and exports, in 2005, the government created a ‘foreign investment and
export promotion’ agency, designated as TradeInvest Timor-Leste (TITL) under Decree 7/2005
(dated July 27, 2005). Article 3 of the decree stated that the duty of TITL is “to promote,
coordinate, facilitate, register, and follow-up on foreign investment and exports, as well as centralize
the necessary administrative procedures for authorizing and registering foreign investments within
the framework of laws, incentives and benefits provided in the Foreign Investment Law.” Article 4
also guaranteed funds for TITL from the government’s regular budget with a view to sustaining
TITL’s operations. To promote and support domestic investment, the Instituto Apoio ao
Desenvolvimento Empresarial (IADE)50 was also established in 2005. Both TITL and IADE were to
operate as ‘one-stop-shops’ to foster private investment.
40. But shortcomings in three critical areas have hindered TITL’s effectiveness as a foreign
‘investment promotion agency’ (IPA) and in export promotion:
Low institutional status: during 2005-2007, TITL reported directly to the Prime Minister,
which helped elevate its legal status, gave it a sense of independence, and credibility. But
in 2007, the government changed TITL’s reporting status and brought it under the
jurisdiction of the MED. This has lowered the organizational status of TITL, thus
hindering the agency’s ability to affect investment policy and help investors.
Lack of an investment promotion strategy: TITL has operated without an ‘investment
promotion strategy’ that is linked to the country’s economic development objectives and
FDI goals. Without a strategy, a business plan, a vision, and performance targets, the
TITL has lacked focus and has primarily been involved in issuing foreign investment
certificates. It has not been able to do much in the way of promoting FDI and exports.
Limited capacity: TITL’s low institutional capacity has constrained its ability to respond
to investor inquiries in a timely manner, prepare basic information about the investment
environment and about specific sectors, and provide updated information on a user-
friendly web-site.
41. With a view to eliminating differential treatment of domestic and foreign private investment
and bringing transparency in the processing of investment applications, the government has drafted a
new Private Investment Law, which was recently approved by the Council of Ministers and has been
sent to Parliament. In addition, a Decree Law on the statutes for Investe Timor-Leste, the new IPA to
replace TITL; regulations/procedures related to Investe Timor-Leste; and a Decree Law on the new
48
A separate ‘Domestic Investment Law’ was also promulgated in June 2005, followed by its regulations. The two laws
have similar provisions. The key difference between them relate to the levels of incentives that they provide for domestic
investment vs. FDI and also in the amounts of minimum investments required to benefit from these incentives.
49
TRIMS that discriminate against imported inputs/products, say because of the domestic content requirements, are not in
compliance with the TRIMS Agreement included in the GATT 1994 (details can be accessed at www.wto.org).
50
Enterprise Development Institute.
25
statutes for IADE have also been prepared and will be submitted to the Council of Ministers after the
Parliament approves the new investment law.51
42. Unlike TITL, Investe Timor-Leste will provide a one-stop-shop service to both foreign and
domestic investors. Also, instead of retaining TITL’s organizational structure, Investe Timor-Leste
will have a more streamlined structure with one Executive Director and a ‘Comissao de Avaliacao do
Investimento Privado’ (Investment Review Committee). The committee will have permanent and
non-permanent members at the national director/chief administrator level from the relevant ministries.
The Chamber of Commerce might also be represented in this committee. However, Investe Timor-
Leste will also continue to report to the MED, which may constrain the agency’s effectiveness.
Table 3.9: Estimated Values of FDI Licenses Issued in Timor-Leste
2006 2007 2008 2009
Sector/Activities: Planned/Intended FDI (in $ million)
Hotel services 44.8 12.9 0.0 45.3
Coffee 13.1 0.0 0.0 0.0
Fishing & Industrial fishing 27.4 5.2 0.0 14.0
Construction 3.7 3.4 0.0 9.7
Real Estate & PropertyDev. 1.0 9.0 10.8 0.0
Agro-Business (exclu. coffee) 10.4 0.0 0.2 0.0
Plantation-Cane Sugar 0.0 0.0 100.0 0.0
Wholesale-Retail-Import Trade 2.5 1.3 0.0 0.0
Construction material 1.2 0.0 0.0 1.4
Transportation 0.0 0.2 4.0 0.0
Commercial Banking 5.6 0.0 0.0 0.0
Others 50.5 12.3 3.4 15.1
Totals 160.2 44.3 118.4 85.5
Source: GOTL, TradeInvest Timor-Leste, MED
43. Reliable data on FDI flows are not readily available. According to TITL, the total value of
FDI certificates issued to private investors between 2006 and 2009 was around (in current US dollars)
$408 million (Table 3.9). These indicate a concentration of ‘intended’ investment in construction (not
surprising given the sizable amount of government contracts in the construction sector), tourism (e.g.
hotels in Dili), transportation, property development, wholesale/retail trade, and
agriculture/agribusiness (including coffee). Official data, however, show that actual FDI outside of
the oil and gas sector remains low. The latest BOP statistics from Timor-Leste’s Banking and
Payments Authority (BPA) give estimates of FDI to be around $38 million in 2008 (approximately
7.6 percent of non-oil GDP) compared to $8.7 million in 2007 and $8.5 million in 2006. Over 90
percent of FDI in 2008 constitutes one investment project in the oil and gas sector.52
44. Attracting increased levels of FDI to Timor-Leste will require significant progress in
addressing the key cross-cutting constraints to productivity growth and export competitiveness,
including improvements in Timor-Leste’s fairly challenging business environment. These
aspects are analyzed in detail in Chapters 7 through 9 covering skills gap, land, and business
environment issues. In this section, it suffices to emphasize that an important step to promote FDI
would be to enact the unified Investment Law soon and to transform the new IPA into an effective
entity. Also, to improve the reliability of data on actual levels of FDI, it is recommended that Investe
Timor-Leste speed up the establishment of the planned system to monitor foreign investment inflows.
51
Decree Laws and regulations do not need to be submitted to Parliament.
52
In order to estimate the level of FDI inflows as input for the BOPs, the BPA is collecting information directly from the
three commercial banks; several construction, oil, and gas companies; petroleum products distribution companies; one coffee
processing and export company; and a telecommunication company. Therefore, it is likely that the BOP data underestimate
the actual size of FDI since not all the key companies with at least some FDI are covered. For example, there is foreign
direct investment in hotels in Dili, but these do not appear to be included in the BPA’s coverage.
26
E. STRENGTHENING REGIONAL AND GLOBAL TRADE INTEGRATION
ASEAN Economic Integration
45. Soon after becoming Prime Minister in 2006, now H.E. President Dr. José Ramos-Horta
committed the government to the goal of Timor-Leste becoming a member of the ASEAN by
2012. H.E. Deputy Prime Minister Dr. Jose Luis Guterres signed the Treaty of Amity and
Cooperation on behalf of Timor-Leste in his former capacity as the Minister of Foreign Affairs and
Cooperation on January 2007 at the 12th ASEAN Summit in Cebu, Philippines. This was the first step
towards becoming a full-fledged member of the regional grouping.53 The government has decided to
join ASEAN, and the focus going forward is on identifying the steps needed for Timor-Leste to fulfill
all the membership obligations.
46. ASEAN aims to promote regional integration and create an area that is politically and
militarily secure, delivers equitable and widespread economic benefits, and is respectful of
people and seeks to help them realize their full potential. The Association is built and operates on
consensus. It expects each country to be respectful of the boundaries, laws, and culture of another.
Resolution to conflicts and disagreements are handled using peaceful mediation efforts. ASEAN is
currently comprised of 10 Southeast Asian countries: Brunei Darussalam, Cambodia, Indonesia, Lao,
Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. Timor-Leste is the only
Southeast Asian nation not in ASEAN (for a detailed background on ASEAN see Annex 3.2).
47. Timor-Leste has already begun integrating into the region. Over 70 percent of its
merchandise imports come from ASEAN countries while 27.8 percent of its exports go to the ASEAN
region. Cooperation with the ASEAN Member Countries (AMC) has also increased over the years.
For example, Thailand created a G-to-G initiative for the supply of rice, and in 2006, Malaysia sent
military troops to help restore stability.
48. For Timor-Leste, ASEAN membership appears as a logical next step towards
developing greater regional and international economic integration. Overall benefits from
ASEAN for Timor-Leste include access to an influential regional grouping; enhanced linkages with
Southeast Asia beyond Indonesia; commercial connections to several strong, outward-looking
economies; and opportunities for technology and skills transfers from more developed members.54
According to a 2007 assessment for the Timor-Leste Accession to ASEAN Dialogue Series, the
“potential economic benefits to be gained by Timor-Leste would largely flow from the dynamic effect
of trade liberalization that means increased competition, economies of scale, and spill-over effects of
FDI— especially in terms of technological and management skill transfers.”55 With the 2008 tariff
cuts discussed earlier, Timor-Leste has already taken an important step in getting ready for the AFTA.
49. More specifically, potential economic benefits include locking in and accelerating Timor-
Leste’s developing trade and economic policy regime; enhancing trade capacity through the potential
of supplying intermediate inputs to ASEAN regional industries; receiving additional financial and
technical assistance; and negotiating future trade agreements as part of a block rather than as a small
individual country, among others.56 Equally important is the potential for ASEAN to serve as a
stepping stone towards WTO membership.
53
London School of Economics and Oxford Investment Research, An Investment in the Future: ASEAN Preparedness
Strategy for Timor-Leste (London: Oxford Investment Research, 2007).
54
Antonio Franco, “The Potential Economic Benefits for Benefits for Timor-Leste of Joining ASEAN,” Timor-Leste
Accession to ASEAN Dialogue Series, Timor-Leste, Dili Feb 19-20, 2007 (Feb 2007).
55
London School of Economics.
56
IBM 46-47; Antonio Franco.
27
50. The extent to which these benefits are realized will depend on the internal reform
agenda of the GOTL. As noted at the ASEAN Dialogue Series, integration benefits are not
automatic, and the amount of benefits enjoyed by individual member countries largely depends on the
reforms they undertake and the success of their structural reform and integration efforts.57 The
President has noted that accession to ASEAN is a “whole of government, whole of Timor-Leste”
project since it requires efforts from government agencies, donors, civil society, the private sector,
and most importantly the public at large because membership will impact the lives of all Timorese.
51. For Timor-Leste to become a member of ASEAN all 10 member countries would have to
vote favorably. The countries will be looking at Timor-Leste’s human capacity to fulfill the
obligations of membership. Furthermore, a number of steps are required to join the AEC, which is
one of three communities that exist within the ASEAN family. The other two communities are the
APSC and ASCC. AMC were given six years to fulfill the requirements under each blueprint
beginning in 2009 and ending in 2015. Assuming that Timor-Leste would be given the same amount
of time to fulfill these requirements once it joins ASEAN, this suggests that the approximate ASEAN
accession date should correspond to the date required to fulfill AEC membership requirements less six
years.58
52. In order to ensure timely fulfillment of AEC membership requirements, it is
recommended that Timor-Leste undertake an assessment of the needs required to meet each
section of the AEC Blueprint. Annex 3.3 provides an overview of the needs Timor-Leste would
have to address to implement the AEC Blueprint. It does so in a broad fashion by focusing mostly on
policy, legal, and compliance requirements. A thorough examination of these needs will be required,
including assessments of the timeframe, resources, and actions to address each requirement. Through
this exercise an approximate date can be calculated as to when Timor-Leste can fulfill the AEC
membership requirements.
Accession to the WTO
53. WTO membership entails several important benefits:
It encourages the acceleration of domestic economic policy reforms and the reform of
institutions involved in goods and services trade. Such improvements are required before
accession into the WTO. These structural reforms boost productivity growth and enhance
export competitiveness and diversification.
It sets the stage for locking in economic policy reforms that have already been
undertaken.
It provides for security of ‘market access’ to major export markets on a non-
discriminatory basis (i.e. on a MFN basis).59
It allows access to the WTO’s impartial and binding dispute settlement mechanism for
trade issues, including, for example, protection from unfair trade practices, protection of
trade access rights, transit rights, and intellectual property rights.
54. In addition, there are flexibilities for LDCs during the WTO accession negotiations, 60
including:
57
London School of Economics.
58
Timor-Leste will also have to meet the requirements of the APSC and ASCC Blueprints. However, the fulfillment of
requirements in the AEC Blueprint is expected to take the most time and effort, which explains why the approximate
ASEAN accession date is estimated based on the fulfillment of the AEC Blueprint rather than the other two blueprints.
59
This involves non-discrimination among trade partners and between locally produced and foreign goods.
60
For details on the WTO accession process (negotiation phases and topics, and strategies for applicants) and for
information on the accession experiences of some LDCs, visit: www.wto.org and search for ‘accession process.’ Also, see:
28
extended time for fulfilling all the commitments made during the accession negotiations;
programs aimed at supporting the establishment of SPS and technical standards capacities
and improving national telecommunications;
legal assistance for dispute settlement cases; and
TA programs to: support the development of the institutions needed in a global trading
system (such as customs administration, trade policymaking units); and facilitate training
courses, seminars, and workshops on topics related to negotiation skills pertaining to
accession to the WTO, implementation of the WTO commitments made during the
accession negotiations, the WTO’s dispute settlement, and effective participation in
multilateral negotiations.
55. The critical question with respect to Timor-Leste’s WTO accession is a ‘timing’ issue.
Since ASEAN membership is now the government’s top trade policy priority, Timor-Leste might
prefer to initiate the WTO accession process in the future. However, Timor-Leste will benefit from
implementing ASEAN membership requirements given that some of these are also WTO
requirements. For example, ASEAN members are committed to implementing WTO customs rules
and customs valuation guidelines and national treatment in taxation and private investment.
56. Accession to the ASEAN could also serve as a stepping stone towards WTO
membership. To benefit from greater market access opportunities of the ASEAN, Timor-Leste will
have to accelerate some of the critical capacity building efforts that will contribute export
performance. To begin with, Timor-Leste will have to develop her SPS capacity in order to continue
exporting agricultural products and livestock to Indonesia. The planned land reforms, along with
improvements in transport infrastructure and the critical areas of the business environment will have
to be accelerated to encourage investment in agriculture, attract more FDI, and boost productivity
growth. Fulfilling the AEC Blueprint will likely make an important contribution to WTO
membership requirements. However, it would be desirable to assess ‘if and when’ Timor-Leste
should pursue WTO accession. Such a study would help the government make an informed decision
on WTO accession.
Pacific Island Forum (PIF)
57. Sixteen members of the PIF61 agreed in 2001 on a framework to strengthen their
economic relations under the Pacific Agreement on Closer Economic Relations (PACER). Within
this framework, the PIF countries also signed the Pacific Island Countries Trade Agreement (PICTA)
in 2001, with a view to establishing a free trade area by 2011. The PICTA is not expected to lead to a
significant expansion in intra-PIF trade, but it could lead to benefits in terms of more FDI and
cooperation in trade logistics as well as serve as a stepping stone to WTO accession. Non-Forum
countries can become a member of the PICTA. Thus, Timor-Leste could join the PICTA, but this is
not likely to lead to trade expansion since there is significant degree of substitutability between their
potential exports. One of the important agencies of the PIF is the Forum Fisheries Agency (FFA),
which assists the Forum countries in the management of their tuna fisheries as well as their EEZs.
Since nonmembers of the PIF could become a member of the FFA, Timor-Leste could seek TA from
the FFA for the development of a tuna fisheries management regime.
58. Since gaining membership in the ASEAN is a priority for Timor-Leste, it is prudent for
Timor-Leste to maintain an informal relationship with the PIF while the ASEAN’s position on
Constantine Michalopoulos “WTO Accession,” Development, Trade, and the WTO: A Handbook, Eds. B. Hoekman, A.
Mattoo and P. English (World Bank, 2002) 61-70
61
For a background on the PIF, which was established in 1971, see: IBM 47-48; and Jenks 73-75. The 16 members include:
Australia, Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Nauru, New Zealand, Niue, Palau, Papua New
Guinea, Republic of the Marshalls Islands, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.
29
this matter is sought. Nevertheless, membership in the PIF could offer some potential benefits to
Timor-Leste. For example, Timor-Leste could benefit from the experiences of the small island states
in the PIF in several areas, including public administration and WTO accession process.62
EU Relations: The Cotonou Agreement and ‘Everything But Arms’
59. The EBA program governs Timor-Leste’s trade relationship with the EU, and Timor-
Leste’s broader economic and social development relationship with the EU comes under the
Cotonou Agreement. The EU’s EBA program provides for tariff-free and quota-free market access
to exports of LDCs while the Cotonou Agreement is a ‘partnership agreement’ between the African,
Caribbean, and Pacific Group of States (ACP) and the European Community (EC). The Cotonou
Agreement, which was signed in 2000, is the successor of the four successive Lomé Conventions.
Timor-Leste became a member of the ACP (and, thus, became a signatory of the Cotonou Agreement)
in March 2003 and ratified the Cotonou agreement in 2005.63
60. A key objective of the Cotonou Agreement is to support the ACP group of countries in
their effort to strengthen their capacity to better integrate in the global economy and to foster
regional trade integration as well. Under the Cotonou Agreement, economic policy and
institutional reforms in the ACP group of states are supported by the European Development Fund
(EDF) and also by loans from the European Investment Bank (EIB). The Cotonou Agreement had
included trade preferences for the ACP countries, but these were discontinued in 2008 and replaced
with the EU’s WTO-compatible ‘Economic Partnership Agreements’ (EPAs).
61. The GOTL currently has observer status in EPA negotiations. However, Timor-Leste
will continue to benefit from the trade preferences granted to LDCs under the EBA program. One of
the objectives of the Cotonou Agreement is to foster ‘regional trade integration,’ and as a signatory of
this agreement, Timor-Leste might be expected to join the PICTA. The GOTL may need to manage
this expectation within the context of the country’s first priority which is to join the ASEAN.
62. Since the EBA provides preferential market access on the trade side, the principal
benefit of the Cotonou Agreement for Timor-Leste is development assistance —in the form of
financial and technical support. The 10th EDF, worth € 22.7 billion, covers the period 2008-2013.
These funds are used to support trade-related assistance programs, including in the areas of
institutional capacity strengthening, development of SPS and technical standards capacity, and
negotiation assistance. Such programs will help enhance Timor-Leste’s export competitiveness and
diversification in the medium and long-term. Under the 10th EDF, Timor-Leste has been allocated
€81 million to three focal sectors —sustainable rural development, health, and institutional capacity
building— and to non-focal sectors (‘support for non-state actors’ and a technical cooperation
facility).64 These resources could play an important role in addressing some of the priorities
highlighted in the DTIS for raising agricultural productivity.
F. CONCLUSION AND RECOMMENDATIONS
63. In summary, the trade policy regime is not a constraint to export growth and
diversification and to strengthening Timor-Leste’s integration in the world economy. With a
uniform 2.5 percent ad valorem import tariff rate, today Timor-Leste has one of the most liberal trade
62
Small island states Fiji, Solomon Islands, and Papua New Guinea are already members of the WTO. Samoa and Vanuatu
are in the accession process. Especially, Vanuatu’s experience to date could provide useful lessons to Timor-Leste when the
country decides to apply for WTO membership in the future.
63
For further details on relations between the ACP countries and the EC and on the Cotonou Agreement, visit web-site:
www.europa.eu.int and search for the ‘Cotonou Agreement.’ And for the Timor-Leste and the EU relations see: IBM 49-51;
Jenks 76-80.
64
GOTL/EU, Joint Annual Report 2007: Report of the National Authorizing Officer and the Delegation of the European
Commission (2007) 16.
30
policy regimes in the world. And there are no quantitative barriers to trade and no taxes on coffee
exports. However, this is a relatively new policy area where capacity strengthening and policy
coordination is warranted. Above all, improvements in coordination are required in those areas that
impact the quality of business environment, in general, and export competitiveness and inflows of
FDI, in particular.
64. Attracting increased inflows of FDI will also be critical for boosting economic growth
and export diversification. While the GOTL has made some strides in introducing the country’s
first FDI law and drafting a new investment law, progress is also needed in addressing the key cross-
cutting constraints to productivity growth and export competitiveness, including improvements in the
Timor-Leste’s business environment.
65. In terms of strengthening regional and global trade integration, the GOTL has already
decided that the first priority in the near-term is ASEAN membership. As a result, the objective
is first to strengthen regional trade integration with the ASEAN countries, which are Timor-Leste’s
major trading partners. The critical question with respect to Timor-Leste’s WTO accession is a
‘timing’ issue, and WTO accession is considered by GOTL as an initiative for the medium to long-
term. While PIF membership can offer some potential benefits to Timor-Leste, ASEAN’s position on
this matter needs to be sought. Finally, under the Cotonou Agreement, there is potential for Timor-
Leste to seek financial and technical assistance from the 10th EDF program to focus on improving
agricultural productivity.
66. Recommendations related to the trade, trade policy regime and export competitiveness
include:
(a) Maintain a competitive REER which is crucial for sustaining export competitiveness and
promoting export diversification. Given that the US dollar is the official currency of the
country, on the domestic front pursuing prudent fiscal policy becomes critical in order to
avoid upward pressures on the prices of nontradables. This would help avoid
appreciation of the REER.
(b) Start preparations for the introduction of a ‘generalized sales tax,’ with plans to an
eventual move to a VAT subject to institutional capacity.
(c) Conduct a tourism study to analyze the country’s prospects for developing a viable
tourism sector, perhaps with a focus on niche tourism in the medium-term and a more
diversified tourism activity in the long-term. Such a study also needs to cover the critical
features of an enabling and environmentally responsible legal and regulatory environment
for the sector’s development.
67. Recommendations related to the institutional aspects of trade policymaking include:
(a) Institutionalize the formulation of trade-related policies by establishing economically
sound principles to guide policymaking. The IF National Steering Committee, chaired by
the Prime Minister, provides a suitable forum to strengthen coordination among the
ministries that make policies affecting trade. One option to consider is to transform the
NSC into a permanent policy coordination body in the government.
(b) Strengthening institutional capacity in trade policy analysis and negotiation techniques.
Lack of background in economic policy analysis and in trade policy issues among the
civil servants constitutes a major hindrance to formulating consistent trade-related
policies and to effective trade negotiations. There is a need for training civil servants in
trade policy in the relevant ministries. To this end, the government should seek funding65
65
See the ‘List of Trade Related Projects’ for the earlier TA/training projects supported by UNCTAD/German Government,
Irish Aid, and EC to help improve the trade policy and trade negotiation capacity of civil servants.
31
to develop and implement TA/training projects for civil servants and also for support for
long-term advisory services. Highly talented civil servants could be selected to attend
specialized trade courses offered by internationally recognized institutions.
68. Recommendations related to trade and FDI include:
(a) Enact the new, unified draft Investment Law to remove uncertainty and eliminate the
differential treatment of domestic and FDI.
(b) Strengthen the institutional status of Investe Timor-Leste by having the agency report
directly to the Prime Minister. This change will elevate the institutional status of the new
IPA and enable it to function more effectively.
(c) Develop an investment promotion strategy, business plan, vision, and performance targets
to guide Investe Timor-Leste and build the capacity of Investe Timor-Leste’s staff to
respond to investor inquiries, along with prepare and disseminate both general investment
and sector-specific information.
(d) Improve the reliability of data on actual levels of FDI by having Investe Timor-Leste
speed up the implementation of the planned system to monitor foreign investment
inflows. To this end, the BPA and Investe Timor-Leste could and should cooperate in
gathering reliable data on actual FDI inflows.
69. Recommendations related to regional and global trade integration include:
(a) Undertake an assessment of the needs required for Timor-Leste to fulfill the AEC
membership requirements. This assessment should include a thorough examination of the
timeframe, resources, and actions required to meet the needs under each section of the
AEC Blueprint.
(b) Conduct a study to assess ‘if and when’ Timor-Leste should pursue WTO accession.
Such a study would help the government make an informed decision on WTO accession.
32
SECTION II:
VALUE CHAIN ANALYSIS OF AGRICULTURAL EXPORTABLES
AND KEY SECTORAL CONSTRAINTS TO COMPETITIVENESS
33
CHAPTER 4: VALUE CHAIN ANALYSIS OF AGRICULTURAL
EXPORTABLES
A. AGRICULTURE’S STRATEGIC ROLE
1. In Timor-Leste, agriculture is a strategically important sector where near-term
opportunities for export growth and diversification intersect most clearly with opportunities for
poverty alleviation. Measures to enhance productivity, reduce costs, and boost marketable surplus
production in subsectors where Timor-Leste has the greatest non-oil export potential can have a major
positive impact on employment, poverty, and social and political cohesion. Light manufacturing may
have potential, though its capacity to generate employment (and therefore alleviate poverty) is more
limited in the near and medium-term due to skills shortages and poor transport links. Likewise the
development of competitive tourism and fishery sectors will also take time.
The Agriculture Sector: An Overview
2. The majority of the Timorese population relies on agriculture, which provides
employment for 80 percent of the active population and generates more than 90 percent of non-
oil exports (in value terms). Although Timor-Leste’s topographic features pose challenges for
agriculture, the sector does account for about 30 percent of non-oil GDP. Vulnerability to adverse
weather events, low public and private investment, widespread reliance on traditional technology, and
impediments arising from past agrarian structures continue to constrain this important sector.
However, agriculture could have a greater impact on living standards and economic development.
3. Progress has been made in establishing the sector’s legal, regulatory and institutional
framework. The biggest challenge faced by the MAFF is its limited capacity: in terms of delivery of
services to its rural constituents, financial resources, infrastructure, qualified human resources, and the
enforcement of laws and regulations. The MAFF is aware of these challenges and efforts have
commenced to strengthen its capacity to coordinate programs and deliver services.
4. During 2002-2007,66 agricultural GDP grew by an estimated 2.1 percent. This was driven
mainly by an expansion of the commercial sector which grew from 22.3 percent to 27.3 percent of
total agricultural GDP67 due mainly to increased coffee exports and a growing livestock population.
However, the food subsector, which accounts for about three quarters of the agricultural sector’s
GDP, contracted at an annual average rate of 2.6 percent over the same period.68 Since Timor-Leste’s
rural economy is almost completely dominated by agriculture, slow growth in the sector explains the
slow development of non-farm activities in rural areas. Agricultural growth has to accelerate and
reach a higher and more stable level if the employment opportunities and living conditions in rural
areas are to improve.
5. Agricultural productivity in Timor-Leste is very low. For example, in 2007, (for the main
food crops) Cambodia, which is a reasonable comparison country with Timor-Leste, reported crop
yields (Mt/ha) of 3.45, 20.83, 4.76, and 2.36 for maize, cassava, sweet potato, and paddy rice,
respectively. The corresponding yields (Mt/ha) reported for Timor-Leste in 2007 were only 1.00,
4.14, 3.71, and 1.31, respectively.
66
Over the 2003-2007 period, annual average growth rate of the agricultural sector was lower; (comparable non-oil GDP
figure for 2002 was not available).
67
IMF 2008.
68
IMF data are confirmed by FAOSAT figures which indicate no significant increases in food production since 2000;
between 2000 and 2006 total per annum food crop production in Timor-Leste varied from 209,000 Mt to 243,000 Mt —and
averaged 230,000 Mt— but then declined to 199,000 Mt in 2007. More recently, MAFF reported increased foodcrop
production in 2009, but Timor-Leste’s food production and demand figures are very unreliable.
34
6. When Timor-Leste’s crop yields are compared with other countries’ average crop yields on a
percentage basis, the differential becomes even more apparent — across all crops Timor-Leste only
produces, on an average basis, between 20 percent to 35 percent of the production (Mt/ha) achieved
by Cambodia, Thailand, China, Vietnam, Indonesia, and Laos PDR. In the case of green coffee
beans, Timor-Leste’s productivity short-fall is even greater. These indicate that there is substantial
scope for increasing agricultural productivity in Timor-Leste through gradual modernization of
production techniques. The next section looks at how these issues link to gender and poverty
considerations, particularly for selected subsectors with high export potential.
Table 4.1: Timor-Leste: Cross-Country Comparison of Crop Yields (Mt/ha), 2007
Crop Production per Ha (Mt/ha) (2007)
Cambodia Thailand China Vietnam Indonesia Lao PDR Timor- Avg TL
Leste (Exc TL) (% of Avg)
Maize 3.45 3.84 5.41 3.75 2.59 3.91 1 3.99 25%
Cassava 20.83 22.92 16.25 15.89 16.25 10.59 4.14 17.07 24%
Sweet Potato 4.76 0 21.47 4.87 10.56 9.23 3.71 10.18 36%
Paddy Rice 2.36 2.69 6.34 4.87 4.69 3.5 1.31 4.08 32%
Coffee (Green Bean) 0.82 0.87 1.5 2.14 0.51 0.65 0.22 1.07 21%
Agriculture and Gender Issues69
7. The participation of women in trade-related activities is not only socially desirable but
also critical in maximizing the positive impacts from trade expansion for both men and
women.70 Women are particularly active in the agriculture sector which includes 80 percent of
economically active females.71 The agricultural sector provides employment and income to over 70
percent of rural women, and women are engaged in nearly all activities associated with the cultivation
of staple foods,72 including planting, weeding, harvesting, transporting, storing, and marketing for a
variety of crops.73 However, a significant proportion of both men and women are involved primarily
in subsistence farming and fishing. Women account for 43.5 percent of subsistence agricultural
workers.74 Much of women’s work in the agriculture sector is unpaid as it is considered to be a part of
their household obligations. The government estimates that 70 percent of women working in
agriculture do not receive cash income. In the non-agriculture sector, unpaid female work represents
46 percent of their contribution.75
8. Women experience a double time burden in terms of economic and social obligations,
and their economic contributions are frequently undervalued or unrecognized. Women carry a
heavier burden than men in terms of household activities, such as fetching water, cooking, cleaning,
washing, and taking care of children and the elderly. As a result, women work on average six hours
more than men per week.76 This constrains women’s mobility and also results in less time for
income-generating activities and participation in trainings and agricultural assistance opportunities.
An International Labor Organization (ILO) assessment found that women are given permission by
their husbands to work in rural infrastructure initiatives only if temporary arrangements could be
made to absorb their domestic responsibilities.77
69
See Annex 4.1 for further discussion on gender issues.
70
Anh-Nga Tran-Nguyen and Americo Beviglia Zampetti, eds. Trade and Gender, Opportunities and Challenges for
Developing Countries (UNCTAD, 2004).
71
Census (Direcção Nacional de Estatística, GOTL, 2004) Table 6.3.
72
Seeds of Life, Social Economic Study- Cultivation Practices for Staple Foods: A study of Seeds of Life Farmers in Aileu,
Bacau, Liquiçá, and Manufahi (Dili: 2007).
73
MED, “Agriculture,” State of the Nation Report 2008 (2008).
74
Census Table 6.1.
75
MED, “Gender Equality,” State of the Nation Report 2008 (2008).
76
Sonali Hedditch and Clare Manuel, Timor-Leste Gender and Investment Climate Reform Assessment (Joint Publication of
IFC and AusAID, Jan 2010).
77
ILO, Rural Infrastructure for Women’s Economic Development in Timor-Leste: An Action Guide (2009).
35
9. A number of immediate actions can be taken to address gender issues, particularly in
the agriculture sector. For example, skills trainings and extension services can use female extension
workers and trainers and be better designed to take into account women’s skills gaps and needs,
household schedules, and mobility constraints. It is critical to develop deliberate and systematic
gender responsive interventions to enhance the overall efficiency of the economy and maximize the
positive impacts of trade for both sexes. Gender Focal Points now exist in each ministry, and MAFF
has been particularly pro-active in drafting a Gender Policy in Agriculture Development. This needs
to be complemented with more thorough gender analysis to understand the different needs, priorities,
and modes of participation of women and how existing institutions and practices hamper female
participation and productivity. We cannot assume that general improvements in these areas will
necessarily translate into higher participation and productivity among both males and females.
Agriculture and Poverty
10. This subsection briefly examines the engagement of poor and non poor Timorese
households in selected subsectors with strong export potential including coffee, mungbeans and
cattle (see Section B below). The analysis is based on the 2007 Timor-Leste Survey of Living
Standards (TLSLS) data. Examination is disaggregated by poor-non poor categories and when further
illuminating, by quintiles of per capita household expenditure. The poor-non poor distinction is based
on comparing 2007 per capita household daily total expenditure to the poverty line estimated at
US$.88 per day per person.78
Figure 4.1: Proportion of Households Cultivating Figure 4.2: Average Cultivated Area Among
Some Land (%) Cultivator Households (m2)
92 9000
90 8000
88 7000
86 6000
84 5000
82
80 4000
78 3000
76 2000
74 1000
72 0
Poor Non-poor Poor Non Poor
11. As both coffee and mungbean production is conditional on access to land, it is logical to first
examine access to land for different categories of households. On the whole, about 84 percent of the
total sample of 4,477 households considered for analysis was found to be using some land for
agricultural production. As Figure 4.1 indicates, a higher proportion of poor households (90 percent)
use land compared to the non poor (79 percent). However, as is seen in Figure 4.2, the average size of
land holdings is significantly larger for the non-poor (8539 m2) than for the poor (5048m2).
78
GOTL and World Bank 2008
36
Figure 4.3: Proportion of Cultivator Households Figure 4.4: Proportion of Cultivator Households
Growing Coffee Growing Coffee
30 50
45
25
40
20 35
30
15 25
10 20
15
5 10
0 5
0
Poor Non Poor
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5
12. For coffee production, Figure 4.3 shows that a bigger proportion of poor households
grow coffee (25 percent) compared to non poor households (17 percent). In fact, disaggregating
by expenditure quintiles (1-lowest, 5-highest) reveals that the proportion of households growing
coffee is the highest for the 2nd quintile and drops steadily after that (Figure 4.4). Figure 4.5 is
another way of looking at the relationship between coffee production and rural poverty. It shows that
the percentage of households growing coffee (in each district) is highest in poor districts and that the
four main coffee growing districts (Ermera, Aileu, Ainaro and Manufahi) are all very poor.
Figure 4.5: Coffee Production and Rural Poverty
% of hh growing coffee and poverty incidence
90.0
80.0 Poverty
70.0 Incidence (%) -
stepped
60.0
% hh growing
50.0 coffee
40.0
(%)
Linear (% hh
30.0
growing coffee)
20.0
10.0 Linear (Poverty
Incidence (%) -
0.0 stepped)
Manufahi
Covalima
Ermera
Manatuto
Lautem
Dili
Aileu
Liquica
Oecusse
Ainaro
Baucau
Viqueque
Bobonaro
Source: TLSLS 2007, and Census of Population and Housing 2004
13. Even though a greater portion of the poor households grow coffee, average production
of coffee per household is higher for the non poor, most likely because of larger plantation
areas. Non poor households on an average harvested 699 kg of coffee (green bean) in the year prior to
the survey compared to 378 kg harvest by poor households (Figure 4.6). The average amount of
coffee sold is also higher for the non poor (610 kg) than for the poor (301 kg). In fact, the average
quantity of coffee sold steadily increases up to the 4th quintile and then declines after that (Figure 4.7).
There is also a substantial discrepancy between the amount of coffee harvested and sold. For the 2nd
and 3rd quintiles, this discrepancy exceeds 100 kg per household on an average; for the other quintiles,
this is slightly less than 50 kg. From a policy perspective, it is important to determine whether this is
simply due to home consumption or to quality-related or other impediments in production reporting
and marketing.
37
Figure 4.6: Average Quantity of Coffee Harvested Figure 4.7: Average Quantity of Coffee sold (kg)
(kg)
700
800 600
700
500
600
500 400
400 300
300 200
200
100
100
0 0
Poor Non Poor Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5
14. The proportion of farming households growing mungbeans in Timor-Leste is less than
10 percent. It also does not vary significantly across poor and non poor groups (7 and 8 percent
respectively). Similarly, mean production per household (among growers) does not vary
systematically across expenditure groups – though it is lower for the 3rd and the 4th quintiles (Figure
4.8).
Figure 4.8: Mean Production of Mungbeans per
Household (kg)
180
160
140
120
100
80
60
40
20
0
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5
15. In the country as a whole, less than a third of households own any type of cattle. Figure
4.9 indicates that the proportion of poor households owning cattle (29 percent) is not that much lower
than for the non poor (33 percent). However, the average number of cattle owned (Figure 2.13),
which is low for all households, is significantly lower for the poor (1.1) than for the non poor (2.01).
In fact, as Figure 4.10 shows, cattle ownership declines steadily with average total household
expenditures. This pattern persists even when ownership is examined in value terms. The mean value
of cattle owned is $227 for poor households compared to $431 for non poor households, and the value
declines from $561 for the highest expenditure quintile to $193 for the lowest quintile. In terms of
animal husbandry, less than 5 percent of the households had their cattle vaccinated, and this rate was a
little lower for the poor (3 percent) compared to the non poor (5 percent).
38
Figure 4.9: Proportion of Households Owning Cattle Figure 4.10: Average Number of Cattle Owned per
(%) Household
34 2.5
33
2
32
31 1.5
30
1
29
28 0.5
27 0
Poor Non-poor Poor Non Poor
16. There is some trade in cattle though this is at a very low level. In the country as a whole, less
than a fifth of households reported selling any cattle in the year of the survey. However, as Figure
4.12 shows, the proportion of non poor households that sold cattle (16 percent) was higher than that
for the poor (13 percent). Finally, there is little difference in the number of cattle heads sold between
the poor (0.27) and the non poor (0.26).
Figure 4.11: Average Number of Cattle Owned per Figure 4.12: Proportion of Households that Sold at
Household least One Head of Cattle
3 18
16
2.5
14
2 12
10
1.5
8
1 6
4
0.5
2
0 0
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Poor Non Poor
Subsector Potential and Relative Impact on Poverty and Export Earnings
17. The potential of each subsector to contribute to increased export earnings and/or
poverty reduction depends on a number of factors including: (i) the number of households
involved in each subsector; (ii) the existing production base (crop areas and livestock populations);
(iii) existence of proven technologies to increase production and service providers to assist households
with adopting those technologies; and (iv) existence of operational value chains and export markets.
18. In 2009, about 67,000 households grew coffee in Timor-Leste. The corresponding figures for
mungbeans and cattle/buffalo were about 11,000 and 44,000 households, respectively. Given that
coffee-growing households harvest about 0.8 hectare (ha) of plantation per household and mungbean-
growing households grow about 0.25 ha of crop per household (as a second season crop when
irrigation water is limited), it is apparent in terms of crop areas (and therefore production and poverty
reduction potential) that coffee should be afforded priority over mungbeans. Increasing coffee
production by four times from about 54,000 ha of coffee plantations could result in additional export
earnings of about $45 million per annum.
39
19. The small mungbean industry does not have the same potential to impact on poverty, rural
incomes, and export earnings. But as discussed below, there is scope to expand exports and perhaps
produce 4,000 Mt per annum, which valued at $700/Mt could generate $2.8 million. Similarly, even
though there is potential to increase the export of live cattle from Timor-Leste to Indonesia, the size of
the sector (somewhere between 164,000 and 80,000 head) means that (for a national herd size of say
120,000 head and a 10% annual turnoff) a maximum of 12,000 head at $380/beast could generate $4.5
million. The export potential and value chain of each product is looked at in more detail below. The
broad conclusion though is that all three subsectors could contribute to increased rural incomes, and
therefore poverty reduction, and that the greatest potential in this regard lies with coffee.
B. VALUE CHAINS FOR COFFEE, CATTLE, AND MUNGBEANS
20. An analysis of the integrated value chain systems of three selected subsectors was
carried out for this chapter. GOTL, like others, use Value Chain Analysis (VCA) to help identify
areas where policy actions could have a positive impact on agricultural productivity. 79 As proxies for
similar activities in the sector, the selected subsectors cover a spectrum that might offer potential for
export diversification and growth.80 It is important to note that while a VCA can provide valuable
input into the formulation of policy/institutional interventions, it is also increasingly difficult to obtain
reliable data for certain commodities at each step in the chain. This is particularly true when moving
up the chain and examining further processed, higher value products, many of which bear no
resemblance to the original raw commodity. Value chain work for this DTIS relied on the findings of
earlier studies/projects, information collected during interviews with the principal players in each
related chain, and feedback from several focus group discussions.81
21. During the field work, specific products with ‘best prospects’ for export development
were initially selected, using a rapid ‘Strengths, Weaknesses, Opportunities, and Threats’
(SWOT) assessment (see example for green mungbean in Annex 4.2). The criteria adopted in this
DTIS for selecting specific subsectors included the existence of:
Export market demand for surplus production and an identifiable market chain;
A product value chain;
A strong production base in the area, preferably existing surplus output (the case for
coffee);
Agro-ecological potential to increase productivity with or without significant inputs;
Previous or ongoing production and marketing activities;
79
GOTL, The Strategic Framework for Rural Development in Timor-Leste (2010 – 2020) (Dili: GOTL, Dec 2009): “A
commodity-based approach with value-chain based interventions is one strategy for improving productivity of specific crops.
Value chain mapping would identify bottlenecks and constraints to be addressed and strengthen value chain partnerships.
The interventions would seek to improve all aspects along the value chain, from input supply, to production, to processing,
storage, transport, trading and finally consumption. A commodity based approach would also enable the development of
crop specific specialists for research and extension purposes and commodity based trading groups to transfer surpluses to
districts with deficits. MAF could be instrumental in establishing the commodity based programs, extension packages and
coordinating with development partners for input supply, information sharing, identifying target areas and monitoring
impact.”
80
Numerous studies and project reports identified various technical and non-technical issues specific to Timor-Leste’s
unique economic, social, and political circumstances as key constraints to agricultural development.80 Among these issues,
three principal constraints were specifically emphasized: (i) traditional and social values common among hill tribe
communities; (ii) prevalent apathy and passive community resistance with respect to participating in development efforts;
and (iii) insufficient rural traders, lack of formal and informal credit, and limited rural resources and services, particularly
after the exodus of Indonesian entrepreneurs at Independence, to stimulate agricultural sector growth.
81
It is important to emphasize that the value-chain analysis itself has its own limitations in identifying all the critical
constraints to productivity growth and competitiveness, whether the focus of investigation is the agriculture sector and/or the
manufacturing sector. Therefore, the findings of the VCA exercise in this DTIS are complemented by the findings
established through field visits and interviews, as well as by the findings reported in earlier studies.
40
An identifiable market niche, even when a market is hard to identify; and
Relevant community’s willingness to adopt new technologies/practices.
22. Based on these criteria, government technical staff, exporters, regional traders, and
international advisers have contributed ideas about potential product chain options. Some
candidate products were also identified based on the findings of earlier studies/projects. Specifically,
The West Timor Market Study,82 conducted in mid-2006 and funded by the GTZ,83 provided valuable
information on Indonesian cross-border trade opportunities and issues. Among potential exports, the
suggested product chains included:
Some grains and pulses, including mungbean and groundnuts;
coconut products;
soybean for export to Indonesia;
coffee;
cattle production for live export to Indonesia;
timber and forestry products, including teak and candlenuts; and
other commodities characterized by niche market potential, including: (i) horticulture
(fresh produce for domestic market and export); and (ii) cocoa and semi-processed
bamboo.
23. For the DTIS, three subsectors were selected with three specific (proxy) products
representing them: (i) coffee84; (ii) grains and pulses (mungbean being the focus product); and (iii)
livestock (cattle being the priority). Details on the rationale for selection are provided in Annex 4.3.
In Chapter 5, the DTIS also looks at an additional subsector which may have future export potential—
the horticulture subsector.
Coffee
24. Coffee is Timor-Leste’s leading non-oil export, with an estimated area of 52,000 ha of
plantations, annually producing 6,000-12,000 Mt of green beans. Eighty percent of the coffee is
Arabica, with over 80 percent being exported. The year 2008 was an exceptional year with good
rainfall and a bumper crop of 14,000 Mt compared with 10,500 Mt in 200785 and an estimated low of
8,000 Mt in 2009, reported to be a year ‘of rest’ for the trees. The main coffee-producing districts are
Aileu, Ainaro, Bobonaro, Ermera, Liquiçá, and Manufahi, with Ermera accounting for half of the total
crop. Cultivation of coffee has been a source of supplementary cash for about 67,000 families,
representing approximately 30 percent of the population.86 Of the 52,000 ha of plantations, it is
estimated that half is cultivated by smallholders, and the other half is mostly abandoned, large-scale
plantations previously owned and managed by ‘planters’ during the Portuguese time. The harvest
from these larger plantations is picked by nearby farmers. Nationally, 29,000 hectares are estimated
to have unproductive old trees, resulting in low national average yields of 150 -200 kg/ha of green
coffee beans, with most growers cultivating less than one hectare.87
82
Adam Sendall & NGO Timor Membangun, West Timor Market Study (GTZ, 2006).
83
GTZ.
84
The rice value chain was earlier analyzed by a MED/GTZ team, although conclusive results are yet to be made available.
Moreover, with the Government’s extensive interventions in rice marketing (through subsidies) severely distorting local
production, rice milling, and market demand, the rice chain was not included in the DTIS.
85
World Bank/MAFF Agribusiness Directorate, Restructuring the Agricultural Service Centers to Achieve Timor-Leste’s
Development Goals (2006).
86
MAFF, Coffee.
87
MAFF, Coffee.
41
25. The value of Timor-Leste’s annual coffee exports varies from year to year, depending on
yields and international prices. However, the industry is generally considered to be worth between
$10 million and $15 million per annum in terms of foreign exchange earnings, with enormous
potential to increase from this low base to perhaps annual export sales of about $45 million. This
potential, along with impact on poverty, places Timor-Leste’s coffee industry at the top of the list of
agricultural commodities which should be supported by GOTL.
26. Generally, coffee farmers are paid a flat price for either cherry or parchment, and no
incentive is paid to farmers for quality. There are exceptions—for example, the recently introduced
practices under the donor supported programs which assist smallholders in improving quality and
negotiating with factories. The coffee produced for export is sold as green beans, and the value-
adding roasting process takes place in importing countries, where it is then blended and packaged into
a consumer product.
27. Although Timor-Leste produces less than 0.2 percent of the global coffee supply, it has a
competitive advantage in organic production. Similar to other net export commodities, coffee
generally reflects export parity prices and follows international price movements. In early years of the
decade, prices dropped significantly, severely disrupting Timor-Leste’s coffee industry at a time of a
politically difficult and violent situation.88
Chain Operators
28. The structure of the coffee value chain is short and simple (see Figure 4.13).89 The major
stages include: (i) farm production; (ii) generally negligible on-farm post-harvest handling; (iii) sale
from farmer to local buyer/collector; (iv) processor and/or exporter; and (v) domestic retailer and
consumption.
29. Coffee producers are typically very poor upland subsistence farmers. Other value chain
stakeholders in the districts include rural collectors, truck drivers, or traders handling small volumes
and often acting as agents for processors cum exporters. There are several groups of coffee buyers
and exporters in Dili, including small development projects, NGOs, traders buying mainly parchment
and exporting through Indonesia, as well as heavily invested companies exporting directly from Dili,
such as:
Timor Corporation Ltd (took over the Delta Café firm in 2006)—its 2009 exports of green
bean amounted to about 4,700 Mt, mostly to Germany and a few other countries;
CCT —2009 exports of green bean reached 1,500 Mt, mostly to U.S.A. and Europe;
ELSAA Café Ltd — export of green bean in 2009 was about 450 Mt, mainly to Portugal; and
Timor Global Ltd— with exports of 1,500 Mt green bean in 2009.
30. These four companies account for 90 percent of coffee exports.90 CCT has been leading
the way by improving the processing quality and being the first to obtain Organic and Fair Trade
Certification, experiencing a premium difference in f.o.b. price of approximately $0.10/kg green bean
exported.
88
Further details on Timor-Leste’s coffee industry can be found in the MAFF’s 2009 Commodity Profile Series and in the
2003 Oxfam report (C. Deutsch, Overview of the Coffee Sector in Timor-Leste, Oxfam, 2004), which provide background
data and information for the VCA. The following is based on these earlier studies with updated findings from the October –
November 2009 field work for the DTIS.
89
Input services (seedlings, tools, demos on a pilot basis) provided by the MAFF and several donors, including: PARC
(Pacific Asia Resource Centre); Peace Winds, Responsavel Centro Agro-Florestal e Technologico de Ermera; President’s
Office, Monaco Development Aid Program.
90
A detailed description of buying, processing, and selling practices is available in: MAFF, Coffee.
42
Figure 4.13: Timor-Leste: Coffee Value Chain
Panel A: Farmers Selling Coffee Cherry (reportedly 50 percent of all coffee produced)
CCT Maubissi & CCT:
Input Emera: (pulping, CCT Dili: (export
services Farmers, washing, (drying, certified
(seedlings, Farmer groups transport) hulling, organic to
tools, demos) (production storage, Europe/US/
on a pilot basis harvesting, deliver ELSAA Cafe, shipment, Australia etc)
by MAFF & at collection Gleno: transport)
several donors point) (all processing ELSAA Cafe:
Gleno factory, (export non-
transport) certified to
Portugal, etc)
CCT: CCT:
Production costs: Buys @ $0.30/kg 1kg CCT:
no variable costs – cherry (4-5kg parchment = FOB $2.10/kg
family harvest cherry = 1kg 0.70kg green green bean
labor only, parchment) bean average
No input costs farm gate price: ELSAA Cafe:
$0.30/kg Buys @ $0.32/kg ELSAA Cafe:
factory gate price: cherry. FOB $1,95/kg
$0.35/kg Transport green bean
Emera-Dili average
$100/4t/60km
Panel B: Farmers Selling Parchment (reportedly 50 percent of all coffee produced)
Village agents, TimberCorp,
Input Farmers, exporters and Timor Global, TimberCorp,
services farmer groups in collectors ELSAA Timor Global
(seedlings, upland areas (collection, (2008), ELSAA (2008)
tools, demos) (production, transport) small traders: small traders:
on a pilot basis harvesting, (drying, export to
by MAFF & pulping, drying, hulling, Europe/
several donors transport) cleaning, Indonesia/
storage, Australia/
shipment, Portugal, etc
transport)
No variable costs, Buys parchment Buys
family labor only. @ $1.20-1.50/kg parchment @
Farm-gate price @ Traders sells $1.20-1.60/kg
$1.20 -1.50/kg parchment @
parchment $1.30-1.60/kg Sells green Sells FOB @
No input costs (depending on bean $1.95/kg
quality). domestic average
4-5kg cherry market @
equals 1kg $1.90/kg
parchment average.
1kg
parchment =
0.67 kg green
bean
43
31. TA for the development of the coffee sector commenced in 1994 with the entry of the US
National Cooperative Business Association (NCBA) backed by USAID funding. Currently, the
NCBA works through the umbrella organization CCT. The CCT incorporates coffee processing,
marketing, and trade support as key components of the project. The essence of the marketing support
involves strengthening village coffee grower groups to improve harvesting practices, achieve
economies of scale in handling and transportation, and standardize quality and grades, thereby
improving negotiating power in the international marketplace.
Box 4.1: ELSAA Café, Gleno sub-district, Ermera district
In 2009, ELSAA Café purchased coffee parchment and small volumes of cherries from surrounding
growers. Their annual exports amount to approximately 500 Mt of green beans. About $5 million worth
of investment has been made in a new processing plant for both cherries and the handling of parchment,
with an annual capacity of up to 5,000 Mt green bean, ten times more than the 2009 production. All
processing will take place in Gleno, where the cooler climate allows for the storage of green bean, although
there are plans for mechanical drying. Demand from the new plant will increase local demand for green
beans, thus significantly intensifying competition with other buyers. Hence management is keen to
participate in coffee rehabilitation schemes. They have, however, yet to devise a strategy and assess
extension services to farmers. One farm incentive is higher prices—$0.10/kg parchment for better quality
produce, a practice also introduced by Timor Global Ltd. Currently, the MAFF and three TA programs are
supporting coffee tree rehabilitation, with funding covered by donors for: (i) farm tools and seedlings; (ii)
pulping machines for coffee grower groups; and (iii) wages, operational expenses and management of
extension worker services. During discussion with field workers it was reported that the on-farm trials
have proven feasible and can now be replicated on a wider scale, although it is recommended that it
involve all four processing factories and provide seedlings for designated areas.
Coffee Value Chain Bottlenecks
32. One of the key bottlenecks is the lack of extension service support from the private
sector to farmers because of potential free rider problems. There is little incentive for the private
sector to provide extension advice to farmers because benefits can be captured by competitors. With
stagnant coffee output and strong foreign import demand for organic coffee, the exporting companies
compete aggressively to purchase cherries and parchment from farmers, resulting in favorable farm
gate prices.91
33. Only CCT provides some services to the member farmers since it is a ‘cooperative.’
However, other processors are assessing what types of services they could provide in the area of
smallholder rehabilitation. The coffee processors reported that in the case of Arabica coffee
parchment, which is the main crop, on average they achieve 66 percent exportable quality, with the
remainder being lower grade and waste. This is a significant loss and much higher than, for example,
the 20 percent lower grade and loss encountered in Indonesia. ELSAA Café reported that in their
newly installed coffee processing facilities, all processing takes place in the Gleno sub-district and
they intend to store green bean for a longer period in the cooler climate. This is unlike the other three
processors who export finished green bean immediately following processing in Dili, where the
humidity is high, thus impacting the quality and storage life.
34. Aside from extension advice to farmers, processors reported high transport costs. For
example, from Same District to Dili, the in-season rent for a 4-ton truck is $250 one-way since
demand for transport is high during the May to August harvesting period. The transport cost recorded
in a survey in 2006 was $0.18 per kilometer-tonne for small volumes.92
35. The other major cost is weekly fuel consumption. To operate the Timor Corporation
hulling plant, the weekly fuel consumption amounts to 4,500 liters of diesel at a cost of $0.90/lt, and
this is low compared to 2008 when the price was up to $1.45/lt. It is noted that Indonesia subsidizes
91
MAFF, Coffee.
92
AusAID/MAFF, Outline – Integrated Rural Development Program Specific for East Timor, BARDEP (1998).
44
fuel (currently retailing at 0.55/lt), which may put Timor-Leste’s coffee industry (and many other
industries) at a disadvantage. This is not to suggest subsidies for fuel in Timor-Leste but to give an
example of an external factor that puts Timor-Leste at a competitive disadvantage.
36. Based on the DTIS-related literature review and interviews with major stakeholders,
several key constraints to enhancing productivity and export competitiveness of the coffee value
chain were identified:93
Challenges to improving international cost competitiveness: relatively high local salaries,
poor roads and infrastructure, high fuel costs, and limited access to processing facilities in
remote areas;
Inconsistency of quality compounded by poor understanding among producers of quality
issues, general lack of price incentives for farmers for high quality coffee, and poor farm
cultivation practices caused by the lack of effective extension services;
Aged and neglected plantations, resulting in vulnerability to diseases (currently, shade
trees are affected by a leaf fungus, potentially also coffee bushes) and low yield;
Difficulties in reaching large numbers of small growers. Formation of farmers’
organizations or grower groups could help strengthen bargaining power and improve the
impact of extension services, post harvest practices, processing, and marketing;
Growers’ market access difficulties for increased production due to an insufficient
number of local traders after Independence, when Indonesian traders departed;
Lack of access to formal commercial credit for working capital needs of farmers wishing
to rehabilitate plantations and of rural traders wishing to purchase increased amounts of
coffee. This situation is reportedly resulting in buyers with cash buying coffee at bargain
prices when growers urgently need cash for necessities;
Traditional high consumption levels by coffee-growing families, immediately post
harvest when communities expect cash from coffee sales to be shared; and
No industry coordination and the lack of any organization for sharing information and
jointly planning interventions.
37. There is significant potential to increase production of high grade coffee for specialty
markets, but the challenge is to develop and maintain consistently high coffee quality. This
requires improved coordination among the key stakeholders in the coffee value chain. As a follow up
to the International Coffee Conference held in April 2009,94 there were suggestions as to how to
coordinate interventions. A working group with members from processors and the MAFF has met
(latest gathering in October, 2009) to discuss concrete actions and activities. However, intervention
details are still unclear. In general, most organizations recognize the development challenges facing
the sector, but there is little communication between the organizations and donor projects. This
results in the duplication of efforts and lack of synergy between the support programs. There is
clearly a need for better donor coordination to ensure that various projects reinforce each other and
there is technological spillover. Discussions are ongoing as to whether a Coffee Board, supported and
managed by the industry groups, is a more effective way to advance stakeholder coordination,
productivity, and export competitiveness in Timor-Leste’s coffee sector.
Examples of Support Initiatives
38. In addition to CCT, there are currently several other organizations and projects
assisting smallholder coffee farmers but on a small scale.95 The MAFF’s Coffee Unit has initiated
93
“Conference Proceedings: 1st International Conference on CAFÉ TIMOR” (Dili: Apr 2009); MAFF, Coffee; and Deutsch.
94
1st International Conference on CAFÉ TIMOR.
95
Details of their activities can be found in: MAFF, Coffee.
45
several small rehabilitation programs, reportedly including the distribution of 20 pulping units,
establishment of six central nurseries (targeting production of 800,000 coffee seedlings in 2009),96
and a rehabilitation program that pays farmers $200-300/ha and works with 30 farmers on
approximately 50 hectares. They employ two centrally-based coffee specialists and two specialists in
the Ermera district.
39. It is estimated that coffee production in Timor-Leste could more than triple (and
possibly quadruple) through replanting and pruning alone. The MAFF and several donors
working with coffee-growing communities have already initiated a ‘coffee commodity development
program,’ and it is recommended that this program be further supported to achieve a target of
rehabilitating or replanting 40,000 hectares by 2020.
40. The MAFF’s 2009 study on coffee presents several coffee sector development initiatives
and assesses their likely impacts on a large number of growers across the sector. It also
identifies a number of distinct approaches for the development of the coffee sector, including:97
Commercial private sector development by processors and traders;
Community capacity building practiced by NGOs and the CCT; or
a combination of both.
Grain and Pulses (priority Mungbean)
Overview
41. Whilst there is potential for increased export earnings from the sale of mungbeans to
Indonesia, the relative size of this subsector needs to be kept in perspective. This is particularly
the case when compared with the potential of the coffee subsector to generate increased foreign
exchange and to impact on rural poverty. The analysis above concludes that the coffee industry could
be 15 times the size of the mungbeans industry in terms of export earnings and benefit six times as
many rural households, hence the recommended focus on coffee as a priority export crop.
42. In the southern parts of Timor-Leste, agro-climatic conditions are highly suitable for the
production of pulses. An estimated 10,500 ha was in production pre-Independence.98 In 1997,
mungbean production was estimated to be more than 4,000 Mt from an area of 4,000 ha.99 After
Independence and following the departure of Indonesian traders, the lack of marketing infrastructure
practically wiped out mungbean production. Any current production is consumed by farmers, with
small quantities sold on the domestic market. Estimates of domestic trade are in the range of 300 to
400 Mt from about 1,000 ha. Limited volumes —about 100-125 Mt— are exported to West Timor,
Indonesia.100 Domestic production is inadequate to meet the domestic demand as indicated by the
recently introduced GOTL and World Food Program (WFP) schemes. Hence, mungbean is imported
out of season under the Food Security Program —more than 2,000 Mt in 2006.101
43. Most growers are subsistence households. Re-starting mungbean cultivation would
mean a valuable source of supplementary cash. Average yields are reportedly low, on average
300-500 kg/ha, with most growers cultivating less than one hectare. Mungbean is a low-input crop,
requires no tilling, and is relatively easy to grow. It does not pose any major technical problems,
except occasional attacks by insects. If not sprayed, the life span of stored seed is only 3-4 months.
96
The quality of the seedlings produced in MAFF’s nurseries was poor and the seedlings were distributed too late in the
planting season.
97
MAFF, Coffee.
98
Sendall; MAFF, Mungbeans.
99
MAFF, Mungbeans.
100
MAFF, Mungbeans.
101
MAFF, Mungbeans.
46
Also, the no-till practice makes production a carbon-credit efficient practice,102 and the crop
contributes to improving soil fertility as a legume plant. Usually farmers keep their own seed, which
is adequate for an area handled by family labor. In lean years, all output is consumed. In some areas,
increasing the planted area requires additional labor or mechanical preparation (and therefore not no-
till) of the ‘sleeping land.’103
44. There is clearly scope for increasing production and existing commercial demand, both
in Indonesia and in Timor-Leste. For the latter, there is demand from the recently introduced
school feeding program. Also, in 2007, the Dili exporter Timor Global Pty Ltd conducted an export
trial to Singapore of mechanically brushed and graded produce—the quality of which was well
accepted. But increased supplies are required to commence exports to other countries. The local
variety is in strong demand, reportedly receiving a premium price over improved varieties. A further
value adding opportunity has been highlighted in separate USAID Dezenvolve Setor Privadu (DSP)
studies, outlining the attractive seasonal market price differences between peak and off-peak seasons
in Kupang, West Timor. Programs for storing mungbean for several months will, however, require
new skills and capital in order for this value chain to value-add.
Chain Operators
45. Apart from the many subsistence farmers, other stakeholders are rural collectors and
traders handling small volumes for the domestic market. In the Bobonaro and Covalima
districts, a dozen trucks of mungbean are exported annually to Atambua, West Timor. The
major buyer is currently the MTCI, procuring produce from district traders for the school feeding
program and storing product in their Dili warehouses for gradual release. As the MTCI’s minimum
price —c.i.f. Dili warehouse— has been fixed slightly higher than average prices paid by Atambua
importers, most of the mungbean produced is now procured by the MTCI. This incentive is
welcomed by farmers although the scheme is unlikely to be sustainable in the long-term. Firms
involved in buying and exporting mungbean are:
Leo Atsabe Ltd, Maliana;
BURAS HAUBUR, Maliana; and
COMICO Ltd, Covalima.
46. The structure of the mungbean value chain is short and simple, as depicted in Figure
4.14. The major stages include: (i) farm production; (ii) negligible on-farm post harvest handling; (iii)
farmer-to-local buyer/collector; (iv) domestic wholesaling/retailing and/or export to Atambua; and (v)
consumption. Following the exodus of Indonesian traders and entrepreneurs after Timor-Leste’s
Independence, only few agricultural input service providers and rural traders have established
themselves in this market.
102
If applied; at present there is are no zero- or minimum-till practices used in Timor-Leste, except for traditional
swiddening with dibble sticks on steep slopes.
103
Preben Larsen, Timor-Leste Agriculture Based Value Chain Promotion, RDP II (Prepared for GTZ/EU/MAFF, Apr
2008); Preben Larsen, Timor-Leste Agriculture Based Value Chain Promotion, RDP II (Prepared for GTZ/EU/MAFF, Oct
2007); Preben Larsen, Timor-Leste Agriculture Based Value Chain Promotion, RDP II (Prepared for GTZ/EU/MAFF, Sep
2008).
47
Figure 4.14: Timor-Leste: Mungbean Value Chain
Input Farmers, Village agents Township
services: farmer groups: & collectors - traders
seed, - upland (collection & - exporters to
extension - low land transport Atambua
program, (production, function) (bagging &
trader access drying, cleaning, transport) Dili wholesalers,
to credit delivery function)
MTCI
No input costs Average yield: 500 Buys @ $0.35- Buys @
(in RDP II kg/ha, 0.40/kg, sells $0.40-
areas certified farm gate price @ $0.45/kg 0.45/kg,
seed costs: 2008: 0.35-0.45/ sells @ $0.50-
$1/kg, kg 0.65/ Buys @
40kg/ha) kg $0.65/kg,
sells @ $0.70/kg
Note: all prices are averages.
47. In the MAFF’s Commodity Profile Series No. 3104 (on mungbeans), a detailed study is
presented on Timor-Leste’s competitive advantage, indicating seasonal advantages105 of exporting to
West Timor, and providing information about Timor-Leste’s wholesale break-even purchase price. In
addition, a farm gross-margin/cost of production model is presented for intensified mungbean
production using West Timor farm trial results.
Value Chain Bottlenecks
48. Mungbean value chain upgrading and expansion of production efforts are facing a
number of reported key challenges106 to enhancing productivity, competitiveness, and exports
including:
Inadequate/ineffective extension services —reportedly the most critical constraint;
Insufficient seed supplies of improved varieties to meet demand from new growers, who
also lack resources to purchase seeds;
Traditional farm cultivation practices, resulting in low productivity of farm labor;
Large numbers of small growers that are difficult to reach;
Low commercial mungbean quality for export to Asian markets;
Difficult market access for growers’ increased production due to insufficient number of
local traders, poor roads, and lack of networking with buyers;
Local entrepreneurs lack access to formal credit and facilities to handle increased
purchases, and to export to West Timor; and
Large tracts of ‘sleeping land,’ particularly in Covalima district, requiring industrial
tractor services to plough upland areas for corn inter-cropped with mungbean.107
104
MAFF, Mungbeans.
105
In India and China in-season mungbean production takes place in October, and in Timor-Leste rainy season production
takes place in May.
106
Larsen, Apr 2008; Larsen, Sep 2008; Larsen, Oct 2007.
107
Note: this is not no-till as suggested earlier.
48
Examples of Support Initiatives
49. Efforts are being made to fill gaps by developing the needed services with support from
development partners. For example, the Second Rural Development Programme (RDP II) is
supporting NGOs and rural traders, such as the Fini Esperansa and Hadomi Malu, both of whom are
promoting mungbean production. Also, USAID DSP promotes mungbean production and linkages
among mungbean farmer groups, collectors, and traders. The project also provides seed grading
equipment as a grant to Fini Esperansa and Covalima. The RDP II supports private sector certified
seed development and seed distribution as well as the upgrading of MAFF’s extension services to
improve farmer productivity and market linkages. The RDP II has put in place an arrangement with
the ANZ bank for rural traders to gain access to a formal line of credit of up to $4,000 on commercial
terms but without collateral.
50. As a result of the RDP II’s108 ongoing value chain consultations among chain operators
and support agencies, preliminary interventions for chain upgrading have been identified and
problems and challenges are being addressed. Given limited resources, skills, and experienced
operators in the agricultural services sector, interventions with the best chance of success were
selected by applying the five steps for value chain promotion outlined in Annex 4.4. The
interventions are gradually being implemented and tested during consecutive agricultural seasons, e.g.
involving the MAFF’s extension services, NGOs, and support to traders both for wet-season
commercial mungbean upland production in Bobonaro and wet and dry-season lowland production in
Covalima. Furthermore, formal commercial credit facilities have been provided to rural traders as
well as support for linking growers to traders. The RDP II’s TA includes:
‘Seed grants’ to distribute improved quality seeds from Fini Esperansa, delivered through
contracted local traders and NGOs under the RDP II private sector input supply revolving
fund scheme;
funding of a NGO extension service scheme to test a private sector alternative extension
model;
recruitment of short-term Indonesian field crop production specialist to improve the
delivery of NGO and MAFF extension services and the work experiences and skills of
staff; and
formal credit to local traders through the ANZ bank on commercial terms with GTZ
providing bank guarantees.
51. Based on RDP II’s experiences in Bobonaro and Covalima Districts, preliminary tests
have shown positive results from mungbean production when basic essential support services
and incentives for growers and traders are provided. Increased output can be exported to
Indonesia and other Asian nations, creating direct benefits for poor farmers. Hence, this value chain
approach could systematically be promoted and easily replicated in other districts particularly in the
southern parts of the island, but for this, TA would be required. As for improving the contents and
delivery of the public extension services in general and for grains and pulses provided by the MAFF
in particular, the following (Box 4.2) is excerpted from the Strategic Framework for Rural
Development in Timor-Leste:109
Box 4.2: Notes on Public Extension Services
“MAF has recently recruited 400 extension officers, allowing one extension worker for each village in Timor-
Leste. They are supported by sub-district coordinators and supervisors at district level […] A review of the whole
agricultural knowledge system is required. Firstly, the skills level of extension workers needs to be improved
through developing quality curricula for pre-service training at agricultural secondary schools, colleges and
universities. A career development program for in-service training also needs to be developed.
108
Larsen, Apr 2008; Larsen, Sep 2008; Larsen, Oct 2007.
109
Sendall.
49
Pro-active, client-based extension management is of a priority concern, as is improving farmer-based technology
development through integrated research-extension approaches. An important consideration is the limited
number of employment opportunities within the public extension service. More graduates will be entering the
private sector, thereby requiring different skill profiles. Private sector training providers for farmers should be
encouraged, through promoting private sector partnerships with a focus upon increasing incomes through
agribusiness. With limited public extension coverage, farmers themselves will also need to be better educated
and have access to short duration training courses. A five-year program to strengthen the agricultural extension
system is required to address the above.110
It is also proposed to support longer-term commodity development programs and public private partnerships for
the provision of strategic extension campaigns. MAF’s main roles would be coordination and funding. Industry
experts would be required to develop extension and training materials to promote specific technologies and
techniques or address specific constraints, such as diseases for specific crops. Extension officers from MAF and
the private sector, such as NGOs, would then be trained on the technologies prior to mobilizing the campaigns.
Such extension campaigns are performance driven, have a wide coverage and also encourage the emergence of
private sector extension providers. It is proposed to develop and execute strategic extension campaigns, through
public private partnerships, for each of the commodity development programs described above, by 2015.”
Livestock (Cattle)
Overview
52. Grazing and animal resources in Timor-Leste are undeveloped, with extensive
underutilized grazing lands that can be developed to promote the export of live cattle to
Indonesia111. The area of grazing land is reported to be 206,000 ha, and the districts with the largest
areas are Lautem, Covalima, Manufahi, and Viqueque.112 In 2001, the number of beef cattle was
estimated to be 164,000, which in 2004 was reported to have increased to 174,000 by the MAFF’s
Livestock Division.113 The accuracy of these data is disputed and some sources claim that the beef
cattle population might be only around 80,000 head. Based on reported cattle numbers, currently the
most important areas for raising cattle are Bobonaro, Oecussi, Viqueque, and Covalima.
Approximately 80 percent of the herd is cows, predominantly Bali cattle which are well adapted and
easy to handle (but do not travel well in small trucks on poor roads), and the balance is buffalo,
mostly used for the traditional preparation of rice fields and consumption at traditional ceremonies.
53. The cattle sector comprises mainly of smallholders keeping on average 2 to 5 head each,
grazing on communal land pastures and crop residues. Only a few medium-size cattle owners
keep animals primarily for status and consumption at traditional ceremonies rather than for
commercial purposes. As summarized in Annex 4.5 on cross-cutting value chain constraints, most
farmers keep cattle to sell for cash in emergency, e.g. as a ‘bank,’ although the status element is
strong and viewed according to the number of animals in a family.
54. The export industry is currently geared for Indonesia, focusing on small numbers of
male live bulls.114 There is, however, a growing domestic market for beef due to increasing
consumption and tourism, catered for by local individual butchers cum retailers in Dili. They operate
at 10 slaughtering points, mostly inside open markets, since the abattoirs (only public) are not
operational. Some 20 to 30 cows and buffaloes are estimated to be slaughtered daily in Dili, i.e.
approximately 9,000 head annually. Only limited quantities of fresh local beef are sold in
supermarkets and most is retailed at the three daily open markets in Dili. Due to the lack of cooling
facilities, beef is not aged and is therefore of low quality and sold on average for $3 per kg. In 1998, a
110
The forthcoming RDP IV will assist with this task, as will Seeds of Life Phase III.
111
With one proviso: that the noxious weed Chromoleana can be eradicated and replaced with productive and palatable
pastures. At present much of Timor-Leste’s grazing lands are invaded with this weed which means that large areas of
“resting or sleeping land” are currently totally unproductive.
112
MAFF, Cattle.
113
Latest available data.
114
Prior to Independence, cattle ‘exports’ to Indonesia were reportedly around 5,000 heads.
50
modern and well equipped abattoir was constructed in the Tbar sub-district and was ready for
operation. But during the 1999 violence, it was stripped of all equipment and since then abandoned.
55. About 200 Mt of frozen beef are imported into Timor-Leste annually, mainly from
Australia and New Zealand, and sold in the four supermarkets to expatriates and middle
income local customers.115 The imported beef is reportedly of the lowest quality, often referred to as
’freezer burned’ beef, yet retail prices are between $8 -12 per kg. Thus, there is also a potential to
substitute some of the beef imports — in total equivalent to some 1,400 local cattle annually.116
56. The potential to increase live cattle exports to Indonesia is considerable, provided: (i)
the very small base herd can be increased in size to generate increased annual turnoff; and (ii)
the industry is not under-cut by Australian exports if it becomes a serious competitor.
Indonesia's demand for beef is estimated to be growing at 6-8 percent per year, and imports are likely
to supply 38 percent of their demand by 2010.117 More than 750,000 head per year are imported live
from Australia, most of which are fattened for 2 to 5 months in Indonesian large industrial feed lots.
There is also strong demand in Indonesia for Timor-Leste’s Balinese-type cattle due to their low meat
fat content compared with Australian-breed Indonesian feed-lot fattened cattle. TA could play a
crucial role in increasing cattle production for export.
Chain operators
57. The structure of the live cattle export value chain is long, involving extensive Indonesian
inter-island trade, as depicted in Figure 4.15. The DTIS analysis primarily considered the Timor-
Leste part of the chain. Rural traders commonly buy from subsistence farmers, often acting on behalf
of exporters who purchase the bulk of traded live cattle. Rural traders transport the live cattle either to
Dili butchers or sell them to one of the few exporters operating holding yards with some feeding prior
to export to West Timor.
58. According to the MAFF’s Livestock Division, 3 businesses exported live cattle and
buffalo bulls to Indonesia in 2008.118 The CCT was the largest exporter, and the two other firms
operated out of Covalima district. The number of bulls exported in 2008 was reportedly around 3,000
head at an estimated total value of $750,000, including export from the Oecussi district, with 80
percent assumed to be cattle and the remainder buffalo.119 A small number of cattle are exported
unregistered, especially from Oecussi, although at lower prices than those legally exported.
115
Sendall.
116
Sendall.
117
Sendall.
118
The export of only the heaviest bulls is applying reverse genetic selection to the herd.
119
Data from the MAFF’s Division of Livestock include estimated illegal/informal border export.
51
Figure 4.15: Timor-Leste: Live Cattle Value Chain for Export and Domestic Market
Dili
Input Farmers, farmer Village agents,
slaughter
services: groups: CCT program
point trader
breeding, (CCT fattening (transport to
AI & vet, program with a farmer & pick
extension selected up) Exporters, Indonesia
services, farmers) including CCT live cattle
feed, others (finish fattening) importers,
West Timor,
Surabaya
Buys @
Farm-gate price: Buys @ $300/head
$270-308/head $270/head,
wide range in sells @
No farm prices according $300/head
Buys @
inputs and to weight & CCT buys @
$270-308/head,
costs (i) conditions (i) $270/head
sells @ Indonesia
150–280kg/ inter-island
$380/head CIF
head trading,
West Timor
(i) Farm- level budget data for the CCT cattle operation are presented in Timor-Leste, Commodity Profile Series: No. 4 Version 1 – Cattle.
Note: All prices are secondary data, average and recorded during a few interviews. In MAFF’s Timor-Leste, Commodity Profile Series: No.
4 Version 1 – Cattle a detailed value chain for a 280 kg animal shipped to Jakarta via Surabaya is presented together with a Timor-Leste
value chain for cattle slaughtered in Dili.
59. The market prices paid for cattle in Timor-Leste are closely linked to the overall cattle
prices in Indonesia. They generally reflect export parity prices with the f.o.b. prices for Australian
live cattle exported to Indonesia from the northern part of Australia, which is a common guideline,
quoted as follows:
Table 4.2: Current live cattle exports to Indonesia, Darwin FOB prices:
Live cattle AU$/kg US$/kg
Steers 1.80 1.65
Heifers 1.50 1.40
Cows 1.20 1.20
Cattle Value Chain Bottlenecks
60. Development support for the cattle industry in Timor-Leste has barely started. The
MAFF’s Livestock Division has established a small communal fodder bank in the Same District and
some plots in other areas, but the implementation of enhanced productivity and farm management
practices are reportedly proving difficult when applying existing farm production practices as a
model. It appears that farmers are reluctant to carry fodder and cut large volumes of dry matter
needed to feed the animals,120 whereas the farming model developed by the CCT is reportedly more
successful.
120
MAFF, Cattle.
52
61. The cattle industry’s upstream and downstream value chains are facing a number of
challenges in expanding production and in enhancing productivity and export
competitiveness.121 Some of the key constraints include:
A very low production base (small national herd size) which limits the size of the annual
turnoff of surplus males and eventually surplus females,
Low farm productivity due to traditional, rudimentary farm management practices,
resulting in long inter-calving intervals, high calf mortality, and low calving
percentages;122
Inadequate feed supplies from either forage, cut-and-carry, or poor pastures which are
invaded with unproductive weeds;
Herd inbreeding, resulting in animals too small to meet Indonesian import requirement of
>280 kg live weight;
Veterinary services not yet operational, primarily due to lack of farmer demand and poor
public funding and training facilities;
Only bulls can be exported to Indonesia; and
Lack of formal credit for farmers, traders, and feed-lot operators.
62. Value chain stakeholders interviewed during the DTIS field work acknowledged the
potential to create a sizable live cattle export industry. However due to reduced national funding
allocated to the MAFF’s Directorate of Livestock, national efforts are currently very limited and the
challenges cannot be addressed through the current capacity of MAFF’s Livestock Directorate.
Further support is needed to bring together all the key value chain stakeholders from the private and
public sectors as well as the development partners to achieve progress.
Examples of Support Initiatives
63. Despite promising potential to upgrade the live cattle export value chain and expand
cattle sector production, only one development partner has been providing TA to developing
this industry.123 The CCT’s Procurement and Fattening System in Western Districts Project, which
commenced after Independence, is continuing with the development of a CCT export model for cattle
fattening, and it is placing young bulls with subsistence farmers to stall feed and later export to
Indonesia. Increasingly, the bulls are also being sold into the local market. The CCT provides
veterinary services to participating farmers, employing six full time staff and using CCT trucks to
transport animals. In mid 2009, more than 10 bulls were sold weekly in the Dili market because of
Indonesia’s stricter phytosanitary, quarantine, and import restrictions, which caused a temporary
border closure to imports of agricultural produce from Timor-Leste.
64. Long-term commitment is required by the key stakeholders to develop and create stable
conditions for increasing cattle production and live cattle export. Targeting organic markets for
live cattle exports is clearly another prospect for Timor-Leste. Steps can be taken to meet the
compliance standards for entry into such markets by obtaining organic production certification.
Stakeholders must agree on a feasibility study for a Timor-Leste Cattle Development and
Improvement Project. Extension staff need to be dedicated to the cattle industry, rather than part of a
general extension service.124 The task of cattle breeding and improvement of livestock is a long-term
process, and 7 years would be a minimum timeframe for such TA to the MAFF and private sector.
121
MAFF, Cattle.
122
A forthcoming ACIAR-funded adaptive livestock research project is expected to address some of these constraints.
123
ACIAR’s adaptive livestock research project is about to commence.
124
MAFF, Directorates of Livestock and Agribusiness, Working Paper, 2007: A Strategy for Developing the Timor-Leste
Cattle Industry and Cattle Exports (Dili: MAFF, 2007).
53
The CCT experience stresses the need for support initiatives to be particularly simple and basic given
the traditional nature of Timor-Leste’s cattle sector.
C. CONCLUSION AND RECOMMENDATIONS
65. Agriculture has good short-term opportunities for export growth and diversification,
which at the same time has the potential for wide-spread impact on rural poverty. In terms of
priorities, the coffee subsector stands out as the best opportunity to: (i) increase export earnings from
$10-15 million to around $45 million; and (ii) increase coffee grower’s incomes by up to $500 per
year. The size and geographic spread of Timor-Leste’s coffee industry means that this subsector
should be afforded top priority by donors and GOTL. Other subsectors (such as cattle and mungbean
exports) also have potential to achieve the same objectives, but not on the same scale and therefore
should be afforded secondary priority in terms of GOTL resource allocation and donor support.
66. The review of the value chains of these three subsectors demonstrates that commercial
demand does exists for such products, both through substitution of existing imports and/or
potential demand from international markets. However, to fully capitalize on these opportunities,
a number of cross-cutting constraints to agricultural development need to be addressed along with
specific constraints in some of the subsectors.
67. Some key cross-cutting issues have been identified above. These include inadequate and
poor quality of extension services; general lack of market information and coordination (both
horizontal and vertical), which is particularly important given the large number of small growers; lack
of access to formal credit; absence of input supply markets with development agencies and
government currently providing and subsidizing all inputs; and the lack of mechanisms for public
private dialogue. At the same time, value chains tend to be short and poorly developed with weak or
non-existent marketing channels and limited value-added activities (i.e. drying, storage, processing,
and packaging).
68. Recommendations for cross-cutting issues for all subsectors include:
(a) Establish an effective agricultural extension service model (public and/or private).
Among other things, the extension services should focus on improving crop and livestock
production practices and address current problems with rudimentary farm management
systems.
(b) Evaluate the merits and feasibility of forming additional farmer cooperatives or producer
groups to improve coordination among the many small growers while also strengthening
the organization, management, and technical skills of existing farmer organizations.
(c) Strengthen input supply markets with a view towards providing affordable but good
quality inputs (e.g. improved variety of seeds and simple agricultural machinery). This
will be essential for the overall sustainability of the value chains.
(d) Develop industry representative organizations along with mechanisms for public private
dialogue (e.g. consultative groups for each of the subsectors) as a means to encourage
greater coordination around identifying, organizing, and guiding the export orientation of
these subsectors.
(e) Strengthen rural financial services. This may include an assessment of whether to expand
the RDP II/ANZ initiated line of credit program for rural traders, and micro credit through
existing providers.
(f) Provide technical and financial support to agribusinesses for the development of value-
added activities and market linkage activities.
54
69. Recommendations specifically for the coffee subsector include:
(a) Plan, prepare, and implement the initial rehabilitation of coffee plantations, including the
pruning of aged trees and/or their replacement with new seedlings, and inter-planting to
increase plant density, to increase average green bean yields from 150-200 kg/ha to
around 650 kg/ha.
(b) Promote ‘Integrated Pest Management’ (IPM) techniques for controlling the main pests
and diseases, such as coffee flower beetle and rust, and for improving plant resistance
with mechanical and biological control. These measures will be required to achieve and
maintain organic certification.
(c) Establish and maintain clearly defined standards and classifications, taking into account
the liquor flavor and taste of beans, size grade, and defects proportion.
(d) Devise farm gate price incentives for high quality organic coffee following selective
picking of ripe berries as opposed to strip-picking of unripe and immature berries, thereby
reducing quantities of defective beans in processed coffee and expanding Timor-Leste’s
reputation as a producer of quality organic coffee.
(e) Petition for the prioritization of road improvements, especially farm to market roads
within coffee growing areas as well for roads connecting the production areas to Dili, in
order to reduce transportation costs for the buyers/exporters.
70. Recommendations specifically for the mungbeans subsector include:
(a) Review the requirements (quality, quantity and type) for renewed/expanded mungbean
exports to Indonesia and for local consumption, taking into account seasonality of
production and demand.
(b) Work with the MTCI (and possibly UNTL) to improve in-country mungbean storage
practices to overcome the current problems associated with bulk storage losses.
(c) Work with the Seeds of Life program to: (i) identify improved mungbean varieties and
then test on station and on farm with cooperative farmers; (ii) introduce no-till cropping
systems which are not reliant on annual mechanized ploughing services; and (iii) bulk-up
and distribute increased supplies of seed of improved varieties.
(d) Through cooperating development partners and the MAFF’s extension system, target
potential mungbean producing farmers on the south coast with the objective of forming
producer groups to act as technology transfer and market accumulation focal points.
(e) Work with current small accumulators and traders to re-establish links with mungbean
buyers in West Timor and other parts of Indonesia and with the agencies responsible for
Timor-Leste’s school feeding program which uses mixed legumes in food supplements.
(f) Liaise with Timor-Leste’s road building/reconstruction programs with the objective of
improving access to key mungbean production areas in the south and in other areas with
suitable climate and soils and access to supplementary irrigation.
71. Recommendations specifically for the livestock subsector (cattle) include:
(a) Update the 2004 livestock census results regarding cattle populations by district. This
will be important to help focus development of the cattle subsector. While there are
statistical estimates of 175,000 cattle, market players have indicated a much lower figure
of less than 80,000 head.
(b) Design a strategy to increase the size of the base herd in order to increase annual turnoff
numbers for export and local consumption. This is necessary even if the current cattle
55
population is 175,000 head. The strategy should include a national plan to increase the
productivity of communal grazing areas and to attempt to control/eradicate Chromoleana.
(c) Re-evaluate and implement current food ‘health and safety’ regulations which should
apply to the slaughter of animals within Dili proper. This is critical for any expectation of
competition with much of the 200 Mt of imported beef.
(d) Identify and evaluate options for proposing a new (small-medium scale) public or private
abattoir construction and operation close to Dili in order to process quality meat to
compete with imported beef.
(e) Evaluate and support the development of a national livestock training center and assess
the potential for establishing a training center for livestock-related training programs.
Participation by private sector, university, or MAFF trainees will vary by training activity
(i.e. improved cuts, fodder raising/feeding, breeding, grazing development and
management practices, cattle raising business models, etc).
(f) Monitor the final design and implementation of the forthcoming ACIAR-funded adaptive
livestock research project, with the objective of aligning other programs with this
important national initiative.
56
CHAPTER 5: HORTICULTURE SUBSECTOR – FUTURE EXPORT
OPPORTUNITIES
A. INTRODUCTION
1. This overview of Timor-Leste’s horticulture subsector considers the potential for
producing and marketing export quality vegetables and fruits within the coming decade.125 The
potential to produce and export quality fruit and vegetables is relevant because these crops are labor
intensive and can contribute to employment generation and income generation in rural areas. There
are pockets of micro-climates in Timor-Leste which are suitable for the off-season production of
selected horticultural crops. Although a wide range of vegetables and fruits was grown in small
parcels on hill sides and in small gardens in the past, relatively few farmers cultivate these crops
today. However, a transition appears to be underway following the initial technical success of a
greenhouse now operating in Aileu.126 In addition, commercial agribusiness enterprises are reported
to be entering Timor-Leste’s horticulture subsector.
2. As background to such an assessment, however, it should be kept in perspective that Timor-
Leste faces major constraints to the development of this subsector because of: (i) distance from export
markets (except for Indonesia and Northern Australia); (ii) sea and air freight disadvantages; (iii)
scattered production and collection sites; (iv) lack of suitable technologies and extension services to
farmers; (v) considerable climatic variations which are not conducive to regular and timely crop
production; (vi) past failed attempts to establish export markets for perishable products; and (vii) the
lack of Sanitary Phytosanitary Certification capacity. Therefore, whilst in theory there may be
potential to export quality fruit and vegetables from Timor-Leste, existing constraints make such
ventures extremely risky with limited potential to attract foreign investment in the short-term. But
given some of the preliminary trials and investments, horticulture may be an area to look at over the
medium-term as some of the wider structural constraints are addressed.
B. HORTICULTURE SUBSECTOR
3. A Horticulture Production Feasibility Study for Timor-Leste was conducted in 2004 by
Winrock International and commissioned by USAID to evaluate the export potential of vegetables and
fruits to Australia through Darwin. Although the study found export potential for a range of fruits and
vegetables (asparagus, cherry tomatoes, sugar snap peas, baby corn, green beans, sweet potato, red
banana, limes and lemons, passion fruit, and guava), the detailed analysis was confined to snow peas.
In particular, it considered whether Timorese exports could compete with those from China and
Africa.
4. The study found favorable conditions for the production and export of snow peas. A
field survey was conducted in Ermera and Ainaro Districts, with a focus on Aileu and Maubisse,
given their elevation, favorable rainfall patterns, and road access to the port in Dili. The field visits
found no case of fungus and no obvious insect infestation in locally grown snow peas. For assembly,
packaging, storage, and pre-cooling, Aileu town was found to be a suitable site for a centrally located
packing house given its position on an all weather road, good water supply, and access to electricity.
Although farmers were generally interested to participate in export trials for snow peas, they were
reluctant to allocate large areas to vegetable production given market uncertainties.
125
This section draws on extensive field experience with the horticulture subsector of Timor-Leste during the 2005 to 2007
period. It also draws on the Horticulture Production Feasibility Study for Timor-Leste, the results of the Snow Pea Trial of
2006, the findings from the Assessment of Fresh Food Demand by the DSP project of USAID in 2006, and DSP’s
Greenhouse Initiative as initially implemented in Aileu in 2007/2008.
126
This type of investment is probably not financially viable without considerable ongoing donor support and therefore the
potential of further such investments needs to be kept in perspective.
57
5. A preliminary breakdown of returns and costs suggested that the commercialization of
snow peas from Timor-Leste could be profitable. Table 5.1 presents the study's summary of
production and marketing costs for snow pea exports to Darwin in 2004. This analysis was based on
the shipment of 4,320 kg of export quality snow pea each week127 in a 20' refrigerated container.
Based on these parameters and agreements from Australian traders in Darwin and Perth, such a
volume was profitable for all participants in the value chain. Farmers could earn $1/kg of export
grade snow peas, with a selling price in Australia of $2.45/kg128 and total packing, shipping, and
storing costs of $0.71/kg from the field to distributor in Darwin. Shipping rates from Dili to Darwin
for refrigerated containers have not changed much since 2007 because these containers return to
Darwin empty. Therefore, shipping lines are often open to negotiating favorable rates.
Table 5.1: Summary of Production and Marketing Costs for Snow Pea Exports to Darwin
Cost Item Unit $/Unit Total
Snow pea delivered to pick-up points kg $1.00 $1.00
Packing house costs* kg $0.30 $0.30
Storing, shipping to importer** kg $0.41 $0.41
TOTAL COST $1.71
Selling price in Australia (i.e. export price) $2.45
Profit/kg to cooperative/association/company $0.74
Profit/week based on 4,320 kg $3,212.00
Assume 50% profit retained** ($/week) $1,606.00
Dividend/farmer/week, 50% distribution $10.04
Dividend/farmer/year*** $522.00
* See below. Includes transport to Dili.
** Loan amortization, depreciation, repairs, etc. included in packing house budgets.
** For payment to other shareholders, professional managers, losses, auditors, association overhead, taxes,
university extension workers, etc.
*** In addition to returns from snow pea growing.
Shipping cost, Dili to Darwin $USD $AUD/hr
Freight $900
Export customs clearance $50
Withholding tax, 2.64% of freight cost $24
B/L fee $20
Wharfage, Dili port $35
Bunker adjustment factor $50
Darwin port charges $158 $225
General sales tax, Darwin port fees @ 10% $16
Trucking within Dili port area $100
Customs inspection, Darwin* $112 $160
Labor for unloading, Darwin port (per hour)** $280 $50
General sales tax, Darin labor @ 10% $28
Cost per container $1,772
Cost /kg assuming 4,320 kg of produce $0.41
* Rate is $ AUD 160/hour, assume 1 hour inspection needed
** assume 4 hours each by two laborers required to unload container.
127
Organizing the production, processing, local transportation and shipment of over 4 Mt of snow peas per week would be
an enormous task and fraught with a range of risks, any one of which could cause the collapse of the industry.
128
During the study period, a Perth broker offered a firm $A 3.50/kg [$USD 2.45/kg] for the container in Darwin. The
current price for Chinese snow peas arriving in Perth range from $A 4.50 to $A 6.00/kg, or $USD 3.15 to $USD 4.20/kg.
58
Table 5.2: Changes in Shipping Rates between 2004 and 2007
2004 2007
Shipping Cost Dili to Darwin $USD $AUD/hr $USD $AUD/hr
Freight $900 $900
($1,200)***
Withholding tax, 2.64% of freight cost $24 $24
($32)***
Bunker Adjustment Factor $50 $75
($125)***
Wharfage, Dili port (SDV handles) $35 $35
($50)***
Darwin port charges (includes GST of 10% in $158 $225 $330 + $5.50
2007)
GST of 10% on Darwin port charges $16
Export customs clearance (SDV handles) $50 $50
B/L Fee (SDV handles) $20 $25
Trucking within Dili port area (SDV handles) $100 $100
Customs inspection, Darwin ** (Customs $112 $160 Unknown
Broker)
Labor unloading, Darwin /hr (Customs $280 $50 Time $75/hr/man
Broker) Unknown
GST Darwin labor @ 10% [Customs Broker] $28
Total cost per container $1,772
Costs/kg assuming 4,320 kg of produce $0.41
** In 2004 the costs for inspection were $A 160/hour and assumed to need only 1 hour inspection (according to the
shipping line and Darwin AQIS's acknowledged thoroughness, it is likely to take much longer!).
***Different Figures were provided by SDV for 20' containers in Dili; those are also noted in parenthesis:
6. The critical issue was the unproven capacity to meet export requirements in terms of
reliability, quantity, quality, and continuity of supply. Achieving technical and financial
sustainability would require extensive training and intensive organizational work with selected groups
of farmers. Respondents in Darwin were concerned that imports from Timor-Leste would not meet
the Australian Quarantine Inspection Service’s (AQIS-Darwin) requirements. There was also lack of
capacity in Timor-Leste to issue Phytosanitary Inspection Certificates.
7. Based on the feasibility study, USAID agreed to conduct a snow pea trial and support
commercial enterprises to grow snow peas using organic practices. The feasibility study
estimated that 4,320 kg of marketable, export quality snow peas would be needed for the weekly
shipment129 of one 20' refrigerated cargo container to Darwin. This would require about 320 farmers
growing snow peas on 1,000 m2 each over 2 seasons with a minimum initial yield of 3.5 ton/ha/crop
or 225 Mt/year, with an expected value of about $500,000. The practicality of the venture was tested
in Aileu by a private entrepreneur based in Dili with TA support from experts in West Australia.
8. After initial difficulties, by April 2006, the land was cultivated and fertilized; irrigation
was installed; and the first planting was completed even though an extended rainy season
hampered these efforts. By 14 May 2006, the pea vines bore fruit, and snow peas were harvested
and packed. Seventeen boxes of export quality snow peas were delivered for export to Australia.
Although Winrock attempted to expedite the shipment, the inability of the Timor-Leste Quarantine
office to issue a Phytosanitary Inspection Certificates stopped the shipment. Given the outbreak of
civil unrest and riots in May, the project staff were unable to proceed further with the trial. Even
129
From a marketing perspective, more frequent shipments of smaller volumes, such as 500 kg per shipment, would be less
likely to glut the Darwin market and depress local retail prices, especially during the initial period when it would be difficult
to orchestrate distribution throughout Australia. Likewise, with no experience to date, lower volumes would provide AQIS
the opportunity to get used to managing inspections of imported fresh vegetable imports.
59
though prospective buyers in Australia had been identified and prepared for the delivery to Darwin
and AQIS was reportedly supportive of the shipment, the snow peas were finally sold domestically.
9. The main lessons from the snow pea trial include:
The scale of cultivation as a commercial enterprise required use of heavy equipment for
land preparation, but such equipment was not readily available given that most
agriculture equipment in Timor-Leste was in varying degrees of disrepair.
The agribusiness enterprise required vigilant management regarding work habits during
production-grading-shipping activities. However, given insufficient middle management
expertise in Timor-Leste, it will remain difficult to support medium or large scale
horticulture production/marketing systems for export unless such management expertise
is imported from another country in the short run or hands-on training initiatives are
followed with actual employment with agribusiness enterprises.
The choice of models for this type of export intervention was a trade-off between: (i)
organizing, training, managing, and coordinating hundreds of dispersed small farmers; or
(ii) focusing resources and expertise on a medium-large sized commercial enterprise with
access to middle managers who would be responsible for all aspects of the production-
marketing system.
Since high value horticulture crops are particularly perishable, they require far more
detailed attention by such managers of a commercial enterprise or organizers of many
small farmers. A viable alternative model could be the ‘group model,’130 but only if the
volume requirements were considerably smaller than those used for the trial.
A critical issue related to the ‘social situation’ at the trial site was the consequences of a
perception of ‘users' rights to land,’ even for public land. In the snow pea trial location,
the local households who lived near the fields were accustomed to grazing livestock or
growing their crops on this parcel of government land. These households exerted
substantial pressure to be employed by the enterprise. However, the poor work habits
and high pay expectations rendered this commercial enterprise model non viable for
exports even though the land quality, access to water, public ownership, and location near
a major road were technically favorable. This experience reflects what has been
experienced in other places, such as the situation which is currently being experienced by
Timor Global on its leased land in the coffee growing area.
Advanced Technology (Greenhouses)
10. In 2007, the introduction of greenhouse technology sponsored by the DSP project
provided a potential way forward for Timor-Leste’s horticulture subsector. The project
sponsored initial work, which identified a level site north of Aileu and near Maubisse to construct and
operate a greenhouse. A collaborative agreement with Bali Fresh provided training in Bali for a few
young Timorese, contracted all the materials required for greenhouse construction and operations, and
scheduled the construction and support activities of a team of Bali Fresh staff. At the village level,
the Timorese staff made many visits to bring the local community along as partners in this effort. The
business began gradually with hands-on training in the cultivation of a few vegetable crops until the
local farmers were ready and able to participate in greenhouse production activities.
130
In brief, the "group model" involves 10 or more farmers within a village who are organized by and around the local lead
farmer in the cultivation of a new crop by working together within a designated field for all tasks from land preparation, bed
formation, planting, crop care through to harvesting. All members of the group share in the money earned from the sale of
the crop. It is an extremely effective method for learning about risky vegetable crops in site-specific locations and varied
micro climates.
60
11. The leadership and guidance of a well-trained and dedicated Timorese horticulturalist
ensured effective planning, implementation, and monitoring of activities. Likewise, marketing
services were provided by the Zero Star Company, whose trucks made regular assembly and buying
trips from Hatobuiliko to Dili. This company had access to imported plastic crates and a refrigerated
truck to help ship high quality tomato and capsicum to supermarkets, restaurants, and individual
consumers in Dili. This service, along with the efforts of other donor projects, has substantially
improved the quality, selection, and quantity of fresh vegetables in Dili for most months.
12. Given the positive publicity and recognition of this effort, including visits by high
government officials, embassy staff, and managers of other donor projects, several other
greenhouses are now in the pipeline. If these greenhouses are constructed at good sites, operated by
experienced and trained staff, and achieve their full potential, the volume of high quality tomato and
capsicum may exceed consumer demand in Dili. SPS certification will be critical for enabling the
export of such surpluses.
13. Despite these positive developments, considerable caution is needed. Some financial
analysts doubt the longer-term viability of these ‘high-tech’ horticulture production models without
ongoing and substantial support from donors and government. Furthermore, there are opportunity
costs – would such investments benefit more poor households if aid and development funds were
allocated to other crops which are grown by the majority of poor Timorese farmers and for which
simple and proven technologies are available, e.g. rehabilitation of coffee plantations?
14. Financial viability and equity arguments are not the only issues. Since the middle of 2009,
the first greenhouse has experienced serious disease and management-related problems resulting in
closure at one point. The primary reason for this problem is that the DSP project lost the services of
key Timorese technical and management staff and, in turn, the commitment and cooperation of the
local farmers. Therefore, new greenhouse projects will need sound technical leadership and the
ongoing commitment of local farming communities, otherwise such advanced horticulture production
technologies will face serious risks.
15. Lessons learned from the application of greenhouse technology in Timor-Leste include:
Advanced horticulture technology can be successfully transferred to Timor-Leste.
However, the scarcity of middle level management skills and the constant need for a good
working relationship with local farmers and employees make it very difficult to sustain
production at an financially viable level on a longer term basis;
Given the scarcity of Timorese professionals who have both advanced technical expertise
and effective management skills, there is a need to acknowledge such individuals and
provide other rewards for both skills, not just one or the other;
Internal disputes or personality clashes among Timorese and foreign staff require
immediate and effective resolution for all involved. Otherwise, resignations can destroy
the project outcomes and adversely affect participating farmers;
The fragile relationship between personnel management and technological requirements
can result in lapses in greenhouse management procedures and rapid disease and/or insect
build-up within the enclosed environment and bring production to a halt;
A market-led, integrated marketing-production system is critical for planning purposes.
The demand characteristics of the harvested commodity (and not just the plant growth
characteristics) should dictate planting and harvesting schedules; and
New locations for intensive horticulture crop cultivation will gradually experience a
build-up of insect populations and incidence of diseases. These need to be anticipated
prior to initiating this type of intervention.
61
Dimensions of Local Demand
16. The DSP project carried out an Assessment of Fresh Food Demand to estimate the
potential for selling fruit and vegetables in Timor-Leste. The assessment involved a survey of the
5 major supermarkets/importers, 63 restaurants, and selected members of the food service industry
(e.g. catering services) based in Dili during late 2006. The survey results were affected by the
disruptions during that period and were never published. But the assessment found that the main
imported vegetables were Chinese cabbage, potato, tomato, capsicum, onion, and garlic, totaling
about 35 Mt/month in certain seasons. Other high value vegetables, such as cauliflower, snow pea,
French beans, and lettuce were also in strong local demand. In some cases, local varieties could be
sold as substitutes for imports. Importers expressed a strong interest in additional purchases of highly
perishable vegetables from the local market because of losses experienced during transit from
Singaporean or Australian sources. The main types of fruit imports were oranges, apples, and pears
which reached 30-50 Mt/month. The supermarkets were the main buyers and sellers of imported
fruits. Restaurants purchased three times more local fruits compared with imports.
17. The interpretation of this assessment’s data concluded that:
Selected high value vegetables, such as capsicum, tomato, cauliflower, snow pea, French
beans, and lettuce can substitute for limited imports;
Other high value vegetables which have strong market demand from supermarket
customers include Chinese cabbage (white), Chinese spinach, and broccoli;
For storable vegetables, if MAFF introduced improved production practices and larger,
improved varieties to replace the small local garlic and onion varieties, they could
generate good income for farmers as they can substitute for imports; and
Field fruits, such as watermelon, musk melon, and other Asian melons are too bulky,
expensive, and perishable to import in substantial quantities. However, supermarkets are
very interested to sell these products if they are locally grown, reasonably priced, and of
good quality.
18. There has been progress since 2006/2007 in the production and marketing of vegetables
and fruits, primarily for the domestic market. There has been a sharp increase in the number of
vegetable production and marketing initiatives. One supermarket has supported the production and
marketing of vegetables delivered from selected growing sites. Several NGOs are establishing home
garden projects as part of their programs, and the initial technical success of the greenhouse in Aileu
has generated significant interest and plans to construct new subsidized greenhouses. The range of
varieties, quality, and volume of leafy vegetables has improved substantially in Dili when compared
to earlier periods. Investments in such businesses envisioned an initial import substitution process
with deliveries to Dili supermarkets in order to gain cultivation and marketing experience, confirm
product quality and reliability of the production/marketing systems practiced, and then gradually
expand into accessible export markets.
C. CONSTRAINTS AND PROBLEMS
19. The following list of constraints and problems provides an indication of priority
interventions required to achieve eventual exports for the horticulture subsector of Timor-
Leste. The constraints include a high population density in most rural areas, unresolved land use
versus ownership issues, poor transportation network limiting market access for perishable
commodities, irregular rural access to year-round water supplies, limited farmer experience and
expertise in cultivating commercial vegetables and fruits, and a traditional, risk-averse mindset
common in subsistence agriculture which makes it very challenging to promote commercially viable
enterprises for export grade vegetables and fruits.
62
20. Safe Pesticide Usage. Formerly, some within the government and among NGOs were
aggressively opposed to the import and use of chemical pesticides given the country's image as a
source of organic agricultural commodities. This is gradually changing. However, MAFF and
National Directorate of Quarantine and Biosecurity (NDQB), in particular, would need to quickly
establish the range of safe and unsafe chemical pesticides and manage imports accordingly. Likewise,
farmers will need rapid and thorough training in the selection, use, and costs of using chemical
pesticides for each type of crop. It will be important for Timor-Leste to decide at a national level if
the country is to remain completely chemical (and GMO) free or whether selective importation and
safe use of non-organic agricultural production inputs (including inorganic fertilizer) will be
permitted. This is a fundamental policy issue which has the potential to lead to confusion and delay
the introduction of modern agricultural production systems.
21. Dangerous Quality and Types of Pesticides. From the perspective of product quality, it has
been reported that Timor-Leste has a wide range of chemicals and pesticides with some being expired,
unsalable, or dangerous. This problem can become extremely critical in terms of consumer food
safety whenever growers do not understand how dangerous a particular pesticide is or spray their crop
just prior to harvesting. Lettuce is susceptible to this treatment because it needs to appear insect free
(i.e. no holes in the leaves) when delivered to the retailer. Likewise, the spraying of chemical
pesticides can cause problems of cross contamination. While the farmer is spraying in his field, wind
can spread pesticides to neighboring fields.
22. Market Failures in Dili. The Dili-based marketing systems for fresh vegetables and fruits
have serious issues, which if addressed would lower the costs of trading, improve services to
consumers, increase employment with more retailers, and improve health safety standards:
Retail sales in Dili use a ‘unit-based’ pricing system (e.g. piece, pile, can) rather than a
‘weight-based’ system, which is more commonly used. This makes it difficult to
establish a meaningful ‘Marketing Information System’ with which to inform farmers of
market conditions; and
Several deteriorating, under-utilized, and unsanitary market facilities are located around
the city. These have negative impacts on the health of trading families and become
potential sources for contamination of the goods sold to consumers. Other adverse
impacts include a reduction in the number of active traders and the acceleration of
spoilage given the absence of cold storage rooms.
23. Absence of Rural Assembly Markets. In many rural areas there are few, if any, local
traders, and local traders prefer to buy less perishable commodities which can be accumulated over
time before transport to Dili. Likewise, most rural traders are agents of a larger Dili-based trader or
factory. Thus, for most perishable commodities, such as vegetables, there are few, if any, local
buyers. The presence of a periodic wholesale market site, timed to coincide with the local weekly
retail market, could substantially increase competition based on itinerant buyers and provide farmers
with better returns. It would also stimulate the care for and cultivation of additional crops, as shown
by marketing research in India which confirmed that such stimulation occurs with the anticipated
presence of active local buyers during the harvest season.
24. Absence of Effective Input Support Systems. MAFF projects, donor programs/projects,
and NGOs import agricultural inputs, machinery, and containers at times on an ‘ad hoc’ basis, often in
support of pilot interventions. Meanwhile, several institutions and agencies have complained that
there has not been sufficient growth in the number, types, and location of private sector input supply
stores. The small shops which are in business reportedly have limited inventories, along with few
choices in vegetable seed varieties and related inputs, such as fertilizers and pesticides. In other
words, the small scale input supply stores seem to be competing directly with inputs imported by the
organizations and agencies referred to above rather than serving as the main conduits for the input
63
needs of these entities. This situation clearly inhibits the necessary development and growth of input
support systems and services in the private sector.
25. Absence of Cold Chains. Although Chinese and local traders are developing a cold chain in
Dili, there is no full cold chain for perishable products available in the interior of the country. This
encourages supermarkets and restaurants in Dili to import agricultural products from abroad,
including perishable fruits and vegetables, rather than sourcing locally grown products. As a result, a
cold chain system that is viable, sustainable, and replicable will be an important step towards
promoting import substitution and eventual exportation of locally grown fruits and vegetables.131
Some alternative technologies, like the QPod systems developed in New Zealand, would be ideal for
exploring, establishing, and verifying export market channels at a realistic cost.
D. CONCLUSION AND RECOMMENDATIONS
26. Progress in the production and marketing of vegetables and fruits, primarily for
domestic markets, could provide the basis for gradual expansion and eventual exports. While
there has been an increase in vegetable and fruit initiatives and plans to construct new greenhouses,
efforts directed towards future exports can only be realized after NDQB has achieved the capability to
issue Phytosanitary Inspection Certificates (see Chapter 6). Nonetheless, given other constraints
discussed above, horticulture is not recommended as a short-term priority for exports.
27. Recommendations for possibly developing the horticulture sector include:
(a) Establish and conduct an on-going series of pesticide use, application, and safety courses
both within the 3 agricultural high schools and for farmer groups around the country,
especially those with vegetable growing experience. This should be pursued after
finalizing a national policy on the use of non-organic production inputs.
(b) Establish and implement regulations for pesticide safety and develop an effective
mechanism to screen dangerous pesticide imports (e.g. through collaboration between
NDQB staff, crop protection staff in MAFF, input supply stores, and donor projects).
(c) Work with and devise schemes for interested private sector enterprises who are interested
in investing in the establishment and operations of agricultural input stores in the country.
(d) Identify, import, and test small scale cold chain equipment (suitable for a few hundred
kilograms) which can provide refrigeration from the farm level to the full range of end
markets, especially overseas markets.
(e) Propose that donor projects implement and work within the longer term, practical strategy
of Specialized Vegetable Cultivation Areas and Specialized Fruit Cultivation Areas to
help consolidate and combine crop production with targeted input delivery services,
extension advisory services, access to traders, and improved access to infrastructure.132
(f) Identify examples of the group model, study causal factors, and understand the dynamics
of this rural Timorese model (as compared to the small farmer model or commercial
enterprise model) for sharing risks and evaluating, undertaking, and supporting village
level, agricultural change.
(g) Rehabilitate all major retail market facilities throughout Dili and establish a meaningful
Marketing Information System to inform farmers and buyers of market conditions.
Consider encouraging a move from unit-based pricing to weight-based pricing.
(h) Assess and test the potential for establishing rural assembly markets.
131
USAID, Sustainable Improvements in Upland Agricultural Productivity and Incomes in Timor-Leste (Feb 2006).
132
This strategy has been extremely successful in Taiwan, China.
64
CHAPTER 6: ACHIEVING SANITARY AND PHYTOSANITARY
CERTIFICATION CAPABILITIES
A. INTRODUCTION
1. SPS capacity is a high priority for both current agricultural exports but also for Timor-
Leste’s ability to expand its exports in the future. SPS capacity in Timor-Leste is very limited.
There are a small number of academics with experience in entomology and plant and animal
pathology but not with sufficient experience to run a SPS laboratory. None of the physical, legal,
regulatory, or procedural infrastructure currently exist that would permit Timor-Leste to comply with
internationally recognized SPS requirements. Although Timor-Leste has had alternative arrangements
to date, Indonesia has indicated that without SPS certification it will no longer be able to import
Timorese products.
2. There are generally three sets of quality standards when looking at the international
trade in agricultural commodities. First, there are ‘entry standards’ in terms of the SPS
requirements of importing countries aimed at protection against insects and diseases. The quarantine
service of the exporting country ensures their export commodities and cargo containers are clean and
issue a Phytosanitary Inspection Certificate to that effect. Second, there are the ‘domestic market
acceptability standards’ relating to the preferred commodity characteristics of the importing market.
Often supermarkets cite these characteristics in terms of their store standards. This is separate from
SPS requirements. Third, there are the ‘shelf life standards’ or commodity characteristics which
enable long-distance transportation given the perishable nature of agricultural products. This chapter
focuses primarily on the SPS requirements for exports from Timor-Leste.
SPS and Timor-Leste’s Exports
3. Lack of SPS capacity has not severely restricted Timor-Leste’s exports to date. Aside
from coffee and candlenut oil exported to Singapore and Australia, Indonesia is the only country that
receives exports of agricultural products from Timor-Leste. Cross-border trade with Indonesia
appears to reflect mostly an informal export arrangement, continuing a historical trading pattern of
selling internal surpluses for copra, candlenut, and livestock.
4. The lack of SPS capacity and inability to issue Phytosanitary Inspection Certification
has been accommodated in various forms, especially in the case of coffee beans. Foreign
quarantine services have granted Timor-Leste special status. For trade with Indonesia, an agreement
signed in Kupang in 2005 allowed exports from Timor-Leste through an Export Permit rather than a
Phytosanitary Certificate for a period of two years. Though there is some inspection and certification
conducted at a border check point into West Timor, for example on livestock exports, these are
reportedly not of a high standard. Coffee beans exported to Darwin require: (i) an Export Permit; and
(ii) an Additional Declaration based on the conditions specified by Australia. For coffee exports to
Singapore, a Phytosanitary Inspection Certification is issued in Singapore before onward shipment to
the final destination.
5. Although the arrangement with Indonesia was extended for two years in 2007, the
Government of Indonesia has indicated that it will cease imports from Timor-Leste unless it
complies with standard ISPM Export Certification System and Guidelines for Phytosanitary
Standards. In a letter dated January 6, 2009 from the Department of Agricultural Quarantine,
Ministry of Agriculture, Indonesia, Timor-Leste was granted a one-year extension of the agreement
and was urged to adopt internationally recognized SPS practices. A further twelve-month extension
was granted at the end of 2009 following a request from the MAFF to the Government of Indonesia.
Meanwhile, international agencies are also waiting for Timor-Leste to sign the International Sanitary
65
and Phytosanitary Agreement.133 Border closure will have a major impact on farmers throughout the
country. For example, in 2008, 508 tons of candlenuts worth $279,000 were exported by four
companies alone,134 and in 2007, $0.68 million worth of live cattle were exported to West Timor.135
B. REQUIREMENTS FOR A SUSTAINABLE SPS SYSTEM
6. The NDQB in MAFF is the responsible authority for issuing Phytosanitary Inspection
Certification. A Phytosanitary Inspection Certificate is a formal document issued by an exporting
country’s agricultural authorities to confirm that a shipment is free from disease, pests, and noxious
weeds on the date of inspection. It is issued at the air, sea, or land point of origin for agricultural
goods crossing borders.136
7. Establishing the necessary capacity to issue a credible Phytosanitary Inspection
Certificate will take time. The requirements for the NDQB include but are not limited to:
A high level of professional expertise, including educated and trained entomologists and
pathologists for inspecting agricultural export cargo.
A range of physical facilities, including:
- A Laboratory Building;
- Repository Rooms equipped for holding and displaying the full range of insect
and disease specimens present within Timor-Leste (refrigerated and non-
refrigerated sections); and
- Screen houses, warehouses for seized goods (refrigerated and non-refrigerated
rooms), and the like at each exit point around the country.
Full complement of administrative and technical manpower to manage and implement the
range of functions for this organization from the headquarter offices to the compounds at
each exit point.
Legislation and other legal requirements, which provide NDQB with the jurisdiction for
implementing all aspects of the SPS certification process, including search and seizure of
dangerous goods.
8. NDQB has developed a comprehensive plan with costing for all the prerequisites and
basic requirements to establish basic SPS Certification capacity. The plan is expected to cost over
$5 million to implement, according to NDQB estimates. This includes a Short-Term Program entitled
Assistance to Strengthen the Services of the National Directorate of Quarantine and Biosecurity of
Timor-Leste and a Long-Term Program entitled Assistance for Establishment of the National
Laboratory of Quarantine and Capacity Building to Strengthen the Functions of the National
Directorate of Quarantine and Biosecurity of Timor-Leste. These documents contain most of the
requirements noted above. It is important to acknowledge that NDQB needs to have full ‘access’ to
the listed expertise, facilities, and equipment but not necessarily exclusive ownership or control over
them in the short-term. In the short to medium-term, some expertise or facilities might be shared with
or drawn from other units within MAFF or the public university system.
133
Global developments in the pattern of ‘animal, plant, and food safety standards’ are summarized in: World Bank, Food
Safety and Agricultural Health Standards: Challenges and Opportunities for Developing Country Exports (World Bank, Jan
2005).
134
MAFF, Candlenut Export to Indonesia (Dili: MAFF, 2009).
135
MAFF, Cattle.
136
As an illustration of the degree of detail required, one can refer to the web-based ICON system developed by the AQIS at
www.aqis.gov.au/icon32/asp/homecontent.asp. ICON is the Australian import conditions database. Other relevant
information can be found on http://www.daff.gov.au/animal-plant-health/plant. The quarantine services of Singapore also
have such a web site at www.ava.gov.sg/aboutAVA/overview.
66
9. There are several challenges to developing and implementing an SPS system including:
Resources –The initial proposals by NDQB estimate around $6 million for longer-term
infrastructure, preparation of legislation, and capacity building support. In the short-term,
the NDQB estimates that it will require around $244,000 for basic facilities, capacity
building, and immediate legislation. The costing is still being reviewed, and support will
need to be properly coordinated among donors to avoid duplication. But in addition to
this support, the government will also need to allocate sufficient budgetary resources for
regular operating expenses.
Total exports – The relatively limited volume of exports that currently require
Phytosanitary Certification may explain the low share of budget to NDQB. The limited
funds ear-marked for NDQB have been primarily focused on the inspection of imports,
which are much higher. Therefore investment in NDQB has to be commensurate with the
level and types of exports.
Seasonality and use of SPS capacity – The quarantine services in other countries
provide services for large volumes and year-round exports of a variety of commodities,
whereas in Timor-Leste there is substantial seasonality for SPS services with the coffee
harvest and exports mainly extending from May to December. This results in several
months with minimum use of manpower, facilities, and equipment. Likewise, graduate
degrees in pathology and entomology require many years of study, and these have not
been preferred areas of study for Timorese students.
Timeframe – Indonesia has asked that Timor-Leste’s exports comply with standard
ISPM Export Certification System and Guidelines for Phytosanitary Standards by the end
of 2010. This timeframe is tight when acknowledging that most countries have had
decades in which to gradually develop and expand their SPS capacity.
10. In 2007, the DSP project commissioned a limited review of Timor-Leste’s quarantine
services, which confirmed some of the above challenges but also highlighted others.137 These
included: (i) establishing the credibility and reputation of Timorese exports; and (ii) political
commitment for the regulations and funding needed to establish the SPS system. One underlying
concern was that even if NDQB is able to issue the appropriate Phytosanitary Inspection Certificates,
exports may still be rejected because the quarantine services of importing countries need to inspect
goods themselves. If insect or disease contamination is identified or some other condition does not
meet expectations of the quarantine services, immediate action is required, whether: (i) special
treatment; (ii) the goods re-exported (at importers’ expense); or (iii) contents destroyed.
11. Consequences of failures in the SPS system could result in the destruction of the cargo,
high costs of delays in entry, or high costs for extremely detailed inspections. Even one major
incident with the certification process can adversely affect the reputation of Timor-Leste's export
certificates. Meanwhile, the farmers would still be harvesting large volumes of export quality crops
but without a high-end market in which to sell it at the anticipated high price. Previous experience
indicates that any inspections by AQIS in Darwin would be very thorough.
12. The risk of potential failures in the SPS system could arise for a variety of reasons,
including if NDQB is not sufficiently prepared to identify all applicable pests and diseases and
the import requirements for the end market. This can be avoided if NDQB is made aware of the
impending exports well in advance in order to identify all applicable pests and diseases as well as the
import requirements for the end market. From another perspective, although the shipping company is
responsible for providing its customers with a container with a very clean interior, in fact the customer
must re-clean the inside. If anything unacceptable is found inside at an Australian port (regardless of
137
At the time, the responsible authority was the ‘Directorate of Quarantine Services,’ which has been replaced by the
NDQB in the MAFF. The NDQB is the responsible authority for issuing Phytosanitary Inspection Certification.
67
whether it was there from the beginning or loaded with the goods), this one problem causes an alert to
be issued and will require that the next six shipments of those goods will receive special AQIS
attention. In other words, given the hourly inspection fee charged in the Darwin port, the costs for
AQIS inspection will increase substantially.
13. Once issues with quarantine services are dealt with, there may be other issues to address
relating to the trading community in importing countries. For example, Singapore traders require
special market entry linkages before an exporter can do business in their wholesale market. Likewise,
Surabaya traders are said to ‘control’ the inflow of perishable commodities, thus the exporter also
needs special connections in order to do business there. Payment arrangements must be assured in
advance of deliveries. On the other hand, the Darwin-based importers/traders are more proactive and
very interested in importing a range of priority vegetables, especially temperate vegetables. Darwin
does not have access to temperate vegetables from high elevation tropical production areas any closer
than Timor-Leste, and its vegetable retail prices are quite high in comparison to other options.
C. STRATEGY TO ADDRESS CHALLENGES
14. Insights into the challenges noted above should become the basis for a SPS strategy for
Timor-Leste. Such a strategy needs to be designed in close consultation and collaboration with the
leadership of NDQB/MAFF and with a ‘Donor Champion’ that the quarantine services can identify
and recruit. Components of such a strategy which should be considered include:
Single Donor Champion to help coordinate and build consensus around a coherent system
uniquely suited to Timor-Leste’s circumstances;
Timeframe for phasing the formation, implementation, and expansion of a quality
quarantine service, including SPS capability;
Feasibility for NDQB to progress from a joint institutional working arrangement to a
stand alone, fully funded government agency; and
Goal of achieving a dynamic and evolving agency that is linked to both the ‘world
network’ of quarantine services and the evolving markets for agriculture exports from
Timor-Leste.
15. The strategy formulation process should be based on the present comparatively low
volumes, limited overall value, and irregular (seasonal) timing of agricultural exports. These
may not warrant nor can they financially support the relatively expensive quarantine service fees of a
stand-alone SPS certification scheme. Spreading costs over time and between institutions can be
more realistic. A stand alone SPS certification capability is a relatively expensive system to institute,
equip, manage, and continually update and modify given changes in the International Standards,
additional trade protocols negotiated with other countries, and new commodities which the private
sector may propose to export over time. The NDQB needs to join forces with a public organization
(e.g. UNTL with an Agricultural Campus at Hera) to cover construction costs, jointly manage the use
and maintenance of both the equipment and facilities, and source manpower. Such an organization
would employ the pathologists and entomologists to teach students as well as provide inspection
services to NDQB on part-time contracts. NDQB could recruit its management staff from this
organization as exports expand over time and its mandate grows.
16. This would require a practical and effective mechanism, unique to Timor-Leste for the
indefinite, short term transition from limited agricultural exports to future larger scale exports.
Other points for consideration include measures to:
Hire middle level managers who have an adequate academic education to quickly learn
and adapt to the changing SPS requirements.
68
Engage the services of experienced entomologists and pathologists with the expertise
needed, yet not over-extend the operating costs by fully employing them during the early
years while exports gradually expand.
Find ways to fully utilize, maintain, and update the laboratory facilities and equipment
throughout the year.
Institute a process of regularly initiating trade protocol negotiations with nearby interested
countries.
Coordinate the identification of trade opportunities with on-the-ground, focused
production initiatives, such as the coffee rehabilitation, Specialized Vegetable and Fruit
Areas program, localized livestock feeding and raising initiatives, etc.
Support and strengthen NDQB along with the enhanced productivity efforts and
expansion of potential agricultural exports.
Commission an annual market search for niche market opportunities throughout the
region for new as well as currently exported commodities.
17. As part of the strategy process, NDQB’s SPS team should anticipate the repercussions
for growers and traders within Timor-Leste, given a functioning SPS capability. If everything
works as planned, there will be expanded rural and urban employment opportunities, increased rural
incomes, and stimulation and support for allied businesses, such as input stores, transporters,
packaging companies, and shippers. The key point regarding the implications of SPS for agricultural
exports is the on-going requirement for some mechanism by which NDQB is kept well informed of
agricultural export initiatives well in advance of their completion, whether with MAFF or private
sector sponsorship.
D. DONOR TA AND GOVERNMENT INITIATIVES, ESPECIALLY MAFF
18. The exact form of TA by the development partners would emerge from decisions
regarding the strategy noted above. A few of the known activities within the current pipelines
include:
A field investigation scheduled for 2010 with NDQB staff and the participation of AQIS
personnel to examine the full range of prevalent plant insects and diseases;
Outfitting of an imported laboratory which will conduct tests of materials found from the
field investigation noted above;
Initial equipping of the MAFF laboratory facility within its complex in Comoro; and
The formation of a SPS Consultative Group as a result of discussions instigated by the
DTIS mission in November 2009.
19. Indicative types of TA activities could include:
Evaluation of the costs and returns to an off-shore inspection capability in the immediate
term (explanation noted below);
Evaluation of the costs and returns for short-term employment of foreign technical
expertise instead of Timorese personnel (i.e. entomologist and pathologist) to assist
NDQB in issuing short-term Phytosanitary Inspection Certificates. Foreign technical
experts needs to be considered to ensure effective knowledge transfer as well as on-the-
job-training and extended exposure to using laboratory equipment for the local staff;
Engineering expertise at a very practical level for detailed plans for each quarantine
compound at each air, sea, and land exit point for inspecting exports and imports; and
69
Training of capable NDQB staff as well as one or two academic staff from UNTL in
Australia, Singapore, or Indonesia to gain exposure to the current quarantine/SPS
standards and tests. Inclusion of the UNTL staff in this activity could ensure continuity in
knowledge transfer since civil servants tend to change positions more frequently.
20. Issues which the MAFF should carefully review:
Should export inspection services be for free or fee-based? The MAFF needs to
determine whether the SPS service should be provided for free to exporters in order to
further stimulate export businesses or whether exporters always need to ‘pay for service’
(at what level?), which may impose high costs to export growth. Although Australia
currently applies a fee for such services, several other countries do not. Given other
constraints to Timorese exports, in the short to medium-term, it might be appropriate to
provide free export inspection services.
Should Timor-Leste attempt to negotiate with Australia/Indonesia/Singapore an off-shore
inspection (pre-clearance) capability in Dili in the immediate term so that questionable
exports can be sold in the local market if they do not meet export expectations for their
country of destination?
- In the case of Australia, previous enquiries indicated that for AQIS support: "..
off-shore inspection service would be at the expense of the exporter. However,
they currently have a somewhat similar service with the Australian military in
Dili at this time (inspection of equipment, etc. being shipped back to Australia).
As a result, something might be worked out. Australia has such arrangements in
the U.S.A, New Zealand, and China. It is a government arrangement based on
certain conditions. It is usually requested by the export industry." 138
- Regarding the constraint that a Phytosanitary Certificate cannot be issued in
Timor-Leste at this point in time, an AQIS official mentioned that AQIS would
have to think of another form of documentation. This would need to be carefully
considered in Canberra.139
o Biosecurity Australia (BA) will recommend Import Permits for certain
commodities. It will conduct Risk Assessments per commodity which would
take years to complete, especially for high risk commodities such as fresh
food. It is very important for the Timor-Leste government to submit a
prioritized list of potential export commodities to the quarantine service as
soon as possible if exports are envisioned. Import Permits are feasible for
snow peas, but they may not be for other items.
o If a fresh commodity has to be submitted for a new ‘Pest Risk Assessment,’
then an alternative approach would be to process that item, such as freezing
it, thus killing any harmful elements.
Determine and evaluate what mechanisms MAFF can utilize for determining each year a
practical and realistic priority list of potential agricultural export commodities in addition
to those with a history of exports. This mechanism will require the active participation of
the private sector and donors with projects such as initiatives in greenhouse technologies.
138
Pre-conditions for this regular off-shore inspection and pre-clearance procedure included the following criteria at that
time: (i) Minimum of at least 4 full inspections per day (1 to 2 inspections would not be worthwhile). Those inspections
normally include 600 or so samples from 6 to 8 containers; (ii) Service fees are usually paid by the exporting country or
sometimes by Australian importers, such as the case of Australian importers of US citrus. Normal charges are $9,000
monthly, $2,400 weekly, and $714 daily; and (iii) Other documentation is still needed, such as Phytosanitary Certificate.
139
The same AQIS official noted that a ‘Pest Risk Analysis/Assessment’ has already been done for snow peas. Based on
that assessment, AQIS would not allow ‘mature peas’ in the shipment because those peas could be sold as seed material and
be planted in Australia later (potential for pathology problems).
70
Determine and commission, in addition to NDQB, an institution to develop detailed
listings and identification procedures for the full range of insects, diseases, and weeds (for
plants and animals) originally present in or introduced into Timor-Leste. This institution
will provide the back-up option in case of future riots or natural disasters which might
affect the MAFF facilities.
E. CONCLUSION AND RECOMMENDATIONS
21. Though SPS has not restricted exports to date, this has become an urgent issue for
exports from Timor-Leste, particularly for trade with Indonesia. A number of key challenges in
developing and implementing a SPS system have been highlighted, including financial resources, the
current volume of exports, seasonality and use of SPS capacity, pressures around timeframe, and the
time required to establish reputation and credibility of the SPS system. There is a clear need for
Timor-Leste to formulate a strategy around SPS and organize stakeholders.
22. Recommendations for building SPS capacity and systems include:
(a) Form a SPS Consultative Group and identify a donor partner to be the champion for the
NDQB quarantine systems and services and co-chair (along with the Secretary of State
for Livestock) for the SPS Consultative Group. The SPS Consultative Group would
propose, review, and coordinate all the varied sources of financial and technical support
for the short and medium-term development of the quarantine services, including SPS
capabilities.
(b) Develop a strategy to build SPS capacity in a systematic and coherent way such that each
additional component contributes to and does not conflict with previous components and
strategies. Considerations for the strategy include timeframes, institutional arrangement,
and sustainability of the SPS system.
(c) Evaluate the cost and returns of short-term options such as (i) an off-shore inspection
capability in the immediate term; and/or (ii) short-term employment of foreign technical
expertise (i.e. entomologist and pathologist) to assist NDQB Phytosanitary Inspection
Certificates in the immediate term.
(d) Develop detailed plans for each quarantine compound at each air, sea, and land exit points
for inspecting exports and imports.
(e) Build capacity of NDQB staff and academia from UNTL in current quarantine/SPS
standards and tests.
71
SECTION III:
CROSS-CUTTING CONSTRAINTS TO EXPORT COMPETITIVENESS
72
CHAPTER 7: ADDRESSING SKILLS DEFICITS, TRAINING, AND
LABOR MARKET CHALLENGES
A. INTRODUCTION
1. The nature and dimensions of the skills gap pose a potentially binding constraint and
threat to the growth and export competitiveness of Timor-Leste’s economy. In the agriculture
sector, the most significant and immediate underlying constraint to the sustainable development of the
commodities identified in Chapters 4 and 5 (coffee, cattle, mungbeans, and horticulture) is limited
farmer production skills.140 This problem is exacerbated by weaknesses in Timor’s agricultural
extension service. There is very little chance of developing these agriculture subsectors into
profitable export and import replacement businesses unless skills and experience are built at two key
levels—farmers and extension workers.
2. Gaps also penetrate other areas from high level professional occupations to middle and
lower level occupations. Thus, the labor market is characterized by a large and growing excess
supply of unskilled labor, and a large demand for a skilled and experienced national workforce.
These challenges in the labor market are further compounded by the high cost of labor in Timor-
Leste. In the short-term, many of these gaps can only be filled by a large cadre of expatriate labor,
drawn into both the public and private sectors. There is, however, a need to build local capacities and
encourage skills transfer in order to substitute imported labor in the long-run (See Annex 7.1 for
details on the structure of employment).
B. NATURE AND IMPACT OF THE SKILLS GAP
3. The lack of skills and knowledge is particularly glaring in the agriculture sector, and the
most pressing issue is to increase crop and livestock productivity across the nation.141 The
demand for other skills affecting the agriculture sector (including skills required for moving up the
value chain or for addressing business environment issues such as access to finance) are secondary
and will not generate a significant impact on the growth of agricultural exports until progress has been
made towards building the capacity of farmers to increase yields. The agricultural skills gap threatens
to constrain productivity growth through two channels: (i) smallholder farmers lack basic education
and the technical know-how to increase crop yields and livestock production; and (ii) MAFF’s newly
created ‘Extension Service,’ which employs 400 Suco Extension Officers (SEOs), lacks the skills and
experience to service Timor-Leste’s 166,000 rural households efficiently and effectively.
4. In the rural sectors, skills training often occurs at home, on the farm, and/or in the
village from older members of the family and community. Hence, the quality of this type of skills
transfer depends largely on the initial skills and knowledge levels of family and community members,
which is likely to be limited. A World Bank Policy Note produced in January 2010 found that “rural
households generally lack the technical, management, and crop storage skills which allow them to
take advantage of improved crop and livestock production packages, many of which are available,
proven and ready for widespread extension.”142 Both pre- and post-harvest crop losses are high, with
farmers losing up to 33 percent of their crop. In addition, agro-processing technologies are typically
outdated and inefficient, preventing the rural sector from evolving into a more commercially oriented
sector. 143
140
Young, 13.
141
Refer to Chapter 4 for a cross-country comparison of crop yields. Across all crops Timor-Leste only produces between
20 to 35 percent of the production (Mt/ha) achieved by Cambodia, Thailand, China, Vietnam, Indonesia and Laos PDR.
142
Young, 13.
143
Young, 12.
73
5. At the same time, although the SEOs have received some pre-service training from GTZ
and are working with rural development donors, they are severely constrained by inadequate
operational, training, and demonstration budgets. The forthcoming RDP IV and Seeds of Life III
projects include extensive capacity building activities and operational budget support for these key
staff, but there remains an urgent need for MAFF to convince the MoF that a much larger annual
budget is needed if these staff are to be effective in terms of increasing agricultural production.
Fortunately, some of the small scale donor financed demonstration projects are showing great promise
in addressing the skills gap in the agriculture sector (for both farmers and SEOs) and can potentially
be replicated nationwide for coffee, horticulture, other crops, and livestock.
6. The World Bank144 (using adjusted Commodity Profiles prepared by the MAFF) and Seeds of
Life Phase III design data145 have analyzed the likely impact on rural household income from the
adoption of improved production technologies for the country’s main agricultural commodities,
including coffee, cattle and peanuts (the latter, equivalent to mungbeans). These technologies are
based on adaptive research by projects such as Seeds of Life Phases I and II, RDP II (GTZ), CCT
(USAID-supported) and Portuguese support for the coffee subsector, followed by wide-spread on-
farm testing under local production conditions and input supply situations.
7. In summary, Timor-Leste has a wide range of improved crop and livestock production
packages which are ready for nationwide adoption, provided the technologies can be extended
to farmers and markets developed. For example, if coffee farmers adopt the improved technology
recommended by CCT and Portuguese Aid on 1.0 ha of plantation, gross margins could increase from
about $120/ha to as high as $800/ha, with an average increase of about $500/ha; and returns per labor
day would increase from about $3.70 to $5.90. If a family fattened 2 heads of cattle per year, their net
farm income would increase by $280 per year. The corresponding figures for 0.50 ha of peanuts (or
mungbeans) would be an incremental household gross margin of $340 per year and returns per labor
day of $5.90.
8. Aside from the skills gap in the agriculture sector, the lack of adequate skills is a
problem which exists across the board. According to the Global Competitiveness Report, business
respondents identified the ‘inadequately educated workforce’ and ‘poor work ethic in the national
labor force’ among the top five constraints for doing business from a list of 15 factors (Figure 7.1).
Skills and education factors are considered to be more problematic than factors such as corruption,
policy instability, and government instability.
Figure 7.1: Most Problematic Factors for Doing Business 146
144
Phillip Young, Raising Agricultural Productivity: Issues and Options (Timor-Leste: World Bank, Jan 2009).
145
Production and financial models prepared during the design of Phase III – not yet published.
146
World Economic Forum, The Global Competitiveness Report 2009-2010 (WEF, 2009).
74
9. The number of foreign workers in different kinds of occupations and sectors can be used
as a proxy for the scale of the skills gap in Timor-Leste. There is some information available on the
number of foreigners in the construction, hospitality, and tourism sectors. According to a nationwide
survey in October/November 2008, the permanent and temporary employees in these sectors were
roughly equivalent to one fifth of Timor-Leste’s non-agricultural private sector labor force. One in
ten of the permanent construction workforce was foreign as were just over one in twenty permanent
workers in the hospitality sector.147
10. In this context, the presence of expatriate labor has been essential for addressing Timor-
Leste’s skill problems and has been a commendable policy response from the government.
While the presence of expatriate labor is essential for the immediate future, there is still a need to
design and implement programs and policies that encourage foreign-owned and domestic firms
employing expatriates to transfer skills to the local workers (see below for further discussion).
11. The lack of adequate skills in the workforce is not only apparent through the import of
skilled foreign labor but also in how urban employers reported that half of all workers were
fully proficient in their core competencies in their jobs.148 This is based on a survey of urban
enterprises in Timor-Leste which considered the full spectrum of employment categories (excluding
managerial positions). The survey concluded that most employees lacked basic language proficiency
(Portuguese/English), customer service skills, and administrative and financial skills. Perhaps the
most frequent plea by employers and others is the gap in basic skills such as “leadership, motivation,
initiative, punctuality, honesty, management of money, numeracy, and literacy.”
12. The deficiency in basic skills can be attributed to poor performance in the education
sector, particularly primary education. Previous World Bank149 research has shown that the rate of
return to primary education is highest. Good ‘basic education’ is critical for ensuring employability
and trainability of potential job market entrants and for success in higher levels of education.
13. Even in the construction sector, which is the most dynamic sector in the economy,
experienced local workers are in very short supply. According to the survey of the construction
and hospitality sectors, occupations typically filled by foreigners include engineers, cooks, skilled
workers in construction (carpenters, plumbers, masons, welders, and mechanics), and on-the-job
trainers.150 The list of priority skills identified by employers in the two sectors placed the high-level
technical skills of engineer, architect, and draftsperson at the top. The bottom of the list included
security guards, interpreters for Bahasa, and drivers in the hospitality sector.
14. In addition to the need for sector specific skills, capacity also needs to be developed to
create an efficient, enabling business environment (see Chapter 9, Section B on business
registration and licensing). The dearth of capacity in professions that support business and commerce
is evident in the accountancy, finance, auditing, and legal professions, which are heavily dependent on
expatriate labor. For example, while there is a lawyer’s association in Timor-Leste, there is no formal
bar association. There are reportedly three international law firms in Timor-Leste and no private
notaries. All notarizations are performed by the MoJ but capacity is quite low.
15. The area where there is significant structural weakness is the professions of accounting,
audit, and finance. Only three independent private accountants operate in Timor-Leste, with other
services provided by government and private foreign companies. There is no professional association
of accountants. New enterprises in Timor-Leste face the challenge of effective financial management,
147
Richard Curtain, Skills in Demand: Identifying the Skill Needs of Enterprises in Construction and Hospitality in Timor-
Leste (Feb 2009).
148
Maitreyi Bordia Das and Philip O’Keefe, Enterprises, workers, and skills in Urban Timor-Leste, World Bank Policy
Research Working Paper 4177 (Mar 2007).
149
For example, George Psacharopoulos, Economics of Education: Research and Studies (Oxford: Pergamon Press, 1987).
150
Curtain.
75
and most small companies do not produce financial statements. If they do, they are not in line with
International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS). In
the area of business professions, the development of professional associations is important, as is
capacity building in the government to regulate and supervise where appropriate.
16. There is also a lack of entrepreneurial skills which is linked to the generally weak
business culture and other cultural aspects. Historically, with a few exceptions, there has not been
a strong business culture in Timor-Leste. These obstacles to private sector development are
compounded by other cultural factors including family responsibilities that sometimes undermine
potential entrepreneurs and puts pressures on business owners and those in formal employment to
share their good fortune. Moreover, agricultural subsistence activities are often not conducive to
nurturing an entrepreneurial spirit, especially given that the bulk of the labor force operates in a non-
cash rural economy and/or are involved in informal income earning activities.
The Skills Gap and Gender Issues
17. Women in particular are affected by the skills gap. They are constrained by lower literacy
rates than men, and they are also more likely to drop out at pre-secondary and higher levels of
education. Although no gender disparities exist in primary school enrollment, the number of male
graduates is twice that of female graduates at the secondary level and three times more than females at
the tertiary level.151
18. In addition to the lack of literacy and numeracy skills, Timorese women tend to also
have very limited business skills.152 Business and technical skills training and networking activities
for women are relatively rare.153 Where business development services and training do exist, they
often do not adequately consider the needs of women including those operating in micro and small
enterprises.154 As a result, access to information is primarily dependent on male family members,
thereby reinforcing traditional gender notions that women are less capable than men. 155 In a survey of
staff and officials from MAFF, respondents noted that when women participate in agricultural
development programs, they were largely dependent on men to make important decisions about the
choice of seeds, fertilizers, credit, services, and technologies.156 In terms of business networking,
there is a small Women’s Business Association of 15 women based in Dili, and female attendance in
the Better Business Initiative’s Working Group meetings has been strong.
19. Low literacy, numeracy, and education, coupled with insufficient trainings and limited
access to information, directly impact women’s ability to engage in trade-related activities.
According to a USAID project on Candlenut Oil Processing, low levels of literacy and numeracy
make it difficult for women to negotiate with buyers and oversee the management of processing
facilities. 157 Likewise, navigating through the complex business registration requirements is also
more difficult for women than their male counterparts because of their lower levels of literacy. This
may be one reason for limited female ownership of formal enterprises, and it also suggests the need to
clarify the rules around registration, particularly the differences and benefits around different types of
business entities.158
151
MED, “Gender Equality.”
152
UNIFEM/UNDP, Concept Note & TOR for Mapping of Women’s Economic Empowerment Programmes (Dili: UNIFEM,
2010).
153
Hedditch Timor-Leste ix.
154
WISE, Women In Self-Employment Final Report (Joint Publication of SEFOPE, SEPI, MED, UNDP, and ILO, 2010).
155
GOTL, SEFOPE, Gender Dimensions in Vocational Training (2008).
156
MAFF, Assessment of Gender Mainstreaming in the MAFF (Dili: MAFF, 2007).
157
DevTech Systems, Inc., Community & Gender Aspects of a Proposed Candlenut Oil Processing Facility in Timor-Leste
(USAID, Mar 2005).
158
Hedditch Timor-Leste.
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C. MEASURES TO ADDRESS THE SKILLS GAP
Agricultural Extension Services
20. Prior to Independence, Timor-Leste’s rural sector was serviced with a ‘traditional’
Indonesian agricultural extension service. This was based on the assignment of 700 field workers
operating across the 13 districts, 65 sub-districts, and 442 sucos and the delivery of a range of mostly
centrally-planned services, which included technical advice, demonstrations, free inputs (seed,
fertilizer, pesticides, herbicides and seedlings), and marketing support. The extension officers were
supported with a hierarchical subject matter and extension specialist system from the sub-districts
through to the districts and Dili. Whilst tightly structured (the extension officers told farmers what to
grow, how to grow, etc.) the system achieved good results in terms of the introduction of new crops
and increased production from existing crops. Many of the remaining plantations (a variety of fruit
trees, cashews, coconuts, etc.) were established during Indonesian times. In addition, much of the
irrigation infrastructure which has been repaired post-Independence under donor-supported159 and
GOTL programs was originally constructed during the period of Indonesian rule.
21. One of the main legacies of the traditional service which has caused problems since 2000
is the farmer ‘dependency and handout’ syndrome. Farmers grew used to being provided with
crop production inputs free of charge and therefore expected this to continue.
22. Post-Independence the international donor community and government debated the
options for the provision of agricultural services and inputs, and a decision was taken to support
the development of a private agricultural extension sector. The private sector was to take
responsibility for the provision of technical advice and inputs to farmers with assistance from NGOs.
This policy was reflected in the design of the three Agricultural Rehabilitation Projects (ARPs) which
were implemented by MAFF with support from direct-hire TA. The ARPs also set out to establish
and support the development and operation of Agricultural Services Centers.
23. Neither of these initiatives was successful160 and after further analysis of the options for
the provision of agricultural extension services to Timor-Leste’s 167,000 rural households,
MAFF decided on a public sector funded agricultural extension service. The private agricultural
extension sector was unsatisfactory because coverage by NGOs was uneven in both spread and
quality, and whilst donors were willing partners with MAFF, they had a limited focus and insufficient
resources for a nationwide program. Private sector technical and extension services had not
developed even for the few commercial commodities with market access (e.g. coffee) with the
possible exception of the village livestock workers. MAFF’s response has been to place one SEO in
each of the 400 rural sucos. This will not provide the depth of coverage achieved by the Indonesian
system but will be compensated for in part by the closer cultural fit of the new extension workers who
will be more familiar than outsiders with the local farming systems, languages, and cultural features
of their sucos.
24. The current status of Timor-Leste’s agricultural extension services can best be
described as fledgling but large – numerous staff have been assigned at various levels but there
remain significant technical and organizational constraints which hinder MAFF’s ability to
deliver effective services to farmers.161 Moreover, ongoing capacity building of field-level officers
and middle-level subject matter specialists is often technically inappropriate and ineffective. And
159
Mainly JICA and the World Bank/EC-supported ARPs, with other donors assisting on a district by district basis.
160
ICM (TF050151), The World Bank, Rural Development and Natural Resources Sector Unit, Timor Leste Country Office,
June 27th, 2005.
161
World Bank, Implementation Completion and Results Reports: Third Agriculture Rehabilitation Project (World Bank, 07
May 2010).
77
there is a danger that future centralized training programs will develop a blanket approach to
technology transfer irrespective of local potential and the specific demands of local producers.
25. Extension skills are just one part of the equation – the missing part which is currently
impacting just as severely as technical and organizational skills is the lack of government
funding. Four hundred new SEOs need support in the form of: (i) adequate per-service training (one
month of class-room type training in technical subjects is inadequate); (ii) on-going in-service training
(some is provided by cooperating development partners but MAFF does not have the resources to
provide on-going technical support for the SEOs); and (iii) operational budget for field days,
demonstrations, training materials, technical handouts, etc. The other major deficiency in agricultural
extension services is that, apart from the Seeds of Life Program, there is virtually no investment in
adaptive research on Timor-Leste’s major agricultural products. Results from such programs are
essential for the ongoing development of national crop and livestock production programs.
26. In December 2008, the World Bank-managed ARP III assisted MAFF in preparing a
draft policy framework for agricultural extension.162 The draft framework stresses: (i) attaining
and maintaining technical proficiency in agricultural extension and extension methods; (ii) achieving
scale coverage and equity; (iii) achieving balance in extension programs and priorities; (iv)
coordination of extension services; and (v) administration, accountability, and evaluation of extension
outcomes. The policy focuses on a farmer-centered, problem solving, participative approach which is
fully consistent with adult learning principles and is quite distinct from the traditional technology
transfer model of extension. The policy document confirms that there is very limited expertise within
MAFF in these modern approaches to extension for either training or mentoring purposes. In order to
fill this gap and build local expertise, MAFF will need to partner strategically with donors and NGOs
that have strong extension and adaptive research expertise and experience under Timorese conditions.
27. A recent national workshop163 concluded that the key challenges in the present extension
system are: (i) the absence of an agricultural extension strategy to articulate the extension needs of
uplands vis a vis lowlands and subsistence vis a vis commercial farming, based on production and
marketing constraints and potential; (ii) different strategies, technologies, and subsidy practices
currently used by MAFF, development partners, and NGOs which is confusing target beneficiaries –
these need to be harmonized and standardized; (iii) lack of adequate experience, skills, and exposure
to innovative technology transfer techniques for most extension workers; (iv) lack of transportation
limiting extension workers’ mobility, outreach, and effectiveness; and (v) lack of resources to support
farmers, e.g. seeds, tools, training materials, and facilities.
28. The World Bank has recommended an Agricultural Productivity Improvement
Program (APIP) to MAFF.164 This nationwide commodity focused program is based on the
operationalization of the Policy Framework for Agricultural Extension in Timor-Leste. Whilst APIP
is still in the concept stage, the EC’s forthcoming Rural Development Project Phase IV (RDP IV) has
adopted many of APIP’s design features. Therefore, it seems that international support for
agricultural extension in Timor-Leste is in the pipeline, provided that RDP IV evolves into a national
program and GOTL allocates adequate operational funds as part of their contribution.
29. There are also a number of other donor-supported rural development programs which
are already providing training and capacity building activities for farming households and the
SEOs. This includes support from Portuguese Aid to the coffee and farm-forestry subsectors, FAO
and NZAID for on-farm food grain storage, and numerous national and international NGOs. These
projects and programs have made good progress in small geographic areas and identified and tested
162
Bryan Gorddard, Policy Framework for Agricultural Extension in Timor Leste (Timor-Leste: World Bank, Dec 2008).
163
November 2009 - MAFF and GTZ organized a national workshop in collaboration with six international NGOs on
“strategic strengthening of extension delivery in Timor-Leste”.
164
Young.
78
productivity improvement technologies. However, there is now a need for a well-coordinated
nationwide agricultural extension and supportive adaptive research program which builds on the
proven pilots and releases the inherent potential of Timor-Leste’s rural sector. This task should be
undertaken by MAFF with support from MOF as considerable incremental annual budget will be
required (about $5.0 million per year over and above MAFF’s current operating budget).
30. In summary, the main elements of a national agricultural extension service have been
developed, but some more work is needed to make the system fully operational and effective.
MAFF and its donor partners agree that the most important need of the agricultural sector is capacity
building of agricultural support service providers, i.e. public and private sector education institutions,
research and extension agencies, animal health services, input suppliers, and post-harvest handling,
processing, and marketing organizations, particularly now that 400 SEOs have been appointed and
assigned. It will take considerable donor support and substantial GOTL investment for Timor-Leste’s
agricultural extension systems to be effective and therefore impact on rural production and incomes.
There is also a need for the draft Policy Framework for Agricultural Extension to be finalized by
MAFF and promulgated by GOTL to guide agricultural support service providers in adaptive research
and the delivery of improved and new technologies to Timor-Leste’s impoverished farmers.
Vocation Education and Training (VET) Programs
31. A 2007 review of vocational training by the Secretariat of State for the Vocational
Training and Employment (SEFOPE) suggests that VET is not adequately addressing the skills
gaps. The study focuses only on providers registered with the National Division of Vocational
Training (DNFP). The study finds that many of the courses in the 39 vocational training providers
and 12 technical secondary schools that were surveyed do not sufficiently equip trainees for the labor
market because of: low levels of education for many of those entering vocational training; the short
duration of courses coupled with weak links to the labor market; the lack of standard qualifications for
training institutions; and variable qualifications and experience of training staff.
32. The range of vocational courses is also narrow, and the review finds that more than half
of the trainees were taking language, IT, or office administration courses. Only 17 percent of
trainees were engaged in livelihood and agriculture courses and another 17 percent in technical trades.
In general, vocational courses on offer at the different institutions are limited to basic trades (such as
electrical, plumbing, and basic construction), and sectors such as tourism/hospitality, mining,
petroleum, and agribusiness are often neglected. The review found no training courses in
telecommunications, road maintenance, rural water supply and sanitation, transport, and the oil and
gas industry. Only just over one in three of the permanent workforce of construction enterprises and
one in five of the permanent workforce of hotels, restaurants, cafes, and tourist facilities had recruited
workers from local training institutions.165
33. Formal VET is concentrated in Dili, with limited training activities aside from
agricultural trainings happening in surrounding districts. Some institutions have been offering
subsidized accommodation on campus to encourage non-Dili based students to relocate for training
purposes, and others offer meals and a per diem allowance. This, however, is becoming unsustainable
in some cases.
34. To try and address these shortcomings, productive sector working groups were started
in 2008. These groups include trainers, employers, and worker organizations relevant to the
productive sector, and they attempt to promote greater partnerships and the identification of skills
required for specific jobs.
165
Curtain.
79
35. However, one of the key constraints identified by the National Labor Force
Development Institute (INDMO) and other programs is the lack of qualified trainers. Some
potential trainers have been taken out of their institutional employment for short periods and sent
overseas to Australia, Malaysia, and Indonesia to build their technical knowledge and enhance their
industrial experience. Because there is such a small pool of potential trainee material with the
appropriate educational background, the impact will be small at first and will only come to fruition as
a larger quota of trainers is developed. The process will be time consuming. One potential strategy
to overcome some of the problems would be to bring in skilled expatriates from overseas for short and
longer term periods to train the trainers.
36. With the assistance of the ILO, the INDMO initiative was established by the GOTL in
2008 to strengthen the VET system. The INDMO is a partnership between the government,
employers, worker organizations, and vocational training institutions with the objective of ensuring a
strong, relevant, and good quality vocational training system. The INDMO is an autonomous, public
institution under the auspice of the SEFOPE. The government has also demonstrated its commitment
to skills development and building the training system by approving the National Vocational Training
Policy and nominating Human Resource Development as the overarching priority for the 2010 and
2011 National Priorities.
37. More specifically, the mandate of INDMO includes:
Offering training in the industries and skill areas that are needed in the labor market now
and in the future;
Approving competency standards determined by the relevant industry sector for the jobs
in that sector;
Recognizing qualifications that are required by industry; and
Registering and certifying vocational training providers that are of good quality and have
trainers with the qualifications to deliver and assess the competency standards.
38. Within this mandate, INDMO has ambitions to upgrade the capacity of institutions and
expand the scope of trainings into areas such as hospitality, administration and finance, and
agriculture. While efforts are being made to place apprentices in industrial workshops, more must be
done in this field. The INDMO has not yet addressed the agricultural and engineering sectors but plan
to expand into these areas. Although the oil and gas sectors demand highly trained technical staff,
there is scope for a newly trained Timorese labor force to work on the oil rigs.
39. To facilitate INDMO’s mandate, an Employment and Vocational Training Fund has
been established to finance activities contributing to employment promotion and vocational
training. VET providers and technical schools can apply for financial support in order for trainees to
experience work placements for a maximum of two months. In addition, there is an internship
program targeting unemployed youth who have finished secondary school. Interns gain three months
of practical experience in the workplace. The third component of the fund targets graduates of VET
and business management trainings and supports them for six months while attached to a business to
enhance their skills and experience via supervised work. A further extension of this initiative could
be undertaken depending on the results of the evaluation.
40. In addition to the policy initiatives by the government, a number of international donor
funded programs and NGOs are also supporting vocational training. There have been a number
of business training programs with wide outreach through the Business Development Centers. A
range of courses were offered starting from basic start-up entrepreneurship to financial management.
The ILO has participated in this approach with its Start Your Business and Improve Your Business
components under the Youth Employment Promotion Program. Externally funded programs have
also provided ethics training linked to vocational schools. For example, the USAID-funded project
80
Preparing Ourselves for Work is addressing some of these ‘life-skill’ problems amongst the low-
skilled. The project focuses on rural areas and is geared towards school drop-outs. Over 2,500 low-
skilled, rural-based youths in 9 districts are enrolled in the program of ‘work readiness’ (including
money management, leadership, and punctuality), implemented by local NGOs. Other programs
include GTZ’s Employment Promotion for Young People, Brazil’s Professional Training and Social
Promotion as well as trainings provided by NGOs such as Oxfam and Concern.
41. It is outside the scope of this study to make an assessment of donor funded programs
and NGO trainings. However, it is worth noting that some of the constraints highlighted by
interviewees include the ad hoc basis of business training programs provided by NGOs; the lack of
sufficient resources to ensure effective follow-up and sustainability of some training programs; the
inability to gauge the needs of the local labor market in the absence of labor market information; poor
resourcing of some NGOs to provide effective support; and difficulties in establishing tracer studies
and other monitoring and evaluation systems.
On-the-Job Training
42. Aside from vocational training at institutes and secondary schools, skills acquisition is
also being undertaken on-the-job. While the on-the-job training in private enterprises is largely
undocumented, most business enterprises provide some training for their employees. According to
the construction and hospitality survey mentioned above, over one in three enterprises in these sectors
provided training for their workers in 2008, with most of the trainings being on-the-job. Three in ten
enterprises knew what training they would provide in 2009. These findings suggest that business
enterprises could be key sources of skills training with further encouragement from the government.
Disappointingly, only one in six of the sampled businesses provided work placements, which is a
fundamental way to promote skills formation. Where work placements were provided, they were only
for a short duration, with half of the placements being for four weeks or less and with limited impact.
Placements and on-the-job training are limited mainly due to the small size of the economy, and
currently, there is also no national apprenticeship scheme operating in the country.166
43. Results from the construction and hospitality sectors suggest a willingness of employers
to increase the quality of trainings and provide information about their skills needs.
Encouragingly, most surveyed employers supported the government’s new arrangements to lift the
quality of skills training through INDMO. In response to a series of questions to gauge interest in the
new training arrangements, the survey also found that over 8 out of 10 construction and hospitality
enterprises expressed strong interest in learning more and in actively participating in ways to increase
the quality of training. The survey also demonstrates that it is possible for the government, with
modest resources, to seek information directly from enterprises about their skills and other needs. The
study provided a tool to develop a priority skills profile, which can be used to seek employer ratings
in other sectors of the economy.167
166
Curtain.
167
Curtain.
81
Box 7.1: Informal On-the-Job Training
The DTIS team met a construction workshop in Dili operated by an Indonesian citizen who has been in Timor-Leste
since 1985. It undertakes the building of houses, offices, and metal work, often for the GOTL, NGOs, and private
households. It employs 63 workers of various skill levels, 20 of whom are Indonesian nationals. 7 of these are
highly skilled workers who oversee the local staff. The top rate of pay varies between $200-300 per month,
depending on skills and experience, with the lowest skilled earning $150 per month. The business seems to have
enough working capital for contracts under $200,000 but demands an advance for those which exceed this amount.
Contracts are often made verbally, while government contracts are written but often arrive after work has begun.
The respondent had never had any form of bank loan, although he had enquired from ANZ and was told ‘we don’t
give credit!’ He had applied for a loan from a Portuguese bank but was refused because he had no formal contract
for the work to be undertaken for the government.
The Indonesian workers arrive on tourist visas and begin work at the plant. After 5 months, the employer is
entitled to apply for a work permit for them. In order to obtain a work permit, the employee has to be vetted by
the urban village chief, examined by a doctor, and vetted by the police before seeking the approval of the Labor
Department who passes the approval to the MFAC. The process can take up to one year. The Labor Department has
been known to refuse the application without providing any reason. Once the work permit has been obtained, the
employer does not face any additional problems in getting an extension for the expatriate worker.
He recruits local staff from the technical schools, as well as the Don Bosco training school, and the newcomers earn
$4 per day plus meals. He keeps no formal accounts and fills in a tax form once a year to satisfy the tax authorities.
While there is obvious skills transfer from the Indonesian workers to local staff, there is no recognition or
certification of this. At the same time, there is no appreciation of the need to do so and no formal requirement that
the expatriate worker should pass on his skills, ultimately to be replaced by a local. None of the local staff had left
the employer to start up their own company.
This example shows that skills transfer is taking place in a very informal way. There is a need to acknowledge this
and design incentives such that expatriate workers are assigned local counterparts who will pass on their skills.
With such on-the-job training, local workers can eventually take over the jobs of the foreigners once they leave.
Foreign labor
44. As previously mentioned, the import of foreign labor is an alternative channel being
used to address the prevailing skills gaps. The Law on External Investment of 2005 sets the tone of
the policy environment, and it recognizes that:
‘the establishment of a legal framework that attracts and favors external investment in the
country is of paramount importance to promote the development of natural and human
resources, create jobs, and contribute towards the economic and social development of
Timor-Leste.’
45. The External Investment Law goes on to specify that a foreign investor may employ expatriate
workers under certain conditions, and during the first 5 years of its operations, the investor is entitled
to a tax credit of $300 for each Timorese permanently employed.
46. According to the Immigration and Asylum Law, expatriate labor can be employed where
it can be shown that no Timorese is available for the position. Two problems have been
highlighted with this approach: (i) the process of obtaining a working visa is often burdensome and
can lead foreigners to work illegally; and (ii) there is no policy to ensure that the engagement of
expatriate labor will raise the skills of the Timorese. SEFOPE has determined that the following
professional activities are exclusively reserved for Timorese workers and prohibited for foreign
workers: waiters and housekeeping in bars or restaurants; public transport drivers (exceptions for 8
wheels car and stevedores); receptionist; domestic helper; security for the house and public place;
82
cashier in commercial areas; shop waiters; logistics supervisor; labor assistant in all works (e.g. civil
construction); cleaning service; parkman/park lady; and itinerant vendors.
47. The problem of foreigners working illegally is recognized by the Migration Operational
Group’s 2009 report on visa processing. According to the report, many foreigners enter Timor-
Leste under a tourist visa and proceed to work illegally. These visa violations and overstays are
sometimes detected during routine inspections, and illegal workers are either repatriated and/or fined.
The report, however, also admits that such inspections are limited by the availability of resources.
48. With respect to work permits, the Selected Articles from the Law 9/2003 of 15 October
(Immigration and Asylum Law) specifies the purpose and duration as follows:
A work permit is intended to authorize the bearer thereof to enter the national territory,
on a temporary basis, to carry out a professional activity as an employee or independent
worker.
A work permit exclusively allows the bearer thereof to carry out the professional activity
which he or she claimed for the granting of the visa.
A work permit allows a length of stay of up to one year and is valid for one or multiple
entries.
49. Responsibility for enforcing this rests with the National Directorate for Labor Inspection,
bearing in mind “The need to promote the protection of Timorese work in National Territory; and the
need to make a regulation promoting capability transfer from foreigner who is practicing professional
activity in National Territory.”
50. At the same time, in order to better understand the professional activities of foreigners,
SEFOPE has decided that:
Labor Inspection shall send Inspectors Officers to the companies’ offices;
Applicants will be interviewed;
The Directors at Labor Inspection shall participate in the interview; and
Companies and employers must comply and respect the Timor-Leste Labor Code (No.
5/2002, 01/05/2008) and Immigration and Asylum Law (No. 9/2003, 15 October).
51. To address the issues of illegal foreign workers and the need for measures to ensure
skills transfers to Timorese counterparts, a ‘Visas Working Group’ has also been established.
The group is working on a proposal to establish a ‘one-stop-shop’ to obtain work visas and to
incorporate a training provision in a revised labor law. One of the key challenges lies in determining
how and if such a transfer is taking place.
D. SKILLS GAP, LOW PRODUCTIVITY, AND HIGH COSTS
52. High and rising labor costs compared to neighboring countries affects the
competitiveness of exports. Monthly wages are relatively high compared to the minimum monthly
wages in Indonesia and Vietnam. When compared to Thailand, China, and the Philippines, Timor-
Leste’s monthly wage is within the minimum monthly wage range of these countries (see Annex 7.2).
However, productivity in Timor-Leste is also much lower than these countries. Even when looking at
government wages and salaries in Southeast Asia, Timor-Leste has the highest average pay rate by
regional standards, and this rate has been increasing over time. This, in turn, places upward pressure
on private wages. With labor as the country’s main non-tradable, the progressive increase in wages
provides a disincentive for investing in the tradable sector. This is further compounded by the fact
that much of the existing domestic labor supply is unskilled.
83
53. Despite high wages, productivity is also low in Timor-Leste, largely due to skills issues
discussed above. When examining the extent to which pay is related to productivity, the Global
Competitiveness Report indicates that Timor-Leste ranks among the worse 20 countries out of 133.
Philippines is the only other Southeast Asian country with a relatively low ranking at 74, but even so,
its link between pay and productivity is stronger than 45 percent of the countries surveyed. Vietnam,
Malaysia, and Indonesia rank among the top 30 in terms of the relationship between pay and
productivity.
E. CONCLUSION AND RECOMMENDATIONS
54. Limited farmer production skills are significant constraints to transforming agriculture
subsectors into commercially oriented export and import replacement businesses. This requires
building skills at both the level of farmers and the SEOs employed by MAFF’s new extension service.
Beyond agriculture, there are limitations across the range of skills in the public and private sector. A
number of channels are being used to address these issues, including the import of foreign labor, VET,
and on-the-job training.
55. Recommendations related to the skills gaps include:
(a) Build on support to be provided under RDP IV and Seeds of Life III to improve the newly
created agricultural extension service. Finalize and implement the extension and adaptive
research policy framework prepared for MAFF 2008 and increase budget resources to
agricultural research and extension.168
(b) Institutionalize the transfer of skills from expatriate labor to Timorese counterparts,
including through the design and implementation of incentives for employers and the
drafting of appropriate Labor codes.
(c) Generate regular, reliable labor market data in order to better understand the scope of the
skills gaps, better link training programs to market demand, and identify occupations and
sectors that offer scope for substituting foreign labor with future local talent.
(d) Support the expansion of training in current and future export growth areas of
agribusiness, horticulture, fisheries, tourism, and hotel management.
(e) Develop and support efforts to improve the VET system, including initiatives to improve
the professional development of trainers, establish and implement the National
Qualifications Framework, ensure that INDMO has the financial and human resources to
fulfill its mandate, and conduct tracer studies to feed into curriculum development.
(f) Raise quality and efficiency in the education system at all levels, particularly in the post-
primary levels for the rural population and for the poor, especially in urban areas. Also,
tackle the problem of late starters, repeaters, and interruptions.
168
GOTL should follow the international recommendation to invest 10% of agricultural GDP in agricultural research and
extension every year. (Shenggen Fan, Halving Hunger: Meeting the First Millennium Development Goal through “Business
as Unusual” (Washington D.C.: International Food Policy Research Institute, June 2010).) For Timor-Leste this would
amount to an annual allocation of about $25 million in research and extension, compared with the current allocation of about
$5 million.
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CHAPTER 8: ADDRESSING PROPERTY RIGHTS AND ACCESS TO
LAND169
A. INTRODUCTION170
1. The rural economy in Timor-Leste remains overwhelmingly at the subsistence level and
the great majority of rural landholdings (around 97 percent) remain under customary tenure.
There have been few examples of private sector investment in agricultural intensification. Land held
under ‘customary tenure’ is land that has (usually) never been titled in accordance with state
administrative processes. Ownership and use rights over such land are typically regulated by
customary (or traditional) authority structures.
2. Furthermore, the country has no functioning system of formal property rights able to
facilitate investment, particularly in rural areas. In terms of registering property, Timor-Leste
ranks 183 out of 183 countries surveyed in the World Bank’s 2010 Doing Business Report.171 While
the land and property department can issue a no objection letter when someone requests proof of
ownership, this merely states that to the best of the registry’s knowledge, the person’s claim over the
property is not wrong. The department conducts an on-site inspection and verifies the claim with
neighbors before issuing the letter. However, the no objection letter does not replace a property
title.172
B. LAND AND RURAL DEVELOPMENT CHALLENGES AND
OPPORTUNITIES
3. In Timor-Leste, land, rural development, and present-day export performance
challenges are historically linked to the subsistence economy of the territory during the
Portuguese and Indonesian periods. At the very end of the Indonesian period, the Province of
Timor Timur was the least urbanized of all Indonesian provinces.173 With 414 of its 442 villages
considered underdeveloped in 1995, the territory was considered among the least developed regions in
the archipelago.174 The unsustainable harvesting of sandalwood is a well-known feature of the
colonial period, and while the Portuguese sought to establish a coffee industry in the late 19th Century,
only an estimated 48,000 hectares (approximately 3 percent of the land area) was ever planted with
coffee. Traditional cultivation approaches were used over much of this area, and modernized
plantations established on concessions granted to plantation enterprises such as the Sociedade
Agrícola Pátria e Trabalho (SAPT) appear to have contributed less than 45 percent of production.175
169
Since the National Validation Process in October 2010, a Transitional Land Law was approved by the Council of
Ministers in March 2010. The Land Law will be complemented primarily by laws on expropriation and compensation, both
of which are approved by the Council of Ministers. The status of community or customary held land remains unclear and
there are historically multiple sources of claims to land. The National Cadastral Office is now collecting data and processing
conflicting claims in urban and peri-urban areas in 10 of 13 districts.
170
In addition to meetings held in November 2009 with agribusiness actors and representatives of the MED, this analysis
draws on land and agribusiness research activities coordinated by the land specialist in recent years including:
(1) Research undertaken in 2005 during the USAID-supported Land Law Program that led to the preparation of the study
titled Non-customary Primary Industry Land Survey: Landholdings and Management Considerations.
(2) Research undertaken in 2009 as part of the Justice for the Poor (J4P) program that led to the preparation of a briefing
note titled: Contracts, Land Tenure and Rural Development (J4P Briefing Note Volume 3 Issue 3 November 2009).
171
IFC, Doing Business 2010, Timor-Leste (World Bank/IFC, 2009). The ranking did not change in DB 2011.
172
IFC, Timor-Leste: Reform Advisory Memo, Doing Business Project (World Bank/IFC, 2007).
173
Ministry of Health, Republic Indonesia, Indonesia: Health Profile 1999 (Jakarta: 2000) Figure II.A.3, 11. Only 10
percent of the population of Timor Timur was urbanized.
174
Ministry of Health, Republic Indonesia, Figure II.B.3, 17.
175
The Timor-Leste coffee industry has traditionally been smallholder-dominated. See W.G. Clarence Smith, Planters and
Smallholders in Portuguese Timor in the Nineteenth and Twentieth Centuries (Mar 1992) and M. H. Soesastro, “East Timor:
85
4. There remains very little private sector investment in the rehabilitation of coffee
plantations or other areas of the primary industry sector, representing a major obstacle to the
development of exports. Although some areas of primary industry, notably teak, expanded during
Indonesian times, many coffee leases had been abandoned by the end of the Portuguese period.176
The industry was strictly controlled during the Indonesian occupation by the military company P.T.
Salazar, which paid those who harvested the crops a fraction of the value of the produce. The limited
extent to which pruning and replanting occurred during these decades is only now being addressed by
donor-supported programs, including CCT and the Portuguese Cooperation Agricultural
Rehabilitation program.
5. The minimal extent to which post-subsistence agricultural practices gained a foothold in
Timor-Leste during the Portuguese and Indonesian periods is evident in how very limited land
had been alienated from customary tenure for such purposes. Notwithstanding the production of
coffee and, on a more limited scale, the production of other cash crops including candlenut, peanuts,
maize, mungbean, and copra, the majority of rural farmers in Timor-Leste rely mainly on subsistence
crops for their livelihoods.177 The 2005 ‘non-customary primary industry survey’ undertaken by the
USAID-supported Land Law Program identified only 47,000 hectares of rural land that had been
alienated178 from customary tenure for post-subsistence purposes (including coffee concessions and
areas of state forest)179 during the Portuguese and Indonesian periods (see Table 8.1).
180
Table 8.1: Alienated Primary Industry Land in Timor-Leste by Tenure Status
Main Tenure Status Number of Average area Total
Parcels (Hectares) Hectares
State Aquaculture Sites (mostly from the Indonesian 15 1.6 24
period)
State Agricultural Concessions (established mostly 40 318 12,712
during the Portuguese period, and mostly for coffee
cultivation)
State Agricultural Land (including production sites, 51 28 1,420
seedling sites, Indonesian-period model farms, and
agricultural secondary schools)
State Forestry Sites (teak common but condition 49 290 14,213
variable)
Transmigration, Translocation and Rural Housing Areas 44 345 15,198
Private (Individual) Parcels 60 36 2,156
Private (Church) Parcels 57 25 1,411
Private (Community) Parcels181 8 18 143
Other State Parcels (including industrial zones 7 37 257
potentially of use for primary industry purposes)
Total 331 47,534
Questions of Economic Viability,” Unity and Diversity: Regional Economic Development in Indonesia Since 1970, Ed. H.
Hill (Singapore: Oxford University Press, 1989) 207-229.
176
For further details, see: (1) Rod Nixon, Non-customary Primary Industry Land Survey: Landholdings and Management
Considerations (Jun 2005); (2) Dennis Shoesmith, ed, “Challenges for Managing State Agricultural Land and Promoting
Post-subsistence Primary Industry Development in East Timor,” Crisis in Timor-Leste: Understanding the Past, Imagining
the Future (Darwin: CDU Press, 2007) 101-115.
177
According to the 2008 MED State of the Nation Report Volume IV: Sector Status Reports (page 5): “more than 50 percent
(of rural households) engage in subsistence farming producing no saleable surplus and generating no off-farm income. Fewer
than 50 percent produce a modest saleable surplus, mainly coffee, rice, vegetables and/or fruit, chicken, pigs, eggs, fish and
other grains.”
178
‘Alienated’ land is land which has been excised (and hence ‘alienated’) from customary tenure, such as agricultural
concessions or land expropriated for use by the state.
179
As mentioned above, much of the estimated 48,000 hectares of coffee growing area was established on land never
alienated from customary tenure and cultivated using traditional methods.
180
See Nixon, Non-customary. Note also that the survey identified a small number of parcels that had been alienated from
customary tenure in the post-Indonesian period.
181
This category refers to land that local informants assert is privately owned by a community (as distinct from customary
land). The existence of this category of land was not foreseen at the outset of the research.
86
6. Overall, the total area of alienated land in rural Timor-Leste amounts to about 3
percent of the land area. This is roughly equivalent (if urban areas are also taken into account) to
the amount of land alienated from other ‘subsistence states’ in the region. Seventeen percent of land
in Fiji, 16 percent in Solomon Islands, 2 percent in Papua New Guinea, and 1 percent in Vanuatu are
alienated land.182 Some of the larger areas of alienated land in Timor-Leste (agricultural concessions
generally dating from the Portuguese period) are located in the coffee-growing parts of the country
while other large areas (mainly state forests and transmigration areas dating from Indonesian times)
are located along the south coast, known for its increased rainfall in comparison to the north.
7. Although there has been some government activity in property rights, minimal focus has
been given to expanding land registration in rural lands. Whereas the GOTL, with USAID
support, is addressing the critical area of property rights in urban and peri-urban areas through the Ita
Nia Rai land registration program, this initiative will not cover the vast amount of the country over
which customary systems of authority predominate. As a result, there is reason to consider expanding
this land registration program over critical areas of primary industry land, including some areas of
coffee plantation. Care would need to be taken, however, to protect the interests of rural communities
and mitigate the acknowledged possible risks of expanding land registration into land under
customary management.
8. Research by the World Bank’s J4P program highlights the extent to which the rural
Timorese business culture remains bound to the largely unmodernized rural economy. Not only
is the struggling post-subsistence sector burdened by poor infrastructure (see Box 8.1), low levels of
technology, and a limited market, but there is as yet little familiarity with institutional arrangements
commonly associated with more advanced agriculture.183 Based on interviews with over 20 domestic
agribusiness actors in the districts of Aileu, Baucau, Dili, Ermera, Manatuto, Liquiçá, and Manufahi,
some of these characteristic features of the rural economy can be identified.184
Box 8.1: The Tyranny of Poor Infrastructure
To date, infrastructural challenges have discouraged farmers and agribusiness actors
alike from investing in agriculture, and one buyer in Manufahi referred to the risks, until
recently, of trucking produce to market, especially in the wet season. Given road
conditions, a misjudgment about when to transport produce could result not only in a
stalled transaction but also the ‘dead’ fuel costs associated with an unsuccessful attempt
at accessing the market. Not surprisingly, regional buyers believe that the amount of
produce sourced from outlying sub-districts could increase significantly as roads
improve.
9. Neither the leasing of land nor the use of contracts play much of a role in agribusiness in
Timor-Leste. This is because transactions are typically negotiated between producers and buyers at
the time of sale. Personal relationships, meanwhile, are an important (but not decisive) element. A
farmer, for example, may travel to a district centre, possibly with as little as several kilograms of a
cash crop (coffee, candlenut, peanuts, maize, mungbean, green bean, or copra) and offer the produce
182
See P. Larmour, “Migdal in Melanesia,” Weak and Strong States in Asia-Pacific Societies, Ed. Peter Dauvergne.
(Canberra: Allen & Unwin, 1998) 77-92. Note that while the rural economies of these south-west Pacific states are also
characterized by subsistence farming, post-subsistence activities have been facilitated by leasing arrangements to varying
extents. Examples include the plantation sector in Papua New Guinea (including the Ramu sugar plantation in Ramu Valley
and the palm oil industry in West New Britain).
183
See for example the 2009 draft Timor-Leste National Employment Strategy paper (prepared by the Secretary of State for
Vocational Training and Employment as input to the National Development Plan), which describes (pages 6-9) economic
conditions in Timor-Leste as characterized by ‘small markets, high costs, low skill base, poor physical infrastructure and
incomplete legal institutions.’
184
A total of 50 domestic agribusiness operators were identified using the Peace Dividend Trust Timor-Leste business
database (www.buildingmarkets.org). Some of these businesses, upon closer investigation, were not active in the sector.
Others have yet to be interviewed.
87
to a locally based buyer. Often the producer and the buyer will have a long-standing personal
relationship, based perhaps on marriage or village of origin, which increases the likelihood of a
transaction. However, this will not guarantee a sale, unless the buyer: (i) meets any higher offers; and
(ii) has sufficient cash on hand.
10. Concerning the links between a district-based buyer and the broader market, the buyer may
sell independently to bigger traders in Dili or Indonesia or act as an agent for a larger Dili-based
trader. If the buyer is an agent for a larger trader, he/she may expect access to interest-free loans for
the purchase of equipment (typically trucks). Again, written contracts between traders and district-
based buyers appear rare, although traders report few problems having their loans repaid. Central to
some agreements between traders and their district agents is the trader’s first right of purchase to the
produce collected by his/her agents, a similar but significantly more formalized version of the
arrangement that prevails between farmers and district-based buyers. One Dili trader explained how,
after lending money to agents, he would provide updates on the prices he would pay for various
commodities. In the event an agent is tempted by a higher price from a rival trader, the agent is
expected to inform his Dili-based sponsor of this offer. The trader then contacts associates in
Surabaya (where much of Timorese produce goes for processing) to determine if the higher price is
realistic. If so, the trader will pay it; if not, the trader will allow the agent to sell to the rival.
11. As a further disincentive to investors, there is little familiarity with contract farming
practices (see Box 8.2). No contract farming support institutions are in existence, and defaults by
farmers on contract farming deals are reported to be common. While one large Dili-based trader lends
out (via agents) pulping machines in order to expedite early stages of coffee processing by villagers,
almost none of the private sector agents visited have invested directly in the intensification of
agriculture by leasing and improving land or engaging in contract farming activities in which
investors provide farmers with key components of intensified agriculture (e.g. seeds, fertilizers,
training) in return for the right to purchase the crop at an agreed price. This suggests that
developments in the areas of leasing customary land and registering contractual agreements are
necessary if the GOTL is to realize its goal of increasing private investment in the rural economy and
expanding export-oriented production.185
Box 8.2: Contract Farming in Timor-Leste
The prevailing business culture has presented difficulties to large buyers, including
GOTL agencies, which have engaged in contract farming arrangements. In 2006, when
the MAFF contracted Viqueque farmers to produce mungbean at 35 cents/kilo, farmers
sold part of the crop to a rival buyer at 40 cents/kilo, notwithstanding the inputs
(including seeds and training) provided by MAFF. In this case, MAFF was eventually able
to purchase the remainder of the crop for the agreed price.
12. The minimal role which contract farming arrangements have in Timor-Leste highlights
the need for a better understanding of the options for developing a contract farming culture in
Timor-Leste. Although it is unlikely that parties to these contracts will ever seek to enforce them
legally, contracts can play a role in clarifying the responsibilities of each party and identifying
mechanisms for dispute resolution.186 With international experience suggesting that contract farming
investor/sponsors and farmers rarely take each other to court,187 there is no reason to expect that this
situation will be any different in Timor-Leste. Hence, the promotion of a commerce-oriented
mediation/dispute resolution forum may provide a more practical means to resolve disputes, thereby
185
These objectives were referred to by Cipriana da Costa from the MAFF at the MED conference on Sustainable Rural
Development for Poverty Reduction (27-28 March 2009).
186
C.S. Eaton and A.W. Shepherd, Contract Farming: Partnerships for Growth, a Guide (Rome: FAO, 2001) 61-62.See also
M. Doria, FAO brief- Contract framing: Legal Considerations on Contractual Design and Enforcement (FAO: Rome. 08
Mar 2010) .
187
Eaton 62.
88
reducing the risks for both investors and community members/farmers to partake in such a
relationship. Additionally, whatever the final form a contract farming promotion institution takes in
Timor-Leste, it is worth noting that international experience indicates that the management of it
should not be dominated by government although there may be a role for government
representation.188
13. Despite the challenges, opportunities for Timor-Leste agribusiness actors appear to have
improved since Independence. Some traders who formerly sold only to Dili-based merchants have
taken advantage of the 1999 exodus of Indonesian businesses, and they now export a number of
agricultural products (including candlenut) directly to Indonesia, albeit on a modest scale. In another
new initiative, farmers experimenting in Natabora with agricultural cooperatives are adamant that the
cooperative approach is improving labor efficiency and yielding improved rice harvests.189
14. A handful of entrepreneurs, meanwhile, aim to climb the value chain and improve the
quality, value addition, and marketability of local produce.190 Among these is the Baucau-based
Acelda organic candlenut oil enterprise. Although it is the beneficiary of support from international
organizations,191 Acelda remains a locally-owned business and an example of the benefits of niche
approaches tapping into the expanding organic market.192 Acelda is one of a number of examples
(others involve coffee) where businesses have sponsored the organic certification of agricultural land
belonging to communities. Interestingly, this process appears to bond investors and farmers in a
mutually beneficial relationship requiring neither contracts nor leases because the premium which
businesses can pay for produce from areas for which they have arranged organic certification means
that farmers sell to them out of self interest. As promising as this sounds as a possible replacement
for more traditional forms of engagement between buyers and producers, the global demand for niche
products, such as organic candlenut, is finite.193 Accordingly, it is clear that more traditional
approaches such as contracts and leasing arrangements still have a critical role to play in the
expansion of agribusiness exports in Timor-Leste.
15. In the present contractual and land-tenure environment, there continues, however, to be
concern around the general absence of reciprocal obligations between buyers and producers.
For instance, some forward-looking traders speak of introducing improved varieties of commercial
species (coconut, hybrid teak) and distributing these among farmers. And yet, potential investors are
concerned about whether they will gain additional return from distributing improved varieties to
farmers who have no reciprocal obligations to them. The general absence of reciprocal obligations
between buyers and producers in the rural Timor-Leste economy is at the heart of the problem, with
the effect that there is no incentive to invest in new crops or expand existing ones. Accordingly,
despite the handful of positive innovations profiled above, the available information suggests two
defining and interlinked features about the nature of agribusiness in Timor-Leste at the present time:
188
Eaton 62.
189
The MED initiated a number of agricultural cooperatives in 2008.
190
Some traders support the introduction of an exports standards organization as a way of improving the quality of Timor-
Leste crops.
191
These include the University of Hawaii and GTZ.
192
See M.J. Luzius, “Agricultural Firm Export Strategies in Fiji,” Pacific Economic Bulletin, Vol. 21, No. 2 (2006) 162-168.
Data from the International Federation of Organic Agriculture (Willer, Helga, Minou Yussefi-Menzler, and Neil Sorensen,
eds, The World of Organic Agriculture - Statistics and Emerging Trends 2008 (IFOAM and FiBL, 2008)) places global sales
in 2006 at US$38.6 billion (twice the 2000 figure).
193
Total demand for niche organic products can be limited. Acelda (visited 7 May 2009), for example, has a standing order
from a cosmetics manufacturer for 36 tons of organic candlenut oil per year, yet this is all they can sell. Accordingly, as
Luzius notes, there are advantages in diversification. Also, organic marketing may not be recession-proof. After conducting
extensive organic certification throughout Ermera district in recent years, Timor Global (interviewed 25 June 2009) found
that demand for organic coffee dropped following the 2008 economic crisis.
89
Most agribusiness actors in Timor-Leste appear to be engaged largely in competing for a
share of the limited and, according to some reports, dwindling harvest of available cash
crops, especially in relation to coffee.
As a direct corollary of the first point, there is very little private sector investment in the
expansion of crops or the improvement of crop quality.
16. This present situation of minimal engagement of the private sector presents clear
problems for the intensification of agriculture and the expansion of exports. Given the weakness
of state extension and agricultural training capacity, as discussed in Chapters 4 and 7, the
disengagement of the private sector means that the modernization of the agricultural sector is almost
entirely dependent on donor programs. It is uncertain, however, whether these alone can address the
declining productivity, quality issues, and wastage which characterize the commercial primary
industry sector (notably the coffee industry), especially given increasing population pressures.194
17. In short, one major consequence of Timor-Leste’s land issue is reduced domestic and
foreign investment. With farmers less likely to invest in land that they do not own, this limits
agricultural productivity. More generally, the lack of a functioning property rights system combined
with limited familiarity with contract farming discourages investment in increased productivity
through leasing, contract production, or small-scale improvement by individual smallholders.195
Foreign producers are also unlikely to invest in land where the borders and ownership is unsure.
Long-term leases are insufficient. Many foreign landowners have a business model where they own
the land where they operate. The company expects to gain equity from their long-term payments. In
addition, foreign companies may believe that they will be unable to resolve a dispute fairly with a
local landowner.
18. In the few instances where the private sector has tried to invest in agribusiness, state
leases proved to be an insufficient basis for companies to begin work, and further negotiations
with the surrounding communities were required. As highlighted by these instances (see Box 8.3),
it is clear that decisive action— based on a robust framework for negotiation that promotes mutually
productive and equitable outcomes for investors and communities and respects existing rights to land
and natural resources— is necessary to facilitate means by which such investment can be realized in
order to engage private capital in the modernization of the agricultural sector and the expansion of
export-oriented production and employment. Given the size of coffee plantations in Timor-Leste
(approximately 50,000 hectares or over), it makes sense to promote private sector investment in this
particular crop as a matter of priority.
19. Another severe consequence of the land issue on the business environment is the effect
on access to finance. The absence of a formal property rights system has prevented the development
of a formal land market through which land (even in the form of lease-rights)196 could be used as
collateral. This is particularly problematic since land is the most frequently utilized form of collateral.
Because of the lack of a land cadastre or registry, there are few clear or clean titles in Timor-Leste.
Although the process to establish land rights and a cadastre is underway, it is a lengthy process. In the
meantime, the commercial banks will not accept land in Timor-Leste as collateral because without a
clean title, it is difficult for the banks to claim the land in the event of a default. Foreign land is,
however, accepted.
194
In the course of DTIS consultations held in Timor-Leste in November 2009, coffee exporters referred to the likelihood of
decreasing production in view of the age and condition of much of Timor-Leste’s coffee plantation. Some exporters also
reported significant quality issues. See also Deutsch.
195
In the Timor-Leste context, one might think of a ‘smallholder’ as someone farming no more than a few hectares.
196
Note that freehold title is not essential in order for land to be used as collateral. As in Vanuatu, for example, leases over
former areas of customary land can also serve as the basis for collateral.
90
Box 8.3: Trying to Invest in Agribusiness in Timor-Leste
The case of a state lease issued by the GOTL to Timor Global in 2005 for 3000 hectares of coffee plantation at
Fatubesi (Ermera district) clearly demonstrates the need for new strategies for promoting engagement between
the private sector and communities. Although formally state land, Timor Global discovered that the lease
provided an insufficient basis for the company to commence crop improvement and management activities.
Before the company could begin work, it had to negotiate with community leaders and agree to provide benefits
including employment opportunities and security arrangements. Timor Global has now commenced work on a
60 hectare section and employs around 80 members of the local community (including 30 said to have
connections to the resistance movement). Based on the Fatubesi experience, Timor Global has incorporated a
‘community relations approach’ into new operations. In Baucau district, for example, the company has leased
1,500 hectares of community land and is introducing intensive cultivation methods on sites in three sucos
totaling up to 100 hectares. The company is presently using a share-farming approach which it hopes will assist
movement towards contract farming in future years. Although, in this case, the community has agreed to lease
the 1,500 hectare parcel to the investor, the right of the community to issue this lease (under RDTL law) is not
yet clear (although hopefully this will be resolved in the forthcoming land law and supporting regulations).
C. CONCLUSION AND RECOMMENDATIONS
20. Timor-Leste is characterized by the lack of a functioning formal system of property
rights, limited use of leasing and contract farming, and complications resulting from how the
vast majority of land is owned by the community. These not only negatively impact access to
finance and provide disincentives for domestic and foreign investment, but more generally, they
constrain agricultural productivity and the development of primary industry in Timor-Leste.
21. Recommendations related to land issues include:
(a) Conduct a preliminary rural land tenure assessment which evaluates the nature of
community ownership and use claims over areas of coffee estate land. Potential strategies
for addressing land tenure aspects and facilitating greater private sector investment in the
modernization of the coffee sector could include: (i) Support for lease-based industry-
community partnerships on community land; (ii) Re-issuing of leases over state plantation
land; and/or (iii) Issuing titles to smallholders with substantiated long-term claims. (For
more details on these options refer to Annex 8.1.)
(b) Evaluate the potential for expanding the Ita Nia Rai land registration program over
critical areas of primary industry land, including some areas of coffee plantation, while
ensuring protection for community rights.
(c) Identify options for developing a contract farming culture including the establishment of
facilities for the voluntary lodgment and filing of contracts by sponsors and farmers
wishing to build their respective reputations as reliable parties.
(d) Develop a commercial arbitration or mediation facility with the capacity to resolve
conflicts around contract farming. Such a facility should support education and resources
for communities and investors to secure equitable dispute resolution outcomes given the
potential for power imbalances.
(e) Develop a coffee working group to encourage major coffee buyers/exporters to work with
landowners and land users to realize the rehabilitation of particular areas of coffee
plantation, on the basis that within reason, the buyer/exporter contributing to the
rehabilitation of a particular area will have first right of purchase of the harvest of that
area. Develop an accord between the main coffee producers to respect each other’s
harvest purchase rights. This should help address competition between major coffee
buyers over the existing harvest, with little or no private sector investment in the
management, modernization, and expansion of plantation areas.
91
CHAPTER 9: IMPROVING BUSINESS ENVIRONMENT TO
ENHANCE EXPORT COMPETITIVENESS
A. INTRODUCTION197
1. Timor-Leste’s export competitiveness is affected by legal and regulatory constraints and
limited access to finance. A country’s legal and regulatory environment is critical to export
development. Domestic and foreign traders must be able to establish businesses, mediate disputes,
and obtain capital to purchase equipment, raw materials, or goods for sale.
2. Timor-Leste ranks among the lowest countries in the world on most international
measures of business environment and global competitiveness. According to the World Bank’s
2010 Doing Business Report, Timor-Leste’s business environment ranks 164 out of 183 countries
measured.198 In the World Economic Forum’s Global Competitiveness Report 2009-10,199 Timor-
Leste also ranks low at 126 out of 133 states assessed. The purpose of noting these rankings is to try
and identify priority actions to improve the business environment.
3. The key business environment constraints to trade and export competitiveness were
identified through discussions with private sector, government officials, and civil society
organizations. Registering land, access to finance, starting a business, and contract enforcement
were repeatedly cited as major constraints. These four areas are interrelated. For example, the lack of
clear land titles inhibits access to finance because land cannot be used as collateral. These areas are
also significant to export competitiveness. For example, traders cannot buy goods if they lack access
to capital. Companies, foreign or domestic, cannot set up their businesses or obtain capital if they
cannot register. Export contracts will not have credibility if disputes cannot be resolved.
Table 9.1: Timor-Leste’s Ranking for the 10 sub-indicators in the 2010 Doing Business Report
Sub-Indicator Ranking (out of 183 countries)
Ease of Doing Business 164
Closing a Business 183
Enforcing Contracts 183
Registering Property 183
Getting Credit 181
Starting a Business 150
Protecting Investors 132
Employing Workers 89
Dealing with Construction Permits 87
Trading Across Borders 85
Paying Taxes 19
Source: Doing Business 2010 Timor-Leste
197
This chapter deals primarily with the legal and regulatory component of business environment and access to finance.
Infrastructure, land, and human resources are often considered part of the business environment, but they are covered in
other chapters.
198
IFC, Doing Business Report 2010 (World Bank/IFC, 2009). The Doing Business ranking measures ten aspects of
operating a business. Among the ten indicators which make up the ranking, a number of them measure both the degree of
regulation and the regulatory outcomes by looking at the number of procedures, time, and cost involved. Timor-Leste’s
ranking in the Doing Business Report 2011, which was published since the National Validation Process, fell to 174.
However, the rankings are only used for illustrative purposes to give an idea of where Timor-Leste sits compared to other
countries. A drop in ranking does not necessarily mean lack of progress in Timor-Leste, it may mean faster progress in other
countries. The change in rankings between 2010 and 2011 do not affect the recommendations.
199
WEF. The Global Competiveness Index consists of 12 pillars, including ‘institutions’ and ‘financial market
sophistication.’
92
4. The 2010 Doing Business Report, which provides a baseline for understanding the
business environment constraints, also identifies these areas as being problematic relative to
other countries. These four areas are rated among the lowest in the world (see Table 9.1), with both
registering property and enforcing contracts ranked at 183 out of 183 countries assessed.
Furthermore, in the Global Competitiveness Report for 2009-2010, ‘inefficient government
bureaucracy’ and ‘access to financing’ were the top two most problematic factors for doing business
that were identified among a list of 15 factors.200 As noted above, land access issues are discussed in
Chapter 8, and this chapter will focus on access to finance and legal and regulatory issues, in
particular issues around starting a business and contract enforcement.201
B. BUSINESS REGISTRATION AND LICENSING
Figure 9.1: Starting a Business and Time to Start a Business
Starting a Business Time to start a business
Singapore Singapore
Thailand Malaysia
Malaysia Thailand
Lao Vietnam
Papua New Guinea Philippines
Solomon Islands Papua New Guinea
Vietnam Solomon Islands
Timor-Leste Indonesia
Indonesia Timor-Leste
Philippines Cambodia
Cambodia Lao
0 50 100 150 0 20 40 60 80 100
Ranking Days
Source: Doing Business 2010 East Asia & Pacific
5. In terms of starting a business, Timor-Leste ranks 150 out of 183 countries measured in
the 2010 Doing Business Report.202 When compared to a selection of countries in Southeast Asia
and the Pacific Islands, Timor-Leste’s ranking is only slightly better than Indonesia, Philippines, and
Cambodia (see Figure 9.1). Papua New Guinea and Solomon Islands rank at 104 and 111
respectively and have environments that are relatively more conducive to starting a business.203 With
the process taking 83 days on average, Timor-Leste requires the 3rd most number of days to start a
business among regional comparators. Furthermore, the process is also cumbersome with 10
procedures. While there is no official fee for business registration, the minimum capital requirement
of $5,000 for ‘sociedades por quotas’ is still a significant barrier for small enterprises204 (See Annex
9.1 for more details and regional comparisons).
6. All business enterprises seeking to operate formally in Timor-Leste must register with
the MoJ. Nevertheless, the Doing Business Report for Timor-Leste has noted that many companies
in Timor-Leste continue to be irregularly registered.205 According to a Peace Dividend Trust survey
200
WEF.
201
This chapter does not cover trade facilitation and ‘Trading Across Borders.’ The former topic is the subject matter of
Chapter 10.
202
IFC, Doing Business Timor-Leste 2011 ranking for Starting a Business fell to 167. The number of procedures and time
needed to start a business have not changed though as reported at the National Validation Workshop, there are efforts
underway to introduce online registration and significantly streamline the registration process.
203
IFC, Doing Business Timor-Leste.
204
The amount specified for a ‘sociedades por quotas’ is $5,000 and for a ‘sociedades anonimas’ is $50,000. In the
Portuguese system, sociedades por quotas and sociedades anonimas are among the most common forms of incorporation.
205
IFC, Doing Business Timor-Leste.
93
of 2,384 local companies, most of which were micro to small businesses,206 11 percent of these
companies said they did not register, and an additional 7 percent said their company was registered
but did not supply corroborating evidence. The main reason given for not registering was the
complexity of the process and the lack of information on the subject.207
7. The current process likely deters potential domestic investors and encourages firms to
operate in the informal sector or pay illegal fees to speed up the process. Business registration is
important since foreign investors will look to enter into contracts with registered local businesses. It
is also important for expanding the tax base and promoting access to finance (although even registered
firms have difficulties accessing financial services). Long and complex processes for starting a
business send negative signals to foreign investors about the business environment and can cause
investors to lose confidence and interest. This is an important issue to address given the potential for
foreign investment in high-value agricultural goods, including the possible expansion of the coffee
trade.
8. To improve business registration and licensing, reforms are required in a number of
areas, some of which will be addressed through support from the International Finance
Corporation’s (IFC). Under the scope of the Memorandum of Understanding between the MoJ and
IFC, a list of legislative reform measures was circulated in mid-May 2010 for public consultation (see
Annex 9.2).208 Required reforms include eliminating requirements such as the paid-in minimum
capital. Policy decisions will also be necessary regarding business licensing, including the
abolishment of temporary business licenses and elimination of licenses for all business activities
while requiring licenses for only those activities posing a danger to the public. These measures are
discussed more fully in Annex 9.1. Two overall priorities for business registration/licensing reform
are discussed below.
9. One of the complications with respect to business start-up arises from confusion among
officials in the MoJ and MTCI regarding their respective roles. From a legal perspective there is
no duplication of the registration process since this is MoJ’s responsibility.209 The MTCI, on the other
hand, is responsible for issuing business activity licenses, which is not the same as a legal verification
of the business.210 The confusion arises because the terms registration and licensing are often used
interchangeably by officials, and the MTCI sees the issuing of the provisional activity license as
‘registration.’ Interviews conducted by the IFC also found that similar confusion existed in the
private sector with lawyers unable to differentiate between incorporation, registration, and licensing,
or distinguish between the different procedures and compliance requirements.
10. Capacity building is required to clarify the different responsibilities of MoJ and MTCI
to staff members, including on terminology related to business start-up. Private sector companies
identified the lack of legal training and commercial knowledge as an issue with government officials.
This is compounded by the fact that the relevant laws are in Portuguese, which is not always
understood by government staff. Other examples of problematic areas for MoJ staff involve the
distinction between sole entrepreneurs and companies with a single shareholder. As a result,
companies who want to register as sole entrepreneurs often end up registering as a company with a
single shareholder, which is a more complicated process.
11. In addition to capacity building, the creation of a one-stop-shop for business start-up,
along with a quick incorporation and registration procedure, should be prioritized. For
countries that have been reforming their processes to start a business, the most popular reform
206
98.6% of the 2,384 surveyed companies were classified as micro to small enterprises, with 81.6% being micro enterprises
with up to 10 employees.
207
Claire Parois and Scott McCord, Business Community in Timor-Leste (Dili: Peace Dividend Trust, Sep 2009).
208
“Business Registration Reform,” Ministry of Justice, MOJ, 07 May 2010 .
209
GOTL, Decree Law 6/2007 Code of Business Registration (2007).
210
MTCI, Despacho Ministerial N. 1/2008 de 6 de Fevereiro (2008).
94
measure since 2004 has been to create or improve a one-stop-shop.211 The proposed quick
incorporation and registration procedure for Timor-Leste involves executing the approval of the
company’s name, the incorporation’s formalization, and its registration in a single act in the presence
of interested parties.212 This would consolidate these procedures into one day. The basic idea behind
a one-stop-shop is that it enables the registrant to visit ‘a single window,’ and the responsibility for
routing the application and documents to various government offices is moved from the registrant to
the government. This would be greatly facilitated by electronic sharing of information across
ministerial departments (including those responsible for the allocation of a TIN in MoF, for issuing
the business license in MTCI, for issuing work visas and residence authorization, etc.). It is
envisioned that this service will be provided by the Public Registry Department of MoJ.213
12. Alongside these overall priorities, measures are also needed to address problems which
have particular relevance for foreign investment: (i) language for application documents and (ii)
the requirement that at least one of the company directors reside in Timor. While the law does
not specify what proof is necessary for the residency requirement, in practice, the MoJ requires a valid
work visa/residence permit. In order to obtain this, a foreign director must already be employed by a
registered company in Timor-Leste. Anectodal evidence suggests that a workaround procedure exists
where a local director is hired specifically for the registration process. This workaround process can
be lengthy and expensive, thereby deterring foreign investment. Moreover, a work visa is not a
standard requirement to register a company in other countries. If it is necessary to maintain such a
requirement, a potential solution to accelerate the process would be to require only the proof of
application for a work visa/residence permit.
13. Application documents are currently required to be in one of two official languages, Tetum or
Portuguese. Private businesses reported that government staff request submissions to be in Tetum
even though Portuguese is an approved language. Often the business licensing center at the MTCI
translates documents into Tetum, which can considerably delay the process. An alternative would be
to allow for registration in English. This would facilitate trade and investment with Australia, one of
Timor-Leste’s major trading partners, and may enhance the benefits of joining the ASEAN.
14. In short, long and cumbersome business start-up processes can be a significant deterrent
for investment, particularly foreign investment. It also encourages domestic businesses to operate
in the informal sector. To facilitate overall business start-up, priority reforms include establishing a
one-stop-shop with quick incorporation and registration procedures and electronic sharing of
information across ministries. Measures are also needed to address business start-up problems
specific to foreign investors. This includes language issues around application documents and the
requirement that at least one company director reside in Timor.
C. CONTRACT ENFORCEMENT
15. In terms of enforcing contracts, Timor-Leste ranks 183 out of 183 countries surveyed in
the 2010 Doing Business Report. It requires 51 procedures, which is the highest among the selected
regional counterparts in Figure 9.2. The number of days required to enforce a contract on average in
the region is 568 days, whilst in Timor-Leste it is close to1285 days.214 With a cost of 163.2 percent
of the claim value, Timor-Leste also has the highest cost of enforcing a contract in the world. Private
sector stakeholders interviewed for this study stressed the importance of contract enforcement, and
when asked how long court cases could take, the response was often as long as five years. Even so,
enforcement is not assured.
211
IFC, Doing Business.
212
See Annex 9.1: “Business Registration Reform.”
213
“Business Registration Reform.”
214
IFC, Doing Business 2011. The ranking on contract enforcement has not changed since 2010, though the number of days
needed to enforce a contract has fallen slightly from 1435 days to 1285 days.
95
Figure 9.2: Procedures and Time to enforce a contract
Procedures to enforce a contract Time to enforce a contract
Singapore Singapore
Malaysia Vietnam
Vietnam Cambodia
Thailand Lao
Solomon Islands Solomon Islands
Philippines Thailand
Indonesia Indonesia
Lao Malaysia
Papua New Guinea Papua New Guinea
Cambodia Philippines
Timor-Leste Timor-Leste
0 20 40 60 0 500 1000 1500
Number Days
Source: Doing Business 2010 Timor-Leste
16. The issue of contract enforcement is a high-priority from the perspective of export
competitiveness. If a foreign trader cannot gain resolution of a dispute in a reasonable amount of
time, then the trader will be less likely to do business in that market. If capital used to purchase
products is held in abeyance because of lengthy court proceedings, then additional trades are not
made. Moreover, contract enforcement has a multiplier effect on other shortcomings in the business
environment. Lack of collateral impedes access to finance in Timor-Leste. If creditors are unsure that
collateral can be claimed in a timely fashion, if at all, then their risk is higher and obtaining credit
becomes more difficult.
17. One problem with contract enforcement is the low capacity in the government. There
are only 17 judges in Timor-Leste and little capacity to enforce contracts outside of Dili. There is also
a strong lack of commercial knowledge within the Timorese judicial system. The UNTL only began
providing a general law degree in 2006. While this is not a commercial law degree, students are
provided with some commercial law education in the last years of the program.215 The Legal Training
Center (LTC) has also delivered some training on commercial issues, particularly for notaries.216
However, the LTC’s trainings for judges, prosecutors, public defenders, and lawyers focus mainly on
civil contracts with few subjects related to commercial law. The low capacity in the government is
further compounded by the fact that there is currently no legislation to regulate commercial contracts,
although the draft civil code will provide some general guidance going forward.
18. At the same time, in many industries, such as coffee, cash transactions are the primary
means of exchange and few contracts are used. With no guarantee of the sale of their cash crop via
contract, farmers may be managing risk by using a portion of their land for subsistence farming. In
addition, the minimal role of contract farming arrangements also adversely affects agricultural
intensification (see Chapter 8 for an in-depth discussion on contract farming). These examples
suggest that greater use of contracts could facilitate increased private investment in the rural economy
and expansion of export-oriented production.
19. Because of the inability to enforce contracts, assets are not used as collateral for loans.
Since land is not a viable form of collateral in Timor-Leste, equipment and other assets could be
considered. The banks have, however, indicated that claiming such assets in the case of a loan default
215
This includes a general overview of the commercial law, intellectual property rights, and commerce agreements with
practical exercises in drafting agreements in the 3rd year. The Code of Business Registration Decree Law 7/2006 is also
taught in the 4th year.
216
A second notary training program, which covers the commercial law (120 hours) and business registration code (69
hours), is scheduled for July 2010.
96
are often unsuccessful and an extremely difficult and expensive process. As long as the enforcement
process is lengthy and difficult, the banks will not accept these other forms of collateral. Improving
and expediting contract enforcement could facilitate the acceptance of other forms of collateral by
banks.
20. Contracts are also not being used in Timor-Leste as a basis for credit. In other markets,
contracts are often the basis for access to finance, particularly trade finance. Firms can utilize
contracts with reputable buyers to obtain loans. In Albania, textile manufacturers are granted loans to
purchase raw materials on the basis of contracts with Italian companies. This is rarely done in Timor-
Leste with the exception of contracts with the GOTL. The widespread use of contracts and the ability
for creditors to enforce those contracts could spur lending in Timor-Leste. This can only be
accomplished if contract enforcement works effectively.
21. Finally, there is also limited use of alternative methods of dispute resolution in Timor-
Leste. Arbitration and mediation are often methods of dispute resolution that are utilized prior to
court proceedings because of their lower cost and shorter timeframes, particularly for contract
disputes in countries where the judicial environment is challenging. Frequently, two enterprises will
agree to resolve any disputes in an arbitration or mediation facility. While there is some informal
mediation and arbitration in Timor-Leste, no formally recognized commercial arbitration and
mediation facility exists. Informal, customary arbitration with suco leaders may suffice for some
domestic companies. However, an international trader or investor will seek a formal procedure that
he or she believes will be fair and impartial to resolve any disputes. There is a clear need to set-up a
commercial arbitration or mediation facility, which can potentially be housed in the new Chamber of
Commerce or Investe Timor-Leste. In order to boost investor confidence, consideration might also be
given to allowing foreign investors to have recourse to the International Chamber of Commerce’s
International Court of Arbitration.
22. In summary, the limited use of contracts, low capacity of government to enforce
contracts, lack of a legal framework for contracts, and the general lack of alternative methods
of dispute resolution adversely impact trade and productivity in Timor-Leste. In order to address
these problems, measures are required to build the capacity of Timorese businesses to use contracts
while simultaneously building the capacity of the judicial system and educating the wider community
about the role and advantages of contracts. The development of a commercial arbitration or mediation
facility, along with trainings for mediators and arbitrators, will also be important for boosting investor
confidence and providing alternative methods of dispute resolution.
D. ACCESS TO FINANCE
23. Weak institutions impact adversely on the growth of credit markets. In the 2010 Doing
Business Report, Timor-Leste ranks 181 out of 183 countries surveyed in terms of getting credit.217
The report highlights two issues. The first is limited information on potential borrowers to help
lenders assess credit risk. Foreign banks have difficulty adjusting risk models to the Timorese
environment, and two banks reported that their risk assessments were carried out abroad. The second
is the weak legal structure to protect borrowers and lenders. Land in Timor-Leste is generally not
accepted as collateral and, as discussed above, contract enforcement is weak. However, banks do
often accept land owned in Australia, New Zealand, and Indonesia as collateral.
24. Institutional weaknesses are compounded by limited financial management capacity in
the private sector, including the lack of skills for preparing bankable proposals. Those
companies that do seek capital often are unable to estimate how much capital they need, do not have
financial statements, have not prepared a business plan, and have difficulties preparing the forms and
other paperwork to apply for credit. An IFC survey of 50 enterprises found that 50% of respondents
217
IFC, Doing Business 2011 – Timor-Leste’s ranking for Getting Credit in 2011 fell slightly to 182.
97
did not prepare any type of financial statements and among these a quarter of them indicated that they
did not identify the lack of financial management practice as a problem to repay loans. Over half of
the sample used the same bank account for personal and business purposes, which makes it difficult to
determine the real cash flow of the enterprise. The lack of understanding of financing needs is
reflected in a recent survey of fifty SMEs whose demand for credit was eight times more than
effective demand.218 There is also evidence of a poor understanding of bank interest rates, practices,
and fees.219
25. The above issues have limited the size and reach of financial services for Timorese
businesses including exporters. There are three commercial banks,220 all branches of private foreign
banks, and one government owned finance provider, Instituicao de Microfinancas de Timor-Leste
(IMfTL). Commercial bank lending operations are largely concentrated in Dili.221 Microfinance is
provided by IMfTL, two microfinance institutions,222 small credit unions, savings and loan
cooperatives, and NGOs. One microfinance institution, Moris Rasik, provides life microinsurance.
Mobile banking and use of new technologies are under discussion at the banks and microfinance
institutions to ease the problems with making payments. The Asian Development Bank (ADB) has
funded initial assessments for mobile and branchless banking.
26. The limited availability of financial products impacts on business growth, including in
the export and agriculture sectors. Loans are typically not available for the purchase of farm inputs
or improvements, or for trade in farm products, thereby affecting the growth of agribusinesses.223 No
local business insurance (general business, liability, property, casualty insurance, etc.) is available yet
in Timor. If local lending institutions cannot insure their businesses against losses, they will be less
likely to lend, particularly to new businesses without collateral. Insurance can also protect exporters
if goods are lost or stolen in transit or if a customer fails to pay. The establishment of an insurance
industry in Timor-Leste is essential to facilitate higher value export transactions in the future. The
BPA approved in March 2010 the issuance of its first license for insurance to National Insurance
Timor-Leste (NITL). Currently, NITL only provides motor vehicle insurance. However, it is in the
process of developing other categories of its business, and marine cargo insurance is among the
approved classes of general insurance to be underwritten by NITL.224
27. In addition to the lack of local business insurance, there is also no formal leasing in Timor-
Leste. Leasing allows entrepreneurs to acquire capital equipment. Furthermore, there are a limited
number of lines of credit. A line of credit is essentially a preapproved loan that enables a borrower to
access funds up to a defined limit in a short period of time. As noted previously, most agricultural
trading is done in cash, and frequently Indonesian traders will purchase coffee or peanuts at a lower
price because they have cash on hand and farmers want the assurance of the immediate transaction.
Timorese traders, despite their willingness to pay a higher price, are often working as intermediaries
and have to consult with buyers for additional funds. A line of credit would enable traders to obtain
218
According to the IFC survey, “effective demand is defined here as ability to service and repay a loan… An effective
demand is one backed by at least preparedness to meet requirements such as a liquidity cushion (equity); a loan purpose
related to a feasible technology and economic activity (business plan); measures to contain the effects of probable risks,
interest rate and collateral requirements and others.” The survey estimated an effective demand of $14.4 million: Johanna
Stenstrom Johansson, SME Credit Demand In Timor-Leste: Survey Findings (IFC for the Better Business Initiative (BBI),
Aug 2009).
219
Johansson.
220
The three commercial banks are: Banco Nacional Ultramarino (BNU) of Portugal, Bank Mandiri of Indonesia, and
Australia New Zealand Bank (ANZ). IMfTL is a quasi-bank institution established by the government.
221
BNU has the furthest reach across Timor-Leste with 8 branches, including in Dili, Baucau, Gleno, Maliana, Oecussi,
Viqueque, and Suai. Bank Mandiri is only in Dili but has expressed an interest in opening a branch in Baucau. ANZ is also
located only in Dili but has an automated teller machine in Baucau.
222
Moris Rasik and Tuba Rai Metin
223
IMF, “Annex VI. Prospects for Financial Development: The Emerging Role of Micro-Finance,” Democratic Republic of
Timor-Leste: 2009 Article IV Consultation–Staff Report (IMF, Jul 2009).
224
BPA, Press Release, 15 Mar 2010.
98
additional cash prior to coming to the market. There is overdraft protection in Timor-Leste, but this is
a relatively high interest product not designed as business credit.
28. IMfTL is the largest microfinance lender with an estimated 44% of its total lending
going towards business purposes. Around seventy-five percent of the capital lent by IMfTL is
salary loans to individuals. An individual that can secure his/her loan against a government salary
(whether his/her own or someone else’s) can borrow money and arrange for that salary to be debited
to repay the loan. Approximately 29% of loans linked to government salaries are used for trade and
finance or agriculture/forestry. Business loans (market vendor loans, seasonal crop loans, etc.)
accounted for 23% of IMfTL’s portfolio as of 31 December 2009.225 There is, however, a maximum
of $5,000 per loan limit at the IMfTL. Thus, successful businesses, such as smaller exporters, that
have progressed beyond the microfinance phase face a dilemma since the loan sizes available from
IMfTL are too small.226 With IMfTL in the process of applying for an unrestricted banking license
and potentially privatizing in the future, this would allow increased loan sizes, deposit taking, and
total lending for private business.
29. Despite rapidly rising bank deposits, credit to the private sector has stagnated and is
associated with increased non-performing loans and defaults. Deposits went from $248 million in
the third quarter of 2009 to $289 million at the end of the year. Credit to the private sector has
remained at around $100-110 million since 2007.227 Non-performing loans have been high at around
$29 million since 2008. Default rates were reported as high as 40 percent by some banks but have
steadily improved since reaching that peak. Defaults on loans were reportedly due to over-borrowing,
projects failing to come to fruition, and poor financial management. While no sector was singled out,
failed construction, real estate, and hotel projects were noted.
30. Although this does not pose systemic risks given the level of provisioning and limited
level of lending, the situation causes credit rationing. The spread between lending and deposit
rates remains high at around 10 percentage points,228 reflecting private sector capacity constraints and
associated risks. Commercial banks have become more selective with credit applicants. High default
rates in previous years have caused banks to become more risk averse.
31. The IFC survey also identified specific gaps in the lending market and reported that
“…[in Timor-Leste] small, medium and large enterprises perceive a lack of access to:
Investment capital loans at 12-48 months terms with loan size in the range of US$ 5,000-
3 million;
financial leasing products as a less expensive means of acquiring needed equipment
(currently many enterprises rent equipment at high costs); and
insurance.”229
32. Based on the same survey, enterprises who were primarily seeking financing for trade,
services, and small investments had effective demands for loans in the range of $5,000-$50,000.
These enterprises tended to be smaller, less experienced, and with limited credit history. This market
segment is particularly underserved. For lower value loans, microfinance and other avenues are
available. Larger companies with international connections are able to borrow overseas. Companies
indicated that they borrowed money in Singapore, Australia, and other locations. However, a
225
ADB, Private Sector Development—Pacific Liaison and Coordination Office.
226
According to Johansson, enterprises who were primarily seeking financing for trade, services, and small investments had
effective demands for loans in the range of $5,000-$50,000.
227
BPA, Banking Indicators 2004-2009, BPA, 30 Jun 2010
228
Based on BPA, Interest Rate January-December 2009, BPA, 30 Jun 2010
.
229
Johansson.
99
Timorese exporter looking for $25,000 to buy raw materials will be hard-pressed to obtain capital
without a clear title to land or a government contract.
33. There are efforts under way to tackle some of the above challenges. The BPA has
developed a credit information reporting system. The system has buy-in from the banks and the
largest non-bank financial institution. The information system contains both positive and negative
repayment information and detailed borrower identity information but reportedly falls short of a full
registry. The BPA consulted MFIs in the design phase, and it is anticipated that the MFIs will join the
information registry. On microfinance, Moris Rasik and Tuba Rai Metin (TRM) are two institutions
that are successfully lending with some scale to poor entrepreneurs in Timor-Leste. Moris Rasik is
trying to register as a local NGO and expand its services to take deposits. TRM is a smaller
institution with an aggressive expansion plan underway in partnership with BASIX. INFUSE (a
UNCDF/UNDP project that provides TA and capital to microfinance institutions) and the Better
Business Initiative (supported by IFC) are assisting the BPA to establish appropriate supervision of
Non-Banking Financial Institutions. Draft legislation has been prepared and was circulated by the
BPA to a limited group of practitioners and experts for comment in May 2010.
34. Banks and microfinance institutions do see the potential to increase lending to SMEs. In
many emerging economies, banks offer low value loans (between $1,000-$10,000) without collateral
to SMEs. These loans are often approved within 2-3 days. One private sector company mentioned a
plan to work with the banks to provide credit to reliable farmers in order to upgrade the farmers’
productivity. These farmers have a track record as suppliers, and the company would help the farmers
with a plan for production and to pay back the banks. Theoretically, the relationship with a reputable
company should decrease the borrower’s risk to the bank, though banks have not indicated any
interest in this scheme to date.
35. There are no specific trade finance products in Timor-Leste for exporters. Letters of
Credit are available from the commercial banks in Timor. The Letters of Credit are primarily tools to
assist government procurement agents with importation. A contract with the GOTL is normally
required to secure a Letter of Credit. During the DTIS mission, none of the commercial banks,
microfinance institutions, and other members of the banking community identified any specific trade
finance products. As those sectors develop and enterprises become capable of export, they will need
capital to buy additional supplies, improve production or processing facilities, hire workers, or certify
goods. The establishment of trade finance products while export competitiveness improves is a
measure to facilitate the capability of enterprises to export.
36. A national development bank to be established with initial public capital of $8 million
has been approved by the GOTL. The objective is to address the lack of access to finance for
Timorese nationals. A task force has been formed, headed by the Minister for Economy and
Development, to finalize an initial MOU with the Bank Rakyat Indonesia (BRI) for joint venture
partnership. The initial partnership is envisioned as 51% government ownership with the balance of
capital from BRI and Timorese private investors.
37. In summary, freer flow of capital is obstructed by the limited financial management
capacity of businesses and by institutional weaknesses which prevent risk management. Lenders
have identified land issues as the predominant impediment to lending, and while bankers were
generally positive about the macroeconomic prospects of Timor and the potential for lending, they
were dismayed by the inability to collateralize loans. In order to improve access to finance, measures
are required to further develop the credit information reporting system, enact enabling legislation for
Non-Banking Financial Institutions, enable the provision of credit on the basis of contracts, and
augment the capacity of business development services to provide financial management training to
local businesses.
100
E. CONCLUSION AND RECOMMENDATIONS
38. A challenging business environment and lack of access to finance places domestic
producers at a disadvantage and impedes private sector development. This chapter has focused
on three specific issues, which pose particular challenges to the private sector, therefore impacting on
potential exports. These are burdensome business registration and licensing processes, weak contract
enforcement, and lack of access to finance. It is also important to recognize the important
progress that is being made. For example, tax reforms have helped to reduce costs of doing business
in Timor-Leste. The new Investment Law has been approved by the Council of Minister and is
expected to be finalized by Parliament in 2010. Measures are being taken to create a new investment
promotion agency, Investe Timor-Leste, which will assist both foreign and domestic investors.
Clearly, there is much progress and addressing some of the issues above will help to further improve
the business environment.
39. Recommendations related to starting a business include:
(a) Build government capacity with respect to business registration and licensing and clarify
to the staff and private sector the difference in responsibilities between MoJ and MTCI.
(b) Establish a one-stop-shop for business start-up, including (i) creating a procedure of quick
incorporation and registration of companies in the MoJ’s business registration office and
(ii) rendering possible the electronic sharing of information related to business
registration between relevant ministerial departments.
(c) Resolve issues regarding the language of application documents and assess the option for
supporting English language registration.
40. Recommendations regarding contract enforcement include:
(a) Develop a commercial arbitration or mediation facility, which can potentially be housed
in the new Chamber of Commerce or Investe Timor-Leste and assess the option of
allowing foreign investors to have recourse to the International Chamber of Commerce’s
International Court of Arbitration.
(b) Develop a training program for commercial disputes for mediators and arbitrators and
train judges on related matters.
(c) Build the capacity of Timorese businesses to use contracts and educate the public about
their role and advantages with relevant models for the agriculture sector.
41. Recommendations related to increasing access to finance include:
(a) Provide support to evolve the credit information reporting system into a full-fledged
credit bureau.
(b) Enact the enabling legislation for Non-Banking Financial Institutions.
(c) Enable the provision of credit on the basis of contracts with reputable private sector
companies by developing an awareness campaign and trainings for local financial
institutions, coupled with the development of recourse mechanisms in the event of default
(e.g. legal framework for loan recovery and/or trade insurance). Activities may entail
working face-to-face with the banks to evaluate current risk models and establish
requirements for Timorese businesses as well as foreign or domestic purchasers in order
to utilize a contract as collateral.
(d) Augment the capacity of business development centers to be able to provide specific
training on financial management practices and on preparing financial statements,
business plans, and other documents required by a bank to receive credit.
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SECTION IV: TRADE FACILITATION
102
CHAPTER 10: IMPROVING TRANSPORTATION AND TRADE
FACILITATION
A. INTRODUCTION
1. In Timor-Leste, opportunities for improvements in transport and trade facilitation are
constrained by the same factors that limit trade: small economy, low density of population and
production, shortages of skilled labor, relatively high cost labor, difficult terrain, and limited
communications network. The networks used to collect and deliver exports and to deconsolidate
and distribute imports are relatively simple. They use Dili as the international gateway and hub for
aggregation and distribution. The hub is connected to the major towns by narrow arterial roads with
limits on travel speeds and truck size. From these, the network deteriorates into dirt roads providing
limited access to rural areas. The capacity of the port and road network is adequate for the current
level of economic activity. But with increasing volumes, congestion problems are expected to
become relatively severe over the next few years, which requires that the infrastructure be
strengthened.
B. ROAD TRANSPORT
2. The road transport system in Timor-Leste is somewhat unusual in that the distances
traveled are short and the loads are small, but travel times are relatively long and costs are
high. This is due primarily to the terrain, although even the coastal roads have low average travel
speeds. Dili is connected to the larger towns through a network of narrow paved roads, typically 3.5-
4.5 m wide. The average speed on these roads ranges from 20-40 kph depending on terrain and
condition of the pavement. Truck size is limited by road alignments and grade with most of the fleet
being 4-6 wheel trucks with capacities of 1.5 to 5 tons. There are some large trucks transporting
containers and project cargo, but these operate primarily within the Dili area. They are sometimes
used to carry project cargo to inland sites, but these are carefully controlled and relatively expensive
movements. The trucking industry consists of:
A small number (about 10) of construction companies and 3rd party transporters with
fleets ranging from 10-20 trucks. Their fleets include a mix of smaller trucks for internal
distribution and 10-14 wheel trucks for operation around the Dili area; and
A large number of individuals owning 2-3 trucks with capacity of 1 to 3.5 tons.
The largest vehicles in the truck fleet are cement mixers, side loaders for transporting containers, and
a few heavy chasses.
3. Because of the terrain and road alignment, travel times will continue to be long, limiting
utilization of trucks in terms of annual kilometers to levels well below international norms. In
this situation, restrictions on the age of imported trucks serve only to increase capital cost and
therefore the cost for transport.230 It is more important to ensure the roadworthiness of both imports
and the existing fleet and capacity for operating in the mountainous terrain.
4. There is relatively little demand for transport of agricultural goods between towns other
than for coffee. Even this is limited in volume and season. The volume of imported goods
distributed to the rural areas is relatively small since much of the consumption takes place in Dili.
The principal demand for 3rd party transport is the movement of basic construction materials for roads
and buildings.
230
Limiting environmental impacts remains important but given the low level of utilization, it is unclear whether
requirements for meeting standards applied in more developed countries is appropriate.
103
5. The core road network is approximately 3,000 km in length and provides reasonable
coverage given the size of the country (see Annex 10.1 for more details). The limitation in terms of
road width restricts the speed but is adequate for the projected volume of traffic except in the area
around Dili. The basic challenge is to maintain the roads in good condition throughout the year. In
recognition of this need, the government has recently increased the maintenance budget. At the same
time, it is working with the ADB to develop a project for rehabilitating around 230 kilometers of the
major links in the network. This, combined with continuing private investment in truck capacity,
should significantly improve the efficiency and quality of road transport.
Road Traffic Pattern
6. The findings of the ‘Origin and Destination’ (O-D) survey conducted in 2009 under an
ADB-funded TA clearly confirm the dominance of Dili in the countrywide traffic pattern.231
Baucau also demonstrates the potential of becoming a regional center. Some interesting findings
include:
65 percent of trips (57 percent if motorcycles are included) have either origin or
destination in Dili;
25 percent of trips (35 percent if motorcycles are included) are intra-district/local;
only 12 percent of trips (10 percent if motorcycles are included) are inter-district, about
half of which are centered on Baucau;232 and
in general, the cross-island trips tend to use the longer coast roads. This is mainly due to
the poor condition and difficult terrain of the north-south roads.
7. Weather and coffee production are two major factors affecting traffic. The rainy season
has a direct impact on traffic patterns. The duration of the rainy season can vary in different areas of
the country, between an average of 4 months (from December to March) and 8 months (from
November to June). Landslides and flooding, which are common during that season, cause frequent
road closures. Another factor affecting traffic patterns during the year is the coffee production and
harvesting cycle. Five coffee-growing centers are concentrated in the western area of Timor-Leste.
Coffee is picked up by small trucks and first brought to wet factories for processing. It is then sent to
other factories for drying and finally to Dili for final processing and shipping. The coffee harvest
season peaks between August and September. During that season, light and medium truck traffic in
the coffee growing areas and between those areas and Dili increase significantly.
Key Trade Corridors
8. Given the extensive road network and sparsely distributed population (particularly in
the rural areas), road links with potential to grow into a trade corridor should be prioritized to
receive funds from the road sector’s limited investment budget. Related to this, the key issues
faced in two of the important road links that function as trade corridors are discussed here (note,
however, that these two trade corridors are not the only ones requiring capital investment). Other
corridors, such as the one connecting Dili to Baucau, may also be considered as priority roads in the
core road network development.
9. Coffee Corridor: Dili – Tibar – Gleno – Ermera. The coffee corridor connects the
country's main coffee growing areas in Ermera district to the capital, where the commercial airport
and seaport are located. This corridor includes road A03-01: Dili – Tibar (7.2 km); A04-01: Tibar –
231
ADB, Technical Assistance to the Democratic Republic of Timor-Leste for Preparing the Road Network Development
Project (Manila, 2008).
232
The percentages of the three categories total above 100 percent. This is because trips within Dili district were counted in
both category (i) and (ii).
104
Gleno (33.3 km); and A04-02: Gleno – Ermera (11.5 km), totaling 52.0 km. The highland areas in
Ermera district is the largest coffee growing area in the country, accounting for about 53 percent of
total coffee production. The coffee corridor may therefore be considered in a pilot trade-corridor
development program to demonstrate how improved road transport, together with other infrastructure,
can facilitate trade-related activities. The coffee corridor could serve the important Dili – Gleno line.
Road A03-01(Dili – Tibar) bears the highest traffic volume among national roads, about 1,500
vehicle-per-day (vpd), excluding motorcycles. Road A04-01 and 02 provide direct access for Ermera
district to the north coast trunk road. The current traffic volume on these two roads are about 500
vpd, excluding motorcycles.
10. While the traffic volume does not yet meet the road capacity and will not in the near
future, improvements are necessary to address road safety and potential landslides. This
includes:
Improving the geometric features of roads, particularly the section of Tibar – Gleno –
Ermera, to address road safety concerns;
Planning and implementing other road safety measures to enhance the corridor’s
capability of trade facilitation. The current road from Dili to Tibar was constructed along
the coast line with an average width of 6.0 m. After Tibar, the coffee corridor turns into
the mountainous area, and the road width is reduced to 4.5 m and even narrower around
difficult terrains. The driver's sight distance is severely limited by the poor horizontal and
vertical alignments; and
Implementing slope protection measures along the road. Geotechnical stability is another
major concern in the mountainous area of Ermera. Landslides during the rainy season
have caused frequent road closure. As an interim solution, the corridor's vulnerability to
geotechnical instability can be alleviated through: (i) bioengineering works on the road
side; (ii) rehabilitation and maintenance of the drainage system; and (iii) emergency road
repairs during the rainy season.
11. Cross-Border Corridor: Dili – Tibar – Liquiçá – Batugade – Mota Ain. The cross-border
corridor connects Dili with the Mota Ain border to Indonesian. The corridor includes road A03-01:
Dili – Tibar (7.2 km); A03-02: Tibar – Liquiçá (26.3 km); A03-03: Liquiçá – Batugade (75.8 km);
and A03-04: Batugade – Mota Ain (3.0 km), totaling 112.3 km. The corridor may be further extended
to connect the exclave Oecussi and even Kupang, the major city in Indonesian West Timor, to let
Timor-Leste access the air and sea transport facilities of Indonesia.
12. In 2008, Indonesia was the largest source of Timor-Leste's imports (including rice, fuel,
construction materials, and other commodities) and its third-largest export market (including coffee
and livestock). The expected membership in the ASEAN will increase the opportunities for
cooperation between these two countries. The cross-border corridor may improve the connectivity in
border areas, thus creating economic benefits, reducing poverty, and promoting trade with Indonesia.
13. The current traffic volume on the cross-border corridor is among the highest in the
country, but it is still fairly light in terms of traffic capacity. In 2009, the Average Daily Traffic
(ADT) was about 500 vpd, excluding motorcycles. About 30 percent of the traffic uses large vehicles
such as Jeeps, pick-ups, and trucks. Medium-size trucks are also seen traveling on the road from
West Timor to transport construction materials and other goods. The road geometry is characterized
by flat longitudinal gradient with occasional short sections associated with steep-sided coastal cliffs.
The majority of roads have a width of 4.5 m. Generally the horizontal alignment is not severe with
curvature of about 30 degrees per km. However, the curvature increases significantly in the vicinity
of steep coastal cliffs where road alignments are compromised by the difficult terrain.
105
14. With the trunk road connecting Dili to the border areas, the corridor may keep serving
the highest traffic volumes in the future. As a result, it will be important to address the problem of
river flooding along the road since this is the main cause of road closure. Before road widening
becomes necessary, the drainage system, including both longitudinal and transversal, should always
be functioning. To minimize road closure, inspection of the drainage system before and during rainy
season should be undertaken regularly.
Strategic priorities for developing a road network to facilitate trade
15. Identifying trade corridors in the country-level strategy – Timor-Leste's extensive road
network provides reasonable access to basic socioeconomic facilities, such as markets, hospitals, and
schools. However, the development of the road network must be programmed in a sustainable
manner such that the country's economic development will not be held back by the operational costs
of such a network. Among others, the population centers and trade-related facilities need to be well
connected to support economic development. The role of trade corridors should first be clarified in
the country-level strategy in order to guide capital investment and policy strategy for trade facilitation.
16. Building a road maintenance scheme to reduce the vulnerability of the trade corridor –
The existing road network provides good connectivity within the country, but it is still vulnerable to
severe climates and unstable terrains. Road infrastructure must be preserved through routine and
periodic maintenance. Routine maintenance will clear drainage and small landslips promptly, keep
vegetation under control, and repair surface damage in its early stages. Periodic maintenance to
restore road surfaces damaged by traffic abrasion and wet season erosion could help to postpone the
need for rehabilitation or reconstruction. The maintenance works should be programmed
systematically in the sector budget to allocate limited resources more efficiently and effectively over
the entire road network. The annual maintenance expenditure for the whole core road network in its
present condition is estimated at $25 million. But improving the roads to a maintainable condition
will reduce the expenditure to about $10.5 million.
17. Monitoring trade activities to guide road sector capital investment – A trade activity
monitoring mechanism should be established after the DTIS to guide capital investment and policy
reforms, monitor impacts of trade facilitation investments, and propose timely adjustment to capital
investment, such as road widening, realignment, and upgrading. Only with such a mechanism, which
will allow informed decision-making by the government, will road sector development contribute to
trade facilitation and Timor-Leste’s overall economic growth and development.
C. PORTS233
18. The Port of Dili is used to handle both container and breakbulk cargo. The container
traffic is loaded containers inbound and primarily empties outbound. While coffee and some other
exports are containerized, these are very small in volume. The current volume of containerized
imports is about 14,000 TEU per year. Nearly all is transported in 20’ boxes because of limited
handling capacity of both the vessels and the road network. Over half of these are multiple containers
carrying a single consignment of homogenous goods such as bottled water, rice noodles, bagged rice,
canned soda, etc.
19. The port is a small facility originally designed for breakbulk operations. It has a wharf
length of 285 meters, which is nominally divided into three berths, and an alongside depth of about 7
meters. The port has a relatively short approach channel, and the bay is protected from waves by
reefs. The available depth limits the size of vessels calling at the port to 500 TEU.
233
See Annex 10.2 for more information on ports.
106
20. Only one berth was operational in early 2010. The other two should be operational by the
end of the year, but so far this has not been a significant problem. Currently there are 3-4 vessel calls
a week by feeder vessels operating out of Singapore, Darwin, and Surabaya. These are typically in
port less than a day. Three shipping lines provide most of the container services using vessels in the
range of 120-240 TEU. Delays in berthing these vessels occur only when there is bunching of
arrivals, e.g. 5 per week. This does not occur often but the frequency is increasing and is expected to
be a problem in the next year.
21. Port capacity is limited not on the waterside but on the landside. The backup area of the
port is only about 2.7 hectares stretching along the coast with a maximum width of 75 meters. The
eastern section of the yard has been recently rehabilitated, but there is a significant subsidence in one
area and another section has been used for storage of construction material. The western section is in
reasonable condition so far for its current application of relatively haphazard storage of containers, but
it is not suitable for use as a high density container storage yard.
22. The current yard configuration accommodates only about 360 TEU stacked three high.
Although the average amount of containers transferred per vessel call is only about 170 TEU, the
average dwell time is 3 days. As a result, the average yard occupation is already nearly 70 percent
even though the average occupancy for the single berth serving containers is only about 35 percent.
More importantly, the larger vessels transfer 250-300 TEU, which requires the entire yard to be
available for that vessel call. There is an additional constraint on port access from the landside. The
trucks exiting the port not only must make a difficult turn onto a 2 lane road but also travel to the west
on roads with the highest level of traffic in Dili.
23. If the volumes continue to increase, congestion will become a severe problem, and this
cannot be addressed through the independent actions of three competing stevedoring
companies. The vessels calling at the port are self-sustaining since the port lacks fixed or mobile
container cranes. So far, this has not been a problem. While the ships have relatively low berth
productivity, about 10 containers per hour at berth, their performance is limited primarily by the cycle
time of the yard equipment. Container handling is done by private stevedoring companies, which
supply their own equipment, primarily toploaders and reachstackers. There are three companies, each
handling specific shipping services. They assume responsibility for unloading and loading the vessel,
stacking and unstacking the boxes in the yard, and transferring the boxes to and from the road
transport. The port authority has minimal involvement in operations. The result is that there is an
excess of equipment but none of it designed to maximize the throughput of the storage area. There is
no system for managing the yard other than the record-keeping of the individual lines. There is no
strategy for transferring boxes to an off-dock facility to prevent yard congestion. So far, this
arrangement has worked exceedingly well given the extremely difficult configuration of the port.
24. In order to avoid congestion, it will be necessary to convert the port to a modern
configuration. This would involve block stacking of containers in designated slots to a maximum
height of 4 boxes with rows 5 wide. This will require a unified management of the yard with a
computerized system for controlling yard inventory. It will require investment in yard gantries and
major physical modifications including:
Removing all structures from the yard, including the passenger terminal;
relocating the port and customs offices to the other side of the street;
rehabilitating the new ferry terminal, closing the old one, and opening a separate gate for
the ferry traffic; and
repairing the yard in the western section and rehabilitating the yard in the eastern section.
25. Such changes will allow the port to double its current capacity and continue operating
without congestion for another 6-8 years. The port throughput can be increased further by
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establishing an off-dock yard together with procedures for transferring full vessel loads from the port
to the yard at night. This would provide a further increase in capacity of 50 percent and allow the port
to continue operating without congestion for another 4 years. At this point, it would be necessary to
have developed a new port outside of Dili, and by that time, the volumes would be sufficient to justify
the capital cost.
26. Since these improvements require not just capital investment but a fundamental change
in port operations, a new system of terminal management is required. This can be done through a
concession or other arrangement that produces an efficient, unified, user-oriented system of terminal
management. Complementary improvements in customs activities would be required to ensure that
these increases in capacity could be realized.
D. CUSTOMS
27. Customs in Timor-Leste is confronted with the same set of problems faced by any
customs department that is attempting to modernize its procedures, but there are a several
factors that make its situation unique. First, the introduction of a single band tariff and reduction in
rates means not only that the revenues collected are a small portion of total government revenues but
also that there is much less requirement for precision in the classification of cargoes. Second,
although there is excess staff, most of the cadre has been involved in customs for less than seven
years, and technical skills are still developing. Third, as a young customs service, it should be
amenable to change but the lack of existing procedures has led to a lack of discipline. Fourth, the
introduction of the ASYCUDA system is proceeding, but the lack of reliable communications system
limits its effectiveness and requires a manual backup. Fifth, the borders remain porous although the
formal border crossings are being upgraded. Sixth, although scanners have been introduced at the
seaport and airport, the use of this equipment and the procedure for maintaining them have yet to be
determined. Finally, most of the formal trade moves through the port so neither the airport nor the
land borders have a significant customs presence.
28. An efficient customs is essential for efficient operation of the port, and at present, the
dwell time of import containers is determined almost entirely by customs procedures. This
includes not only the time to complete procedures but also the uncertainty due to lack of consistency
in these procedures. So far, customs has succeeded in clearing goods within 2-3 days. This would
place it well ahead of most developing countries, except that it has been accomplished through
omission rather than commission. The documentation process is cumbersome, but the level of due
diligence is minimal. A high percentage of shipments are subject to physical inspection, but these are
cursory and generally expedited through informal payments. In addition, a large percentage of
shipments involve multiple containers for which only one is inspected. There is provision for
clearance of goods at bonded warehouses and the facilities of some of the larger traders, but there is
no formal program for expediting the shipments of the more reliable imports.
29. The biggest challenge for customs is to introduce a more rigorous system while
maintaining the short clearance times that currently allow Dili port to continue functioning.
Improvement in transparency is important not only to expedite the clearance of cargo but also to
maintain the integrity of the customs procedures. Some of the government’s ongoing efforts to
improve customs transparency and efficiency include:
Increasing the use of ASYCUDA to expedite submission and processing of declarations;
allowing electronic submission of manifests to support a program for pre-arrival
clearance;
developing a simple commodity value database;
introducing basic risk management using random sampling and simple risk profiles; and
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developing a post-audit capacity.
30. As part of these initiatives, it is important to recognize the ineffectiveness of a border
control strategy based on a high level of physical inspection. Not only is it less effective than a
targeted approach but it also encourages carelessness and can lead to malfeasance as has been
observed in Dili. Other initiatives that need to be taken up include:
Integrating the use of x-ray scanning into both the inspection procedure and the flow of
containers;
recognizing Customs as the lead border agency responsible for coordinating border
control; and
introducing an ‘Authorized Economic Operator’ (AEO) program for the major shippers.
31. The first requires coordination with the port. The facilities currently provided for customs
activities are poorly placed and inadequate. While it is not uncommon for port authorities to treat
customs as a necessary inconvenience, this is not an option for Dili port. Close coordination in the
layout of the storage and customs facilities is essential if congestion is to be avoided. A proposal for
such a layout is addressed in Annex 10.3. The second is necessary to avoid delays in clearing cargo as
a result of lack of coordination among border control agencies. Since customs initiates the clearance
procedure and secures the basic documentation, it is the appropriate choice for coordinating the
inspection activities of immigration, security, and health among others. This is a common practice
and a necessary precursor to establishing a single window procedure, as has been done in Papua New
Guinea, Fiji, New Zealand, and elsewhere. The third initiative is extremely important since more than
half of the imports are shipped by large consignees in multiple container loads. These would be ideal
candidates for an AEO program since they are familiar with the procedures and would be willing to
agree to a post-audit or other procedure in exchange for expedited clearance.
32. There are currently various TA activities directed at strengthening the customs service,
most notably from New Zealand. This is being complemented by the establishment of a new
customs office opposite the port and by upcoming improvements in the reliability and bandwidth of
the communications services used by customs. These should improve the general quality of customs
services. What is missing is a prioritization of initiatives based on their contribution to trade
facilitation with top priority given to reducing port dwell time. While not needed immediately, there
will eventually be a need to develop a system for the transfer of containers to bonded off-dock yards
based on the manifest rather than bills of lading. Accordingly, additional measures to improve the
port system include simplifying procedures, formalizing the customs regime at the border, developing
a procedure for moving long-stay cargo to the off-dock facility, and eliminating delays in clearance of
duty exempt cargo.
E. TRADE AND SUPPLIER DISTRIBUTION NETWORK
33. Complementing the focus on the performance of the international gateway is the
performance of the network of domestic supply chains that link Dili with the rest of the country.
These supply chains serve three types of trade. The first is the distribution of imported consumer
goods to retail outlets in Dili, larger towns, and rural areas. The second is the collection and
processing of agricultural exports, especially green coffee, and their delivery to Dili for shipment
overseas. The third is the internal trade in agricultural goods, in particular fresh produce and meat
shipped from rural areas for sale in Dili, especially to the expatriate community. The existing
network has a simple structure based on direct movements of small shipments over short distances at
relatively high costs. While the exports of coffee are well organized, the other trades are largely
unstructured.
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34. Nearly all of the formal trade passes through the Port of Dili. Informal movements of goods
across the border from Indonesia are largely intended for consumption in the rural areas. The delivery
of imported consumer goods is managed by larger trading companies, which act as wholesalers. They
operate large retail outlets within Dili and sell to retailers from throughout the country including Dili.
They distribute the goods from their storage facilities, which vary from a collection of containers to
large warehouses. They are not involved in distribution of these goods but rather smaller retailers
collect the goods from the central facilities. In some cases, these smaller retailers transport the goods
to intermediate storage facilities in the large towns for distribution to retail outlets in the rural areas.
35. While this system works reasonably well given the low density of demand outside of Dili,
there is potential for establishing secondary distribution hubs in a few of the larger towns. The
principal advantage would be to reduce transport costs by increasing the size of shipments. There
would be some advantage in providing shorter delivery times from the secondary hubs to the rural
outlets, allowing them to better manage their stock but this would be marginal. The establishment of
these secondary wholesale hubs requires a private sector initiative but could be encouraged through
collocation of hubs for the distribution of public services as part of a strategy for fostering economic
growth. An obvious choice for a secondary hub would be Baucau, the second largest town in Timor-
Leste. It has good road connections to Dili allowing for the shipment of containers. Hermara is an
agricultural center, and Hera is the third largest town. But both are too close to Dili as is Liquiçá.
Maubisse and Malianna are smaller but already have some small wholesale operations. The latter
could serve the southern coast and act as a collection point for agricultural goods to be shipped to Dili.
The development of these secondary hubs would also be supported through improvements in
infrastructure, specifically by giving priority to the rehabilitation of the roads linking these locations
with Dili and by improving the quality of utilities and the capacity of their communications services.
36. Shipments of agricultural goods, especially fresh fruits and vegetables, from the rural
area to Dili will increase only when the quality, quantity, and reliability of supply to the retail
market improves. This will require integrating the supply chain linking rural producers with retail
outlets. The question is whether this can be accomplished by integrating up the supply chain from
urban grocery stores to the farmer through production contracts or by organizing farmers groups and
processors in the rural areas and integrating through supply contracts to the urban markets.
37. So far, the retailers have shown no interest and the only effective processors have been
the coffee mills. In lieu of these two solutions, farmers markets and NGOs have provided small-scale
outlets for rural produce in the urban area. The latter is not sustainable, but the former can be
upgraded. The challenge is to organize collection in the rural areas through farmers markets, deliver
from these markets to the farmers market in Dili, and upgrade the hygiene and organization of the
latter. The farmers market in Dili is a collection of small stalls in an unpaved area. An earlier attempt
by the government to provide better facilities was unsuccessful. This suggests that a joint effort by
the government and the private sector is required.
38. Although it is not clear which solution is appropriate, there is little likelihood that
Timor-Leste can develop agricultural exports if it cannot compete in the domestic expatriate
market. One alternative might be to take advantage of the supply chains developed by the coffee
industry. However, these are not designed to deliver fresh agricultural products to the urban market
or to sell to small-scale purchasers.
39. Aside from the distribution network that links Dili to the 12 nearby districts,
improvements are also required in the trade network connecting Oecusse with the rest of
Timor-Leste and Indonesia. The former requires improving the arrangement for transit movements
on the route between Batugade and the eastern border of Oecussi. Current negotiations with
Indonesia on visa and border procedures should work towards seamless cross-border movements.
This need not include a TIR arrangement or other insurance schemes or costly monitoring
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technologies since the travel between the two crossings is relatively short. The trade with Indonesia
can be facilitated by designating Oecussi as a Special Economic Zone (SEZ). The primary benefits of
this status are for imports from Indonesia. There is little likelihood that it will attract FDI or container
shipping services. Also, it will require additional customs controls on trade with Timor-Leste by road
and ferry.
F. CONCLUSION AND RECOMMENDATIONS
40. With respect to the road network, basic challenges exist in maintaining the condition of
the roads throughout the year, reducing road closure, and improving road safety concerns.
There is also a need to prioritize road links that have a potential to grow into a trade corridor. With
regards to ports, the current port configuration and operations risks congestion as the volume of
exports and imports increase. This would constrain the expansion of exports. Customs activities are
also important for ensuring timely movement of goods, and they require measures to reduce delays
caused by the lack of coordination and high levels of physical inspections.
41. Recommendations related to road transport include:
(a) Identify trade corridors and clarify the role of trade corridors in the country-level strategy.
This will help guide capital investment and policy strategy for trade facilitation.
(b) Build a road maintenance scheme to reduce the vulnerability of the trade corridor. This
would include routine maintenance (clearing drainages and small landslips, keeping
vegetation under control, and repairing surface damage in its early stages) as well as
periodic maintenance to restore road surfaces damaged by traffic abrasion and wet season
erosion.
(c) Establish a trade activity monitoring mechanism to guide capital investment and policy
reforms, monitor impacts of trade facilitation investments, and propose timely adjustment
to capital investment, such as road widening, realignment, and upgrading.
(d) Plan and implement road safety measures to enhance the coffee corridor’s capability of
trade facilitation. This includes improving the geometric features of roads (particularly
the section of Tibar-Gleno-Ermera) and implementing slope protection measures. Interim
solutions to the geotechnical instability include: (i) bioengineering works on the road
side; (ii) rehabilitating and maintaining the drainage system; and (iii) conducting
emergency road repairs during the rainy season.
42. Recommendations related to ports include:
(a) Convert the port to a modern configuration to avoid congestion. This would require: (i)
removing all structures from the yard including the passenger terminal; (ii) relocating the
port and customs offices to the other side of the street; (iii) rehabilitating the new ferry
terminal, closing the old one, and opening a separate gate for the ferry traffic; and (iv)
repairing the yard in the western section and rehabilitating the yard in the eastern section.
(b) Develop a new system of terminal management. One option to consider is a concession
arrangement that produces an efficient, unified, user-oriented system of terminal
management.
43. Recommendations related to customs include:
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(a) Integrate the use of x-ray scanning in both the inspection procedure and flow of
containers. This will require close coordination in the layout of the storage and customs
facilities.
(b) Delegate Customs as the lead border agency responsible for coordinating border control.
(c) Introduce an ‘Authorized Economic Operator’ program for the major shippers.
(d) Eliminate unnecessary steps in customs procedures (e.g. first check requirement) and
develop standard procedures for targeted inspections with penalties for misrepresentation.
(e) Formalize gradually the customs regime at the border in such a way that the benefits of
facilitation exceed benefits of informal trade.
(f) Develop a procedure for moving long-stay cargo to the off-dock facility.
(g) Eliminate delays in the clearance duty exempt cargo.
44. Recommendations related to the trade and supplier distribution network include:
(a) Encourage private sector initiative in the establishment of secondary wholesale hubs,
potentially through the collocation of hubs for the distribution of public services.
(b) Assess potential models (production, contracts, supply contracts, etc.) for integrating the
supply chain linking rural producers with retail outlets.
(c) Improve the trade network connecting Oecussi with the rest of Timor-Leste and Indonesia
by: (i) improving the arrangement for transit movements on the route between Batugade
and the eastern border of Oecussi; (ii) promoting seamless cross-border movements in
current negotiations with Indonesia on visa and border procedures; and (iii) assessing the
option of designating Oecussi as a SEZ.
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SECTION V: IMPLEMENTATION
113
CHAPTER 11: IMPLEMENTATION
A. IMPLEMENTATION ARRANGEMENTS
1. In order to mainstream trade into the national development agenda, assist in the coordinated
delivery of trade-related technical assistance, and improve Timor-Leste’s trade competitiveness
through capacity building and reducing obstacles to trade, the GOTL agreed in 2007 to engage in the
IF process. According to IF requirements, the GOTL would have to designate a Focal Point (FP) and
establish a NSC and National Implementation Unit (NIU).
2. On June 19, 2008, the GOTL approved Resolution No.12/2008 which provides the legal
framework to meet these requirements. More specifically, the resolution establishes the National
Implementation Arrangements required to supervise, coordinate, implement, and monitor and evaluate
in-country IF activities and defines the responsibilities of the NSC, NIU, and the FP. The
implementation arrangements are outlined below.
3. National Steering Committee. The NSC is a high-level inter-ministerial committee that
provides senior level engagement, political commitment, and coordination on trade policy. The NSC
is chaired by the Prime Minister and consists of six Ministers (Ministers for Foreign Affairs; Finance;
Economy and Development; Justice; Agriculture, Forestry, and Fisheries; and Tourism, Commerce,
and Industry). It has the following responsibilities:
Monitor the overall IF process and activities, including mainstreaming trade into national
development plans and Poverty Reduction Strategy Papers;
Elaborate the strategic plan within the area of trade;
Ensure effective coordination and buy-in among relevant GOTL agencies, the private
sector, civil society, and development agencies;
Approve DTIS recognized pilot-projects and trainings;
Evaluate the DTIS and its action matrix as well as approve priority interventions;
Ensure that trade-related issues are included and receive due attention in Development
Partners’ Conferences; and
Evaluate matters submitted to the Committee and approve the necessary measures to
move matters forward.234
4. Advisory Council. The NSC is supported by an Advisory Council which consists of 9
development agencies (World Bank, IFC, IMF, EU, ADB, AusAID, GTZ, JICA, USAID) as well as 3
representatives from the private sector and 3 representatives from civil society. The private sector and
civil society representatives will be appointed by the NSC.
5. National Implementation Unit. The NIU is the Secretariat to the NSC and is intended to
lead IF implementation at the national level and be responsible for coordinating in-country IF
activities. The Minister of Economy and Development and the Minister of Tourism, Commerce, and
Industry are the co-chairmen of the NIU and the FP is the manager of the NIU. Organizationally, the
NIU is set up as a joint government agency belonging to the MED and the MTCI with the FP
reporting to the co-chairmen. The NIU will have administrative and technical staff, both national and
international, and the staffing terms and conditions will be determined by the NSC. The NIU’s
responsibilities include:
234
GOTL, Resolution No. 12/2008: Cria a Comissão Directiva Nacional do Quadro do Comércio Integrado e Alargada
para Países Menos Desnvolvidos (Dec 2008).
114
Ensuring that priorities identified in the DTIS Action Matrix are integrated into national
development plans and Poverty Reduction Strategy Papers;
Assisting in the preparation and evaluation of projects, including converting the priorities
defined in the DTIS Action Matrix into projects that can qualify for funding and
recommending priority interventions and strategies to the NSC;
Monitoring the implementation of the trade strategy and projects supported by the IF
initiative, which includes assessing progress of the IF initiative, reporting to NSC about
the ongoing implementation of the IF, and organizing, as appropriate, IF implementation
meetings;
Promoting inter-ministerial and donor coordination as well as dialogue between the public
and private sector on trade issues; and
Promoting awareness of the IF process among relevant stakeholders.235
6. The development of the NIU will be supported by a number of activities under the pre-DTIS
funding. This includes a country visit to Lao and Cambodia to observe the operation of their NIUs
and identify lessons learned from the establishment of their NIUs.
7. Focal Point. On September 1, 2008, H.E. Prime Minister Dr. Kay Rala Xanana Gusmão
appointed Mr. Jose Guterres, the former manager of the Small Enterprise Program, to be the FP. His
responsibilities include overseeing the functioning of the NIU, managing the NSC funds, advising the
NSC, and reporting to the NSC and the Executive Secretariat of the Enhanced IF on a quarterly basis
on IF progress. The FP is also responsible for establishing links between the NSC, development
partners, IF Executive Secretariat, and other stakeholders and for taking measures to ensure the
preparation of the DTIS and its updating.
8. Donor Facilitator. Resolution No.12/2008 indicates that the DTIS will be conducted by the
World Bank in the initial phase of the IF. While there is no discussion in Resolution No.12/2008
regarding the Donor Facilitator (DF), the EIF guidelines indicates that it is “vital that an effective
local Donor Facilitator, with clear terms of reference adapted to the local situation, be appointed by
donors in consultation with the local authorities.” The main role of the DF is to ensure timely
implementation of the DTIS Action Matrix by assisting in mainstreaming trade into development
partner programming. Discussions are underway to identify a permanent DF who would be
responsible for assisting GOTL to enlist and coordinate development partner responses to the Action
Matrix, including liaising with development partners to ensure effectiveness, complementarity, and
harmonization of interventions and exploring possibilities for pool funding arrangements for the
implementation of the Action Matrix. Additional responsibilities of the DF include:
Following up on the Action Matrix, especially on development partners' responses, to
optimize coordination among development partners;
Supporting the NIU and the FP in the conduct of their responsibilities as per the
established TOR;
Assisting the NIU in formulating and appraising projects;
Facilitating the GOTL's contacts with the development partners by functioning as a link
between the development partners and the GOTL;
Providing regular briefing updates to development partners on IF progress and arranging
for consultation and coordination possibilities for the development partners in Timor-
Leste; and
Assisting local authorities in creating knowledge and understanding the IF process in the
country, especially at the higher political and public servant level.236
235
GOTL, Resolution No. 12/2008.
115
B. PRE-REQUISITES FOR SUCCESS
9. Improved trade policy formulation and successful implementation of priorities identified
through the DTIS will depend on a variety of factors:
Political commitment. High-level support and endorsement of trade is critical since the
implementation of IF activities and priorities identified through the DTIS will require
coordination and comprehensive changes across a number of government ministries and
agencies. Timor-Leste, through its official request to participate in the IF process, has
demonstrated a strong initial commitment by government to integrate trade into its national
development strategy. The existing challenge is to ensure that high-level support is sustained
throughout the IF process. In most countries, the NSC is typically active throughout the DTIS
process and one lead ministry is designated to drive forward the IF agenda. Given the
different set-up in Timor-Leste, it is important that the NSC becomes active as soon as
possible and exerts strong leadership over the IF process.
Intergovernmental coordination and linkages. Strong intergovernmental coordination over
the implementation and monitoring of reforms is important since trade policy involves a range
of government institutions and agencies that need to work closely together to ensure that trade
effectively contributes to development. As an inter-ministerial committee, the NSC will be
the key institutional mechanism to ensure coordination and consensus building across
government.
Figure 11.1: Synergies with National Priorities Process in 2010/2011
NP1: Infrastructure (2010)/ NP3: Human Resources
Basic Infrastructure (2011) Development (2010)/
Accelerated HR Development (2011)
Trade Facilitation Skills Development
EIF Process
Trade Promotion Institutions
Access to Finance
NP2: Food Security(2010)/
NP4: Access to Justice (2010/2011)
Rural Development(2011)
SPS Access to Land
Coffee, Livestock, Mungbeans, Horticulture Contract enforcement, Business Start-up
In addition to the NSC, it is anticipated that the specific areas of the DTIS (agriculture, trade
facilitation, land, business enabling environment, etc.) will link into the National Priorities
(NP) process in 2011 and beyond. The NIU will be responsible for lobbying for the inclusion
of trade-related targets into the NP process as well as monitoring, supporting, and reporting
on relevant trade-related targets. All eleven sections of the DTIS map directly into the 2010
and 2011 NP (see Figure 11.1).
236
Based on the Integrated Framework, Guidelines for the Implementation of the Enhanced Integrated Framework for Least-
Developed Countries (IF, Jun 2008).
116
Sustained, regular public private dialogue (PPD). Extensive dialogue with private sector,
civil society, and other trade-related stakeholders has been integral to the identification of
actions in the DTIS. Also, a number of thematic roundtables (with participation from a broad
range of stakeholders) will be held in the lead up to the National Validation Workshop. In
particular, the MED and MTCI will be hosting four roundtables which will correspond to the
areas in the NP.
Equally important is the need for sustained PPD subsequent to the identification stage, in
particular as the government translates priorities in the DTIS Action Matrix into projects and
as policies are being driven forward. Options include institutionalizing PPD through the NP
process. To date there has been no direct representation of the private sector in NP working
groups. However, with the creation of the Chamber of Commerce this year, an opportunity
now exists for the NP process to liaise directly with a coordinated private sector
representative body (as they have done previously with the NGO community), thus increasing
private sector representation in the working groups.
It is important that the NIU actively advocate for the inclusion of private sector representation
by way of goals, objectives, and targets in the 2011 NP process. By instilling PPD in the
2011 NP, this will help ensure that PPD is sustained as a government priority as the NP
process transitions from an annual to a multi-year planning process.
Donor coordination. As discussed above, the DF will facilitate donor coordination by
mainstreaming trade into development partner programming and assisting the NIU in
coordinating the donor response to the DTIS Action Matrix. This may involve the
organization of donor meetings to consider the funding gaps for priority areas and
implementation meetings between government and donors to conduct stocktaking exercises
and identify next steps in the implementation process. Advisory Board Meetings also provide
a forum to ensure harmonization of donor interventions with respect to the implementation of
the DTIS Action Matrix.
C. NATIONAL VALIDATION PROCESS
10. The Timor-Leste DTIS was presented in Dili at a series of thematic workshops on 14-16
October 2010 at the World Bank; a National Validation Workshop on 19 October 2010; and an
International Investment Conference on 21-22 October 2010 hosted by the Government. The
workshops included representatives from the Government; development partners; Non-Governmental
Organizations; private companies; and the Integrated Framework. The thematic workshops covered
technical discussions on the four main areas of the DTIS: (i) Developing a longer-term international
trade strategy; (ii) Delivering on the potential for agricultural exports in the near-term; (iii)
Addressing the structural constraints to expanding exports; and (iv) Investing in critical infrastructure
to facilitate international trade. The National Validation Workshop was chaired jointly by H.E. the
Minister of Economy and Development and H.E. the Minister of Tourism, Commerce and Industry. It
was also attended by H.E. the Secretary of State for Agriculture and Arboriculture and over one
hundred participants and stakeholders.
11. Participants broadly endorsed the DTIS Action Matrix. They helped to update some of the
information in the study and discuss details on how some of the actions could be taken forward. MED
and MTCI representatives noted that coordination on policy across the Government will be critical to
expand exports. They outlined the efforts underway to establish the IF National Implementation Unit
to help coordinate and take forward follow up activities from the DTIS. Participants at the workshops
noted that the NIU should include have counterparts from relevant line ministries to ensure proper
coordination and follow up.
117
12. On expanding agricultural exports, participants noted the following:
There should be closer attention to the quality and grading of coffee. This would enable
farmers to price differentiate, and provide incentives to produce better quality coffee, which is
lacking at the moment – farmers use coffee mostly as a subsistence crop. Improving quality
and increasing productivity should have a positive impact on poverty reduction.
Some participants advocated a coffee export tax, so that proceeds could be channeled to the
coffee sector. But the DTIS team advised strongly against this because it is inefficient. An
earlier export tax was eliminated in 2002/03.
There was support for recommendation to increase mungbean exports. Though one producer
noted that competition from other countries is strong. An alternative could be peanut exports,
and targeting mungbean production to the national school feeding programs.
Cattle exports are affected by porous borders. Participants noted that smaller suppliers are not
able to compete due to illegal cross border trade. This will need closer monitoring and
regulation. ACIAR (AusAID) will be an important partner in expanding livestock output.
The Ministry of Agriculture and Forestry and Fisheries (MAFF) outlined ongoing progress
with the establishment of Sanitary and Phytosanitary Certification capacity. Legislation and
regulation have been adopted. MAFF is working with the National University, universities in
Indonesia and Australia, the Food and Agriculture Organization, and the Australian
Department of Agriculture to establish SPS capacity. They have collected data on agricultural
exports to prioritize inspection and certification capacities, and should be able to issue SPS
certification soon.
Everyone agreed on the importance of supporting the relatively new agriculture extension
services (2008), including intensive training for extension workers. MAF noted that there are
already significant activities under way including provision of subsidized inputs, seeds, and
mechanization. The ILO is working with MAF to introduce standards in relation to training in
agriculture.
In addition to exports, it is important to increase agricultural output for the domestic market.
Given the large food import bill, increasing self sufficiency should help to reduce the trade
deficit. The team agreed and noted that the recommendations to increase exports should also
impact positively on output for domestic consumption.
13. On structural reforms, participants noted the following:
Although there are challenges in the area of business registration and licensing, efforts are
underway to streamline processes quite significantly. The Government is putting in place a
system of online business registration, which should enable businesses to register within a
matter of days.
On access to finance, MED noted that the Government has tried to accelerate efforts by
committing its own resources to establishing a bank, but donors have not been forthcoming.
IMFTL reforms are underway, with plans to open three further branches, which would add to
the eight existing ones. One private bank representative noted that they will also be
increasing their outreach to the domestic market starting in January 2011.
To facilitate increased access to finance, Government representatives noted the reforms
underway to reform the Banking and Payments Authority. They noted in particular the
development of a bankruptcy law; the establishment of a credit information reporting system;
and new regulation to give MFIs formal status.
On contract enforcement, participants encouraged to look at alternative mechanisms for small
contracts. The proposed commercial arbitration and mediation facility is important but there
needs to be other channels for smaller contracts. More evidence is needed on the type of
disputes across different sectors to design appropriate mechanisms.
118
14. On infrastructure for trade facilitation, participants noted the following:
On roads rehabilitation, it was indicated that recommendations should not focus solely on
sections with high levels of existing traffic. Other areas with high agricultural potential but
poor transport links may be missed out. It was therefore recommended to look at other
stretches including Dili-Aileu-Maubisse-Ainaro, or the road to Manatuto. The team agreed
that more data on potential output and population density is important for prioritizing road
investments.
On the port, participants updated the team that all three births are now operational. There are
on average seven ships per week, including four shipping lines. The Port Authorities are
looking at several options to make better use of the existing space in Dili Port. For example,
the arrival of new cars, which have to be registered before they are released on the port, are
creating bottlenecks. The IFC is assisting the Government to review this and make
recommendations to manage the space and process more efficiently. But in general,
participants noted the importance of being clear about longer-term plans whether any major
investments in port facilities are envisaged.
On customs, participants reiterated capacity issues. There are around two hundred and fifty
customs officials that are in need of training and technical assistance support. Though
importers also create delays by not filling out forms correctly. The automation of customs
procedures has improved in 2010 with progressive introduction of ASYCUDA modules and a
communication link between Batugade and the international airport. There has also been
progress in improving the time required to approve duty and tax exemptions at the airport,
streamlining of customs declaration processing, and risk assessment procedures to improve
the selection of shipments for inspection.
15. The National Validation Workshop was concluded by a presentation from the representative
of the IF Secretariat, which outlined the follow up to the DTIS and taking forward the Action Matrix.
To assist with this, the Government can access resources through the Enhanced Integrated Framework
Trust Fund. Tier 1 financing helps with institutional capacity building and analytical work, and Tier 2
financing provides limited support to implement DTIS Action Matrix Activities.
119
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MAP SECTION
124º E 125º E 126º E 127º E
Wetar
Island
I N DO N ES I A
10º N 10º N
Romang
Island
TIMOR-
LESTE
Atauro Biquele
Island a i t
Alor Atauro S t r
Island t a r
Berau W e Com
Cape Tei
DILI Laivai
Lautem Mehara Tutuala
Rantar Maínal Cape Cutchá
Island Baucau Jaco
Bucóli Fuiloro
Manatuto Laga Island
DILI Metinaro Vemasse Afagua Lospalos
DILI BAUCAU
BAU CAU Luro
cal
Liquiça Laleia Manufai
Sei
Cape
Maubara
Bazartete
Quelicai LA UTÉM
LAUTÉM
Venilale Baguia
Corimbala
LIQUIÇ A
LIQUIÇA clo
Railaco AILEU La MANATUTO
Gleno Aileu Uatucarbau Iliomar Cape de Loré
Fatu Beso Ermera Laclubar Ossu
Savu S ea Atabae VIQUEQU E
VIQUEQUE
Hatolla Letefoho Maubisse Turiscai Uatolari
Dilor Aliambata
Marko Viqueque
ERMERA Hatobuilico
en
C
Sah
Batugade BOBONARO Atsabe Tata Mai Lau Haotio Bé Aco
iere
Maliana (2963 m)
Cape Deilubún
9º N Balibo Same Natarbora 9º N
To Ainaro Welaluhu
Naikliu d Bobonaro MANUFAHI
n Mape AINARO
Sakato l a Fatolulik Zumalai Hatoudo
Pante Macassar s Lolotoe
Betano
I Cape
OECUSSI COVA LIMA Beco Calétec
Citrana
Baqui r Tilomar
Nítibe
Bobometo o Suai
m To 127º E
Passabe i Kuala
Lumpur
Cape Tafara
T
Timor Sea
T IM OR-L EST E
INDON ES I A
MAIN CITIES AND TOWNS
DISTRICT CAPITALS
0 10 20 30 Kilometers
NATIONAL CAPITAL
0 10 20 30 Miles RIVERS
8
MAIN ROADS
JANUARY 2011
IBRD 33496R
This map was produced by the Map Design Unit of The World Bank.
The boundaries, colors, denominations and any other information DISTRICT BOUNDARIES
shown on this map do not imply, on the part of The World Bank
Group, any judgment on the legal status of any territory, or any INTERNATIONAL BOUNDARIES
endorsement or acceptance of such boundaries.
124º E 125º E 126º E
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