HAMISH MCDONALD May 19, 2012
Illustration: Simon Letch
On the wall of the single classroom at the abandoned village of Batugade, East Timor, where I spent a night in September 1975, there hung a map of the Portuguese empire - or rather a set of boxed maps on a single scroll, to avoid it appearing just as widely dispersed specks on the globe.
Out of all the colonies, few would then have rated Timor's chances very high of establishing its independence, a democratic political system and economic progress. Within three months that independence seemed blocked forever, by Indonesia's forceful annexation.
Yet tomorrow, the republic of Timor Leste celebrates its 10th anniversary of independence, and among the Lusitanian nations it is doing outstandingly well.
It has just held its second elections in that time for its president, replacing the incumbent, and in July will vote for a new parliament.
Where its Portuguese identity looked destined to be submerged in the culture of surrounding Indonesia, the independence generation of leaders, many of mestico (mixed Portuguese and Timorese) families, adopted Portuguese as the main language of the new state. Scholars such as Michael Leach and Helen Hill say they seem to be persuading young people this legacy is their identity, whatever the learning difficulties.
Where it once seemed destined to survive on subsistence agriculture and fishing, supplemented by coffee plantations, it is almost overflowing with petroleum revenue. Its current national budget is about twice Timor Leste's gross domestic product - an economic puzzle explained by revenue flowing from a shared petroleum development zone with Australia that goes into a sovereign wealth fund invested offshore, which just exceeded $US10 billion.
The government's budgetary problem is not how to scrape together enough revenue, but how to spend it. ''The difficulty in a country with such limited capacity as Timor Leste, though it's improving, is the ability to spend well,'' says Luis Constantino, the World Bank's country manager in Dili.
Assuming the elections in July go peacefully, Australia and the United Nations are looking to withdraw their respective military and police security forces about the end of the year. But it will be a long time before we can safely take our eyes off Timor Leste.
The wealth fund does not look big against the cost of raising the population to a sustainable level within two or three decades. Though the fertility rate has fallen since an independence baby boom, the population is likely to double from the present 1.1 million by mid-century.
The fund has been filled by Timor's share of gas revenues from the Bayu Undan field, located in the joint development zone of the complicated maritime resources carve-up in the Timor Sea that the new Timorese state inherited from Indonesia, which Australia only reluctantly modified in its favour.
Bayu Undan's production peaked last year, and will be depleted by 2024. For the past two years, the Dili government has been taking more out of the Petroleum Fund than it yields from interest and dividends on investments - a temporary measure to relieve present-day poverty, it insists. The government has also been borrowing against the fund, again only where interest rates are lower than the fund's rate of investment earnings.
It's all being managed very prudently, say the World Bank and the International Monetary Fund. But will prudent policies always prevail in Dili? To sustain an attack on poverty, Timor Leste badly needs to clinch agreement on the Sunrise gas field, a much bigger reserve than Bayu Undan, straddling the eastern edge of the joint development zone.
That agreement has been stalled for several years. The development consortium, led by Woodside Petroleum, wants to process its output into liquefied natural gas aboard a floating factory. Timor's government has insisted on the gas being brought by undersea pipeline to its coast, to be made into LNG there, and generate power, make fertiliser and other chemicals.
Without Canberra and Dili signing off, the project won't get started. Canberra is neutral about the options - its tax take will be about the same either way. Woodside says the pipeline is technically problematic, crossing a deep seabed trench, and far more costly.
Dili has produced its own consultants' reports, giving different answers, and indicates it is prepared to abandon the development agreement with Australia that covers Sunrise at the next opportunity, which is only nine months away, next February.
A compromise is emerging. A widely respected petroleum expert long sympathetic to Timor's case, Geoff McKee, sees technical and economic arguments swinging in favour of floating LNG plants. In this month's gas industry conference in Adelaide, they were seen as the key to opening a string of small and medium fields across Australia's north.
At the same time, Timor-based development bodies such as La'o Hamutuk doubt an onshore LNG base will be the galvanising force the government predicts, but just an enclave with limited employment and other spin-offs. McKee suggests that a proportion of Sunrise gas production, converted to LNG and other forms of energy on the floating factory, could then be shipped to a terminal in Timor to feed an electricity grid extended to the villages, a far more pervasive generator of economic activity and human development.
Each side of Timor politics, the Prime Minister, Xanana Gusmao, and the Fretilin opposition, are wary of letting the other side accuse it of selling out the country's potential oil wealth for a quick deal. After the elections, they might be more open to a bipartisan compromise. Woodside has meanwhile replaced its abrasive former chief Don Voelte with the more conciliatory Peter Coleman, who has reopened talks with Dili.
Timor Leste could still go horribly wrong. Its government nearly fell apart only six years ago, and oil-funded development is yet to show much result in activity that generates alternative sources of revenue. Australia's ruthless pre-independence grab for Timor Sea resources could yet rebound in a failed state. A less hands-off attitude by Canberra to the Sunrise project could bring an agreement that makes it much less possible.