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The land that Indonesia lost

Jakarta Globe - April 25, 2011

Joe Cochrane To many Indonesians, Timor-Leste is a country redolent with bad dreams, the result of the problematic past when it was the country's 27th province and the traumatic birthing process of the new nation. Joe Cochrane returns to the capital, Dili, to find much has changed and that the neighbors to the west are still a part of the story.

The bustling shops in the Colmera area of Dili are a testament to the return of boom times in the capital of Timor-Leste. Once a conquered, neglected province of Indonesia, Timor-Leste has emerged from the shadow of its own home-grown factional fighting, political upheavals and violence between 2006 and 2008 to show some of its earlier promise as an emerging democratic nation following formal independence nearly nine years ago.

Things are rolling on the eastern side of Timor Island, and these days it has far less to do with the presence of the United Nations support mission composed of a mere 1,500 international police officers and administrative staff. Instead, Timor-Leste can thank its own natural resources this time around: billions of dollars in oil and gas wealth that is now finding its way from a strictly monitored petroleum fund into the state budget. In 2002, the budget was less than $20 million; for 2011 it's $1.3 billion.

The government of Prime Minister Jose Alexandre 'Xanana' Gusmao, the former guerrilla leader who once rattled the cages of Indonesian Army generals, is flinging out contracts like Frisbees as he tries to escalate infrastructure and economic development and better the lot of Timor-Leste's one million people, 41% of whom remain mired in poverty. Ironically, Indonesia is playing no small role in the current economic surge: Timor-Leste's 2010 real GDP growth could top 10%, and the country is projected to have one of the world's top 10 fastest-growing economies in 2011.

But the nature of Indonesia's support has caused some to raise their eyebrows and ask whether it is in reality helping its former neighbor or simply benefiting from the new country's inability to produce goods for itself. Take, for example, the stores of Colmera, where vendors sell a wide variety of merchandise ranging from shoes and jeans to construction materials. Nearby small convenience shops sell cold bottled water and household items ranging from soap to shampoo to laundry detergent.

These diverse products all have one thing in common: they were made in Indonesia and shipped to Dili via Surabaya, just like the majority of Timor-Leste's imported products. "Our exports to Timor-Leste are around 70% (of the country's total imports), but it's mostly the daily needs of the Timor-Leste people," said Mahendra, counselor of the Indonesian Embassy in Dili. But that's not all that Indonesia is exporting.

The young men running the clothing stores in Colmera speak bahasa Indonesia with East Javanese accents. With a nod and a wink, they confide that they are Indonesians and have clothes and shoes shipped in by relatives back on Java, which they sell at a nice profit. No one minds, given that prices for just about everything are higher in Dili as a result of the presence of the UN and foreign aid workers. Indonesian contractors are renovating the famed Hotel Turismo on Dili's beach road, building restaurants and roads, importing cement and participating in a construction of the national power grid.

One-way traffic

It's hard to fault small businessmen trying to earn a fast buck, but the benefits should go both ways. Unfortunately, it does not. Foreign direct investment by Indonesian companies, big or small, into Timor-Leste is basically zero. Indonesia's presence is limited to two state-owned construction companies involved in projects, a Bank Mandiri branch, state oil company Pertamina selling fuel, and Merpati Nusantara Airlines and Batavia Airlines flying in and out.

"There is no investment. We don't have any big business here," says Mahendra, though he holds out the possibility of Indonesian companies partnering with Timorese firms on electricity and other infrastructure projects. In fact, they already have. Indonesian state-owned construction firm PT Wijaya Karya announced in February that it has secured a $16.9-million power plant project in Timor-Leste.

The Gusmao government is spending $600 million this year on infrastructure development, including $450 million alone on a new power plant and national grid system. Once completed the government says it will be finished this November the national grid will be able to generate 130 MW of power, nearly quadrupling Timor-Leste's current supply of 35 MW, says Helio Simatra Tavares, executive director for external trade at Timor-Leste's Ministry of Tourism, Trade and Industry.

"We may be able to sell some to West Timor because we will have such over-capacity," he adds. But electricity and coffee, Timor-Leste's top export, are not helping the country to establish a manufacturing base. The country imports more than 80% of its needs, including items like bottled water, frozen chicken and even rice. Foreign direct investment (FDI) outside of the oil and gas sector remains very low, and total FDI in 2000 was only $18 million. More recent statistics are hard to find. While a few Indonesian companies, such as Tomy Winata's Artha Graha Group, have been looking around for possible investments, according to Mahendra, Indonesia's primary role in Timor-Leste these days is that of a supplier and project expeditor. "Eighty percent of anything being done here is being done with Indonesians," said one Dili-based expatriate development expert, who asked not to be named.

"Despite all the (conflict) in the past, the Timorese are using the Indonesians to rebuild the country. Xanana wants to be as snug as a bug in a rug with Indonesia and there's nothing wrong with it." Indeed, Indonesia is Timor-Leste's closest neighbor and its ports in Surabaya and Makassar are within easy sailing distance of Dili. The countries share a land border, where some goods enter Timor-Leste, their citizens both speak bahasa Indonesia, and for better or for worse they have a shared history.

All that, plus the fact that Indonesia is the world's fourth-largest country and sits right on Timor-Leste's doorstep, made it easy for Timorese leaders such as Gusmao and Jose Ramos-Horta, who is currently the country's president, to reject calls by human rights groups and the Timorese public to request a UN war crimes tribunal in The Hague to prosecute Indonesian military officials.

Instead, they opted for reconciliation with Jakarta and now have warm diplomatic relations. While this has brought stability along the West Timor border, it has not translated into Indonesian companies setting up facilities such as a fisheries cannery, a commercial ice-making factory, a bottled water plant, or any of the other manufacturing enterprises that Timor-Leste needs to create local jobs and reduce its reliance on imports.

Petroleum income accounted for about 95% of total government revenue and almost 80% of gross national income (GNI), and it's widely agreed that Timor-Leste needs to start creating viable alternative economic sectors because the petrodollars won't last forever. "We want investors to do things that we cannot do. We need them to train up our people," says Finance Minister Emilia Pires.

Nonetheless, Ramos-Horta told GlobeAsia that he is not surprised at the lack of delegations of potential Indonesian investors visiting Dili. "The Indonesians are not major investors, neither here or in other regional economies like Singapore, China or India," he said. "Indonesian businesses are very insular; they invest much more within Indonesia itself, which is good anyway."

Even China is investing in rice plantations in Timor-Leste, through a project called the China-East Timor Agricultural Cooperation on Hybrid Rice Technology, according to GRAIN, an international non-profit group. Few doubt that an economically strong Indonesia is a good thing for Southeast Asia. But since 2004, only 86 foreign companies have signed investment deals in Timor-Leste, 68 of which were implemented, says Secundino F. Moreira, director of the Ministry of Economic Development's investment office.

These were mostly small-time ventures such as hotels and restaurants. Sitting in his quiet office along Dili's beach road, Moreira says he thinks foreign investors remain wary of Timor-Leste because of its violent history, most recently in 2006 when rival factions of the Army and National Police battled it out in the capital, killing dozens and leaving some 150,000 people homeless. Adds Mahendra from the Indonesian Embassy: "We should convince Indonesian companies to do more in Timor-Leste. They still have negative impressions of the situation here. Only brave companies are willing to gamble."

For example Digicel, an international telecommunications company, has been in the country for three years yet continues to wait for an operating license. There is also no shortage of stories about foreign businesses being "muscled out" of projects they've got off the ground by the Timorese government or local business players.

Bureaucratic red tape is frequently cited as an impediment to investment, as is high costs for even unskilled labor. The World Bank ranked Timor-Leste 174th out of 183 economies in its 2011 "Ease of Doing Business" survey. But it's not as if Indonesian businessmen are as a rule risk-adverse.

Smaller players are operating in Timor-Leste via relationships first established when the country was an Indonesian province. "The Timorese tried to get global investment, but because of the lack of laws or enforcement of them, the US, the French, Russia, Singapore, and others said no," the development expert states.

"The only people who can do business here are people who have personal relationships, and people who can operate in a gray, fluid, ambiguous environment. "But every Timorese guy who gets a government contract says to themselves, 'Can I do this?' If not, they find an Indonesian to do it for them. And it's almost all construction." The profit margins are enticing enough.

The presence of the UN and foreign aid workers for the last 11 years, plus Timor-Leste's petrodollar-fueled economy, means that prices for nearly everything are higher. As a result, an Indonesian contractor can make up to 50% profit on a government contract by using imported materials and Indonesian laborers. Of course, this is small potatoes compared to the investment potential in mining, palm oil plantations, manufacturing and other industries in Indonesia itself.

An informal survey among several businessmen and analysts had a clear consensus: Why invest down in Timor-Leste when there are so many opportunities in Kalimantan, Sulawesi and Sumatra? Good point, but Timor-Leste still has a card up its sleeve that should get it some international attention. Oil and gas production could continue until 2050 or beyond, if it can reach an agreement with Australia on jointly developing the Greater Sunrise field in the Timor Gap.

The Gusmao government has included in its national strategic development plan a proposed $3.9 billion facility on Timor-Leste's south coast consisting of a LNG processing plant, an oil refinery, a supply base and a new highway and road system. Finally, there's the Timor-Leste Petroleum Fund. The government is seeking amendments to the country's petroleum law so it can increase its equity investments to up to 50% of the fund's value.

Currently, the government can only invest 10% in equities and the remaining 90% in US Treasury bonds. The government would also like to acquire international loans based on the fund's net worth. "With our petroleum fund and significant liquidity and surplus, we can also invest in strategic sectors in other Asian economies," Ramos-Horta says, including in Indonesia. In an irony of history, Timor-Leste may end up some of the country that once ruled it.

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