Managing Natural Resource Revenues: the Timor-Leste Petroleum Fund
Publisher: Alastair McKechnie (ODI)
Date: 2013
Topics: Economic Recovery, Extractive Resources
Countries: Timor-Leste
This note describes the Timor-Leste Petroleum Fund and issues that have arisen in its implementation. This petroleum fund (PF) is considered by commentators and international financial institutions to be a good example of a sovereign wealth fund to manage petroleum resources in a fragile or post-conflict setting. The note contains analysis intended to brief governments in similar settings looking at how to manage revenues from natural resources such as petroleum, minerals, hydroelectricity and forests. Such resources are depletable in the sense that they cannot be easily replaced, or alternatively face a rising cost curve so that developing the current project means its successors will produce more expensive unit output, for example in the case of large-scale hydroelectricity. Exploiting these resources is equivalent to exporting the national wealth – ‘selling the family silver’ – which can either be consumed, for example in expanding civil service employment, or transformed into other assets that generate a stream of income for current and future generations.The paper proceeds as follows. Section 2 looks at how the Timor-Leste Petroleum Fund works. Beginning with a brief overview of petroleum in Timor-Leste, the section then describes the fund, its asset management systems, estimated sustainable income calculations, its mechanisms for transferring the funds to the government budgets, and its governance. Section 3 looks at the advantages for managing petroleum revenues that the fund has provided, including increased transparency and accountability and the preservation of wealth for future generations. This section also looks at the challenges the fund faces, including the sustainability of governance arrangements, the levels of withdrawals from the fund and the difficulties in forecasting future oil prices. Section 4 outlines the key issues countries should consider when establishing a resource fund. Section 5 concludes that the success of the Timor-Leste Petroleum Fund demonstrates that resource funds are a viable option for countries lacking a strong institutional base to manage resources effectively.