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«Executive Summary Twelve years after independence, Timor-Leste eagerly welcomes investment and development opportunities. Plagued by conflict and ...»

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Executive Summary

Twelve years after independence, Timor-Leste eagerly welcomes investment and development

opportunities. Plagued by conflict and turmoil during its formative years, the country is

experiencing its first period of sustained peace and stability. The country’s infrastructure and the

government’s provision of basic utilities have improved. Growth rates have been consistently

strong as the country’s economic prospects have trended upward. However, despite positive

indicators, the country still has a long way to go as it struggles with a legacy of unclear and incomplete legislation; inadequate dispute resolution and regulatory mechanisms; insufficient personnel capacity; deficient infrastructure; and corruption. Much of the country’s industries remain unregulated and early entrants into the market will have to navigate this unknown territory. The Government of Timor-Leste (GOTL) offers investment incentives to offset some of these challenges, including 5, 8, or 10 years of tax exemption depending on the location of the investment. Investment opportunities outside of the oil and gas sector are gradually increasing, with interest growing in the telecommunications, construction, and agricultural sectors. The GOTL is planning to build major petroleum sector infrastructure along the south coast and to create a Special Economic Zone in the exclave district of Oecusse.

1. Openness To, and Restrictions Upon, Foreign Investment As Southeast Asia’s youngest country, Timor-Leste is in the midst of establishing effective and comprehensive legislative, executive, and judicial institutions, drafting laws and regulations, and building government personnel capacity. Although instability and periods of violent upheaval marked the early part of the country’s twelve year history, the country has experienced sustained calm since 2008. This peace is underscored by the departure of the United Nations Integrated Mission in Timor-Leste (UNMIT) peacekeeping operation and the International Stabilization Force (ISF) at the end of 2012. This young and vibrant country is eager to take advantage of its current tranquility to focus on achieving the country’s development goals, as laid out in the Strategic Development Plan 2011-2030. One of the primary goals of the Plan seeks to use the country’s petroleum revenue to support economic development and a transition to a middleincome country by 2030. Although Timor-Leste has only 1.2 million people, it has one of the world's most rapidly growing populations and Timorese authorities are interested in expanding private sector economic activity to generate increased employment opportunities.

Attitude Toward FDI The Government of Timor-Leste optimistically welcomes foreign direct investment (FDI). The private sector, while also optimistic about the country’s investment potential, is a bit more cautious. To date, the oil and gas sector accounts for the vast majorityof FDI and the largest component by far of the country’s overall economy. However, the GOTL is interested in diversifying and is taking steps to facilitate the process. In 2005, the Government established TradeInvest Timor-Leste, an agency aimed at promoting foreign investment and assisting investors. The Government also tasked Timor-Leste’s Secretary State for the Support and

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Promotion of the Private Sector with the dual goals of developing the country’s nascent private sector and creating a favorable climate for FDI.

ConocoPhillips is the country's largest investor with a 57.2 percent share in the Bayu-Undan gas condensate development, located in the Timor Sea Joint Petroleum Development Area (JPDA).

Other companies that are or have been active in the JPDA include Shell, Woodside Petroleum, BHP Petroleum, Marathon Petroleum, and Enterprise Oil. Eni commenced production at the Kitan field in the JPDA in 2011.

Other major foreign investors in Timor-Leste include Portugal Telecom; it holds a 76 percent share of Telecomunicações Públicas de Timor (TPT), which owns 54 percent of Timor Telecom.

Portugal's Entreposto also maintains a substantial presence in the automotive, construction, contracting, and retail sectors. Indonesia's Telin and Vietnam's Viettel both acquired telecommunications licenses in 2012 and have entered the market since 2013. Private business partners from Singapore, China, Indonesia, and Australia are among investors in Timor-Leste, particularly in the hospitality, tourism, export-import, logistics, and consumer goods sectors.

Other Investment Policy Reviews Timor-Leste’s political stability is encouraging and businesses are beginning to gain confidence in the young nation. Commerce is increasing and the GOTL is starting to fund more public services and larger public works projects. Other than the oil and gas sector, other investment opportunities exist in the services, tourism, and agriculture sectors. Obstacles to investment include bureaucratic inefficiency; infrastructure bottlenecks; a paucity of local financing options;

the absence of rules governing real property ownership and other essential legislation; uncertain implementation of government procurement procedures; significant deficiencies in personnel capacity; and perceptions of malfeasance, conflict of interest, and corruption.

Laws/Regulations of FDI In many ways, the Timorese legal system lacks cohesion as it is based on a mix of Indonesian laws and regulations, acts passed by the United Nations Transitional Administration, and postindependence Timorese legislation. The country has yet to undergo a comprehensive overhaul of these overlapping yet disparate laws. Timor-Leste has two official languages, Tetun and Portuguese, and two working languages, Indonesian and English; all new legislation is enacted in Portuguese and is based on the civil law tradition.

The Private Investment Law specifies the conditions and incentives for both domestic and foreign investment, and guarantees full equality before the law for international investors. Other major laws affecting incoming foreign investment include the Companies Code of 2004, the Commercial Registration Code, and the Taxation Act of 2008. A government agency, TradeInvest Timor-Leste, reviews foreign investment applications to ensure compliance with all applicable requirements and helps applicants navigate licensing and registration procedures. All investors, both foreign and domestic, are required to obtain an Investor’s Certificate. The Certificate costs $500 for domestic investors and $2,000 for foreign investors and requires approximately 30 days to process.

Department of State: 2014 Investment Climate Statement June 2014 The government’s Business Verification and Registration Service office (SERVE – Serviço de Registo e Verificação Empresarial) processes business registration and licensing. For companies involved in civil construction, food processing or pharmaceutical industries, SERVE will work closely with relevant ministries, particularly the Ministry of Commerce, Industry and Environment, to facilitate their business licenses. Getting a business license takes between five days and one month.

Industrial Strategy Foreign investments in natural gas and oil, minerals, wholesaling, and retailing fall outside of the scope of the Private Investment Law and are handled through various resolutions or regulations.

In the case of foreign investments that are of particular value to the national development strategy, the option of a special investment agreement is available; such an agreement must be authorized by the Council of Ministers and provides the possibility of tax reductions or exemptions, customs incentives, leases of state property, and up to a 100-percent cost sharing in the training of employees. However, the Private Investment Law does not set out criteria for determining which investments fall under this category. To date, the Council of Ministers has authorized only two projects, both of which have high political interest: the South Coast Project – aimed at developing refineries and infrastructure for the petroleum industry along TimorLeste’s south coast – and the Oecusse Special Economic Zone (ZEESM) Project. These projects have yet to be fully implemented.

Limits on Foreign Control Foreign investors may invest in any sector other than postal services, public communications, protected natural areas, and weapons production and distribution, as these are specifically reserved for the state. Investors are also prohibited from investing in sectors otherwise restricted by law (such as criminal and immoral activities).

Section 54 of Timor-Leste’s Constitution grants the right of land ownership exclusively to Timorese nationals, either individuals or corporate entities; however, foreigners may conclude long-term (up to 50-year) leases. There is no national legislation governing land ownership and investors who wish to lease property must often sort through competing claims from the Portuguese colonial administration, the Indonesian occupation era, and the post-independence period.

Privatization Program Companies, foreign and domestic, may incorporate as a general partnership, limited partnership, limited liability company, or joint stock company; foreign companies may also register as a local branch.

Screening of FDI TradeInvest Timor-Leste reviews foreign investment applications which are then presented to the Private Investment Commission for further study and evaluation. The Private Investment

Commission evaluates applications for foreign investment permits, verifying the following:

Compliance of the application with requirements established in the National Development Plan, in the Procedural Regulation for Foreign Investment and other applicable legislation;

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Suitability, capacity, experience and availability of financial resources necessary for implementation and operation of the proposed investment enterprise;

Capacity, experience and business or technical characteristics of the promoter or its managers in order to guarantee implementation and operation of the enterprise;

Positive operational balance of the business, according to the project proposal;

Environmental, infrastructural and social implications which could condition the viability of the enterprise or that can result from its implementation;

Conditions for:

Guaranteeing availability of necessary land for installation and functioning of the investment enterprise;

Ensuring consistency of the expected new jobs to be created in the short and medium term;

Establishing interconnection with other economic sectors.

The Private Investment Commission submits its recommendations and the foreign investment application to the State Secretary for Support and Promotion of Private Sector for final approval,

except in cases where:

The investment project is equal to or greater than $20 million The project requires use of state land with an area equal to or greater than 5 hectares for tourist purposes or 100 hectares for agricultural, fishery or forestry purposes;

Any other project which the State Secretary for Support and Promotion of Private Sector, decides should get higher level review because of possible political, social, economic, financial or other reasons.

In the abovementioned cases, the Council of Ministers must make the final approval.

Government Decree no.6/2005 on Procedural Regulation for Foreign Investment describes among other things, the timing and investment application review process. The minimum capital requirement for Foreign Direct Investment is $1.5 million.

Upon the final approval and authorization by the State Secretary for Support and Promotion of Private Sector or the Council of Ministers, TradeInvest will issue an Investment Certificate to the investor. It takes an estimated 30 days to process an investment application.

Although foreigners may serve on the board of a Timorese company, at least one of the company's directors must live in Timor-Leste. Business registration and commercial licenses are processed at SERVE. On April 24, SERVE announced one-day registration for sole trader businesses and single shareholders with limited liability. The GOTL has registered 12,360 companies, foreign and domestic, since 2009.

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Competition Law Timor-Leste does not have a Competition Law.

Investment Trends For the last six years, Timor-Leste has experienced a period of strong economic growth, based mostly on public expenditure and private sector activity, driven by oil and gas revenues. The Asian Development Bank estimates that non-offshore petroleum based GDP grew by 8% in

2013. The strong growth rate is slightly lower than in recent years. Timor-Leste’s Central Bank estimates that the country’s FDI has increased over the last five year period, primarily in the civil construction and oil and gas sectors. Business contacts are cautiously optimistic and see many opportunities in Timor-Leste, despite business climate challenges. However, Prime Minister Xanana Gusmao’s publicly stated intent to resign during the second half of 2014 has made the political situation more uncertain and infused some investors with more caution about the country’s growth prospects. In one of the world’s most oil dependent economies, investors are also concerned about revised projections that known offshore oil and gas reserves will run dry by 2020, earlier than previously anticipated.

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Heritage Foundation’s Economic 2013 170/178 http://www.heritage.org/index/ranking Freedom index World Bank’s Doing Business 2014 172/189 http//doingbusiness.org/rankings Report “Ease of Doing Business”

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World Bank GNI per capita 2012 3,620 USD http://data.worldbank.org/indicator/NY.

GNP.PCAP.CD Table 1B - Scorecards: The Millennium Challenge Corporation, a U.S. Government entity charged with delivering development grants to countries that have demonstrated a commitment to reform, produced scorecards for countries with a 2012 per capita gross national income (GNI) or $4,085 or less. A list of countries/economies with MCC scorecards and links to those scorecards is available here: http://www.mcc.gov/pages/selection/scorecards. Details on each of

the MCC’s indicators and a guide to reading the scorecards, are available here:

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