East Timor struggles for foreign investment

East Timor struggles for foreign investment

Tom Wright, Dow Jones, Dili

When East Timor asked foreign investors to help rebuild its war-torn phone system after independence three months ago, only one company stepped forward.

And it wasn't Australia's Telstra, which reconnected East Timor to the outside world in 1999 after the destruction wrought by Indonesian troops as they pulled out of the territory.

In its early days as a free nation, East Timor is facing the harsh reality that very few investors are lining up to help rebuild an economy which is one of Asia's poorest after 24 years of Indonesian occupation, ending in 1999 with a United Nations- backed vote for independence.

As the U.N. winds up its operations after more than two years of running the country, companies such as Telstra, and smaller foreign businesses from restaurants to supermarkets that served the thousands of expatriates, are pulling out, leaving East Timor's new government to go it alone.

Only Portugal, which ruled East Timor for four centuries until shortly before Indonesia's 1975 invasion, has since independence committed significant investment in this country of 800,000 people, returning with nostalgia to its former tropical colony.

Portugal Telecom signed a 15-year contract last month to invest $29 million to rebuild and operate the phone system, which it should complete by the end of next year, says Ovidio de Jesus Amaral, East Timor's communications minister.

Attempts to attract investment from countries that lack a historical and cultural bond with East Timor is going to be an uphill battle. Few see advantages in doing business in a country where 85 percent of the population makes a living from semi- subsistence agriculture.

Until now, only petroleum companies have shown major interest in East Timor for the oil and gas which lies under the sea between the country's southern shore and Australia.

East Timor has a number of plans to lure smaller investors to create employment, including exploiting its mountains and excellent diving to attract tourists. The country's organic coffee industry, for now its only major export, could also bring in foreign business.

"It's not out of the question," according to Jose Texeira, the country's investment and tourism minister.

Still, with so many deterrents for doing business here at the moment, this looks like a pipe-dream.

Telstra doesn't want to talk about why it's pulling out after helping the U.N. restore basic telephone services here, but Amaral admits it was hard to find a developer for the phone system with only a forecast 10 percent return on investment over the 15-year contract.

East Timor's population can't afford basic services. The government, for instance, is unable to make everyone pay for electricity, meaning the system is heavily overloaded, with power outages a daily reality in Dili.

The country's infrastructure is barely hanging together after the systematic destruction by the departing Indonesian troops three years ago, a 'scorched earth' policy meant to leave the East Timorese without the backbone of a functioning state.

The main road to Maliana, a small town near the land border with Indonesian-controlled West Timor, was threatening to collapse on a recent visit. Locals complain of having power for only two days a week, and of lacking water for irrigation. Telephone lines trail on the ground, left where Indonesian soldiers cut them three years ago before retreating over the mountains.

Such problems are likely to kill plans to turn Portuguese-era hot springs near Maliana into a tourist drawcard.

"Infrastructure is the area that worries us the most," said Sarah Cliffe, the World Bank's local representative.

The government is taking other measures to remove barriers to investment, but progress has been uneven.

Prime Minister Mari Alkatiri's administration is considering a bill to assuage concern over the security of land ownership and tenure, which is deterring long-term investment. Ownership of land is confused by overlapping claims dating from the Portuguese and Indonesian periods, compounded by the destruction of ownership documents in 1999.

Lack of certainty over land is also stopping the development of a proper banking system, as there is no collateral for lending. Australia & New Zealand Banking Corp. and Portugal's Banco Nacional Ultramarino have branches in Dili, but are not making commercial loans.