East Timor struggles for investment

East Timor struggles for 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.