PACIFIC PRIVATE SECTOR DEVELOPMENT INITIATIVE

TIMOR-LESTE

COUNTRY OVERVIEW | AUGUST 2016

OVERVIEW

PSDI allocation to Timor-Leste was $3.3 million as of mid-2016. Two-thirds of this has been used for financing growth initiatives, primarily, assisting with the establishment and commercial transformation of the National Commercial Bank of Timor-Leste, the country’s first locally owned commercial bank. PSDI is also actively assisting in other areas of financial sector development, namely mobile banking, secured transactions reform, anti-money laundering, and technical assistance to the Central Bank of Timor-Leste. These activities absorbed more than half of the $486,000 spent on Timor-Leste in 2015-2016. PSDI has also provided substantial assistance with public-private partnerships (PPPs), amounting to 26% of overall expenditure in Timor-Leste. Assistance with the development of a PPP policy and legal framework was provided from 2011-2014 and support for pre-feasibility assessments from 2012-2014. Capacity building and procedural assistance for the PPP Unit is ongoing, with funding for PPP-related support amounting to $52,000 in 2015-2016. A private sector assessment, which was translated into Tetum, was published in 2015. In 2013, PSDI appointed a Dili-based private sector development coordinator. Working out of the ADB Timor-Leste Resident Mission (TLRM), the private sector development coordinator works closely with PSDI’s core team and undertakes ongoing discussions with the Government of Timor-Leste, the private sector, and key stakeholders; assists with PSDI implementation and advocacy activities; and identifies potential private sector reform opportunities. The coordinator also works closely with the Asian Development Bank’s (ADB) sovereign operations team members within the resident mission. Following a re-organization in early 2015, the government has shown increased appetite for reforms to improve the enabling environment for the private sector, and recognition that increased private investment is needed to generate inclusive growth. The reform agenda has been further strengthened by Timor-Leste’s desire to join the ASEAN Economic Community and the subsequent need to demonstrate a coherent policy to promote competitive growth. As a result, PSDI’s portfolio of initiatives grew substantially in 2015 following increased requests for assistance from the government to support its Economic Reform Program. PSDI’s initiatives are now embedded within a government-led strategy to strengthen institutions and align TimorLeste’s policies and laws to promote sustainable growth through private sector development.

CURRENT AND FUTURE PROJECTS

OUTCOMES AND RESULTS

FINANCING GROWTH In 2012, PSDI reviewed laws and policies affecting branchless banking operations for the Central Bank of Timor-Leste and assessed the potential for introducing providers of branchless banking services. In collaboration with the Inclusive Finance for the Under-Served Economy program, PSDI produced a report and presented it to the government in June 2013.

In 2015, PSDI provided momentum for lending environment reforms through a legal and policy review of laws governing collateral. Through a consultative process incorporating inputs from the government, the private sector, and other stakeholders, a policy paper proposing a secured transactions law was completed in late 2015. The next phase of the secured transactions reform will involve finalization of a draft law, completing consultations on the law, and obtaining parliamentary support for its enactment. This is anticipated by early 2017. PSDI was instrumental in transforming the Microfinance Institute of Timor-Leste into National Commercial Bank of TimorLeste (BNCTL) in 2011. Since the change, PSDI has supported BNCTL’s institutional capacity strengthening through targeted advisory support to its board, human resource development, risk management, and strengthened accounting frameworks and audit function. The bulk of ADB’s assistance to BNCTL is now provided under a technical assistance project administered by ADB’s Pacific Liaison and Coordination Office. Within this broader assistance, PSDI is supporting the development of BNCTL’s internal audit capability. This work commenced in May 2015.

ASIAN DEVELOPMENT BANK Pacific Private Sector Development Initiative Pacific Liaison and Coordination Office Level 20, 45 Clarence Street, Sydney, Australia

Tel +61 2 8270 9444 • Fax +61 2 8270 9445 [email protected] • @ADB_Sydney_PSDI www.adbpsdi.org • www.adb.org/plco/psdi

PSDI works with ADB’s 14 Pacific developing member countries to improve the enabling environment for business and address constraints to private sector development in support of sustainable and inclusive economic growth.

PSDI is a regional technical assistance facility co-financed by the Asian Development Bank, the Government of Australia, and the Government of New Zealand.

TIMOR-LESTE

COUNTRY OVERVIEW | AUGUST 2016

CURRENT AND FUTURE PROJECTS

FINANCING GROWTH (CONT’D) In line with the emphasis it places on institutions, PSDI has been working closely with the Central Bank of Timor-Leste (BCTL) since mid-2014 in several areas. One of these was support to BCTL’s Financial Information Unit to prepare a national risk assessment and anti-money laundering/combating the financing of terrorism (AML/CFT) strategy. This work is part of the broader mandate of the National Commission for the Implementation of the AML/CFT, which was established in 2014. The strategy was approved by the Council of Ministers in June 2016. PSDI support to BCTL has also included assistance with the development of the legal and regulatory framework for digital financial services. PSDI consultants worked with BCTL to prepare draft regulations and a policy paper on the use of agents in branchless banking, issues relating to consumer protection, and protecting the e-money float. PSDI is also working with BCTL to review its offsite banking supervision system.

OUTCOMES AND RESULTS

BUSINESS LAW REFORM On request of the government, PSDI provided a review of the company laws in Timor-Leste in 2015. The review makes recommendations to simplify and modernize the laws to bring the companies framework up to global standards and provide greater access to the formal sector. In early 2016, PSDI supported a consultative public-private reform taskforce to review amendments to Timor-Leste’s company laws. Many of the recommendations were incorporated into a new draft company law, which received Council of Ministers’ support in April 2016 and is expected to be presented to Parliament later this year. PSDI also provided a legal diagnostic and policy framework of Timor-Leste’s insolvency laws, which are currently non-functioning and are a hindrance to the growth of the financial sector. The legal diagnostic forms the basis of broader recommendations for insolvency reform. Reforming the insolvency framework is a highly technical process. PSDI conducted an in-country analysis in the first half of 2016 and is working on the insolvency policy framework.

STATE-OWNED ENTERPRISE REFORM AND PUBLIC-PRIVATE PARTNERSHIPS PSDI supported the preparation of a public-private partnership policy and laws, with the first decree law approved by Council of Ministers and promulgated in 2012. The amendment to the first decree law and the second decree law were both approved by the Council of Ministers in 2013 and both were promulgated in early 2014.

CURRENT AND FUTURE PROJECTS

Since early 2014, PSDI has been assisting the government with implementation of the PPP policy and legal framework. In 2012–2013, PSDI financed a PPP pre-feasibility analysis for the Dili Water Supply System, which concluded that a PPP could be structured to improve service delivery. The government endorsed the recommendations in early 2014 and is now funding a full PPP feasibility study. PSDI has been supporting the Dili Water Supply System’s PPP Unit in managing the study, which will be completed in the third quarter of 2016, and is expected to set up a competitive tender for a PPP contract in 2017. This work is being undertaken in parallel with ADB’s Urban Water Supply and Sanitation Enhancement Sector Project and the Directorate of Water and Sanitation’s ongoing system upgrade planning. In addition to the on-the-job training provided through this PPP project development work, PSDI developed detailed procedures and guidelines for the PPP Unit, and is supporting its evaluation of other potential PPP opportunities, in particular in the power sector.

COMPETITION PSDI received a request from the government in 2015 to undertake a review of the country’s competition law and policy requirements. This work commenced in September 2015 and an options paper for the government’s consideration was delivered in June 2016.

ANALYTICAL WORK A private sector assessment for Timor-Leste, Building the Non-Oil Economy, was published in July 2015 and has been translated into Tetum.

ASIAN DEVELOPMENT BANK Pacific Private Sector Development Initiative Pacific Liaison and Coordination Office Level 20, 45 Clarence Street, Sydney, Australia

Tel +61 2 8270 9444 • Fax +61 2 8270 9445 [email protected] • @ADB_Sydney_PSDI www.adbpsdi.org • www.adb.org/plco/psdi

PSDI works with ADB’s 14 Pacific developing member countries to improve the enabling environment for business and address constraints to private sector development in support of sustainable and inclusive economic growth.

PSDI is a regional technical assistance facility co-financed by the Asian Development Bank, the Government of Australia, and the Government of New Zealand.