Dili – The Petroleum Fund Administration Unit (PFAU) of the Ministry of Finance (MoF) organized a series of information sessions on the Role of Petroleum Fund in the National Development Process. The first session was held on the 3rd of August 2013 at the Ministry of Finance Knowledge Centre and was attended by members of the V Constitutional Government. The second session was on the 5th of August 2013 for representatives of civil society and university students. The third session was on the 7th of August 2013 attended by General Directors and National Directors of the public service.
The main objective of these information sessions were to share with the participants the important role played by the Petroleum Fund in the Timor-Leste national development process. Three main topics were discussed; (1) update on the Petroleum Fund investment strategy, and (2) update on the Petroleum Fund investment performance, and (3) introduction to the benefits framework analysis.
Ms. Emilia Pires, Minister of Finance, in her brief intervention, drew the participants’ attention to the significant dependence of the state on the nation’s petroleum resource. Revenue from the petroleum sector supports 90% of the state budget. She further added that all public promises that are made should take into consideration the forecasted future costs and the sustainability of financing. In response to this concern, she informed the participants that the Ministry of Finance is in the process of conducting a comprehensive benefit framework analysis to look at the costing of all public promises that have been made by the government.
Mr. Cosme da Costa Araujo, a staff in the Ministry of Finance, started the first presentation with a slide highlighting that the objective of having a Petroleum Fund is to benefit both current and future generations of Timorese. This objective was established in the preamble of the Petroleum Fund Law. He further stated that the Petroleum Fund can benefit Timorese in two ways. Petroleum revenues are spent and invested domestically through the annual state budget process, of which money are allocated to pay for goods and services, social transfers, and also to invest in physical infrastructures and capacity development. Spending and investing domestically benefit the current, but also future generation of Timorese. Meanwhile unspent petroleum revenues are invested in financial instruments located abroad. Investment in financial instruments generates additional financial return that provides opportunities for future generations to spend on their priorities and needs.
On investment strategy, Sr. Cosme reminded the participants that the fundamental reason for changing the Petroleum Fund Law, which was approved in 2011, was to diversify the Petroleum Fund investment to enable the alignment between the investment policy and fiscal policy. In other words, as he further explained, with the new strategy of 60% investment in bonds, and 40% in equities, there would be a reasonable probability that in long-run, the Fund could achieve a real return of 3%, which is matched to the 3% ESI (Estimated Sustainable Income), the guideline for annual transfers to the state budget.
With regard to petroleum investment evolution, Mr. Cosme updated the participants that as of the end of 2012, 74% of the Fund’s assets were invested in the United States Government Bonds and 26% were invested in developed market equities. The Ministry of Finance, on behalf of the Government, decided to continue to increase the equities exposure to 40%. This targeted exposure is planned to be achieved by the end of June 2014. In addition, the Fund will diversify 10% of its bond portfolio to international sovereign bonds ex-US.
In relation to the investment process, Sr. Cosme made an important comment, which was that investing is complex and involves detailed and comprehensive analysis. Financial investing is a long-term and systematic process that requires clear objectives and discipline. Ad-hoc decisions are unlikely to pay off over time. In addition, any investment decision should balance four important factors (1) speed, (2) ability, (3) quality and (4) cost.
In the second presentation, Mr. Peter Ryan-Kane, from Towers Watson, an external advisor to the Ministry of Finance on the Petroleum Fund, mentioned that since the inception, the Fund’s annual investment return has been positive. But he also reminded the participants that this reality will not hold permanently, meaning that the Fund may see some negative returns in the years to come. But he reassured them that as long-term investor, short-term fluctuations in value are less important, because these are the risks that the Fund is willing to take in order to gain a higher return in the long-run.
Mr. Peter also explained that there are three key risks that the Fund faces. The first is the risk that the Fund earns less than 3% return. Therefore, to manage this risk he suggested continuing to develop the investment strategy. The second risk is reputation risk. Therefore, to mitigate this risk, he emphasized the need for a strong governance standard, using a sound international investment process, having a formal process for considering proposals from third parties, and formal sign off procedures. The third risk is the risk of losing money. The strategy to manage this is by spreading the investments across multiple asset types, countries, currencies, and managers, and using custodian bank and external fund managers wisely.
In his last presentation, Mr. Peter talked about the relationship between the budget process, sources of funding and promises. He stated that all the promises that we make today will have implication on the future costs. He said that some budget items have a current cost, but do not contain a future promise, for example health, education and security. Other budget items have both a current and future cost, for example payments for veterans. Some items have only a future costs, for example pensions promised to civil service when they retire. Therefore, he suggested that the costs of these promises should be quantified and their implication on future costing should be considered. In response to this concern, Mr. Peter reiterated Minister’s early statement that the Ministry of Finance is going to conduct a benefit framework analysis to look into the costs of all promises made by the government.
The information sessions were concluded with Mr. Cosme reminding the participants of the important role played by the Petroleum Fund in the Timor-Leste national development process. By participating in these sessions, it was hoped that the participants can contribute, directly or indirectly through their day-to-day work, to ensure that the nation’s petroleum wealth is managed and spent in a way that brings the most benefit to both current and future generations of Timorese.