A new bill allowing more diversified investments by Timor-Leste's multi-billion dollar oil and natural gas sovereign fund, which underwrites the lion's share of the country's expenditure, has divided opinion, with some saying the step is necessary to maintain current levels of development spending and others calling the move risky.
The amendment, passed by parliament in late August and recently approved by the president, allows for up to 50 percent of the Petroleum Fund, currently exceeding US$8.7 billion, to be invested in equities, including up to 5 percent in other forms of investments.
Under the previous law, all but 10 percent of the fund had to be kept in US-dollar-denominated government-issued bonds, which traditionally have been a safe but low-return investment.
Timor-Leste is little more than a decade out of a violent 1975-1999 occupation by Indonesia, during which an estimated 180,000 people were killed, hundreds of thousands were displaced, and the country's infrastructure was left in ruins.
Oil revenues have funded much of the country's rebuilding efforts. More than 90 percent of government finances come from the Petroleum Fund, which makes it instrumental in the livelihoods of the country's one million inhabitants.
Any plans to alter the fund are therefore contentious.
Changing the model
Established in 2005, the fund was intended to help avoid the "resource curse" of corruption, wasteful spending and inflation that have often made people in developing countries worse off when their governments come upon sudden wealth from non-renewable natural resources, which discourages long-term planning, fiscal responsibility, and development of productive sectors of the economy, activists say.
Timor-Leste's Petroleum Fund was modelled on Norway's conservatively designed sovereign wealth fund, whereby the Nordic country uses its considerable oil revenues to cover pension payouts today.
A formula called Estimated Sustainable Income (ESI), a guideline for the maximum amount the government should spend from its Petroleum Fund, is supposed to ensure annual withdrawals for public spending are limited to amounts that will allow the fund to last for many generations after oil and gas reserves are exhausted.
The Petroleum Fund's ESI had originally been set at 3 percent of the country's total present and expected future oil and gas wealth.
However, the government has been overspending: 3.8 percent in 2009, 4.8 percent in 2010, 4.3 percent in 2011, and it proposes 7.2 percent for 2012.
Proponents of the new bill, which was spearheaded by the Ministry of Finance, say the only way to raise the fund's rate of return, and thus make current levels of government spending sustainable, is to invest a larger share of the fund in equities.
Financial exposure and corruption concerns
Tim Anderson, a professor of political economy at the University of Sydney and former adviser to Timor-Leste's Consultative Committee for the Petroleum Fund, said the changes invited financial risks - especially given recent volatility in international stock markets - and corruption, the consequences of which would ultimately fall on poor Timorese.
Any amendments to the investment model should be more modest, he said.
In a written response to IRIN, the Finance Ministry said new equities would be acquired through a "controlled and high-quality process" undertaken gradually, with oversight by multiple government offices. Ensuring the fund's assets are highly diversified "is the antidote to many avoidable risks", the ministry said.
However, this is contradicted by another revision just made to the Petroleum Fund law, exempting Timorese "external investment managers" from standards required of international companies entrusted to invest in the fund, activists say.
How much to spend
The Timorese government remains institutionally weak, and there are strong concerns about its ability to manage the fast-rising state budget.
The government's annual budget has increased from $70 million in 2004 and $650 million in 2009 to $1.3 billion in 2011, and $1.8 billion proposed for 2012 - with nearly all the monies coming from the Petroleum Fund.
Jeffrey Sachs, a professor at Columbia University, is among those encouraging the government to open its coffers at a faster rate to jumpstart the country's development.
"I'm less interested in building up international financial assets than I am in seeing children going to school, having proper nutrition, building up the health sector, making sure there's an education all the way through secondary [schooling] universally and tertiary for a rising proportion of students," he told IRIN in Dili, where he was attending a development conference. "I'm interested in there being a good power grid, safe drinking water, disaster preparedness and so forth."
There are strong concerns, however, that sharp increases in spending will spur corruption, not to mention wasteful and misdirected mega-projects over the development of productive sectors of a non-oil economy once the country's two producing oil fields are depleted.
"If you can spend more money well on health and education, you would have an excellent return," says David Hook, a governance specialist with the World Bank in Dili. But, he added, "The question is the capacity of state institutions to manage more money."
In recent years there have been increasing allegations of corruption in government contracts for foodstuffs, services and infrastructure projects.