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quarta-feira, 25 de janeiro de 2017

Killing Two Birds With One Stone, Arguing For Reviving Timor-Leste Investment Corporation

KILLING TWO BIRDS WITH ONE STONE
ARGUING FOR REVIVING TIMOR-LESTE INVESTMENT CORPORATION

*Cosme da Costa Araújo

*Cosme da Costa Araújo
Timor-Leste Investment Corporation (TLIC) is the embodiment of the adage – “having your own cake and eat it”. TLIC will earn financial returns from its investments in the local economy and help to finance the country’s economic development by providing long-term finance at affordable rates to the private sector.

Our private sector – where are we and quo vadis?

Our economic growth is being driven by public expenditures. With the blessings flowing in from oil and gas, we want to develop a vibrant private sector that will be the backbone for the transition to a sustainable non-oil economy. GGovernment, at least in the earlier stage of development, is responsible for nurturing, supporting and creating favorable enabling environment for private sector to grow.  

Our private sector, however, is still miles away from the Strategic Development Plans (SDP)’s targets. TheyIt is  are under-resourced and so under-developed. The non-oil business sector comprises of small locally -owned sole proprietorship companies. These businesses are based primarily in Dili and are mainly involved in retail, wholesale and construction activities. Construction companies are set up mainly to tender for government’s projects and investments. Lack of continued financial support and poor management often lead them to incur costs overruns which erode their already tight profit margin and in many occasions result in projects delays, quality impairments and abandonments. Lately a few of them find a new role of acting as “project brokers” for their international counterparts. Money earned from doing public projectsinvestments is not reinvested back into the business or in new business ventures. Not a small number of the businesses are heavily indebted. Ill-equipped locals will be outnumbered and outcompeted in an uneven level of playing fields. As we will continue to rely on foreign imports in years to come, about 70 percent of every dollar spent in Timor-Leste will go overseas. We are left nothing but “HELENA” – as locals normally call it. A small but promising number of start-ups begin to venture into non-construction-retail related businesses. 

The question is what could have we possibly not done enough to cause such a gloomy picture of our private sector? The answer is simple and we all know it well. Our private sector has no money. A multi-language Timorese would call it “Modal Laiha”; literally means “No Capital”. Our infant private sector is constrained by limited or no access to credit and long-term finance at affordable rates. 

A limited access to finance at affordable rates

Corporate financing or ways of raising money or capital for a business can be either or a combination of debts, and contributions from owners and shareholders. Without a well functioning of financial market, raising capital will be not easy. However, it can still be done without necessarily having one. For a small economy as ours, the amount of money sitting with our banks is not insignificant. The recent report by the Central Bank shows that total deposits, as of 2015, amounts to $US725 million but only US$191 million are loaned out. The average of private sector credit to GDP ratio is significantly below the average for lower middle-income countries. The IMF argues that our banks are falling short in their role of financial intermediation. The absence of collaterals is cited as the main reason for banks’ reluctance to lend out more. As a result of that, banks charge high interest rates, which to a large extent further prevent businesses from taking out loans. The high interest rates the banks charge, which commensurate with the risks they take, prevent businesses from taking out loans. 

BDeposits banks lending out isare only to for a few highly net-worth businesses mostly foreign-owned and in sectors that rely on government’s contracts. Excess deposits are placed offshore, instead of making them available for loans in the local economy. When loans are made, mMost loans have very short maturity with an average of two years. This prevents businesses from taking up meaningful long-term investments. Even the our own BCNTL is yet to fulfill its mission to support “commercial activities” in the country. Only a handful of micro-credit institutions areis taking the risk to offer small short-term loans with reasonable rates to households and small businesses. 

We can now see the challenge the private sector is facing here. Without access to finance, they cannot invest, expand, purchase goods and equipments and upgrade facilities, and let alone achieveing the SDP’s targets.   

Limitations of the existing financing mechanisms 

Many people have been calling for the Petroleum Fund to invest more in the local economy, instead of “helping other countries”. Well it does invest domestically indirectly. Transfers are made every year from the Petroleum Fund to finance the state budget. It is the government who is ultimately responsible for designing a good plan and having an efficient budget execution that ensures every dollar spent counts. 

But facing with capacity constraints, government opts to take out concessional loans and engage in the Public Private Partnerships (the PPPs). The former is to finance projects that generate social benefits, while the later is for projects that provide economic returns. From the economic point of view, in both arrangements, mostly foreign private sector, mostly foreign partners, gain more benefits from the upsides and government has to bear more risk for the downsides and content with the little uptake from the upsides. It is understandable. For a country that as Foreign Direct Investments (FDIs) are hard to come by, government would do whatever it takes to secure investors’ confidence and lure future potential FDIs.
  
Government is contemplating on introducing a credit guarantee scheme. It will serve as collateral for banks to lend out more and or for businesses to borrow more.  It is an interesting ideaI am sympathetic to the idea, but doubtful that it willof fulfillling its intended objective. AThe similar scheme was introduced few years ago. But due to information asymmetry and adverse selection and coupled with moral hazards from the lenders side, businesses took excessive and reckless borrowings , which to such an extent it of nearly bankrupted a commercial bank. 

So what else do we have at our disposal? The answer is many. One of which I strongly support is to revive Timor-Leste Investment Corporation (TLIC).

TLIC and its many pros

TLIC was created in 2011 to follow the successful story of the Singaporean Temasek. However, it was prematurely slaughtered in the 2011 budget when an initial capital injection of $200 million was proposed and discussed. 

TLIC, as envisaged in the SDP, is intended to support the country’s transition to a non-oil economy by promoting investments in sectors of the national economy that are vital to our economic growth and development. It will help nurture, protect and support private sector. It will assist in the development of new industries, build domestic skill base, broaden the base of our economy and decrease our reliance on imports. 

To achieve those desired goals, it could do what most investment funds in Pacific do. They invest in domestic financial securities and real assets such as hotels, ports, airports, telecommunications and real estates. They maximize financial returns for their shareholders and at the same time contribute to the economic development of their countries. By saying that, I am not suggesting that we should follow ”the Pacific Way”. They have limitations. Their investments lack diversification, have strong home bias by definition, concentration risk and high correlation of asset classes as they are exposed to the same systematic risk. We should instead do ”the Singaporean Way”. They have two distinctively investments arms with different objectives and asset allocations. GIC invests in a globally diversified portfolio spread across various asset classes, while Temasek invests initially in local companies in the domestic market. They both play a distinct role and have a different investment portfolio as part of the larger strategy for diversification. Contrary to theoretical concernSurprisingly, Temasek investments in local economy have not resulted in a crowding out of private investments; instead, it helps attract private investment from within and outside of the country. If we are to follow the “the Singaporean Way”, we already have the Petroleum Fund, an equivalent of the GIC, that invests in a diversified assets abroad and TLIC, our version of Temasek, will invest domestically in our selected local companies. Essentially, by following “the Singaporean Way”, we can avoid the problems inherited in “the Pacific Way”. 

An important characteristic of TLIC is that it will involve only in investments and projects that have a commercial focus. In that sense, it could be a party to the PPPs arrangements in, for example, Tibar Port, TL Cement and Heineken projects. Its fundamental focus should be on long-term financing directly or indirectly eitheror alone or co-investing with others into projects that foster development, generate positive externalities and under-financed by private creditors. It can either be a debt-holder or an equity-holder or preferably both. With the former, it will provide long-term loans with subsidized interest rates – interest below market rates. With the later, it will provide not only finance, but also technical assistance and direct involvement in the management of the business. This helps to bring discipline and necessary skills that our private sector is lacking. It can become a business partner by providing money in return for a share of project’s profits. It will help to pick “winners” that will be competitive domestically and internationally. The benefits accrued from TLIC as an equity-holder is what is missing from a development bank as a debt-holder. 

In addition, by acting as catalyst, TLIC can help attracting foreign investors, guarantors, regional and multilateral financing institutions. It can also help to enhance climate for business and attract and pool together private sources of capital from within and outside of the country. This in turn allows TLIC to initiate and nurture the development of an inclusive financial market in Timor-Leste. 

TLIC will also support small businesses in gaining access to credit. This means that it will provide support to microfinance institutions that are currently overstretched to meet the continued increase in demand for loans from households and small businesses. It will foster entrepreneurship and commercialization of agriculture in rural areas. It is easy to set up with minimal regulatory requirements and can be funded initially with public capital and owned by the government. It requires different skill sets and resources to achieve its intended objective. 

TLIC is certainly not without risks. Government will ultimately still be responsible for all sorts of risks that TLIC may facestumble upon. The sorts of risks governments in advanced countries defy the market principles when they bail out failed banks and companies with taxpayers’ money. The sorts of risks that central banks in those countries are willing to take when they lower interest rates close to and below zero and engage in unconventional measures just to support the revival of their economies. The 1997 South-East Asia’s Armageddon gives us an important lesson, that is, the government must keep its financial institutions aligned with its development strategies until they are achieved. The close alignment of finance with agricultural and industrial policy objectives facilitates the unprecedentedly rapid economic development of North-East Asia. The key is to have finance pointed at the right targets or right development strategies. This is better achieved through TLIC than a development bank as banks anywhere have a different DNA.  

TLIC – having your own cake and eat itkilling two birds with one stone

It is worthwhile to look at the experience of others on how they can meet their return target and still contribute to the economic development of their countries. In reviving TLIC, “the Singaporean way” needs to be contextualized to our reality. As both debt and equity holders, TLIC will invest directly or indirectly either alone or with others in the local economy through local companies and in key strategic investments. In doing so, TLIC will earn not only financial returns from its investments in the local economy but also help to finance Timor-Leste’s economic development by providing long-term finance at affordable rates to the private sector. TLIC is all we ask for – an embodiment of the old adage – having your own cake and eat it.killing two birds with one stone. 

References

  • ADB, 2015, Growing the non-oil economy: a private sector assessment for Timor-Leste, Manila, the Philippines. 
  • GIC, Frequently Asked Question, www.gic.com.sg.
  • Lao Hamutuk, 2011, The Unofficial Translation of Decree-Law No.41/2011, of 21 September, Timor-Leste Investment Company, www.laohamutuk.org.
  • RDTL, Timor-Leste Strategic Development Plan 2011-2030, Dili, Timor-Leste. 
  • The United Nations, 2005, Rethinking the Role of National Development Banks, Financing for Development Office, Department of Economic and Social Affairs.

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