ATTRACTING INVESTMENT FOR

GROWTH AND DEVELOPMENT IN

TIMOR-LESTE

Soneath Hor

IFC Resident Representative

Timor Leste

STRATEGIC DEVELOPMENT PLAN 2011 – 203 OF TIMOR-LESTE

CALLS FOR ECONOMIC DIVERSIFICATION.

• Economic diversification is considered a key policy objective for countries

dependent on one sector, often natural resources, in order to -

- become more competitive;

- minimize exposure to volatility and external shocks; and to

- generate jobs.

• Strategy is also used by countries to accelerate growth through exports.

Economic Diversification

FDI & Trade Diversification

New FDI mix, new export/import

products, markets, quality upgrading.

Domestic Production

Diversification

New products, efficient resource

allocation across & within sectors,

industries,& firms.

Investment in Assets

Infrastructure, human capital,

institutions, governance.

Other Framework

Policies

Fiscal policy, exchange rates,

credit policies etc.

FDI INFLOWS, GLOBAL AND BY ECONOMIC GROUP, 2007–2018

(BILLIONS OF DOLLARS AND PER CENT)

4

125 731.7

173.2 1 701.0

15 508.2

1 219.8

11 121.5

2 824.05 234.0

65 262.4

10 844.6

43.0

11 800.0

-

20 000.0

40 000.0

60 000.0

80 000.0

100 000.0

120 000.0

140 000.0

South-EastAsia

BruneiDarussalam

Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Timor-Leste Viet Nam

ASEAN + Timor Leste FDI Inflow 2010-2015 (UNCTAD WIR 2016)

2010 2011 2012 2013 2014 2015

Myanmar USD

2.84 b, 2015

Lao PDR

USD 1 b,

2015Cambodia, USD

1.7 b, 2015

$48M in 2018

Urgent Need to Boost Private Sector Investment

Real GDP growth (% GDP)

-2

0

2

4

6

8

10

12

2003-06 2007-10 2011-14 2015-18

Timor-Leste EAP (excl. HICs) Lower-MICs

Competition for FDI is getting tougher

• Almost all countries are engaged in FDI promotion

• Massive growth in number of IPAs

o Perhaps 2000+ IPAs worldwide

o All countries have national IPA except a very few

o Highly (and increasingly) competitive marketplace for FDI

o Key challenge is how to differentiate your location in such

a noisy market

Investment Promotion: Three key organizing ideas

Investment promotion is not about choosing between

foreign and domestic investment

It is about connecting them through global value chains. Trade and investment are two sides of the same coin.

Foreign investment is not a transaction; it is a relationship

An investment promotion strategy should not only pursue attraction, but also enable the establishment, retention and linkages with the domestic productive

sector, thereby maximizing benefits from investment.

Not all types of investment are the same

Different types of investment have different effects on socio-economic development and thus require different policies. Countries should align the

type of investment with different policies.

Investment Lifecycle

Vision and Strategy

Investment Attraction

Investment Entry & Establishment

Investment Retention & Protection

Linkages & Spillovers

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Investment

Lifecycle

Vision & Strategy

Role of investment in the overall national development strategy.

Investment Attraction

IPAs build contacts with foreign investors. Streamlined and cost-efficient use incentives

Investment EntryInvestment Entry and Establishments reforms address barriers

Investment Protection & Retention

Investment Retention and Expansion tools help countries

reduce political risk by providing legal guarantees.

Linkages with Local Economy

Investment climate interventions contribute to allowing spillovers.

Diagnostics Promotion Strategy, Incentives

Regime, Barriers to Entry and Establishment,

Investment Retention Tools, and others

Investment Reform Agenda

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The Investment Lifecycle

APPROACH

Typology of entry barriers

Typology Types of barriers Examples

De Jure

BarriersBarriers in the

legal

framework

Legal and

Regulatory

barriers

Policy decisions

• Prohibition of foreign

investment in certain

sectors

• A country may prohibit FDI in the retail sector by regulating that

only companies owned and controlled by nationals can own

supermarkets or department stores

• Restrictions on top

managerial personnel

• A country may restrict the appointment of foreigners to the board

of directors and/or to executive-level positions

• Discriminatory licensing

requirements

• A foreign investor may be required to meet additional conditions

in order to get a license to operate (in comparison to a domestic

investor)

Procedural

barriers

Red tape

• Obtaining investment

approval

• A country may require several different agencies to sign off on

investment approval, causing increased time and costs

• Registration or

notification of investment

• Registration or notification requirements may require detailed,

forward-looking information that is time-consuming to prepare

• Obtaining a work permit

or visa

• Work permits applications may be onerous and lengthy, and may

impose restrictions on staff mobility

• Opening a bank account

in a foreign currency

• Documentation required to open a bank account may be costly to

collect and slow to process

• Having documents

recognised

• A country may require that certain foreign documents be certified

or notarised before they can be recognised for establishment

De Facto Barriers

Barriers on the ground

• Lack of Transparency • Substantive laws and regulations of the country may be complex

and difficult to access, and decision-making processes may be

opaque .

• Excessive Discretion • Decision-makers may have significant discretion, allowing

informal practices to creep into the system.

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Investment retention & expansion

12

Reinvested earnings are an increasing source of FD

Around 25% of investors either withdraw from an

existing investment or cancel planned investments due

to political risk concerns

0 5 10 15 20 25 30

Transfer and convertibility…

Breach of contract

Non-honoring of gov't guarantees

Expropriation/nationalization

Adverse regulatory changes

War

Terrorism

Civil disturbance

Withdraw existing investment Cancel planned investments

Source: WIPR 2012

Political risks that

investors are most

concerned about

relate to

government actions

Timor Leste underperforms in most areas measured by Doing Business.

0

25

50

75

100

Starting aBusiness

Dealingwith

Construction Permits

GettingElectricity

Registering Property

GettingCredit

ProtectingMinority

Investors

PayingTaxes

Tradingacross

Borders

EnforcingContracts

ResolvingInsolvency

Timor Leste Score

Doing Business score across topics (DB 2019)

164

174

168169

172 172173

175

178 178

160

165

170

175

180

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Doing Business ranking is worsening

Top Business Environment Obstacle for Firms in Timor Leste

14

Example: Cumbersome Business Licensing Regime

• Licenses are not clear in their purpose:

• Requirements to get licenses are duplicative, time-consuming and costly

• There is no transparency in the information regarding the requirements to get a license:

• Vistorias and inspections are not undertaken in a coordinated way

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Example: Tax Clearance Certificate (Dividas) and Working Visa

DIVIDAS➢ The certidao de dívidas is a key document to interact with Government institutions

➢ It has to be renewed every 3 months, but…

❑ The renewal has to be requested one week before it expires

❑ Processing time can take up to 2 weeks

❑ Common mistakes are made when it is requested (payment does not get registered, capturing the payment

in the system can take long, etc.)

➢ Not having the certificate can impose serious costs to businesses. For instance:

❑ No clearing of containers by customs

❑ No renewal of SERVE authorization if the certificate is not presented

WORKING VISA: chicken and egg? ➢ SERVE requires proof of residence in Timor-Leste, which has to be certified by a working visa, a residence visa or a

special stay visa.

➢ That proof has to be issued by the Ministry of Immigration, which requires that those applying have a contract

approved by the Labor Department, and that means the company has to be registered

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✓ Provide comments on draft Private Investment Law 2017.

✓ Negative List (finalized with TradeInvest) • Negative list of investment sectors, in

which foreign investment is prohibited or otherwise restricted was finalized and shared with TradeInvest.

• The List is pending approval from the govermnet

➢ Investment Promotion Capacity Building for TradeInvest (on-going)

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IFC support to Investment Policy and Promotion

IFC Investment Promotion Capacity Building Support

18

Image building

Investment facilitation

Investor services

Policy advocacy

✓ IP Training/ on the job capacity building

❖ 3 half days

❖ 10 staff

❖ Interactive

CRM

✓ Provided a simple Excel

template for investor tracking

TradeInvest

✓ Institutional

Assessment

Website update✓ Assessment and recommendations

✓ On-going guidance for updating

Investment Promotion Capacity Building for TradeInvest

IFC Support for Business Licensing Reform

Which licenses apply? - Inventory

What are the issues with the licenses? – Mapping process and analysis of existing situation

How can they be improved? - Identification of improvements

What to do? – Simplification measures (procedural, legal, using ICT)

Sustainability – New licenses through basic RIA system

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Thank you