Seventh Progress Report on Timor-Leste

Asian Development Bank

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○

SeventhSeventh ProgressProgress ReportReport onon Timor-LesteTimor-Leste

Timor-Leste and Development Partners Meeting 3–5 December 2003 Dili, Timor-Leste

ii Seventh Progress Report on Timor-Leste

iii

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ iv Seventh Progress Report on Timor-Leste

Abbreviations ○○○○○○○○○○○○○○○○○

ADB Asian Development Bank ARP II Second Agricultural Rehabilitation Project AusAID Australian Agency for International Development BPA Banking and Payments Authority CFET Consolidated Funds for East Timor CU credit union CUF Credit Union Federation EDTL Electricidade de Timor-Leste EIRP Emergency Infrastructure Rehabilitation Project EIRP-1 Emergency Infrastructure Rehabilitation Project, Phase 1 EIRP-2 Emergency Infrastructure Rehabilitation Project, Phase 2 ETPA East Timor Public Administration FAO Food and Agriculture Organization IMTL Instituição de Microfinanças de Timor-Leste MTCPW Ministry of Transport, Communications and Public Works NGO nongovernment organization PMU Project Management Unit SEP Small Enterprises Project TA technical assistance TFET Trust Fund for East Timor UN United Nations UNDP United Nations Development Programme UNTAET United Nations Transitional Authority in East Timor WS&S water supply and sanitation WSS Water and Sanitation Services WSSRP Water Supply and Sanitation Rehabilitation Project WUG water users group

NOTE: In this report “$” refers to US dollars.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ v

Contents ○○○○○○○○○○○○○○○○○

Page Map of Timor-Leste iii Abbreviations iv

■ EXECUTIVE SUMMARY vii Introduction vii Supported Interventions vii Development Impacts viii Continuing Needs x Sector Investment Programs xi ADB Technical Assistance xi

■ PART 1: PROJECT PROGRESS 3 Summary Project Matrix 3

■ PART 2: TFET PROJECTS 5 ■ Emergency Infrastructure Rehabilitation Project, Phase 1 Grant 8181-TIM(TF) 7 Summary 7 Rationale 7 Objective 7 Intended Output 8 Achievement of Output 9 Project Cost and Disbursement 11 Procurement and Construction 13 Organization and Management Performance 16 Donor Coordination 16 Project Impacts 16 Long-Term Sustainability 18 Lessons Learned 19 Continuing Needs and Investment 21 ■ Emergency Infrastructure Rehabilitation Project, Phase 2 Grant 8198-TIM(TF) 22 Map 22 Summary 23 Rationale 23 Objective 23 Estimated Costs 24

Procurement 24

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ vi Seventh Progress Report on Timor-Leste

Intended Impact 24 Donor Coordination 25 Achievement of Output 25 Expenditures 25 Project Impacts 25 Continuing Needs and Investment 26 ■ Water Supply and Sanitation, Phase 2 Grant 8189-TIM(TF) 27 Summary 27 Background 28 Implementation Performance 32 Project Impacts 33 Impacts on Capacity Building (Individual and Institutional) and Policy 36 Overall Contribution to the Economy 37 Continuing Needs and Investment 39 ■ Hera Port Fisheries Facilities Rehabilitation Project Grant 8190-TIM(TF) 41 Summary 41 Background 41 Implementation Performance 42 Project Impacts 43 Overall Contribution to the Economy 44 The Future 45 ■ Microfinance Development Project, Grant 8186-TIM(TF) 47 Summary 47 Rehabilitation of Credit Unions 47 Background 48 Implementation Performance 49 Capacity Building of IMTL Staff 50 IMTL Operations 51 IMTL’s Operational Progress 59 Rehabilitation, Strengthening, and Expansion of Credit Unions 59 Strengthening of the Credit Union Federation 60 Project Cost and Disbursements 60 Implementation Arrangements 61 Project Impacts 62 Overall Contribution to the Economy 64

■ PART 3: ADB TECHNICAL ASSISTANCE PROGRAM 69

Summary of ADB Technical Assistance to Timor-Leste 71

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ vii

Executive Summary

○○○○○○○○○○○○○○○○○○○○○ Introduction

This Progress Report updates the Trust Fund for East Timor (TFET) activities of the Asian Development Bank (ADB) in Timor-Leste. Since 2000, ADB has focused on rehabilitation of infrastructure with efforts directed at the urgent needs of the roads, ports, and water and rural power supply sectors. In all activities, ADB prioritized local capacity building that was severely affected following the aftermath of the 1999 referendum. As of 1 December 2003, most of the ADB-managed projects are at an advanced stage of implementation, and all, except one project (Emergency Infrastructure Rehabilitation Project, Phase 2 [EIRP-2]) have been substantially completed. ADB will ensure that projects are fully completed and sustained, and long-term operation and maintenance will be undertaken by the respective ministries and beneficiaries.

Supported Interventions

TFET funds have supported six projects managed by ADB in Timor-Leste with grants totaling $52.8 million. As of 1 December 2003, three projects, Emergency Infrastructure Rehabilitation Project, Phase 1 (EIRP-1), Water Supply and Sanitation Rehabilitation Project (WSSRP-1), and Hera Port Fisheries Facilities Rehabilitation Project have been completed, and two projects (WSSRP-2 and Microfinance Development Project) are at an advanced stage of implementation. The EIRP-2 is at an early stage of implementation and is expected to be completed in 2004. Cumulative disbursements have reached 83% of the total value of the grants.

Available for Grant Amount Disbursed Commitment $52.8 m 100.0% $43.6 m 83% $9.2 m 17%

• Emergency Infrastructure Rehabilitation Project, Phase 1 (EIRP-1) – for $29.8 million to provide access to humanitarian relief and facilitate peace and security by (i) repairing main roads to facilitate transport of aid and security cargo; (ii) inducing revival of economic activity; (iii) reducing port congestion to enable effective logistic services for humanitarian and economic goods; (iv) contributing to power supply restoration; and (v) employing local

labor and skills to initiate income generation. The Project is now fully completed.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ viii Seventh Progress Report on Timor-Leste

• Emergency Infrastructure Rehabilitation Project, Phase 2 (EIRP-2) – for $9 million to support long-term road sector development by strengthening the local contracting industry, undertaking preventive civil works and periodic maintenance by instituting operation and maintenance (O&M) systems, and providing capacity building for sector management. Project implementation started January 2003, with completion scheduled in mid-2004.

• Water Supply and Sanitation Rehabilitation Project 1 – for $4.5 million to provide the people of Timor-Leste with adequate, affordable, and sustainable water supply and sanitation (WS&S) services using appropriate technology and management systems. Work was successfully completed in June 2001; the Project was closed in December 2001.

• Water Supply and Sanitation Rehabilitation Project 2 – for $4.5 million to ensure the communities of Timor-Leste have access to clean WS&S services as these are considered essential for public health, protection of the environment, and for promotion of economic growth based on appropriate technology and management systems. The Project is now substantially completed.

• Hera Port Fisheries Facilities Rehabilitation Project – for $1 million to contribute to sustained food security for the people of Timor-Leste. A parallel goal is to achieve responsible fisheries management by promoting offshore pelagic fisheries to ease inshore fishing pressure. This has been achieved by rehabilitating the necessary harbor infrastructure facilities at Hera port for larger offshore fishing vessels. The Project has been completed in June 2003.

• Microfinance Development Project – for $4 million to reduce rural poverty by developing a sustainable rural microfinance system to respond to the needs of the rural poor, particularly women. Performance of rural lending operations has been highly satisfactory. Three Instituição de Microfinanças de Timor- Leste (IMTL) branch offices are operating. For credit union (CU) development there is a need to strengthen appropriate policy and regulatory framework, and capacity building. The Project is expected to be completed in mid-2004.

Development Impacts

TFET grants have provided the initial impact needs of the country and the project impacts have extended and deepened beyond the humanitarian needs. Evaluation of the completed and ongoing projects indicates the substantial impacts in terms of building local capacity, stakeholder ownership, and multiple synergestic benefits to the communities in Timor-Leste. Road rehabilitation under the EIRP-1 provided access

to places that would otherwise be isolated. The EIRP-2 will help maintain access and

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ ix Executive Summary

improve transportation through reduced road closures and lower costs of maintenance and vehicle operation. Rural electricity in various districts benefits many and there have been for more social benefits from increased availability and duration of power supply. Up to 250,000 people in rural areas and 15,000–20,000 in Dili benefited from the TFET-funded water supply projects by improving access to safe water supply, thus freeing women and children from many hours spent collecting water. Beneficiaries include about 31,500 in the Oecussi enclave and 1,750 on Atauro Island. Promotion of offshore fisheries at Hera port has increased fish supply and brought down prices, which is leading to improving nutrition and health. It has also eased pressure on inshore fishery resources. Easy access to microfinance especially by women is enabling the formerly resource-poor population to start their own small businesses. Market vendor loans are evenly split between men and women but microfinance group loans have a strong gender bias, with some 90% of loans to women. Employment generation is a pressing need. Road maintenance by community groups and national contractors created employment throughout the country, especially in rural areas, estimated at over 300,000 persondays. Water supply projects are estimated to have created up to 90,000 persondays of work. Increased fisheries production will directly employ fishers and indirectly create jobs in marketing, processing, distribution, and supporting services. Microfinance loans are supporting employment on farms, in households, and small trading businesses. TFET-funded projects also addressed institutional and capacity development. Government capacity and ownership were developed through each of the TFET projects. • Road projects helped strengthen staff in maintenance, road asset management system, and contract bidding and selection process; • water supply capacity building activities helped increasing numbers of WS&S staff with management, technical, and planning skills; • the microfinance project developed the policy and regulatory framework and internal systems and procedures for the IMTL and strengthened local staff capacity in managing IMTL; and • overall, the Government’s project implementation capability and capacity have improved substantially through TFET projects. Local contractors have improved their capability to manage and implement civil contract works. International contractors employed have also trained Timor-Leste nationals in project civil works, increasing the pool of local technical expertise. Local NGOs were engaged in water supply projects, developing their capacity to implement participatory community development, including mobilization of beneficiary groups, training, and physical implementation. Local community groups have helped in implementing as well as benefited from TFET projects: • in roads, local communities were provided employment in road maintenance

activities;

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ x Seventh Progress Report on Timor-Leste

• in water supply, water users groups helped communities become more self- reliant in addressing their water needs and in sustaining their projects; and • in microfinance, beneficiary groups underwent a socialization process to inculcate in them sound principles of credit and their responsibilities as borrowers of small credits. IMTL is also providing opportunities for safekeeping of cash in the rural areas.

Continuing Needs

TFET-funded projects have made a great contribution to restore basic essential infrastructure and services in Timor-Leste. However, much remains to be done to continue the rehabilitation development of the country. In sectors addressed by ADB-managed projects, specific needs have been identified.

Power

• Further support is needed to establish efficient management systems and sector planning capacity, and appropriate policy and regulatory framework. • Capacity development for management and operation of district and subdistrict systems is needed. Local power management capabilities may also require further support for institutional and capacity development for sustainable operation and maintenance of rural power stations. • Identification of alternative renewable energy is crucial.

Water Supply

• Establishment of water resources databases is crucial. Further assistance will create capacity for data management and reestablish databases and improve analyses. • With TFET project support, WSS has created a core of experienced staff; to meet the National Development Plan aspirations for better health, environmental protection, and quality of life, more staff will be required to extend geographical scope and new skills for such tasks as billing of user charges and improved financial management. • Priority reticulation mains and water treatment plants need to be upgraded. • Appropriate water supply policy and legal frameworks including water tariff should be promulgated.

Roads

• There is a continuing need for road upgrading and O&M to provide access to

remote areas throughout the year.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ xi Executive Summary

Fisheries

• Support is needed to develop the legal framework and regulations for sustainable natural resource management. • Further assistance to carefully monitor catches may be needed to manage the utilization of fishery resources.

Microfinance

• The regulatory and legal framework, especially for credit union operations, needs to be further refined. • Nationwide expansion of microfinance will necessitate further donor assistance. • Micro and small enterprise development is important for further microfinance development. • IMTL (microfinance bank) need to be divested to ensure long-term sustainability.

Sector Investment Programs

On request by the Government, ADB provided support in the preparation of sector investment programs (SIPs) in the infrastructure sector, which included Water Supply & Sanitation, Power, Transport, and Communications. The preparation of SIPs is intended to facilitate collaboration and coordination with the donor community in funding and implementing priority programs over the medium term.

ADB Technical Assistance

In parallel with the implementation of TFET-funded projects, ADB has approved a total of 20 TAs for $8.6 million, of which 13 are substantially completed and 7 are ongoing. ADB TAs have supported implementation of TFET-funded projects either as project preparation or addressing specific capacity building and institutional issues. Related work has included development of regulatory and legislative framework, analysis of policy issues, and sector-specific capacity development. Wider support has also been provided to sectors not addressed by TFET, such as posts and telecommunications, Timor Sea Office, and for general capacity and local institutional

development requirements.

Part 1

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ Project Progress

2 Seventh Progress Report on Timor-Leste

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 3

Project Progress

○○○○○○○○○○○○○○○○○○○○○

Summary Project Matrix

ADB manages six projects funded by TFET grants totaling $52.8 million. One project, the first Water Supply and Sanitation Rehabilitation, has been financially closed but most of the other projects are approaching the final stage of implementation. The exception is the Second Emergency Infrastructure Rehabilitation Project, which only began implementation in January 2003 and accounts for $8.7 million of the available balance of $9.2 million. The status of each grant is summarized below.

TFET-Funded ADB-Administered Projects As of 15 November 2003

Available for Project Name Grant Disbursed a Commitment

Portfolio of TFET Projects $m 52.800 43.600 9.200 managed by ADB % 100.00 82.53 18.17 Emergency Infrastructure Rehabilitation Project, Phase 1 $m 29.800 29.160 0.064 Grant 8181-TIM(TF) % 100.00 97.78 0.10 Emergency Infrastructure Rehabilitation Project, Phase 2 $m 9.000 0.762 8.671 Grant 8198-TIM(TF) % 100.00 8.47 96.34 Water Supply and Sanitation Rehabilitation Project, Phase 1 $m 4.500 4.500 0.000 Grant 8185-TIM(TF) % 100.00 100.00 0.000 Water Supply and Sanitation Rehabilitation Project, Phase 2 $m 4.500 4.500 0.050 Grant 8189-TIM(TF) % 100.00 100.00 1.11 Hera Port Fisheries Facilities Rehabilitation Project $m 1.000 0.099 0.004 Grant 8190-TIM(TF) % 100.00 99.90 0.40 Microfinance Development Project $m 4.000 3.679 0.841 Grant 8186-TIM(TF) % 100.00 91.98 21.03

a Includes imprest funds disbursement.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○

Part 2

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ TFET Projects

6 Seventh Progress Report on Timor-Leste

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 7

Grant 8181-TIM(TF) Emergency Infrastructure Rehabilitation Project,

Phase 1

○○○○○○○○○○○○○○○○○○○○○

Summary

The transport and power infrastructure of Timor-Leste, severely damaged during the postreferendum conflict, hindered humanitarian relief and security operations. The Emergency Infrastructure Rehabilitation Project (EIRP) restored this infrastructure and reduced the maintenance burden over the long term. Phase 1 (EIRP-1) was carried out with the help of a grant from the Trust Fund for East Timor (TFET) to restore road conditions, port operations, and power infrastructure. EIRP-1 has (i) restored transport and power sector assets and supply; (ii) improved the flow of goods, fuel, health care services, and food, and access to reviving markets; (iii) generated significant employment among the people, most of whom are returning refugees who have lost their property and livelihood; and (iv) generally improved the quality of life of the people of Timor-Leste. The Project Management Unit (PMU) under the Ministry of Transportation, Communication and Public Works (MTCPW) was the Executing Agency. The physical completion of the Project, which cost $29.8 million, is expected by December 2003.

Rationale

The EIRP-1 supported humanitarian assistance in Timor-Leste by rehabilitating transport and power infrastructure to facilitate peace and security, and provided the people with access to humanitarian relief aid.

Objective

The objectives were to (i) undertake emergency road repair works to facilitate efficient transport of humanitarian aid and security cargo, and to induce the revival of economic activity; (ii) expand the capacity of port facilities to reduce congestion; and (iii) reinstate power supply. The Project also supported the implementation of the transport sector institutions. The EIRP-1 has the following components: • Road rehabilitation, including road repair, equipment for road repair works, labor-based road and causeway restoration, and rehabilitation and

reinstatement of bridges and depot facilities;

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 8 Seventh Progress Report on Timor-Leste

• Port rehabilitation, including wharf extension at Dili Port, restoration of the landing craft slipway at Dili Port, restoration of the container yard at Dili Port, and port repairs; • Power sector rehabilitation, including rehabilitation of 16 rural power stations and associated distribution systems and consumer connections, and support in developing a power utility and its financial management system; and • Project management services and training.

Intended Output

Road Restoration

• Bridge Restoration Works. Keep roads open to security and humanitarian traffic during critical postconflict operations. • Contractor Classification and Prequalification. Enable the Road Service Division to prequalify domestic and international contractors according to their technical and financial capabilities. • Five Emergency Contracts. Close any specific road subnetworks to be cleared within 48 hours during the raining season in the second quarter of 2000. • Pilot District Road Priority Work. Carry out emergency repairs on the feeder road network in three districts on a pilot basis. • Road Maintenance and Rehabilitation. Carry out substantive repairs on the structures in the primary road network after the 2000–2001 rainy season. • Supervision. To ensure quality through controlled measurement of the works under road maintenance and rehabilitation contracts (RMRCs), guide the local contractor in the execution of the works and provide training to local supervisors. • Refurbishment of Regional Depots. Establish four regional depots to manage and implement road maintenance. • Community Road Maintenance. Implement a community-based routine maintenance program to improve access to markets in poor communities and generate employment and income opportunities. • Road Asset Management System. Implement a basic road inventory and asset management program in the Road Services Division of the MTCPW to provide a basis for preparing an optimum routine maintenance program. • River Training Assessment. Engage consultants to assist the PMU with the design of economic and efficient solutions to problems of bridge abutment damage. • Geotechnical Assessment. Engage consultants to enable the PMU to undertake RMRC projects to maximize benefits while avoiding potential costly

geological instabilities.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 9 Emergency Infrastructure Rehabilitation Project, Phase 1

Port Restoration

• Eastern Container Yard. Seal the container yard area to improve container management and provide additional maneuvering space, thereby alleviating congestion in the port. • Completion of the Third Berth and Repair of the Slipway. Reduce congestion and transport costs that hamper the initial delivery of relief and security goods to Timor-Leste.

Power Restoration

Rural Power Station Rehabilitation. Rehabilitate 16 rural power stations and associated medium voltage/low voltage (MV/LV) distribution systems and consumer connections. Extend the distribution system to connect new consumers who expressed willingness to pay. Provide technical training for local mechanics and electrical operators to cover operating and routine maintenance procedures. Implement and develop village-based committees in the subdistricts to manage day-to-day power station operation.

Power Sector Restructuring

Improve the management of the power sector and gradually strengthen the financial management of the sector to (i) improve services, (ii) increase consumer satisfaction, (iii) gradually increase capacity to extend power supply, (iv) lower operating costs, (v) reduce and gradually eliminate the fiscal subsidy to the sector, and (vi) make the sector financially self-sustaining.

Achievement of Output

Roads Rehabilitation

• Roads Rehabilitation. The EIRP-1 has tendered 65 road repair civil works contracts. The contracts have addressed specific road closures by repairing slips, culvert failures, and drainage. The contracts under the EIRP-1 addressed backlog maintenance to the extent possible, in addition to ensuring access on the main road network. These contracts have generated 192,263 work- days, and restored 1,025 kilometers (km) of road drainage involving 259 villages. The 248 contractors were prequalified under a capacity classification system providing a foundation for a contractor registry. Of the 104 prequalified contractors, 95 are from Timor-Leste. Community involvement in routine maintenance has been implemented over about 1,445 km of

the core network.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 10 Seventh Progress Report on Timor-Leste

• Bridges Restoration. The EIRP-1 conducted an emergency and a medium- term bridge condition survey covering all major bridge structures and the culverts. This resulted in a phased emergency bridge works program and a medium-term bridge rehabilitation program incorporated into the transport sector master plan. In its first phase, the emergency program includes works on nine critical bridges, river training, and provision of a stock of temporary bridge materials for use in the event of weather-related bridge failure. The EIRP-1 implemented these requirements under its road repair component. • Roads Maintenance. The EIRP-1 has established four regional depots, in Baucau, Dili with Oecusse as subdepot, Maliana, and Same, each with a regional engineer from Timor-Leste and an international engineer-trainer. The depots have been equipped with basic equipment necessary for routine maintenance and small-scale road repair. The depots have established a core routine road maintenance organization. The EIRP-1 has provided training for the emerging contractors in the use of appropriate technologies for emergency and periodic maintenance of rural roads, bid preparation, estimation, cost control, contract procedures, and management. • Roads Administration. The EIRP-1 has established basic accounting and recording systems to support field management, budgeting, and contracting, as well as for record keeping and enhancement of sector governance and accountability. • Donor Coordination. Road restoration activities are coordinated on a geographic basis by the Project and the Dili–Ainaro road rehabilitation funded by the Government of Japan. The road rehabilitation activities include (i) road works under the EIRP, (ii) the United Nations Development Programme (UNDP)–Japan project for the Dili–Aileu–Ainaro–Cassa road, (iii) the road repair and bridge restoration projects funded by the United Nations Transitional Authority in East Timor (UNTAET), and (iv) the UN Peace-Keeping Force (UNPKF) road works.

Port Rehabilitation

• The EIRP-1 has completed (i) the third berth and slipway repair, (ii) concrete decking of the third berth, and (iii) rehabilitation of the hardstand area at the eastern container yard of Dili Port. It has also installed a sealed surface in the area to reduce the environmental implications of heavy machinery operating on a compacted surface. • Donor Coordination. The port rehabilitation activities included (i) the EIRP’s rehabilitation works, (ii) UNTAET’s small works for restoration of lighting and communications at Dili Port, and (iii) UNDP and Japan–funded contracts

for the restoration of the wharf fenders and navigation aids at Dili Port.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 11 Emergency Infrastructure Rehabilitation Project, Phase 1

Power Rehabilitation

• Rehabilitation of Rural Power Stations. The EIRP-1 has assessed 21 rural power stations. The PMU has carried out detailed assessment of the communities’ needs and concluded that that they are willing to pay for electricity supply. Funding was made available for the rehabilitation of 14 prioritized rural power stations (12 subdistricts and 2 districts), associated distribution systems, and consumer connections. The cost was estimated at $3.34 million. The EIRP-1 restored power supply to about 4,900 consumers, 30% of them new. The sector requires significant additional resources to rehabilitate the remaining distribution networks and the subdistrict and district stations, the latter having been commissioned after the postreferendum conflict with only quick-impact bilateral assistance. • Utility Development and Financial Management System. The EIRP-1 has helped to establish a power utility, efficient utility management, and its financial management regime. Rigorous tariff collection is being implemented with the support of the EIRP-1. It has additionally procured and installed 1,000 single-phase and 300 3-phase meters, and has undertaken a capacity building program for the power sector. • Technical Assistance. The EIRP-1 has supported the power service with tariff evaluation, accelerated tariff collection, budget preparation, provision of status reports, and assessment of sector issues. Through technical assistance and policy dialogue, ADB assisted the Government with the preparation of strategy options and long-term development directions for the sector. ADB funded TA 3748-ETM to prepare a power sector development plan. The TA examined the potential for alternative renewable energy sources in Timor-Leste. • Donor Coordination. Donor-supported rehabilitation programs are coordinated on a geographic basis in the context of ADB-supported donor coordination meetings. The power rehabilitation activities included (i) the rehabilitation works under the EIRP-1, (ii) rehabilitation of 13 subdistrict power stations and overhaul of the Comoro power station with funding from the Government of Japan, and (iii) rehabilitation of four power stations and support to increase the billing capacity of the power service, with funding from the Government of Portugal.

Project Cost and Disbursement

On the basis of the available funding for emergency infrastructure restoration, in December 2001, the EIRP-1 was allocated $29.8 million, of which 70% was directed to the restoration of roads, with 9% for power restoration, 7% for port

restoration, and 10% for project management and advisory services. Power sector

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 12 Seventh Progress Report on Timor-Leste

Maubisse Power Supply

José Mendonça da Silva, a former commandant in the resistance movement, waged war for 24 years out of his base in the jungle. Now, as administrator of Maubisse (subdistrict of Aileu) he is waging peace. This subdistrict of 21,000 people was one of 14 chosen for electrification for their ability to pay. Construction started in May 2002. The EIRP-1 supplied two 50 kW generators in February 2003, and the new system was inaugurated in May 2003. For now, 150 households in Maubisse are connected. Four thousand households originally signified interest, but priority was given to those who already had meters in Indonesian times and lived close to power lines. The community members met to decide how much each household should pay. Capacity to pay, not load, was considered. The monthly charges range from $5 to $30. The people, Mendonça da Silva says, come to his office to pay. Monthly collections come to about $1,500. “If everybody paid,” management committee member Olga Mendosa puts in, “there would be enough to pay for fuel” and to pay Joao Nunes, the volunteer power operator. The community also hopes to see the connections extended beyond the present 6 km radius to more households. Says Filomeno de Araujo, a government employee in education and also a member of the management committee, “We are glad we have electricity. Our children can study better. We know what it is like to live in the dark. But other communities have no electricity and at least we are better off.” To improve collection, there are also requests for bicycles for collectors and line inspectors. Mendonça da Silva himself often goes around on foot, sometimes by minibus. He had to do sosialisasi (sell the project) to settle complaints. But Maubisse (literally, “wanting to become steel,” from a local myth about a stone that can be transformed into steel) does not come by its name lightly. And Mendonça da Silva and his committee, who have taken upon themselves to improve the community

needs, are not about to back down.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 13 Emergency Infrastructure Rehabilitation Project, Phase 1

activities are ongoing; however, it is relevant to note that net savings in the PMU, roads, and ports categories, as well as physical and price contingencies, were transferred to the power components, the scope of which underwent significant changes during Project implementation.

Financial Performance As of 18 November 2003

Component Planned Actual PMU 2,479,631 2,571,000 Roads 20,607,050 21,017,000 Ports 1,190,681 1,172,000 Power 5,522,638 5,040,000 Total 29,800,000 29,800,000

Procurement and Construction

Roads Rehabilitation

The first phase of the road restoration began in June 2000 with the awarding of five contracts tendered using international shopping (IS) procedures. Local interest in participating in this program was greater than had been envisaged and two of the five contracts were awarded to local bidders, two to an international contractor, and one to a joint venture between an international and a local company. It was the intention at appraisal that these contracts would be labor- intensive, thereby generating cash incomes in the rural areas. Some difficulty was experienced in reconciling the need to perform the works in a timely and technically satisfactory manner with the need to generate employment to facilitate economic recovery. It was intended at inception that international contractors be used to undertake all maintenance in a region while at the same time mentoring local contractors in all aspects of implementation. This method assumed that the capacity of the local contracting industry would be minimal and that considerable support would be required. The tender process for the five emergency infrastructure rehabilitation contracts (EIRCs) demonstrated that considerable local interest existed, though capacity was in doubt. The PMU has reviewed the efficiency of international competitive bidding (ICB) maintenance contracts, for which only $2 million each was available. A significant portion of the funds available for each ICB was consumed in contractor’s overheads. It was therefore decided that the budget identified for contract supervisors should be reallocated to regional engineer-trainers, whose role would be to support regional

engineers and maintenance staff from Timor-Leste in developing institutional

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 14 Seventh Progress Report on Timor-Leste

maintenance capacity. The regional offices were used to assist in the supervision of work implemented under small contract packages. The physical works were carried out by a combination of local and international contractors prequalified to undertake works of a value commensurate with their respective capacities. Contractors were invited to prequalify in three categories: (i) up to $50,000, (ii) up to $200,000, and (iii) up to $1 million. A list of prequalified bidders was established and was later adopted by the MTCPW for its own works program. Bids were invited for defined work scopes using contracts of the bill-of-quantity type. A total of 65 such contracts (known as RMRCs) were awarded and implemented between January 2001 and June 2002. It was found that the local contractors were indeed limited in their capacity to execute the contracts in a timely manner and initially did not understand the contract arrangements. This also caused difficulty with the supervision arrangements. The regional offices did not have the capacity to supervise the works; therefore, local and international consultants were engaged to assist. The use of local consultants (working with internationals) contributed significantly to training and capacity building among local consultants. Depot equipment was procured directly by the PMU using international shopping (IS) procedures. Implementation of the community-based maintenance program required considerable input from the new regional engineers and their supervisors. Detailed community consultations were required involving over 400 community groups to assure that the obligations assumed were fully understood.

Port Rehabilitation

Two civil works contracts for the graveling of the eastern container yard, repairs in the east slipway, and completion of the wharf extension were awarded in June 2000. The eastern container yard works were accomplished without problems but the wharf extension work was delayed by problems related to the quality of concrete. The design of the graveling of the eastern hardstand failed to address environmental and safety concerns. A subsequent contract to pave the area was awarded following IS procedures in February 2002 and completed in June 2002. This contract included lighting, firefighting equipment, power outlets for refrigerated containers, and fencing.

Power Rehabilitation

Power rehabilitation was coordinated with the bilaterals. ADB mobilized consultants in October 2000 under TFET to prepare detailed designs for 15 rural district and subdistrict power stations that had been either totally destroyed or severely damaged. Security concerns in border areas delayed the program and caused six other stations to be transferred from the Government of Japan program to the TFET project.

Although the restoration assessment was completed in November 2000, budget

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 15 Emergency Infrastructure Rehabilitation Project, Phase 1

constraints and the sustainability concerns expressed by the UNTAET limited the Project to the restoration of 12 subdistricts and 1 district power station. A contract for the Project was awarded in February 2002. Physical completion of the rural power restoration is expected by December 2003. The original design of the EIRP and the bilaterally funded rural electricity projects focused on generating capacity while excluding transmission and distribution from the restoration efforts. The 20kV distribution system was significantly damaged, and the LV network and consumer connections in particular required the implementation of completely new systems. In April 2002, savings in other project components were reallocated to extend the scope of the rural electrification program to include (i) rehabilitation of the medium- voltage distribution network and implementation of new low-voltage distribution networks and consumer connections, associated with the selected power stations; (ii) rehabilitation of the Gleno district power station; (iii) increase in generating capacity from 50kW to 100kW in Betano; (iv) addition of one 100kW unit in Maubisse; (v) training; (vi) supply of workshop tools; and (vi) supply of distribution transformers, LV distribution panels, and equipment to be used to extend the distribution network. The revision addressed the need to connect generating capacity to consumers to ensure that the power restoration achieves its objectives, particularly that of poverty reduction in the rural sector. The Government requested that the Project provide assistance for the urgent rehabilitation of the Gleno power station, as well as the restoration of power supply to Ermera and Letefoho. The activities undertaken were (i) maintenance of an existing 800kW generator, (ii) supply of a 1x1,250kVA step-up power transformer, (iii) rehabilitation of 20kV lines to Ermera and Letefoho, (iv) rehabilitation of eight distribution substations, and (v) implementation of new LV distribution system and consumer connections. PMU procured goods, materials, equipment, and implementation works and provided overall supervision. Works have been completed as scheduled, and on 19 May 2002, the Gleno power station was inaugurated by ADB President Tadao Chino. The EIRP-1 also provided funds to the United States Support Group for East Timor (USGET) to purchase equipment and spare parts required for emergency repair in Baucau and Oecussi district power stations. In May 2003, the Government requested ADB for an expansion of the rural power sector program adding the savings of the Project of $0.3 million for the rehabilitation of the power stations in Fatululik (1x50kW generating unit) and Fatumean (1x50kW generating unit) and associated distribution systems and consumer connections. In August 2003, the assessment of the various options for the use of savings to expand the existing medium- and low-voltage distribution systems identified Maubisse and Batugade as suitable candidates. The expansions increased the power

supply significantly by doubling the number of consumers connected.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 16 Seventh Progress Report on Timor-Leste

Organization and Management Performance

The PMU began operating as Executing Agency in April 2000 with the support of both international and local staff. In addition to its project administrative functions, the PMU supports the establishment of the road operation within the MTCPW. The Roads Contracting Section of the PMU has been coordinating with the contracting section of the Roads Services Division in MTCPW. On-the-job training by PMU experts for MTCPW staff has also facilitated the successful implementation of contract works funded by the Consolidated Funds for East Timor (CFET). The PMU reviewed each quarter the sector funding requirements, and identified available funding and the emerging financing gaps. The Project also helped with the preparation of a report on the road asset management system. In the power sector, the PMU managed the restoration activities for 16 rural power stations and associated distribution systems. Fourteen of the 16 rural power systems have been restored and are operating and the PMU successfully implemented village- based community management, a key factor in the sustainability of the rural power stations.

Donor Coordination

The PMU has carried out donor coordination on a geographic basis for road restoration activities executed by UNDP-Japan, UNTAET, PKF, and TFET components. Coordination efforts were directed to the following: • overhaul of Comoro power station (Government of Japan); • rehabilitation of 13 rural power stations (Government of Japan); • rehabilitation of four rural power stations (Government of Portugal); • UNTAET’s small works; • Dili–Aileu–Ainaro–Cassa road rehabilitation (Government of Japan); • UNTAET-funded road repair and bridge restoration project; and • port sector interventions for the repair of wharf fenders, supply of navigation aids, and upgrading of the western port area (Government of Japan).

Project Impacts

Socioeconomic Impacts

The EIRP-1 provided employment opportunities at a critical time, and thus assisted in the recovery of the rural areas. Sustainable employment was provided through continued use of communities in routine maintenance tasks. The overall restoration of reliable road access has allowed other reconstruction activities to proceed and helped normalize social conditions. The restoration of power supply in rural areas, the rehabilitation and

implementation of distribution networks, and the rehabilitation and implementation

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 17 Emergency Infrastructure Rehabilitation Project, Phase 1

of consumer connections and their extension to new consumers have significantly contributed to poverty reduction, improvement of the quality of life, and resumption of social services that use electricity such as education and health facilities. The Project, by extending supply to new consumers, also provided long-term socioeconomic benefits.

Environmental Impacts

EIRP-1 has had no negative environmental impact. In roads, the repair of drainage has decreased the possibility of erosion and much work has been done to prevent landslides adjacent to the roads. No land acquisition was required and, consequently, no persons were displaced by the project activities. In the port, the construction of a pavement has eliminated the dust problem in central Dili.

Capacity Building

When the EIRP-1 began, no effective management skills existed in Timor-Leste. The Project provided capacity building services as follows: Roads Sector. The EIRP-1 PMU undertook activities to reestablish capacity in the Government to plan, implement, and maintain road maintenance by implementing the (i) road asset management system, (ii) contractor classification and prequalification, (iii) contractor training, (iv) training of local consultants, and (v) technical assistance. Power Sector. Efforts to build a sustainable power infrastructure and institutional framework have been less successful. The major challenges facing the sector are (i) to manage the transition from a subsidized public service to a truly user- supported power system, (ii) to improve financial sustainability, and (iii) to establish sector management skills and institutions. In January 2002, in view of the failure of the technical assistance funded under the Project to establish a sector institution and a viable financial management system, ADB assisted the Government in preparing a short-term action plan. At the Government’s request to implement the plan and prepare the management contract documentation, the EIRP-1 funded and ADB administered technical assistance to accomplish those tasks. Management contract documentation required careful review, updating, and adjustment to meet the requirements and desire of the Government to attract qualified bidders. The process has been supported by additional ADB technical assistance. The management contract document has been finalized, approved by the Government and by ADB, and tendered. Three proposals from bidders have been received, and technical and financial evaluation has been carried out. Negotiations between the Government and the successful bidders are completed and signature of contract is likely by end-November 2003. Commencement of Management Contract is expected by January 2004. The rural power stations rehabilitation component provided training and

capacity building to 32 local power operators (two for each rural power station) and

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 18 Seventh Progress Report on Timor-Leste

to four operators at the national level. Training for local operators provided basic skills for the operation and ordinary scheduled maintenance program, while the training of national operators will focus on the execution of extraordinary maintenance (major overhaul activities including the dismantling and substitution of engine parts).

Long-Term Sustainability Roads Sector

Extensive follow-up action is required in the roads sector to ensure sustainability. Both physical work and capacity development is incomplete. The EIRP-1 has implemented the required regional depots to be responsible for routine maintenance and has introduced a variety of implementation methods. The local staff who have been trained will require further training and unrelenting motivation. A component for such support is included in EIRP-2. The Project was unable (because of limited funds) to meet the demand for periodic maintenance. Failure to address this requirement in the immediate future poses a significant threat to the sustainability of the network.

Port Sector

The port need further support for the development of its physical infrastructure. This will include the paving of the western container yard. The port is already “off-budget,” with revenues funding recurrent costs. It is therefore expected that port operations will be sustainable in the longer term.

Power Sector

Rural Power Stations. In the villages where rural power stations and distribution networks are being rehabilitated under the EIRP-1, community management committees have been formed to take responsibility for the day-to-day operation and maintenance of the power station. To date, 14 rural power systems are operative (2 district and 12 subdistrict power stations). The 12 subdistrict stations have adopted a community-based structure of management, which has generally allowed them to manage the local electricity supply following the restoration of the power stations, including imposing a tariff structure, collecting fees from consumers, disconnecting nonpaying consumers, ensuring that only legal connections are made to the distribution network, purchasing consumables such as fuel and oil, and successfully operating the power station to an appropriate and reliable schedule. There is evidence that some subdistricts (Bobometo, Baoknana, Betano) found it difficult at times to collect fees, to the extent that they may defer fuel purchases or

reduce the operating times of the generator. Balibo, Batugade, Lequidoe, Maubisse,

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 19 Emergency Infrastructure Rehabilitation Project, Phase 1

and Turiscai are already operating independently, although it is probably premature to regard these as complete successes or those subdistricts still experiencing difficulties with revenue collection as failures. Manelima and Passabe have been operating for less than 3 months and should be regarded as still in a start-up phase, while Bobonaro and Lolotoe have just been put into operation in September 2003. The communities will be supported by a roving maintenance team set up by EDTL for major overhauling (dismantling and substitution of engine parts). The experience with villages where the power station and distribution systems are operative is generally positive. The village-based committee is periodically monitored and assisted by the PMU and the overall performance is satisfactory. An important factor in Project sustainability will be (i) the technical support for major maintenance works to be provided by EDTL, and (ii) the availability of additional funds for extending the distribution systems to increase the number of customers, and thus the benefits and sustainability of power stations through a large customer base and a higher load factor.

Lessons Learned

Lessons learned from the implementation of EIRP-1 include the following: • Flexibility in project design is important in conditions of uncertainty, particularly in the initial, emergency phase when humanitarian and security needs are not predictable. Unknown geological conditions, landslides, road closure, unpredictable weather determined priorities at short notice and could only be addressed through a flexible and responsive process. • Capacity building for local contractors and communities necessarily involves the risk of inexperience and the resulting need to redo work. To diminish this risk a program of training in procurement, work management, and quality control needs to be undertaken. • In an immediate postconflict situation, alternative project implementation actions are necessary in view of the lack of capacity and facilities of the recipient government. Project management assumed considerable executive responsibility, allowing prompt response and successful implementation and supporting donors and the Government in financial planning, coordination, and capacity development. • Affordability of power supply in the rural areas is a continuing issue affecting both short- and long-term sustainability. Community feedback remains positive and indicates awareness of the precarious financial situation presented by such small consumer bases, with local committees asking for

additional connections.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 20 Seventh Progress Report on Timor-Leste

Batugade Power Supply

Electricity has come to Batugade (“big rock”) village in Bobonaro district, and to the villagers, especially the 96 households that are connected, that has been the best news all year. There is now electricity in the village for 5 hours everyday, from 7 pm to 12 midnight. Mr. Tuquero remembers how the power was established in the village by the EIRP-1. Eighty households pay $5 monthly; nine pay the top rate of $10. The village electricity users association agreed to Tuquero’s suggestion to collect for power operation. This small informal group of volunteers under Suares Pereira meets when needed to attend to electricity matters. “Five dollars is just about right,” the villagers say. If they had to pay more, they would hardly have anything left with which to put food on the table. These fishermen and soybean and vegetable farmers earn no more than $4–$5 a day selling their produce on the roadside or in the market. Those with refrigerators make ice and sell it at $0.25 a ½-liter plastic bag for preserving fish. Occasionally households cannot pay on time due to the seasonal nature of income but promise to pay the next month and they usually do. Perhaps the line can be extended to other villages, association member Pedro Dasdores suggests, so more fees can be collected and the power operator can be regularly paid. Tuquero says that up to 1,000 houses can be served and that the line is being extended to Palaka village, 5 km away, where there are about 120 potential users. The association believes that the project is sustainable. With cooperation and support from the villagers, more houses in the village will be

connected soon.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 21 Emergency Infrastructure Rehabilitation Project, Phase 1

Continuing Needs and Investment

General

TFET-funded projects have made a great contribution to restoring essential infrastructure and services in Timor-Leste. However, much remains to be done to continue the rehabilitation of the country and the development of national potential. The main concern for infrastructure management is the inadequate capacity of the Timor-Leste to finance the recurrent costs of operating and maintaining the reinstalled facilities. The conditions of the eight district power stations not covered by donor-funded rehabilitation programs have become acute and power supply disruptions are common. The rehabilitation of these district power stations are included in the Sector Investment Program (SIP) Medium Term Infrastructure Program Priority Investments in the Power Sector.

Roads

Capacity building and human resource development in the sector must continue.

Power

The power sector restoration program is contributing essentially to the quality of life of the poor. In the medium term, the installation of capacity for generation and expansion of the distribution network in the rural areas creates the opportunity for substantially greater poverty reduction benefits. Realization of this potential requires the following: • Assistance to establish efficient management systems and sector planning capacity. • Capacity development for the management and operation of district and subdistrict systems and review of local power management capabilities. • Review of technical needs of eight district power stations (Aileu, Baucau, Los Palos, Maliana, Oecussi, Same, Suai, and Viqueque) and associated distribution systems. The conditions of these eight district power stations not covered by donor-funded rehabilitation programs have become acute and power supply disruptions are common. The rehabilitation of these district power stations included in the Sector Investment Program (SIP) Medium Term Infrastructure Program Priority Investments in the Power Sector. • Review of the technical needs of the two remaining subdistrict rural power stations in Covalima District as well as other rural districts whose rehabilitation is not covered by any other donor program. • Rehabilitation and expansion of the distribution network to boost the sustainability of the power station, increase the number of poor households connected to the system, expand the hours of supply per day, and enhance affordability through

lower unit costs and higher quality of supply.

22 Seventh Progress Report on Timor-Leste

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 23 Emergency Infrastructure Rehabilitation Project, Phase 2

Grant 8198-TIM(TF) Emergency Infrastructure Rehabilitation Project,

Phase 2

○○○○○○○○○○○○○○○○○○○○○

Summary

The EIRP-2 will intensify and extend the EIRP-1 objective of restoring the road network to a condition in which its economic life can be extended effectively through routine maintenance within available recurrent funding levels. For this purpose, it will (i) carry out preventive civil works and periodic maintenance; (ii) provide support for the establishment of a routine maintenance regime; (iii) execute detailed engineering; and (iv) provide training and project management. The Ministry of Transport, Communications and Public Works (MTCPW) is the Executing Agency and the PMU is the Project Implementing Agency reporting to the MTCPW minister. The estimated cost is $9.0 million and the expected completion date is 31 May 2005.

Rationale

The EIRP-2 supports long-term sector development by strengthening the local contracting industry, instituting operational and maintenance systems, and providing capacity building for sector management.

Objective

In light of the forecasted recurrent budgetary constraints of Timor-Leste, the EIRP-2 will focus on stabilizing the road network and leaving it in a condition in which it can be maintained on a relatively modest budget. The objective of EIRP-2 is to support earthworks to minimize annual emergency repairs by reducing the backlog maintenance requirement. It will also continue programs initiated under the EIRP-1 to establish a viable and efficient road maintenance operation in Timor-Leste and support the technical preparation of the maintenance service to carry out routine maintenance using village groups. The EIRP-2 scope includes the following: • preventive civil works and periodic maintenance, • support for the establishment of a routine maintenance regime, • detailed engineering, and

• training and project management.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 24 Seventh Progress Report on Timor-Leste

Estimated Costs

The total cost of the EIRP-2 is $9.0 million. The estimated costs of the components are summarized below.

Cost Estimates and Financing Plan ($)

Description Foreign Cost

Civil Works Backlog and Earth Works 4.02 Slip Rehabilitation 1.35 Routine Maintenance Program 1.35 Subtotal 6.72 Consulting Services Project Management and Training 1.02 Detailed Engineering 0.33 Subtotal 1.35 Contingenciesa Physical Contingency 0.77 Price Contingency 0.16 Subtotal 0.93 Total 9.00

a Physical (10%) and price (2%) contingencies are included.

Procurement

All procurement for the EIRP-2 will follow international and local competitive bidding and international shopping procedures in accordance with ADB’s procurement guidelines. Contractors will be eligible to tender for one or more of the contract packages within their respective bid capacities. ADB approval prior to award will be required for all contracts.

Intended Impact

The road network will be handed over in adequate condition to contribute to economic development and allow its effective maintenance by • establishing a field organization to maintain the road network; • significantly reducing the backlog maintenance requirement; • addressing all landslips to facilitate access; and • employing local labor and developing skills to develop sustainable

employment opportunities in road sector management.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 25 Emergency Infrastructure Rehabilitation Project, Phase 2

Donor Coordination

The PMU will carry out donor coordination on a geographic basis for road restoration activities executed by the Government of Japan, the United Nations Peace-Keeping Force, the European Union, and the Trust Fund for East Timor (TFET) components.

Achievement of Output

The implementation of the EIRP-2 was expected to start in July 2002. However, this was delayed until January 2003. The Project is slightly behind schedule because of delays in the selection of the (i) replacement for the Chief Technical Advisor; and (ii) in the shortlisting and selection of the detailed design engineering consultants, who will provide geotechnical assessment and detailed designs for civil works. The selected consultants are expected to be fielded in December 2003. Assessment of training needs is under way to address capacity building for a routine maintenance program, and for the upgrading of skills needed to assume managerial and technical responsibility for field administration and periodic maintenance, bio- and other engineering techniques, and financial and administrative accountability.

Expenditures

The table below shows project expenditures by category.

Expenditures by Category As of 18 November 2003 ($)

Category Allocated Disbursed

Civil Works 6,720,000 0 Consulting Services 1,350,000 121,000 Unallocated 930,000 0 Imprest Account 600,000 641,000

Total 9,600,000 762,000

Project Impacts

Socioeconomic Impact

The EIRP-2 is a pro-poor growth intervention. An initial social assessment (ISA)

and a poverty assessment have been carried out. Significant positive impact on the

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 26 Seventh Progress Report on Timor-Leste

beneficiary communities is expected. The civil works component is expected to enhance the reliability of road access for communities around the country, including poor and vulnerable communities. The establishment of a community-based road maintenance regime will provide a cost-effective means of ensuring that roads are maintained, and provide a mechanism for fostering sustainable incomes to the rural communities with a strong need for income-generating opportunities. Rural communities in Timor-Leste have a strong structure of rural representation, and village representatives are capable of organizing collective activity, such as road maintenance.

Environmental Impact

An initial environmental examination (IEE) was prepared in accordance with ADB’s Environmental Guidelines for Selected Infrastructure Projects. The IEE indicates that while construction-related environmental impact is unavoidable, this can be mitigated by using appropriate engineering practices. The IEE concludes that the EIRP-2 will result in a net benefit with the costs of mitigation being outweighed by the envisaged benefits.

Capacity Building

Timor-Leste is now a fully independent nation. This situation provides the opportunity to introduce concepts that have evolved from lessons learned through development efforts in Timor-Leste and elsewhere in Asia. The EIRP-2, as a strategically designed sustainable maintenance initiative, will put forward a strategy for the management of the road sector that embodies the principles of equity and justice.

Long-Term Sustainability

The EIRP-2 will focus on restoring the road network and will depend on adequate annual funding.

Continuing Needs and Investment

TFET-funded projects are providing a substantial contribution to restoring crucial infrastructure and services in Timor-Leste. However, much remains to be done to continue the rehabilitation of the country and the development of national potential. A major challenge in infrastructure management is the scarce capacity of the country to finance the recurrent costs of operating and maintaining the reinstalled facilities

including the road network.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 27

Grant 8189-TIM(TF) Water Supply and Sanitation Rehabilitation Project,

Phase II

○○○○○○○○○○○○○○○○○○○○○

Summary

The second TFET-funded Water Supply and Sanitation Rehabilitation Project’s physical components have been substantially completed as of November 2003. With funding of $4.5 million each, WSSRP11 and 2 were among the largest project interventions in the sector and between them benefited an estimated 110,000 citizens of Timor-Leste. Each of the projects addressed urban needs through the Water and Sanitation Services (WSS) and rural needs through a community development approach in partnership with local and international nongovernment organizations (NGOs). A high degree of emphasis was placed on capacity building and institutional development through development of systems, practical experience, and building confidence. Although separate grants, the second was a logical continuation of the first and each contributed to the sectoral goal of ensuring access to water supply and sanitation (WS&S) services essential for public health, environmental protection, and economic growth. Commitment of funds under Phase 2 of the Project is now at 98% with physical completion scheduled on 30 November 2003. The major project activity was the implementation of priority WS&S projects in Dili, district centers, and in rural communities. Work in Dili was primarily to complement the Government of Japan- funded headworks rehabilitation by addressing needs in the distribution system. Works implemented under the District Towns (Public) Water Supply and Sanitation Rehabilitation Project (WSSRP2) included rehabilitation of part of the transmission mains for Viqueque and from Beremau stream in Maliana; construction of new intake, transmission main, reservoir, and distribution mains in Lauhata (Liquica); construction of new transmission main and installation of new submersible pump in Suai; in Oecussi, construction of a new bore and installation of new transmission main, reservoir, and distribution mains; and construction of intake improvement works and installation of new reservoirs for Gleno and Maliana. In undertaking planned sector development activities, the Project assisted WSS to strengthen its capacity through the consultative processes involved in the preparation, implementation, and review of the WSS input into the National Development Plan; the preparation of a 5-Year Sector Development Plan; development of an Infrastructure Asset Management System; revision and distribution of Community Water Supply and Sanitation Guidelines; updating the Dili Water Supply Master Plan;

1 The WSSRP1 was completed on June 2001.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 28 Seventh Progress Report on Timor-Leste

and preparation of an Urban Wastewater and Drainage Strategic Plan. Detailed design and documentation was provided for a number of infrastructure rehabilitation schemes that may be funded from the Consolidated Funds for East Timor (CFET) or future donor assistance. Support was provided in an attempt to reintroduce water user billing charges along with drafting and promulgation of enabling legislation. The Community Water Supply and Sanitation Rehabilitation and Improvement component focused on rehabilitation and improvement of peri-urban, subdistrict, and rural WS&S using community participatory approaches to promote project sustainability through community ownership, operation and maintenance. The participatory development activities were intended to equip communities with the skills to make them more self-sufficient and self-reliant. Implementation, by local and international NGOs, featured integration with hygiene promotion programs and an emphasis on gender equity and minimizing environmental impacts.

Background

Rationale of the Project

The political upheaval and economic and social disruptions that followed the August 1999 vote for independence caused extensive damage to WS&S facilities while the Indonesian withdrawal led to the collapse of sectoral institutions. The Project addressed these issues by undertaking physical repair and rehabilitation, and supporting establishment of new institutions and systems for managing, operating, maintaining and further developing appropriate and sustainable urban and rural WS&S systems throughout Timor-Leste.

Project Objective and Outputs Intended

The Project’s overall strategic objective was to provide the people of Timor- Leste with sustainable WS&S services using appropriate technology and good management systems. The Project aimed to provide assistance to rehabilitate and restore damaged and inadequate WS&S infrastructure, and at the same time, reestablish the human and institutional capacity needed to manage, operate, and maintain the infrastructure. The major project output was implementation of priority WS&S projects in Dili, district centers and in rural communities. Work in Dili was primarily to complement the Government of Japan-funded headworks rehabilitation by addressing needs in the distribution system. Works implemented in the district towns included rehabilitation of headworks, transmission mains, and distribution mains in various towns. Rehabilitation and improvement of peri-urban, subdistrict and rural WS&S systems were undertaken using community participatory approaches intended to promote

project sustainability through community ownership, operation and maintenance.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 29 Water Supply and Sanitation Rehabilitation Project, Phase 2

Implementation of priority improvements to urban sanitation has been undertaken to improve the operation of the central Dili drainage system. As well as an extensive staff training program, the Project assisted WSS to strengthen its capacity while undertaking planned sector development activities. The Project has three components, each being subject to such modifications as the Government and ADB may from time to time agree:

Component 1. Water Supply and Sanitation Implementation Program (93% complete)

This Component had the following five parts: 1. WS&S Quick Response Facility – Provision of services and resources sufficient to respond rapidly to urgent WS&S repair and rehabilitation needs across Timor-Leste; 2. Dili Water Supply Rehabilitation and Improvement – Provision of civil works, materials and equipment for priority rehabilitation and improvement activities for the Dili water supply system, such activities to complement the improvement being undertaken under the Japan-funded Dili Water Supply and Sanitation Rehabilitation Design and Construction Project and the planned Dili Distribution System Rehabilitation and Improvement Project; 3. District Towns (Public) Water Supply Repair and Rehabilitation Program – Procurement of equipment and civil works for priority WS&S rehabilitation and improvement focusing on District capitals and WSS priority works; 4. Community Water Supply and Sanitation Rehabilitation and Improvement – Assist with the rehabilitation and improvement of community-managed WS&S systems through: supporting other donor programs by extending their scope or geographic coverage; engaging NGOs on contracts to undertake further implementation activities in priority areas within Districts where they are currently active; and support to the WS&S sector coordination activities of WSS; and 5. Urban Sanitation Improvement – Assist with key urban sanitation initiatives, particularly for Dili, to include investments in solid waste collection, septic tank desludging and septage treatment. Proposals were developed to encourage the involvement of private sector resources in the provision of these services. Rehabilitation of drainage systems should be focused on drain cleaning, structural repair, and asset mapping of priority drainage systems.

Component 2. Capacity Building and Institutional Development (97% complete)

Component 2 provided training and other assistance in priority areas, assisted in key policy development initiatives, and generally strengthened the capacity of WSS to coordinate overall development assistance for the sector. In particular, this

component included the following:

30 Seventh Progress Report on Timor-Leste

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 31 Water Supply and Sanitation Rehabilitation Project, Phase 2

1. Organizational Development Technical Assistance, in particular, training programs for WSS staff in identified priority areas; 2. Capacity Building Technical Assistance – Provision of technical assistance to WSS covering policy development, human resource development, and institutional support, and 3. IT and Communications Equipment – Upgrading of essential computer and communication systems.

Component 3. Project Management Unit (94% complete)

This Component extended the operation of the Project Management Unit established under Phase I to implement the Project.

Costs, and Implementing and Executing Arrangements

The TFET budget allocation was $4.5 million for each phase of the Project. A Project Management Unit was established within WSS to assist with program implementation and to plan for future development of the WS&S sector.

Impacts Intended

The impacts of the Project included providing improved access to WS&S to enhance the quality of life for an estimated 110,000 people in both urban and rural areas whose attempts to improve their status and health are continually impeded by the need to divert time, energy, and financial resources to satisfy their daily water needs. The Project also helped to create a stable social and economic environment by employing local labor.

Actual Expenditures As of 15 November 2003 ($)

Planned Commitments Disbursements Water Supply 2,775,000 3,229,000 2,627,000 Capacity Building 585,000 562,000 442,000 Project Management Unit 486,000 659,000 519,000 Unallocated 654,000 0 0 Imprest Account 0 0 912,000

Totals 4,500,000 4,450,000 4,500,000

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 32 Seventh Progress Report on Timor-Leste

Implementation Performance

In the absence of sufficient government capacity and resources, the Project implemented a community development approach to improve and maintain rural WS&S. The model is effectively a test application of the anticipated method of addressing infrastructure needs likely to be implemented post-project and was based on partnerships between communities and NGOs to develop, operate, and maintain facilities while the Water and Sanitation Service (WSS) provides support in planning, donor coordination, establishment of technical standards and guidelines, and monitoring and evaluation. Communities provided labor while the Project funded development materials and equipment and capacity building. Water user groups were established and received training on financial management for sustainable operation and maintenance. Use of NGOs has proven crucial to implementation success due to their local experience and knowledge of social, cultural and physical conditions, integration of participatory approaches in

physical rehabilitation activities, and through capacity building.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 33 Water Supply and Sanitation Rehabilitation Project, Phase 2

Nine implementation contracts were awarded to local NGOs and six contracts to international NGOs with a total value of $405,572. These contracts improved WS&S services for an estimated 21,200 beneficiaries at an average cost of $234 per household or $35 per person. Materials to the value of $343,855 were procured to support the contracted commitments. The Project endeavored to ensure access to WS&S services to improve public health and enhance the quality of life of people in both urban and rural areas. A very poor standard of environmental amenity posing significant risks to health exists in all urban areas of East Timor. The situation is worse in Dili due to high urban development density, lack of maintenance on the urban drainage system, low levels of solid waste collection and poor or nonexistent on-site sanitation facilities. In district towns the risks are more related to the lack of adequate toilet and bathing facilities, and environmental health practices, than from the gross deterioration of the urban environment. The Project has gone some way toward addressing these issues through development of a comprehensive Urban Drainage and Wastewater Strategy involving WSS, communities, and other key stakeholders. Crucial aspects of the strategy include building the capacity of WSS in urban sanitation generally (wastewater, solid waste and drainage) and an integrated approach to improve service delivery simultaneously in all three subsectors. The strategy realistically recognizes the constraints of WSS and communities and will require support from donors for capital investment and capacity building. On the physical side contracts were let to improve the operation of the drainage system serving the older and more developed section of Dili. One contract comprised cleaning of approximately 700 road inlet pits and repair of approximately 500 road inlet pits. A second contract included clearing of approximately 20 kilometers of open channels or piped drains to remove accumulated sediment and solid waste from several years of neglected maintenance as well as some structural repair work to drains. Extensive field survey work was required to assess the condition of Dili’s drainage assets in advance of the repair works. Despite considerable effort in engaging the community, the issue of growing vegetables in the accumulated sediment in certain drains was not able to be resolved and these particular drains were not cleaned.

Project Impacts

Socioeconomic Impacts

The operation and management of community-managed piped water systems for small communities require consideration of all social, cultural, technical and financial issues. To support the sustainability of these operations the Project developed Community Water Supply guidelines and standards covering quality and level of service, and processes for involving the beneficiaries in the decision-making process

and in operation and management.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 34 Seventh Progress Report on Timor-Leste

Communities were guided and facilitated to form community-accepted water user committees that were representative of the entire community using the water supply system. All efforts were made to have a reasonable and equitable representation of women and poorer/disadvantaged community members. In the absence of specific studies empirical evidence suggests that women were in fact well represented on water user committees and in maintenance activities. One aspect of this increase in women’s participation in the community management process is the change in Timorese traditional systems with women gaining new skills and responsibilities largely as a result of the social disruption caused by the long-term struggle for independence. Another is thought to be the significant number of female facilitators and substantial gender expertise in the NGO teams that implement the projects in the communities.

Environmental Impacts

Any construction project will affect the environment to some extent. Impacts as a result of implementing this project have been minimized because most of the pipeline works have been installed within existing rights-of-way. The buildings renovated for district WSS offices were former Government of Indonesia buildings that had been burnt and vandalized. Some new sites or additional land at existing sites were acquired for boreholes, storage reservoirs, and water treatment plants. Wherever possible public land was selected in preference to private land but in all cases a community consultation process was undertaken prior the selection of any new sites. Compensation was paid to affected landowners. No resettlement was required for any project. As most of the works are of relatively small scale and are located in already disturbed areas there has not been significant or lasting impact on the physical or biological environment. Construction works were comparatively minor and as such are transient environmental disturbances of short duration. Any materials removed from drains in Dili were dried on site and disposed of at the Tibar landfill site. On the positive side the poor environmental conditions that endangered residents in some urban areas through pervasive waterborne diseases and lack of sanitation

were addressed through water, sanitation and drainage works in project towns.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 35 Water Supply and Sanitation Rehabilitation Project, Phase 2

Tibar Water Supply System

In Tibar, a village of about 420 households in Liquiça district, 10 kilometers (km) away from Dili, 100 households use the water facilities handed over to the community in January 2003. Only half of them pay for the water. The other families do not understand how the system works and think the water comes free. Before the project, says Berehunu, a native of Tibar, water was indeed free. In fact the people of this village used to live near a water source until 1975, when they were made to move to the hinterlands for better control. The younger people in the village only remember having to walk about 15 km a day behind pushcarts loaded with empty pails and lining up for an hour to get water. Then ProBem, a local NGO, entered into partnership with the government and installed the water supply system, with the participation of the community. Now the households use eight public tanks a mere 100 meters away. It is good to have water closer to their houses, says kepala desa (village chief) Domingo da Silva Fatima, but during the dry season not enough water flows to the tanks. About 50 households each pay $0.50–$1 a month, depending on their capacity to pay. These are the households that helped build the system. Anything more is beyond their means. They grow vegetables, clean coffee beans, work as drivers, weave palmetto branches into wall panels, and raise pigs and other small livestock, which they can sell to pay for the schooling of their children. The money they pay goes into a fund for system repairs. But this money will not cover replacement pipes. Da Silva Fatima suggests finding another source close to the present one to supple- ment the supply. If more water becomes available, then perhaps, he says, more users can

be found who can help pay for repairs.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 36 Seventh Progress Report on Timor-Leste

Impacts on Capacity Building (Individual and Institutional) and Policy

TFET has provided specific support in a number of areas to train and develop WSS, WSS-PMU, and NGO staff in knowledge, skills, and abilities to enable them to contribute productively to sustain activities in the sector. Specific areas of human resources development addressed have included the following. • Funded the preparation by specialist consultants and delivery to WSS technical staff of a training program on the use of EPANET 2 (computer modeling of hydraulic behavior within a pressurized pipe network). • On-the-job AutoCAD training for four East Timorese technical officers from national NGOs while preparing new standard drawings for the revised community water supply guidelines. • Airfares for three senior WSS officers to attend the National Water Technology Training Institute, Bangkok. • Funding for two senior WSS officers to attend the Australian Water Association/Mt Eliza Business School “Pricing and Asset Management” Master Class; for two senior WSS officers to attend the Sustainability of Water Resources Conference at Perth’s Murdoch University; and for two WSS local

Aileu Water Supply System

Antonia Sarmento Faria goes to the public tank 10 meters away from her house and turns on the tap. As the water gushes out, she flashes a grin and runs her hand through the water. Her delight is clear and understandable. Her village now has its own water supply system, for the first time ever. Before February 2003, when the system was turned over to three villages in Aileu subdistrict, about 50 kilometers from Dili, Antonia and members of the 370 or so other households in Aileu used to walk long hours to various water sources to collect water. They would wait for their turn, fill their pails, and load them onto pushcarts for the long walk back. And the water, if it came from wells, was salty and not fit for drinking. The first Water Supply and Rehabilitation Project built the system with community participation. The villagers were taught how to run and manage the project on their own. Then the system was turned over fully to them. Jose Mozino from Sarin, one of the three villages served by the water system, is pleased. “Life is easier now that the water has been brought nearer,” he says. There is water most of the time, for drinking, bathing, cooking, and washing clothes. Not having to fetch water from a distance frees up time for more productive work. And with two public tanks and 20 public taps serving the villages, there is very little chance of overcrowding. The spirit of cooperation and self-help is strong, villagers say that if the system should

need repair, they will pool their resources to pay for it.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 37 Water Supply and Sanitation Rehabilitation Project, Phase 2

staff to attend the International Water Association 3rd International Congress & Exhibition in Melbourne. • Formal in-house training for WSS-PMU staff in English language, and in bookkeeping principles and in the RDTL accounting package “Free-balance”.

WSS and the local NGOs require considerable institutional capacity building for the significant investment in infrastructure to be sustainable and effective. Capacity building of relevant institutions has been delivered through an integrated approach comprising a number of approaches. To the extent possible all infrastructure delivery activities undertaken by the Project have been used to train staff (of WSS, local NGOs, contractors) and to develop capacity to operate and maintain the assets. The Project community participation model for facilitating community based WS&S system provides local NGOs and WSS with opportunities to develop community participatory skills. However, the main focus has been on strengthening of government institutions: These capacity building opportunities included the following. The Project assisted WSS to strengthen its capacity through the consultative processes involved in the preparation, implementation, and review of the WSS input into the National Development Plan; the preparation of a 5-Year Sector Development Plan; reintroduction of water user billing charges along with drafting and promulgation of enabling legislation; development of Water Resources legislation and Sanitation Management legislation; development and implementation of an Infrastructure Asset Management System; revision and distribution of Community Water Supply and Sanitation Guidelines; updating the Dili Water Supply Master Plan and preparation of an Urban Wastewater and Drainage Strategy.

Overall Contribution to the Economy

Sustainability of the Investment in the Long Term

The Project has generated employment through local labor, thus helping to create a stable social and economic environment. The Project directly employed 7 local full-time staff and as many as 20 short-term local staff have been engaged for administrative, drafting, and contract supervision activities. In addition, international contractors and international NGOs are required to partner with local companies and local NGOs where available and appropriate. It is estimated that the Project generated 5,800 person-days of direct local employment to date and 65,000 person-days of indirect local employment through contracted activities. To ensure the continued operation, maintenance, and effective use of the facilities to be provided by this Project, technical solutions have been selected that consider the needs, preferences, expectations, and capabilities of the end users as

well as facilitating the intimate involvement of key WSS officers in all phases of the

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 38 Seventh Progress Report on Timor-Leste

Project to promote the retention of knowledge and experience of project activities and build capacity within the organization. Systems have been kept as simple as possible while still matching the demands so that operation and maintenance would be possible by local staff. Where possible, diesel-driven pumpsets were specified in preference to more sophisticated electrically powered sets that require an additional diesel-powered generator to provide for reliable operation. In some cases pump sets complete with engines were duplicated so that if problems arise with either the engine or the pump, the entire set can easily be replaced without significant delays. Stocks of commonly used spare parts and consumable items were procured with the initial purchase to ensure continued operation in the future.

Lessons Learned

(i) In hindsight, due to the difficulties experienced with some contractors having insufficient operating capital, it is recommended that future projects of this nature insist on applicants hoping to gain prequalification as either a Class A or B Contractor to provide relevant audited balance sheets. (ii) Future projects should provide more support for local capacity building, especially local service providers. (iii) Future projects must ensure that international advisers pay more attention toward training and strengthening the understanding of sector and project priorities and plans and should inculcate ownership of these policies and strategies. (iv) A focus on cost recovery from service users is required to meet Government expectations and to increase sustainability. (v) Substantial capacity building assistance is required to increase its awareness on the need for user charges for longer term sustainability service levels and to re-introduce user charges. The capability of WSS needs to be upgraded to improve its services and to minimize leakage and maintenance costs and improve water quality. (vi) Substantial sector investment is still required to improve WS&S service levels and coverage to that required to achieve improved community and individual health, ensure human dignity, and protect the environment. (vii) External sector investment requires centralized project coordination and monitoring. (viii) Future project design should aim for achievable and sustainable outcomes that are responsive to local needs. The project design must be flexible enough to allow changes during implementation. Future preparation of Project activities should consider recurrent costs, user willingness and capacity to pay, and include detailed operating and maintenance systems, and an estimate of return on capital investment. Water user surveys should be undertaken to determine the

willingness and ability of potential users to pay.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 39 Water Supply and Sanitation Rehabilitation Project, Phase 2

Continuing Needs and Investment

It is clear that there is a need for substantial ongoing external assistance to the sector in the medium and longer term. The needs include both physical works and capacity building in the broadest sense, for the WSS as an institution, WSS staff, as well as local implementing agencies (NGOs, contractors), and communities. ADB supported the Government’s Sector Investment Programming (SIP) exercises and provided a resource. Under the guidance and direction of the Timor- Leste Government, the following medium-term programs were proposed for the WS&S sector. (i) Improving rural access; (ii) Improving urban water supply; (iii) Improving urban water sanitation; (iv) Improving sector policy, planning and regulation; (v) Introduction of water user charges; and

(vi) Undertaking cross-sectoral programs.

40 Seventh Progress Report on Timor-Leste

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 41

Grant 8190-TIM(TF)

Hera Port Fisheries Facilities Rehabilitation Project

○○○○○○○○○○○○○○○○○○○○○

Summary

In June 2001, the World Bank informed ADB’s Special Office in Timor-Leste that $1 million from the Second Agriculture Rehabilitation Program (ARP II) had been set aside for the rehabilitation of Hera fishing port, located around 16 kilometers east of Dili. ADB was requested to execute this particular Project given its experience in fisheries projects in small countries in the Pacific region. A fact-finding mission took place on 10-23 July 2001 and on 17 October 2001 the Project was approved and was subsequently declared effective on 27 October 2001. Due to limited capacity within the Fisheries Division, the procurement officer from ARP II was included in the Project Management Unit (PMU). Tender documents were issued to the shortlisted firms in December 2001, and after additional information and clarification regarding the concept of design and build were provided to shortlisted firms, the deadline for submission of proposals was extended until end-March 2002. An ADB consultant in Manila undertook a special evaluation of the technical proposals and the contract was awarded to Wakachiku Construction Co., a Japanese firm. The Contract was finally signed in August 2002 and work began in September 2002. All these procedures delayed the commencement by nearly 12 months and the monsoon season 2001–2002 saw further erosion of the breakwater core material and subsequent erosion/damage to the revetment wall west of the breakwaters. After mobilization, work progressed fast on all breakwaters, face-walls of the harbor basin, adjacent aprons, dredging, fencing of the perimeter, installation of navigation aids, revetment walls, and construction of storage and working area. An additional $77,000 was allocated from the Consolidated Fund for East Timor (CFET) money to cover the installation and construction of navigation lights, as well as water storage tanks and fuel pipes. The Project was completed in August 2003, and the facilities are fully operational.

Background

Rationale of the Project

The inshore marine resources of Timor-Leste are limited and vulnerable to overfishing, while the offshore resources of smaller pelagic species are fast growing and in robust abundance. To catch such species of sardines and smaller mackerels,

larger fishing boats are needed and hence the need for a dedicated fishing harbor.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 42 Seventh Progress Report on Timor-Leste

Project Objective and Intended Outputs

The Project’s overall objective is to contribute to sustained food security of marine protein for the people of Timor-Leste. The scope of the Project was relatively modest comprising (i) rehabilitation and strengthening of three individual breakwaters totaling approximately 140 meters (m) in length, (ii) rehabilitation of the wharf faces of the harbor basin totaling approximately 400 m, (iii) dredging of the harbor basin, (iv) pavement of the aprons and side areas of the harbor basin, and (v) general leveling of surface. The Project emphasized as much use of local labor, local purchase of materials, and lease and hire of equipment from people of Timor-Leste as possible. Furthermore, the Project incorporated training of Timor-Leste people at all levels in harbor construction to ensure sustainability with maintenance tasks.

Costs and Implementing and Executing Arrangements

Total costs for civil works, goods and related services, and supervisory consultancy services were estimated at $766,000 and contingencies at $132,000. The Ministry of Agriculture, Forestry and Fisheries was the executing agency, and the PMU within the Division of Agriculture Affairs oversaw the implementation of the Project. Weekly site meetings were held between the contractor, the supervisory engineer, ADB representatives from its Timor-Leste office, and the Department of Fisheries.

Intended Impacts

The intended impact of the Project is increased landings of smaller, fast-growing, and therefore affordable fish for the poorer strata of the population and at the same time ease the fishing pressure on the inshore resources, which are vital for most subsistence fishers’ livelihood.

Implementation Performance

Achievement of Outputs

After the initial delay because of the unfamiliarity of domestic contractors with the design-and-build concept, all planned outputs were completed in August 2003. Additional work as such as navigation aids, fuel pipes, storage tanks, fencing, and working shed were also completed using savings in construction costs and additional

funds from the Government’s CFET funds.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 43 Hera Port Fisheries Facilities Rehabilitation Project

Costs

The civil works was contracted at a price of $733,933. The original quantities of scope of work have all been within the contract amount. However, the delayed project implementation caused further erosion of some harbor structures, and additional and/or improved civil works necessitated three variations to the original contract. The extra amounts were taken from the contingencies. The final completion cost was $0.9 million.

Procurement and Construction

Some delay in the work program was encountered as a result of the Project’s deliberate effort to employ and engage as many local people to participate in the construction as possible. Before commencement of work, the chiefs of the surrounding villages were consulted on how best to engage the local people and at the same time provide some training in construction techniques, placement of armor-rock for breakwaters, etc. To provide wider local employment opportunities, the solution agreed upon was the mobilization of a new group of people every 5 weeks. This solution was probably the most socially just but it also created two unforeseen problems: (i) the contractor had to train new people every 5 weeks and naturally incurred delays in the process; and (ii) on a couple of occasions the workers were extremely reluctant to be laid off after 5 weeks. In the interest of spreading the work benefits as wide as possible, ADB did not want to change the solution agreed upon.

Organization and Management Performance

A supervisory engineering firm was awarded a contract to oversee the project implementation. Weekly site visits were held and all issues were discussed up front and rectified where possible. The supervisory engineer also played an important role in evaluating the cost of the additional work to be undertaken and for which variations were issued. Detailed report of site visits were sent every week to ADB.

Project Impacts

Socioeconomic Impacts

The impact from the construction of the harbor itself is difficult to quantify at this stage because the intended impact of the Project hinges upon the resumption of the fishery for smaller pelagic fish species and resulting affordability of fish protein for the people of Timor-Leste. However, the economic benefits to the people who were engaged directly as

laborers as well as the Timor-Leste private sector that was contracted to supply all

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 44 Seventh Progress Report on Timor-Leste

aggregates, core material and armor rock, have been substantial. More than 800 local people benefitted from the Project, and the local private sector was involved in supply of goods and services.

Environmental Impacts

As the Project was a rehabilitation project, no adverse environmental issues were associated with the actual harbor structures. During implementation, prudent steps were taken to minimize noise and dust, and accidentally spilled aggregates on public roads by the project-hired lorries were on every account cleaned up. Dredged material from the harbor basin was used as landfill within the harbor perimeter and subsequently graded and compacted, thus increasing the useable area of the harbor. The longer-term environmental impact of the Project is to ease the fishing pressure on inshore resources and also achieve a sustainable fishery for offshore smaller pelagic fish resources.

Impacts on Capacity Building

The many unskilled workers employed by the Project received useful training in the special requirements for marine structures construction. This should ensure a certain level of sustainability for the maintenance work of the harbor in the future. Also the operators of machines involved to place the heavy armor rock as the outer protection on the breakwaters should ensure that skills have been developed for future projects or maintenance involving coastal erosion or harbor development.

Overall Contribution to the Economy

Hera port itself is expected to facilitate the development of the offshore fishing, which over a period of 5 years would result in an incremental catch of 1,360 tons as compared to the without-project scenario. The with-project situation will result in an increased intake of fish protein from 8% to 56% of the FAO-recommended per capita daily consumption of fish as compared with an increase from 8% to 28% in the without- project situation. The economic internal rate of return is calculated at 87%, under the assumption that the Government will promote the development of traditional offshore

fishing vessels.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 45 Hera Port Fisheries Facilities Rehabilitation Project

The Future

Experience from other countries has clearly shown that the Government’s role in fisheries should be regulatory but at the same time it should provide the necessary infrastructure for the best result of a private sector-led industry. Hera port has virtually all the necessary facilities, e.g., ice plant, workshops, repair facilities, boat yard, fuel, water etc. to support a commercial fishery and all are obvious entities to be run by the private sector. The next step for the Government is to promote fishery development especially smaller pelagic fish species using simple local technology. The perilous state of the majority of the world’s fisheries is a direct result of well-meant but ill-conceived fishery strategy. Timor-Leste would be well advised to encourage additional vessels of the Lorosae-type, which not only is known in the country, can be repaired and even be built with sufficient economic efficiency, but also will generate maximum employment. It would also be the time now to consider the introduction of a rights-based fishery, which, appropriately managed, would ensure the sustainability of the offshore fishery and create the maximum economic return to the economy. In nearly all other countries in the world, a rights-based fishery regime is being introduced as a last desperate attempt to halt further decline in their fisheries. Timor-Leste has a unique opportunity to avoid the dire consequences of a mismanaged fishery. Except for possible small credit facilities to promote the particular offshore fisheries, there is at present no need for further investment by the Government in the sector. Once Timor-Leste achieves an enabling, but well-managed business environment for its fisheries, the domestic private sector should be very able to invest in fisheries themselves. It is imperative that a supporting Fisheries Act and associated Regulations be

given top priority to protect Timor-Leste’s valuable resources.

Grant 8186-TIM(TF)

Microfinance Development Project

○○○○○○○○○○○○○○○○○○○○○

Summary

The Microfinance Development Project helped to establish a sustainable microfinance institution designed and suited to the conditions in Timor-Leste, the Instituição de Microfinanças de Timor-Leste (IMTL). Its objective is to respond to the needs of the rural poor, particularly women, capable of supporting job creation and contribute to the reduction of poverty. In the interim, IMTL is owned by the Foundation for Poverty Reduction in Timor-Leste (FPRTL), and governed by its own Board of Directors. Its future strategic directions including lending policies are the responsibility of the foundation trustees and the Board of Directors. IMTL is presently a wholly regulated non-bank finance institution and is under the direct supervision of the Banking and Payments Authority (BPA). It hopes to acquire a banking license and evolve in the near future into a licensed domestic bank in Timor-Leste. To date, IMTL has established 3 branches and a head office. Further branches are envisaged over the medium term. Since May 2002 until to date, some 4,974 borrowers have availed themselves of microcredits totaling $1,344,610 cumulatively, while 5,206 depositors have opened savings accounts with an outstanding amount of $926,788. The past due ratio is 4.28% while its consolidated repayment rate is hovering around 90%. The ratios are still within safe levels, but performance of the microfinance institution is expected to improve further over the next few months.

Rehabilitation of Credit Unions

In connection with credit unions (CUs), the Project’s main focus now is on local capacity building of IMTL staff in implementing a credit scheme for CUs in districts where IMTL operates, and promotes direct transactions with the CUs for future expansion of microfinance in Timor-Leste as envisaged in the original project design. The Project has been successful in establishing the needed policy and legal framework, basic financial infrastructure, such as the IT system, and training necessary for microfinance development in Timor-Leste. It is essential to appreciate the complex challenges faced by the Project in the initial stages of establishing IMTL. Establishing and operating a viable microfinance institution in a new nation like Timor-Leste takes time. A microfinance divestment specialist was fielded in mid-November 2003 to review

IMTL progress and possibility of transformation.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 48 Seventh Progress Report on Timor-Leste

Background

The main objective of the Project is to help reduce poverty. Its main purpose is to facilitate community-based opportunities for income generation and sustainable employment. The three major components of the Project are (i) institutional building and strengthening, (ii) rural finance for micro-enterprise, and (iii) project management. ADB provided an associated advisory technical assistance (TA) for $250,000 to help the United Nations Transitional Authority in East Timor (UNTAET) develop a policy and legal framework for microfinance operations. The TA was approved on 6 December 2000 and is now completed. In addition, ADB also approved another TA in October 2001 for $150,000, part of which is to support the installation and adoption of the UN/FAO-GTZ microbanking system (MBWin) as the core microfinance and banking software for IMTL operations. This part of the second TA was completed in September 2003. The TAs provided support in reviewing existing microfinance policies and in preparing the required management information system (MIS) to benefit IMTL’s financial management and in installing and customizing the MIS in relation to the microbanking system. The consultants for the first TA that led to the development of policy and legal framework prepared (i) policies for the establishment of a microfinance bank including bylaws for incorporation, ownership, licensing, minimum capital requirements, etc.; (ii) the creation of a foundation (to act as the initial owner of the microfinance bank or institution);1 (iii) broad policy and regulations for effective microfinance operations; and (iv) draft regulations for CU operations. As a result of the first TA, FPRTL and IMTL2 were approved with the promulgation of two executive orders3 in December 2001. FPRTL’s was established in the first week of December 2001, and the Board of Directors of IMTL was organized in early 2002. The BPA issued a preliminary operating license on 22 May 2002. The TA has been instrumental for the successful establishment of a microfinance operational system and necessary policy and legal framework in Timor-Leste. IMTL established a head office on 13 May 2002, and now has three branches. The Dili branch was launched in May 2002, Gleno in September 2002, and Maliana in November 2002. Due to the 4 December 2002 riots, the Dili branch was badly damaged. The damage did not affect its core operations, however, and no great losses to its database and financial records as it has a well-maintained computerized back-up system. The operation was resumed within a week after the riots despite the ransacking

1 UNTAET/East Timor Public Administration (then the Government of East Timor prior to independence) or any recipient of the grant could not own a bank or finance institution due to prohibitions under the UN Charter. 2 This is the official name of the microfinance institution to be established under the grant in accordance with the objectives of the Project (para. 2 of the Aide Memoire). 3 Executive Orders Nos. 2001/7 and 2001/8 were issued on 1 December 2001 by the Office of the

UN Special Representative of the Secretary General, the late Sergio Viera de Mello..

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 49 Microfinance Development Project

and burning of the hard file records, computers and office equipment, furniture, supplies, and stocks and inventories of business forms. Furthermore, there was no bank run. As per the license issued by the BPA, IMTL is now authorized to: (i) receive deposits in the form of demand, time, and other types of deposits in US dollars; (ii) extend credits with a 65% minimum of portfolio for microcredits; (iii) provide payment and collection services; (iv) issue and administer current accounts/checks; and (v) provide safekeeping services for valuables.

With the authority to engage in demand deposit account transactions, IMTL has created a settlement account with the BPA and is a member of the Timor-Leste interbank clearing system.

Implementation Performance

Table 1: Implementation Progress and Projection (All figures are cumulative unless otherwise stated)

30 Jun 31 Dec 31 Mar 30 Jun 30 Sept 31 Dec 2002 2002 2003 2003 2003 2003

No. of IMTL offices opened Planned 3 3 3 4 5 5 Actual 2.a 5.b 55 5 5 No. of IMTL staff hired Planned 20 35 40 50 60 70 Actual 14 26 26 28 30 30 Amount of savings/ Planned 100,000 300,000 400,000 500,000 600,000 700,000 deposits generated ($) Actual 58,600 385,160 622,000 957,655 926,788 950,000 No. of savers/depositors Planned 300 1,000 1,500 2,300 3,000 3,800 Actual 167 1,990 2,800 4,020 5,200 5,300 Amount of loans disbursed Planned 50,000 150,000 300,000 600,000 900,000 1,200,000 ($) Actual 12,200.c 104,800 410,000 747,195 1,344,600 1,400,000 No. of individual borrowers Planned 200 500 1,100 1,800 3,000 4,500 Actual 150 900 2,340 3,380 5,000 5,100 Repayment rate (%) Planned 100 92 87 85 80 80 Actual n.a. 97.4 98 96 89 91

a Included here is the Dili IMTL branch, and the Head Office (HO) operation. b Included here is the setting-up of the temporary Dili branch and HO after the destruction of the Dili branch, HO and Project Management Unit office in Comoro, Dili. c IMTL started operations only on 20 May 2002.

Note: Figures in red are forecast for 31 December 2003.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 50 Seventh Progress Report on Timor-Leste

Table 1: Implementation Progress and Projection (continued) (All figures are cumulative, unless otherwise stated)

30 Jun 31 Dec 31 Mar 30 Jun 30 Sept 31 Dec 2002 2002 2003 2003 2003 2003

No. of CU members saving Planned 1,700 3,000 6,000 9,000 12,000 15,000 Actual 1,786 n.a.d n.a. n.a. n.a. Amount of CU members’ Planned 90,000 110,000 120,000 140,000 160,000 200,000 savings ($) Actual 119,672 n.a.e n.a. n.a. n.a. No. of CU members Planned 1,000 2,000 3,000 5,000 7,000 10,000 borrowing Actual 731 n.a. n.a. n.a. n.a. Amount of CU members’ Planned 120,000 180,000 210,000 250,000 300,000 350,000 loans ($) Actual 108,388 n.a. n.a. n.a. n.a. Amount of funds lent to Planned 20,000 30,000 30,000 50,000 50,000 80,000 CUs ($) Actual 0 0 0 0 0 Repayment rate of CUs Planned 100% 100% 100% 100% 100% 100% to IMFTL Actual n.b. n.b. n.b.f n.b. n.b. No. of CU/CU related Planned 12 20 24 30 35 40 training conducted Actual 9 16 20 – – No. of MFIET/ IMFTL training Planned 7 12 16 20 25 30 conducted Actual 8 14 18 23 24 Training/Operating manuals Planned 7 8 10 10 12 12 prepared Actual 10 10.g 12 12 12

d No updates submitted. Data not available. e No updates submitted by Credit Union Federation (CUF). Data not available. f Since funds were not disbursed to CUF and CUs, “no basis” for reporting repayment rate. g Most of the hardfiles and backup copies of the manuals were destroyed during the 4 December riots and all have to be rewritten The task is still ongoing.

Capacity Building of IMTL Staff

A total of 30 staff has been recruited to run IMTL. Since its inception, IMTL has been focusing on training the local staff to undertake efficient microfinance operations. As part of the capacity building, training activities are undertaken regularly on microfinance principles, activity planning and field implementation; handling loan products, financial concepts, accounting and banking procedures; and also outreach and target setting. Selected staff are also provided with on-the-job training including computer system and financial software (MBWin) for day-to-day operations. Formal MBWin training was conducted by the UN-FAO-GTZ technical team.11 Specific training for field staff is being undertaken in microfinance technologies. On-site training has

11 Services are financed under TA No. 3743-ETM: Microfinance Information Technology Systems

Development, approved in October 2001.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 51 Microfinance Development Project

been provided for (a) promoting microcredit products, (b) forming small groups of 5–8 members, (c) evaluating loan applications, and (d) loan disbursements and collections. So far, most microfinance centers have completed the first and second loan cycles with acceptable repayment rates except for a few centers and groups in Gleno (Ermera) and in Dili. The causes of the group delinquencies and dropouts are currently being studied closely. Each field staff is handling slightly more than a hundred clients on the average, with an outstanding loan portfolio of about $5,000. A number of workshops have been conducted to strengthen the loan field staff to increase the pace of expansion and recruitment of new microfinance groups. It is still hoped that based on the trends, in a year’s time, each staff will be handling about 300 clients, which is comparable with other countries’ experience. The Project has established contacts and links with other international microfinance institutions as well as banking associations in the region to keep itself updated with developments in microbanking practices, trends, techniques, and technologies. A key institution with whom IMTL is associated is the Asia-Pacific Regional Agricultural Credit Association (APRACA). During APRACA’s 16th annual membership conference held on 23–28 September 2003 in Beijing, People’s Republic of China, and co-hosted by the Agricultural Development Bank of China, the full membership of IMTL was approved and the membership plaque was given to the IMTL President as head of the Timorese delegation.

IMTL Operations

To date, total loans disbursed cumulatively reached $1,344,610. These have been extended to 4,974 borrowers since the start of operations on May 2003. Outstanding loans stood at $713,164 to 2,529 active borrowers. Of these, $30,552 are considered past due loans12 (Table 2). The future viability of the financial institution rests on the capability of the IMTL management and loan staff to minimize loan delinquencies, effectively collect the loans disbursed, and keep the level of loans past due between 5 and 10%. The microcredits extended to public market vendors and stallholders in Dili, the main sources of loan delinquencies. In the Gleno branch, the source of loan delinquencies are the microfinance group loans made up mainly of vegetable farmers. In the Maliana branch, the rice farmers who availed of the seasonal crop loan scheme are the bulk of customers with past due accounts. Numerous market vendor and stallholders’ accounts in Maliana also show signs of weakness. Overall, IMTL’s loan staff/collectors’ capacity to enforce collections have improved to bring down the level of delinquencies. Deposits have continued to increase despite severe damage caused to the main IMTL office in Dili during the December 2002 riots. To date, savings from 5,206

12 Past due loans are loans whose payment of principal, either in installment or lump-sum, is already more than 30 days overdue. Past due ratio is computed by dividing the total loans whose payment

of principal are overdue by the total loans outstanding.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 52 Seventh Progress Report on Timor-Leste

Table 2: Disbursements, Loans Outstanding, and Delinquencies (As of 6 October 2003)

Disbursed Loans Principal Past Principal PAR (cumulative) Outstanding IMTL Branch Overdue Ratio Due at Risk a Ratio No. (%) No. (%) ($) ($) ($) (%)

Dili 2,413 630,846 1,086 345,950 5,574 1.61% 15,371 4.44 Gleno 1,625 387,049 885 167,475 11,185 6.68% 22,352 13.34 Maliana 936 326,715 558 199,738 13,793 6.90% 23,586 11.08

Total 4,974 1,344,610 2,529 713,164 30,552 4.28% 61,308 8.59

a Loans/principal-at-risk (PAR) are loans with un-serviced installments and missed payments even a day after stipulated payment due dates. PAR ratio is arrived at by dividing PAR over the total loans outstanding.

depositor-accounts have reached $926,788.60 (Table 3). Between January and September 2003, the deposits increased as follows: Dili 76%, Gleno 130%, and Maliana 480%. IMTL has been providing valuable services in the rural areas due to lack of banking facilities outside Dili. So far, the opening of the Indonesian-owned Bank Mandiri did not bring about a marked reduction of the deposit-liability level of IMTL. IMTL has managed to reduce operational losses and is much lower than projected in its Business Development Plan. By industry standards, the figures are very encouraging, considering that the Dili branch has been in operation for 18 months, Gleno branch for 14 months, and Maliana for just 12 months. Actual operational results have shown more positive trends than projected. Currently IMTL total assets stand at $2.9 million or around 45% increase from the beginning, mainly due to larger than expected deposits. Actual deposits have reached the $1.0 million mark. However, the financial institution is constrained by its license restricting it to accept deposits beyond $1.0 million. As a result in August 2003, IMTL has to to trim down its deposits liabilities through various measures. To date, the net worth stands at $1,965,732.40, which is an improvement from previous periods. The

Table 3: Status of Deposits ($)

Total No. of Total No. of Increase/ Branch Deposits ($) Accounts Deposits ($) Accounts Change (31 Jan 03) (30 Sept 03) (%)

Dili 407,816 991 717,787 3,229 76 Gleno 24,050 482 55,321 1,236 130 Maliana 26,420 166 153,680 741 480

Total 458,286 1,639 926,788 5,206 102

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 53 Microfinance Development Project

gap between generated income and operating expenses has steadily narrowed down. It is expected that by the end of December 2003, IMTL will achieve a breakeven. Based on the financial ratios proposed by the Consultative Group to Assist the Poorest (CGAP) on financial institutions, IMTL’s overall financial position as of 30 September 2003 is satisfactory (Table 4). Table 5 depicts the common causes of nonrepayment of loans identified during workshops, in-field studies and regular branch reviews. Tables 6 and 7 provide the Consolidated Statement of Condition and the Consolidated Income and Expenses, respectively.

Table 4: IMTL Operation and Financial Ratios

A minimum of 15-25% capital position versus total assets is 1,958,179.33 deemed desirable per CGAP Equity to Total equity 2,899,097.90 = 67.54% Asset Ratio Total Assets standards. The IMTL’s 67.54% EAR X 100 supports further expansion of the loan portfolio and leveraging. (Basis of measuring outreach will be changed after getting population data by village). Using “loan size” as No. accts. < 500.00 2,3622529 tentative measurement, outreach to Outreach No. of outstanding = 93.4% the “target poor sector” is around loan accounts x 100 90%, meaning 90% of accounts borrow $500 or below. Acceptable standard is at least 65%. Generally, IMTL loans are small. The ratio of 2.3:1 is high and safe. The Business Plan submitted to BPA Current assets 2,142,637.58 pegs liquidity at 50% of total deposit Current ratio 2.28:1.0 Current liabilities 940,918.57 liabilities. 1.0:2.0, however, is considered microfinance industry standards, as well as of others. The ratio of 89% means that IMTL is experiencing the initial stages of On-time Total repayments 250,636.14 collection difficulties that need to be Repayment Total amount 281,188.31 = 89% addressed immediately. In the ratio due incl. past previous period, some paid prior to due x 100 maturity of loans, i.e., advance

payment of their loan installments.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 54 Seventh Progress Report on Timor-Leste

Table 4: IMTL Operation and Financial Ratios (continued)

61,308.47 The PAR is the total of all loan Principal at risk 713,163.86 balances where installment due and/ Portfolio at risk Loans outstanding = 8.6% or maturity have been missed by x 100 even 1 day and more.

A loan is considered past due if it 30,552.17 has not been paid 30 days after Past due principal 713,163.86 Past due ratio = 4.28 % installment due or maturity date. Loans outstanding (definition of East Timor banking x 100 authority and regulation). At around 33%, this means that IMTL spends so much for its credit Operating expenses 127,986.41 delivery. The optimum ratio of Operating cost = 32.98% expenses over average loan portfolio Ave. loans 713,163.86+62,964.39 ratio outstanding /2 is 25%, and is the recommended CGAP ratio and other microfinance standards.

IMTL still has a long way to go until it attains operational self-suffi- 120,433.34 ciency. 120% > is optimum level. Operating Operating income 127,986.41 = 94.09% This is understandable since IMTL self-sufficiency T. operating expns. has just started operations and x 100 expects to lose within the initial 2 years. If is to consider the subsidies it gets from ADB-MDP, financial self- Operating income 120,433.34 sufficiency is at 78% while the Financial Adjusted total 127,986.41 + 20% = 78.42% optimum ratio is 100%. The calcula- self-sufficiency operating expense x 100 tion however is not exact since the detailed expenses have not been determined as of yet.

ADB = Asian Development Bank, BPA = Banking and Payments Authority, CGAP = Consultative Group to Assist the Poorest, EAR = Equity

to Asset Ratio, MDP = Microfinance Development Project.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 55 Microfinance Development Project

Table 5: Common Causes of Nonpayments

Loan Staff Control and Corrective Measure 1. Poor and inadequate Loan staff should be very patient in explaining the details explanation of terms of the loan conditions. They should take time in explaining, and conditions of the especially to the poor applicants. They should not presume loan that one explanation is enough. Also, while explaining, the repayment conditions should be emphasized. 2. Loan officer/staff did Management should check and test if the loan staff not have mastery of themselves understood the loan schemes and the lending the lending operations system. Loan staff should be encouraged to review their materials during their “free” time. 3. Accommodation of Loan personnel should not relax rules and procedures just undeserving loan to accommodate friends, neighbors, acquaintances, and applicants. relatives. Management should never allow loan staff to process loan applications of acquaintances and relatives. 4. Arrogance of loan Loan personnel should be trained in “courteous” approaches staff to customers. Respect of customers at all times should be encouraged. Arrogant and disrespectful behavior will be reprimanded. 5. Lack of understanding Loan staff should get the “feel” of their customers. Loan of the real needs, staff should have the ability to imagine how it is to be “in motives and intentions the shoes” of loan applicants. This would allow them to of loan applicants imagine the hardships and difficulties of the borrowers’ life- circumstances. This will also give an idea if “credit could really help, or is really needed.” 6. Complete lack of Loan staff should not be superficial and haphazard in gath- information and failure ering information, especially during the interviews where to assess the character, they can size up the character and personality of the capacity to pay, and applicant. credit needs of applicants

7. Poor evaluation and Loan staff should not take lightly the evaluation and analy- analysis of projects sis of information. They should regularly review the infor- proposed for financing mation already provided by the borrowers with new information about them. Also, loan staff should upgrade and learn more about analytical techniques. 8. Poor loan Loan staff should not fill in information by “inventing” the documentation data. Required information should be provided by the ap-

plicants themselves, and should be verified by loan staff.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 56 Seventh Progress Report on Timor-Leste

Table 5: Common Causes of Nonpayments (continued)

Loan Staff Control and Corrective Measure 9. Poor supervision and All loan personnel should use their extra-time productively monitoring of by doing supervision and monitoring. They should not be borrowers and their contented in only collecting. As much as possible, they projects should stay longer in the field or in the markets to supervise and monitor the borrowers and the projects.

10. Dishonest and corrupt Management and the Audit unit should constantly under- acts of loan personnel take “loan verification” and “post-release” loan audits to counteract dishonesties. Contact of the auditors with the borrowers also gives opportunity to victims of dishonest and corrupt acts to voice out their complaints against an erring staff. 11. Connivance with Management and Audit personnel should do “random” borrowers check and verification of accounts through direct interviews of borrowers. 12. Fictitious or “ghost” Management and Audit personnel should independently borrowers verify the borrowers in their own stores, village, residences and abode, offices, and the likes.

13. Lax and loose Management and Audit personnel should constantly monitor collection efforts and check activities of the loan staff, personnel and collectors. Their scheduled contacts with borrowers are kept on record for direct verification. Management should also see to it that stiff and rigorous collection efforts and techniques are really implemented by loan staff. 14. Poor public perception Management should pro-actively do image-building, media or credibility of the exposure, promotional campaigns, and information drives institution to ensure good public perception of the institution. 15. Lack of public Dedication, sense of commitment to the development of recognition of the Timor-Leste, sensitivity to the social problems affecting social mission of the Timorese society, and participation in community affairs institution. should be instilled in all staff of the Institution, not only loan personnel, to create a wholesome perception of the

institution as a socially committed institution.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 57 Microfinance Development Project

Table 5: Common Causes of Nonpayments (continued)

Borrower Control and Corrective Measure 1. Misrepresentations Verify, test, monitor, and counter-check all substantive information given by borrowers during initial interviews. 2. Misinformation Counter-check and test the correctness of information given by borrowers through varied means and from numerous sources. 3. Intention to defraud Loan personnel should immerse themselves among their the institution borrowers so that side-information could be gathered. Referrals could also help provide information. 4. No economic projects Ocular inspection and verification should be carried out of and income generating projects and activities proposed to be financed. activities 5. Diversion and misuse Postrelease audits, home visits, and monitoring of financed of loans projects should be done by management. 6. Wasteful consumption Loan officers and collectors should also conduct unan- nounced visits to borrowers at their locations/stores or homes/villages. 7. Lack of home budget- This is part of character-evaluation. In addition, home visits, ing and financial chats, and informal exchanges could help provide discipline information. 8. Inability to understand Test if borrowers understood what they are getting into, the terms and condi- and that they understood the contractual nature of tions of borrowing borrowing and paying. 9. Inability to identify Check for negative remarks with the lending

institution

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 58 Seventh Progress Report on Timor-Leste

Comoro Microfinance

Talk about being enterprising. Noting that there was much more business to be had outside the main Comoro public market, where she had a vegetable stall, 25-year old Dominga da Silva Alves wasted no time setting up a second stall outside. That was nearly 2 years ago. Dominga’s stall outside the market has grown and now does brisk business in kitchen items, packaged food, and many other things, aside from vegetables. She buys from wholesalers and pays cash. Her earnings have also grown. Dominga used to earn $5 a day selling vegetables. Now even on slow days she earns at least $10; on good days she earns up to $50. She earns enough for her own needs; and helps put her younger sister, two younger brothers, and a nephew through school and even save some money. All these, thanks, she says, to the loans she has taken out, and studiously paid. Her first loan, for $200, helped her set up her stall. She recently paid off her fourth, for $400, and is applying for a new loan for $450. When Dominga heard about the project from friends she had never borrowed before. Now it has her full trust. And why not, she says. The service is good and the payment are relatively painless— at $32.20 a week on her last loan.

Now to add just a little more capital …

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 59 Microfinance Development Project

IMTL’s Operational Progress

Among the key achievements of IMTL to date are: (i) During its slightly more than a year of operation, total assets grew from $2.0 million to $3.0 million, or an equivalent of 50% growth in total resources; (ii) Total loans disbursed to 4,974 borrowers reached $1,344,600 with an outstanding loan receivable of $713,164 to 2,529 borrowers; (iii) Growth in the loans is attributable to the increase in salary-deducted credits for microcredit projects of civil servants, salaried personnel, and petty employees. This loan type is lesser in administrative requirements, and readily collectible (through the Government account at the Banking and Payment Authority); (iv) Repayment rate of not less than 98% was maintained during most part of the first year despite the extreme poverty and restricted financial and economic opportunities characterizing and affecting the economy of Timor-Leste. Due to bad rice harvests in Maliana and poor prices of coffee in Gleno, however, the repayment rate has gone down to 90%, but is expected to improve; (v) IMTL has attracted deposits amounting to almost a million from small savers and customers in only 1 year of operation; (vi) The consolidated income shows IMTL operations nearing breakeven point; and (vii) The total number of customers, both borrowers and savers, had reached the 10,000 mark by September 2003, or in 1 year and 4 months.

Rehabilitation, Strengthening, and Expansion of Credit Unions

The Project, in its original design, provides support for rehabilitation of 21 existing CUs. With a projected outreach to around 8,000 poor families through the CUs, it is hoped that the approach would improve the supply of microfinance services complementary to what could be supplied by the “Microfinance Bank”. Of the initially identified CUs, only 4 were considered to be operational. As such, support to rehabilitate 4 CU offices in Same, Atsabe, Bobonaro, and Ailieu has been provided. These CUs were provided with about $23,000 worth of office furniture, equipment, and building reconstruction costs. The assistance provided to the CUs was aimed at accelerating their rehabilitation and operations. The assistance, on the other hand, to CUF was to enable it to assist in hastening the revival of the CU movement in the country. In practice, most old CUs are beyond rehabilitation, and efforts at reactivating others are slowed down by the nonresolution of the issue between CUF and specific credit unions regarding previous fund accountability. Based on an independent verification of the 15 CUs currently listed by CUF, only 5 are old CUs, and the rest are new, and only 3 are considered to have the potential to be viable in the short term. The rest have less than 50 members and are not even worth registering. Sustainable CUs should have at least 250 members to be able to

generate the synergy to benefit members. The Government’s views regarding additional

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 60 Seventh Progress Report on Timor-Leste

interventions and the future of CUs are being solicited. The existing CUs, and CUF itself, have very low-absorptive capacities. A major issue for providing additional funds to CUF is good governance. As a result, the Project Management Unit (PMU) will seek the Government’s support to supervise CUs and CUF to ensure CU development. Overall economic growth and employment generation is crucial also to CU progress.

Strengthening of the Credit Union Federation

The Project supported CUF in setting up its entire office operations, improving its capacity in networking with CUs, updating its trainers’ skills in assisting primary CUs, and establishing new CUs. The Project also provided assistance in capacity building through training-of-trainer series, seminar-workshops, CU management and bookkeeping training, coaching and mentoring exercises, etc. The Project supported field-level training conducted in some districts. CUF directors were funded to attend a CU executive training program and workshops/conferences overseas. Two officials were sponsored to attend the Asian Center for Credit Union conference in September 2002 in Bangkok and a study tour/exchange visit in Australia in December 2001. As part of capacity building, a short-term consultant experienced in business operations of credit unions and cooperatives was also fielded in July 2002 for 5 person-months to set up the CUF’s financial system; assist in streamlining financial activities of CUs and CUF; and intensify assistance at the CU level. CUF has received sizeable operating assistance and technical and logistical support in the form of transport, computers and other office equipment, furniture, and supplies, apart from various training support. New data and updated information from the CUs that cover financial operations and organizational status could not be readily provided despite the support for CUF mobility, personnel, subsidies for fuel and traveling cost, provisions for office supplies, and travel allowances of staff from Dili to the district CUs.

Project Cost and Disbursements

The project cost was originally estimated at $7.72 million for financing from TFET, but only $4 million has been made available. The project expenditure has reached $3.4 million (inclusive of $2.0 million as equity). Even though the project records covering February–November 2002 were destroyed during the December 2002 riots, all transactions were reconstituted and surrogate records were generated and filed. Based on current evaluation, the major Project activities will be completed by end-2003 but may need 4–6 months extension to be able to set up additional measures that will ensure the viability of IMTL, and at the same time lay down effective networking and

linkages between IMTL branches and any of the existing CUs at the subdistrict level.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 61 Microfinance Development Project

Financial Performance As of 15 November 2003 ($)

Planned Disbursement MFI (Capitalization and Credit Line) 2,300,000 2,187,000 Credit Lines – Credit Unions 150,000 27,000 Training 200,000 96,000 Consultancy Services 800,000 460,000 Vehicle Equipment & Supplies 360,000 110,000 Adm. Support for PMU 160,000 27,000 Unallocated 30,000 0 Imprest Account 772,000 4,000,000 3,679,000

Implementation Arrangements

Project Organization and Management

The Project Coordination Committee (PCC) was established from the start of the Project to provide policy guidance to the PMU on administrative and financial matters. The Government actively coordinates with the Project through the Ministry of Development and Environment. Several PCC meetings were held during the project implementation period.

Procurement of Goods and Services

All major procurement of goods and services for the Project has now been completed and is in accordance with the ADB’s regulations and practices. No further procurement is projected until the closing date.

Monitoring and Evaluation

Project activities are being monitored regularly by the PMU. IMTL has an internal reporting system that generates up-to-date reports on its financial conditions and status. The UN-FAO-GTZ team under the ADB-funded TA has developed and integrated the MBWin financial software for IMTL operations. In the field, an internal system of monitoring the performance of loan field staff is in operation. Each staff supervises and collects from 10 centers that have 4–8 groups each, and each group has 4–8 members. Microfinance group loans range from the first cycle of $80, then $120, $150, and $200, up to $250. Operations are closely monitored. The PMU prepares regular

reports on IMTL’s operations and the overall implementation progress of the Project.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 62 Seventh Progress Report on Timor-Leste

Separate accounts and financial statements for the microfinance institution and the Project are being maintained. The first audit report of the Project accounts was recently completed by Ernst & Young, Darwin, Australia. The external auditors confirmed that the Project and IMTL’s accounting system and records fully meet the requirements and the TFET grants have been utilized efficiently.

Consulting Services and Training

To date, six international and five domestic consulting services have assisted in the areas of project management, training, human resources development, and management information systems. In addition, training consultancy for microfinance promotions, organizing, procedures and monitoring were provided through ADB TA. The Project is committed to instilling prudent banking practices among local officers/ staff and training them to undertake full management and operation of IMTL as early as possible.

Project Impacts

Socioeconomic impact

The Project’s overall goal is poverty reduction through increased rural employment and income opportunities by providing appropriate microfinance services for microenterprises. Microfinance operations in the rural areas are well appreciated by the poor. Some 5,206 deposit accounts had been opened of which 1,952 were less than $500. These figures translate to an average of around $36 per individual account. The microfinance group’s first cycle of loans are mostly small and averaging about $45. IMTL now serves the needs of the poorer households in selected districts for savings and as a source of small, short-term loans. If these services are continuously provided efficiently and properly sustained over long periods, then the poor will benefit both from access to credit (such as for production and for assistance during lean months), as well as to saving facilities (building-up own capital for enterprise and livelihood projects). Efforts are being made to expand microfinance operations to more districts. Microfinance support through small and micro enterprise development has a positive socioeconomic impact.

Impacts on Capacity Building and Policy

The Project has been successful in building local capacity. Since its inception, the Project has been focusing on training IMTL staff to undertake efficient microfinance operations. For sustainability, staff training on microfinance operations has been the main focus. Each IMTL staff is targeted to handle about

300 clients in a year’s time.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 63 Microfinance Development Project

Manleu Microfinance

Filomena Pereira, 21, just married and expecting her first child; vendor. Manuel Berek, 47, married with eight children, five of them of school age; small trader. Michael da Costa, 25 with two young children; tailor. These three first-time borrowers are among 42 project borrowers in the village of Manleu, in Dili. Filomena was already selling vegetables, rice, cooking oil, detergent, and other basic necessities at a small kiosk in the village when she took out a loan. “But I was earning only $1 a day,” she says, and with a child on the way she wanted to do better. People told her that credit was available. She joined a training program where she learned about borrowing and saving. A month after she submitted her application she had $70, with which she could buy more goods for her stall. The $2–4 that Filomena now earns covers daily expenses and the weekly amortization of $4.65. Manuel buys firewood in Metinaro and Railako and sells it in Dili. Before he took out a loan on the advice of friends, his net income was only $2.50 a day. He used the $80 loan “to buy more firewood and more goods for my small kiosk.” Manuel now nets at least $3.50—enough to pay for food and school fees. For Michael, the loan of $80 could not make up for the increase in tailoring costs. His loan of $80 went to cloth and thread. It could not buy what he really needed: a machine to hem clothes and make buttonholes. Because he has to pay someone else to do these things for him, his average income is $50–$60 instead of $70–80. To add to his income, he used part of the loan to buy firewood for resale. Michael thinks he would have to borrow at least $200 for things to change for the better. Like Manuel, he hopes to borrow more, and to be allowed to pay twice a month or monthly instead of weekly. Still, the project is a good one, all three say. They are glad to be a part of it and they

hope the assistance continues.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 64 Seventh Progress Report on Timor-Leste

Overall Contribution to the Economy

Poor and low-income households have a large demand for safe and convenient deposit and microcredit services. Microfinance operations under the Project started to provide the poor an opportunity to save and access microcredits to improve their livelihoods through microbanking.

Lessons Learned

However, there is a great deal that remains to be done to improve microfinance operations in Timor-Leste. (i) The major challenge for IMTL operations is to keep loan delinquencies low, collection efficiency high, and yet achieve greater outreach. In the initial run of IMTL, there is the tendency to succumb to pressures and demands that the institution rapidly increase its lending operations, specially the microfinance group loans. Had this been resorted to, the repayment rate would have been much lower. (ii) Further legal and regulatory framework has to be developed especially in the areas of enforcing credit contracts, mortgages, foreclosure proceedings, escrow, and sale of acquired assets in settlement of financial obligations. (iii) More ongoing local training in skills upgrading to increase competency levels is needed before embarking on further expansion of operations. The lessons that could be derived from the results of operations of the three branches and the head office would be valuable in evaluating what to introduce in future branches in other districts. (iv) Changing the mindset, especially instilling a sense of positive attitude toward development of microfinance within the country, is important for poverty reduction.

Continuing Needs

(i) There is a need for continuing support to extend microfinance operations through more branches to provide seasonal saving and loan facilities to rural micro-enterprises. The capabilities of the Timorese management and staff in organizing and establishing a branch unit have to be strengthened. Their experience in setting up the existing branches in Dili, Gleno, and Maliana seem to be improving. This capability need to be supplemented however with further training on internal procedures, compliance with regulations, and communication skills. (ii) There is also a continuing need to support capacity building. Some of these needs are in simple areas such as in:

- conducting, handling board meetings, and facilitating discussions therein

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 65 Microfinance Development Project

Taibesi Microfinance

In 1999, when Jose Nunes Marcelo Martins lost his job as a driver in a private Indonesian company, he and his wife, Cecilia dos Santos, were at a loss. How were they to survive? Then a neighbor who had experience in selling clothes encouraged them to go into business. In 2001, Jose turned his back on unemployment and Cecilia ceased being a stay-at- home housewife. With $500 of their own money, they built a small stall in the Taibesi public market, and started selling clothes they bought in Audian or from Indonesian merchants. Earlier this year, they took out a 91-day loan for $200 from the project to increase their capital. Paying it back was “no problem,” according to Jose. Although the stall still brings in about the same amount of money—anywhere from $10 to $50 a day—they now sell a wider variety of clothes. Their 16-year-old son, who is in senior high school, even helps in the stall sometimes. The business is doing well enough, it seems, for Jose and Cecilia to contemplate putting up another stall of the same kind elsewhere. To do that, they hope to borrow $1,000. Meanwhile, the savings account that they were required to open when they applied for the loan is healthy and has a growing balance. Jose’s only other experience with savings accounts was not a happy one. He put money in a Portuguese bank, but when he realized that it was not earning interest and yet he was paying charges, he withdrew his money. Those bleak years when he was out of work seem so long ago, says Jose. Now that

he and Cecilia have a business they can look forward to better times.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 66 Seventh Progress Report on Timor-Leste

- preparation of minutes of meetings and resolutions passed/resolved during meetings - interpreting and drawing-up conclusions from financial and management information system (MIS) reports - writing internal memoranda, directives, office orders - report writing, specially in response to regulators (BPA) - techniques in follow-up actions, monitoring - conducting internal audit and management review (iii) The regulatory and legal framework for CUs is not yet complete, although some legislative proposals and suggested promulgations have already been submitted to the parliament. (iv) Further support to monitor performance is also necessary to ensure that the systems and procedures are adopted, that regular and special internal audits are conducted, that audit findings are corrected, and that general improvements in the operations are put into place. (v) IMTL needs to be developed and transformed into a commercially viable institution. In mid-November 2003, ADB engaged a divestment specialist to recommend ways to transform IMTL into a commercially sustainable institution. A draft report will be available for donors in December 2003.

Terms of Reference - Divestment Specialist 1. Consult with the Government and the key donors including the Credit Union Foundation and the Instituição de Microfinanças de Timor-Leste (IMTL) on their views on transforming the existing institution into a shareholder based microfinance institution. 2. Based on the above discussion, identify options for possible transformation and discuss these options with the Government and other key stakeholders. 3. Propose the most feasible modality and shareholder structure for IMTL, taking into account the views of the Government and donors and other stakeholders, and relevant country specific conditions.

4. Propose a realistic divestment/transformation plan.

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 67 Microfinance Development Project

Table 6: Instituição de Microfinanças de Timor-Leste Consolidated Statement of Condition As of 30 September 2003

Consolidated Code Account Title No. of Amount Accounts ($) 1.0 ASSETS 1.01 LIQUID FUNDS 2,142,637.58 1.01.1 Notes and Coins 128,192.85 1.01.2 Due from BPA 1,817,151.36 1.01.3 Items in course of collection – 1.01.4 Due from Commercial Banks 197,293.37 1.02 INVESTMENT – 1.04 LOAN, ADVANCES AND DISCOUNTS (net) 2,529 694,148.79 1.04.1 Current Loan 693,380.34 1.04.2 Past Due Loans 19,783.52 1.04.3 Provision for Loan Losses (19,015.07) 1.05 ACCOUNTS RECEIVABLE 1,859.61 1.06 FIXED ASSETS (net) 44,137.74 1.06.2 Premises 2,603.59 1.06.3 Furniture and Fixtures 5,100.05 1.06.4 Machinery and Equipment 37,327.74 1.06.5 Vehicles 13,370.00 1.06.9 Reserve for Depreciation (14,263.64) 1.09 OTHER ASSETS 16,314.18 1.09.3 Office Accounts 6,050.31 1.09.6 Miscellaneous Assets 10,263.87 Total Assets 2,899,097.90 2.0 LIABILITIES 2.04 DEPOSITS 5,206 939,233.39 2.06 Other Sundry Current Liabilities 1,477.00 2.08 Other Liabilities 208.18 3.0 CAPITAL ACCOUNTS 1,958,179.33 3.02 Capital Paid-Up and Assigned 2,000,000.00 3.06 Profits/Losses (41,820.67) 3.06.1 Previeous Financial Year (34,267.60) 3.06.2 Current Financial Year (7,553.07)

Total Liabilities and Capital Accounts 2,899,097.90

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 68 Seventh Progress Report on Timor-Leste

Table 7: Instituição de Microfinanças de Timor-Leste Consolidated Statement of Income and Expense As of 30 September 2003

Code Account Title Amount ($) 4.0 INCOME 4.01 INTEREST INCOME 116,402.41 4.01.1 Interest on Due from Banks 8,217.31 4.01.4 Interest and Fees on Loans & Discounts 108,185.10 4.01.4.1 Interest Income on Loans 49,344.48 4.01.4.2 Loan Fees 58,840.64 4.02 NONINTEREST INCOME 3,978.73 4.02.5 Commission Income & Transaction Fees 3,221.03 4.02.6 Other Noninterest Income 757.70 4.03 EXTRAORDINARY INCOME 52.20 TOTAL OPERATING INCOME 120,433.34 5.0 EXPENSE 5.01 INTEREST EXPENSE 2,953.10 5.01.2 Interest by Individual Deposits 2,895.05 5.01.3 Interest on Legal Entities Deposits 58.05 5.02 NONINTEREST EXPENSE 4,173.60 5.02.4 Commission Expense and Transaction Fees 4,173.60 5.03 OPERATING EXPENSE 120,859.71 5.03.1 Salaries and Employee Benefits 62,450.00 5.03.3 Advertising and Public Relation 255.00 5.03.4 Audit, Legal, and Professional Fees – 5.03.5 Rents Paid 160.00 5.03.6 Expense on Premises and Fixed Assets – 5.03.7 Depreciation and Amortization 13,296.45 5.03.8 Provision 16,638.03 5.03.9 Other Operating Expenses 28,060.23 5.04 EXTRAORDINARY EXPENSE – TOTAL OPERATING EXPENSES 127,986.41 NET INCOME (LOSS) BEFORE TAX (7,553.07) PROVISION FOR INCOME TAX –

NET INCOME (LOSS) AFTER TAX –

Part 3

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ ADB Technical Assistance Program

70 Seventh Progress Report on Timor-Leste

○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ 71 ADB Technical Asissistance Program

Summary of ADB Technical Assistance to Timor-Leste As of 1 November 2003

Comple- Amount Date Date tion No. Title ($) Agency Approved Started Date Status Completed Technical Assistance 3425 Poverty Assessment and Statistics 52,900 UNTAET Apr-00 Apr-00 Dec-00 Closed 3435 Microfinance 150,000 UNTAET May-00 Jun-00 Dec-01 Closed 3400 Community Empowerment Program 990,000 UNTAET Feb-00 Feb-00 Dec-01 Closed 3401 Transport Sector Restoration 1,000,000 MTCPW Feb-00 Mar-00 Nov-02 Closing 3412 Capacity Building and Governance for Sector Management 1,000,000 MPF Mar-00 Apr-00 Dec-02 Closing 3428 Rehabilitation of 300,000 MTCPW Apr-00 May-00 Jul-02 Closed 3504 Telecommunications Sector 1 and 2 Sep-00 Sep-02 Closed 3501 Environmental Assessment Capacity Improvement 250,000 MDE Sep-00 Jan-01 Jul-02 Closed 3512 Strategies for Economic and Social Development 650,000 MPF Oct-00 Jan-01 Dec-02 Closing 3515 Capacity Building for Local Government 150,000 MPF Oct-00 Oct-00 Dec-01 Closed 3556 Strengthening the Microfinance Policy and Legal Framework 250,000 MDE Dec-00 Feb-01 Jun-02 Closed 3592 Economic Policy Forum 150,000 MDE Dec-00 Dec-00 Dec-02 Closed 3654 Exclusive Economic Zone 120,000 MPF May-01 May-01 Feb-03 Closing 13 Subtotal 5,062,900 Ongoing Technical Assistance 3743 Microfinance Information Technology System 150,000 MDE Oct-01 Mar-02 May-03 Ongoing 3748 Preparing the Power Sector Development Plan 400,000 MEAD Oct-01 Apr-02 Dec-03 Ongoing 3803 Economic Policies and Strategies 950,000 MTCPW Dec-01 Nov-02 Mar-03 Ongoing 3819 Postal Services Development 250,000 MPF Dec-01 Mar-02 Dec-03 Ongoing 3839 Capacity Building to Develop Public Sector Management and Governance 688,000 MPF Mar-02 Oct-02 Sep-03 Ongoing 3986 Integrated Water Resources Management and Governance 600,000 MTCPW, Nov-02 May-03 May-04 Will start MAFF, January MDE 2004 6 Subtotal 3,038,000 Other Technical Assistance 3731 Transport Sector Improvement 500,000 MTCPW Oct-01 Delayed Delayed 1 Subtotal 500,000 20 Total 8,600,900

MAFF = Ministry of Agriculture, Forestry, and Fishery; MDE = Ministry for Development and Environment; MEAD = Ministry of Economic Affairs and Development; MPF = Ministry for Planning and Finance; MTCPW = Ministry

of Transport Communications and Public Works.