April 2012 Edition No. 6 www.adb.org/Timor-Leste About the ADF Project Milestones The Asian Development Fund  The ADB Board of Directors approved the Road The Asian Development Fund (ADF) has been the main Network Upgrading Project on 30 March, inclusive of source of funding for activities in Timor‐Leste supported by Timor‐Leste’s first loans from ADB. The project will the Asian Development Bank (ADB). In 2011–2012, Timor‐ upgrade 29 kilometers (km) of roads from the capital, Leste will receive $32.2 million in ADF resources: $23.0 Dili, to Liquica, and a further 31 km from Tibar to Gleno million of grants, and $9.2 million of concessional loans. (see next page). Established in 1973, the ADF is the oldest and largest  Civil works commenced in February on the upgrade of of ADB's existing special funds. Activities supported by the the Liquica–Maubara section of the national road ADF promote poverty reduction and improvements in the network. This is one of the first national roads to be quality of life in the poorer countries of the Asia and the upgraded to an international standard of 6‐meter‐wide Pacific. pavement with 1.5‐meter shoulders on both sides of From 2006 to 2010, ADF provided over $2.5 billion a the road. year for projects and programs that helped poor families  Rehabilitation commenced over January and February escape poverty. In 2009–2010 alone, over 100 loan and of 18 km of national roads between Batugade on the grant projects totaling $6.2 billion were made to border with Indonesia and Maliana, the capital of developing member countries of ADB. Preparations are Bobonaro District. ongoing for the next replenishment, ADF XI, which will  Civil works commenced in February to rehabilitate cover the period 2013–2016. three subzones of the Dili water supply system— ADF resources come mainly from contributions of Cacaulidun, Fatuhada, and Kintal kik. Work is ADB's member countries, which are mobilized under scheduled to be completed this year. periodic replenishments, and reflows from ADF loan  The Aid Transparency Portal operated by the Ministry repayments. The largest contributors to the ADF have of Finance went live in February. Detailed information been, in descending order, Japan, the United States, on development partner support is now publicly Australia, Canada, Germany, the United Kingdom, and available as part of the government’s Transparency France. Portal (amp.mof.gov.tl). The Aid Transparency Portal A special feature of the ADF is the performance‐based has been developed with the support of the allocation system. This allocates funds based on the quality governments of Japan and Australia, and ADB. of a country’s policy and institutional environment. Annual performance assessments are prepared with the ADB‐supported Events government using a publicly available questionnaire. The Timor‐Leste recently participated in the: World Bank conducts a similar exercise, and ADB and the  Regional Conference on Community‐driven World Bank work closely to ensure the two exercises are Development, 31 January 2012, ADB headquarters, harmonized. Manila, Philippines; More information is available at adb.org/site/adf/  Conference on Regional Cooperation and Integration, Experiences in Asia and the Pacific, 26–27 March 2012, How to reach us? Kunming, People's Republic of China; and  ADB Procurement Training, 29–30 March 2012, Dili. Special Office in Timor-Leste Timor‐Leste will soon participate in the: ADB–World Bank Building, Avenida dos Direitos Humanos Dili, Timor-Leste  Country Safeguard Systems Regional Workshop, Telephone +670 332 4801 18–19 April 2012, ADB, Manila, Philippines; Asian Development Bank Headquarters  45th Annual Meeting, Board of Governors, 2–5 May 6 ADB Avenue, Mandaluyong City 2012, Manila, Philippines; and 1550 Metro Manila, Philippines Telephone +63 2 632 4444  Workshop on Production Networks and Trade Policy in Turbulent Times, 16–18 May 2012, ADB headquarters,

Manila, Philippines. Page 2

The project is the responsibility of the Conselho de Upgrading Roads Administracao do Infraestrutura (the Infrastructure Fund The Road Network Upgrading Project was approved by the Council). The project will also involve the Major Projects ADB Board on 30 March 2012. The project will upgrade Secretariat and the National Development Agency to two of the busiest roads in Timor‐Leste and improve the review quality, costs, and payments, and the Procurement main western road link to Indonesia. Construction will be Commission to oversee all major procurement. well under way by the end of 2012, creating jobs and The project is due for completion by December 2015. bringing down the cost of transport for people and goods. ADB is financing $40.00 million of the project’s total cost, The roads will be built to an international width of and the Government of Timor‐Leste is contributing 6‐meters plus shoulders, which will make travel faster $13.66 million from the Infrastructure Fund. and safer. Financing includes Timor‐Leste’s first loans from ADB; The new project will also prepare detailed designs for a loan of $9.15 million from the ADF, and a loan of the upgrade of the Manatuto to Natarbora road, to $30.85 million from ADB’s ordinary capital resources. The provide a reliable road link between the north and south ADF loan has a 32‐year term, including a grace period of of the country. 8 years, and an interest rate of 1.0% per annum during the The project is to deliver five outputs: grace period and 1.5% per annum thereafter. The ordinary (i) Upgrade and climate proofing of national roads. The capital resources loan will have a 25‐year term, including roads from Dili to Liquica (29 km) and Tibar to Gleno a grace period of 5 years, an annual interest rate (31 km) are core subprojects that will be upgraded. determined in accordance with ADB’s London interbank Upgrading will include strengthening and widening offered rate‐based lending facility, and a commitment existing sealed pavements from a width of generally charge of 0.15% per year. less than 4.5 meters to 6 meters and provision of The proposed loans were identified in the 2012 asphalt surfacing. Vulnerability to damage from severe Budget approved by Parliament in December 2011. As rainfall, sea‐level rise, and other potential effects of required under the public debt legislation, the cost of climate change will be reduced through engineering financing is well below the project’s estimated economic countermeasures, including ensuring suitably sized rate of return of 16%. drainage structures, raising of road levels that are Tenders for the Dili to Liquica section are expected to prone to floods, and bioengineering to promote slope be issued in the June quarter, and tenders for the stability; remaining 32 km are expected to be issued before the end (ii) A feasibility study and detailed design for the road of 2012. from Manatuto to Natarbora (81 km); The new project adds to an ongoing project funded by (iii) Performance‐based road maintenance. The civil an ADB grant that is upgrading 66 km of roads from Liquica works contractors will be responsible for maintenance to Batugade on the border with Indonesia. An additional of the upgraded road sections for 2 years. Local 42 km of roads from Batugade to the regional center of contractors will be trained in performance Maliana are also being rehabilitated. For this grant‐ maintenance, and period performance‐based financed project, 33 km are already under construction contracts will be used for future maintenance; and bids for the remaining 75 km are under evaluation. (iv) Awareness of road safety and transport‐related social When the two projects are completed, there will be an issues will be raised. The awareness of road safety will upgraded 6‐meter‐wide road plus shoulders from Dili to be increased by implementing a community‐based the border. This will be the first major road upgrade road safety awareness program, including an completed by Timor‐Leste. education program for schools, drivers, road users, The new works are linked to support from the Japan and the community, and implementing an HIV/AIDS International Cooperation Agency to upgrade the Dili‐to‐ prevention program; and Baucau road, and from the World Bank to upgrade the (v) Efficient project management, to ensure the project is road from Dili to Ainaro. Taken together, about 235 km of delivered on time and on budget. Project management road will be upgraded with development partner support. support is included for the Ministry of Infrastructure Maximum use is being made of government systems, as the agency responsible for implementation. particularly the government’s new systems for major projects. Notably, all development partner‐supported projects are being implemented on a day‐to‐day basis through the project management unit within the Ministry of Infrastructure. Page 3

Improving District Providing Essential Capital Water Systems Skills Training The District Capitals Water Supply Project was approved The Mid‐Level Skills Training Project was approved by the by the ADB Board on 28 September 2011. The project will ADB Board on 7 December 2011. The project will assist rehabilitate and expand the water supply systems in the Timor‐Leste in introducing and implementing mid‐level district capitals of Manatuto and Pante Macasar to provide skills training in construction and automotive trades. The 24‐hour, potable water to over 30,000 people. project will provide the fast‐growing, young population The project represents a first step toward with new opportunities for employment, as well as helping achievement of the target of the Strategic Development provide the skilled labor needed to accelerate the rollout Plan 2011–2030 of providing 24‐hour access to safe water of infrastructure. in all district capitals. It will also support the government’s The project will build on existing training programs efforts to meet the Millennium Development Goals for and facilities, which have a proven record of delivering improved health of children under 5 years of age. quality skills training at basic levels. It will strengthen The target outputs of the project include selected public and private training providers so they can (i) rehabilitation and expansion of water supply systems in continue to expand their operations and train more Pante Macasar and Manatuto towns, (ii) increased Timorese men and women. knowledge of efficient use of water and safe hygiene The Tibar Training Center is one of two public training practices, and the (iii) sustainable operations and providers recognized as delivering quality basic skills maintenance of urban water systems. training in construction trades (e.g., carpentry, plumbing, A feature of the project is the inclusion of a 2‐year electrical, masonry, solar energy). The project will finance operations and maintenance contract. This is a simple the upgrading of facilities and equipment at Tibar, as well form of public–private partnership that will sustain the as the construction of dormitory facilities, to expand delivery of potable water after construction. It will also access for students from remote areas and for women. allow the government to explore if a longer‐term public– The project will also support two registered private private partnership would be suitable elsewhere. (nongovernment) training providers—DIT Baucau and Don The project also includes a separate activity to Bosco at Comoro—with facility and equipment upgrades. rehabilitate the dam walls of Lehumo Lake in Ermera The support will be provided under a partnership District. This will ensure that the lake provides a agreement to be entered into with the government. sustainable and secure water resource that will improve Training will be conducted in accordance with standards income generation opportunities in the surrounding set for particular industries by the National Labor Force communities. Development Institute with the input of the private sector. The total project cost of $14.32 million will be funded A new Vocational Training Development Center will be by an ADF grant of $11.00 million from ADB and established to deliver in‐service training for the teaching $3.32 million from the government. staff needed to expand skills. Long‐term plans to improve The project is the responsibility of the Ministry of their skills will also be developed. Infrastructure, and will rely on the Ministry’s national‐ and Labor market linkages will be improved by helping district‐level staff to lead implementation. The Secretary of expand promotion activities and job counseling services, State for Oecusse and the district administrators of and helping private‐sector employers to provide Manatuto and Oecusse will also be involved. workplace training or internships. An existing labor market The project is supported by technical assistance from information system will also be strengthened to better ADB. On 14 December 2011, ADB approved a identify skill shortages and training needs. $1.2 million technical assistance project to help water The total project cost of $13.00 million will be funded sector officials at the national and district levels undertake by an ADF grant of $12.00 million from ADB and the capacity and institutional initiatives needed to $1.00 million from the government. The project is the manage, operate, and maintain urban water supply responsibility of the Secretariat of State for Vocational systems. On 26 March 2012, ADB approved a $0.55 million Training and Employment. It will be an important tool for technical assistance project to begin preparations of a implementation of the government’s Technical and follow‐on investment project that would rehabilitate the Vocational Education Strategic Plan. water and supply systems of more district capitals. The first priorities are Baucau, Viqueque, and Los Palos. Page 4

GDP growth Economic Update (%, annual)

The economy’s strong growth performance continued in 2011, 15 with gross domestice product (GDP), excluding the offshore petroleum sector and the United Nations (the measure of GDP used hereafter), expanding by 10.0%. The spending of petroleum revenue continued to drive the economy. 10 Although the full 2011 budget allocation was not spent, government expenditure, including development partner‐funded activities, reached $1.4 billion. This was an increase of 36.4% on the 2010 level, and saw the ratio of government expenditure to 5 GDP reach 185.5% in 2011. Average annual inflation was 12.1%. Inflation rose rapidly in the first quarter of 2011 as higher world oil and food prices fed 0 through the economy. Other contributing factors to the first 2007 08 09 10e 11p 12p 13p quarter rise were a reduction in rice subsidies, and disruption to e = estimate, p = projection. the harvest cycle because of excessive rain in 2010. There was Note: Nonpetroleum, non-UN GDP, annual growth. little additional inflation over the second and third quarters, Source: Government of Timor-Leste. 2011. 2012 Budget Book No. 1. Dili (November). despite strong domestic demand. But in the final quarter of 2011, inflation on a year‐on‐year basis reached 15.4%. Increased demand during in the lead‐up to end‐of‐year Consumer price index celebrations and the loss of capacity at the international port in (y-o-y % change)

Dili from October as new navy vessels occupied one of three 20 Dili (monthly) berths were the key contributors to the fourth quarter jump in Indonesia (monthly) inflation. This jump in inflation was despite the deflationary Timor-Leste (quarterly) 15 effects of some easing in world food prices and an appreciation of the United States dollar (which is used by Timor‐Leste) against key currencies. 10 The continuing rise in government expenditure is projected to see the economy remain strong. But the rate of economic 5 growth is expected to ease, from about 10% in 2012 to 8% in 2013, as the rate of fiscal expansion begins to moderate. Government expenditure is projected to expand by a high 0 Jan10 Apr Jul Oct Jan11 Apr Jul Oct Jan12 25.7% in 2012, but by only 10.3% in 2013. The budget for 2012 provides for a further large increase in government expenditure Source: Timor-Leste National Statistics Directorate. to $1.8 billion, of which $1.6 billion is to be funded from the Petroleum Fund and domestic revenue, with the remainder from Inflation month-by-month, Dili development partners. The ratio of expenditure to GDP is (month-on-month % change, monthly) projected to remain close to 200% in 2012. Inflation is expected to remain high in the first half of 2012. 4 The temporary loss of capacity at Dili port, and extra demand arising from preparations for the Parliamentary elections due 3 mid‐year, are expected to maintain upward pressure on prices. Inflationary pressures are expected to decline over the second 2 half as these effects pass, and as the gradual departure of the United Nations peacekeeping mission helps slow the expansion 1 in aggregate demand. Inflation is projected to average 10.2% 0 over 2012 before declining to 7.4% in 2013. For more analysis of the Timor‐Leste economy, see -1 www.adb.org/publications/pacific‐economic‐monitor Jan10 Apr Jul Oct Jan11 Apr Jul Oct Jan12

Source: Timor-Leste National Statistics Directorate.