11 November 2011

Acting Audit Court reviews 2010 State Accounts

East Timor Legal News 11 Nov 2011 Source: Lao Hamutuk - Under Timor-Leste's 2009 Budget and Financial Management Law, the High Administrative, Tax and Audit Court is responsible to review the annual audited report of State Finances. Since the HATAC hasn't been created, the Appeals Court is doing its function. On 20 October 2011, the Court sent Parliament its Opinion on the 2010 State Accounts, and on 28 October, Parliament Committee C held a hearing with the Minister of Finance. La'o Hamutuk wrote a letter with some of our concerns about the Opinion, which is abridged below:

We do not understand or agree with the Court’s concluding Opinion that the state accounts are valid. The court identified too many fundamental flaws, and we describe several others below, to reach this conclusion.

The Court should have been given more information than the Government provided, as the current Opinion points out. We encourage Government to be more forthcoming to the Court, Parliament and the public. We support the Court's recommendations for a more disaggregated, comprehensive and accurate system to manage and report on state finances, as well as for better systems for reconciliation and control of cash.

Rapid budget growth is a symptom of the resource curse. During 2008-2012, Timor-Leste’s State Budget grew faster than any nation in the world except Zimbabwe, and it is not sustainable, manageable or producing good results. The 2010 mid-year budget was an extreme case, which transferred a lot of money out of the Petroleum Fund without a valid reason, sacrificing future generations for current greed.

Taking more than the Estimated Sustainable Income (ESI) from the Petroleum Fund for short-term convenience violates both the Petroleum Fund Law and good policy. It is illegal to withdraw money from the Petroleum Fund merely to increase the balance in the Treasury account for the following year. During December 2010, the Ministry of Finance directed the BPA to transfer $211 million from the Fund, although the Treasury contained enough for several months’ expenses. At the end of the year, the Treasury Account held $340 million dollars, the highest amount in Timor-Leste’s history.

The Court recommended that donor assistance be included in this review and in the State’s budget execution reports. We do not share this view, except for possible future direct budgetary support from donors.

The Court mentions evidence of possible violations of law. We hope that they provide full information to the Anti-Corruption Commission.

The end-of-the-year budget execution rush is bad policy. Timor-Leste signed 235 contracts over $250,000 during 2010, totaling nearly $700 million. Nearly half (107) were signed during November and December. Hasty spending before the fiscal year ends often leads to waste, corruption and poor outcomes.

The Court should have discussed the largest outlay in 2010, the national electricity project. La’o Hamutuk has written extensively about this debacle, but we remain hopeful that Timor-Leste will learn from it. Timor-Leste signed a $330 million (later increased to $406 million) contract without competitive bidding on 15 September 2010 with Puri Akraya Engineering to build the power stations. The previous December, Timor-Leste’s largest contract ever ($367 million) was signed with Chinese Nuclear Industries No. 22 (for the same power plants and the national high voltage grid), which was reduced to $298 million when PAE was contracted. These two contracts totaled $629 million at the end of 2010 (they are still increasing; today the total project cost is around a billion dollars and rising).

Parliament had not approved the outlays obligated by these contracts, which are ten times  more than the 2010 budget says. The 2010 mid-year budget adjustment appropriated $60 million for this project during 2010 (budget execution reports say that $90 million was spent), but omitted multi-year costs. The original 2010 budget gives a project cost of $48 million, with no expenditures listed after 2010.

To avoid repeating similar violations, we encourage Government to implement a system to provide accurate information to Parliament and the public about total expected costs of multi-year projects and future contractual obligations, including alterations while the projects are being implemented.

The full text of La'o Hamutuk's letter is at http://www.laohamutuk.org/econ/OR10/TRaudit/LHtoComCGSA2010En.pdf and our unofficial translation of the court's Opinion is at http://www.laohamutuk.org/econ/OR10/TRaudit/TRGSA2010En.pdf. La'o Hamutuk discussed many of these issues in more detail in our submission to Parliament last week on the proposed 2012 State Budget.

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