Document of

The World Bank

Report No: 24532-TP

PROGRAM APPRAISAL DOCUMENT

FOR A PROPOSED POST CONFLICT GRANT

IN THE AMOUNT OF US$5 MILLION

TO THE DEMOCRATIC REPUBLIC OF EAST TIMOR

FOR A

TRANSITION SUPPORT PROGRAM

July 22, 2002

Poverty Reduction and Economic Management UnitEast Timor Country Management UnitEast Asia and Pacific Region

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CURRENCY EQUIVALENTSCurrency Unit = US Dollar (as of July 2002)

WEIGHTS AND MEASURES: Metric System

FISCAL YEAR: July 1 - June 30

ABBREVIATIONS AND ACRONYMS

BPA Banking and Payments Authority

CEP Community Empowerment and Local Governance Project

CFET Consolidated Fund for East Timor

CPV Commitment and Payment Voucher

FTP First Tranche Petroleum

FY Fiscal Year

GDP Gross Domestic Product

MPF Ministry of Planning and Finance

MTFF Medium Term Fiscal Framework

NDP National Development Plan

NGO Non-Governmental Organization

TFET Trust Fund for East Timor

TSP Transition Support Program

UN United Nations

UNTAET United Nations Transitional Administration in East Timor

Vice President: Mr. Jemal-ud-din Kassum, EAPVPCountry Director: Mr. Klaus Rohland, EACNFSector Director and Chief Economist: Mr. Homi Kharas, EASPRTask Team Leader: Mr. Adrian Fozzard, EASPR

THE DEMOCRATIC REPUBLIC OF EAST TIMORTRANSITION SUPPORT PROGRAM

PROPOSED POST CONFLICT GRANT

TABLE OF CONTENTS

I. INTRODUCTION 1

II. RECENT DEVELOPMENTS 1

A. Poverty in East Timor 1B. Economic and Fiscal Developments 2C. Economic and Fiscal Outlook 3

III. GOVERNMENT'S POST-INDEPENDENCE PROGRAM 5

A. The National Development Plan 5B. Promoting Growth 5C. Poverty Reduction 7D. The Expenditure Program 10

IV. WORLD BANK GROUP STRATEGY 12

A. World Bank's Transitional Support Strategy 12B. Partnerships with Other Donors and Agencies 13C. World Bank Financing Strategy 14

V. THE TRANSITION SUPPORT PROGRAM 14

A. Rationale for the Program 14B. Transition Support Program 15C. Technical Assistance Requirements 21D. Implementation, Performance Indicators and Monitoring 21E. Grant Administration 22F. Trust Fund Arrangements 23G. Fiduciary Assessments 23H. Environmental Assessment Requirements 24I. Benefits and Risks 25

THE DEMOCRATIC REPUBLIC OF EAST TIMORTRANSITION SUPPORT PROGRAM

PROPOSED POST CONFLICT GRANT

Grant and Program Summary

Recipient: Democratic Republic of East Timor

Amount: US$ 5 million

Terms: IBRD (DGF) Grant

Description: The proposed Post Conflict Grant to be disbursed in a single tranche will support theimplementation of the Government of East Timor's post-Independence developmentprogram, as laid out in its National Development Plan and FY2003 Budget. Thecomponents of the program, are as follows:

(a) establishment of the framework for poverty reduction planning, allowing theGovernment to update and operationalize the National Development Planfocusing on key poverty reduction activities;

(b) creation of the institutional and legal framework for open democraticgovemance and an enabling environment for the private sector;

(c) ensuring a pro-poor orientation of public spending and strengthening ofexpenditure management controls; and

(d) improving cost-recovery in the power sector.

Benefits: Benefits of the proposed operation are:

(a) Avoidance of a sharp contraction in public spending following the withdrawalof the UN mission, allowing the Government to implement a FY2003expenditure program that is sustainable when future oil revenues are taken intoaccount.

(b) Establishment of basic governance structures and policies that improvetransparency and accountability in the public sector.

(c) Strengthened public expenditure management improving transparency,accountability and pro-poor orientation in the use of public funds.

(d) Creation of a regulatory environment conducive to private investment.(e) Improvements in the efficiency and effectiveness of public services, particularly

in the priority education and health sectors.(f) Strengthening of public sector financial management capacity by channeling an

increased volume of funds through government systems.

Risks and Risk Given capacity constraints and the challenges facing a newly independent country, theMitigation proposed Post-Conflict Grant may be considered a high risk operation. The key risks and

risk mitigation measures are:

(a) Local Capacity. Capacity constraints in East Timor will become acute as theUN mission winds down and expatriate staffing is reduced. One hundred "core"posts - including forty one in finance functions - will be funded from the UNassessed budget for three to twenty four months after May 2002. Bilateraldonors will provide support for additional "developmental" posts. TheGovernment has prepared a program of technical assistance in consultation withexternal partners, combining both long-term and short-term advisory services, to

facilitate implementation of the Transition Support Program.(b) Low budget execution. Aggregate budget execution has been significantly

below programmed levels due to lack of front-loaded external financing andweak execution capacity in line agencies. During FY2003, with the frontloading of donor funds, the Government intends to allow for quarterly frontloading of funds release to enhance budget execution. To support this strategythe Bank.will adopt a single tranche disbursement profile.

(c) Legislative bottleneck. The Transition Support Program presents an ambitiouslegislative agenda for the first year of Independence. Given Parliament's limitedtechnical capacity, this may constitute a bottleneck in program implementation.Formulation of a legislative program, which constitutes a prior action, is criticalto the implementation of a heavy legislative program. So too is the creation ofadequate parliamentary committee structures. The Action matrix itself reflects aphased program of legislative drafting. The Government has also soughttechnical assistance in legislative drafting and review from bilateral donors inparallel with the Transition Support Program.

(d) Continued high spending on power subsidies. Ambitious targets have been setfor the reduction of power subsidies in FY2003. It is the Bank's assessment thatthese targets are unlikely to be met, even if the Government puts in place amanagement contractor from January 2003. Performance should be monitoredclosely to ensure that the power subsidies do not increase significantly duringthe first six months of FY2003.

(e) Governance. Governance concerns have come to the fore in recent months,there are anecdotal accounts of corruption, lax civil service discipline, asrevealed by poor attendance, and difficulties in processing cases within thejustice system. Action will have to be taken promptly to enforce managementcontrols, strengthen the judiciary, improve transparency and citizens' awarenessof their rights. These issues are critical to the Government's credibility bothwith its citizens and with the donor community. Failure to address theseconcerns would seriously undermine the viability of the FY2003 and successorprograms. Actions intended to improve governance figure prominently in theFY2003 program.

Poverty Category: Not applicable

EstimatedDisbursements The grant would be disbursed in a single tranche of US$5 million.

Project ID Number: P075796

TRANSITION SUPPORT PROGRAMPROGRAM APPRAISAL DOCUMENT FOR A

POST CONFLICT GRANT TO THEDEMOCRATIC REPUBLIC OF EAST TIMOR

I. INTRODUCTION

1. East Timor became independent on May 20, 2002, following 25 years of conflict, a violenttransition from Indonesian rule in September 1999 and two and half years of United Nationsadministration. The country now faces all the challenges of nation-building with very limitedhuman resources, embryonic institutions, and high levels of poverty, particularly in the ruralareas.

2. The proposed Post Conflict Grant for the Transition Support Program (TSP) supports theGovernment of East Timor's post-Independence program, as laid out in its NationalDevelopment Plan and FY2003 Budget. Priority is given to the creation of the institutions,legislative framework and management systems needed for core government functions. The fourcomponents of the program are: establishment of the framework for poverty reduction planning,allowing the Government to update and operationalize the National Development Plan focusingon key poverty reduction activities; creation of the institutional and legal framework for opendemocratic governance and an enabling environment for the private sector; ensuring a pro-poororientation of public spending and strengthening of expenditure management controls; andimproving cost-recovery in the power sector.

II. RECENT DEVELOPMENTS

A. Poverty in East Timor

3. The 2001 Household and Suco (village) Surveys, complemented by a Participatory PovertyAssessment in twenty-four sucos, have shed light on living conditions and the extent of poverty.Preliminary household survey data indicates that 40 percent of the population is poor. Theincidence of poverty is significantly lower in urban centers (25.7 percent ) than in the rural areas(45.9 percent ), with the highest incidence of poverty found in the rural west and rural center ofthe country (51 percent ). About 85 percent of the poor live in rural areas.

4. Households lost their main economic assets - houses and livestock - during the violence in1999, with the border districts worst affected. This has aggravated structural food insecurity,with 30 percent of households reporting food shortages between rice and maize harvests. Half ofall children are malnourished. The surveys also reveal a legacy of under-investment in publicservices: almost half of the adult population never attended school; 46 percent cannot read;BCG (Bacillus Calmette-Guerin) vaccination rates are 41 percent for urban centers and just 27percent in rural areas.

5. While there are strong signs of recovery in the provision of public services, coverage andquality are still deficient. Most school buildings were destroyed in 1999, when the majority ofIndonesian teachers left. Since then, around 900 schools have been put back in operation and thegross enrollment rate has reached 95 percent. Nevertheless, in 2001, only two-thirds of children

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aged 6-11 attended school, over half of all students had no textbooks and a large proportion ofteachers were inadequately qualified. Around 200 health facilities have also been restored andthere is some improvement in the coverage of basic services, such as vaccinations. However, thenetwork is also sparse with average time to a community center around seventy minutes. Thismay explain low usage of health services. Similarly there is limited access to safe drinkingwater, with only 7 percent of families having dom.estic connections and around a quarter servedby community taps.

6. For most of those who participated in the surveys the most significant improvements since1999 have been in security and the degree of political participation. The Government hassought to engage communities in debate about development priorities and encourage activeparticipation in the political process. Turnout in the April 2002 presidential elections was 86percent.

7. There is considerable ethnic diversity in East Timor, with at least twelve separate,linguistically defined ethnic groups. Development strategies will have to be sensitive to thisdiversity and ethnic vulnerabilities where these exist.

B. Economic and Fiscal Developments

8. Destruction of much of the country's infrastructure and dislocation of the population led toa sharp decline in output in 1999. Since the restoration of public order in late 1999, the economyhas made a strong recovery. It is only possible to give rough estimates of economic performance,owing to the scarcity of economic data, but these suggest that non-oil GDP grew by 15 percent in2000 and 18 percent in 2001. Output, at US$389 million, is now comparable to pre-1999 levelsin real terms. Recovery has been strongest in the capital, Dili, driven by spending on services bythe international military and civil administration. However, the rapid rehabilitation of ruralroads, together with favorable weather conditions, has also elicited a strong response in ruralareas. Production of most food crops has now recovered to pre-1999 levels, though riceproduction is still lower than in the mid- 1 990s - owing to the poor state of much of the irrigationinfrastructure and competition from imports. Marketing of coffee, the main non-oil export, hasalso recently been affected by low international prices.

9. Consumer prices rose sharply in late 1999 and early 2000 due to the disruption of importsand rural marketing. Since then prices have stabilized, indeed inflation turned negative at the endof 2001 due to improved availability of goods and the winding down of the internationalpresence, which had kept prices unsustainably high. In January 2000, the East TimorTransitional Administration adopted the US dollar as the sole legal tender. Dollarization of theformal economy has proceeded rapidly, with around 90 percent of businesses using the dollar asthe means of payment. With the exception of border districts, most of the country is now fullydollarized. Two foreign commercial banks have opened delegations in Dili but there is still noaccess to banking services outside the capital. Although bank deposits have increased, to US$54million as of April 2002, commercial credit is still negligible.

10. On the external account, East Timor faces a huge trade deficit - with imports of goodsestimated at US$237 million and non-oil exports of just US$4 million in 2001 - driven by publicsector imports of capital goods for reconstruction and consumer goods to support the largeinternational presence. The trade deficit is financed by inflows of official grants.

11. East Timor has benefited from substantial inflows of external assistance, with total public

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spending amounting to around 70 percent of GDP in 2000 and 2001. More than half of thesefunds have supported UN technical assistance activities and bilateral programs. Publicexpenditures executed through the Consolidated Fund of East Timor (CFET) amounted to 14.3percent of GDP in FY2002. Approximately half of this amount has been financed from domesticand oil revenues (5.1 percent and 3.2 percent of GDP respectively in FY2002), with the deficitcovered by budgetary support from a consortium of donors. There has been a gradual shift inthe structure of public spending away from core government functions - including administrativeservices, defense and law and order - which accounted for nearly half of total CFET spending inFY2001, towards the social sectors, whose share of CFET spending increased from 26 percentin FY2001 to 33 percent in FY2002.

12. CFET execution rates have been significantly lower than programmed, at 86 percent oforiginal appropriations in FY2001 and 80 percent in FY2002. This is partly a consequence of afreeze on recruitment during the first half of the year and a freeze on minor capital spendingduring the second half, a policy of expenditure restraint to ensure adequate coverage ofcommitments from revenues and budgetary support disbursements, together with the coverageof some budgeted expenditures by UNTAET (utilities and office supplies) and Trust Fund forEast Timor (TFET) (medical supplies). Nevertheless, it is clear that there are underlyingcapacity constraints throughout the public sector that impede timely budget execution.

C. Economic and Fiscal Outlook

13. The withdrawal of the United Nations civil administration and winding-down ofpeacekeeping operations from early 2002 will lead to a decline in formal economic activity,particularly in the service sector. IMF forecasts anticipate slight decline in output over the yearas a whole, followed by a drop in output by 2.2 percent in 2003. Output is expected to pick upin 2004, with a projected 1.2 percent increase, achieving a long-term growth rate of around 5percent by 2006. The decline in output will be accompanied by a decline in imports, with thetrade balance expected to level out at around US$150 million a year by 2004. Although someincrease in non-oil exports is expected over the medium term, together with some increase in net-income and capital inflows, the overall balance will continue to be financed by official transfers.

14. Minor increases in sales, excise and services taxes, together with improvements in taxadministration, are expected to offset the downturn in the formal - taxable - non-oil economy,with non-oil revenues increasing slightly in FY2003 to 5.8 percent of GDP and then stabilizingover the period to FY2006 (see Table 1). Owing to changes in the oil and gas projects' taxregime, the oil and gas revenue profile is now likely to be backloaded, with significant increasesin revenues starting in FY2010 rather than FY2006 as originally anticipated. Conservativeestimates for oil revenues have been used to program the Medium Term Fiscal Framework(MTFF) resource envelope, discounted by 25 percent to accommodate price and volume risks.On this basis, oil revenues are expected to rise from US$21 million in FY2003 to US$76 millionin FY2006 (as compared with US$17 and US$214 million respectively in previous estimates).In line with Government policy, only oil tax revenues will be available to finance ConsolidatedFund spending. Royalties will be assigned to savings through the Timor Sea Account.

15. Appropriated CFET expenditures for FY2003 increase to US$70.7 million, largely due torecruitment against approved posts - in education, the police and defense forces - and increasesin administrative overheads, as the Government assumes responsibility for support servicesformerly provided by the UNTAET mission. The budget also provides for a small development

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Table 1: Consolidated Fund Position, FY2001 to FY2006 ($ million)

Component Actual Est. Budget ProjectionsFYOI FY02 FY03 FY04 FY05 FY06

Revenues 28.5 35.3 48.6 61.3 108.2 112.6Consolidated Fund 25.5 25.3 41.3 46.2 73.5 76.8

Non-Oil Revenues 15.5 19.3 20.8 20.1 21.3 22.9Oil Revenues 10.0 6.0 20.5 26.1 52.2 54.1

Timor Sea Account 3.0 6.0 0.8 6.6 24.2 22.3Revenue Retention Agencies - 4.0 6.5 8.5 10.5 13.5

Expenditure 51.3 53.8 77.7 83.1 96.6 101.4Salaries and Wages 13.9 19.8 26.0 28.0 28.9 29.5Goods and Services 15.7 23.4 35.6 40.3 42.4 42.3Minor Capital 21.7 10.6 6.1 4.9 5.3 4.6Capital & Development - - 3.0 10.0 20.0 25.0

Capital & Development (supplementary) - - 7.0 - - -

Self-Funded Agency Expenditure - 2.7 6.3 8.3 11.8 12.9Savings 3.0 7.3 1.0 6.8 22.9 22.9

Timor Sea Account - 6.00 0.8 6.6 24.2 22.3Revenue Retention Agencies - 1.30 0.2 0.3 (1.3) 0.6

Deficit/Surplus (25.8) (28.5) (36.4) (36.9) (23.1) (24.6)Net Financing 25.8 28.5 36.4 36.9 23.1 24.6

CFET Reserves (3.4) 15.0 5.1 - - -

Timor Sea Account - - - - - 24.6

External Financing 29.2 13.5 31.3 36.9 23.1 -

Non-Oil Revenues % GDP 4.4 5.1 5.8 5.7 5.8 5.7Expenditure % GDP 14.6 14.3 21.7 23.7 26.1 25.4Source: Ministry of Finance Note: Reserves (-) designates increases in reserves.

program, amounting to US$3 million, mainly comprising critical administrative infrastructure.The Government has also scheduled a supplementary budget of a further US$7 million forFY2003, to fund an expanded on-budget development program. Execution of this program is tobe deferred until the second quarter FY2003, pending the presentation of fully costed projectproposals, a review of budget execution and taking into account scheduled disbursements ofexternal assistance.

16. Total spending for the FY2003 to FY2005 period has been significantly cut back fromestimates presented at the December 2001 Oslo Donors Conference. This is largely due to thetrimming back of the capital program, from US$90 million over the three years immediatelyfollowing Independence, to a graduated program totaling just US$33 million - or US$40 millionif the proposed FY2003 supplementary budget is included. Recurrent expenditures for FY2003are also somewhat lower than the Oslo estimates, while the subsequent growth path is muchmore conservative, with expenditures rising to US$76 million in FY2006, as compared withUS$90 million in earlier projections. The proposed expenditure program yields a financing gapof US$84 million - US$91 million including the proposed FY2003 supplementary budget - overa three-year period, with external financing requirements peaking at US$37 million in FY2004.

17. The proposed expenditure path is sustainable when future revenue streams from on-goingoil and gas projects are taken into account. The Government anticipates that it will be able tofinance programmed expenditures from domestic revenues from FY2006. To achieve this goalGovernment may occasionally need to draw down on Timor Sea Fund investment income until

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substantial oil and gas revenues come on stream, though retaining principal in line with itssavings strategy. Continued external financing in FY2005 - when total revenues coverprogrammed expenditures - is justified by the need to build up adequate savings as a cushionagainst future price and volume shocks. This strategy is endorsed by the donor community.

III. GOVERNMENT'S POST-INDEPENDENCE PROGRAM

A. The National Development Plan

18. The Government presented its National Development Plan in May 2002. This wasprepared following a broad participatory approach. The Government launched a nationwideprogram of consultations in early 2002. About 38,000 people participated in meetings to discussnational priorities. Within the Government, eight cross-sectoral working-groups wereestablished, led by Ministers. These were responsible for the formulation of thematic visions,development goals, guiding principles and strategies, ultimately translating the thematicstrategies into sectoral programs that supported the formulation of the FY2003 budget andMedium Term Fiscal Framework for the period to FY2006. On the basis of these consultations,the Government has presented its vision for the year 2020 (see Box 1). This vision is now beingdisseminated to all households and schools in a booklet "East Timor 2020: Our Nation, OurFuture".

19. In achieving this vision, the National Development Plan presents a strategy for 2002-2006that has two overriding goals: to promote rapid, equitable and sustainable economic growth andto reduce poverty. The key elements of this program are outlined below.

B. Promoting Growth

20. The National Development Plan lays out the guiding principles for the Government's

Box 1: East Timor's Vision for 2020

. East Timor will be a democratic country with a vibrant traditional culture and a sustainableenvironment;

. It will be a prosperous society with adequate food, shelter and clothing for all people;

. Communities will live in safety, with no discrimination;. People will be literate, knowledgeable and skilled. They will be healthy, and live a long,

productive life. They will actively participate in economic, social and political development,promoting social equality and national unity;

. People will no longer be isolated, because there will be good roads, transport, electricity, andcommunications in the towns and villages, in all regions of the country;

. Production and employment will increase in all sectors - agriculture, fisheries and forestry;

. Living standards and services will improve for all East Timorese, and income will be fairlydistributed;

. Prices will be stable, and food supplies secure, based on sound management and sustainableutilization of natural resources;

. The economy and finances of the state will be managed efficiently, transparently, and will befree from corruption; and

. The state will be based on the rule of law. Government, private sector, civil society andcommunity leaders will be fully responsible to those by whom they were chosen or elected.

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growth-oriented economic policy. These provide for the maintenance of a market system, with astrategic and regulatory role for the Government in providing basic physical infrastructure andsocial services, and ensuring an enabling policy, legal and institutional environment. The Planaffirms the importance of open trade and investment policies and the maintenance of macro-economic stability, with low inflation and a competitive real exchange rate. It asserts a strongrole for the private sector, with the Government avoiding the temptation to pick winners andinvest directly in commercial activities.

21. In line with these principles, the NDP envisages a lean, effective and transparent publicsector, free of corruption. Despite pressures to increase ermployment opportunities by expandingthe size of the public sector - which had a payroll of over 28,000 in Indonesian times - theGovernment intends to keep total payroll for full-time permanent staff under 16,400 in FY2003and intends to cap the size of the core administration at 4,000. Public sector pay will remain atcurrent levels during FY2003, though the Government will undertake a study of pay policy inorder to address difficulties in recruiting and retaining qualified staff for high level professionaland managerial posts. It is expected that the FY2004 budget will incorporate elements of therevised pay policy. This will be accompanied by a new Civil Service Code covering matters ofpublic sector ethics, discipline and routine personnel management. Since this legislation is onlylikely to be presented to parliament in 2003, the Government intends to approve an interim-decree on ethics and discipline shortly after Independence, thereby sending a strong message tocivil service regarding standards of conduct.

22. The Plan stresses the importance of a prudent fiscal policy and sound financialmanagement practices in ensuring economic stability and an effective, transparent application ofresources. As noted in Section II, the Government has trimmed back its expenditure plans in linewith demonstrated execution capacity and revised revenue projections for the medium-term inorder to present a program that can be delivered and is sustainable, allowing a transition tofinancial independence within three years of Independence. Considerable progress has beenmade in designing a comprehensive, transparent budget, with a strong medium-term andperformance orientation. Public expenditure management systems are basically sound. Furtherwork on linking these systems to management controls on assets, personnel and procurement isincluded in the FY2003 program. One of the priorities for FY2003 is the development of an on-budget development program, with the introduction of procedures for the appraisal, managementand monitoring of investment projects. Not only will this facilitate the integration of externallyfinanced projects into the budget process, improving resource allocation in the short-term, it willalso provide a framework for ensuring that oil and gas revenues are used productively as theycome on stream. Action will also be taken to ensure that standards of financial management aremaintained, notably through the formulation of a medium-term capacity building plan that willaddress short-term capacity constraints as the UN mission winds down.

23. Management of oil and gas revenues presents a particular challenge, considering theexperience of other countries after such windfalls. The Govermment currently saves royalties soas to constitute an investment fund that will generate income in perpetuity, thereby ensuring thatfuture generations will benefit from the depletion of oil and gas reserves. The Government willput in place framework legislation during FY2003 to ensure that oil and gas revenues aremanaged transparently, with draw-downs to finance budget deficits subject to parliamentaryapproval.

24. The Government will also strengthen its economic management institutions, notably the

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Banking and Payments Authority, which acts as the Govermment's banker and regulator of thefinancial sector. The BPA now enjoys administrative autonomy. Over the next five years, theGovernment intends to further capitalize the BPA in order to promote its financial independence,while developing its capacity to manage an independent monetary and exchange rate policy.Development of a strong statistics capacity is also seen as a priority, in order for the Governmentto be able to monitor the impact of economic policies. A medium-term strategy for thedevelopment of the statistics system will be presented in FY2003.

25. The NDP gives high priority to the development of economic infrastructure, including thetransport, power and communications networks. While the public sector is seen as having acentral role in the establishment and maintenance of an adequate road transport network, thepower and communications networks are recognized as presenting opportunities for privatesector investment. Where, as in the power sector, the Government is currently the provider ofprivate goods, measures will be taken to ensure that services are managed on a commercial, cost-recovery basis and establish the institutional framework for autonomous public enterprises,whilst options for their transfer to private sector and the design of an appropriate regulatoryframework are explored. Regulations for the telecommunications sector have recently beenapproved. Establishment of an appropriate management structure and institutional frameworkfor the power sector figures prominently in the FY2003 program. This is intended to improvecost-recovery and reduce the drain on the state budget, freeing resources for the provision ofsocial services.

26. Establishment of an enabling environment for private sector development is seen as apriority for the period immediately after Independence. Government recognizes that anappropriate legal framework for private investment and commercial activity is a necessary -though not sufficient - condition for the development of the nascent local private sector and toattract foreign direct investment. Draft Public Notary Code, Commercial Code and ForeignInvestment Laws have been prepared and will be reviewed and submitted to Parliament duringFY2003. Further work is needed on the preparation of a Bankruptcy Law, which will probablybe based on models drawn from a country within the region. Key legislation should be in placeby the end of FY2003.

27. Resolution of the problem of land tenure is more problematic. Real estate and land recordswere destroyed in 1999 and East Timor lacks procedures for settling conflicting claims orregistering new titles. This has proved a significant impediment to private investment, not leastbecause it has prevented the collateralization of assets. The Government intends to issue adecree clarifying the status of abandoned land in urban areas in FY2003, establishing proceduresfor claimants to confirm title. This is a temporary solution. Studies and nationwideconsultations will be undertaken to assist in the formulation of an appropriate legal frameworkfor land ownership over the longer-term, taking into account the various traditional and formalland ownership systems, including the status of abandoned estates established under Portugueseand Indonesian administration.

C. Poverty Reduction

28. Economic growth is seen as a precondition for sustained poverty reduction, with citizensand the private sector as the driving force and the Government as facilitator. To ensure thatgrowth has a significant impact on poverty reduction, the Government proposes a PovertyReduction Strategy that seeks to:

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* Create an enabling environment to generate opportunities for the economicparticipation of the poor, improving their productivity and enhancing incomes;

* Provide and/or encourage and help others to provide basic social services to the pooron affordable terms;

* Provide or help to provide security of person and property, and protection fromunforeseen shocks and disasters (vulnerability), including food security at both thehousehold and national levels;

* Empower the poor and other vulnerable groups through popular participation indecision making, managing village development and at all levels of theadministration.

29. The broad framework of the Poverty Reduction Strategy is already clear. However, furtherwork is needed on the design of'specific sector policies and action plans. Those for educationand health sector are included in the FY2003 program. Work has also begun on policies foragriculture, fisheries and forestry. The requirement for preparation of FY2003 action plans willbe generalized and included in the FY2004 budget process. As part of its review of the NDPprocess, the Government intends to present a road map to operationalize the NDP beyondFY2003 and identify gaps in content and consultations. This provides for the preparation ofrolling plans that will operationalize the National Development Plan, linking medium-termoperational plans to the Government's Medium Term Fiscal Framework.

30. Given that the vast majority of the poor are engaged in agriculture, the agricultural sectorfigures prominently in the Government's strategy for the promotion of economic participation.Key initiatives identified in the National Development Plan include the rehabilitation andconstruction of irrigation systems, introduction of water harvesting techniques, wider distributionof improved seeds and other inputs, together with community participation in the sustainablemanagement of natural resources. Formulation of an agricultural policy, supported by acomprehensive program of public sector interventions, has already started. The NDP alsoidentifies measures for improving opportunities and the productivity of the informal sector, suchas training, introduction of appropriate technologies and provision of micro-credit, building onsuccessful on-going TFET and bilaterally financed initiatives. In all of these areas, theGovernment recognizes that it must work in partnership with NGOs and the private sector toachieve the desired coverage and quality of support services.

31. Delivery of basic social services, particularly quality primary and secondary education andprimary health care (including preventive programs such as immunization and public health), isgiven priority in the NDP., The Plan presents programs aimed at increasing enrolment rates,particularly for children from poor families, improving the quality of teaching, through increasedprovision of teaching materials and teacher training, and for adult literacy. In the health sectorthe delivery of basic health services will focus on the needs of women and children by expandingpreventive and promotive programs at the community level. Budgetary allocations in both thesesectors will favour primary level services, with primary education taking over 45 percent of thetotal education budget and allocations to hospitals capped at 40 percent of health spending.Provision of drinking water in urban areas will, eventually, be made on a cost-recovery basis,whilst community ownership and operation is already the norm in rural areas, with the Statesupporting initial investments.

32. The Government intends to promote community participation in the management ofservice provision as a means of improving efficiency and a tool for empowerment. A pilot

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program of school parents' associations will be introduced in FY2003 with a view to its eventualexpansion to national level. Similarly, the Government recognizes that it cannot be the soleprovider of basic social services if it is to achieve the desired levels of coverage. TheGovernment intends to strengthen partnerships with the Church, NGOs and the private sector, aswell as communities, in education, health and rural water supply. Public-private partnerships inthe education and health sector will be explored with a view to the expansion of cost-effective,quality services for all. To address these concerns, and ensure that Government agencies focuson the delivery of services, the FY2003 program includes the preparation of health and educationsector policies together with a number of "quick wins", areas in which service coverage can bestepped up relatively easily in the immediate post-Independence period.

33. Security has been a major concern of East Timorese over the past twenty five years,particularly in terms of security of person and property, but also in terms of food security andsecurity of livelihood, and protection against natural and man-made disasters. The relativelyhigh level of spending on public order and security - 19 percent of CFET spending in FY2002 -should be seen in this light. The Plan stresses the importance of police and law enforcementactivities and the establishment of a justice system that is independent, respects civil rights and issensitive to cultural values. This is a huge challenge given the current shortage of trainedlawyers and judges. The first step, addressed in the FY2003 program, is to put in place anappropriate legal framework for the judicial system. Statutes for judicial magistrates havealready been drafted and will be submitted to parliament, legislation on public prosecutors anddefenders will follow.

34. Alongside measures intended to promote growth and economic participation, which, byincreasing income and assets, should improve resilience to shocks, the NDP outlines the broadframework of a social safety net for the vulnerable. Since women and children are particularly atrisk, this includes school feeding and targeted provision of milk and food supplements forpregnant women and young children. The Plan also proposes to continue distributions of food tothe vulnerable during times of food stress, together with employment in public works,particularly road maintenance, as a self-targeted form of assistance. Programs aimed atimproving economic participation, will target those affected by economic shocks, includingthose laid off as UN mission and supporting services wind down.

35. Disadvantaged groups, including widows and orphans of the resistance, veterans, child-soldiers and the traumatized, deserve particular attention. The FY2003 program includes theestablishment of a veterans support unit and the development of a vulnerable groups policy.Again, the emphasis will be on partnership, with the Government supporting community, NGOand Church initiatives to ensure a basic safety net for all.

36. The National Development Plan process itself is evidence of the Government'scommitment to the empowerment of its citizens. The Government intends to build on thisexperience by establishing an institutional framework for continued civil society consultation inthe formulation and monitoring of operational plans at the national and sectoral level. Similarly,the Government's FY2003 legislative program provides opportunities for consultations with keystakeholders and, in the case of fundamental legislation, the wider public as part of thelegislative process. The Government will also extend mechanisms for community participation indecision making and service management developed under the Community Empowerment andLocal Governance Project, which delegates responsibilities for investment decisions to VillageDevelopment Councils, and in the rural water sector, by introducing community management

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structures for schools and health facilities.

37. At the same time, the Govermment intends to implement a gradual process ofdecentralization. This will entail the deconcentration of resources and decision-making authorityfrom line Ministries closer to the field level, with community management structures and theallocation of resources to the district / sub-national level as an essential first steps in a processthat will allow communities to guide sector programs. It will also entail the reform of localgovernment, providing opportunities for community and local participation in the prioritisationand management of services. The Community Empowerment and Local Governance Projectprovides one model. Studies launched in FY2003 will examine other options, leading to broadconsultations and the formulation of a program and implementation plan.

38. Civic education has played an important part in promoting popular participation in thepolitical and development process. Civil society organizations, including the Church, will bemobilized to promote awareness of civil rights and the rights of users of public services. Civiceducation will be included in a revised school curriculum. The Government too will seek topromote awareness of the role of public institutions, such as parliament, and policies. Specificmeasures in the FY2003 program include the dissemination of a popular guide to the Plan andpublication of a citizens' guide to the budget.

39. Safeguards have been built into the Constitution, including provision for an independentOmbudsman and an Administrative, Tax and Audit Court. Framework legislation for theOmbudsman's office will be presented and staff appointed by the end of FY2003. TheOmbudsman will address irregularities in public administration but also broader human rightsviolations, corruption and abuse of power. This oversight mechanism is seen as critical to aneffective campaign against corruption and the promotion and protection of human rights. In linewith the Constitution, the reports of an independent auditor, together with the management letterand management response, will be submitted directly to Parliament for review. Although it willnot be possible to establish the Audit Court in FY2003, owing to capacity constraints, frameworklegislation will be prepared with a view to implementation in FY2004.

D. The Expenditure Program

40. The proposed expenditure program is broadly in line with the. strategy laid out in theNational Development Plan. One feature of the program is the gradual increase in developmentspending, rising to nearly one quarter of total spending by FY2006 (Table 2). These funds aretentatively programmed for the expansion of periodic infrastructure maintenance programs,capitalization of BPA, capacity building and expansion in service delivery. This fulfils animmediate development purpose, by providing funds in investment in infrastructure and humancapital. It also compensates for the winding down of TFET projects in FY2004 and serves acapacity building function, by channeling an increased share of spending through the budget andtreasury, allowing Government to test and strengthen development project management systems.This capacity will be critical once the increased flows of oil revenues come on stream.

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41. As the development program expands, the share of spending on wages and salariesgradually falls from 37 percent in FY2002 to 29 percent by FY2006, spending on goods andservices falls slightly, while spending on minor capital drops to replacement levels. These arebroadly positive trends, suggesting that operational and development activities will benefit frommuch of the programmed increase in expenditure.

42. Allocations to the National Development Plan's priority poverty reduction sectors, health,education and social protection increases from 33 percent of the FY2002 final budget to 39percent in FY2003 and 47 percent of total programmed spending in FY2006 (see Table 3).This is well above allocations in other countries in the region, and is a concrete reflection of EastTimor's commitment to these sectors.

43. Health sector allocations increase from 10 percent of FY2002 final allocations to 11percent of programmed spending in FY2003 and 19 percent by FY2006. Additional spendingon goods and services accounts for the bulk of this increase, most of which is allocated to

Table 3: Actual and Programmed CFET Expenditure by Sector, FY2003-FY2006 (%)

Function Actual Est Budget ProjectionsFunction_________________ FY01 FY02 FY03 FY04 FY05 FY06

Core Government 49 40 - 40 40 39 40General Public Services 35 13 17 14 14 14Defense 1 8 6 9 9 9Public Order and Safety 13 19 17 17 16 16

Economic & Infrastructure 25 26 21 17 16 13Economic Affairs 22 23 17 14 13 9Environmental Protection - 0 0 0 0 0Housing & Community Dev. 3 3 4 4 3 4

Social 26 34 39 43 45 47Health 6 .10 11 16 17 19Education 20 24 27 25 26 28Social Protection I I I I IRecreation, Culture, Religion - - I 0 0 0

Total Programmed Expenditure 100 100 100 100 100 100Source: Ministry of Finance

purchases of pharmaceuticals and medical supplies. Per capita spending more than doubles,from US$6.5 to US$15, over this period, exceeding the international benchmark of US$12 percapita for a minimum package of health services from FY2004. The Government is committedto capping the share of health spending allocated to hospitals at 40 percent , thereby releasing

Table 2: Structure of Consolidated Fund Spending, FY2002 to FY2006 (%)

Actual Est Budget Projections. Consolidated Fund Structure FY01 FY02 FY03 FY04 FY05 FY06

Salaries and Wages 27.0 36.8 36.8 33.7 29.9 29.1Goods and Services 30.7 43.5 50.4 48.4 43.9 41.7Capital 42.3 19.7 8.6 5.8 5.5 4.5Development - - 4.2 12.0 20.7 24.7

Total Programmed Expenditure 100.0 100.0 100.0 100.0 100.0 100.0Source: Ministry of Finance

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funds for the services used by the poor.

44. Spending on education increases at a slower pace, from 24 percent of FY2002 finalallocations to 27 percent in FY2003, leveling out thereafter. Junior secondary and vocationaltraining benefit most from the additional funding. Senior secondary education's share ofeducation spending stabilizes, while spending on the University declines. So too does the shareof primary education, which falls from 60 percent in FY2002 to around 50 percent in FY2003and then drops to just 44 percent in FY2005. This is largely due to a shortage of qualifiedteachers, which restricts the short-term expansion of primary education, and the substitutioneffect of projectized external financing, which provides most teaching materials, so that costshave not been fully programmed. Clearly, education allocations will have to be increased stillfurther as these expenditures are brought on budget.

45. There are two areas of concern in the expenditure program. The first relates to spending ondefense and public order and security. Allocations for these sectors were increased to 26 percentof total spending just before Independence and are programmed as remaining around this levelthrough to FY2006. There should be scope for savings in the outer years of the program, onceimmediate security concerns have subsided after Independence. The second relates to thedecline in financing of economic affairs in FY2003 and thereafter. This is largely due to cuts inprogrammed transfers to the Power Authority, from US$6.8 million in FY2002 (12 percent ofCFET spending) to US$4 million in FY2003 (5.7 percent), with these transfers phased out byFY2006. Despite the recent improvement in the Power Authority's revenue collections, andmeasures programmed to enforce cost-recovery, this scenario appears optimistic. Moreover,allocations for agriculture and other economic support services remain insignificant, at around 4percent of spending (around US$3 million a year) in FY2003 and thereafter, despite the fact thatagriculture employs about 74 percent of the population, and most of the rural poor. Similarly,road transport's share of programmed CFET spending remains at around 4 percent from FY2003to FY2006. This is clearly insufficient to sustain the agricultural and road maintenance programscurrently financed under TFET and on-going bilateral projects. These sectors, and roadmaintenance in particular, should be considered as priorities under the Government's on-budgetdevelopment program if the investments undertaken during reconstruction are to be sustained. APublic Expenditure Review, scheduled for FY2003, is expected to identify the policy options thatwill enable the Govenmment to address these concems.

IV. WORLD BANK GROUP STRATEGY

A. World Bank's Transitional Support Strategy

46. The Transitional Support Strategy (TSS), presented to the Board in November 2000,provides the framework for assistance in the immediate post-Independence period until aCountry Assistance Strategy is prepared. The key elements of the strategy are: basic povertyalleviation and reconstruction over the short term; and analytical and advisory assistance on post-Independence policy and governance issues.

47. Since early 2000 the primary vehicle for World Bank support to poverty alleviation andreconstruction has been the multi-donor Trust Fund for East Timor (TFET). TFET has financedprojects in agriculture, education, health, infrastructure, private sector development, micro-finance and community empowerment, totaling US$160 million. TFET projects areimplemented by the respective Government departments. Besides financing a substantial

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reconstruction and service delivery program, TFET has contributed to the formulation of sectoralpolicy and development of institutional capacity.

48. Analytical and advisory services have included a Country Economic Memorandum,covering economic policy and governance issues, recently reviewed and endorsed by the EastTimorese authorities. A preliminary Poverty Assessment, based on a household survey, waspresented in February 2002 and the results used to support preparation of the NationalDevelopment Plan (see Section III). The World Bank has also supported a capacity buildingprogram for the political and administrative leadership and, with co-financing from the UK,technical support for preparation of the National Development Plan. Further technical supporthas been provided through the preparation of a Public Expenditure Management andAccountability (PEMA) Note, providing an assessment of fiduciary risks. The PEMA Note hascontributed to the Ministry of Planning and Finance's medium-term action plan for strengtheningfinancial management as reflected in the Government's FY2003 program.

49. Attention has now turned to the development of a comprehensive, government-led andgovernment-implemented development strategy based on the National Development Plan. Inthis context, the mechanisms by which external financing is delivered are important. TheGovernment faces a substantial fiscal deficit, formerly financed from voluntary contributions tothe UNTAET Trust Fund, which will now have to be financed as direct balance of payments andbudgetary support. The move from projectized assistance to balance of payments support alsohas a development purpose, since this will help develop local capacity to manage the increasedflows of resources that will become available when substantial Timor Sea revenues come onstream.

50. A Country Assistance Strategy (CAS) will be prepared in FY2003. This will build on theNational Development Plan and a parallel Poverty Reduction Strategy Paper process (see para29). Successor operations to the Transition Support Program are expected to figure prominentlyin the World Bank's medium-term strategy, given the importance of developing nationalexecution capacity as oil and gas revenues increase and East Timor moves towards financialindependence.

B. Partnerships with Other Donors and Agencies

51. There is a record of close donor collaboration in the implementation of reconstructionprograms in East Timor. Twenty two donors made voluntary contributions to the UNTAETTrust Fund financing Consolidated Fund deficits in FYs 2000, 2001 and 2002. Total financingover the two and half budget years amounted to US$58 million. Twelve bilateral donors havechanneled a further US$150 million through the Trust Fund for East Timor, managed by theInternational Development Association and implemented jointly with the Asian DevelopmentBank. In addition, bilateral donors with a field presence in East Timor - notably Portugal,Australia, United States of America, Japan and EU - also have substantial project portfolios.

52. The IMF has been closely involved in the design and staffing of the key public financeinstitutions, with advisors placed in the Ministry of Planning and Finance, the Revenue Service,Statistics and the Banking and Payments Authority. The IMF has also played a key role inmonitoring macro-economic developments and supporting the formulation of macro-economicand fiscal policy. East Timor is in the process of becoming a member of the IMF, IBRD andIDA.

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53. The Government and donors have defined the broad principles for budgetary and balanceof payments support financing post-Independence, as successor arrangements to the former UNtrust fund which disbursed directly to the Consolidated Fund account. The intention is toestablish a unified program, based on the NIP, supported by financing commitments for thethree years to FY2005, with a single monitoring framework and reporting mechanism. Funds areto be channeled to the Consolidated Fund, as before, and executed according to the budgetapproved by Parliament following Govemment procedures. Although the Government anddonors agreed that the World Bank and IMF would have a key role in monitoringimplementation of the Government program, the Govemrnment has encouraged all donors toparticipate and made provision for joint donor supervision missions.

54. Donors have been asked to provide support directly to the Treasury's Consolidated Fundaccount or, if more convenient, through parallel financing channeled through World Bank TrustFund arrangements. This allows the Government to mobilize financing from donors that do nothave a field presence in East Timor and would not otherwise have been able to contribute. So farseven donors have opted for World Bank administered trust fund arrangements (Australia,Finland, Ireland, New Zealand, Norway, Sweden, United Kingdom and United States ofAmerica) and several others have shown interest in such an arrangement (European Union andGermany). Total parallel financing arrangements are currently prograrnmed at US$80 million,

of which approximately US$70 million is expected to pass through World Bank administeredTrust Funds.

C. World Bank Financing Strategy

55. The World Bank envisages a mediurn-term program of assistance in support of theNational Development Plan over the three years to end-FY2005. The Transitional SupportProgram, as laid out in the attached Letter of Development Policy and Action Matrix prepared bythe Governrment and outlined in Section V below, provides the framework for World Bankassistance in FY2003. Progress in implementation of the proposed Action Matrix will beassessed prior to the negotiation of proposed subsequent operations, in order to verify the

Government's comrnitment to its program. A proposed follow-up operation in FY2004 wouldsupport implementation of an annual workplan laid out in the Governnent's FY2004 budget andaction plan.

56. Bank financing in FY2003 will amount to US$5 million. This will be provided as a grantfrom earmarked FY2003 Development Grant Facility allocations for the Post-Conflict Fund.Subsequent financing will depend on an assessment of requirements, taking into account theexpenditure program and grant financing available from other sources, including bilateral fundschanneled through World Bank administered Trust Funds.

V. THE TRANSITION SUPPORT PROGRAM

A. Rationale for the Program

57. The Transition Support Program provides the basis for the Government to mobilizebridging finance that will allow East Timor to implement a modest development program in thethree years immediately after Independence before increasing oil and gas revenues enable theGovernment to finance its expenditure program from its own resources. Given the size of theprogrammed fiscal deficit, undeveloped capital markets and a statutory prohibition on borrowing

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from the Banking and Payments Authority, there is little prospect of raising financing from

domestic sources. Consequently, during this transition, balance of payments support andbilateral budgetary support will address both external and fiscal gaps, mobilizing donor funds

and thus allowing East Timor to sustain a level of imports and public expenditures that would not

otherwise be possible. By channeling these funds through the Government budget system,balance of payments and budgetary support will also fulfill a developmental purpose in

strengthening the Government's capacity to manage future revenue streams.

58. On the basis of the Government's FY2003-FY2006 Medium Term Fiscal Framework, total

budgetary and balance of payments support financing requirements for the three years to FY2005are estimated at US$91 million including the programmed FY2003 supplementary budget (seeTable 1, page 4). Financing requirements for FY2003 are estimated as US$24.3 million

(US$31.3 million with the supplementary budgetary). The Bank's proposed contribution in

FY2003 will be US$5 million.

B. Transition Support Program

59. The Transition Support Program provides the framework for an annual programcomprising four components: continued poverty reduction planning and quick wins in servicedelivery; governance and private sector development; public expenditure policy and

management; and power sector management. These components and the supporting actionsreflect priorities identified in the Government's National Development Plan. They have beenidentified through a process of consultation with Government departments, led by the Prime

Minister, and endorsed by key external partners.

60. The prograrn is broad ranging, seeking to put in place the basic framnework for an open anddemocratic state apparatus in the period immediately after Independence. Given limited capacity,

the creation of fully functioning institutions is likely to be a much longer process. Nevertheless,the Government believes that it is important to take action on a broad front immediately afterIndependence, in order to lay the foundations for future capacity building and create an

environment for development.

61. There are no tranche conditions for World Bank fmancing. Government has implementedthe key actions identified as necessary for a successful launch of the FY2003 program, and onthis basis it is recommended that a single tranche operation should be approved. Notably the

Recipient has:

a) approved and published its National Development Plan for fiscal years 2003-2007.

b) published and disseminated the popular version of its National Development Planentitled "East Timor 2020: Our Nation, Our Future".

c) prepared a draft policy framework for the Ombudsman's Office and initiated civilsociety consultations.

d) prepared a comprehensive fiscal year 2003 budget with detailed budget line items,staffing profiles and Government agencies' performance indicators.

e) included the guiding principles for the Recipient's oil fund in its fiscal year 2003

budget document.f) presented to Parliament a fiscal year 2003 budget with appropriated core

Consolidated Fund expenditures of $67,700,000 (excluding appropriated and

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supplementary capital and development expenditures and programmed savings of theTimor Sea Account), with (i) a permanent payroll of less than 16,400 staff; (ii)expenditure allocations for the health and the education sectors greater than 35percent of core Consolidated Fund programmed expenditures; and (iii) expenditureallocations for defense and public order of less than 22 percent of core ConsolidatedFund programmed expenditures.

g) prepared a revised chart of accounts for the execution of the fiscal year 2003 budgetwhich specifies line items for consumables and temporary employees.

h) conducted an interim audit of the fiscal year 2002 financial statements up to May 20,2002, the date of independence.

i) employed an interim management team for its Power Service for the period fromMay 20, 2002 to August 30, 2002.

j) appointed a consultant to prepare terms of reference and performance indicators forthe management contract for the East Timor Electricity Authority.

62. At the Government's request, the priority actions identified under each of thesecomponents have been broken down by quarter. This allows the Government to identify whereactions are running behind schedule and take the corrective necessary action. It also allows theGovernment to schedule a staggered process for legislative drafting, consultation andpresentation to the legislature.

63. The program is presented in detail in the attached Letter of Development Policy and ActionMatrix. The summary below identifies prior actions completed by appraisal and key outputs tobe achieved by component during FY2003.

64. Continued Poverty Reduction Planning and Quick Wins. This component seeks tomaintain the momentum of poverty reduction planning initiatives launched by the NationalDevelopment Plan by establishing an institutional framework for updating and operationalizingthe Government's development strategy and providing an adequate policy framework for theeducation, health and social protection sectors, whilst at the same time implementing priorityactivities that can bring immediate benefits. Particular attention will be given to monitoring theimpact of policies on the poor and vulnerable, to ensure that they benefit as much as the rest ofthe population from public sector interventions. Prior actions and key actions programmed forFY2003 are, by National Development Plan objective:

a) Keeping the vision alive - operationalizing and updating the National DevelopmentPlan and Poverty Reduction Strategy. Prior actions include, publication of theNational Development Plan and dissemination of popular version of the plan to allhouseholds and schools. Key programmed actions are:

Establishment of the institutional framework for routine planning, including: i)strengthening of Economic Planning and Project Assessment Unit in theMinistry of Planning and Finance, assuming routine planning and monitoringfunctions of the Planning Commission after Independence; ii) nomination ofplanning focal points in each line agency; and iii) a high level coordinationstructure for participative implementation and monitoring of NDP andsubsequent planning exercises.

. Operationalization and updating of the National Development Plan, bypreparing (i) agency action plans for FY2003, particularly for key poverty

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reduction sectors (education, health and justice), followed by rolling actionplans for FY2004 -FY2006 presented with budget submissions; and (ii) a roadmap for operationalization of the NDP beyond FY2003, identifying gaps incurrent policy and strategic framework and consultation strategy.

b) Expansion of access to primary and junior secondary education, whilst improvingefficiency and quality, and creating incentives for partnerships with communities,NrGOs and the private sector. Prior actions include, restoration of public educationnetwork with 713 schools in operation, and completion of a school mapping exercise.Key programmed actions are:

* Adoption of a National Education Policy, focusing on primary and secondaryeducation, and rolling plan for FYs 2004-06.

* Piloting of a program to enhance the role of parents' associations in schoolmanagement.

c) Targeting of health care to achieve the greatest impact on mothers and children, byemphasizing promotive and preventive health care close to the community. Prioractions include, restoration of health network, installation of health office in eachdistrict and launch of consultations on health policy framework. Key programmedactions are:

. Adoption of a Health Policy Framework, addressing organization andmanagement, relationship with religious organizations, NGOs and communities,health financing, human resources, infrastructure, and pharmaceuticals policy,and rolling plan for FYs 2004-06.

* Expansion of the coverage of basic mother and child services, including anincrease in the number of trained midwives from 135 to 327 and an increase inDPT3 coverage from 60 percent to 80 percent.

d) Define and locate vulnerable groups and assist through targeted training andfinancial support. Prior actions include, creation of a window for highly vulnerablegroups in the community empowerment program, establishment of social servicesdepartment in Dili and authorization of veterans affairs unit. Key programmedactions are:

* Establishment and staffing of a veterans unit.* Strengthening of working and policy groups on veterans affairs involving

stakeholders.* Preparation of a policy and institutional framework and medium-term action

plans for veterans programs.* Integration of the medium-term action plans for veterans programs in FY04-06

rolling plans of all Ministries.

65. Governance and Private Sector Development. This component seeks to establish theinstitutional and legislative framework for an open, efficient state founded on the rule of law andan enabling environment for private sector development and investment. Actions programmedfor FY2003 are, by National Development Plan objective:

a) Implementation of an annual legislative program. Government has prepared a draftlegislative program. This will be finalized in consultation with the Parliament,adopted and implemented.

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b) Establishing an independent judiciary with technical quality, respect for citizenshiprights, sensitivity to cultural values and popular participation and involvement. Prioractions include, adoption of a Constitution providing for an independent judiciaryand preparation of a draft judicial magistrates code. Key programnmed actions are:

• Finalization and submission of judicial magistrates' code and legislation onpublic prosecutors and public defenders to Parliament.

* Nomination of the Superior Council for the Judiciary.

c) Creation of an enabling environment for the private sector. Prior actions include,preparation of drafts of the investment, commercial and notary codes, and posting ofland dispute mediator and claims registrators in three regional centers. Keyprogrammed actions are:

* Finalization and submission of the Commercial Code, and Investment andPublic Notary to Parliament, drafting and submission of the Bankruptcy Laws tothe Council of Ministers.

. Launch of background studies on land legislation and their review byGovernment and stakeholders.

* Issuing of Ministerial Decree to clarify the status of abandoned property.

d) Raise awareness of citizens' rights, defend citizens against abuse of power andsafeguard them against corruption. Prior actions include, adoption of Constitutionproviding for an independent Ombudsman's office, and preparation of a frameworkpaper and draft organic law. Key programmed actions are:

* Finalization and submission of organic law on Ombudsman to Parliament, andnomination of Ombudsman and staff.

* Implementation of a pilot on the role and functions of the Ombudsman's officeand a pilot information campaign on fees for basic public services.

e) Creation of a lean, efficient and transparent civil service, free of nepotism andcorruption. Prior actions include, preparation of a draft civil service statute andcapping of number of civil service personnel at 12,000. Key programmed actionsare:

* Publishing of a Interim-Ministerial Decree on civil service discipline.* Finalization and submission of civil service statute to Parliament.* Compilation and making public information on complaints of absenteeism,

irregularities, and corruption among civil servants, investigations and actionstaken by concerned Ministries and Inspector General's Office

f) Provide the enclave District of Oecussi with a special status reflecting its particular

circumstances and needs. Prior actions include establishment of an inter-ministerialtask force on the special status of Oecussi. Draft legislation on the special status of

Oecussi will be prepared.

g) Decentralize Government and empower communities to manage their local affairs.Prior actions include the establishment and staffing of 13 districts, nomination of

subdistrict coordinators and implementation of block grants to sucos through thecommunity empowerment program. A study will be completed on decentralizationoptions, as a means of defining the role of central and local government andcommunities, facilitating cost effective and efficient delivery of services,strengthening transparency, and empowering communities and grassroots

democracy.

66. Public Expenditure Policy and Management. This component seeks to ensure thatresource allocations and budget execution are broadly in line with initial budget allocations andforward estimates, favoring the poverty recluction programs, whilst at the same timestrengthening the public expenditure management systems to ensure transparency andaccountability in the application of public funds. Actions programmed for FY2003 are, by NDPobjective:

a) Strengthen capacity in core financial management functions. Prior actions includethe preparation of an interim framework for capacity building. During FY2003, theMinistry of Planning and Finance m,ill finalize and approve a capacity building planand contract long-term technical support and training in those areas where gapsidentified.

b) Promote stable, sustainable econo;nic growth and monitor economic and socialprogress. Prior actions include a commitment to market oriented economic policiesin the NDP, with flexible pricing policies, together with the routine collection ofconsumer price index data. Key programmed actions are:

* Monitoring of economic and social developments and indicators in cooperationwith IMF.

* Approval of a medium-term program for the development of statistical reportingsystems.

* Presentation of a review of economic trends and statement of guiding principlesof economic policy in mid-year budget review.

. Improvement in compilation of trade and price statistics, includingimplementation of the automated system for customs data (ASYCUDA).

c) Implementation of a prudent, pro-poor expenditure policies. Prior actions includeapproval of a pro-poor FY2003 budget, with core CFET spending at US$67.7(excluding, appropriated and proposed supplementary capital and developmentexpenditures and programmed savings of the Timor Sea Account) with health andeducation spending at 37 percent of programmed spending. Key programmedactions are:

* Execution of the FY2003 budlget with total permanent staff less than 16,400;current pay policy, maintained; defense and police spending less than 20 percentof core CFET; education and health greater than 35 percent of core CFETspending; primary education greater than 45 percent of core CFET educationspending; and hospitals less than 40 percent of core CFET health spending.

* Completion of review of public sector pay policy, together with proposals fortheir implementation, with results submitted to the Council of Minister.

d) Ensure transparency and accountarbility to the legislature in public expendituremanagement. Prior actions include submission of FY2003 budget to Parliament forapproval and interim audit the appioval of a comprehensive, performance orientedbudget to Parliament. Key programmed actions are:

* Submitting Report of independent auditor on FY2002 financial statementssubmitted to Parliament with M:anagement Letter and Response.

* Establishing a working group to review requirements for independent audit

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function (Tribunal das Contas), prepare TOR and contract consultants.Citizens Guide to the budget published.

e) Improve the policy consistency, efficiency and effectiveness of public spending, byensuring a disciplined, open and consultative budget process. Prior actions includethe approval of a comprehensive budget with detailed budget books, staffing profileand agency performance indicators. Key programmed actions are:

* Presentation of a revised Budget Framework Law to Parliament, providing for:(i) an outline budget process, based on prior establishment of expenditure limits;(ii) establishment of agency budget management committees; (iii) institutionalresponsibilities for target setting and reporting; (iv) integration of externalfinancing in the budget process, including requirement for MPF endorsement ofall financing agreements; (v) presentation of all financial assets in budget andaccounting documentation.

* Development project appraisal, tracking and reporting system established, withproject portfolio appraised and approved for FY2003.

* Public Expenditure Review focusing on poverty reduction sectors launched andpreliminary results used in FY2004 budget process.

. Preparation of a comprehensive FY2004 budget, including presentation ofagency spending by district and a comprehensive list of development projects.

f) Ensure compliance with expenditure policy and legislation by strengtheningexpenditure controls and information systems. Prior actions include specification ofline items for consumables, verification of the asset register and approval ofprocurement tracking system. Key programmed actions are:

* Implementation of management information systems for asset management,procurement tracking and integration of personnel and payroll systems.

* Approval and publication of policy on vehicle procurement and directive ontemporary public sector employees.

g) Ensure that oil and gas revenues are used productively, transparently andaccountably to benefit present and future generations. Guiding principles for themanagement of the oil fund were outlined in budget documentation. The legalframework for the Timor Sea Fund will be submitted to Parliament by the end ofFY2003.

67. Power Sector. This component seeks to strengthen management capacity and institutionalframework for the power authority, thereby improving service quality and cost recovery.Actions programmed for FY2003 are:

a) Establish appropriate, adequately staffed and motivated management structure ofEast Timor Electricity. Prior actions include establishment of a power sector steeringcommittee, extension of contracts of interim management team, appointment of aconsultant to prepare Terms of Reference and Key Performance Indicators for aManagement Contract, and agreement on a moratorium on the expansion ofgenerator capacity until the financial and institutional position of the power authorityis resolved. The Govermment intends to appoint new management, either through amanagement contract or a management team (selection of management model to bemade by September 2002).

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b) Improve cost recovery. Prior actions include approval of reduced budgetappropriations for power sector, lauwch of cost recovery and awareness campaigns,report on status of billing errors in performance reports, and launch of consultationson community management for sub-clistrict systems. Key programmed actions are:

* Contracting out of meter installation in Dili with 2,500 meters installed.* Approval of amended tariff direcvtive with provision for enforcement.* Tariff analysis and targets for cost recovery set.* Monthly reports on performance, including billing errors.

c) Establish appropriate institutional structure for an autonomous power authority.Prior actions include approval of a regulation for revenue retention and ToR forexternal audit for power authority. A draft legal framework for a autonomous powerauthority will be submitted to parlianment in FY2003.

d) Prepare long-term national power development plan. Prior actions include issuingof ToR for preparation of a developrnent plan. A draft National Power DevelopmentPlan will be presented in FY2003. This will include an assessment of theenvironmental and social impact of alternative development strategies.

C. Technical Assistance Requirements

68. Given capacity constraints within the publ[ic administration, this ambitious program canonly be implemented if the Government receives adequate and timely technical assistancesupport. An assessment of in-line technical assistance requirements has been made by theGovernment with the assistance of UNDP. This has identified 100 "stability" posts and 200"development" posts many of which are now being filled. Additional support is providedthrough TFET and bilateral projects.

69. In consultation with external partners, the Govermment has identified additional technicalassistance required to implement the actions identified in the Action Matrix for FY2003. Theproposed Technical Assistance Program is pre,ented as an attachment to the Government'sLetter of Development Policy. The Government and external partners will monitor the deliveryof programmed technical assistance alongside the monitoring of the Transition Support ProgramAction Matrix.

D. Implementation, Performance Indicators and Monitoring

70. Implementation Arrangements. The Transition Support Program will be implementedunder the overall guidance of the Prime Minister's Office. The program will be managed by theMinistry of Planning and Finance (MPF) under the direct supervision of the Minister of Planningand Finance. The Minister will be assisted by a Program Management Team that will includeofficials from MPF's Budget Office, Treasury, and the External Assistance and ManagementDepartment, together with representatives of the Council of Minister's Secretariat, and theMinistry of Foreign Affairs and Cooperation. Additional members of the Team includerepresentatives of the Ministries of Justice, Education, Health and Transport, Communicationsand Public Works, and other priority sector agencies. The Program Management Team will beresponsible for tracking and reporting on implementation actions identified in the TransitionalSupport Program, as well as recommending conrective actions where the program is at risk ofgoing off track. The Team will ensure that there i.s adequate participation across the Governmentand that all key stakeholders, including external partners, are informed of progress.

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71. Monitoring arrangements. The Government will ensure regular monitoring of theactivities supported by the Transition Support Program and subsequent annual programs throughregular meetings with the Donor Community and quarterly progress reports. The Government'sprogress reports will assess the current status of each of the program components and, whereimplementation is off-track, propose corrective actions. Regular meetings with donors willprovide an opportunity to assess the status of donor inputs to the program, both in terms ofexternal financing and the delivery of technical assistance inputs. Formal quarterly reviews willbe complemented by regular updates on the program's status presented in the routine monthlyDonor Coordination Meeting between the Government and resident donor missions.

72. The World Bank will field Supervision Missions late in the second and fourth quarters ofFY2003. The Supervision Missions will make an assessment of progress against each of theprogram components and present recommendations on rescheduling and reprioritization whereimplementation is off-track. The intention is to support the Government in implementing itsprogram. The Supervision Missions will present a report on the status of the Transition SupportProgram to the Government and participating Donors.

73. Disbursement of Bank funds under the FY2003 Transition Support Program is notconditioned on progress in implementing the actions as programmed in the Government's ActionMatrix. However, progress will be taken into account in assessing the Government'scommitment to its development program in determining the proposed level of financing andcontent of subsequent programs. This assessment will focus on the broad achievements,strengths and weaknesses of the Government's implementation record rather than the status ofindividual actions. The assessment will be used to support the design of the FY2004 program.

74. The Government's guiding principles for donor support in the post-Independence periodassign the IMF a central role in the monitoring of macro-economic developments and advisingon macro-economic policies. The IMF's consultation mission will be held in October/November2002, in time to assist in the preparation of the FY2003 Mid-Year Budget Review and launch ofthe FY2004 Budget process. The results of this consultation, and on-going monitoring activities,will constitute an important resource for the World Bank's Supervision Mission and routinemonitoring of the Transition Support Program.

E. Grant Administration

75. Recipient and Grant Amount. The grant recipient is the Democratic Republic of EastTimor. The Post Conflict Grant is a single tranche grant of US$5 million. The first and onlytranche will be made available upon grant effectiveness. The closing date of the Grant is June30, 2003.

76. Disbursement, Reporting and Auditing Arrangements. Disbursement, reporting andauditing arrangements for the Grant will follow IBRD's simplified disbursement procedures foradjustment operations'. Disbursement will not be linked to any specific purchases and noprocurement requirements will have to be satisfied. Measures taken to ensure that the overallfiduciary policies and institutions are adequate to proceed with support from IBRD and otherdevelopment partners are outlined below (paras 83 and 86).

1 Operational Memorandum: Simplifying Disbursements under Structural and Sectoral Adjustment Loans,February 8, 1996.

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77. The Recipient will open and maintain a dedicated Deposit Account in US dollars in theEast Timor Banking and Payments Authority (BP.A) into which the proceeds of the Grant will bedisbursed for the Recipient's use, once approved by the Bank. Disbursements from the DepositAccount will follow normal Government policies and procedures. If after deposit in the DepositAccount the proceeds of the Grant or any part thereof are used for ineligible purposes, as definedin the Grant Agreement, the Bank will require the Grant Recipient to either return that amount tothe Deposit Account to be used for eligible purposes, or refund the amount directly to the Bank.The Ministry of Planning and Finance, on behalf of the Government, will maintain anappropriate accounting system in accordance with generally acceptable accounting principles. Ifrequired by the Bank, the Deposit Account may be independently audited on the basis of termsof reference agreed with the Bank.

78. All US dollar disbursements out of the Deposit Account will be executed by theGovernment of the Democratic Republic of East rimor in accordance with its existing rules andshould be monitorable by the Bank. The Ministry of Planning and Finance will ensure thatpayments are made for eligible imports and will retain supporting documentation (includingCommitments and Payments Vouchers, evidence of receipt of payment, evidence of importation,such as bills of lading and certification from the Border Control that goods have been imported).

F. Trust Fund Arrangements

79. A number of bilateral donors will provide financing in support of the Government's post-Independence program, either through direct agre-Iments with the Government of East Timor orthrough World Bank administered Trust Fund arrangements. Following the guiding principlesagreed with the Government, the Government's National Development Plan and the annualprogram presented in the Budget will provide the framework for all programmatic assistanceover the period to FY2005.

80. Bilateral donors have been encouraged to commit resources for Trust Funds over a threeyear period. These commitments will be progranuned annually, on the basis of an assessment offinancing requirements by the Government, in collaboration with the World Bank, the IMF andbilateral partners. Annual programs will be reflected in subsequent annual Letters ofDevelopment Policy and Action Matrices. Should the Government complete a full PRSP, thiswould provide the basis for a multi-year program.

81. World Bank administered Trust Funds apply World Bank procedures. For the purposes ofthe Transition Support Program and successor operations in the period to FY2005, the WorldBank has provided a waiver, allowing the Recipient to use Trust Fund disbursements forexpenditures in the currency of the Recipient and originating from the territory of the Recipient.

82. The Recipient of Trust Funds will open and maintain dedicated Deposit Accounts in USdollars in the East Timor Banking and Payments Authority (BPA) into which the proceeds ofTrust Funds will be disbursed. The Deposit Accounts will be independently audited each year onterms of reference already agreed with the Bank.

G. Fiduciary Assessments

83. Public Expenditure Management and Accoiuntabiity Note. A draft Public ExpenditureManagement and Accountability Note has been prepared by the World Bank, cleared by theRegional Financial Management Advisor in March 2002 and was subsequently shared with the

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authorities. Its findings have served as an input to the design of the Government's strategy forstrengthening public expenditure management systems, as reflected in the FY2003 Budgetbackground presentation. The findings are also reflected in the Transition Support Program'sAction Matrix.

84. The overall fiduciary risk in East Timor is considered medium to high. The core Treasurymanagement system is robust, with a centralized payments system providing for multiplecommitment and payment controls, supported by an on-line computerized payments trackingsystem. The principal weaknesses in the current system relate to the linkages between theTreasury payments systems and supporting management controls, particularly as regards:inconsistencies between personnel registers held by Civil Service and Public Employment Unitand Treasury's payroll registers; difficulties in tracking payments through the procurementprocess; and lack of a comprehensive asset register for public agencies. These deficiencies arebeing addressed by Treasury as it rolls out its information systems.

85. Notwithstanding the soundness of the existing expenditure management systems, thedeparture of expatriate personnel will increase fiduciary risks, particularly in areas such asprocurement, recruitment and operations administration. National personnel are not yetadequately acquainted with management controls to ensure adequate enforcement. The rolling-out of Treasury information systems should mitigate these risks. However, these risks will besignificantly increased if Treasury gatekeeper functions - supervision and clearance ofcommitments and payments - are transferred to national staff without sufficient training and on-the-job experience.

86. Also of concern is capacity in key analytical functions, particularly in planning andbudgeting. While a sound, performance oriented system has been put in place, this reliedheavily on expatriate advisors to ensure quality budget analysis. The expatriate budget team hasnow been replaced with a team that is not yet familiar with the systems currently used in EastTimor. Further strengthening of the budget functions, through the provision of additionaltechnical assistance personnel, should be considered a priority before the Government undertakesits FY2003 Mid-Year Budget Review and starts the FY2004 budget process.

87. Country Procurement Assessment. A draft Country Procurement Assessment Report(CPAR) was presented to Government review in May 2002. This indicates that the procurementrisk is high, owing to the weak institutional capacity for procurement management. The draftCPAR presents a program of action that is already under consideration by the Government,including: modification of the Procurement Regulations and Manuals and, as an interimmeasure, deletion of provision for obtaining telephone quotations and reduction in the thresholdfor purchases through shopping (quotations) to US$15,000; institution of procurement planningprocedures, including greater coordination between budget, planning and procurement processes;establishment of the Procurement Policy Committee; and installation of the procurement moduleof FreeBalance, in the Procurement Unit and Treasury. The Government has endorsed theseproposals and is already taking steps to implement the preliminary report's recommendations.

H. Environmental Assessment Requirements

88. The proposed Transition Support Program supports policy and institutional developmentactivities. In accordance with Bank's environment policies (OP 4.01), this operation is classifiedas Category C.

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I. Benefits and Risks

89. Benefits. The Benefits of the proposed oper-ation are:

a) Avoidance of a sharp contraction in public spending following the withdrawal of theUN mission, allowing the GovermnerLt to implement a FY2003 expenditure programthat is sustainable when future oil revenues are taken into account.

b) Establishment of basic governance stiuctures and policies that improve transparencyand accountability in the public sector.

c) Strengthened public expenditure management improving transparency,accountability and pro-poor orientation in the -use of public funds.

d) Enhancing the regulatory environmeni conducive to private investment.

e) Improvements in the efficiency and effectiveness of public services, particularly inthe priority education and health sectors.

f) Strengthening of public sector financial management capacity by channeling anincreased volume of funds through govermment systems.

90. Risks and Risk Mitigation. Five risks are identified:

a) Local Capacity. Capacity constraints in East Timor are acute. The Government hasnot been able to recruit about 25 percent of senior management posts. Staff that havebeen recruited often lack experience and requisite technical skills. There are just afew dozen trained accountants and economists in the public sector. Throughout theGovernment senior management and supervisory posts have been occupied byexpatriates: national staff have largely been engaged in routine tasks rather than in asupervisory capacity. These constraints have come to the fore as the UN mission haswound-down and expatriate personnel departed. The UN has secured financing forone hundred "core" posts for three to twenty four months, of which forty one postsare in core expenditure management, revenue administration and supportingfunctions and five are agency Finance Officers. The UN is seeking bilateral donors'support for an additional two hundred "development" posts, some of which may befilled by bilateral donors directly, though many remain vacant. Government hasprepared a program technical assistamce in consultation with external partners,combining both long-term and short-term advisory services, to facilitateimplementation of the Transition Support Program. Mobilization of this support iscritical to the implementation of the program.

b) Low budget execution. Aggregate budget execution has been significantly belowprogrammed levels - with year end execution at 86 percent in FY2001 and anestimated 84 percent in FY2002 - due to lack of front-loaded external financing andweak execution capacity in line agencies. During FY2003, with the front loading ofdonor funds, the Government intends to allow for quarterly front loading of fundsrelease to enhance budget execution. Tro support this strategy the Bank will adopt asingle tranche disbursement profile. The Bank has encouraged bilateral partners toadopt a similar strategy.

c) Legislative bottleneck. The establishment of the institutional framework forgovernance, public sector management and regulation of the private sector representsan ambitious legislative agenda for the first year of Independence. Given

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Parliament's limited technical capacity, this may constitute a bottleneck in programimplementation. Formulation of a legislative program, which constitutes a prioraction for the Transition Support Program, is critical to the implementation of aheavy legislative program. So too is the creation of adequate parliamentarycommittee structures. The quarterly breakdown of program actions has allowed theGovernment to schedule extensive consultations and stagger presentation of keylegislation to Parliament. This should reduce pressure on the legislature. TheGovernment has also sought technical assistance in legislative drafting and reviewfrom bilateral donors in parallel with the Transition Support Program.

d) Continued high spending on power subsidies. The power authority has recently putin place billing systems - albeit error prone systems - and stepped up enforcement,leading to a recent improvement in cost-recovery, the authority cannot meet itstargets for FY2002. Even so ambitious targets have been set for FY2003, reducingsubsidies from US$6.8 million in FY2002 to US$4 million in FY2003. It is theWorld Bank's assessment that these targets are unlikely to be met, since the existingmanagement team is unlikely to recover US$2.5 million in the period before January2003, when the management contract is scheduled to begin. Progress must beclosely monitored to ensure that power authority subsidies do not increasesignificantly in the first half of FY2003.

e) Governance. Governance concerns have come to the fore in recent months, there areanecdotal accounts of corruption, lax civil service discipline, as revealed by poorattendance, and difficulties in processing cases within the justice system. Action willhave to be taken promptly to enforce management controls, strengthen the judiciary,improve transparency and citizens' awareness of their rights. Failure to address theseconcerns would seriously undermine the viability of the FY2003 and successorprograms. Actions intended to improve governance figure prominently in theFY2003 program.

Attachments

A. Letter of Development PolicyB. Action MatrixC. Technical Assistance Program

Annex 1

DEMOCRATIC REPUBLIC OF EAST TIMORMINISTRY OF PLANNING AND FINANCE

1 7 July 2002

Dear Mr Wolfensohn.

Subject: Letter of Development Policy

I. As the newest independent nation in the Twenty-first Centuwy, we are starting on ourdevelopment path, to achieve and sustain economic growth and poverty reduction. Our peoplehave been tenacious and resourceful in successfully overcoming the occupation and achievingpolitical freedom. While we can be proud of our success in the political arena. we face dauntingchallenges on the economic and social fronts to improve the welfare of our people. The violenceand destruction following the referendum in August 1999 has dislocated lives, destroyed a largepart of our limited public and private assets, and further impoverished the already deprivedpopulation. Our efforts during the past two and a half years, undertaken with the generous help ofour development partners, including the Bank, under the overall guidance of the UJnited NationsTransitional Administration in East Timor (UNTAFT)), to rebuild the infrastructire and help ourcitizens to re-establish their lives and livelihoods have achieved modest success.

2. We are not only a young nation, but many of us in the Government are also new togovernance, and have limited experience in many areas. Our govemance structures, legislation,regulations, procedures and practices are evolving. Realignment of old institutions and thecreation of new ones are under way. Many of our government staff are receiving training on-the-job and through formal courses in diverse areas. We are being assisted by a small number offoreign personnel in building our capabilities and improving service delivery to our citizens.

3. T he main features of the development and poverty reduction strategies of our country arepresented in the following. We formulated the strategies in a highly participatory mannerinvolving consultations with more than 38.000 of our fellow citizens - men and women, rich andpoor. urban and ruial residents - drawn from all walks of life, and spread throughout the country.In formulating our strategies. we also benefited from discussions with, and feedback from, civilsociety organizations, including national and international NGOs, religious groups. politicalparties, and donor partners. The strategies are incorporated in our country's first NationalDevelopment Plan (2003-2007), which has been released in May 2002, agnd reflected in theAction Matrix for FY 03 presented in the Annex.

4. The vision of our people for our country in the year 2020 is:'

* East Timor will be a democratic country with a vibrant traditional culture and asustainable environment;

'Sourcc: Planning Commission. National Development Plan (2003-2007J, Dili, May 2002.

* It will be a prosperous society with adequate food, shelter and clothing for all people;* C'ommunities will live in safety, with no discrimination;* People will be literate, knowledgeable and skilled. They will be healthy, and live a long.

productive life. They will actively participate in economic, social and politicaldevelopment, promoting social equality and national unity;

* People will no longer be isolated, because there will be good roads, transport. electricity,and communications in the towns and villages, in all regions of the country;

* Production and employment will increase in all sectors -- agriculture, fisheries andforestry:

* Living standards and services will improve for all East l'imorese, and income will befairly distributed;

* Prices will be stable, and food supplies secure, based on sound management andsustainable utilization of natural resources;

* The economy and finances of the state will be managed efficiently, transparently, andwill be free from corruption; and

* The state will be based on the rule of law. Government. private sector, civil society andcommunity leaders will be fully responsible to those by whom they were chosen orelected.

5. Poverty reduction and the promotion of rapid, equitable and sustainable economic growththat improves the well being of all our people, are the overriding goals of development identifiedby our people and incorporated in our Plan. These are to be achieved in the following ways:-

* Helping the sizeable number of poor East Timorese to help themselves, and to reducepoverty;

* Improving the position of women to achieve gender parity;* Improving human resource capacities in the Government, private sector-and civil society

to manage and administer a nation state in the Twenty-first Century;* Facilitating an orderly and cost-effective transition to the new official languages of

Portuguese and Tetun;* Transforming agrarian subsistence production to a market-based economy;* Improving productivity in all sectors through the introduction of appropriate technologies

and practices, reducing risk and modemising production processes;* Creating an enabling environmnent for the private sector (including farmers, fishernen,

small, medium and large investors and entrepreneurs, traders and others) to generate thejobs and economic growth necessary to improve the welfare of the people:

* Managing public finances in an efficient and pragmatic way to enhance good govemanceand attract adequate budgetary support from donor partners, to provide essential servicesduring the next three to five years, until significant revenue flows from the exploitation ofoil and gas reserves in the Timot Gap begin to materialise; and

* Developing a sound administration and sustainable utilisation of the oil and gas revenuesfrom the Timor Gap to benefit present and future generations of East Timorese.

6. The next section presents the development strategy and the macroeconomic outlook,while section three focuses on the poverty reduction strategy. Section four covers the next steps intranslating the National Development Plan into actions and the monitoring mechanisms. T'heaccomplishments to date and some of the concrete actions proposed to be taken over the next 12

Ibid

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months are highlighted in the relevant sections and listed in the Action Matrix, presented in theAnnex.

1. DEVELOPMENT STRATEGY AND MiACROECONOMIC OUTLOOK

A. Development Strategy

7. The outlook for key components of our economy is not very favourable in the next two tothree years. Largely due to the phased withdrawal of UNTAET and the Trust Fund for East Timor(TFET). economic growth is projected to be negative in FY 02 and FY 03,' before comrnmencingrecovery in FY 04. The sharp contraction is a reflection of the fact that public spending has beenthe main driving force of the economy in recent years. This makes a good argument for ongoingdonor budget and project support to help smooth what will be a difficult transition in oureconomy. By the end of the Plan (FY 07) the prospects are encouraging for broad basedeconomic growth to reach and possibly exceed 5% per annum. The worst hit sectors during thedownturn in FY 03 are likely to be transport, commuinications, trade, hotels and restaurants,utilities, construction, finance, rents, business and government services. Achieving sharpreductions in formal unemployment will be challenging.' Exciuding agriculture, around 40,000private sector jobs will need to be created over the five-year Plan period, to halve the openunemployment rate. Agriculture and inforrnal sector employment will remain imnportant socialsafety nets. Prices arc expected to remain stable, with inflation averaging 2% to 3% per annum.P'ublic sector wage growth will be targeted at levels below that of inflation. riomestic revenueswhile growing will remain small. We estimate that external balance of payments and budgetarysupport financing amounting to about US$94.1 million will be needed over the period FY 03 toFY 05. Oil revenues are expected to increase sharply from FY 05 or thereafter, and to averagealmost US$100 million a year by the end of the decade. In the meantime, total Combined Sourcesexpenditure will contract sharply over the course of the Plan period, as UN and TFETcontributions peter out. After rapid growth in FY 03, expenditures from the Consolidated Fundfor East Timor (CFET) are targeted to remain stable in relation to GDP for the remainder of thePlan period.

8. Our development strategy focuses on growth, employment, improved living standards andbetter delivery af public services to our people, in a culturally appropriate and environmentallysustainable manner. The broad principles that will gtjide our actions include the following:

* Maintenance of a market economic system, with strategic and regulatory roles forGovernment, including the provision of a social safety net during difficult times.

* Strong role for the private sector in development.

* Open trade and investment policies. The Govemment's role will be limited toensuring thai physical and social infrastructure and services are provided, and toestablishing a growth enabling policy and legal environment, including provision ofmacroeconomic stability.

e EIffective, transparent and corruption-free tnanagement of the economy and publicfinances.

FY 03 denotes the year beginning 01 July 2002 and ending 30 June 2003.in 2002, aboLu lti%/o to 18% of rhc labour fo)rce is estimated to be unemployed. In addition. there will be around

16,0410 new entranis into thc labour force each year or about 800.04) over the next five years.

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* Pursuing a fair and equitable economy and society with equal opportunities andimproving living standards for all.

* Developing in ways that preserve the environment, traditions and customs of EastTimor.

B. Governance and Private Sector

9. High levels of public expenditure generated most growth during the Indonesian periodand during the past two and a half years (UNTAEI period). However, public expenditure from allsources will decline sharply in the immediate years ahead, thereby acting as a negative force ongrowth. Future growth has to be generated largely by the private sector, including agriculture.However, the private sector is currently small and weak. The need to remove impediments toinvestment. develop laws and institutional arrangements covering land and property rights,foreign investment, lenders collateral and a sound regulatory environment, and formulate policiesand programs to address inadequate infrastructure and low skill levels in the labour force istecognised.

10. The Govemment proposes to create the enabling environment for nurturing andstrengthening the private sector through: (i) enacting the enabling laws and regulations includingcommercial and notary codes and investment and bankruptcy laws; (ii) helping to encourageincreased access to credit through development of the banking and financial sector; (iii)clarification on land ownership and tenancy rights leading eventually to a comprehensive landlegislation: (iv) provision of training and access to new technologies; (vi) improving theinfrastructure and ensuring a reliable supply of essential services including electricity, and (vii)promotion of Fast I imor as an attractive country for foreign investmnent on the one hand andexport markets for the country's products on the other.

I1. This requires first the adoption and implementation of a legislative program. This is a newprocess both for the executive and legislative branches of our govemment. It is necessary toevolve the process and refine it as we gain experience. Although we lack even the most basiclegislative framework for our society and economy, our capacity is limited and we are prioritisingand sequencing the laws/codes/statutes that need to be submitted to the Parliament for enactmentover the next twelve months (see Matrix in Annex for details). It is important to fornulate andadopt the civil and criminal codes first, which provide the framework for most other laws. Also,enactment of the Judicial Magistrate's Code is a high priority as a well-functioning judiciary isessential for the administration of justice and enforcement of the laws and contracts.Simultaneously, work on the draft legislation for public prosecutors and defenders will becompleted and submitted to Parliament before the end of June 2003. Also, submission of thecommercial and notary codes and investment law to the Parliament will be accomplished withsubstantial work on the bankruptcy law completed during the year (July 2002 to June 2003).

12. We recognise that citizens awareness of their rights and respect for law are importantingredients for a harmonious and democratic society. Also, protection of citizens from potentialabuse by the public administration is necessary. Further, citizen participation in safeguarding thepublic administration against corruption and nepotism is essential. Keeping these in view, ourConstitution provides for an independent Provedor or Ombudsman. We will submit legislation toestablish and make operational the Ombudsman's office during the year. Simultaneously, we planto formulate and launch an information campaign to publicise the role of the Ombudsman'soffice.

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13. We are committed to creating and maintaining a lean and effective public service that isfree of corruption and nepotism. We intend to limit the strength of the permanent publicadministration (including police and defence) at less than 16,400, which is less than half thatmaintained during the Indonesian period! The first draft of the civil service statue is completedand will be refined in consultation with all stakeholders and finalised for submission toParliament for approval during the course of the year. We plan to operationalise the statute beforethe end. of the year. Pending the approval of the civil service statute, a number of regulations toimprove civil service performance including discipline in the civil service have been or will beissued. Simultaneously, a study on civil service pay policy focusing among others, ondecompression and within grade progression, will be undertaken and completed during the year.

14. As recent experience on the formulation of our National Development Plan demonstrates,we strongly believe in and are committed to facilitate citizen participation in governance.Accordingly, we intend to examine the best practice examples/models of decentralisation fromother countries with a view to formulate a system that is best suited to our circumstances. Weplan to complete this exercise during the year and consider legislation in the following year.

C. Infrastructure and Power Sector

15. We recognize that good infrastructure (covering electric power, water, sanitation, postalservices, telecommunications, roads, air and sea transport facilities, and various support services)is of overarching importance and has strong cross-sectoral implications for national development.Good physical infrastructure and services are crucial for improving agricultural productivity,attracting business investment and laying the foundation for private sector development. It is alsovital for poverty reduction and human development.

16. Although significant progress has been made in the past two and a half years to restoreinfrastructure, the lvel, quality and reliability of services remain inadequate in many areas. OurPlan for the infrastructure sector emphasizes the restoration or establishment of required physicalcapabilities and public services. Accordingly, a program of infrastructure development has beendeveloped that will ensure proper maintenance and provision of safe and reliable services atequitable prices. Most of the programs are capital intensive and the Plan presents altematives fordevelopment, including private sector investment, foreign investment, build-operate-transfer(BOT) options, and public service contracts. Thus, the sector strategies are heavily reliant onthese alternatives in the medium and long-term and on assistance from the intemational donorcommunity in the short-term.

17. The power sector in our country is a pressing example of a utility in need of urgentimprovement. It consists of approximately 60 isolated diesel-powered electricity supply centres,including one in the capital, Dili, I I District stations, and about 48 power stations in the sub-district headquarters and villages. Electricity demand in Dili has outstripped available capacity.while the power generation and distribution systenms are overloaded and prone to frequentbreakdown. The monthly revenue (electricity tariff) collections have averaged only about 10% ofthe amount billed since routine billing started in October 2001. Part of the problem seems to beinaccuratc billing, which often showed exorbitant consumption that is out of tune with the actual.Nearly all funds available to the utility, Eletrisidade de Timor Lorosae or EDTL, are currentlyexpended on fuel and wages, with little left for capital improvement. In fact, the budget subsidyfor electricity was estimated to be about $6.8 million in FY 02. The budget for FY 03 visualises areduction in the electricity subsidy to $4.0 million through improved tariff collections. We areexamining the options for improving the operation of EDI'L including the engagement of amanagement contract tied to performance. Eventually, we plan to bring the power sector under

5

the control of a national management team that could efficiently operate the utility and meet thegrowing demand.

D. Public Expenditure Management

18. The starting point for economic management by our newly independent Government isdifficult, and a period of consolidation is needed before longer-term development is likely to takehold. Significant further economic adjustment will be needed over the next two to three years ascurrent investment programs from bilateral donors and TFET reduce in size, and in some casesterminate completely. T'he immediate challenge for us is to build on the economic institutions andframework that have been put in place, and particularly to ensure that public finances are placedon a sound and sustainable medium term path. The challenges we face include limited experiencein economic management. a low domestic revenue base, a very weak banking and credit sector,and low domestic savings and investment.

19. We plan to improve the capacity and performance of key central economic agencies,including the adoption of effective and transparent management approaches. We recognise theneed to develop a formal capacity building plan for core financial management functions and willseek technical assistance to undertake and complete Ihe study during the next 12 months. We willstrive to continue to maintain macroeconomic stability. Improving our database on nationalaccounts, trade and price statistics including consumer prices is a high priority and will bepursued with technical assistance support.

20. We have adopted a pro-poor budget for FY 03 with 37% of core programmed CFFTresources allocated to education and health sectors. We are aware that intemal and externalsecurity is a key prerequisite for sustainable economic and social development. Making trade-offs between areas that directly contribute to economic and social development, such as educationor infrastructure, and areas that contribute more indirectly, such as security, generaladministration and foreign representation, is a major challenge facing our Govemment. Thus.over the next eighteen months, a priority of Government is to ensure that, prior to the withdrawalof CivPol, the GNR and the UN Peace Keeping Forces, our country has in place an appropriateand effective defence and police capability. In addition, our Police have been given newresponsibilities for Border Patrol, Immigration functions and Special Police Unit, requiring therecruitment, training and equipping of an additional 410 personnel. Accordingly, the FY 03Budget provides for increased spending on these programs. In addition, given the lower thananticipated budget execution in FY 02 and to reduce the pressure on FY 03 budget. some goodsand services and capital expenditures in these programs have been brought forward to FY 02.21. We wish to ensure that primary education receives an increasing share of educationspending in the coming year. We intend to develop and adopt an education policy; institutionalframework and action plan for primary and secondary cducation in the course of the year. Thiswould include the policy on partnerships with the private sector and NGOs including religiousorganisations in the delivery of education to our people. To enhance transparency andaccountability at the grassroots and improve service delivery, we propose to pilot parent'sassociations in primary schools to monitor the performance and manage the resources.

22. In the health sector, we will make sure that the lion's share of resources will be devotedto preventive and promotive health care including maternal and child care services with hospitalsreceiving less than 400% of' the health budget. The delivery of services will be improved,especially on maternal and childcare, and increased immunization coverage, with DPT3 coverageincreasing from 60'%N to 80%. Further, the draft health policy framework already prepared will besubmitted to the ('ouincil ol'Ministers for approval in the course of the year.

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23. We recognise the importance of ensuring compliance with the expenditure policy andlegislation. Accordingly we intend to strengthen the expenditure controls and informationsystems. It will cover. among others, prioritization of funds release, installation of an assetmanagement system, adoption of procurement policies and guideiines, and maintenance andregular updating of personnel registers in an.integrated personnel and payroll systems. The timelyrelease of donor funds will be an important factor in achieving expenditure and service deliverytargets.

24. As a democracy, we are obliged to ensure transparency and accountability to ourParliament in, among others, public expenditure management. Accordingly, the FY 03 budget hasbeen presented and approved by the Parliament. An independent audit of the expenditures will befacilitated and the audit report tabled in the Parliament. We intend to set up a working group toexamine the means through which an independent audit function could be established as acontinuing feature of accountability to the Parliament and the people.

25. lTo improve policy consistency, efficiency and effectiveness in public spending. we planto revise the Budget and Financial Management Law and submit it to the Parliament before theend of the year. We plan to undertake a public expenditure review mid-way through FY 03 andutilise the results in preparing the FY 04 budget.

26. We need a sound saving and investment strategy to maximise the benefits to the EastTimorese people from the significant Timor Sea revenue expected over the next twenty years. Inaccordance with this objective, the Government is committed to the creation of Timor Sea (oil)fund. to encourage the wise investment of oil savings. Such a fund will also serve as aninstrument to save revenue for future generations, to insulate the non-oil economy from theadverse effects associated with natural resources windfalls, and smooth Governmentexpenditures.

27. The following principles would be adhered to in establishing and operating the fund: (i)the fund should be integrated within the Budget process, with inflows and outflows subject toParliamentary approval; (ii) the fund should not have separate spending, borrowing, or lendingauthority; (iii) the fund should be administered transparently and be kept free of politicalinterference, with regular and frequent disclosure and reporting of the principles governing thefund, as well as its finances. (iv) the strategy for management of the fund's assets should be welldefined, with guidelines governing the allocation of the fund's resources; (v) a separate institutionor agency should not be established for the purpose of operational management of the fund'sassets; and (vi) the Ministry of Planning and Finance, under the Government's direction, andalong with the Monetary Authority, will be responsible for the operational management of thefund's assets. We will develop a management strategy and legislation for creation ol the lTimorSea fund during FY 03.

28. Based on the priorities and programs identified in our National Development Plan, we havereceived pledges from our donor partners to provide the required support, notably at theConference held in Dili in May 2002. Our Government's policy is not to undertake any publicsector borrowing, and to manage the external account with a reasonable build up in oil and gasrevenues saved in the offshore account. Within this framework, the Plan outlines policies andapproaches to be pursued to obtain aid, which are critical for the management of the economy inthe short and medium term.

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It. POVERTY REDUCTION STRATEGY

A. Growth and Poverty Reduction

29. Economic growth and poverty reduction are the overall goals of the development of our.country. Our people - including farmers, fishennen, traders, labourers, workers, and micro, smalland large investors - are the main actors that generate economic growth through their innovation,skills and work. Our Government is primarily a facilitator in this process. The assets and effortsof our poor are necessary for our country to accelerate its economic growth, and to sustaindevelopment. This is all the more significant, since the poor constitute more than two-fifths of thepopulation. Thus, we recognise our people as our most valuable resource.

30. A large majority of the poor are capable of contributing to our country's economicgrowth and development. 5 The challenge the Ciovernment faces is to provide an enablingenvironment for them to participate in, and to partake of the benefits of development, whileassisting the few that cannot help themselves. Thus, we see poverty reduction primarily as ameans to accelerate and sustain economic growth. Accordingly, the Poverty ReducLion Strategyof the country is formulated on the basis of this approach. It is understood that rapid economicgrowth is a prerequisite for sustained poverty reduction. The main elements of the PovertyReduction Strategy comprise the following:

* Create an enabling environment to generate opportunities for the economicparticipation of the poor. improving their productivity and enhancing their incomes;

* Provide and/or encourage and help others to provide basic social services to the poor onaffordable terms,

* Provide, or help to provide, security of person and property. and protection fromunforeseen shocks and disasters (vulnerability), including food security at both thehousehold and national levels; and

• Empower the poor and other vulnerable groups through popular parti,cipation, to decideupon and manage development in their ald(eias, sucos, post6s, districts and the country.

Elaboration of these four elements ot the strategy and their links with activities undertaken in thevarious planning sectors are illustrated in the following sections:

B. Opportunities for Economic Participation

31. The poor in our country are engaged primarily in agriculture in cultivating crops,animal husbandry. fisheries and forestry. Improving productivity in the sector is recognized as ahigh priority. Traditionally, East Timorese farming families have attempted to minimize risksfrom crop failure due to adverse weather or other unforeseen events through the practice ofintercropping and low seeding rates.' Other approaches to risk minimisation such as the use ofdrought resistant varieties, improved water use including irrigation management. and high

5 Only a small minority (including orphans, the disabled, widows. and other vulnerable groups) require eitherlemporarily or on a continuing basis direcI transfers of income or other help to lead a reasonable life by the standards ofthe East Timorese sociely.6 For example. many small farmers grow three or morc crops (e.g. sweet potato, maize and beans) on the same plot orland simulrmneously.

8

yielding crop varieties are feasible. Proposed initiatives for this within our National DevelopmentPlan include rehabilitation and construction of irrigation systems and their improved operation,introduction of water harvesting techniques, wider distribution of improved seeds of crops, fruitsand vegetables, protection of livestock, improved fishing and sustainable management Of forestand other natural resources, through community participation. Improvements in marketing andinfrastructure are also planned. Provision of support services is expected to materialize throughpublic and private initiatives in agriculture, and in other sectors.

32. Alongside agriculture, a large proportion of the employed in our country are dependen1on the informal sector, in both the urban and rural areas,7 and a majority of them may be poor.Consequently, increasing opportunities and improving productivity in this sector are crucial forenhancing the country's economic performance and reducing poverty. Initiatives proposed in ourNational Development Plan include training, introduction of appropriate technologies, and othersupport services including the supply of micro credit.

33. A third important area is the formal privatc sector, in manufacturing, construction andreal estate, trade, transport, tourism, and financial and other services. Priority policies andlegislation are being drafted to improve the policy environment, and to encourage both domesticand foreign private investment in the country.

34. A fourth area is the provision of infrastructure - including roads and bridges, ports andairport(s), electricity, telecommunications and postal services. These are critical for themovement of people and goods, an orderly and elficient 'functioning of markets. and for asustainable devclopment of the country. A number of interventions are proposed to improve thecountry's infrastructure, drawing primarily upon aid resources (see also the subsection onInfrastructure and Power Sector in the preceding).

35. The final area relates to macroeconomic policies and the management of public finances,including public expenditure allocation. In this area, pro-poor macroeconomic and publicexpenditure policies will be implemented (see also the relevant subsections on this in thepreceding).

C. Basic Social Services

36. We recognise that enhanced access to, and use of basic social services is an urgent need inEast Timor. Almost half the adult population is illiterate, with women considerably disadvantagedrelative to men. Whilst access to schooling improved considerably during the Indonesian period,when compared with the latter years of Portuguese rule, the quality of teaching and leaming waslow. Currently, about a third of children are not enrolled in primary school, and up to 20% ofthose reported as enrolled do not attend classes. Access to and use of public health services isminimal, due to the inadequate number of trained personnel, facilities, medicines and supplies(supply constraints), coupled with poor access and cost (demand constraints). For example, in therural areas, reaching the nearest health facility requires ... on average - a 70-minute walk. Afterreaching the facility, there is no guarantee that a doctor and/or nurse will be available.

7 For example, a 1993 survey by BPS, thc Indonesian statistical agency. showed that about a third of the farmhousehold income came from off-farm sources including wage income and self-cnmploymeni in manufacturing, trade,transport. other transfers (e.g. pensions), etc. (Cited in Booth, A. (2001), "Povert), Equily and Living Standards in FastTintor: Challenges for the Newi Nation, ' in Hill, H. and J Saldanha, East Timor: Developmcnt Challenges for theWorld's Newest Nation. Institute of Southeast Asian Studics, Singapore, p. 249.)

9

Additionally, each visit costs about two dollars (US$2). Access to safe water and sanitation isalso low, and the quality of much of the housing stock is inadequate.!

37. The provision-and effective use of basic social services is an important means to break thepoverty cycle. Education and literacy are prerequisites for the introduction and adoption ofmodem productivity enhancing technologies. Our National Development Plan incorporatesprograms to improve school participation rates, especially for children from poor families, and toimprove the quality of teaching and learning. Adult literacy programs are also proposed. Inparticular, the Plan intends to expand the access of our people., including the poor, to primary andjunior secondary education, and to improve internal efficiency and quality. The delivery of basichealth care will be improved by addressing both supply and demand constraints. In particular, thePlan emphasises preventive and promotive health care to be provided closest to the community,and to achieve greatest impact by emphasizing mother and child health care. These are keyingredients for improving not only the productivity of our population but also the welfare of oursociety.

38. It is acknowledged that ensuring access to, and promoting the affordability of basic socialservices is an important task for the Government. This does not mean that the Government shouldhe the sole deliverer of all the services. As in many countries in the region, NGOs and religiousorganizations in our country have been involved in the delivery of some of the basic socialservices. For example, the Church is prominent in education, some NGOs have been involved inhealthcare delivery (until mid-2001). and others are involved in supporting community watersupply and sanitation. In other countries, the private sector has also been active in the delivery ofservices to those who can pay. The Plan promotes the creation of incentive partnerships with theprivate sector, religious organisations. NGOs, parents' associations and communities.

39. The delivery of quality primary, junior secondary and senior secondary schooling, andprimary health care (including preventive care such as irmunization and health, hygieneeducation and curative care) are prioritised in our National Development Plan (see also thediscussion on public expenditure allocations to primary education and preventive and promotivehealth care within education and health sectors respectively in the preceding). With regard towater supply and sanitation, our overall approach is to address the provision of the services inurban areas on a cost recovery basis, whilst community ownership and operation is the norm inrural areas. The challenge we face is to build partnerships and strengthen complementaritiesbetween public and private entities in this case mainly with the Church and the NGOs - todeliver services to the population at large. and to the poor in particular, with gender equity.

D. Security

40. The third element of the Poverty Reduction Strategy is concemed with ensuring thesecurity of person and property (against violence, destruction and theft), food security, livelihoodor job security, and protection against unforeseen calamities - including natural disasters such asfloods and droughts, as well as economic shocks and political and social disturbances. Security olperson and property was a major concern for many East Timorese families during much of the25-year occupation, and particularly in September 1999. The security situation has improvedconsiderably since then. Proposals are included in our National Development Plan to consolidate,improve and sustain the current relatively stable and peaceful situation in our country, with theparticipation of our cormmunities (see also the discussion on public expenditure on security in FY02 and FY 03 in the preceding). Proposed interventions include precautionary measures

8 The phenomcnal destruction of property in thc 1999 violencc decimated the modest stock of relatively beticr qualityhousing.

(monitoring/intelligence), police and law enforcement activities, and efforts to promotereconciliation and reintegration of refugees and other groups at risk. The plan promotes thedelivery of justice, which is independent, with respect for citizenship rights, and sensitivity tocultural values. The Plan emphasises the identification and location of vulnerable groups such aswidows and orphans of the resistance, veterans and child-soldiers, the traumatized and thementally ill. It outlines policies to assist them through the provision of training, access to servicesand financial support.

41. Food security is an important concem for our population in general, and for the poor inparticular. The findings from the Poverty Assessment show severe stress in food availabilityduring December and January - the lean months preceding the harvesting of maize and rice- withsignificant stress during November and February. Coping strategies mentioned by our peopleinclude reducing consumption (eating two meals a day instead of three), substituting maize forrice, and cassava and sweet potato for food grains, selling livestock, and borrowing from relativesand friends. There have been some improvements in national food security in the last two years,resulting from better harvests of rice and maize. However, food security is still a major concem atthe household level.

42. Interventions outlined in our National Development Plan for the agricultural sector willenable a consolidation and further improvement in overall food availability in our country. [Iheywill also contribute to improving food security at the household level. Further targetedinterventions may be necessary to strengthen food security at the community and householdlevels, incliding strengthening traditional community structures such as caring and sharingarrangements. Often children and women are at greater risk. This takes on increased significancewhen viewed in the context of almost half the children in the country being underweight, and aquarter mainourished. Examples of interventions included in the Plan at the program level includeschool feeding and the distribution of milk and food supplements to pregnant and lactatingwomen. We cnvisage a continuation of the current practice of augmenting food availabilitythrough imports in the short and medium-term, and timely distribution to vulnerable groups.

43. Insecurity of livelihood or employment is pervasive in the traditional, informal andformal sectors.9 This may arise from lack of recognition of ownership and tenancy of agriculturalland, from restrictions on traditional access to such resources as forests, or other public lands forcollection of food, fodder and other products, and from delineation and lease or sale of commonproperty resources (e.g. fishing grounds and pastures). In most cases, it is the poor and vulnerablethat are at risk. The proposed legal frameworks and policies on agricultural land, fisheries andforestry should minimize such risks. Additionally, employment arrangements in the informal andformal sectors for unskilled (and often poor) labourers may be insecure, due to economic ormarket developments (e.g. cheap imports) or to unscrupulous employers exploiting workers forlong hours of menial work with low wagcs. Some protection of the workforce in terms of safeworking conditions is envisaged, without creating disincentives for employment.

44. Security fiom natural and man-made disasters is a further dimension that will beaddressed. We intend to draw upon the wealth of experience in other countries in strengtheningour capacities in such areas as disaster forecasting, preparedness, prevention and mitigation.Employment in public works, including community maintenance of roads, is already beingimplemented in our country. Other initiatives in this direction are proposed in the Plan. The

9 Also, open unemploymeni is in exccss of 16% of the tabour force with a much higher ratc among youth and veteranswho participated in the struggle for indcpendence. A significant proportion of the labour in nmral areas may beunderemployed.

importance of community involvement and the strengthening of community resilience arestressed, in addition to material help from the.Govemment, donors and NGOs. We plan to refinethese interventions and arrangements, based on our experiences during the first two to three yearsof implementation of our National Development Plan.

45.' Security from economic shock is an area that also needs attention. One of the moresignificant recent economic shocks is the scaling down of IJNTAET operations, and the departureof a large number of loreign staff. This is being felt not only in the urban areas of Dili and otherdistrict towns, but also in the hinterlands that formerly provided goods and services to foreigners.Some short and medium-term training and employment measures are contemplated to cushion theadverse impact of the UNTAET contraction.

E. Empowerment

46. The fourth dimension, empowerment. embraces the provision of "voice", and theparticipation of the poor in making decisions, both about their future and the future of theircommrunities, on economic, social, cultural and political issues. As our experiences in theformulation of the Plan demonstrate, popular participation is a widely accepted norm in presentday East Timor. Many initiatives proposed in our National Development Plan intend toconsolidate and build upon these practices. Examples include community decision-making in themanagement of water supply, infrastructure and natural resources. Successful examples ofcommunity management of schools and health facilities in other countries will be drawn upon inpiloting and testing similar approaches in our country.

47. It is recognised that decentralisation is an important means to ensure the sustainedparticipation of our people, including the poor and women, in local affairs. The degree ofdecentralisation can occur at three levels: deconcentration, delegation and devolution.'° Forexample. prior to 1999, "deconcentration" was the rule, with the central government delegatingresponsibility for implementation of policies and programs decided by Jakarta to administrators atthe local level. It was a top-down system with little room for decision making at the local level orthe flow of information from the bottom up, let alone people's participation. Delegation involvesthe'transter of some decisions and functions to local organisations including those at the villagelevel. For example, the ongoing Community Empowerment Project (CEP) delegatesresponsibility for a number of decisions and functions to elected Village Development Councils.We aim to build upon the experiences and lessons leamed in the CEP, and to expand and replicatethe more successful approaches in other areas. Significant capacity building at the local level is aprerequisite for the introduction of devolution, which is the next level of decentralisation, andinvolves the transfer of significant authority for decision-making, finance and management toelected local governments, often with the power to impose taxes and raise revenues. This is agradual process, which we intend to pursue and empower conimunities to manage their localaffairs.

48. Informed participation of our people requires civic education and improvements ineducation and communication. The recent highly successful experience of voter educationresulting in high levels of participation in the Presidential election - with a turnout of more than86% of eligible voters - is an excellent example of civic education, which we plan to replicate inother areas. Civil society organisations, including the Church, have been important facilitators inthe voter education process, and may be mobilised to be partners in other areas as well. Further,school curriculum development will incorporate civic education. Additionally, separate programson civic education are planned for the mass media, in partnership with civil society organisations.

IO UNDP. Fasi Timorr liju,mal Developrncti Reprort 2002, sccond draft, Dili, April 2002.

12

49. The challenge of formulating and implementing an information, education andcommunication (IEC) strategy, focusing on all our people, is recognised. This is critical forinforming and educating our people on the roles, functions and activities of the different organs ofthe Govemment, donors, NGOs and other civil society organisations. At the same time, the needfor developing viable channels to facilitate the flow of information from the people on the groundto policy makers, Government functionaries and stakeholders is acknowledged. The Planincorporates initiatives that go some distance in this direction (e.g. information and education onthe role and activities of the Parliament, organisation of communities and provision of audiovisual equipment). In particular, we intend to raise awareness of citizen's rights and respect forthc law, defend citizens from abuse of power by public administration, and safeguard againstcorruption and nepotism. We anticipate an examination of our initial sectoral experiences both informulating the TEC stbategy, and in designing appropriate coordination mechanisms.

V. CONTINUED POVERTY REDUJCTION PLANNING

50. We formnulated our National Development Plan in a highly participatory and inclusiveprocess. It drew upon the initiatives of Government. civil society organizations and communities.It involved consultations with more than 38,000 ordinary citizens. Perhaps, we are the only nationin the world, which on the eve of its independence has consulted its people so widely and sosystematically on their aspirations and priorities for the future. Most importantly, this process hasbuilt confidence and capacity among our government officials, civil society organisations andcommunities.

51. The preparation of the Plan is a milestone in our history. It is the first time in more than450 years that the people of East Timor have participated as free people in formulating a twenty-year vision, identifying key development challenges, and evolving'strategies and programs ofaction for the next five years, to take the nation forward economically, socially, and politically. Itis apposite to say that the people of East Timor prepared the Plan. It belongs to all of us, andreflects our values, needs, ideas, aspirations and priorities.

52. We have published and distributed the Plan in early May 2002. Simultaneously, weprepared a popular version of the Plan . called "East Timor 2020: Our nation, Our Future - whichincorporates the vision and aspirations of the people on the one hand and how the Govemmentplans to respond to them on the other. This has been disseminated to households and distributedto schools all over the country.

53. All of us are reminded that the Plan is not the end of the planning and developmentprocess; it is only the beginning. The important work of preparation and implementation ofannual action plans, including programs and projects, has begun. During the next three months,we plan to train the planning personnel in Ministries and Agencies in translating the Plan intoannual action plans. Further, a national multi-stakeholder forum to monitor progress on Planimplementation including public expenditure will be evolved in the next six to nine months. Thegovemment, private sector, civil society, interest groups and religious organizations are plannedto be represented and participate in the forum.

54. As the Plan implementation unfolds. we may find gaps and the need for modification ofcertain aspects to address the emerging new challenges in the next twelve months. 'rherefinements will be carried out with the highlights of the program of action for the followingyears incorporated in a rolling plan linked to the Govemment's Medium Term Fiscal Fra'mework(MTFF). Thus, we visualize the Plan to be an organic instrument - alive and capable of growing

13

-- with the CGovernment nurturing and empowering the people to take ownership of their owndevelopment initiatives.

55. Some ot our recent achievements in the areas of planning and poverty reduction,governance, public expenditure management and the power sector as well as the proposed actionsover the next twelve months are presented briefly in the Action Matrix in the Annex. It isimportant to note that we are now beginming our self-governance in earnest, but that in manyareas we do not yet have experience or a track record. Many of our staff and institutions are onlyjust beginning to function and their performance in delivering on our commitments is difficult topredict. We are heavily dependent on our donor partners for the timely provision of competenttechnical assistance to facilitate completion of the tasks. We take our commitments seriously, andwill make every effort to fulfil them.

56. In conclusion, we are fully aware that improving the productivity of the poor is essentialfor our country's economic growth and development. It will be an integral part of ourinterventions in all sectors of our cconomy to achieve and sustain rapid economic growth andimprovements in the welfare of all our people. The important task facing the Government is thecreation of an enabling environment for catalysing and sustaining the contribution of the poor toour national development. It will entail both providing, and helping others to provide, basic socialand essential economic services to the poor, nurturing and promoting their entrepreneurialinitiatives, and prohibiting discrimination based on gender, ethnic origin. language, or geographiclocation.

57. Enforcing the rule of law, creating a secure environment. and sound management offiscal and monetary affairs are recognised as important ingredients for economic growth andoverall development. The role of Government will be limited to providing those essential servicesthat the private sector and civil society organizations are not in a position to deliver. In particular,we see the need to link closely governance and poverty reduction, to enable our people to seeksolutions to their development problems, and to exploit all available opportunities. We intend tobuild upon recent achievements and strengthen the political, social, economic and legalenvironment for the poor to mobilise their resources, to realise their potential, and to buildsustainable livelihoods.

58. In this context the Govemment of the Democratic Republic of East Timor requests thefinancial assistance of the World Bank and other extemal partners for implementation of itsprogram.

Maria Madalena BAtes BoavidaMinister of Planning and Finance

Annex: Action Matrix FY 03

14

Annex 2

T R A N S IT IO N S U P P O R T P R O G R A M : A C TIO N M A T R X 16 Ju ly 2 0 0 2

-___________ A. CONTINUED POVERTY REDUCTION PLANNINGNDP reference Actions already t n By 30 September 2002 By 31 December 2002 By 31 March 2003 By 30 June 2003

___________ __________ y 30 June 2002 B1. Keep the vision alive and * Prepared and published the * Designate and prepare TOR for * Submi proposal to CoM to * Establish high-leveloperathonafse tde Nadonal National Devleopmt Plan focal point for planning in each allocate rtesources in the Mid-Year coordination structure forDtvelopment Plan (NDP); and (NDP) based on extensive MinistrvyAgency. Budget Review to strengthen the participative implementtatonadopt permanent Insiltatdanl consuhations with all stakeholders * Prepare FY03 agency action Economic Planning and Project monitoring and continuousarrangements for routine - the people, civil society plans based on NDP (especially Assessment linit in MoPF. paricipative imprnvemeni ofplanning, regular consultation organizations, government and for priority Ministries- education. * 4D. NDP I I ,and revision of the Pait a doim. Plan adopt by helth, justice). I Prepari a concept paper on . Ministnes reviewrequired (N DP pages ]Sand 53) Parliament. . f % DI 11 At \l1 coordination, participative implenmentation of FY03 agency

* Dissemunated apopuiar version * Train Ministries for improved i implenmcrtation monitoring and action plans (especially priorityof the plan. Eost r,, 0 planng for FY0406 (especially i continuous participative Ministries - education. health.

households and all school in E. prionty Ministries -education, impmvement of NDP. I -- usnc).Timor. health, justice). it :.It. * lMinistries draft FY04-06

-rI l U * Prepare road map to rolling plans (especially priority* Started disseminating Poverty operationalise NDP beyond FY03 Ministies - education. health.Assessment. i - \\It *I)i and identifv gaps in both content justice).

andconsultations.: IA W'lei *Submnit NDP and road map tostakeholders including donors.

L Expand access to primarn and * Restored Primary public Prepare FY03 Ministry action * Define program for ceation of * Review implementation of * Finalize and submit to CoMjunior secondary educatlon: educaton network including 713 plan. parents associations in every FY03 Ministry action plan tor approval the policy.Improve Internal effkienev and schools in oprration at all levels * Prepare TOR and launch primary school to contribute to D * Draft FY04-O0 Minist-v rolling insntutional hmmework andquailit (NIDP p. 26-2) Create and 3.901 tencheis in place. development of national education and monitor school management plan. medium-tenm action plan forincentive panrtnenripsltn tbr * Restored grow prinarv policy. institutional framework including teacher attendance.I pnrmary and secondarypnvatt sector. m*iGOspanty' enrollment rate to 95% with girls and tedium-term action plan for .in.i. i ltuII I . 1)1 sl1 t .Discussdral pwork andlic.

isDic,bttiorn,asid cortzmmunIty aaccounting for 4S% of school primary and secondary educaion, action plan for pnrmary and(NDP pge 21). enrollees. including policy for partctielship secondary education with

* Complt.ed School mapping with private sector, religious stakeholders.process. providing data pathform orpnisations. NGOs and parents. associatofor policy developmrnt. focusing on erpandg access, and pamrents' nriarv !

imprnv,n,intemal efficiency and progmmlt in selected primarvquality. i'-\ l'Jii ,i. I I( 1i: schools.

Prepare an options paper on therole of parents associations inpnrmary school management. m -

Identified TA for each action item is indicative only at this stage and based on discussions with donors at the meeting of 27 June 2002 Sccuring the proposed TA will be cnrticalto cnabling the Government to achieve the action items.

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TRANSmoNsuPPORTPRoGRAM: ACTIONMATRI 16 Jsdy 2002

A. CONTINUED POVERTY REDUCTION PLANNING

NDP reference Actbas~~3 Junead 2002e By 30 September 2002 By 31 December 2002 By 31 March 2003 -By 30 June 2003

3. Empbaste prevendlve anvtd Restorted public hethh network *Prepare FY03 Minmstry action *Submit healtht policy framework * Reviewv implcmentation of * ncemasc number of tntined

promtiZve beatit care provided :irtcluding rehabilitation oirbasic plan, to t.oM (adSdrecsing organization FY03 Ministry action plan. midwivas front 135 in June 2002

closest to the coimm0nlty. Targt infras awm training essentiatl * Incrctew number of trained and maunagemenL relationship * Draft FY04406 Minisur rolling to 327 in June 2003.

grwusp t) triebvr gnaltte5t inPtg merlical staff ttnd midwives. and nudwives from 135 to 183. with religious orpnextnott. ptatn. *Increae DPTt coverage for

byy tte aIzig2s oter g d motber andionofa chilh*dItinstDP1acoerge or NGt)sondcomuniie. haltNIcrese umer fcrtmd cilreninicrott-yeraldtiohealtht care jNWP page 2t). ma fledcnt ofIce in ach Inre DPT3 coverageror finacng, hua reources. Intcres cntmbrcoveramgclr udroeyerodfo

and bunched stakeholckT * nnaste rnumber oftrained childr unde 7 oney odfo

consulm tiorss. midwvives &Tom 183 to 23 1. 7%t 5

* IncTease DPT3 coverage forchildren under one-vear old fiomo5%h to 70°/e.

. *~~~~~~~~~~~~~~~~~~~~~~ Monitor hospimst expentditures atmid-yte*r budget review..

4. Dertte aknd locate vultnerable Recognized existettc of the *Establish and staff the vertnsa * Establish and/or stregthen * Iormid ate and adopt criteria Coyr * ntegmate the medium-term

groups Clarify deft lti and groups. affnitis unt.l working and policv groups ideninfving those eligible for action plan for veterans

Idetnify vetertm clandetine * Esamblished 'highty vulnerablc *Set up Social Serices regional invotving sEakehoiders (e.g. mnter- assistance under vetcranS progntms in FY04-06 rolling

movement metnben artd othter gtroups gftrns window" in the offices in 8aucau ( Eastcrn ministerial. religious organizanons programs. type ofa&ssistace pisns of alli Ministncs.

vketirts of the RecsEttget. Assit Commumity Empowemocnt Regsion) and Maliana (Wcstern and NGOs) on veteras. required. and rokes orttme groupst tSrtstst wteess to Port.R on communities, N(iOs. religious

trainting, referral, eommueltv prga1. Reio oraiatospvt.etr

aetlon, and financial support *Established units in Social Gov ernmcem.

fro ogel3 pr5et (D btegin to addTess the contcerns of *Pncparc policy. tnstitutional

P ~~~~~~~~~vulnerable groups. with plas framcwork and medium-tcrm

accepted rot Ba-,n and Mali3ru. act non plans fior veterarns

*Authorksed development of for approval. Is i 3 115 >

vetemns afrains unit.

Note: FY 03 denotes the fiscal wear beginnmg 01 July 2002 and cnvding 30 June 20D3.

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TRANSITION SUPPORT PROGRA9M: ACTION MA TRIX 16 July 2002

____________ B. GOVERNANCE AND PRIVATE SECTOR DEVELOPMENTNDP reference Actionis already taken NW____________________ DB 30 June 2002 By 30 September 2002 By 31 December 2002 | By 31 March 2003 By 30 June 2003

1. Ensure lmplrentadt t of * Prepared FY03 draft legislative * Adopt FY03 legislative program * Review implementaion of FY03anntu legislative progrant prugram. (July). legislative program.

________________________ Adopt FY04 legislative program.

2. Adminhiar utiee of tiech ical * Adopted Constitution providing * Submni judicuti magistrtes' * Draft legislanon for public * Discuss draft legislation for * Submit legislation for publicquality independently, with for independent justice system. code to Parliament. prosecutors and defenders. public prosecutors and defenders prosecutors and defenders torespcfor ItIznmip rights, *Dted judictal magiswmta' with stakeholders and submit to Parliament.segsitivity to cltau'rd values and code uncluding establishment of CoMpopular participatIon and supenor counci Ilior judicLarv * Operationalise judicialIvaotemettt (NDt pspous Zt utds . magistrates' code.108l, - Nominate members o rsuperior

council for judiciary.

3. ProvIde enabMing environment * Drfted commercial code and * Finalize draft comrmercial code * Discuss draft commercitl. and * Submit comtmermial and notary * Discuss drafl bankruptcyfar thie private sector: contnrtlal notary code. and notssry code. notary code with stakcholders and codes to Parliament. legislation with stakeholders androde. uotirv code. tmeatmett * Drafted investent law. * Finalize unvestmettt taw. submit to CoM. * Submit drafl mivestmnent aw o submit to CoM.law, baakErnptc law, and landlaw (ND? pagre l4 and W * Posted one pacson for dispute * Deftne strategy for studying and * Discuss draft investment law with Parliament.

mediation and oma person to list addressing abandoned urban stakeholders and submi ton CoM. *Draft bankruptcy legislation. * I I

land claims in each ngion property * Issue ministenal decree m clarity I ' 111 stIt-1-1'1' iii

(Baucsu. Suame DitI) and in * Define TORs for background situation on abandoned urban * nr-, !' m;C! It.Oecussi ditsrct. studies regaing land legislation properv.

in consultation with stakeholders. * Launch in-depth studies on land* -iIf) 2il,-t', legislation. '' -

4. RaIse avareness of etiwc's * Adopted Conrstniution providing * Finalize and submit Framework * Submit organic law on Ombudsman * Review pilot information * Nominate Ombudsman sod staffrights and rect for law; defend for an indqendt Ombudsman's Paper on Ombudsman to CoM. to Parlianment. canmpaign on the role of the Ombudsman's Ofrice.cIti from abtne of power by office. * Finalize organic law on *.Pilot information campaign on the Ombudsman's office. * Generalize information campaignptblic admnkrstlon; and * Formulated and discussed draft Ombudsmnan and submit to CoM. role and functions of the * Design infomiation campaign on on the role and functions of thesafegsard against corruption and Fmntework Paper on Ombudsman * Seek TA to the Office of the Ombudsman's ofice.r fees for basic public services. i0 ' Ombudsmtan's office.nepodam(NDPpas 109pand with stakehoklers. Humnan Rights Advisor tolhe L a ' I \r51'i *Lnunch pilot informalion

* Drafted organic law on Prime Minister. (0 -X I NDll' campaign on fees for basic publicOmbudsman. Ir."'N I \ '. services.

* Detign information campaign topublicize the role of theOmbudsman's office. ' f

.1, I t osOt'l z \'!P'I t . ._

3 of 9

TRANSITION SUPPORT PROGRAM: ACTION MATRIX 16 July 2002

B. GOVERNANCE AND PRIVATE SECTOR DEVELOPMENTNDP reference Actions already takenNDP__________ By 30 Jtne 2002 fly 30 September 2002 By 31 December 2002 By 31 Marcb 2003 By 30 June 2003

S. Create a leka. effective and * Limited civil savice personel - * Submit Government organic law * Discuss drafl civil service statute * Submit civil service statuc to * C rationalise civil scrvice

eMieent civil service free of excluding defense forces and to Parliatent. * with stakeholiers including civil Parliarnent. statute.

eorruption and nepotism (NDP autonomous entitis - to 12.000 * Refinc draft of civil service servants and submit to CoM. * Continue to compile and make * Continue to compile and make

pages 21, 107 and 138). persons as reflected in FY 03 State, -s ii' * Compilc and make public public iniommation on complaints public information on complaints of

budget approved by Parliament. * Issue and publish ministerial information on complaints of of absenteeism. irregulasities. and absenteeism. irregularities. and

Drafted civil service statute. decree on issues of discipline in absenteeism. irregularities. and corruption among civil servants; corruption amnong civil servants:

the civil service. corruption among civil servants: and and investigations and actions and invesigations and actions takeninvestigations and actions taken by taken by concemned Ministries and by concerned Mimnstes and

concerned Ministnes and Inspector Inspector General's Office. Inspector General's Office.GCeral's Office. *. s'i I.

i 6. Provide special status for * Established intr-ministerial task * Consult with stakeholders on Prepare policy paper including * Discuss draft repor n special * Prepare draft legislation on

Otenssl (fNDP pages 123 and 138). farme on special status for Oecussi special status for Oecussi. rartionale-and justification for special status for Oecussi with special status for Oecussi. I

status for Occussi.. '! * '':m stakeholders and submit to CoM. V ,, tl,

7. Deceuntalize governmnt and * Established and staffed 13 * Adopt TOR for developing * Launch studies nn decentralization * Complete studies on

empower communtles to _anae districts. Also esublished decentralization options, defining options, . A ! * I0t decentralization options and launch

their local affain (NDP pages 40, subdistrict coordintors. roles of central and local discussions with stakeholdem.

44 and 13S) * Continued with existing govemnrnent and comtnumities:

structures in sucos and aldeias ftcilitating cost effective andand implemented block grant eMcient delivery of services:program with suco councils strengthening tnsparncy: andthrough the Conminunity empowering communities andErnpowerment Program. graasroots democracy.

4of9

TRANSITION SUPPORT PROGRAM: ACTION MATRIX 16 July 2002

C. PUBLIC EXPENDITURE POLICY AND MANAGEMENT*NDPIBudget reference Actions already taken By3 cm r20 Iv3 arh20

By 30 September 2002 Bv 31 DeceBber 2002 t By 31 March 2003 By 30 June 2003By 30 June 2002 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

It. Strent eepadty ien c Dafted ntasenm fiawoTk for * DmRft medium-term capactty * Approve capacity buikting Pbn * Review FY 03 capcity

ftab7 treQemt catpacitv building for Ministry of building plan for eore financiail antd contra t lotmg-err termitta building program artd rormnulate

b,cow (Nr po -59 *d Ptnning and Financ (MoPf) in maarte'n fimctirm. based on support and traning in_ hose p rogram for FY t0 ua

6t). the short-tcrm ~ rev,le-a of insitunutl e3pacity areas where pps identiried; andand development stmegy in Icomprehenso e pmgram (orconsuhaton woh stkdholders contracting of shon-temm

.A \. technical speclalists.

P. .: _dr,

5 of 9

TRANS 1ON SUPPORT PROGRAM: ACTION MATRIX 16 July 2002

C. PUBLIC EXPENDITURE POLICY AND MANAGEMENTNDPiBudget reference ActionB 30 June 2002 By 30 September 2002 By 31 December 2002 By 31 Marcb 2003 By 30 June 2003

2. Prnmnote stable, smtuduable * Commitment in NDP to matketr * Maintain macrO-economic * Maintain macro-economic * Maintain macro-cconomic * Mairtam macro-conomicecenomk growth and monitor oriented econoomic policirm with stability, stability stability. stability.Economkc and sotl progres. flexibic prcing regime. * Continue to monitor economic * Continue to monitor economic * Continue to monttor economic * Continue to monitor economic

Routne reporting on consumer and social developments and and social developments and and social developments and and social developments andprice index, indicators in cooperation with indicators in cooperation with indicators in cooperation with indicators in cooperation with

IMF I IMF IMWF IMF.

Formulate medium-tsem * Ensurc Mid-Ycar Budget * Se up and operationalise theprogram for economic and social documents review macro- Automated System for Customs

statistics, with a rinancing and economic trends and include Data or ASYCL IDA.insttutional development suttement on guiding prtnciples . i ; -- i tkstrategy. 1 \iI of economic policy

* Submit medium-term programfor economic and social statisticsto CoM for approval.

* Improve compilaton of tadestanstics (continuousl. I i:

* Impmve compilation orpricestatistics tconitnuous). t

3. Implementatlon of a * Prepared pro-poor FY 03 * Prepare 7OR and commission * Publish Mid-Year Budget * Issue FY 04 budget circular * FY 03 budget execution in lineprudent, pro-poor eapenditure budget: core CFET spending study on civil service pay policy. Review with hard expenditure limits: with appropriations: toralpolicy (NDP page 62). S67.7 million:: total perinancrt I .. Wv '1 19 \ I * Ensure structur of revised t total spending In line with permanent saff <16.400; current

staff<16.400: commitmet to (Public Service Commission appropriations budget execution resource envelope: total pay policy maintained, defensemaintain pay policy. education with Budget Department) consistent with initial pernsanent staff< 1400. payroll | and police spending <20% ofand health 37% of core C FET: aproprationa total permanent <S30 million; defense and core CFET: education and healthexpenditure on primary staff c16.400: curent pay policy police spending <20%/. uf core >35% of core CTET; primatryeducation >4s% of education maintained: deferse and police CFET; education and health education > 45% of core CFET

spending spending <20% of core CFET: >35% of core CFET: primary cducation spending; andeducation and health -35%: ' education > 45° of core CFET hospitals <40%- of core Cl-ETprimary education > 45% of education spending: and health spending.core CFET education spending: hospitals <40%/ of comr CFET * Publish comprehensive. pm-

and hospitals <40% of core health spending. poor FY 04 budget withCFElI health spending * Submit recommendations of resource allocations in line with

* Discuss draft repon of Study study on pay policy to CoM for Medium Term Fiscal FramewoTkon pay policy focus ig on ! conideration in the coniext of (MITFF) FY 04-06 expcndituredecompression and within grade budgetary resurces, limits.progression. etc.. withstakeholders.

2TIhe $67.7m "coreCFET"excludestheSlOm Capital & Development Fund - 53m of which has been appropriated to specific priority projects and $7m of which is unallocatedpending: development by December 2002 of a comprehensive 3yr rolling capital and development program for Government (refer action poiln 5): a review of budget cxecution andtaking into account scheduled disbursements of external assistance.

6of9

TRANSITION SUPPORT PROGRAM: ACTION MATRIX 16 July 2002

C. PUBLIC EXPENDITURE POLICY AND MANAGEMENT _

NDP/Budget reference Actions already taken __-__ _--_I_ _ _ ___ --__ _IBY 30 June 20fl02 By 30 September 2002 By 31 December 2002 By 31 March 2003 By 30 June 2003

4. Ensuring transparency and * Parliament approved * Submit to Parliament repon or * Establish working group i° * Contract auditor for FY 03aotuntabllty to the legisature comprehensive FY 03 budget. independent auditor for FY 02 review requirements for accounts.in publik expenditure * Implemnentd interim audit of Financial Statements with independent audit functionmantaent. (NDP pages 24 FY 02 financial suatements to Management LIetter and j (Tribtunal dag Contas); andand 6769). May 20. Response. prepare TOR and contract

Publish C itizens Guide ta the consultants. -Budget - byMoPF 1 - *

Submit TOR for audit of FY03accounts to CoM for approval.

S. Improve po'dv conasatency, * Prepared a compreheaive FY * Prepare and issue * Submit Revised Budget and * Submit prelimmnaty resuhs of * Prepare comprehensive FY 04effkciency and effectiveness in 03 budget with detailed budget Administratve Directive on Financial Management Law to Expenditure Revicw as budget including; a) presentationpublic spending, by ensuring a books. stafftng profile, and development project appraisal. CoM. s -; "I. contribution to FY 04 budget of agency spending by district:disciplined. open and agency perfornance indicators. tracking and moitonng * Submit Revtsed Budget and psrcess. and bt comprehensive list ofconsultative budget progit procedures in consultation with Financial Management Law to i* Develop medium-term (rolling) development projects by(NDP page 24 and 6749). ssakeholders- by MoPF - Pariament. capital development (invesenent) program.

Define Ependiture R w * praieandappOve capital program. i l;efine Expendinch Review developrnems project portfolio as! rOR and launch review. ,: - supplemcntary budget for FY 03.

6. Ensure conqdiakice wkth * Approved char of accounts * Prepar and adopt cntena tor * tnstall asses snsnagemcnt and * Approve and publish vehicte * Prepar FY 04 Budget Booksexpenditure polky and specifying line iterns for priorid72titon of in-vear funds procurement tracking systems in standardization policy - by identifying projects as individuallegbiation, by strengtbenlng consumables and temporary release. Treasury and P[MtD. Trnapori and Communications cost centers.expenditure controlo and employeces. * Prepare vehicle standardization Department. * Keep up to date Civil Serviceinfornsation systemts (NDP * Approved Procurement policy by Transport and * Approve and publish directive personnel registers in integratedpages 24 and 67469) raking module. Communications Department. on temnporary employees (Public pesonnel and payoll

bnplemnent integratCd Civil SCevice Commission and Budget information system.service human resources Dept. 1.management and psayrollinformation system.

7. Mectanisms tD ensure that * Outlined guiding principles for * Draft pnsposals for Timor Sea * Submit proposals for * Submit proposals forotl and gas reveues are used the management of Timor Sea Fund govenance and governance and management of govemance and management ofproductivety, trausparntaly (oil) fund in FY 03 budget management and discuss with Timor Sea Fund to CoM. Timor Sea Fund to Parliament.and accountabl to benefit documentation. stakeholder.prneut and future gentrations * Reported trunautions of t; - "if .tni'.(NDP pages 24 and 67). notional Tumor Sea Account in

FY 03 budget

7 of 9

jt

TRANSITION SUPPORT PROGRAM: ACTION MATRIX 16 July 2002

D. POWER SECTORNDP/Power S e By 30 Jtne 2002 |pteber 2002 By December 2002 By March 2003 By June 2003

I.EstaibHh approprtasa * Established Power Sector o Dee onmanagement Appoint and mobilize * Hand over electietrv asses to * If selected. Minagementadequately staffed tad Steering Comnmittee (PSSC) and Icontract vs. manwgers contraats Management Contractor or I management contractor. if Contractor reports to PSSC onmoivaeted matemeot appoimed menmben. inchding for power Cector. ISept) International Managers -as per management contract is selected. regular basts.stracture for East Timor private sector representative. * Fxecute selcted option and decision in September- by (January)Electrkdtv (EDTLI. * Contracted interim relevant tenders. (Sept) EDTI.. IDecemberl * If selected Management

management team for penod 20 * Prepare performance indicators Contractor reports to PSSC onMay to 30 August. for Management Contract (Julv) regular basis. (Jinuatry. February.(PSSC'MoPF) * Issue international call for March)

* Appomted consultant to expressioms of interest (nonprepare TOR and Key committal) for ManagmrentPerformance ICdicators for Contract. (July)Management Contract. * Prsent to Donors power sector

* Agreed on moratorium on management options andexpansion of capacity until finricial implications. (9finantcial and institutional September)strutcture of power authorityresolved.

2. Icmprve co recovery. * Adopted govemment budget * Contract-out meter insalling Report on revtew and status of ! Monitor first set of Key * Monitor Key Performanceprenenting reduction in subsidy with 500 metrs to be installed corection ofbilling system: Perfimmance hndicators under the Indicators under the contract.to EDTt. from USS6.8M in FY per month. (July) billing etrors trcked in contract. (March) * Monitor monthly financial02 to USM in FY 03. * Amend tariffdirective petformance reports - by EDit. * Monitor monthly financial performance of EDTL, if* Launched media coat tecovery tightening disconnection (Oct. Nov. Dec) i performance of EDTL if management contract notcampaign. (June) provisios and enforcement of * Insalil a total of 2,500 meters management contract not adopted.* Launched Dili awareness Tevenue collections approved by since conitnet commenced for adopted.campaign. CoM. (July) meter instalation. IDecember)* Launched Distr,te interm * Undetake Tariff Analysis and * Evatuate media campaign onbilling and payment campaip, set Targets for cost recovery -by cost recovery for Dib. (Dec)* Launched Subdistrict ED1IUSSE/PSSC. (August) * Evaluate mterim billing andcommnunity managed payment * Install a total 1.000 meters payment mechanism in Districts.consultations. since contract commenced for (Decenber)* Reponed on review and status meter installation. (Septeinbrtl * Evaluate paynent system inof correction of billing system: * Monitor monthly financial subdistriets. (December)billing erros tracked in perfonnance of EDTL including * Monitor monthly financial

(June) and corrections- by status of billing syster erroorsEDTI.'SSE/PSSC. arro correeions -by|

._____________________ ______________________ E tTLlSSE/PSSC. _

8 of 9

TRANSITION SUPPORT PROGRAM: ACTION MA TRIX 16 July 2002

D. POWER SECTORNDPfPower Stratey Actions e By September 2002 By December 2002 I By Marcb 2003 By June 2003

referenkee By 30 June 2002 ________I__________

3. Estebllab appropriate * Issued Regulation 2001113 *Complete external audit of * Submit draft Power SectorInsdtutloni satetre for an providing for revenue retention EDTL prior to picetment under iegtslanon to CoM for approval.autonoimous power authorfty. authonties as first step in a rnagtaemniet contract - by

process leading to the creation of MoPF (August) l Submit Power Sectm.autonomous pinvate enterprse * Reviw of lega mework and legislation to Parlient

Prepared TOR for cxtemnal preparation of lcgal draftingaudit, amendment of conrat - instrucion on sector stnuctureby PSSC/MoPF OJune) (Aug) - to be reviewed with

Ministry of Justice.* Prepare draft legislationincluding all related and affectedlgal texts for defining assetownership, sector organization.government responsibilities, andprocurement personnel andritncml managementprocedures for the sector andEDTL -by MoPF/SSFJMIA._September)

4. Prepare long term nadtiotu * issued TOR for preparation of * Appoint consultants for * Undertake tnception Review of * Undertake Final Review of * Discuss draft National Power

power deveiopmeoa plan and national power development preparation of national power the preparation of national power preparation of national power Sector Development Plan with

framework for private sector plan. development plan. (September) sector dev lopment plan. sector developfment plan. stakeholdes and finalise.

partlpation (October) (March)* Undertake Mid-term review of * Formulatc TORs for secondthe preparation of national power phase for preparation of thesector development plan. national power sector(December) development plan. (enviromnens.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ poverty ) | _ _ _ _ _ _ _ _ _ _

Note: All technmcal assistance requirements in Power Sector to be funded from TFET and ADB.

90f9

Annex 3

DEMOCRATIC REPUBLIC OF EAST TIMORDEVELOPMENT POLICY LETTER AND ACTION MATRIX

List of Technical Assistance to Fulfill Actions in Matrix with Expressions of Interest

Processing and approval of TAs and consultants to be in place by end of (month):

July 2002

1. Overall: Technical assistance (TA) to Government (Ministry of Planning andFinance) to coordinate TA projects listed below.- UNDP

A. CONTINUED POVERTY REDUCTION PLANNING

2. Preparation of FY03 action plan based on National Development Plan or NDP,especially for priority Ministries (health, education, ... ) - some Ministries may needTA (long-term advisors possibly from 200 positions) - DFID/WB , USAID

3. Train Ministries for improved planning for FY04-06 (especially priority Ministries:education, health, ... ) to be undertaken by Economic Planning and ProjectAssessment Unit in MoPF - DFID/WB, USAID

4. Prepare a concept paper on multi-stakeholder participative implementation monitoringand improvement - Ireland

C. PUBLIC EXPENDITURE POLICY AND MANAGEMENT

5. Draft capacity building plan for core financial management functions, based onreview of institutional capacity and development strategy; contract long-termtechnical support and training in those areas where gaps identified; and prepare andimplement comprehensive program for contracting of short-term technical specialists- to be undertaken by Ministry of Planning and Finance - AusAid, IMF, Japan,Portugal and WB

6. Formulate and implement medium-term program for economic and social statistics,with financing and institutional development strategy - to be undertaken by theStatistics Office in the Ministry of Planning and Finance or MoPF - IMF

August 2002

A. CONTINUED POVERTY REDUCTION PLANNING

1. Dissemination of Poverty Assessment results to districts and communities - To beundertaken by the Statistics Office in collaboration with the Economic Planning andProject Assessment Unit, both in the Ministry of Planning and Finance or MoPF -WB,UNDP

2. Prepare terms of reference and launch development of national education policy,institutional framework and action plan for primary and secondary education,including policy for partnership with private sector, NGOs, parents, focusing onexpanding access, improving internal efficiency and quality - to be undertaken byMinistry of Education - Portugal ,UNICEF, WB

B. GOVERNANCE AND PRIVATE SECTOR DEVELOPMENT

3. Define ToR for background studies regarding land legislation in consultation withstakeholders and launch study - to be undertaken by Ministry of Justice - USAID,200 Posts

4. Strengthen the Office of the Human Rights Advisor to the Prime Minister - UNDPfrom UN System

5. Design information campaign to publicize the role of the Ombudsman's office, pilotand replicate - to be undertaken by the Office of the Human Rights Advisor to thePrime Minister - USAID, UNDP

6. Design information campaign on fees for basic public services, pilot and replicate - tobe undertaken by the Office of the Human Rights Advisor to the Prime Minister -USAID, UNDP (may be combined with 5 above and processed under one TA)

C. PUBLIC EXPENDITURE POLICY AND MANAGEMENT

7. Administrative Directive on development project appraisal, tracking and monitoringprocedures prepared in consultation with stakeholders and issued by MoPF - WB

September 2002

A. CONTINUED POVERTY REDUCTION PLANNING

1. Strengthen the Economic Planning and Project Assessment Unit in MoPF - 200Positions - 200 Posts

2. Prepare road map to operationalise NDP beyond FY03 and identify gaps in bothcontent and consultations - to be undertaken by Economic Planning and ProjectAssessment Unit in MoPF - WB

3. Prepare Options paper on roles of parents' associations in school management anddefine program to ensure creation of parents' association in every primary school tomanage school operation including teacher attendance - to be undertaken by Ministryof Education - Portugal, UNICEF, UNDP, WB

4. Prepare policy, institutional framework and action plan to help veterans and theirfamilies and integrate it in FY04 budget and FY04-06 MTFF - to be undertaken bythe Veterans Affairs Unit under the Secretary of State for Labour and Solidarity -USAID

2

B. GOVERNANCE AND PRIVATE SECTOR DEVELOPMENT

5. Prepare report on rationale and justification for special status of Oecussi drawingupon consultations with stakeholders - to be undertaken by Ministry of InternalAdministration - Portugal

6. Draft legislation on special status of Oecussi - to be undertaken by Ministry ofInternal Administration - Portugal (may be combined with 5 above and processedunder one TA)

7. Adopt TOR and launch study for developing decentralization options, defining role ofcentral and local government and communities; facilitating cost effective and efficientdelivery of services; strengthening transparency; and empowering communities andgrassroots democracy - to be undertaken by Ministry of Internal Administration -Ireland, USAID, WB

8. Compile and make public information on complaints of absenteeism, irregularities,and corruption among civil servants, investigations and actions taken by concernedMinistries and Inspector General's Office (need TA)

C. PUBLIC EXPENDITURE POLICY AND MANAGEMENT

9. Improve compilation of trade statistics (continuous) to be undertaken by the StatisticsOffice in the Ministry of Planning and Finance or MoPF; dependent on generation ofreliable data in a timely manner by the Border Control/Customs Department, whichrequire technical assistance to set up and operationalise the third version of theAutomated System for Customs Data or ASYCUDA + + - EU through 200 posts

10. Improve compilation of price statistics (continuous) to be undertaken by the StatisticsOffice in the Ministry of Planning and Finance or MoPF - EU through 200 posts

11. Establish Working Group to review requirements for independent audit function,Prepare ToR for consultants, and implement - to be undertaken by MoPF - Portugal,IMF

12. Draft legislative proposal for independent audit function prepared and made availableto the public - to be undertaken by the Ministry of Justice - Portugal, IMF (may becombined with 11 above and processed as one TA)

13. Prepare and disseminate Citizens' Guide to the Budget - to be undertaken by MoPF -UTNDP

14. Public Expenditure Review ToR defined and review launched - to be undertaken byMoPF - WB

15. Revise Budget and Financial Management law and submit to CoM - to be undertakenby MoPF - IMF

16. Project portfolio appraised and approved as supplementary budget forimplementation in FY2003. (need TA - ?)

3

17. Prepare draft policy and procedures including institutional arrangements for themanagement of Timor Sea Oil and Gas revenues for the benefit of present and futuregeneration of East Timorese including consultations with stakeholders - to beundertaken by MoPF - IME, Others

October 2002

A. CONTINUED POVERTY REDUCTION PLANNING

1. Establish high level multi-stakeholder coordination structure for participativeimplementation monitoring and continuous participative improvement - to beundertaken by secretariat to the coordination structure - Ireland

B. GOVERNANCE AND PRIVATE SECTOR DEVELOPMENT

2. Draft bankruptcy legislation - to be undertaken by Ministry of Justice - USAID,WB/TFET Small Enterprise Project II

C. PUBLIC EXPENDITURE POLICY AND MANAGEMENT

'3. Develop medium-term (rolling) capital and development investment program - WB

November 2002

C. PUBLIC EXPENDITURE POLICY AND MANAGEMENT

1.. Set up and operationalise the third version of the Automated System for CustomsData or ASYCUDA ++ - to be undertaken by the Border Control/CustomsDepartment - UNDP, Others?

December 2002

A. CONTINUED POVERTY REDUCTION PLANNING

1. Establish high level multi-stakeholder coordination structure for participativeimplementation monitoring and continuous participative improvement - to beundertaken by secretariat to the coordination structure - Ireland

January to June 2003

Begin processing TAs for FY 04 and later

POWER SECTORAll TAs in Power Sector to be processed by ADB

1. Extend interim management team contract to December 2002 - to be undertaken byPower Sector Steering Committee or PSSC and MoPF. Needs funding if not provided forin budget

2. Prepare terms of reference, tender (invitation) documents and draft performance contractfor senior management team (Chief Executive; Finance and Technical Directors) - to beundertaken by PSSC

3. Evaluate bids and contract senior management team on performance contracts for 12months (PSSC) to be in place at least by November 2002 - to be undertaken byPSSC/MoPF. Needs funding if not provided for in budget.

4. National management team contracted (EDTL) - to be undertaken by PSSC/MoPF.Needs funding if not provided for in budget.

5. External audit of EDTL, including performance contracts - to be undertaken by EDTLunder direction of PSSC/MoPF. Needs funding if not provided for in budget.

6. Formulate ToR and prepare media cost-recovery campaign, and implement bycontractor/NGO - to be undertaken by EDTL

7. Negotiation and approval of streamlined procurement, personnel and financialmanagement procedures for EDTL as Ministerial Decree - to be issued byMoPF/SSE/MIA

8. Formulate draft Autonomous Authority Law, including criteria for establishment ofautonomous agency - to be undertaken by SSE/PSSC

9. Formulate ToR and launch preparation of national power development plan - to beundertaken bv SSE

MAP SECTION

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JULY 2001

IMAGING

Report No.: 24532 TPType: PAD