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Definition: Petroleum Fund of Timor-Leste
It is basically a sovereign wealth fund into which surplus wealth produced by East Timor petroleum/ gas income is deposited by the government. It was formed in 2005 with an opening balance of $205 million. The Petroleum Fund of Timor-Leste was incepted in 2005 by the government of Timor-Leste by promulgation of the Petroleum Fund law. The fund was to ensure petroleum resource management for the benefit of its current and future generations.
The Minister of Planning and Finance of the government of Timor-Leste is responsible for managing the fund. Timor-Leste's Petroleum Fund is modelled on Norway's conservative SWF, wherein the oil revenues cover pension payouts. The Petroleum fund is intend to avoid the ‘resource curse’ of corruption, excess spending and inflation that harm people in developing countries with rich non-renewable natural resources. The fund symbolizes the long term planning, and fiscal responsibility of the East Timor government.
A sovereign wealth fund (SWF) is an investment fund that is state owned that invests in real estate, financial assets (stocks, bonds, precious metals) or alternative investments like private equity fund & hedge funds. SWFs invest globally. SWFs are generally funded by commodity export revenue or from the central bank’s foreign-exchange reserves. SWFs are usually created by countries to diversify revenue streams.
The Petroleum Fund is intended to contribute to the prudent management of the petroleum resources for the benefit of posterity. It contributes to sound fiscal policy, as consideration and importance is given to Timor-Leste’s citizens’ long-term interests. The Petroleum Fund is meant to be seamlessly integrated into the State Budget. To achieve its objectives, the fund is required to be prudently managed and operated in openness and transparency, within its legal & constitutional framework.
Governance Structure of the Petroleum Fund
The Petroleum Fund was established under the Petroleum Fund Law, which was promulgated in 2005 which was amended in 2011.
The Minister of Finance, representing the Timor-Leste government is responsible for the overall management and investment strategy of the Petroleum Fund, which passively managed to a defined benchmark by the Banking and Payments Authority (BPA) of Timor-Leste.
The Petroleum Fund Law requires that entirety of petroleum revenues are transferred to the holdings of the fund and then invested in financial assets abroad. The only fund outgoings are transfers back to the central government budget. The fund governance model banks on high degree of transparency & information disclosure, to reduce bad governance risks. The Ministry of Finance is required to consult the Investment Advisory Board prior to deciding on investment strategy or fund management.
Overall management of the petroleum fund on behalf of people of Timor-Leste is the responsibility of the Ministry of Finance. The Petroleum Fund law entasks the Central Bank of Timor-Leste to undertake the operational management of the Fund in accordance with Ministry of Finance & Investment Advisory Board guidelines. The Petroleum Fund Management Department was established by the Central Bank of Timor-Leste in 2005. The Petroleum Fund Law also makes the Government accountable to Parliament.
Up until 2009, the Fund was internally managed by the Central Bank under a passive mandate. The funds invested only into US Bonds Market. As part of the diversification, in 2009, the Bank for International Settlements (BIS) was selected as the Fund’s first external manager to manage 20% of the Fund – its mandate was a global portfolio in global sovereign & supranational bonds. In 2010 a further diversification into global equities(~4%) happened by appointment of Schroder Investment Management Limited as the Funds’ first equity manager.
Amendment to the investment strategy after 5 years of the Fund’s existence is permissible under the Petroleum fund law. Not less than 50% of the Fund is to be invested in fixed income, up to 50% in listed equities and up to 5% can be invested in other investments.. To promote transparency, the Central Bank submits quarterly performance reports of the Petroleum Fund to the Ministry of Finance.
The Estimated Sustainable Income (ESI) formula guideline is followed to ensure prudence in the maximum amount the government should spend from its Petroleum Fund, so as to ensure the fund lasts for many generations after oil and gas reserves are exhausted.
Earnings of the fund hovered around 4% for the last 5 years.