Document of The World Bank PROJECT APPRAISAL DOCUMENT ON A THE DEMOCRATIC REPUBLIC OF TIMOR-LESTE FOR A SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank PROJECT APPRAISAL DOCUMENT ON A PROPOSED TRUST FUND FOR EAST TIMOR GRANT IN THE AMOUNT OF USD 1.7 MILLION TO THE DEMOCRATIC REPUBLIC OF TIMOR-LESTE FOR A Report No TP SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT Energy Sector Management Unit East Asia and Pacific Region June 18,2003

2 CURRENCY EQUIVALENTS Currency Unit = U.S. Dollar FISCAL YEAR July 1 to June 30 ABBREVIATIONS AND ACRONYMS ADB: CAS: CPAR: IDA: IMF: MOPF: NCB: NDP: NORAD: SOE: TFET: UNMISET: USAID: USTDA: TSO: TSP: TSS: TSTD: Asian Development Bank Country Assistance Strategy Country Procurement Assessment Report Intemational Development Association Intemational Monetary Fund Ministry of Planning and Finance National Competitive Bidding National Development Plan Norwegian Agency for Development Cooperation Statement of Expenditures Trust Fund for East Timor United Nations Mission of Support in East Timor United States Agency for International Development United States Trade and Development Agency Timor Sea Office Transition Support Program Transition Support Strategy Timor Sea Tax Division Vice President: Jemal-ud-din Kassum, EAPVP Country Director: Xian Zhu, EACNF Sector Director: Christian Delvoie, EASIN Task Manager: Charles McPherson, COCPO

3 FOR OFFICIAL USE ONLY TIMOR-LESTE SECOND PETROLEUM TECHNICAL ASSISTANCE PROJECT CONTENTS Project Appraisal Document A. Project Development Objective 1. Project Development Objective 2. Key Performance Indicators B. Strategic Context 1. Sector-related Transitional Support Strategy Goals Supported by the Project 2. Main Sector Issues and Government Strategy 3. Sector Issues to be Addressed by the Project and Strategic Choices C. Project Description Summary 1. Project Components 2. Key Policy and Institutional Reforms Supported by the Project 3. Benefits and Target Population 4. Institutional and Implementation Arrangements D. Project Rationale 1. Project Altematives Considered and Reasons for Rejection 2. Major Related Projects Financed by the Bank and/or other Development Agencies 3. Lessons Leamed and Reflected in the Project Design 4. Indicators of Recipient Commitment and Ownership 5. Value Added of World Bank Support in this Project E. Summary of Project Analysis 1. Economic 2. Financial 3. Technic a1 4. Institutional 5. Social 6. Environmental Assessment 7. Participatory Approach 8. Safeguard Policies F. Sustainability and Risks 1. Sustainability 2. Critical Risks 3. Possible Controversial Aspects Page This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed ]without World Bank authorization.

4 G. Main Grant Conditions 1. Implementation 2. Financial H. Readiness for Implementation I. Compliance with Bank Policies Annexes Annexes 1 & 2: Annex 3: Annex 4: Annex 5: Annex 6: Annex 7: Annex 8: Annex 9: Annex 10: Project Design Summary and Description Estimated Project Costs Cost Benefit Analysis Summary Financial Summary Procurement and Disbursement Arrangements Project Processing Schedule and Budget Documents in the Project File Statement of Grants Timor-Leste At-a-Glance

5 TIMOR-LESTE Second Petroleum Technical Assistance Project Project Appraisal Document Energy Sector Management Unit East Asia and Pacific Region Date: June 18,2003 Country Director: Xian Zhu Project ID: PO82942 Lending Instrument: Grant Task Manager: Charles McPherson Sector Director: Christian Delvoie Sector: Energy - LC Poverty Targeted Intervention: [ ] Yes [XI No Project Financing Data Source Local Foreign Trust Fund for East Timor Total 1.7 Total: 0 Grantee: TIMOR-LESTE Responsible Agencies: Timor Sea Office Implementing Agency: Contact Person: Address: Tel: Timor Sea Office Alisa Newman Timor Sea Office, Government Building 3, Dili, Timor-Leste (x 6637) alisamnewman@yahoo.com Estimated Disbursements (Bank FYKJSD OOO): Annual Cumulative , ,700.0 Project Implementation Period: June June 2005 Expected Effectiveness Date: August 1, 2003 Expected Closing Date: December 3 1,2005

6 2 A. Project Development Objective 1. Project Development Objective Over the next several years Timor-Leste s petroleum sector is expected to provide revenues accounting for up to 50 percent of GDP and 85 to 90 percent of government revenues and foreign exchange. These figures will drive future poverty reduction programs, facilitate economic recovery, and allow for donor exit. Against this background, technical assistance to Timor-Leste in the petroleum sector to date has been significantly under-funded, amounting to a mere 0.2 percent of the budget and less than three percent of donor flows. In the near-term, a considerable shortfall relative to needs exists. Although issues related to the entry into force of the Timor Sea Treaty and signing of the Greater Sunrise Unitisation Agreement have been resolved, challenges facing Timor-Leste s petroleum sector are daunting; they include: complex ongoing and new negotiations with companies and governments (on the development of the Greater Sunrise field and Jahal and Kudatasi fields, among others); agreement of a new petroleum mining code and model production sharing contract for the Timor Sea Treaty area; oversight of the development of Bayu-Undan, a major liquids and liquefied natural gas project; maritime boundary negotiations; increasingly significant tax compliance issues; the development of minimum technical capacity; the design and implementation of a sustainable administrative fiamework for the sector; a growing need for domestic and international public information outreach programs; and transparent and efficient management of petroleum revenues to ensure that they contribute to the development of the people of Timor-Leste. Thus, in line with vital needs, the proposed project will provide support to two key government divisions involved in overseeing petroleum sector development: (1) the Timor Sea Office (TSO) in the Office of the Prime Minister; and (2) the Ministry of Planning and Finance (MOPF), specifically, the Timor Sea Tax Division (TSTD) and, separately, a petroleum revenue management function. The TSO has been the lead agency on all sector policy and strategic topics and has conducted all international negotiations; the TSTD is now facing rapidly escalating oversight demands; and there currently exists no office in the Government charged specifically with the critical task of implementing a petroleum revenue management strategy. Funding for these areas will focus on maintaining and increasing capacity in core functions, including the retention and/or recruitment of essential international advisers, the provision of programmed and just-in-time technical assistance, critical operating costs (e.g., travel for essential negotiations and tax audits), and the provision of selected infrastructure for basic office functions (TSTD). Technical assistance support to Timor-Leste s petroleum sector to date has already generated significant returns. By means of example, relying on funds provided in part by the first Trust Fund for East Timor (TFET)-funded Petroleum Technical Assistance Project, the TSO negotiating team successfully shifted more than USD 200 million in value to the Timor-Leste Treasury in the negotiations on the Greater Sunrise Unitisation

7 3 Agreement and an estimated USD 300 million to the Treasury in the Bay-Undan negotiations, assuming these projects proceed as currently scoped. Without the critical technical assistance provided under the first Petroleum Technical Assistance Project, it is unlikely that Timor-Leste would have realized such gains. Similarly, the few visits to petroleum company headquarters in Perth already taken by the TSTD have boosted company tax compliance considerably. The selection of activities for funding over the next 24 months under the proposed project has been closely coordinated with the other donor programs in the sector (see Section D, 2). These programs remain relatively limited, however, and are still fragmented. During implementation and over the next 24 months, the Bank will continue to work with the Government and other donors to develop a more strategic, sustainable approach to funding medium- and longer-term activities related to petroleum sector development. 2. Key Performance Indicators The intended outcome of the project is successful and sustainable oversight of the petroleum sector in the areas of investment and project development, sector policy and administration, and revenue collection and management. Performance indicators include: orderly development of existing major projects; progress on new licensing and maritime boundary negotiations; demonstrable progress on international and domestic information outreach programs; completion of drafting and the adoption of key sector legislation; and enhanced tax compliance, auditing, legal interpretation, and revenue collection and management. Immediate indicators include: successful retentiodengagement of qualified consultants and advisers; the definition and implementation of training programs; administrative development and acquisition of essential supporting infrastructure. Performance Indicator Engagement of indicated consultants (detailed in project Procurement Plan) Definition and implementation of training for TSO (petroleum economics) and TSTD (accountingiauditing) Acquisition of office infrastructure (TSTD) Demonstrable expansion of information outreach, especially local outreach and including inside Government and National Parliament Start up of negotiations on new development projects (Jahal and Start up of negotiations on maritime boundaries Presentation of draft model contracts and new Petroleum Mining Code to National Parliament Evidence of expanded tax audits Presentation of draft petroleum revenue management legislation to National Parliament Mid-Term X X X X X X Completion X X X

8 4 Monitoring and evaluation will be addressed through regular reporting and periodic project supervision reports. See Section Cy 1 below for a description of project components. B. Strategic Context 1. Sector-related Transitional Support Strategy Goals Supported by the Project While there is currently no Country Assistance Strategy (CAS) for Timor-Leste, the proposed project is in line with the objectives of the November 2000 Transitional Support Strategy (TSS), which notes that careful management of oil and gas revenues will be required following the country s Independence, which was achieved May 20,2002. Following the TSS, the World Bank has prepared strategy-related reports that discuss concerns related to oil and gas revenue management, including background papers for donor meetings in Oslo (December 2001) and Dili (May 2002), a Country Economic Memorandum (March 2002), and a Poverty Assessment (April 2003). In May 2002, the Government issued a State of the Nation Report and a National Development Plan (NDP), which outlines the Government s development and poverty reduction objectives. A Stability Program, announced in January 2003, serves as a guide for the Government s fiscal 2004 planning and budgeting exercise, highlighting areas of the NDP that the Government considers immediate priorities. In July 2002, in support of the NDP, the Government signed a Policy Development Letter in relation to the Transition Support Program (TSP), a series of balance of payments support operations financed by grants from a host of donors, including the World Bank. The TSP was designed to bridge the gap until oil and gas revenues come on stream. TSP I (FY2003) focused on the creation of institutions and establishment of the legislative and regulatory framework and strengthening of management systems for core government functions. While still ongoing, TSP I1 (FY2004), expected to become effective July 2003, will focus on good governance, service delivery for poverty reduction, and job creation, reflecting Stability Program priorities. The documents and programs mentioned above consistently emphasize the central development role to be played by petroleum in the medium-to long-term and, by implication, underscore the importance in the near-term of ensuring the continued functioning of those government offices involved in overseeing petroleum sector development. At the May 2002 Dili donors meeting, donors agreed to allocate TFET funds for technical assistance to support the Government in its oil and gas negotiations. The subsequent USD 240,000 Petroleum Technical Assistance Project was signed on the occasion of the December 2002 Timor-Leste and Development Partners Meeting. It provided support for expert industry consultants to aid the TSO with the difficult, complex negotiations with international oil companies and neighboring countries that led to the entry into force of the Timor Sea Treaty and the signing of the Greater Sunrise Unitisation Agreement and investor commitment to proceed with the LNG phase of the Bayu-Undan development. The project continues to support the ongoing drafting of

9 5 sector legal, contractual, and fiscal arrangements associated with agreements resulting from the negotiations and development of Bayu-Undan. In December 2002, TFET donors and the Government agreed to allocate an additional USD 1.28 million to the petroleum sector. TFET donors and the Government agreed to increase this allocation by USD 0.42 million, to USD 1.7 million, in June The grant financing will be used to continue support to the TSO and provide support to the MOPF (specifically, the TSTD and a petroleum revenue management function). Specific goals in the TSS and related strategic reports to be addressed by the proposed additional technical assistance project include: maintaining and strengthening capacity in key policy and oversight areas; urgent attention to the completion of appropriate legal and regulatory frameworks and to the management of petroleum revenues; and coordination with other donors on near-term and medium-term objectives. These goals are to be reflected in the CAS that is expected to be prepared in the coming months, based on the NDP. 2. Main Sector Issues and Government Strategy The over-riding issue in the sector remains the lack of capacity to address near-term sector priorities. These include: Oversight of development of the Bayu-Undan field; Preparation of a legal framework for future licenses and development projects; Progress on agreement of maritime boundaries; Design and development of sustainable institutional capacity; Public information and outreach on petroleum sector issues; Ensuring sustainable revenue collections from contractors exploiting Timor Sea resources; and Ensuring transparent and efficient management of petroleum revenues. The Government s approach to the capacity issue has been to seek complementary contributions from multilateral and bilateral donors to fund intemational industry consultant assistance on the most urgent priorities. The near-term strategy has been necessarily somewhat ad-hoc, and the Government is actively exploring with intemational donors the possibilities for a more coordinated, sustained program of assistance for the medium-term. 3. Sector Issues to be Addressed by the Project and Strategic Choices The proposed project is consistent with the Government s strategic approach in that it: (a) provides fimding for just-in-time technical assistance, while (b) simultaneously focusing on the retention and strengthening of core sector functions critical to the medium-term. The design of the proposed project has been closely coordinated with other donor initiatives. The decision to concentrate on preserving continuity and enhancing core policy and oversight functions fills a gap left by other programs.

10 6 Beyond the proposed project, the World Bank expects to play a continuing lead role in supporting the Government in the design and implementation of a sustainable longerterm program (see Section D, 2). C. Project Description Summary 1. Project Components The proposed project will provide support to two key agencies: the TSO and MOPF (more specifically, the TSTD and a new petroleum revenue management function of the MOPF). The table below shows the breakdown of proposed project support by category and cost. Expatriate consultant services account for the largest share of project costs. For the TSO these include, on a residential basis, a coordinator, general legal adviser, petroleum negotiations adviser, media director, and external consultant support in the areas of fiscal and financial advice, commercial oil and gas law, and intemational strategy. Consultant services going to the MOPF include a resident tax/legal adviser, an outside tax audit adviser and a resident expert in petroleum revenue management. Goods to be provided will go to the TSTD to cover essential office upgrading, including such items as photocopiers, printers, fax, telephone and internet connections in Dili, and a branch office to be opened in Perth (the location of the majority of taxpayers). Training support has been allocated to the TSO for English language and petroleum economics/commercial practices, and to the TSTD for tax accounting and auditing. Finally, funds have been set aside for support of incremental operating costs, including staff travel and per diem associated with negotiations (TSO) and tax audits (TSTD). Project Components and Costs (including breakdown by category)

11 7 2. Key Policy and Institutional Reforms Supported by the Project The proposed project will provide a basis for the development of a revised legal, contractual, and fiscal framework for petroleum operations. The proposed project will also develop the capacity of core Timorese staff in dealing with the range issues involved in preparing a framework for, and overseeing, petroleum investment and petroleum operations, including the efficient administration of taxes and management of revenues. 3. Benefits and Target Population Immediate beneficiaries will be officials in the TSO and staff in the MOPF who are responsible for coordination of petroleum sector activities, including follow-on from negotiations on the Bay-Undan project, and the provision of legal, auditing, financial management, media, and other advice and support. Their capacity will be strengthened through proposed training as well as through continuing collaboration with top-level consultants who provided assistance through the first Petroleum Technical Assistance Project. The entire population of Timor-Leste will benefit considerably from the revenues expected to result from Bayu-Undan and other gas development projects. 4. Institutional and Implementation Arrangements Implementation. The TSO, coordinating with the MOPF, will be responsible for implementing the proposed project. World Bank technical staff will supervise the proposed project. Project Management. The TSO will manage the proposed project. The Coordinator of the TSO is designated as Project Director and will be accountable for effective management of the proposed project. Disbursement. The proposed project is expected to disburse over two years from the date of effectiveness. Disbursement will use traditional disbursement methods-direct payments or Statement of Expenditures (SOE). The documentation supporting SOE disbursements will be retained by the TSO for at least one year after receipt by the International Development Association (IDA) of the audit report for the year in which the last disbursement was made.

12 8 Financial Management. Overall financial management of finds under the proposed project will be the responsibility of the TSO, which has employed a financial manager acceptable to IDA. This responsibility will include certain key functions: operation of the Special Account; submission of withdrawal applications (either for direct payments to consultants or replenishment of the Special Account); maintenance of adequate records and supporting documentation for expenditures; and preparation of periodic summaries of expenditures as may be required by IDA. Audit. The TSO will be responsible for preparation of annual financial statements of all project expenditures, and Treasury will make the necessary arrangements to have these audited by independent auditors acceptable to IDA. The audit report will be submitted not later than six months after the end of each fiscal year. For cost effectiveness and expediency, the Treasury envisages this audit will be included as one of the tasks when the auditors conduct the audit of the Government accounts and/or the other IDAadministered, TFET-funded projects. Procurement. The procurement volume under this project is expected to be limited. To mitigate the risks, it was agreed with the World Bank s procurement accredited staff, the head of the Government s Procurement Division, the Government s procurement adviser, and the TSO Coordinator that the Government s procurement adviser will be assigned as the project procurement specialist to assist the TSO in employing the project consultants. The procurement adviser i s a retired World Bank procurement staff with over 29 years of diverse procurement experience; he will assist the TSO in carrying out proj ect-related procurement. Reporting. Reporting and periodic monitoring will be established for the proposed project. D. Project Rationale 1. Project Alternatives Considered and Reasons for Rejection Funding of other sector priorities was considered but rejected on the grounds that: (a) they were of lesser urgency; and (b) they had attracted, or had the potential to attract funding from other donors. 2. Major Related Projects Financed by the Bank and/or other Development Agencies The proposed project will follow directly on from, and is complementary to, the first Petroleum Technical Assistance Project funded by TFET and under World Bank supervision. The United Nations has seconded a member of the Civilian Support Group of the United Nations Mission of Support (UNMISET) in Timor-Leste to the TSO in the role of Coordinator/Legal Adviser. This arrangement will expire at the end of the UNMISET mandate in May 2004.

13 9 The United States Agency for Intemational Development (US AID) is providing bridge financing to support certain direct staff costs (two positions) and certain operational costs at the TSO. This assistance expires at the end of June The United States Trade and Development Agency (USTDA) financed support to preparations of a mediudlonger-term legal, contractual, and fiscal framework for the sector and recommendations on the design of institutional arrangements. This support ended in May USTDA is considering increments to, or extensions of, its assistance. The Norwegian Government is financing the secondment of three experts to the United Nations Development Programme in the areas of (1) petroleum policy advice and sector management (located in the Designated Authority for the Timor Sea Treaty area); (2) sector taxation and tax compliance (located in the Timor Sea Tax Division); and (3) petroleum engineering assistance (located in the Oil and Gas Directorate of the Natural and Mineral Resources Directorate).Beyond secondment of the three resident experts, Norway, through the Norwegian Agency for Development Cooperation ( NOW), has put in place a NOK 30 million (approximately USD 4 million) program of support to the sector covering two resident technical consultancies (in the Directorate), additional short term consultancies, training, workshops and equipment. Funding from the proposed project will in part complement the N O W funding. The International Monetary Fund (IMF) has provided initial direct support and outside consultant assistance on a petroleum revenue management strategy (including a possible oil fbnd ). Further support may be considered. In addition to this outside advice, however, it is critical to have an adviser located within the Government to assist in implementation of this strategy. The Asian Development Bank (ADB) has funded, and has agreed to extend funding until the end of 2003, a Petroleum Fiscal Adviser who is providing crucial support to the conduct of commercial negotiations and significant petroleum fiscal advice. 3. Lessons Learned and Reflected in the Project Design Experience in other World Bank projects underscores the importance of the following as keys to success in this type of technical assistance: (a) counterpart commitment (see next section); (b) effective capacity in core policy, oversight, and coordinating functions; and (c) access to high-quality intemational consultant expertise. The proposed project is designed to provide assistance in the latter two areas. 4. Indications of Recipient Commitment and Ownership The Prime Minister has taken a direct participatory interest in the activities to be supported by the proposed project, and the implementing agency-the TSO-is within the Prime Minister s office. The activities which will be supported have been assigned the highest priority by the Prime Minister.

14 10 5. Value Added of World Bank Support in this Project The World Bank Group s Oil and Gas Policy Unit, which will task manage this project, has extensive world-wide experience in designing and implementing petroleum sector technical assistance, not only in the activities to be financed under the proposed project, but in related plannedfuture activities, e.g. legal and fiscal frameworks, institutional capacity development, and petroleum revenue management. Participation in the proposed project will provide a platform for assistance in other areas and in the design of a broader, longer-term technical assistance program. E. Summary Project Analysis 1. Economic Not applicable. 2. Financial Not directly applicable. However, the fiscal impact of successfil sector development and effective oversight of tax compliance will be substantial. Conservatively estimated, development of the Bayu-Undan field alone is expected to allow for donor exit within three to four years, and to contribute as much as USD 75 million per year to the Government s budget by The benefits of investment in negotiations support have already become apparent. Experienced and well-rounded negotiators can shift significant sums to the Treasury in complex petroleum negotiations. The benefits of investment in tax compliance are also apparent. Even simple audits, especially in a period where tax rules are not yet well understood, have provided significant returns to the Treasury. 3. Technical Not applicable. 4. Institutional (a) Implementing Agency: The TSO is the implementing agency. (b) Project Management: The TSO will provide the staff necessary to manage the project. (c) Procurement Issues. The Government s procurement adviser will be assigned as the project procurement specialist to assist the TSO. (d) Financial Management Issues: The project financial management system to be put in place will need to be acceptable to IDA.

15 11 5. Social Not directly applicable, but expected petroleum revenues will have major implications for the ability to fund public services in health, education, and basic infrastructure, which are crucial for poverty reduction. 6. Environmental Assessment Environmental Category: C Not directly applicable. However, the technical assistance provided under the proposed project is designed with the development of the country s oil and gas reserves in mind. This development, in turn, will have significant environmental implications. Such implications will be taken into account as part of the negotiations. Exploitation of the Bayu-Undan field will occur under the Timor Sea Treaty between Timor-Leste and Australia, which entered into force in April The Treaty establishes a Designated Authority with regulatory authority over environmental matters. The Designated Authority recently took over from the Joint Authority (established by the United Nations, on behalf of Timor-Leste, and Australia in 2000), which had adopted environmental standards of the highest level (essentially an Australian environmental regime) and includes a full-time expert Australian environmental regulator. These standards and access to this expertise are continuing under the Designated Authority. In addition, a Petroleum Mining Code included in the Timor Sea Treaty permits the Designated Authority to issue environmental regulations. The Code, and associated regulations to be issued under the Treaty, prevent the Designated Authority from issuing contracts unless companies can show their ability to meet the environmental standards established; oblige companies to protect the environment in and around the contract area; and empower the Designated Authority to make a company pay for the remedy of any environmental damage. Furthermore, the Production Sharing Contract concluded with the Bayu-Undan operator ConocoPhillips and its joint venture partners requires the joint venture to: develop an Environmental Management Plan to be approved by the Designated Authority; prevent pollution of the marine environment; and pay for the costs associated with clean-up of any pollution from petroleum operations within the contract area. The Production Sharing Contract also requires the contractor to submit to the Designated Authority a plan for decommissioning the project. This plan must include: steps reasonably required to prevent hazard to the environment, and environmental, engineering, and feasibility studies reasonably necessary to support the plan. 7. Participatory Approach (a) Primary beneficiaries: The TSO in the Office of the Prime Minister and the MOPF will be the primary beneficiaries of the proposed project. (b) Other Key Stakeholders: Implementation of the proposed project will be coordinated with other key ministries and departments, such as the Ministry of

16 12 Development and Environment, which includes the Oil and Gas Division of the Department of Mineral Resources. 8. Safeguard Policies As a Category C project, an Environmental Assessment will not be undertaken. It is considered that the existing environmental regime and successor regime, as described above, will provide adequate safeguards with respect to the environment. During project implementation, World Bank experts will review these regimes and provide feedback to the Government as necessary. Since successful development of Timor-Leste s petroleum resources, which the proposed project would support, will have environmental implications, the possibility of preparing a strategic Environmental Impact Assessment will be explored with the Government during project implementation. Similarly, the Projects in Disputed Areas Safeguards are not invoked under the proposed project. The Timor Sea contains areas of overlapping boundary claims by Timor-Leste and neighboring countries. These could become the object of maritime boundary negotiations, and the proposed project provides Timor-Leste with the possibility of expert advice and support in this area. The project does not, however, involve any activity in a disputed zone. The World Bank s other Safeguard Policies are not relevant to the proposed project. F. Sustainability and Risks 1. Sustainability While promoting the conditions for sustainability, the proposed project, in and of itself, will not ensure it. Institutional capacity in the sector over the project period will continue to depend largely on short-term expatriate support and short-term funding. Longer-tenn sustainability will depend critically on available long-term funding and on the development of local capacity. As noted above, the World Bank will continue to work with the Government and with other donors over the project implementation period to put in place long-term capacity to manage Timor-Leste s petroleum sector. The long-term benefits of the proposed project to Timor-Leste will depend ultimately on the proper management of the petroleum revenues that the successful development of Bayu-Undan and other possible oil and gas fields are expected to generate. The proposed project includes support to the design and implementation of a revenue management system. Other current technical assistance projects (e.g., USTDA, NORAD, and IMF) and anticipated follow-on projects are designed to put in place expatriate and, increasingly, local capacity to ensure effective sector and revenue management. That said, the track record in other petroleum producing countries shows that there can be significant risks in this area.

17 13 2. Critical Risks Risks of inappropriate consultant selection are considered negligible. The main consultants have been or will be identified and selected based on their skills and experience. Several well-qualified candidates have already been identified for planned new consultancy appointments. Consultants already in place have a proven record of performance. The risk of complications as a result of anticipated consultancy turnover is considered moderate and will be monitored closely during project supervision. Procurement risk is rated high due capacity issues. To mitigate this risk, the Government s procurement adviser will be assigned as the project procurement specialist to assist the implementing agency in employing the project consultants. The procurement adviser is a retired World Bank procurement staff with over 29 years of diverse procurement experience. 3. Possible Controversial Aspects The proposed project will inter alia fund high profile negotiations with political overtones. These have the potential to be controversial, and indeed, at earlier stages, and even recently, became so. However, the professionalism of the negotiations has never been brought into question and is not expected to be at risk during funding under the proposed project. G. Main Grant Conditions 1. Implementation (a) The Recipient shall: (9 maintain the Timor Sea Office, assigned with such functions, responsibilities and funds, satisfactory to the Trustee, and with competent staff in adequate numbers, including a Project Director and a financial manager acceptable to the Trustee, for the day-to-day implementation and management of the Project; and (ii) maintain the Timor Sea Tax Division, assigned with such functions, responsibilities and funds, satisfactory to the Trustee, and with competent staff in adequate numbers for assisting the Timor Sea Office in the implementation and management of the Project. (b) The Recipient shall maintain in the Recipient s Procurement Department, until completion of the Project, a procurement specialist, with terms of reference satisfactory to the Trustee and provided with adequate support, funds and resources as shall be required to enable such personnel to carry out its functions under the Project.

18 14 (c) The Recipient shall, not later than October 3 auditor acceptable to the Trustee., 2004, employ an independent (d) The Recipient shall, not later than August , and July 3 1,2004, furnish to the Trustee, for its review and comments, an annual budget plan for its Fiscal Year 2003/2004 and its Fiscal Year 2004/2005, giving details of proposed disbursement estimates, including a cash forecast for at least three (3) months, and, thereafter, finalize and adopt each such plan taking into consideration the comments of the Trustee. (e) The Recipient shall: (0 maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with the indicators set forth in Schedule 5 to this Agreement, the carrying out of the Project and the achievement of the objective thereof; 2. Financial (ii) prepare, under terms of reference satisfactory to the Trustee, and furnish to the Trustee, on or about August 31, 2004, a report integrating the results of the monitoring and evaluation activities performed pursuant to paragraph (e) (i) of this Section, on the progress achieved in the carrying out of the Project during the period preceding the date of said report and setting out the measures recommended to ensure the efficient carrying out of the Project and the achievement of the objective thereof during the period following such date; and (iii) review with the Trustee, by September 30,2004, or such later date as the Trustee shall request, the report referred to in paragraph (e) (ii) of this Section, and, thereafter, take all measures required to ensure the efficient completion of the Project and the achievement of the objective thereof, based on the conclusions and recommendations of the said report and the Trustee s views on the matter. (a) The Recipient will maintain records and accounts to reflect in accordance with sound accounting practices, operations, resources, and expenditures in respect of the project. (b) The Recipient will: (i) have the records and accounts referred to in paragraph 1 above audited for each fiscal year in accordance with appropriate auditing principles by independent auditors acceptable to IDA. (ii) hrnish IDA as soon as available, but in any case no later than six months after the end of each such year, the report of such audit, in such scope and detail as IDA shall have requested. (iii) furnish IDA such other information concerning said records and accounts and the audit thereof as IDA shall from time to time reasonably request.

19 15 (c) For all expenditures with respect to which withdrawals from the Grant Account were made on the basis of statements of expenditure, the Recipient will: (i) maintain, in accordance with paragraph 1 above, records and accounts reflecting such expenditures. (ii) retain, at least one year after IDA has received its audit report for the fiscal year in which the last withdrawal from the Grant Account was made, all records evidencing such expenditures. (iii) enable IDA representatives to examine such records. (iv) ensure that such records are included in the annual audit referred to in paragraph 2 above, and that the report of such audit contains a separate opinion by said auditors as to whether the SOEs submitted together with the procedures and internal controls involved in the preparation can be relied upon to support the related withdrawals. H. Readiness for Implementation Consultants for the main assignments under the proposed project are in place or have already been identified. The procurement documentation for the first year s activities are complete and ready for the start of project implementation. Project implementation arrangements have been appraised and found to be realistic and of satisfactory quality. I. Compliance with Bank Policies This proposed project complies with all Bank policies.

20 16 &-LLJ&MW Task Manager: Charles McPherson f Country Director: Xian Zhu

21 17 Annexes 1 & 2: Project Design Summary and Description TIMOR-LESTE: Second Petroleum Technical Assistance The proposed project will support a range of activities in the Timor Sea Office (TSO) and in the Ministry of Planning and Finance (MOPF). The objective of the project is to ensure continued and enhanced functioning of these critical agencies over the next 24 months in support of an orderly, beneficial development of the petroleum sector. Project components and performance indicators are summarized in the table below. Project Component Technical Assistance (via Consultant Services) Training Performance Indicator Mid-Term Completion Engagement of indicated consultants Completed (detailed in project Procurement Plan) Definition and implementation of training for TSO (petroleum economics) and TSTD I (accounting/auditing) Completed Office infrastructure 1 Acquisition of office infrastructure (TSTD) I Completed I I Technical Assistance (via Consultant Services) Demonstrable expansion of information outreach, especially local outreach and including inside Government and National Completed Parliament Technical Assistance (via Consultant Services) Start up of negotiations on new development projects (Jahal and Kudatasi) Negotiations started Technical Assistance (via Start up of negotiations on maritime Negotiations - Consultant Services) 1 boundaries - I started Consultant Services) Techmcal Assistance (via Consultant Services) Techmcal Assistance (via Consultant Services) Petroleum Mining Code to National Parliament Evidence of expanded tax audits Presentation o f draft petroleum revenue management legislation to National Parliament Completed Completed Specific items to be provided and financed include: (a) (b) (c) (e) limited operating expenses, including staff travel and per diem, of the TSO and MOPF related to performance of their petroleum negotiations, policy, oversight, information outreach, audit and revenue management functions; the acquisition of limited IT and communications office equipment considered necessary to effective performance of the TSTD; international consultant support to the TSO and MOPF on a full-time and just-intime basis in petroleum sector management and revenue management, legal, technical, financial, auditing, and media outreach functions; focused training of local TSO and TSTD staff in petroleum economics and taxation and accounting/auditing. In addition, the proposed project will provide support for the carrying out of project audits. The proposed hnding will complement support provided by other agencies including NORAD, ADB, USTDA, and the IMF.

22 18 Annex 3: Estimated Project Costs TIMOR-LESTE: Second Petroleum Technical Assistance Project Components and Costs (including breakdown by category) Annex 4: Cost Benefit Analysis Summary TIMOR-LESTE: Second Petroleum Technical Assistance [Not Applicable to this Project.] Annex 5: Financial Summary TIMOR-LESTE: Second Petroleum Technical Assistance [Not Applicable to this Project.]

23 19 Annex 6: Procurement and Disbursement Arrangements TIMOR-LESTE: Second Petroleum Technical Assistance 1. Pro curem en t Assessment The TSO, the implementing agency for the proposed project, is successfully implementing the first Petroleum Technical Assistance Project. As a result, TSO has processed bid evaluation reports and awarded contracts for consultants in accordance with the Guidelines: Procurement under IBRD Loans and IDA Credits, published in January 1995, revised in January and August 1996, September 1997, and January 1999 (hereinafter referred to as the Procurement Guidelines). Therefore, even though the exposure to World Bank procurement procedures i s limited, TSO, with the assistance of the Government s Procurement Division and the Government s procurement adviser, is capable carrying out the procurement required under the proposed project. However, the overall capacity of the TSO involved with procurement is weak and the associated risks are in the high category due to lack of rules, regulations, and practices that may not fully support the principles of competition. Some of the laws that have yet to passed are those dealing with ethics, bankruptcy, commercial codes, investments, land and property ownership. In addition, the TSO does not include experienced procurement staff. Finally, a review of the current Law on Procurement regulation 2000/10, which is currently being revised, pointed out the following discrepancies: (a) National laws and regulations (2000/10) have been reviewed under the World Bank s Country Procurement Assessment Report (CPAR) and several provisions were found to be inconsistent with the World Bank s Procurement Guidelines. For example, in the national regulation the U.S. dollar is stated as the currency of payment, whereas the World Bank allows bidders to express their bids and receive payments in the currency of any member country up to a maximum of three foreign currencies. The regulation places emphasis on national sources for procurement under USD 1.O million, while the World Bank s preference is intemational competitive bidding unless the contract is unlikely to attract foreign competition. Under the regulation, the procurement entity may extend the bid validity period, whereas under the World Bank s Procurement Guidelines the procurement entity may request extension of the bid validity period but bidders are not obligated to extend the date. However, the regulation also states that if the regulation conflicts with the procurement rules of a donor or funding agency, the requirements of those rules shall prevail. Therefore, consistent with national regulations, all procurement for consultancy services shall be in accordance with the Guidelines: Selection and Employment of Consultants by World Bank Borrowers, published in January 1997, revised in September 1997, January 1999, and May 2002 (hereinafter referred to as the Consultant Guidelines). (b) For the selection of consultants, there is no conflict between the World Bank s Consultant Guidelines and the national regulations. However, the regulations do not require inclusion of the draft contract form in the Request for Proposals. The regulations meet the World Bank s requirements, i.e. the World Bank s Standard

24 20 Request for Proposals: Selections of Consultants (includes Standard Forms Contract), published in July 1997 and revised in April 1998 and July 1999, and which shall be used while inviting proposals. (c) The procurement volume under the proposed project is expected to be limited. To mitigate risks, the following was agreed with the World Bank s procurement accredited staff, the head of the Government s Procurement Division, the Government s procurement adviser, representatives of TSO and MOPF: 0 that the Government s procurement adviser will be assigned as the project procurement specialist to assist the TSO in carrying out the project-related procurement activities. The procurement adviser is a retired World Bank procurement staff with over 29 years of diverse procurement experience; 0 TSO will have easy access to IDA procurement specialists based in the Country Office; 0 for all individual consulting assignments and all contracts costing over USD 50,000 or more, prior review and approval by IDA of all terms of reference and consultant s qualifications, experience, and terms of employment. 2. Implementation Since this is a very small project consisting of 14 short-term consulting assignments (8 of which are incumbents or current advisers), three International Shopping contracts for small equipment, miscellaneous National Shopping contracts for fumiture and small equipment, and two project audits, a simplified procurement capacity assessment was carried out by the Procurement Accredited Staff (Mr. Ronald Isaacson) in the World Bank s Dili, Timor-Leste office, which indicated that the procurement staff in the Government s Procurement Division are generally proficient in implementing the consultant assignments under this project according to the World Bank s Procurement Guidelines. The paragraphs below outline the procurement arrangements that will be followed to employ the consultants and to purchase goods funded by the project. The Project Director based in the TSO will be responsible for project related procurement decisions within the TSO and the MOPF and will be responsible to obtain approvals from the procurement specialist and Contract Assessment Commission (when necessary). A. Procurement of Goods The procurement of goods will follow the World Bank s Procurement Guidelines. Goods to be procured under the proposed project will include computers, printers, overhead projector, scanner, fax, and office fimiture. Bidding documents acceptable to the World Bank will be used for the procurement of goods funded under the project. (i) International Shopping procedures shall be used to procure computers, printers, and miscellaneous office equipment. These contracts will be awarded by comparing price

25 21 quotations obtained from at least three international suppliers from a minimum of two countries, in accordance with the Procurement Guidelines. (ii) National Shopping procedures shall be used to procure miscellaneous office equipment and furniture. These contracts will be awarded by comparing written price quotations obtained from at least three domestic suppliers in accordance with the Procurement Guidelines. B. Consulting Services Selection of consultants and formats of consultant contracts will be done in accordance with the World Bank s Consulting Guidelines. The procurement methods follow. (i) Individual Consultants: The TSO and MOPF will need individual advisers and consultants to carry out the complex and specialized tasks under the proposed project. The selection of individual consultants would be based on their qualifications for the assignment in accordance with Section V of the Consulting Guidelines. The TSO and MOPF will prepare the TOR of the various assignments and send them to the Task Manager for no objection. The specific methods to be employed by the project are outlined in the following two sub-paragraphs. a. TSO and MOPF will solicit a minimum of three CVs of qualified consultants who have the competency to carry out the terms of reference, in accordance with the provisions of 5.1 to 5.3 of the Consulting Guidelines. Under the guidance of the procurement adviser, the TSO will prepare the consultant s evaluation report and draft contract. The procurement adviser, and when necessary the Contract Assessment Commission, will approve the consultant s evaluation report and draft contract before they are submitted to IDA for review and no objection. The above procedures will be followed for the selection of following advisers: (i) Resident Legal Adviser of the TSO; (ii) Resident Petroleum Negotiator of the TSO; (iii) Outside LNG Marketing Adviser for the TSO; (iv) Outside Tax Audit Adviser for the MOPF (TSTD); (v) Resident Petroleum Revenue Management Adviser of the MOPF. b. TSO will select the following positions in accordance with Clauses 5.3 and 5.4 of the Consulting Guidelines as they are either incumbents or have performed similar assignments for TSO under the first Petroleum Technical Assistance Project: (i) (ii) (iii) (iv) (v) Resident Coordinator of the TSO; Resident Media Director of the TSO; Resident Financial Manager of the TSO; Outside Political and Strategy Adviser for the TSO; Outside CommercialPetroleum Law Adviser for TSO;

26 22 (vi) (vii) (viii) Outside Financial Adviser for the TSO; Outside Petroleum Fiscal Adviser for the TSO; Resident Tax Legal Adviser of the MOPF (TSTD). (ii) Auditing: The Treasury is responsible for contracting an auditing firm to audit all of the TFET funded projects. Treasury will include the audit of this project on the list of projects to be audited. The first audit of the project is scheduled for period 1 July 2003 through 30 June Selection for the first audit will be Single-Source Selection as the Treasury has a three-year renewable contract with its current audit firm. Services for project auditing of the remainder of the project will be procured under contracts awarded in accordance with provisions of Section I1 of the Consulting Guidelines, and provisions of paragraphs 3.13 through 3.18 applicable to Quality and Cost Based Selection of consultants. 3. Procurement Methods (i) Procurement of Goods (US0 40,000) (a) International Shopping (IS): Procedures for IS will be used for goods costing less than the equivalent of USD 20,000 per contract up to an aggregate amount estimated not to exceed USD 35,000. These contracts will be awarded after solicitation and evaluation of written price quotations from at least three suppliers in two different countries, in accordance with the procedures acceptable to the World Bank. (b) National Shopping (NS): Procedures for NS will be used for goods costing less than the equivalent of USD 2,500 per contract up to an aggregate amount estimated not to exceed USD 5,000. These contracts will be awarded by comparing price quotations obtained form at least three domestic suppliers, in accordance with the World Bank s Procurement Guidelines. (ii) Consulting Services (US0 1,222,800) Selection of consultants under the proposed project will follow the provisions of the World Bank s Consulting Guidelines. (a) Individual Consultants: TSO and MOPF will require individual advisers and consultants to carry out some of the specialized tasks of the project, such as legal (international law, commercial law, tax law, audits, petroleum law), media, project management, fiscal, negotiations support, financial analysis, petroleum engineering, and petroleum revenue management. Consulting contracts for these tasks financed under the proposed project will be awarded to individuals in accordance with paragraphs 5.1 to 5.4 of the Consulting Guidelines. The World Bank s Standard Contract for Short-Term Individual Consultant: Time Based Remuneration for Small Assignments will be used.

27 23 (b) Single Source and Quality and Cost Based Selection: Selection for the first audit will be Single-Source Selection as the Treasury has a three-year renewable contract with its current audit firm. Services for project auditing of the remainder of the project will be procured under contracts awarded in accordance with provisions of Section I1 of the Consulting Guidelines, and provisions of paragraphs 3.13 through 3.18 applicable to Quality and Cost Based Selection of consultants. (iii) Training (USD 31,000) Expenses for Government staff to attend training courses in advanced law of income tax, language and complex legal interpretation, intemational profit shifting and transfer pricing, auditing, business accounting, and financial statement analysis will be disbursed with prior approval of the World Bank. The estimated total cost of training for TSO and MOPF staff is USD 3 1,000 (iv) Incremental Operating Costs (USD 406,200) Incremental operating costs will include transportation and per diem to permit certain members of the TSO and MOPF whose travel is not otherwise provided for to participate in negotiations, carry out tax compliance activities, collections, audits, communications, etc. These will be procured according to normal commercial procedures acceptable to the World Bank. 4. Prior Review Thresholds IDA will conduct a prior review of procurement for all contracts costing USD 50,000 or more and all individual consulting contracts. The Task Manager will approve all terms of reference, qualifications and experience of the candidates, and the terms of employment. 5. Ex-Post Reveiw Ex-post review in the ratio of one out of two contracts will be conducted regularly by IDA to identify areas of improvement. IDA will conduct supervision missions half yearly for the life of the project. 6. Disbursement The proposed project is expected to disburse over a period of 24 months from date of signing. Disbursement will use the traditional disbursement methods-direct payments or SOEs, reimbursements, etc. All disbursements against contracts for individual consultants costing USD 50,000 equivalent or more will be fully documented. All other contracts will be made against certified SOEs. The documentation supporting SOE disbursements will be retained by the Treasury for at least one year after the receipt by IDA of the audit report for the year in which the last disbursement was made.

28 24 7. Special Account To facilitate timely project implementation, the Government may establish a Special Account denominated in US. dollars under terms and conditions acceptable to IDA. If the Special Account is established, the authorized allocation for the Special Account will be USD 175,000. The replenishment applications should be submitted by the Treasury on a monthly basis or when the balance of the Special Account is 20 percent of the initial amount, whichever comes first. The Special Account will be audited annually by independent auditors acceptable to IDA. 8. Financial Management Assessment The financial arrangements described in Section C, 4 were verified and discussed with TSO and MOPF (TSTD) representatives and a World Bank Financial Management Specialist. Given the nature of the proposed project and expenditures involved, these arrangements were assessed as satisfactory and acceptable. 9. Accounting Organization and Staffing As indicated above, the TSO will assign its financial manager, who is acceptable to IDA, to ensure that the financial management tasks are carried out in a systematic and timely order. 10. Funds Flow The funding sources for the proposed project will come from TFET. The TSO will be responsible for requesting disbursement from TFET for agreed project activities. The disbursement requests will be routed through the designated Government official authorized to sign applications to withdraw funds from the Grant Account established for the project. Based on authorized requests to disburse funds, IDA will withdraw and pay funds directly to a supplier or transfer funds to a Special Account to be managed by the Government. It is likely that the majority of project funds will flow fkom IDA directly to the consultants. 11. Retroactive Financing No withdrawals shall be made from the Grant Account for payments made for expenditures prior to the date of signature of the Grant Agreement, except that withdrawals, in an aggregate amount not exceeding USD 170,000, may be made on account of payments made for expenditures in the categories of consulting services and goods before that date but after May 1,2003.

29 Planning and Budgeting The preparation of the budget plans for project implementation will be the responsibility of the TSO. The budget should be prepared in such detail to allow meaningful monitoring of project implementation. The budget should be coordinated with the procurement plans and supported by a cash forecast of at least three months. 13. Accounting and Reporting The primary responsibility for maintaining accounting records for the proposed project will be with the TSO. The TSO will liaise with the MOPF (particularly the TSTD), who will assist in the maintenance of accounting records of the MOPF for the proposed project. The TSO will establish appropriate accounting and internal control procedures for authorizing payments, recording of all proj ect-related expenditures, periodic financial reporting, and preparation of annual financial statements for external audit. The accounting system should be designed to maintain separate project accounts for TFETfunded activities in accordance with the Trust Fund Grant Agreement. 14. Auditing Periodic internal auditing of the project activities will be carried out in accordance with Government auditing procedures. The TSO will prepare annual financial statements for the project and have them audited by an independent external auditor acceptable to IDA. The auditor will be required to provide an opinion on the financial statements, the operations of the Special Account, and the withdrawals from the grant based on SOEs. The independent auditor will be appointed on terms of reference acceptable to IDA.

30 26 I I 1. Goods Expenditure Category 3. Training 4. Incremental Operating Costs Total Table A: Projects Costs by Procurement Arrangements (in USD 000 equivalent) I7r-T Procurement Method I Ab- I NCB I Other* I NBF I I I I 2. Consulting Services I I Total Cost ,224.1 (1,222.80) (31.0) (31.0) (406.2) (406.2) 1,700 1,700 (1,700) (1,700) * Includes goods to be procured through national and international shopping, technical services, training, staff of the project management office, and incremental operating costs related to managing the project and operating TSTD office in Perth. Consultant Services and Audit Expenditure Category A. Firms B. Individuals Contingencies Total Table B: Consultant Selection Arrangements (in USD 000 equivalent) Selection Method QCBS QBS SFB LCS SBCQ Other N.B.F. (IC/SS) 3.O 3.O 6.0 1, , , , cost I Total Table C: Threshold for Procurement Methods and Prior Review Expenditure Category Contract Value Procurement Method Consultant Services >USD50,000 IC, QCSB, SS and audits (Individuals and Firms) Goods >USD 10,000 IS, NS Contracts Subject to Prior Review (USD OOO) 1, Overall Procurement Risk Assessment: High Average Low

31 27 The Government of Timor-Leste s Procurement Division has employed a retired World Bank procurement staff with 29 years of diverse procurement experience; he will continue as the procurement specialist for the proposed project. However, the Government has yet to pass laws dealing with ethics, bankruptcy, commercial codes, investments, land and property ownership, etc. The Procurement Law is being revised following the UNCITRAL model Procurement Law, but has yet to be ratified. These issues are discussed in the CPAR, which is being finalized. Therefore, the overall procurement risk assessment in Timor-Leste remains high. Table C: Allocation of Grant Proceeds Expenditure Category Amount in USD 000 Financial Percentage Consultant Services I 100% for individual consultants and 96% for consulting fm Goods % of foreign expenditures, 100% of local expenditures (exfactory cost), and 90% of local expenditures for other items procured locally Training % Incremental Operating Costs % Tntal

32 28 Annex 7: Project Processing and Budget Schedule TIMOR-LESTE: Second Petroleum Technical Assistance Processing: Budget (per SAP as of 6/17/2003*): I Fund Source I Staffsalaries I TraveVOther I Total I Percent of Total I BankBudget (BB) Trust Fund (TFET) Total Percent of Total $8, $ $9, % $0.0 $0.0 $0.0 0% $8, $ $9, % 95 yo 5 yo 100% -- Bank Group Staff who worked on the project included: Mei Wang Morag van Praag Abdul Haji Allison Berg Counsel Senior Disbursement Officer Senior Financial Management Specialist Operations Analyst