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    Southeast Asia
     Dec 3, 2008
East Timor kills Chinese power deal
By Matt Crook

DILI, East Timor - A US$390 million power project tendered to Chinese investors was to be the defining action of the Parliamentary Majority Alliance (AMP) coalition government, with the infrastructure seen as crucial for improving livelihoods and attracting foreign investment to this impoverished island nation.

It was announced in October that the Chinese Nuclear Industry 22nd Construction Company had been awarded the tender to build two power generating stations - one in Manatuto district in central Timor and another on the country's south coast - and an electricity grid, with the project budgeted over four years.

That ambitious deal is fast coming undone, raising new questions


about China's commercial diplomacy in the region. The project was dealt a legal blow when the Court of Appeal on October 27 upheld a petition submitted by 16 members of parliament, many from the opposition Revolutionary Front for an Independent East Timor (FRETILIN) party.

The court ruled in line with their complaint that the budget was unconstitutional and illegal because the money for the China-tendered deal would entail a withdrawal beyond the amount permitted by existing laws governing the country's oil revenue-financed sovereign wealth fund, known as the Petroleum Fund.

The controversy represents the latest botched government-to-government deal in the region to ensnare Chinese business interests. Beijing's commercial diplomacy hit a snag in the Philippines this year when a Chinese state-linked firm contracted to build infrastructure for broadband telecommunications came under fire on allegations the company paid kickbacks to high-ranking government officials to pave the way for the deal.

No such allegations have surfaced around East Timor's power plant deal. But the controversy has made clear how hard at work Beijing's soft power commercial diplomacy is in oil-and-gas rich East Timor. China was the first country to establish diplomatic relations with the country after it achieved independence in 2002 and has since been a major donor to the oil-and-gas rich nation, providing everything from food to military equipment.

Chinese assistance went towards building a new building for the government's Ministry of Foreign Affairs and an elaborate new presidential palace is on the way. The two structures have represented the biggest construction projects the capital, Dili, has seen, according to locals. A huge new Chinese Embassy is also on the cards.

In a seeming quid pro quo, Chinese investors may obtain 50-year land leases in East Timor, where most other foreigners are limited to 30-year deals. That's encouraged Chinese investment, witnessed in the growing numbers of Chinese-run businesses in Dili ranging from electronics stores to restaurants to bars. Despite its slim national coffers, East Timor donated $500,000 to China in September for relief efforts in Sichuan province, hit by a severe earthquake last May.

Relations between the two countries go beyond the commercial. In April, East Timor agreed to buy two Chinese naval vessels to improve its ability to patrol its sovereign waters, where it loses millions of dollars every year to fishing poachers and smugglers. Before turning to China, Dili had only two aging Portuguese boats to patrol the country's 870 kilometers of coastline.

Chinese counterbalance
Some analysts have suggested that East Timor is moving closer to China precisely because of Australia's unwillingness to accommodate Timorese strategic development, including a reluctance to help the small nation establish a naval force. Australia has until now taken the lead in patrolling East Timor's territorial waters. The two countries dispute the boundaries of the oil-and-gas rich Greater Sunrise field in the Timor Sea, but reached a joint revenue-sharing agreement in January 2006.

Australian energy company Woodside Petroleum plans a $14 billion Greater Sunrise project, with the aim of piping gas to Darwin, in the north of Western Australia, or build a floating plant. Timor wants the gas piped to its own soil. Neither side is prepared to back down and now it seems East Timor is cozying with China to bolster its negotiating position. President Jose Ramos-Horta was quoted as saying he would "prefer to forgo Greater Sunrise than surrender to the dictates of a bunch of oil executive millionaires".

Ian Storey, a security analyst at the Institute of Southeast Asian Studies, notes, "China gave a lot of support to the Timor independence movement in the second half of the 1970s, so there are friendly feelings. China has been looking into energy deals with East Timor for the past few years."

John Virgoe, Southeast Asia project director for International Crisis Group, said, "I think China should be congratulated for providing aid to [East Timor]. It would be better if the aid were more focused on relieving poverty and sustainable development than on prestige projects - but China is still early on the learning curve when it comes to foreign assistance."

Nor are China's interests limited to East Timor. "[China] is also stepping up its engagement across the Pacific region as a way of extending its regional profile," Virgoe said.

The circumstances surrounding the power project are raising new questions about how China conducts its business in the region. Tibor van Staveren, a researcher for La'o Hamutuk, a non-governmental organization that monitors development issues in East Timor, translated the Appeal Court's recent ruling against the power plant project tendered to Chinese investors.

The verdict said the deal "violates Timor-Leste's [East Timor] constitutional prohibition against secret budgets and parliament's power to oversee budgetary operations".

The government has withdrawn $300 million from the Petroleum Fund this year, according to La'o Hamutuk. This year's state budget was $686.8 million, but the court's ruling now limits that amount to $391 million.

In August, the government proposed to increase the budget by 122% to about $800 million. The revised budget was discussed in parliament and the budget line for the extra $390 million for the Chinese tendered power plants was voted down. Yet the $390 million earmark still went through after an alleged mix up with the paperwork, said Staveren.

Staveren also noted the speed of the tendering process for the heavy-fuel-oil power plant - three months from when the tender was announced to the contract being signed.

"A project like this would normally need almost a year to get through a concept stage and the drawing of technical specifications, to send out tenders, evaluate tenders and do an environmental impact study. They rushed it," said Staveren. "For a project like this, the [tender] documents would be the size of a telephone book - these were five pages."

The government remains adamant that the tendering process was legitimate. Secretary of State for Electricity, Water and Urbanization Januario da Costa said, "The tendering process was announced through the Internet. It was not done too fast. Fourteen companies offered their quotations."

Of the international companies that initially bid for the contract, one was rejected for a late submission and nine others were struck off for not complying with the full proposal. The five remaining proposals, according to a government media release, were then submitted to a committee comprising the National Procurement Director, two electrical engineers, and international advisers from the Ministry of Finance and the Ministry for Infrastructure.

Information about the company that won the bid, Chinese Nuclear Industry 22nd Construction Co, was not made readily available by the government. The Chinese company started as a construction outfit building elements mostly for nuclear power plants, La'o Hamutuk noted. It also built apartment complexes and roads and was involved in construction for the Three Gorges dam project in China.

As part of the deal, the Chinese company would have maintained management control of the plant for five years before handing it over to the Timorese. Critics note the technology the government proposed for the plants - two heavy fuel oil power stations - was an unusual move for a signatory to the Kyoto agreement on greenhouse gas emissions. Others have suggested hydropower would have been a more efficient energy strategy for the power-starved country.

Matt Crook is a East Timor-based freelance journalist. He may be reached at writer@whatismatt.com.

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