Finance holding up business development in ETimor

19/09/2008 10:18:25

The World Bank says it's no easier to run a business in East Timor now than it was a year ago, despite government efforts.

Radio Australia's Stephanie March reports that a key priority for the Alliance of a Parliamentary Majority (AMP) coalition government led by Xanana Gusmao is to develop the private sector.

Tax cuts came into effect on July 1 and new investment legislation is expected to go before the Council of Ministers in coming weeks.

But the recent Doing Business survey by the World Bank's International Finance Corporation (IFC) says there's still a long way to go.

The annual survey rates the ease of doing business in 181 economies and this year it shows East Timor failed to improve on it's rank of 170.

IFC country coordinator in East Timor Rainer Venghaus says the agency has been working with the government and private sector to develop possible reforms.

He says there is a need for clearer processes.

"One message we got, from the private sector and discussed with the government, was to have a clear mapping exercise to know what is happening and how to actually register a business, how to get a license, how to pay taxes," he said.

"We are in that process now to do this mapping, which shows quite significantly where the problems already start, or to put it positively where we can have fairly quick improvement."

Trouble getting started...

For small entrepreneurs in East Timor even getting to the stage of registering a business is proving to be a challenge.

Following the 1999 referendum violence and the bloody political crisis in 2006, many borrowers defaulted on their loans due to loss of income or assets.

Mario Mendes, the director general of BNU, the largest of East Timor's three commercial banks, says it's a huge risk to lend to small businesses.

There are a handful of small microfinance organisations in East Timor, but to get lenders and small entrepreneurs back on track, Economy and Development Minister Joao Gonsalves is asking groups like the World Bank and the IFC to help start a National Development Fund.

"That we can use and then negotiate with the three commercial banks some terms and conditions that would involve low interest rates and certain mechanisms that can support - I believe that the private sector need this initiative to improve and develop because this is one of their biggest problems," Mr Gonsalves said.

"We have a weak private sector but I think the main problem that they face at the moment is actual access to finance."

Rainer Venghaus from the IFC says the idea needs to be scrutinised, and could be problematic.

"What we find, and that is not only IFC, that's generally also the finding from other agencies is that a national development bank the experience is not very favourable," Mr Venghaus said.

Fretilin opposition MP Jose Teixeira agrees.

"Providing state funds, government funds, for loans is fraught with danger because people will see it as money they don't necessarily have to pay back because it's theirs any way," Mr Teixeira said.

He says the problem for entrepreneurs in East Timor is not about a lack of available money.

"There is a law for licensing banks, but yet you have very few banks applying for it because there are still problems with enforcing loan contracts, there are still problems with getting securities registered in order to secure loans, and of course you still have uncertainty about security situation," he said.

"All of these things are what contributes to a lack of credit in the country and therefore access to credit; it is not the absence of money itself."

Along with investment and tax reform, the government is working on a nation-wide project to establish a formal land title system, to increase foreign investor confidence.

Minister Joao Gonsalves says he is not worried about the results of this year's Doing Business survey, as the 2009 survey would more accurately reflect the impact of the coalition Government's reforms.

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