Country Strategy and Program Update 2006-2008 - Timor-Leste

Table of Contents

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I. Country Strategy

II. Current Development Trends and Issues

III. Implementation of the Country Strategy and Program

IV. Portfolio Management Issues

V. Country Performance and Assistance Levels

Country Strategy and Program Update 2006-2008: Democratic Republic of Timor-Leste

V. Country Performance and Assistance Levels

A. Proposed Grant Level and Lending

24. As a poor postconflict country, Timor-Leste is eligible to access the grant facility under the Asian Development Fund (ADF) IX for 2005-2008, at the rate of 40% of its total ADF IX allocation. Under ADB’s performance-based allocation framework (PBA), Timor-Leste’s rating entitles it to a grant of approximately $7.6 million over the first 2 years of the ADF IX period. Timor-Leste’s ADF IX entitlement will be adjusted for the second 2 years according to a revised PBA rating agreed during 2005. Timor-Leste’s PBA rating is expected to improve, while the other considerations of population and poverty should also increase its ADF IX allocation.

25. The Government has no borrowing program to finance its approved sector investment programs; nor does it have an explicit “no borrowing” policy. ADB, World Bank, and the Government have discussed scenarios involving large one-off public infrastructure capital investments that might qualify and be appropriate for concessional loans from the banks.

B. Nonlending Program

26. The TA program for 2006-2008 is estimated at approximately $1 million per year. ADB’s Pacific regional TA program has limited application in Timor-Leste.

C. Summary of Changes to the Program

27. This CSPU introduces three program refinements. The program is

results-oriented;
aligns with ADB’s new Pacific Strategy, and is sharply targeted and focused; and
incorporates a strategy to leverage ADB support through sector leadership, coordination, and resource mobilization.

**Table 1: Asian Development Bank Assistance Program, 2006-2008**
Item	2006	2007	2008
ADF Grant^a	Urban Water Supply and Sanitation Project: $5.3 million
TA Grants	Water and Sanitation Service Organization Development: $0.5 million
	Infrastructure Capacity Development Phase I: Transport: $0.5 million
		Infrastructure Capacity Development Phase II: $1.0 million
			Infrastructure Capacity Development Phase III: $0.5 million
			Preparation of Road Sector Improvement Project Phase II: $0.5 million

ADF = Asian Development Fund; TA = technical assistance. ^aThe first ADF grant, Road Sector Improvement Project, is a 2005 activity. Source: Asian Development Bank estimates.

1. Results Orientation

28. The results orientation requires the CSPU to identify results sought by the Government to which ADB will contribute:

identify what outcomes are expected during CSPU implementation
provide a mechanism and indicators for monitoring progress made toward achieving those outcomes,
provide a basis for evaluating the success of the CSPU, thereby guiding program adjustments to improve results.

Accordingly, this document describes how ADB will help the Government achieve its goals and objectives contained in the NDP; but it does not establish the share or quantitative measure of ADB’s contribution to NDP goals and objectives.

29. The results framework (Table 2) for this CSPU provides a conceptual link between the NDP’s long-term goals (2020), the development context, intermediate results, and ADB support. The framework uses the World Bank’s standard country assistance strategy (CAS) results framework format, and the entries are largely consistent with the draft 2006-2008 CAS results framework for Timor-Leste where they overlap.¹¹

30. The link with the NDP is direct and accurate. Framework entries are grouped under one of two elements derived from the Government’s poverty reduction strategy embedded within the NDP. They are the two elements that align with ADB’s strategic focus:

opportunities for economic participation (NDP p. 37); and
basic social services (NDP p. 38).

The two left-side columns of the framework repeat NDP goals directly from the NDP document and paraphrase NDP analysis of development constraints. The middle two columns of the framework state the intermediate development outcomes for each NDP goal that will be influenced by the CSPU. The framework provides targets or measures to indicate if the outcome has been achieved at the end of the CSPU period; and importantly, it provides milestones and intermediate indicators to track implementation toward the expected CSPU outcomes. Finally, the right-side of the framework lists specific ADB activities that will contribute to the CSPU outcomes and also other development partners contributing to the outcomes.

2. ADB Pacific Strategy: Sharply Targeted and Focused

31. ADB’s Pacific Strategy for 2005-2009 focuses on the two expressed preferences of the poor:

opportunities for cash incomes, and
improved access to basis social services.

Consistent with this sharply focused approach, ADB’s strategy and program for Timor-Leste is updated to focus on two key results areas:

improve provision, operation, and maintenance of physical infrastructure; and
build capacity to manage and deliver quality basic social services.

Within these key results areas, development grants will support only rehabilitation of main roads and improvements for urban water supply and sanitation.

3. Leveraging ADB Support

32. ADB ranks outside the top 10 external agencies supporting Timor-Leste, in terms of resource transfers.¹² With or without a lending program, ADB should leverage its grant-based support to remain relevant and valued after concluding its emergency rehabilitation support funded by TFET. ADB’s leveraging strategy involves sector leadership, sector coordination, and sector-based resource mobilization for infrastructure sectors. At one level, ADB will help the Government enunciate a whole-of-government vision for an efficient and effective institutional framework across all infrastructure sectors¹³ and a capacity development road map for achieving the vision. ADB will then help the Government mobilize and coordinate development partner programs to implement the road map.

33. Specifically for the road subsector, ADB helped the Government prepare a detailed 5-year roads improvement strategy and program that will be endorsed by the Government to all development partners supporting the road subsector. ADB will help the Government mobilize funds to implement the program and an ADB-funded project management unit will be available to help the Government and partners execute their own road investments. ADB intends to provide similar leadership for urban water supply and sanitation.

**Table 2: Country Strategy and Program Update Results Framework (2006-2008)**
Country Development Goals		Outcomes Influenced by the CSPU			Partnerships
National Development Plan Goals^a	Key Constraints^b	CSPU Outcomes and Indicators^d	Milestones and Intermediate Indicators^e	ADB Instruments of Support	Development Partners
Element I: Opportunities for Economic Participation^c (NDP p. 37)
Provide roads and bridges for the movement of people and goods, orderly and efficient functioning of markets, and sustainable development (NDP p. 37)	• Lack of plans and planning capability • Inadequate maintenance of existing road network • Weak institutional capacity • Weak local contractor capability and contractual arrangements	Improved availability of efficient, cost-effective, and financially sustainable transport infrastructure to increase connectivity and thus support social and economic development • 360 km of main roads and bridges rehabilitated and maintained to satisfactory levels (including portions of ongoing projects carrying over to 2006-2008) • Transport costs (vehicle operating costs plus travel time) on main roads reduced by 15%	• Detailed 5-year road improvement strategy and program adopted by the Government, with buy-in from development partners • Comprehensive infrastructure sectors capacity development road map adopted by the Government and supported by development partners • Road sector capacity development road map adopted by the Government, supported by development partners, and under way • 30 additional engineers/technical staff trained and working full-time on roads contract management, and construction supervision • Measures adopted to improve the efficiency of small-scale domestic contracting, including simplified standard contracts • Equipment leasing company established • CFET budget for road rehabilitation and maintenance increased by 200% over FY2005 • Regional cooperation program in place covering movement of people and goods between Timor-Leste and Indonesia	TFET Grant 8181-TIM: Emergency Infrastructure Rehabilitation Project II^f ADF Grant-TIM: Transport Sector Improvement Project TA-TIM: Infrastructure Sectors Capacity Development TA-TIM: Infrastructure Capacity Development TAs-TIM: Infrastructure Capacity Development II & III TA-TIM: Preparation of Road Sector Improvement Project II REG: Economic Cooperation between Timor-Leste and Indonesia: Issues and Options	EC Japan/JICA UNDP/UNOPS WB
Ensure that banking, credit and microfinance services are available to all, including the poor and women (NDP p. 31)	• Inadequate credit available for small businesses, especially in rural areas and for women • Poor information on credit worthiness and collateral	Improved access to credit for private investment and working capital • Increased number of microfinance institutions, in both rural and urban areas • Increased coverage by commercial banks in both rural and urban areas • Increased lending for private investment and working capital • Increased access to credit for women and youth	• IMFTL returned to profitability and banking license issued • Private equity injected into IMFLT • IMFTL branch expansion program recommenced • Credit and collateral registry created • Public awareness campaigns on credit mechanisms conducted • Training programs for bankers and microlending institutions conducted	TA 4509-TIM: Strengthening Microfinance Operations (following on from TFET Grant 8186: Microfinance Development Project)^f	NGOs Portugal UNDP USAID WB
Element II: Basic Social Services (NDP p. 38)
Provide adequate, safe, and sustainable water supplies for the communities of Dili and major urban centers in districts, with the aim of full cost (NDP p. 275) • 80% of urban population with access to safe piped water (NDP p. 280) To facilitate at the national level the safe disposal of sewage and wastewater in urban areas (NDP p. 275) • 100% of urban areas with wastewater systems (NDP p. 280)	• Incomplete water supply systems in Dili and other urban areas (reasonable water production, transmission, and primary distribution, but poor secondary and tertiary distribution) • Lack of legal, regulatory, and institutional framework • Weak institutional capacity in WSS/SAS	Improved water supply and sanitation for residents and businesses in urban areas • 40% of Dili residents and businesses connected to 24-hour piped water and 30% of residents in district towns with access to clean water • 20% of Dili neighborhoods with effective and sustainable wastewater collection, treatment, and disposal capabilities	• Comprehensive infrastructure sectors capacity development road map adopted by the Government and supported by development partners • WSS/SAS corporatization road map adopted by the Government, with buy-in from development partners who are supporting capacity development programs • WatSan regulatory framework and credible regulator in place • WSS/SAS reconstituted as a public corporation, separate or combined with the power corporation • WSS/SAS a full participant in IBNET and regularly measuring and reporting on core performance benchmarks • CFET budget for urban WatSan improvement and maintenance increased by 300% over FY2005	ADF Grant-TIM: Urban Water Supply and Sanitation Project TA-TIM: Infrastructure Sectors Capacity Development TA- TIM: WSS/SAS Organization Development	AusAID CIDA GTZ Habitat/CA Japan/JICA NGOs Portugal/ADP UNDP UNICEF USAID WB WHO
ADB = Asian Development Bank; ADF = Asian Development Fund; CA = Cities Alliance; CIDA = Canadian International Development Agency; EC = European Commission; GTZ = German Technical Cooperation; IMFTL = Instituicao de Microfinancas de Timor-Leste (Microfinance Institution of East Timor); JICA = Japan International Cooperation Agency; NDP = National Development Plan; NGO = nongovernment organization; Portugal/ADP = Government of Portugal/Aguas de Portugal; TFET = Trust Fund for East Timor; UNDP = United Nations Development Programme; UNICEF = United Nations Children’s Fund; UNOPS = United Nations Office for Project Services; USAID = United States Agency for International Development; WatSan = water supply and sanitation; WB = World Bank; WHO = World Health Organization; WSS/SAS = Water and Sanitation Service/Servicio de Aguas de Saneamento. ^aTaken from the NDP. Selected long-term goals (2020) that overlap with ADB’s strategic priorities in Timor-Leste. ^bTaken from the NDP. Related development challenges/issues that need to be addressed to achieve the higher order country outcomes. ^cTaken from the NDP. These are “elements” within the poverty reduction strategy that overlap with ADB’s strategic priorities in Timor-Leste. ^dCSPU outcomes that ADB expects to influence through its interventions and the outcome indicators, during CSPU implementation. ^eMilestones/intermediate indicators to track implementation toward expected CSPU outcome(s). ^fThis is an ongoing activity from the previous CSPU that is included in the matrix due to its contribution to achieving the outcome during the CSPU period. Source: ADB, and development partners; NDP, and sector development programs.

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The CAS and CSPU frameworks diverge at the “pillar/element” level. Whereas the CAS matrix is structured on three pillars from the Government’s Stability Programme prepared after the NDP, the CSPU reverts directly to the NDP and is structured on two of four elements that underpin the poverty reduction strategy contained within the NDP.
While ADB’s ADF grants and TA grants will total approximately $5 million per year, the four largest bilateral donors, Australia, Japan, Portugal, and United States each have annual grant-based programs in excess of $20 million.
Infrastructure sectors in Timor-Leste include transportation (roads, seaports, airports), power, telecommunications, water supply and sanitation, and urban development.

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IV. Portfolio Management Issues

Country Strategy and Program Update 2006-2008: Democratic Republic of Timor-Leste