The Three Per Cent Rule
Timor-Leste copied Norway's sovereign wealth fund almost line for line, wrote a spending limit into the law, and then spent above that limit in nearly every year since 2009. The gas field that filled the fund stopped producing in 2023, and the field meant to replace it has been sitting undeveloped since 1974.
Timor-Leste restored its independence on 20 May 2002, after four centuries of Portuguese rule, twenty-four years of Indonesian occupation and a referendum in 1999 that the departing military answered by burning most of the country's buildings. What the new state inherited was a population of around a million people, a literacy rate below fifty per cent, no functioning tax base, and a claim to some gas fields under the sea between it and Australia.
Three years later it passed the Petroleum Fund Law. Almost everything about the country since — every road, every clinic, every ministry salary, and every argument in the national parliament — has been an argument about that fund.
Copying Norway
Law No. 9/2005 was drafted with Norwegian advice and follows the Norwegian model closely. Every dollar of petroleum revenue goes into the fund, not into the budget. The fund is held at the central bank and invested abroad, on the reasoning that a small economy which spends oil money domestically simply inflates its own prices. Nothing can leave the fund except through a transfer approved in the annual state budget by parliament, and the fund's quarterly reports are published. In the early years the entire portfolio sat in United States government bonds; a 2011 amendment allowed a substantial share to move into equities.
By the standards of resource funds this is unusually well built. It is transparent, it is legislated rather than discretionary, and it is audited. Timor-Leste has been repeatedly cited as an example of how a poor country should handle a windfall, and the citation is deserved. The design is not the problem.
Three per cent
The law defines an Estimated Sustainable Income: three per cent of total petroleum wealth, meaning the fund balance plus the present value of revenue still expected from producing fields. Withdraw only the ESI and the fund lasts indefinitely, because you are spending the return rather than the capital. That is the whole idea, and the number is written into the statute.
The law then adds a clause. The government may withdraw more than the ESI, provided it explains to parliament why exceeding it is in the long-term interest of the country. That clause was intended as an escape valve for emergencies. It has been used in most years since 2009, and in several of them the excess has been very large. Withdrawals have exceeded incoming petroleum revenue every year for roughly a decade, which means the fund has been paying its own way out of investment returns and, in bad market years, out of capital. The balance has hovered somewhere near eighteen billion dollars for about ten years, which looks like stability and is the opposite of it: a fund that should have been compounding has instead been standing still while the state that depends on it grew.
A sovereign wealth fund is a machine for turning something finite into something permanent, and it only works if you take out less than it earns. Timor-Leste built the machine correctly and has spent most of its life running it in reverse.
The field that paid for it has stopped
Nearly all of the money came from one place. Bayu-Undan, in the Timor Sea, began producing in 2004 and was the source of the overwhelming majority of the fund's receipts. It ceased production in 2023 and is now being decommissioned. Domestic revenue — taxes, customs, fees, the coffee that is the largest non-oil export — covers a small fraction of a state budget that has run well over a billion dollars a year. The rest is the transfer from the fund. Petroleum receipts are now close to nothing, and the withdrawal has not fallen to match.
The field that has never been developed
The replacement was always supposed to be Greater Sunrise, a field of roughly five trillion cubic feet of gas discovered in 1974. Fifty-two years later not a molecule has been produced from it, because nobody can agree where the pipe should go. Australia and the operating companies favour piping it to existing infrastructure at Darwin. Timor-Leste wants it brought ashore on its own south coast, to anchor the industrial corridor known as Tasi Mane, on the argument that revenue alone builds nothing durable and a processing industry might. In 2016 Timor-Leste invoked compulsory conciliation under Annex V of the UN Convention on the Law of the Sea — the first time in the convention's history that the procedure had been used — and it worked. A maritime boundary treaty was signed at UN headquarters in New York on 6 March 2018 and entered into force on 30 August 2019, the twentieth anniversary of the referendum. It gives Timor-Leste eighty per cent of upstream Greater Sunrise revenue if the gas comes to Timor and seventy per cent if it goes to Darwin.
The state then bought its way into the project itself, acquiring the stakes held by ConocoPhillips and Shell in 2018 and 2019 for something in the order of six hundred and fifty million dollars — money from the fund — and taking a majority holding in the joint venture through its national company. The commercial case for the south-coast option has never been demonstrated to the satisfaction of the remaining partners or of the IMF, and the deadlock is now older than most of the people living in Dili.
What the money has bought
Some of it has bought a great deal. Electrification is far wider than it was in 2002. The Dili–Baucau road is genuinely good. There is a national university, a functioning currency arrangement, three peaceful transfers of power, and in October 2025 the country was admitted to ASEAN as its eleventh member, twenty-three years after independence and fourteen after it first applied.
Some of it has bought less. A supply base at Suai and a highway along the south coast were built for an industry that does not exist yet and stand largely idle; the Dili institute La'o Hamutuk has documented their costs against their use for over a decade. Meanwhile close to half of Timorese children under five are stunted, one of the worst rates anywhere, in a country whose government has been spending its capital rather than its income in almost every year since 2009. That is not a moral failure so much as an arithmetic one, and it has a deadline: the projections that circulate in Dili put exhaustion of the fund somewhere in the 2030s if nothing changes. The three per cent rule is still in the law. It has simply never been the thing that decided the budget.