Introduction The private sector is at a nascent stage in Timor-Leste. It is estimated that 70% of formal firms in the country are small, 24% medium-sized, and only 6% were large. Around 30% of all businesses are informal microenterprises.[1] Capital formation by private businesses averaged 5% of non-oil gross domestic product (GDP) between 2016–2020—low as compared to other Southeast Asian countries, with Malaysia and Thailand both at 17% of GDP over the same period.Access to credit and formalization of markets through official channels is required to promote business development. Government expenditure, financed through the Petroleum Fund, has historically been Timor-Leste’s main driver of growth. The share of public spending in the annual GDP averaged 75% between 2017–2021, making the public sector the main contributor to GDP.[2] The public sector is also the largest employer in the formal economy, when excluding self-employed subsistence farmers, providing 47% of formal jobs.[3] A large proportion of other formal jobs are linked to businesses that cater to demand originating from public spending, such as transportation and construction. Self-employed non-farmers make up 28% of those formally employed while 14% of formal employees work at a private-owned business or farm. The private sector can play a bigger role in growth and employment creation and facilitating business formation and new investment could yield immediate benefits. An electronic business registration system can significantly impact private sector development in Timor-Leste. This initiative is being supported by the Asian Development Bank. The online service seeks to reduce transaction costs of registering a business and streamline the registration process, thus encouraging formalization of enterprises. Formalization will improve access to markets, credit, and materials, with the increased productivity and profits contributing to overall economic growth. It also improves legal protections for businesses, employees, and consumers. Challenges Categorized as a small island developing state and being in a fragile and conflict-affected situation, Timor-Leste faces the typical challenges of small market-size, geographic isolation, and lack of inclusion in regional trade. It is highly import-dependent, including for food. Challenges that need to be addressed to increase private investment include expanding the domestic market, strengthening property rights, improving the access to land, skilled labor, and credit. There is a need to develop the capital market and build non-financial institutions. Domestic credit to the private sector in Timor-Leste was 15% of GDP in 2020, compared to the Southeast Asia average of 75%. Overall, only 14% of adults had accessed credit through formal channels in 2020 and this was usually from other deposit-taking institutions rather than a bank.[4] It is vital to improve market efficiency and build private sector confidence by strengthening the governance and legal frameworks and easing processes for businesses to operate. Legislative framework. Timor-Leste has very few formal restrictions on trade in goods and services. A national single window was launched in 2021, which is expected to facilitate trade. ASEAN and WTO accession remains a national priority. The banking system is stable and profitable. Total assets have registered growth since 2017 and financial inclusion has improved with the increased use of e-wallet services. Timor-Leste also showed progress with setting up businesses, including a reduction in the paid-in minimum capital requirement for business creation. The legal framework needed to promote and regulate market competition requires further strengthening. Areas to focus on include developing further legislations and byelaws focused on the entry and exit of firms, consumer protection, accounting systems and standards. Improving access to financial services in rural areas and facilitating entry of skilled workers into the county are also vital. The land law package approved in 2017, which includes enablers for real estate development and collateral for investment, needs 18–22 additional decree laws to be implemented. Process impediments. Timor-Leste has shown progress in some areas of private sector development. The number of days required to open a business fell to 13 in 2022 from 94 in 2013. However, concerns remain regarding “time-tax” or high levels of red tape with 17% of senior management time spent on dealing with government regulation, while the average for East Asia and the Pacific is 7%. Developing E-Business Registration Business registration currently follows a 5-step process, including clearances from at least three ministries. Difficulties in obtaining the necessary documentation and in-person submission of numerous supporting hand-signed documents further slow down the process. Hence, the government made the decision to introduce the business registration and verification service, Serviço de Registo e Verificação Empresarial (SERVE), which is establishing a one-stop electronic registration process to help reduce these transaction costs. The e-registration system will encourage the formalization of new businesses by reducing friction costs, allowing online submission of company information, increasing inter-ministerial coordination, reducing the number of places needed for clearance, and lessening the steps to complete the registration process. Individuals will have 24-hour access to the system. Establishing an online registry system requires simplifying the legislative framework on business creation and operation. The roadmap developed under ADB’s technical assistance program suggests two stages: legislative drafting and registry implementation.[5] Legislative drafting. A new legal framework for business registration and operation can be created either through a new law or by amending the laws currently in place. While any changes to existing laws are dependent on the local context, inspiration could be taken from previous ADB work in this area. Examples from the Pacific Private Sector Development Initiative include reducing identification requirements and using moveable assets, such as boats, cars, and farm equipment, as collateral for loans instead of land. This could also help encourage more female entrepreneurs as women often have less access to land ownership. Drafting specific legislative changes needs be done through a working group comprised of relevant stakeholders and advisors from both private and public organizations. The draft law may be supplemented with in-person stakeholder consultations. An early draft of the proposed legislation, together with narrative explanatory materials, should also be circulated for feedback before it is finalized. Implementing the registry. Once the law is passed, the public procurement of the registry software can begin. The selected software vendor should have business-related registry systems already in production. This would ensure that the core functionality was already tested elsewhere and that the focus will be on customizing the system for the local Timorese setting. After the system is completed, user acceptance testing will begin, in conjunction with staff training. The new system will include a website with instructions on how to use the registry, summaries of the new law and processes, and latest updates from the SERVE staff. The new website, registry, and legislation should all be launched simultaneously to ensure consistency. Conclusion Private sector development is vital for Timor-Leste’s long-term development. It can boost employment opportunities, expand the tax base, and reduce dependence on the government and the Petroleum Fund. Online registries have been transparent and easy to use in countries across the world. With features that reduce steps for business registration, it enables the development of the private sector, allowing it to grow and become more competitive. These basic building blocks are also required in encouraging private sector financing of critical infrastructure in Timor-Leste in areas, such as telecommunications, energy, and water and sanitation. Thus, improving regulatory and legislative requirements will benefit not just small businesses but also contribute to the strategic economic development of the country. This Insight article was prepared by Kavita Iyengar, Olivia Stevens, and Helder Lopes. [1] World Bank Group. Enterprise Survey–Timor-Leste: Trade. Accessed 21 Jul 2022. The survey includes a representative sample of 238 firms. A small firm has 5-19 employees, a medium 20-99 and a large over 100 employees. [2] GDP refers to non-oil GDP, based on the domestic economy and excluding production activity in areas of joint sovereignty, such as the Joint Petroleum Development Area. The contribution of the oil and gas sector to total GDP was 16% in 2020 but will decline as current reserves come to an end if no further fields are developed. [3] Government of Timor-Leste. 2018. Timor-Leste Population and Housing Census 2015: Thematic Report Volume 10 - Analytical Report on Labour Force. Dili. The current median age in the country is 20.8 years. [4] Banco Central de Timor-Leste. 2021. Financial Inclusion Report 2021. Dili. When comparing, only 9% of bank clients had accessed credit compared to 70% of clients of other deposit-taking institutions (ODTI). ODTI, often micro-credit institutions, are more accessible geographically than banks. [5] Asian Development Bank. 2020. Timor-Leste: Roadmap for Implementation of an Online Business Registration System. Unpublished report by Terry Reid under TA 9932:Implementing Reforms for Growth and Competitiveness. Resources Asian Development Bank (ADB). 2020. Technical Assistance Report: Implementing Reforms for Growth and Competitiveness. Manila. ADB. 2020. Timor-Leste: Country Operations Business Plan (2021–2023). Manila Banco Central. 2022. Annual Report 2021: Revitalizing the National Economy through Innovations and Synergies. Dili. Government of Timor-Leste. 2018. Business Activity Survey of Timor-Leste, 2017. Dili. Government of Timor-Leste. 2021. National Accounts 2001–2020. Dili. Government of Timor-Leste. 2018. Timor-Leste Population and Housing Census 2015: Thematic Report Volume 10 - Analytical Report on Labour Force. Dili. Government of the United States. 2019. 2019 Investment Climate Statements: Timor-Leste. Washington D.C. International Growth Centre. 2021. Timor-Leste’s Drivers of Growth and Sectoral Transformation. London. Organisation for Economic Co-operation and Development. 2020. Formalisation of Micro Enterprises in ASEAN: Policy Insight. Paris. United Nations Development Programme. 2021. Taking Stock: The Impact of COVID-19 on Timor-Leste’s Private Sector. New York. World Bank Group. 2022. Enterprise Survey: What Businesses Experience, Timor-Leste 2021 Country Profile.Washington D.C. Ask the Experts Kavita Iyengar Economist, Southeast Asia Department, Asian Development Bank Kavita Iyengar is an economist at the Southeast Asia Department. Previously, she was country economist at ADB’s Timor-Leste Resident Mission and focal for regional cooperation and knowledge management at the India Resident Mission. Her varied work experience includes teaching, environment consulting, and publishing. She has a PhD from Clark University in the United States. Asian Development Bank (ADB) The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Follow Asian Development Bank (ADB) on Leave your question or comment in the section below: View the discussion thread.