51884 JUSTICE Briefing note POOR for the November 2009 Volume 3 | Issue 3 Contracts, Land Tenure and Rural Development in Timor-Leste n By Rod Nixon* Introduction Encouragingly, increased public expenditure since 2006­2007 has contributed to higher economic growth, with mid-2009 As in other societies in Southeast Asia and the Pacific, cus- International Monetary Fund (IMF) data indicating that `in per tomary social organization features strongly in rural Timor- capita terms, real non-oil GDP has expanded by more than 14 Leste. As well as providing avenues for conflict resolution, percent over the last two years.' However, the IMF warns that the influence of customary systems extends to land tenure. `private investment in the non-oil sector...remains at very low As the state, development partners, private investors, NGOs levels, complicating the prospects for broad-based growth'.4 and others seek to promote rural development in Timor- Leste, they will be forced to engage in some way with Historical Factors customary ownership and use claims which prevail in the districts. A further dimension of the subsistence nature of the Rural development challenges in Timor-Leste are linked to Timor-Leste economy is the fact that the use of contracts in the minimal transformation of the subsistence economy of connection with agribusiness transactions is rare. This pres- the territory during the Portuguese and Indonesian periods. ents a further challenge to the objective of increasing private This is reflected in figures indicating that at the very end of sector investment in the rural economy. Based on field visits, the Indonesian period, the Province of Timor Timur was the this Justice for the Poor (J4P) briefing note looks at the rural least urbanised of all Indonesian provinces, with only 10% economy of Timor-Leste and considers approaches that could of the population urbanised.5 Furthermore, with 414 of its help promote productive and equitable relationships between 442 villages considered underdeveloped in 1995, the terri- communities and other rural development partners and con- tory was considered among the least developed regions.6 The tribute to mutually beneficial rural development outcomes. unsustainable harvesting of Sandalwood is a well-know fea- Rural Development and Employment * The author is grateful to the Timor-Leste Ministry of Economy and Devel- opment (especially João Baptista and Moses Tilman) for assistance in the field, and to Daniel Adler, Charles Eaton, John Holdaway, Ibere Lopes, Nick Timor-Leste joined the international community seven years Menzies, Habib Rab, Bill Tan Tjo Kek and Bobby Lae Ming for feedback on ago as the `poorest country in Asia'.1 Although now in receipt a draft version of this note. The author can be contacted at rod.nixon@cdu. of petroleum income, Timor-Leste is a post-conflict state edu.au 1 `East Timor is the Poorest Country in Asia'. UNDP press release dated 13 with a mostly subsistence population and severe infrastruc- May 2002 (http://www.undp.east-timor.org/links%20for%20nhdr/main%20 tural challenges. It is also experiencing demographic trends release%20long.pdf). 2 See R.A. Bulatao, Policy Note on Population Growth and its Implications in placing stress on the country's economy, political processes Timor-Leste. 2008, World Bank: Washington. Based on 2004 Census data, Bu- and farming systems.2 The government has identified rural latao refers (pp. 5, 16­17) to a `main' scenario in which the estimated mid-2005 population of 994,500 may increase to 1,780,000 by 2025, resulting in a crude development and job creation as a critical area, and this has population density of 120 people per square km. Other scenarios predict higher been reflected in the 2009 rural development conference and levels of population growth. preparation of the draft National Employment Strategy Paper. 3 Draft Timor-Leste National Employment Strategy Paper (p. 6). Rural develop- ment bottlenecks referred to (p. 9) include the limited skills of farmers and the difficulty of accessing credit, markets and modern cultivation and processing The latter paper notes the difficulties posed by the nexus supplies and technologies (from fertilizers and irrigation systems to processing between demographic growth and the infrastructural, insti- equipment). 4 IMF, Timor-Leste, `Staff Report for the 2009 Article IV Consultation', 8 July, tutional and technological limitations of the rural economy, 2009 (pp. 4­5). and describes economic conditions in Timor-Leste as char- 5 Ministry of Health Republic Indonesia, Indonesia: Health Profile 1999, 2000, Jakarta, p. 11, Figure II.A.3. The province with the second lowest rate of acterised by `small markets, high costs, low skills base, poor urbanisation was Lampung (Southern Sumatra) with 16.8%. physical infrastructure and incomplete legal institutions'.3 6 Op. cit., p. 17, Figure II.B.3. the world baNk ture of the colonial period, and while the Portuguese sought contracts between traders and district agents appear rare, to establish a coffee industry in the late 19th Century, only although traders report few problems having their loans re- an estimated 48,000 hectares (approximately 3% of the land paid. Central to some agreements between traders and their area) was ever planted with coffee. Modern plantations ap- district agents is the trader's first right of purchase to the pear to have contributed less than 45% of production, even produce collected by his/her agents, a similar but significant- in the final years of colonial administration.7 ly more formalised version of the arrangement that prevails between farmers and district-based buyers. One Dili trader Although some areas of primary industry (notably teak) explained how, after lending money to agents, he would expanded in Indonesian times, many coffee leases had been provide updates on the prices he would pay for various abandoned by the end of the Portuguese period8 and the commodities. In the event an agent is tempted by a higher industry was strictly controlled during the Indonesian oc- price from a rival trader, the agent is expected to inform his cupation by the military company P.T. Salazar, which paid Dili-based sponsor of this offer. The trader then contacts as- those who harvested the crops a fraction of the value of the sociates in Surabaya (where much Timor-Leste produce goes produce. The limited extent to which pruning and replanting for processing) to determine if the higher price is realistic. If occurred during these decades is only now being addressed so, the trader will pay it; if not he will allow the agent to sell by donors. As discussed below, however, there remains little to the rival. private sector investment in the rehabilitation of coffee plan- tation or in other areas of the primary industry sector. While one large Dili-based trader lends out (via agents) pulping machines in order to expedite early stages of coffee Doing Agribusiness in Rural Timor-Leste processing by villagers, almost none of the private-sector agents visited have invested directly in the modernisation Recent J4P field visits highlight the extent to which the rural of agriculture by leasing and improving land or engaging Timor-Leste business culture remains bound to the largely in contract farming activities in which investors provide unmodernised rural economy. Not only is the struggling farmers with key components of intensified agriculture post-subsistence sector burdened by poor infrastructure, low (for example, seeds, fertilizers, training) in return for the levels of technology and a limited market, but there is as right to purchase the crop at an agreed price. This suggests yet little familiarity with institutional arrangements com- that developments in the areas of leasing customary land monly associated with more advanced agriculture. Based on and registering contractual agreements are necessary if the interviews with over 20 domestic agribusiness actors in the Government of Timor-Leste (GoTL) is to realise its goal districts of Aileu, Baucau, Dili, Ermera, Manatuto, Liquiça of increasing private investment in the rural economy and and Manufahi,9 some characteristic features of the rural expanding export-oriented production.10 economy can be identified. To be fair, infrastructural challenges have discouraged Firstly, it is clear that neither the leasing of land nor the both farmers and investors from committing to post-subsis- use of contracts play much role in agribusiness in Timor- tence agriculture, and one buyer in Manufahi referred to the Leste, since transactions are typically negotiated between risks, until recently, of trucking produce to market, especial- producers and buyers at the time of sale. Personal relation- ly in the wet. Given road conditions, a misjudgement about ships, meanwhile, are an important (but not decisive) ele- when to transport produce could result not only in a stalled ment. A farmer, for example, may travel to a district centre, possibly with as little as several kilograms of a cash crop 7 The Timor-Leste coffee industry has traditionally been smallholder-domi- (coffee, candle nut, peanuts, maize, mungbean, green bean nated. See W.G. Clarence Smith, `Planters and Smallholders in Portuguese or copra) and offer the produce to a locally based buyer. Timor in the Nineteenth and Twentieth Centuries', 1992 (www.gov.east-timor. org/MAFF/ta000/TA051.pdf), and M.H. Soesastro, `East Timor: Questions of Often the producer and the buyer will have a long-standing Economic Viability', in Unity and Diversity: Regional Economic Development personal relationship, based perhaps on marriage or suco of in Indonesia Since 1970 (ed. H. Hill), 1989, pp. 207­229. Oxford: Singapore. origin, that increases the likelihood of a transaction. This will 8 See R. Nixon: (1) `Challenges for Managing State Agricultural Land and Pro- moting Post-subsistence Primary Industry Development in East Timor', in Cri- not guarantee a sale, however, unless the buyer (a) meets any sis in Timor-Leste: Understanding the Past, Imagining the Future (ed. D. Shoe- higher offers, and (b) has sufficient cash on hand. smith), 2007, pp. 101­115, CDU Press: Darwin; (2) Non-customary Primary Industry Land Survey: Landholdings and Management Considerations, USAID/ ARD Inc. research report, 2005 (http://pdf.dec.org/pdf_docs/PNADE790.pdf). Concerning the links between a district-based buyer and 9 A total of 50 domestic agribusiness operators were identified using the Peace the broader market, the buyer may sell independently to Dividend Trust Timor-Leste business database (www.buildingmarkets.org). Some of these businesses, upon closer investigation, were not active in the sec- bigger traders in Dili or Indonesia, or act as an agent for a tor. Others have yet to be interviewed. larger Dili-based trader. If the buyer is an agent for a larger 10 These objectives were referred to by Cipriana da Costa from the Ministry of Agriculture and Fisheries (MAF) at the Ministry of Economy and Development trader, he/she may expect access to interest-free loans for (MED) conference on Sustainable Rural Development for Poverty Reduction the purchase of equipment (typically trucks). Again, written (27­28 March 2009). transaction, but also the `dead' fuel costs associated with an leasing land and observing contracts is likely to constrain the unsuccessful attempt at accessing the market.11 expansion of agribusiness. Regardless of the reasons for existing approaches, the Land prevailing business culture has presented difficulties to large Whereas the GoTL, with USAID support, is addressing the buyers, including GoTL agencies, which have engaged in critical area of property rights in urban and peri-urban areas contract farming arrangements. In 2006, when the Ministry through the Ita Nia Rai program, this initiative will not of Agriculture and Fisheries (MAF) contracted Viqueque cover the vast amount of the country over which customary farmers to produce mungbean at 35 cents/kilo, farmers sold systems of authority predominate. According to 2005 survey part of the crop to a rival buyer at 40 cents/kilo, notwith- data, only about 3% of rural land in Timor-Leste appears to standing the inputs (including seeds and training) provided have been alienated from customary tenure.18 Developments by MAF. In this case, MAF was eventually able to purchase in other countries with similar land tenure patterns suggest the remainder of the crop for the agreed price.12 that state-managed negotiation frameworks for accessing land for development can play a role in both facilitating eco- Despite the challenges, opportunities for Timor-Leste agri- nomic development and reducing the risk of land conflict.19 business actors appear to have improved markedly since inde- pendence. Some entrepreneurs who formerly sold only to Dili- Timor-Leste doesn't have the vast tracts of agricul- based merchants have taken advantage of the 1999 exodus of tural land that attract investors elsewhere, but the nation is Indonesian businesses, and now export directly to Indonesia. still likely to become of increasing interest to businesses Although there is a question about the extent to which some wanting to invest in such areas as tourism, petroleum traders are contributing to expanded production or, as seems infrastructure and primary industry. Cases to date, includ- more likely, merely competing with one another for a share of ing the 12 hectare East Petroleum site in Liquiça20 and the the harvest, others aim to climb the value chain and improve 2008 Memorandum of Understanding between the GoTL the quality, level of value-adding and marketability of local and GTLeste Biotech concerning a renewable 50 year lease produce.13 These businesses include the Baucau-based Acelda for 100,000 hectares `of unproductive land'21 suggest that organic candle-nut oil enterprise, which although the benefi- transparent process guiding negotiations between investors ciary of support from international organisations14 remains a locally-owned business and an example of the benefits of niche approaches tapping into the expanding organic market.15 11 Not surprisingly, some regional buyers indicate that the amount of produce sourced from outlying sub-districts could increase significantly as roads Acelda is one of a number of examples (others involve coffee) improve. where businesses have sponsored the organic certification of 12 Interview with MAF Director of Agribusiness, Adelino Durego, 4 March agricultural land belonging to communities. Interestingly, this 2009. 13 Some traders support the introduction of an exports standards organisation as process appears to bond investors and farmers in a mutually a way of improving the quality of Timor-Leste crops. beneficial relationship requiring neither contracts nor leases. 14 These include the University of Hawaii and GTZ. 15 See M.J. Luzius, `Agricultural Firm Export Strategies in Fiji', Pacific Eco- Simply, the premium which businesses can pay for produce nomic Bulletin, Vol.21, No.2., 2006, pp.162-168. Data from the International from areas for which they have arranged organic certification Federation of Organic Agriculture (The World of Organic Agriculture: Statistics means that farmers sell to them out of self interest.16 & Emerging Trends 2008) places global sales in 2006 at US$38.6 billion (twice the 2000 figure). 17 The MED initiated a number of agricultural cooperatives in 2008. In other new initiatives, farmers experimenting in 18 Approximately 47,000 hectares (see Nixon, op. cit). 19 In PNG and Vanuatu, the improvement of land access negotiation frameworks Natabora with agricultural cooperatives are adamant that is ongoing. In PNG the `lease lease-back' system has recently been comple- the cooperative approach is improving labour efficiency and mented by legislation facilitating voluntary land registration, following the yielding improved rice harvests.17 Some traders, meanwhile, preparation of the Review of Incorporated Land Groups and Design of a System of Voluntary Customary Land Registration by the PNG Constitutional & Law speak of introducing improved varieties of commercial spe- Reform Commission (2007/2008). For an analysis of developments in Vanu- cies. And yet, in the present contractual and land-tenure en- atu see M. Stefanova, `The Price of Tourism: Land Alienation in Vanuatu', J4P Briefing Note Vol. 2, Issue 1, Jan. 2008. More broadly, the International Food vironment, there is concern among these potential investors Policy Research Institute (IFPRI) is promoting a `code of conduct for foreign about whether they will gain additional return from distrib- land acquisitions' featuring principles relating to: transparent negotiations with uting improved varieties to farmers who have no reciprocal landowners; respect for customary ownership rights; benefit-sharing; environ- mental aspects, and; food security (J. von Braun and R. Meinzen-Dick, `"Land obligations to them. Grabbing" by Foreign Investors in Developing Countries: Risks and Opportuni- ties.' IFPRI Policy Brief No. 13, April 2009). Reportedly, the African Union is considering such a code of conduct (`Outsourcing's Third Wave', Economist, 23 Promoting Rural Development May 2009, pp. 55­57). Partnerships 20 Locals claiming to be landowners (in possession of a letter to this effect signed by the District Administrator, Sub-district Administrator and Chefe de Suco) have indicated concern about the process by which this site was leased to Although the forward thinking of some Timor-Leste agri- East Petroleum by the GoTL. business actors is encouraging, the absence of protocols for 21 See http://www.laohamutuk.org/Agri/08Agrofuels.htm#sugarcane and communities, and facilitating the voluntary registration Although formal legal institutions can play a role in the of areas of community land as appropriate, will assist the development of contract farming arrangements, international development of productive and equitable partnerships and experience suggests that sponsors and producers rarely take help avoid conflict. each other to court.25 Still, the preparation of written con- tracts is encouraged as a means of clarifying the responsi- The case of a lease issued by the GoTL to Timor Global bilities of each party and identifying mechanisms for dispute in 2005 for 3000 hectares of coffee plantation at Fatubesi resolution. Contract farming forums with industry and (to a (Ermera district) demonstrates the advantages of a land ac- lesser extent) government representation have proved use- cess negotiation framework.22 Although formally state land, ful in advancing contract farming outcomes elsewhere and Timor Global discovered that the lease provided an insuf- there are models which could inform the development of a ficient basis for the company to commence crop improve- contract farming body in Timor-Leste.26 There may be merit ment and management activities. Before the company could in the establishment of a registry in which contracts between begin work, it had to negotiate with community leaders and producers and buyers can be filed. agree to provide benefits including employment opportu- nities and security arrangements. Timor Global has now Conclusion commenced work on a 60 hectare section and employs around 80 members of the local community (including 30 As the government of a largely subsistence economy with said to have connections to the resistance movement). The an expanding population, the GoTL's rural development company planned to manage the harvest of the site, for the focus is an important step in meeting Timor-Leste's future first time, in 2009. development challenges. In these circumstances, approaches aimed at increasing the productivity of existing crops Contracts through agricultural training programs and machinery and Based on the Fatubesi experience, Timor Global, per- the introduction of disease-resistant and high-yield varieties haps the largest agribusiness investor in Timor-Leste, has are an essential measure. Nevertheless, the private sector can incorporated a community relations approach into new also make a major contribution to spreading more intensive operations. In Baucau district, for example, the company agricultural technologies to communities, at the same time has leased 1,500 hectares of community land23 and is providing employment opportunities and contributing to introducing intensive cultivation methods on sites in three export earnings. sucos totalling up to 100 hectares. The company is presently using a share-farming approach24 which it hopes will assist While rural development investment has been limited to movement towards contract farming in future years. As date, modernisation can be expected in some sectors. Where discussed in this note, the introduction of contract farming this occurs, the potential benefits of the private sector will in Timor-Leste is likely to present challenges in view of the be more easily harnessed if investors and rural communities more flexible arrangements commonly prevailing between can be provided with a land access negotiation framework producers and buyers. that supports the development of productive and equitable rural development partnerships and reduces the likelihood of crippling land disputes. Similarly, the establishment of a body providing guidance for the development of contract What is J4P? farming agreements and provision for the registration of these agreements could play a role in increasing the confi- Justice for the Poor (J4P) is a global research and de- velopment program aimed at informing, designing and dence of potential agribusiness investors. supporting pro-poor approaches to justice reform. It is an approach to justice reform which: 22 Based on discussions with Bill Tan Tjo Kek and Bobby Lay Ming on 23 June · Sees justice from the perspective of the poor/marginalized 2009. According to these informants the agreement (for a 50 year renewable · Is grounded in social and cultural contexts lease) was signed in 2005 and the lease issued in 2007. 23 Although Timor Global has leased the land from the community, the right of · Recognizes the importance of demand in building equi- suco communities to lease land to investors is not yet clear. table justice systems 24 Featuring written contracts. · Understands justice as a cross-sectoral issue 25 M. Doria, `Contract framing: Legal Considerations on Contractual Design and Enforcement', FAO brief (no date) available at http://www.fao.org/ag/ags/ Contact us at j4p@worldbank.org and visit our web- contract-farming/toolkit/briefs-list/en/?no_cache=1 site www.worldbank.org/justiceforthepoor for further 26 C.S. Eaton and A.W. Shepherd. Contract Farming: Partnerships for Growth, information. a Guide, 2001, FAO: Rome. Note that Eaton & Shepherd (pp. 60­61) warn against the `participation of political nominees in such bodies'. Justice for the Poor Briefing Notes provide up-to-date information on current topics, findings, and concerns of J4P's multi-country research. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank.