INTRODUCTION: MDF stimulates business innovation, investment and regulatory reform with the aim to create additional jobs and income for poor women and men in rural and urban areas through sustainable and broad-based pro-poor growth. In Timor-Leste, MDF will aim to create 800 additional Full Time Equivalent (FTE) jobs and increase incomes for 9,000 small farms and firms, relevant for improving the livelihoods of 61,480 women, men and children over a five year period (2012–2017).
To achieve this, MDF stimulates growth in sectors that represent a major part of the economy, have longterm growth prospects and are relevant for poverty reduction. The two sectors initially chosen in Timor-Leste are Agribusiness, Processing and Rural Distribution and Greenfield Industries (Construction, Manufacturing and Tourism). MDF’s portfolio will continue expanding to include other growing sectors of Timor-Leste’s economy.
POVERTY Of a total of almost 185,000 households in Timor-Leste, nearly half are poor. Incidence of poverty is highest in the central regions followed by the Western and Eastern parts of the country. Poverty is overwhelmingly a rural and an agricultural phenomenon. Nearly 44% of the 136,929 rural households are poor and most of the remaining are vulnerable to poverty. Households with a more diversified income are less likely to be poor and better able to cope with shocks, such as floods or droughts and seasonality. The vast majority of farmers are not able to grow cash crops in a sufficiently productive manner and in sufficient quantities to sustain a household. Markets and cultivation techniques are not sufficiently developed. Malnutrition is prevalent with 58% of children under the age of five categorised as stunted and a quarter of mothers as mal-nourished. Unemployment is very high with up to 40% of youth out of work. GROWTH Growth between 2008 and 2013 was strong at 11% annually, primarily fuelled by public spending of finite and declining petroleum dollars. Revenues from the petroleum fund also fuel a substantial trade deficit. In 2011, 34.2% of GDP was spent on imports, whereas exports accounted for only 2.3%. This trend still continues. Timor-Leste’s non-oil economy accounts for 21% of GDP and has grown at 6.4% (2005 to 2010). Fuelled by public expenditure and a ballooning public sector, construction, wholesaling (imports) and retailing are booming. Private sector investment accounts for a mere 4.6% of GDP with investment concentrated in these booming sectors. Agriculture, the largest non-oil sector, employing 51% of the workforce, is stagnating due to poor market access, poor infrastructure, lack of knowledge about productive cultivation methods and the need to rebuild the rural trading system post-conflict. Demand in Dili is met by imports, whereas farmers are mostly semiself-sufficient and struggle to generate cash incomes.
DEVELOPMENT CHALLENGES ECONOMIC GROWTH DEPENDENT ON DECLINING OIL REVENUES In post-conflict Timor-Leste, the public sector drives economic growth through large-scale capital investments (infrastructure), providing employment in a growing public sector and social transfers – all primarily funded by finite oil and gas revenues. There is a need to stimulate private entrepreneurship and investment in the non-oil economy. LACK OF ECONOMIC DIVERSIFICATION, VALUE ADDITION AND LOCAL MANUFACTURING Over-reliance on imports, combined with the absence of local manufacturing and value-addition, results in poorly functioning local value chains. In Timor-Leste there is a need to rebuild the economy ‘one company at a time’ by stimulating investment in businesses that are not dependent on public expenditure. There are opportunities for local companies to turn local raw materials and agricultural produce into products that are in demand. This would stimulate agricultural commercialisation and create off-farm employment. RURAL DISTRICTS LARGELY DISCONNECTED FROM URBAN DEMAND Farmers primarily aim for self-sufficiency with limited investment in inputs. Demand from Dili is unpredictable; sales in district markets fetch low prices. Better market access would generate income for investment in inputs and household necessities; better yields and more disposable income would improve nutrition intake and make rural households more resilient during the lean season. The Timor-Leste Strategic Development Plan, 2011-2030, identifies improved agricultural production as a driver of inclusive growth. LIMITED EMPLOYMENT OPPORTUNTIES OUTSIDE OF AGRICULTURE High unemployment levels are aggravated by limited opportunities for a fast-growing population; 15,000-20,000 young Timorese join the work force annually and compete for very few jobs. There is a need for more (foreign) investment and a more conducive business environment to generate the economic activity needed to absorb this labour.
CAPTURING OPPORTUNITIES FOR GROWTH AND POVERTY REDUCTION Non-oil GDP growth of 6.4% per annum between 2005 and 2010 fuelled by public expenditure Revenues from natural resource extraction on the decline
Nearly half the population lives under the basic needs poverty line of USD 0.88 per day
Focuses on (emerging) sectors essential to unlock private sector driven propoor growth, provide more productive and resilient livelihoods for large parts of the population, provide off-farm employment and help trigger investment to rebalance the economy. Agribusiness, Processing and Rural Distribution and Greenfield Industries (Construction, Manufacturing and Tourism) identified as growing sectors with the potential to generate income and employment opportunities for poor women and men in rural and urban areas through sustainable and broadbased pro-poor growth. These sectors are also aligned with the country’s Strategic Development Plan 2011-2030. Partners with local businesses and organisations within those sectors to stimulate investment, improve the business environment, and develop innovative ideas that address constraints to growth, increase business performance, and improve service delivery which benefits the poor
POVERTY
SECTOR SIZE AND RELEVANCE
GROWTH
Insignificant private sector investment in the economy
LONG TERM GROWTH PROSPECTS
CHALLENGES
Unemployment is very high reaching up to 40% amongst youth in Timor-Leste
Agriculture is the largest non-oil sector is stagnating
GROWTH
Farmers are disconnected from urban demand and aim for self-sufficiency; cultivation and incomes are insufficient to maintain a healthy diet throughout the year
High import levels and a growing trade deficit
EXPECTED RESULTS
MARKET DEVELOPMENT FACILITY
POVERTY
Poverty is concentrated in rural areas and in agriculture; most agriculture households are either poor or are vulnerable to poverty
Economic growth dependent on public expenditure Lack of private sector investment in economic diversification, value addition and local manufacturing Lack of private sector investment in economic diversification, value addition and local manufacturing Rural production disconnected from urban demand High unemployment compounded by large annual influx of young population into labour force
Activities stimulate economic growth, creating 800 new full-time equivalent jobs and increasing incomes for 9,000 small farms and firms Private sector investment in the economy increases; the economy diversifies and becomes less dependent on public sector investment and imports Farm household are more connected, more productive and more resilient; diets improve, investments in basic household need increase Off-farm employment opportunities increase
AGRIBUSINESS, PROCESSING AND RURAL DISTRIBUTION
GREENFIELD INDUSTRIES (CONSTRUCTION, MANUFACTURING AND TOURISM)
Agriculture is the largest contributor to the non-oil GDP
Emerging industries with potential for long-term growth and off-farm employment
Of a total of 184,652 households in Timor-Leste, 63% are dependent on subsistence-oriented agriculture
Have the potential to attract foreign investment
Employs up to 51% of the workforce in the country
Will contribute to economic diversification and rebalancing the economy (less imports, more foreign earnings and potentially, exports)
Potential for the commercialisation of agriculture by stimulating investment in supply chains, trading, storage and processing of local produce
Extensive opportunities for investment in economic diversification and import substitution
Better informed trade and less transaction costs will stimulate trade between Dili and the districts
Strong growth potential in developing new value chains, products and services currently imported or nonexistent
Increased investments in farm productivity in response to increased demand
Able to generate economic activities in geographically distant locations
RELEVANCE Poverty and low productivity in agriculture are TO POVERTY caused by disconnect between Dili and the districts: REDUCTION information, inputs and demand do not reach farmers, resulting in low-investment, semi-self-sufficient farming
Majority of the population is overly reliant on agriculture with non-agricultural sectors nascent at best; unemployment is rampant and income-earning opportunities outside of agriculture are rare
Growth in agribusiness would contribute to an increase in agricultural trade, access to information and inputs, investments in better yields and off-farm jobs
Employment creation outside agriculture helps absorb the large number of Timorese youth in search of a job
Better yields and a more steady income from farming and off-farm employment will improve nutrition and investments in basic household needs
Any development in non-agricultural sectors helps create jobs and income, which makes households less vulnerable to agricultural seasonal shocks
AGRIBUSINESS, PROCESSING AND RURAL DISTRIBUTION Agribusiness, Processing and Rural Distribution aims to connect farmers to markets and covers both the production, sourcing, storage and value-addition of agro-based products as well as the distribution and retailing of agricultural inputs and access to finance and information on market, products and inputs to support more commercial, higheryielding demand-led cultivation. Where needed, targeted investments in infrastructure will also be made. The sector focuses on unprocessed or semiprocessed staples, unprocessed or semi-processed animal, fresh (vegetables and fruits) and processed consumer foods. SECTOR RELEVANCE Agriculture contributes 30% to the non-oil GDP and employs up to 51% of the workforce, of which 31% are women. Agricultural production is declining due to an increase in social transfers (unsustainable in the long run), inconsistent demand (imports being easier than local souring), and lack of knowledge
to increase productivity. Investments in businesses able to source from farmers, turn their produce into in-demand products and supply them with inputs, information and financing to increase production will help connect farmers to markets and make farming a more rewarding undertaking and farming households more resilient. GROWTH POTENTIAL The growth potential in Agribusiness, Processing and Rural Distribution lies in filling gaps in the trade system between Dili and the districts. Growing demand for food items in Dili is met through imports instead of local sourcing. Storage, quality testing and processing to preserve quality and turn produce into consumer products is virtually absent. Farmers would benefit from more consistent demand and better access to inputs, information and finance to dare invest in more market-led, higher-yielding crop cultivation. Every investment in this space will help deepen markets and unlock rural growth.
CONSTRAINTS TO FURTHER GROWTH IN AGRIBUSINESS, PROCESSING AND RURAL DISTRIBUTION
MDF’S STRATEGY TO UNLOCK GROWTH IN THE AGRIBUSINESS, PROCESSING AND RURAL DISTRIBUTION SECTOR
Famers lack resources to invest in agriculture resulting in low and fluctuating yields threatening household food security
Stimulate investment in more reliable and less costly access to end markets (e.g. more traders buying at farm gate, more frequent and more efficient transportation) resulting in more transactions
Farmers lack the knowledge to make better use of available resources to maximise productivity and/or reduce risk (crop failure, food insecurity)
Improve access to information on cultivation techniques and input use
Farmers lack access to agricultural inputs, machinery and services
Improve access to affordable, cost saving and yield increasing inputs and equipment
Traders struggle to bridge the gap between producers and consumers and lack information and skills to create robust supply chains
Support investments in establishing or improving ‘upstream’ linkages to production centres
Poor infrastructure and communication confines trade to the village level and district level
Support investment in establishing or improving infrastructure around local sourcing such as quality testing, specialised transport and storage
Prevailing rules and regulations around agribusiness (inputs and trading) creates an unfriendly environment for the private sector, leading to limited investment in local agribusinesses
Improve public private dialogue in the agribusiness sector around agribusiness policies and regulations
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Traders and buyers are better able to buy from farmers
Farmers sell more, more consistently and at a better price
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BENEFITS TO FARMERS AND PRODUCERS
Buyers and sellers benefit from a friendlier agri-business environment
RESULTING PRO-POOR GROWTH
Farmers earn more net additional income
Farmers invest in their farms, plant more and improve yields
Improved food and nutrition at the household level
Traders and buyers increase their market share for items sourced locally
Additional FTE jobs created; increased income from additional jobs
GREENFIELD INDUSTRIES Greenfield Industries, currently comprising in TimorLeste of the Construction, Manufacturing and Tourism industries are some of the most promising, emerging non-agricultural sectors within the Timor-Leste economy. The much-needed diversification of the economy beyond agriculture, oil and the public sector is likely to start with (foreign) investment in these nascent sectors. The initial focus will be on construction, manufacturing and tourism. Stimulating investment in business start-ups and expansion will help diversify the economy (rural and urban), create off-farm jobs (rural and urban), and produce local products and services to reduce import dependency. SECTOR RELEVANCE The relevance of all Greenfield Industries does not lie in their current size, but in the pathway they provide to a more diversified and balanced economy. They represent the starting point for the development of a less agriculture-based, less oil-dependent, less
public sector-driven economy. Amongst the three industries construction is most established (and most public-sector driven), contributing 16% to non-oil GDP. Manufacturing and tourism are growing from a very low base. All three have the ability to help balance the economy by attracting (foreign) investment, reducing imports and creating employment. GROWTH POTENTIAL Construction will continue to grow as a result of continuing investment in roads and other much-needed infrastructure. The tourism infrastructure (hotels, activities, transportation, and information) is weak, but now that the country is stable, tourist’s interest in an ‘off the beaten track’ experience will rediscover TimorLeste. For manufacturing there are opportunities in all kinds of items being currently imported. Thus, growth will most likely take the shape of investments in new, often ‘first-of-its-kind‘ businesses in Timor-Leste. This will need to be supported by better access to business services, finance, skilled labour and a better businessenabling environment.
CONSTRAINTS TO FURTHER GROWTH IN THE GREENFIELD INDUSTRIES SECTOR
MDF’S STRATEGY TO UNLOCK GROWTH IN THE GREENFIELD INDUSTRIES SECTOR
Industries lack access to finance, financial advisory or mentoring services, and relevant information, restricting start-ups, investment, efficiency and quality of work
Stimulate investment in the development of innovative financial products, and the growth of relevant business services and information
Industries have limited access to technical business services, which drive up production cost, impact efficiency as well as quality of work
Stimulate diversification, quality and business investment in technical support services
The workforce lacks the technical skills to ensure efficiency and quality of work
Introduce access to affordable skills training through (accredited) in-house training modules or training service providers
Poor enforcement of contracts, unclear land titles, confusing or absent legislation and regulation create uncertainty, drive up costs and impact growth
Improve regulatory environment around specific Greenfield Industries
Negative perception of the country reinforced by lack of positive communication and information
Establish or improve marketing of Timor-Leste as an attractive destination for tourism and/or investment
Poor infrastructure increases the cost of doing business
Stimulate investment in infrastructure bottlenecks
SECTOR CHANGES Businesses (financial institutions and entrepreneurs) invest in and offer new financial products and business development services to construction, manufacturing and tourism industries
Businesses reinvest capital on new products and services and improve efficiency of existing activities
MSMEs invest in diversified and higher quality technical support services in the construction, manufacturing and tourism industries
Training providers and businesses develop and invest in new training programs
BENEFITS TO FARMERS AND PRODUCERS
Businesses sell more and sell better quality goods and services
RESULTING PRO-POOR GROWTH
Net additional increase in income (SMEs, selfemployed, employees)
Increase in employability of new workers and skills of existing staff More new businesses develop
Construction, manufacturing and tourism industry players and the public sector improve ability to organise evidence-based dialogue on business environment Construction, manufacturing and tourism industry players and the public sector invest and contribute to highlighting Timor-Leste as an attractive destination for tourism and investment
Construction, manufacturing and tourism industry players invest in improvements to and set up of supportive infrastructure facilities
Government moves towards improved transparency (improved guidelines and enforcement) due to publicprivate dialogue Increased turnover for existing businesses Number of visitors (tourists and investors) increase; tourist expenditure and investments increase capitalising on better infrastructure and improved perceptions
Businesses hire more people
Net additional employment (FTE) created; increased income from additional jobs
Business Address: 2nd Street, Palm Business & Trade Centre, Surik Mas, Dili Postal Address: P.O. Box 254, Dili Tel: (+670) 3311 316 Fax: (+670) 3311 328 Email: info@cardnomdf.org www.marketdevelopmentfacility.org