NOTES AgriculTurAl & rurAl DEvElOpmENT 42693 Land Policy and Administration A New model of public-private partnership for land Access and iSSuE 32 FEBruAry rural Enterprise Formation 2008 By mAlcOm chilDrESS AND TOm KOrczOwSKi The Honduras Land Access Pilot Project (PACTA) from business plans, and loan approval was a condition for 2001-2006 supported the acquisition of land and the making grants to finance complementary investments formation of sustainable farm enterprises by self-orga- in the enterprise. The ability to leverage substantial nized landless and land-poor peasant families. The amounts of credit (averaging US$2,780 per family) to Government is now scaling up and diversifying the benefit groups of poor families was broadly attribut- pilot into a national program far more inclusive than able to a consistent and exclusive focus on creating the current model. The SDR 6.2 million pilot project viable business opportunities. proved the viability of a public-private partnership strat- egy, with the private sector lending for land purchase The pilot project was similar to other "negotiated and public sector funds being used for complementary agrarian reform" projects, but there were important investments and services to improve productivity and differences in its approach. These differences includ- build capacity for independent development. ed: the participation of the private financial sector; the priority given to participatory monitoring and PACTA was based on a transparent set of incentives evaluation (PME); the emphasis on assuring access to designed to support the formation of sustainable quality services for newly formed enterprises; and the enterprises through an alliance of poor rural families, extent to which the program operated as a decentral- private financial institutions (banks and cooperatives), ized process. Throughout implementation PME was local development organizations, private service pro- used to facilitate the adaptation of procedures, rules viders and government. The program facilitated land and regional strategy, as well as to make sure that purchase only in the framework of enterprise develop- services were focused on enterprise development and ment. Loans for land were approved independently capacity building as opposed to just technical advice by private financial institutions based on detailed about production. The results demonstrate the viability of the approach to land access and rural enterprise formation: 81 group subprojects and 100 individual subprojects were approved by private lenders during the pilot phase; 2,398 hectares of land were acquired; and 97.3 percent of enterprises were paying off land purchase loans on schedule when the project closed. The aver- age annual income of participating families rose from US$600 to US$1,300 even while most groups were in the early phase (first three years) of loan amortization and subproject implementation. As these results became more visible, the level of con- fidence between financial institutions, service provid- ers, and PACTA grew apace. Other organizations and institutions began to participate along with them in local networks to identify and formulate new initia- tives, recommend improvements, and assume roles in oversight role. Six local networks were established ThE wOrlD BANK in Ocotepeque, Intibuca, El Paraiso, Yoro and Colon. BAcKgrOuND: ADDrESSiNg The networks were an outgrowth of project strategy in lANDlESSNESS AND that PACTA consisted in large measure of careful man- rurAl pOvErTy agement of financial incentives designed to promote the formation of alliances centered on the success of By the late 1980s, land redistribution based on the enterprises. Enterprises do not develop as `islands of Agrarian Reform Law of 1975 had come to an effective success,' but in the context of a web of alliances and end. The Agricultural Sector Modernization Law (LMA) market-based relationships. The local networks, in of 1992 called for creating a land fund and a separate turn, evidenced the potential to undertake larger scale land fund law was passed in 1993. However, neither the initiatives related to marketing and product process- land fund nor other related provisions in the LMA were ing on the level of a community or an association of ever implemented. More broadly, PACTA was formu- producers. Given a basic set of objectives and rules, lated in a policy environment characterized by the near PACTA was designed to devolve as much responsibility absence of public sector initiatives to create economic and decision making power as possible to locally-based opportunities for the rural poor. actors. This made the focus on PME all the more Specifically in connection with land access, the need for important so that different points of view could be PACTA was evident in a context where the long term heard and taken into account. trend in land distribution was (and remains) one of increasing fragmentation of small parcels at the bottom, and increasing concentration at the upper end. Around 80 percent of farms have around 15 percent of agricul- tural land, and less than 2 percent of farms control some 40 percent of the total. Most farms of less than 5 hectares are rented or borrowed on short-term basis, and plots of less than 1 hectare constituted the most rapidly growing segment during the last inter-census period 1974-1993. Access to credit for small producers was extremely lim- ited as even microfinance operations did not expand significantly in the rural sector until after Hurricane Mitch (1998). In 2001, the year PACTA was inaugurated, only about 3.5 percent of all rural producers in Honduras had access to formal credit. As recently as 2005, official data shows that the agricultural sector received only 4.4 per- cent of total private sector credit, the share having fallen precipitously since 2000. Access to technical and enter- prise development services was also extremely limited. This was true not only for those with precarious access to land, but also for the more than 200,000 individuals who received property title over the past 20 years. On January 1, 2007, PACTA began a transition for insti- tutionalizing and expanding the program to other land In the post-conflict situations in Guatemala, El Salvador, access modalities (like long-term concessions and com- and Nicaragua substantial initiatives related to land munal property), and to those who have secure access to access were negotiated and implemented. In Honduras, land but lack the other assets needed to create a viable however, there was no such political impetus. In this livelihood. The transition was supported with public context, a new approach was clearly needed that would funds and no Bank financing. In coordination with the be financially sustainable, self-organized (in the sense of National Agrarian Institute, the PACTA team has drafted not recreating relations of dependency on government), a proposal to adapt the approach proven in the pilot clearly aimed at providing opportunities to the poor, and phase to develop self-organized enterprises on reform able to thrive in the market-based economy. sector land. There are also plans to develop PACTA on communal lands and with forestry communities. Indeed, The project loan became effective in August, 2001. The the pilot phase included a few successful experiences in first six bank loans for land purchase under PACTA were these sectors. approved in the first quarter of 2002. 2 iNcluDiNg ThE lOw-ASSET For the program to greatly expand on the experience grOupS iN privATE FiNANciNg to date in facilitating land purchase, further provisions AND rurAl ENTErpriSE for long-term financing for land purchase will have to DEvElOpmENT be established. However, other modalities, where land acquisition is not an issue (and loan size and term might The program was broadly aimed at the rural population be reduced significantly), could be more easily accom- with no access to land or precarious access to small modated by the financial sector. The experiences of parcels for subsistence production. Of the 1,226 families Banco de Desarrollo Rural in Guatemala and Fondo de that took part in the program, 991 were part of this Desarrollo Rural in Nicaragua are especially interesting group ­ day laborers, sharecroppers, or other kinds of in this regard. subsistence producer. The rest were poor families with access to municipal forestland (two sub-projects) or To make this approach work, PACTA supported a learn- communal land (one sub-project). These sub-projects ing process centered very tightly on the challenge of were implemented at the end of the pilot phase. In formulating and implementing viable business plans: addition, the sub-projects supported by PACTA in forest service providers, project personnel, producers and communities and afro-Honduran communities are prom- financial institutions themselves all had to learn how ising for the diversification of economic activities in areas to identify market opportunities and support building like tourism, crafts, fishing, sustainable timber harvest competitive enterprises that could grow in accord with and wood processing, and environmental services. the members' capacity. Both locally-based service providers and local financial Prior to the start of PACTA there was virtually no long- institutions benefited from their participation in the term credit available for rural investment in Honduras. program: their market opportunities expanded and However, the program demonstrated the feasibility of they learned much better how to identify viable busi- leveraging loans from private financial institutions to ness opportunities. After starting out with a single bank support rural enterprise development in the benefit PACTA managed to sign working agreements with 17 of poor and very poor families. While PACTA remains unique in certain respects, especially in connection with financial institutions. As loans started to be repaid in a the public-private partnership to finance land acquisi- timely way, lenders gained more confidence in PACTA tion, the experiences of the rural credit programs men- and they gradually improved credit terms while increas- tioned above--which took off roughly in parallel with ing their overall commitment. The participation of PACTA--suggest that there is a relatively great potential regionally-based credit cooperatives (65 percent of the for applying and adapting the approach in the rural portfolio) was especially strong. Nevertheless, the under- communities of Honduras. lying problem in expanding credit for land purchase remains as identified during preparation: the assets of The scheme of incentives worked well in large part financial institutions are almost entirely composed of because both risks and benefits were shared in a trans- short-term deposits and this imposes a barrier to the parent way by all parties, including credit providers, volume of long-term loans that can be provided for land service providers, enterprise members and the public purchase. Hence, even those financial institutions that sector. PACTA included a strong incentive for families are willing to cooperate in expanding the project will to establish a good repayment record by keeping a por- encounter built-in limits. tion of grant money in reserve until the first several loan Box 1. government plans to continue pAcTA The present government evidenced its commitment to the program by allocating 16 million lempiras a year for the next three years out of the national budget to support continuation of PACTA beyond the pilot project completion date. The program will thus be able to guarantee follow-up on all investments made in rural enterprises during the pilot phase; keep the current project team intact so as not to sacri- fice the institutional learning that has been attained over the past five years; and maintain the partnerships developed with financial institutions and service providers.This commitment reflects the expectation that government hopes to expand operations on a national level in the subsequent phase. Source: Malcom Childress and Tom Korczowski 3 Box 2. Costs and Employment Indicators The incremental annual net income for family and group enterprises is around US$2,400/family and US$1,400/family, respectively. In terms of annual employment, in one calendar year the enterprises gener- ate on average 255 days of work per family, which is equivalent to almost an annual full time job per family. This means that the project generated the equivalent of 1,226 jobs in financial sustainable enterprises, with the potential to grow and generate more direct and indirect employment.Average technical assistance and project management costs were around US$3,170/family (30 percent of total costs). However, these costs included complementary investments such as the testing and adjustment of pilot operational processes and capacity strengthening of local technical units. In a follow-on phase, these costs can be reduced to an esti- mated US$1,270/family (15 percent total costs) if only effective time and costs of local technical units and project management were taken into account. In terms of resource allocation, the average subproject grant to enterprises was US$4,700 per family ­ about 35 percent higher than ceiling estimated at appraisal, but in line with changes agreed during project implementation.The average loan obtained from public financial institutions was US$2,780 per family. Source: Malcom Childress and Tom Korczowski payments had been made. The service providers that In sum, the incentives were designed and implemented worked with families to prepare business plans made in such a way that the success of the enterprise was the sure that they fully understood the financial obligations unifying objective. From this point of view, the achieve- and risks involved. This helped to ensure loan repayment ments and lessons learned in the pilot project could be and the demonstrated willingness-to-pay promoted a meaningful in the design of similar processes, not neces- long-term relationship between the families, service sarily involving land purchase. providers, and the lending institution. While five of the largest banks are still associated with PACTA, most sup- REFERENCES port is coming from regional credit cooperatives. Their management and technical personnel understand more Korczowski,Thomas, Hiska N. Reyes, Fernando Galeana, and clearly how the program works to control risks, and they Francisco Pichón. 2005. "Desarrollo Rural En Honduras Por are more interested in connecting with the communities Medio Del Acceso A Tierras Y El Fomento De Las Empresas Productivas" in En Breve. No. 75. July 2005. that PACTA wants to engage. As these lenders have gained more confidence in PACTA, they have gradually World Bank. 2007. "Access to Land Pilot Project (PACTA): improved credit terms and increased their overall com- Implementation Completion and Results Report. Sustainable mitment. In this way, PACTA facilitated development of Development Sector Management Unit, Central America a new market opportunity in partnership with the credit Country Management Unit, Latin America and Caribbean cooperatives. Region Office. June 21, 2007. The ARD Notes series on Land Policy and Administration aims to disseminate results from research and Bank ESW, describe innova- tive operational practices, or point towards areas meriting further analytical attention. Significant contributions to their publication and content come from the DFID-World Bank land policy partnership, the World Bank-FAO collaborative program, the Knowledge for Change Trust Fund, the Global Land Tools Network, the multi-donor trust fund supporting implementation of the Gender Action Plan, and the Norwegian ESSD Trust Fund. The views expressed are those of the author(s) and not necessarily those of the World Bank Group or supporting institutions. THE WORLD BANK 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural