December 2015 Working Paper Just Buying the Peace? Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste Justice, Security and Development Series Sakuntala Akmeemana Douglas Porter The Justice, Security and Development Series This research report is part of a series on Justice, Security and Development, produced with the generous support of the Bank- Netherlands Partnership Program (BNPP). The series presents the findings and critical reflections of a three-year work program aimed at improving development approaches to justice and security stresses in fragile and conflict-affected settings. Drawing from reviews of current scholarship, in-depth field research, and engagement with development programs, the papers in the series seek to identify the key challenges and obstacles to effective development, and propose ways to re-frame the challenges and solutions as a basis for more effective development programs. The framing paper for this series, Justice and Institutional Change in Fragile and Conflict-Affected Settings: Re-Framing the Challenges and Solutions, presents the rationale, organizing logic and conclusions of this work. © 2015 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Disclaimer This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Working Paper December 2015 Just Buying the Peace? Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste Justice, Security and Development Series Sakuntala Akmeemana Douglas Porter Just Buying the Peace? Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste1 Introduction and Background In the wake of the country’s political crisis and kinds of pacts or settlements enable the political ensuing outbreak of violence in 2006, the newly leadership to send credible signals that there will be elected government of Timor-Leste embarked upon a break from the past. This in turn “buys space” to a fivefold increase in public spending. This initiative transform institutions so that security, public services, is widely seen as an exemplar of “buying the and economic opportunities are delivered over time. peace”—in this case, deploying petroleum wealth for the sole purpose of “offering cash payments Although the spending initiative in Timor-Leste is and contracts to potential spoilers.”2 A more too recent to speculate about long-term trajectories, illuminating lens through which to view the actions many decisions made by the Gusmão government of Prime Minister Xanana Gusmão’s government during this period resonate with the WDR’s findings. between 2007 and 2012 is that provided by the As we will show, Timor-Leste illustrates that conflict World Development Report 2011 (WDR), which is frequently driven by popular and perceived focuses on “successful transitions” from conflict grievances about access to jobs and economic (World Bank 2011). The WDR’s comparative survey opportunities, services, justice, and law and order. of the evidence concluded that societies have been Not all conflict stressors can be ameliorated by best able to transition from chronic instability and public spending and there are limits on the fragility (including, for example, systemic shortfalls in kinds of injustices and grievances it can redress. public authority, uneven welfare/growth outcomes, However, Timor-Leste’s experience highlights that and debilitating patterns of cyclical violence) when the mechanisms used to spend even small shares political and economic elites create pacts that are of public wealth can be profoundly important to sufficiently inclusive of groups capable of mobilizing popular perceptions of whether a governing regime organized violence and also establish a basic level of is indeed “breaking with the past” and governing legitimacy amongst the broader population. These justly and thus more legitimately. 1 The authors are grateful for the advice provided by Debbie Isser, Sue Ingram, Bjorn Dressel, Anthony Goldstone, and Edio Guterres and acknowledge comments by participants at seminars in Canberra (April 18 and November 28, 2013) and Washington, DC (November 25, 2013 and April 23, 2014) where these findings were discussed. They are particularly indebted to Edward Rees, whose insights were invaluable. They are also the authors of a study discussed in this paper, Sub-national Spending in Timor-Leste: Lessons from Experience (World Bank 2014). The views expressed in this paper are not to be attributed to the World Bank but are the authors’ alone, based on several years of engagement in Timor-Leste in different capacities. 2 See, for instance, S. Dewhurst and C. Valters, “Timor-Leste: Security after Xanana,” blog, Development Progress, February 11, 2015, http://www.developmentprogress.org/blog/2015/02/11/timor-leste-security-after-xanana. Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste III This paper is one of a series from a work program political settlement in positive ways (see Berg, Isser, aiming to deepen the Bank’s capacity to respond and Porter 2015b, 275). to the conclusions outlined in the WDR 2011. Each country engagement supported by this work program was oriented toward a common set of SUBNATIONAL SPENDING AS A POLICY TOOL questions (see the review in Berg, Isser, and Porter Here we draw on one aspect of a broader scope of 2015a). In the case of Timor-Leste, our interest was engagement in Timor-Leste4 and focus on the role less in evaluating the drivers and stresses that can of subnational spending mechanisms in enabling explain the conflict of 2006 than in understanding the government to use its rapid fiscal expansion the political, economic, and social conditions in the to counteract widespread public perceptions of aftermath of the conflict that led elites to invest in injustice that threatened both the legitimacy and particular institutions and governing domains where durability of the state. The crisis of 2006 can be seen crucial social contests were occurring.3 Informed by as the point of transition between two distinct phases Mushtaq Khan’s insights (Khan 2010), we concluded of post-independence history in which power shifted that in certain cases, it is necessary to examine how between the two major factions in Timorese politics: bargains among elites were made—the dynamics of the FRETILIN5 party and the political forces allied to the political settlement—and how they conditioned Xanana Gusmão. Not incidentally, 2006 may also be choices to invest trust, loyalties, and networks of seen as the pivotal point of a new development in influence, as well as to direct public wealth into Timor-Leste’s political economy, namely the surge in institutions that would prove capable of effectively oil wealth. The early post-independence phase (2002– delivering political and economic goods. 06) led by the FRETILIN government was marked by an exclusivist political dynamic that heightened long- Two lines of discussion then follow, both concerning standing social cleavages and inflamed the fractious the durability of outcomes. First, how are the politi- party politics that had emerged in the mid-1970s in cal “rules of the game” changing? For instance, as anticipation of decolonization (Goldstone 2013, 210). a result of institutional innovations (as were needed For most of this period and certainly before the 2006 to manage burgeoning oil wealth), are transitions crisis, the government had almost no discretionary occurring from the highly personalized, centralized, resources with which to credibly deliver on its policy and discretionary exercise of executive power promises. The spoils of office—for instance, in the toward more durable, predictable routines by public form of government contracts—were meager and authorities? Second, how is the performance of distributed among a small clique around the party institutions, and their shortcomings, likely to impact leadership. This fueled perceptions of discrimination the political settlement over time? These two lines of against those from the western regions in favor of inquiry were of course instrumentally oriented. Not those from FRETILIN’s stronghold in the east. only are they a prerequisite to understanding the conditions under which different choices—norms, The 2006 crisis was triggered by the expressions of rules, and social, political, and dollar investments— grievance by disaffected soldiers from the western might be made, they are also helpful in examining districts, known as the Petitioners, who charged their how the World Bank’s activities—investment army superiors from the east with discrimination. The portfolio, analytical work, policy dialogue—might subsequent sacking of nearly 600 Petitioners by the be more relevant to the conditions political leaders government led to widespread unrest and violence face. This could reduce the potential of doing harm and fed into a broader narrative of disenfranchisement and perhaps prove more effective in nudging the among veterans of the resistance. These grievances 3 S. Akmeemana and D. Porter, “Timor Leste Engagement Note: Justice, Security and Development in Fragile and Conflict-Affected States” (Bank-Netherlands Partnership Program [BNPP], 2012), http://siteresources.worldbank.org/INTJUSFORPOOR/Resources/BNPPTimorLesteEngagementNote.pdf. 4 To include, in addition to the work discussed in this working paper, a political economy analysis of “big projects” to provide a granular detail to the emerging elite bargain and to better understand potential conflict stresses; and efforts to develop a regulatory framework to enable the state to engage more effectively with a broad range of stakeholders involved in infrastructure development. 5 The acronym stands for the Frente Revolucionária de Timor-Leste Independente or Revolutionary Front for an Independent East Timor. IV Just Buying the Peace? were effectively used by the political opposition to political approach at the base, or subnational level. destabilize the government. The military and police Key to this project was the sharp rise in petroleum fractured, and armed civilians joined in the fray; revenues that enabled a surge in capital and soon marginalized male youth in gangs and martial development outlays from the national budget, arts groups were mobilized by a variety of interests, peaking at approximately US$555 million in 2011, including excluded business elites. and that were channeled through various national systems (World Bank 2014, 1). In contrast, the annual The 2006 crisis saw the return of a United Nations development spending in the years prior to 2007 peacekeeping force and the forced resignation had averaged US$55 million and for the most part of FRETILIN’s Prime Minister Mari Alkatiri. Then- was derived from donor commitments and mana- President Gusmão created a new political party, ged under donor procedures. Subnational spending the National Congress for Timorese Reconstruction before 2007 amounted to roughly only 3 percent (Conselho Nacional de Reconstrução de Timor or of national spending, but it soon became a pivotal CNRT). The party prevailed in the 2007 general element of a suite of responses of the minority elections despite FRETILIN winning a plurality of coalition Gusmão government to stabilize the country votes, leaving Gusmão at the head of a broad by shaping and broadening the elite bargain.8 but potentially volatile coalition of parties.6 The government faced a fragile and fluid political situation, high expectations, and an unprecedented EMPLOYING UNORTHODOX SPENDING level of debate in the press and Parliament. The APPROACHES threat of instability was palpable (Engel 2009), not By 2012, the prospect of further large-scale conflict least because roughly 150,000 internally displaced had been averted, and national elections in that year people remained in camps close to the capital Dili. delivered the Gusmão government an overwhelming Although there had been a dramatic economic electoral mandate. These political achievements, recovery of 8 percent GDP growth in 2008 (after GDP coupled with the apparently successful transition growth of -6 percent in 2006), the private sector was of power over the previous five-year period, are stagnating and private spending contracting with not attributable only to the purchasing power of the onset of the 2008 fuel and commodity crisis. oil wealth. Rather, they speak also to an ongoing An additional 16,000 youth each year were looking process of dynamic institutional innovation of for work with expectations of earning a livelihood. the kind that will be of interest to proponents of Several measures pointed to the fact that poverty “problem-driven, iterative, adaptive learning” and inequality were increasing,7 and the sense of an (Andrews 2013). Further, in order to follow up “east-west” regional divide persisted. Thus, although on political signals to “break with the past,” the the new government had announced its intention to government initially jettisoned existing—largely implement an economic program that would provide donor-designed—modalities for capital expenditure a path from stabilization to recovery, its first task was at the district and village levels and experimented to maintain social order and stability. with systems that would allow for the direct and rapid targeting of spending. Between 2009 and From 2007 until February 2015, when Rui Araujo 2012, the rules governing subnational spending (from the FRETILIN party) took over the prime changed frequently, as responsibilities were shuf- ministership from Gusmão, the Gusmão government fled up and down from central to district to local was characterized by a centralization of political agencies and variously assigned to private sector and authority at the apex but an increasingly inclusive public authorities. It is important to point out that 6 FRETILIN, which had been in government since independence, found itself short of a majority in Parliament and unable to secure a majority coalition. The National Congress for Timorese Reconstruction (CNRT), Democratic Party (PD), and Timorese Social Democratic Association (ASDT)-Social Democratic Party (PSD) formed the Aliança Maioria de Parlamentar, or Alliance of the Parliamentary Majority (AMP), which was later joined by the National Democratic Union of Timorese Resistance. The durability of this coalition required considerable political and public spending compromises to maintain, many of which were seen in 2008. 7 The issue was not just that one in three Timorese were living in poverty, but the results of the Survey of Living Standards revealed a sharp increase in poverty between 2001 and 2007 (World Bank and Directorate of National Statistics 2008). 8 The elite bargain refers to a typically unwritten (and often difficult to observe) agreement amongst powerful military, economic and political people about the rules of the game, which reflects underlying patterns of resource mobilisation and political economy. See Hesselbein (2011). Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste V this dynamism, involving multiple breaks with con- to the foreground at different times—responded to vention and experimentation with hybrid institutional immediate policy objectives, such as stimulating a forms, would not have occurred had the government domestic contracting sector, creating jobs, building of the day adopted the advice of donor partners infrastructure, and avoiding a relapse into conflict about best practice in public financial management in the near term. We then turn to reflect on how and local governance reforms. these mechanisms contributed to larger, closely related strategic goals, including the imperative to The first part of this paper places these innovations consolidate a new elite bargain and broader societal in context and briefly explains the contrast between consensus by economically empowering social and the main subnational spending mechanism in place political constituencies that had previously been during the early post-independence period and a disenfranchised. This spending was more than new mechanism announced by the prime minister “buying the peace” in the short term; it may also in his budget speech in August 2009. The next be seen as a reordering of Timor-Leste’s political section then summarizes the findings of a World economy that began with the advent of the Petroleum Bank/Ministry of Finance study9 that evaluated how Fund in 2005, control of which has animated politics well these two mechanisms—each of which moved since then (Rees 2013). Figure 1.  Major Infrastructure Spending FY 2004 – FY 2013 In $ millions 1000 900 800 700 600 Budget 500 Actual 400 300 200 100 0 Budget Year 04 11 05 06 07 08 09 10 12 FY FY FY FY FY FY FY FY FY 9 See World Bank (2014). VI Just Buying the Peace? 1. Innovations in Subnational Spending: The Referendum Package and its Context Since assuming office in August 2007, the coalition (PDD I and II, District Development Program), which government headed by Xanana Gusmão had by by 2012 became knowns as the PDID10 systems and August 2009 produced five budgets to further its projects. professed aim of increasing annual GDP growth beyond eight percent and diversifying the economy. As a spending modality, the PR (the first year’s In rough terms, each of these budgets had doubled iteration of what eventually became PDID) was the outlays of the one before (Porter and Rab innovative but risky. By creating a group known 2010). To lift the rate of spending, the government as the Associação Empresários Construção Civil entered into a wide range of agreements for e Obras Públicas (Entrepreneurs’ Association for large infrastructure projects (for example, sea and Construction and Public Works, or AECCOP) at airports, power and transmission projects, oil sector the national and district levels, the prime minister equity production arrangements), delegated more embarked on a radical decentralization of power spending powers to line ministries, and increased and authority that was in many respects at direct spending on goods and services, including subsidies odds with the prescriptions and even the logic of on essential commodities. An expansive social the orthodox “good governance” agenda. Rather protection scheme was introduced, including than devolve functions to lower-level government universal pensions for the elderly and people with authorities, the PR created private sector entities disabilities, conditional cash transfers for school- and empowered them to handle public expenditure. age children in vulnerable households, support to AECCOP’s leadership, closely affiliated with and veterans and survivor families, and ad hoc responses trusted by senior members of the government, was to internal displacement and natural disasters. given responsibility for identifying some 700 small to medium-sized projects, allocating the funds, Although dubbed “The Year of Infrastructure,” the awarding projects to their members, and supervising government in 2009 was struggling to disburse all project implementation. Moreover, during its its budget allocation for infrastructure. When the initial rollout in 2009, the entire process was not Prime Minister announced in a supplementary governed by any formal regulations. budget speech in August that US$70 million would be reallocated to a budgeted program known as This bold move was unsurprisingly greeted by a the Referendum Package (Pakote Referendum or chorus of concerns from the political opposition, PR), named for the 10-year anniversary of the 1999 civil society groups, and international donors about independence plebiscite, much more was at stake its fiscal sustainability as well as its governance and than just higher rates of budget execution. Instead, accountability arrangements. But the government the PR signaled a determination to respond to widely felt that this significant break with convention was expressed economic, social, and political grievances needed in order to respond to the political dynamics and demands in the aftermath of conflict. Its professed following the 2006 crisis. Timor-Leste was fortunate aims were to (i) create a local entrepreneurial class in having established a sound architecture for fiscal by capitalizing Timorese contractors; (ii) generate management in the form of the Petroleum Fund employment; and (iii) deliver quality infrastructure. and a reasonably well-defined public financial These policy priorities were often in tension and the management system before the surge in oil revenues relative emphasis given to each has shifted over time, began. This meant that, unusually for a post-conflict as the PR was refined through subsequent iterations scenario, there were no off-budget rents for the of the Programa Dezenvolvementu Decentralizado government to distribute in pursuit of near-term 10 The Planeamento de Dezenvolvimentu Integradu Distritál (Decree Law for Integrated District Development Planning, or PDID) came into effect in January 2012 and now governs a number of different subnational spending programs. Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste 1 political and social stability. Public spending through term. Yet this fact placed extraordinary pressure on the existing, but in many respects untested, public the minority coalition government, which had to act finance management systems was thus the only in a politically expedient and effective way while also means available to stabilize the country in the short relying on existing mechanisms for allocating and spending resources. Figure 2.  PR/PDD & PDL Budgets In $ millions 80.00 1.66 70.00 6.30 60.00 50.00 3.50 40.00 PDL 2.78 70.00 51.75 30.00 PDD 44.30 20.00 31.86 10.00 0 2009 2010 2011 2012 Budget Year Seen through the lens of the literature on post-conflict discussion. Whether under the Portuguese colonial transitions, it could be argued that the government’s administration or the Indonesian occupation, an elite spending was sending what have been termed bargain had been created and held together by a “credible signals of change.” Moreover, again mix of force and incentive. Until 2002, participants consistent with the WDR 2011 lens, this spending in the bargain were few. There were only a small was focused on three areas: security (of person and number of Timorese contractors in the country, property and also broader political stability and social apart from the handful that had collaborated with order, as well as protection against the 2008 global the Indonesian military, and none at the time had food and commodity price crisis), justice (avoiding the capacity to execute large-scale contracts. In egregious exclusion in access to public wealth and the post-independence democratic context, the economic opportunity), and jobs (a reasonable expec- accommodation of the large veteran constituency tation of a dignified existence and the opportunity posed a critical challenge. Until the surge in oil wealth, to accumulate wealth and assets) (World Bank the government did not have the means to deal with 2011). But to this account must be added the par- this fractious and largely impoverished group. The ticular need to economically empower previously PR aimed to economically empower veterans by disenfranchised social and political constituencies, distributing public contracts, thus providing them including the veterans of the resistance struggle and with a real stake in the new political and economic their families, disaffected members of the military, order that was being constructed and with ongoing and those from the western regions of the country incentives to participate and cooperate. who were perceived as having been excluded in the period leading to the 2006 crisis. CONVENTIONAL SPENDING MECHANISM Principal among these groups were veterans, ALREADY IN PLACE particularly those who lived in rural areas and who The PR was a pragmatic response by political leaders were not part of the national political or economic to their conviction that existing subnational spending 2 Just Buying the Peace? mechanisms would not be able to move quickly Although this model had been tested in more than enough or enable the government to effectively 25 countries,12 it was at the time perceived by the reach key constituencies. A mechanism already government as falling short in several ways. First, existed in the form of the donor-supported Programa it was believed that PDL’s participatory planning, Dezenvolvimentu Lokal (Local Development Pro- competitive tendering, and elaborate expenditure gram, PDL),11 which had been initiated in 2004 to controls would hinder the pace of spending. It was respond to a medium-term policy priority of territorial also felt that competitive tendering would favor decentralization. The program was piloted under the existing contractors and weigh against the priority of aegis of the-then Ministério da Administração Estatal favoring new entrants, such as the veterans. Finally, (Ministry of State Administration, MAE), through the that approach was seen as simply “too donor,” when building of local capacities for administrative and the premium at the time was on electoral claiming political representation. By 2008, it had been scaled through a modality that was distinctively Timorese in up to include all districts. PDL’s approach involved conception and operation. Therefore, when the PR elaborate routines of the annual formula-driven was announced, its proponents argued it would have allocation of block grants, participatory planning several advantages over other existing arrangements: and competitive procurement. Proposals were it would reduce time and cost, capitalize a new class generated through consultations at the suco (village) of contractors, and quickly deliver infrastructure level, prioritized by multi-stakeholder groups at the nationwide. The political signaling could not have subdistrict and district levels, and then implemented been clearer; this new, untried modality would under competitive tenders and supervised entirely receive US$70 million in 2009 and a further US$150 by subdistrict development committees and district million over the next three years. representative assemblies. Figure 3.  PDD & PDL Budget Compared to Public Overall & Capital Spending In $ millions 1800 1674.1 1600 1306 1400 1200 958.2 1000 All 758.7 800 717.6 603.6 Capital 600 PDD+PDL 400 209.3 253.7 200 71.7 47.8 58 34.6 0 2009 2010 2011 2012 Budget Year 11 It was supported by the UN Capital Development Fund (UNCDF) through funding from the governments of Ireland and Norway. 12 http://www.uncdf.org/node/325. Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste 3 ADDRESSING THE CONCERNS OF CRITICS to a mix of centralized planning and decentralized During this period, the government made a number implementation in 2010 and 2011, to some degree of modifications to respond to criticisms about of decentralized planning but a greater degree of PDID’s governance arrangements and efficacy.13 In central control over implementation in 2012. Over 2010, new agencies were created at the national and this short period, there was also a rapid consolidation subnational levels, and refinements were introduced of several subnational spending systems under the into how projects were planned and contractors 2012 Decree Law for Integrated District Develop- selected and supervised. A District Development ment Planning. The decree law institutionalized “the Commission14 was made responsible for planning rules and regulations applicable on competency, and contracting and for supervising contractor perfor- planning, implementation and financing of State mance. Between 2009 and 2012, the rules governing projects at the district and sub-district levels”15 and subnational spending changed frequently and the advent of a new spending program, the National rapidly, from the radical market devolution of 2009 Suco Development Program, focused on villages. Figure 4.  Sub-National Spending in Timor - A Chronology PDL funded PR succeeded PDID Decree by government by PDD Promulgated 2004 2008 2009 2010 2011 2012 2013 PDL pilot begins PR introduced PDD split PNDS pilot begins (donor funding) into PDDI and PDDII PDL (Programa Dezenvolvimentu Lokal) Local Development Program PDD (Programa de Dezenvolvimentu Desentralizadu) Decentralized Development Program PR (Pakote Referendum) Referendum Package PDID (Planeamento de Dezenvolvimentu Integradu Distritál) Decree Law for Integrated District Development Planning PNDS (Programa Nacional do Dezenvolvimentu do Suco) National Suco Development Program 13 The Head of Parliamentary Committee G, Pedro da Costa of the ruling CNRT, was cited in Suara Timor Lorosae as saying that the referendum projects lack quality, and the committee therefore “has asked the government to establish a system of supervision, monitoring and oversight in order to guarantee good works result.” See “Referendum Package Lacks Quality,” Suara Timor Lorosae, December 22, 2009, http://www.etan.org/et2009/12december/31/22referendum.htm. Earlier, on November 18, 2009, the Speaker of the National Parliament was quoted in Jornal Nacional Diario as saying that some contractors implementing Referendum projects “are performing works of no quality and stealing the people’s money.” See “Gusmão’s Financial Management Questioned from within,” FRETILIN media release, November 18, 2009, http://groups.yahoo.com/group/ETSA/message/9286. The main opposition party FRETILIN issued a press release on October 27, 2009 in which the party’s Vice President, Arsenio Bano, called the package “a big disaster.” See “Audit Reveals Gusmão Government’s Woeful Financial Management: Action Looms on Referendum Package,” http://easttimorlegal.blogspot.com/2009/10/fretilin-media-release-audit-reveals.html. A November 18, 2009 FRETILIN press release cited all the criticisms from Aid Management Platform (AMP) members of Parliament and Timorese academics about project quality under the package. A local civil society organization, Lao Hamutuk, stated in its 2010 budget submission that the Pakote Referendum was “opening up avenues for corruption, waste and poor quality, it prevents proper accountability and sustainability for public works infrastructure projects, which are definitely needed by our people.” See the media release, “Gusmão’s Financial Management Questioned from within.” 14 Composed of the district administrator, subdistrict administrators, representatives of line ministries at the district level, and suco chiefs. 15 PDID Decree Law, Art. 1 (1). 4 Just Buying the Peace? 2. The Subnational Spending Study The World Bank collaborated with several Timor including them in the settlement by delivering public government ministries in 2012–13 to undertake a safety, services, livelihoods and other opportunities” comparative evaluation of subnational spending (Craig and Porter 2014). In this latter respect, Timor- mechanisms. The prime purpose was to contribute Leste’s subnational spending arrangements are of to ongoing efforts to define subnational spending particular interest. systems and procedures for planning, budgeting, expenditure control, procurement, and auditing. It To address the study’s prime purpose, a multi- was also intended to speak to political audiences disciplinary team of World Bank staff and consultants (Timor’s parliament, executive and the donor and Timorese Ministry of Finance officials community) and contribute to a wider policy and adopted a “mixed methods” approach. The team academic discussion about the role of public finance analyzed databases on total subnational spending in consolidating elite settlements in the aftermath of between 2005 and 2013, visited the districts of violent conflict. Baucau, Ermera, Bobonaro, and Ainaro (and eight subdistricts), and closely examined a representative Two general questions were of interest. First, in the range of 22 projects. While indicative of the larger aftermath of conflict, under what circumstances do picture, these projects represented a small sample, elites invest in institutions to order power (Slater and thus the findings outlined below are presented 2010) and what forms do these institutions take? with some caution. Wide-ranging consultations were Second, how do these choices to invest in particular held with district and subdistrict administration and forms of institutions impact on the durability, nature, line departments, sucos, contractors, users of the and legitimacy of political settlements? Two aspects facilities, nongovernmental organizations, and Dili- of these choices appear to be particularly important based government officials. The study provided in determining the scope, depth, and thus durability a comparative analysis of the PDID mechanism of a successful transition. One is the ability of elites and the donor-supported PDL across five key to impose centralized arrangements to collect and dimensions: i) expenditure priorities (rates of budget distribute rents (Khan 2010); in the case of Timor- execution; patterns of spending, including links with Leste, this condition was satisfied by the existence poverty and geography; achievement of different of the Petroleum Fund as a credible instrument for policy priorities); ii) quality of the assets created collecting the overwhelming source of rents and (construction standards, durability, “usability”); by the statutory regulations that directed all the iii) impact on employment (employment levels, proceeds into national budgets appropriated by the quality and equity of opportunity); iv) impact on Parliament. A second aspect is the “ability of central local contractors and the private sector (including actors and the modalities they use to project authority short-term and likely medium-term benefits); and v) and distribute resources to places where people live, governance (local stability, disputation, elite capture or inclusivity). Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste 5 3. Findings in Summary The two mechanisms, PDL and PR/PDID, achieved mechanisms and the form they took at various times similar results in expenditure priorities and job were designed to serve somewhat different priorities. creation but diverged considerably on other areas These policy priorities were frequently in tension— of comparison, such as the quality of infrastructure, at any point in time, any one of them could be the creation of new contractors, and governance- ascendant in the minds of policy makers, depending related matters. This is not surprising; each of these on the specific political economy considerations. Table 1.  Budget Execution Rates of Sub-National compared to Central Government Investment Programs 2009 2010 2011 2012 Sub-national Programs PR/PDD 67% 80% 94% 70% PDL 93% 103% 98% 99% Central Government Government - all capital dev’t 85% 86% 81% 46% Education - capital dev’t n/a n/a 67% n/a Health - capital dev’t n/a n/a 47% n/a Roads - capital dev’t n/a n/a 27% n/a Source: Study team analysis of data from MAE & ADN reports & MoF budget execution reports Figure 5.  Budget Execution Measures, 2009–2012 In $ millions 120.00% 100% 95% 100.00% 85% Execution District Development 83% 77% 80% 80.00% 70% Execution All Capital and Development 60.00% 46% 40.00% 20.00% 0.00% 2009 2010 2011 2012 Budget Year 6 Just Buying the Peace? First, compared to other government arrangements Geographical spending equity (measured in terms of for capital spending, PDL and PDID both fared dollars spent per capita) under PDID varied greatly very well in terms of budget execution, and both across districts, with the most favored districts recei- performed considerably better than the rates of ving between three and seven times more than the execution recorded before 2009 by most line least favored. However, no relationship was found ministries for infrastructure spending. Spending between spending patterns and relative need as patterns under these two mechanisms were broadly captured by poverty head counts; for instance, (but not entirely) consistent with those for public high per capita allocations were received by the services prioritized in the government’s Strategic Lautem district (with a relatively low poverty rate), Development Plan (education, water, health, and whereas low allocations were received by Ainaro agriculture). (with a relatively high poverty rate). By contrast, PDL employed a formula (based on population) that provided a consistent means to allocate resources on a per capita basis. Table 2.  PDD Allocations per Capita by District ($ per Capita) PR PDD PDD I+II PDD I+II TOTAL 2011 Districts POPN. 2009 2010 2011 2012 & 2012 Aileu 45.724 n/a 29 45 63 108 Ainaro 62.407 n/a 24 37 51 88 Baucau 113.748 20 25 18 34 52 Bobonaro 93.787 37 33 29 41 70 Covalima 62.764 51 n/a 63 66 129 Dili 212.469 31 16 24 29 53 Ermera 118.671 15 n/a 12 29 41 Lautem 65.349 33 36 86 45 132 Liquica 69.925 20 31 50 50 99 Manatuto 41.217 57 49 82 87 170 Manufahi 53.995 44 21 40 72 112 Oecusse 67.736 36 23 35 68 103 Viqueque 72.950 40 33 61 75 137 Totals/Means 1,080,742 35 29 39 48 86 ST. Deviation 12.59 8.58 22.17 18.01 36.44 Highest X Lowest 2.90 3.00 7.00 3.00 4.00 Source: study team analysis of MAE and ADN reports Second, as might be anticipated, technical quality Third, and perhaps because neither mechanism was a and project completion were more robust under specialized labor creation program, the employment PDL than PDID. With the previously mentioned impact of both PDL and PDID was modest. Compared caveats about the small sample size, the quality of to the kinds of large public works and rural investment PDID investments was mixed; just under half of the programs often seen in Asia, such as that established projects were of acceptable standard and of benefit by the National Rural Employment Guarantee Act to users, three exhibited varying degrees of design in India, the share of total investment costs going construction quality and usability problems, and four to unskilled and skilled labor payments under were at the time not usable for the intended purpose PDID and PDL are both low at around 6.5 percent without additional investments. and 3.5 percent, respectively (whereas specialized Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste 7 labor creation programs range between 50 and 75 allocations of spending. When the district/per capita percent). The employment impact depends greatly allocations are overlaid with a political “mapping,” on the type of infrastructure or investment scheme the pattern of spending is plain: an astute use (for instance, buildings generally employ much less of financial disbursements to assuage potential labor than irrigation schemes and erosion protection spoilers, broaden political coalitions, manage dissent walls). The programs provided seasonal employment in relation to such initiatives as the South Coast to an estimated 2.5–10 percent of the subdistrict development,17 and in part, win the 2012 elections workforce,16 and it was predominantly the rural and fracture the unity of the opposition party. underemployed who benefited. Significantly, the benefits were mainly local and widely shared. For the On the other hand, nine out of 13 PDID projects poorest households, the additional cash injection examined closely gave rise to some form of dispute formed a significant proportion of household income. about land, procurement, labor, or contractor performance, whereas only one of the six PDL projects Fourth, discounting the considerable number of produced these kinds of dispute. No evidence was “briefcase companies,” the PDID initiative appears found to support the view that subnational spending to have succeeded better than the PDL in creating mechanisms—as compared to centralized spending a capital base and revenue stream for a new class by line ministries—are vulnerable to “weak local of contractors. The number of registered local capacity.” The reasons for the variable outcomes are contractors has expanded greatly, in the order of a more complex, as they lie in the need to frequently threefold increase since 2009, and many of these modify systems and procedures in response to contractors were awarded a PDID contract each year. changing priorities and lessons learned. Several However, the fact that contractors were precluded aspects of poor performance may be mitigated in from winning more than one project per year meant ways anticipated by ongoing amendments to the that there were few opportunities and incentives PDID decree, including by clarifying the assignment for contractors to consolidate their businesses and of responsibilities (in relation, for instance, to diversify over time. Thus, the expansion in domestic certification and supervision), and by paying more contractor capacity may prove to have been more consistent attention to public communication and apparent than real, indicating that a longer time accountability arrangements. frame and a more extensive case analysis would be needed to draw conclusions here. The study concluded that after experimenting with a range of innovative but risky arrangements to deliver Finally, the governance dividends of subnational public spending and address a series of economic, spending were mixed. On the one hand, these social, and political priorities, the government had mechanisms enabled large numbers of Timorese to largely achieved the initial objectives of PR/PDID. It participate for the first time in the allocation of public took the decision to “regularize” the system through resources and the production of assets largely in the PDID Decree Law 2012 as the point of departure accordance with their priorities. Subnational spending to make several recommendations.18 Many of the was one part of a suite of measures that enabled study’s recommendations were adopted (including the government to target important constituencies competitive tendering and predictable, formula- that were needed to build and maintain stable based budget allocations). And, subsequently, the political settlements. The PDID projects also helped government initiated a further round of analysis of to distribute wealth to rural areas and thus benefit both the quality of assets and PDID systems and a number of important constituencies. This was procedures through a study sample of approximately nowhere more apparent than in the geographical 200 projects. 16 Extrapolations for FY12 suggested that these programs had created some 1.2 million unskilled and 220,000 skilled workdays, respectively. At the subdistrict level, this could provide 165 persons with 100 days of employment each or 740 persons with 25 days each (World Bank 2014, 13). 17 See http://www.timorgap.com/databases/website.nsf/vwAll/SOUTHERN%20COAST%20PROJECT. 18 This included how budgets are allocated to districts; measures to “incentivize” better performance; simpler contractor pre-qualification procedures and competitive tendering to improve contractor performance and create significant cost savings; and a reverting to district payments for contractors to break the highly problematic payment bottleneck arising from delays in certification reporting to Dili and in central Treasury payments. 8 Just Buying the Peace? 4. Lessons of Broader Interest: Institutions for Reordering Power in Post-Conflict Contexts While the study of subnational spending provides Mission in Timor-Leste (UNMIT) assumed executive only a limited snapshot of time and cases, this paper policing responsibilities with one of the largest UN has drawn on several empirical sources. These include police contingents in the world from 2006 until data already in the public domain, new qualitative 2011, the Timorese police force has answered to research, research on public expenditure (including its own command since 2008 and handled internal the wage bill, large infrastructure spending, an threats itself (International Crisis Group 2012). In the expanded social protection scheme, and goods and interplay between a government buoyed by large social services spending), and a broader review of inflows of petroleum revenues and a UN mission the literature. with a very broad mandate, a settlement with a distinctively East Timorese cast emerged, into which The nature of the analytical effort reflects a belief the UN had difficulty inserting itself (Goldstone 2013 that to credibly support Timor-Leste’s long-term 209–10), but one that is seen as locally legitimate transition away from conflict, the World Bank and and to have brought at least near-term stability. A other external actors must fully understand how striking characteristic has been the government’s oil wealth is being used and with what effects, and ability to reach and “cater to groups which see it as specifically how this spending manifests itself in the focal point for their demands for various forms terms of justice and security. Our research probed of recognition (material, political, and symbolic) to the question of whether the fiscal expansion was which they feel entitled as compensation for losses being used to support an emerging elite bargain sustained or services rendered during the struggle in ways that are durable, sufficiently inclusive, and for independence and since” (Goldstone 2013, 209). targeted to effectively address underlying conflict stresses rather than to exacerbate conflict and grievance. The implications of this analysis have a NEW PATTERN OF ELITE CAPTURE EMERGING? bearing on the potential strategic and programming Nevertheless, to assert that Timor-Leste has moved decisions made by an external actor such as the from a narrowly-based elite bargain in the direction World Bank, including how it can work in a more of a more inclusive settlement is not to deny that a politically astute, adaptive, and flexible manner new economic elite is capturing the bulk of resources and also potentially influence the elite settlement in in the post-2007 era. Certainly, the more general ways that have positive impacts on domestic policy ways in which public spending can create political making and the manner in which government carries capital, pacify populations, and consolidate alliances out development activities. by demonstrating “commitment credibility” have been well documented, as have the failures to do At face value, Timor-Leste appears to provide a so and their consequences in the form of violent positive example of a situation in which national conflict (Taydas and Peksen 2012; Azam 2001, 435; elites have used the “breathing space” provided Burgoon 2006). Recent observers of public spending by a peacekeeping operation to forge a locally in Timor-Leste conclude that it “seems to be enriching acceptable settlement that has been sustained elites to a greater degree than before, which is also after the departure of foreign troops and police in line with the expectations of particularist rent (Akmeemana 2014). The approach adroitly targeted distribution associated with clientelist rentier states” particular constituencies as well as the broader (Barma 2014). populace. Although the United Nations Integrated Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste 9 This may be true, but in the particular case of mechanisms, including those that invest heavily in subnational spending over the period considered popular participation, are socially generative are in this paper, this conclusion needs to be nuanced. routinely overstated and the evidence is decidedly Certainly, the pace and frequency of changes to mixed;19 in other words, their positive long-term subnational spending arrangements generated impacts on institutional quality, the inclusiveness of confusion and skepticism among officials, local decision making, or trust and group formation are leaders, and the average citizen. Yet they also infrequent and sporadic (Casey, Glennerster, and provided incentives for certain disaffected groups to Miguel 2012; King 2013). On the other hand, the cooperate and buy into the emerging political order. disputes generated by these mechanisms are not Thus, although amounting to only three percent of necessarily corrosive in the long term, provided that the budget, subnational spending has had a much they do not feed larger narratives of grievance and larger political footprint in alleviating grievance exclusion.20 Decentralized spending arrangements and thereby delivering immediate social and undoubtedly multiply the number of sites where electoral dividends for the incumbent government. political contest occurs, but while these contests Not incidentally, it has also arguably underwritten might result in small disputes, any project that a positive political assessment of the virtues of a creates local contests about where budgets should dynamic and iterative blending of centralization be spent, by whom, and with what expectations can and decentralization. On the one hand, this offers also be a powerful form of political legitimation for technically feasible and politically credible ways the governing regime. to consolidate power and project central authority to dispersed rural populations. At the same time, The subnational spending study—on the basis of it offers a way to build upon existing community limited case examples—did not find that public governance arrangements that shape social order spending of this nature necessarily accentuates and collective values for the majority rural population existing cleavages. Admittedly, Timor’s local land- in order to achieve stability. scape is quite different from that in any number of countries emerging from civil war. Social cohesion at the local level is fairly high, local norms generally LOCALIZED DISPUTES act as some form of constraint on elite behavior, The PDID mechanism certainly generated a fair and prevalent cultural ideals and expectations of number of localized disputes. This is hardly surprising, leadership emphasize community cooperation and given the pace of the rollout, the frequent changes have also enabled cultural continuity and survival in the rules (often year on year), and the sheer logis- through occupation, economic hardship, natural tical difficulties of monitoring up to 500 ongoing disaster, and political upheaval (Brown 2012a, 66; projects each year. The comparative evidence from 2012b). Moreover, many of the kinds of conflicts PDL points to the obvious dividends of arrangements observed around subnational spending could have that ensure more participatory local processes, com- been ameliorated by measures recommended by the panies that prevail through competitive tendering, study, which appear to have been largely adopted and the involvement of local authorities in reducing (although their remedial impact has yet to be disputes around land, thereby creating incentives for determined). Had it been the case that subnational better performance by contractors and greater local spending was projecting political power that was ownership of both process and product. perceived as inequitable and thus creating cleavages or feeding existing narratives of exclusion, it is We would therefore caution against overstating unlikely that the prime minister’s CNRT party would either the positive spillover effects of the PDID have increased its vote in the 2012 elections (for the mechanisms or any pessimism that they foster first time, it had a higher primary vote than FRETILIN) forms of patronage that might corrode democratic or that the government would have sought to further prospects. The claims that decentralized spending ensconce these arrangements. 19 See King (2013) on the comparative record of community-driven development projects in Afghanistan, Democratic Republic of Congo, Aceh (Indonesia), Liberia, and Sierra Leone. 20 In the Timor-Leste case, Belun’s Conflict Potential Analysis reports a “medium level” conflict potential, “attest(ing) to the gradual stabiliza- tion of the security situation” and, of interest, “an overall improvement in most indicators describing politically motivated violence” (Belun 2013, 5). 10 Just Buying the Peace? DEMOCRATIC DEVOLUTION NOT INEVITABLE and centralized authority across different elements Although we cannot claim insights into the political of the system. And although key features of these strategy of Timor’s leaders, the new leadership of changes were repeatedly embedded in administra- the “Sixth Constitutional Government” is carefully tive regulations, there has been no reluctance to reviewing the political and other dividends of review and rewrite these codes or to retain a high subnational spending (Government of Timor-Leste level of political discretion over key decision points 2015). The Council of Ministers under the previous in the mechanisms. The current PDID mechanism government approved the Decree Law on Pre- is a hybrid system that resonates with the broader Deconcentration in August 2013, and a new law reordering of power in Timor-Leste; it is populist in is being prepared to govern village authorities. character and demonstrably shifts discretion over Moreover, elections for district/municipal assemblies some aspects of public financial management to and village councils are anticipated. The commitment lower levels of territorial authority. At the same time, to create district-level treasuries has been reaffirmed the variable, geographically and politically targeted to “get funds directly to the places where they nature of spending points to the salience of a highly are needed most” (Government of Timor-Leste centralized political executive (in the form of the 2015, 65). The government intends to “initiate annual Budget Review Committee process) that is decentralization pilot projects” as a precursor to reliant on capabilities that are alert to, and adept in, creating a “new tier of local government” while the political value in making decisions right down continuing the theme of revision and adaptation, to the project level, on the basis of relationships “thoroughly revising” the PDID mechanism and the with local authorities, officials, and other targeted village-level program (Government of Timor-Leste constituencies. 2015, 58). Looking forward, however, it would be foolhardy for observers to assume that Timor-Leste is In light of the experience with PR/PDID, the Pre- set to “institutionally innovate” along a path toward Deconcentration decree is unlikely to herald a a liberal form of decentralized government. linear trajectory toward populist or liberal forms of devolution and participatory democracy. Rather, its Timor’s record of fast-track, dynamic institutional essence will be consolidating the regime’s reach innovation around subnational spending mechanisms into the periphery, one that increasingly recognizes should be of interest to proponents of iterative, the suco as a point of articulation between locally adaptive learning (Andrews 2013). This is instanced established governance practices and efforts to by the radical break with convention in 2009, the render national socio-political order “legible” from experimentation with hybrid institutional forms, and the center (Brown 2012a, 61). the circling back and forth between decentralized Subnational Spending, Institutional Innovation, and the Political Order in Timor-Leste 11 5. Conclusion: Vulnerabilities Remain How do elite choices to invest in particular forms through state-sanctioned provisioning systems (as of institutions impact on the durability, nature, and exampled by PDID systems), and coercion, to deal legitimacy of political settlements over time? Is with episodic conflict. the structure that is emerging in Timor-Leste akin to what Terry Karl describes as a “rentier” system The type of system we describe as developing in that “progressively substitutes public spending for Timor-Leste faces two key vulnerabilities. Leadership statecraft”? (Karl 1997). There might, in closing, transitions are difficult in systems that are highly be two contending answers to this question. In the dependent on a personalized executive. As with the specific and narrow terms of the study reported here, regimes of Kagame (Rwanda), Museveni (Uganda), one answer may lie in whether political elites follow and Hun Sen (Cambodia), government in Timor- through on a few key principles—local consultation, Leste since 2007 has been highly dependent on the competitive procurement, expenditure transparency, personalized authority of Gusmão. The first real test and so on—to which they have apparently committed of the emerging political settlement and “mutual in the PDID Decree and which reflect the norms that dependency” among elites (Phillips 2013) will occur incoming Prime Minister Rui Araujo is articulating.21 in the months to come, as the new prime minister settles into office. There are clear signals that this A second, much more speculative response may political transition has been given a great deal of be found in the wider literature of comparative thought. In the 2012 elections, CNRT successfully politics (Slater 2010) and historical institutionalism thwarted FRETILIN’s attempts to recapture popular (Thelen 2004), together with scholarship on the oil support in the rural base. After that election, it curse more generally (for example, Karl 1997; Barma appeared that the FRETILIN leadership (and its 2014). This might suggest that the flow of oil rents Secretary-General, Mari Alkatiri, in particular) had will undermine incentives for elites to coalesce and negotiated a form of “détente” with Gusmão. This invest in functional and legitimate public authorities. was described by some as the beginning of a “post- Among other outcomes, this would mean that political” era in Timorese politics in which Gusmão follow-through on principles such as transparency and Alkatiri had elected to eschew direct political and competitive procurement might be likely in competition and oppositional forms of politics in form but not in function. Rather, oil will finance the favor of a form of collaboration and a consolidation kind of political pacting observable elsewhere in of the patrimonial system (Rees 2013). Southeast Asian history that will over time exceed available revenue and seriously corrode state capacity The second vulnerability is structural: the exhaustion (Slater 2010). According to Slater, this trajectory of oil and gas revenues. If the economy does not leads to either fragmentation or militarization. It diversify, the country’s economic viability will be might prove to be both crisis-prone, as elites battle in question unless new hydrocarbon deposits are for control over the prize of oil rents (Tornell and Lane found. If not, it may need to be buttressed by signifi- 1999), and durable over the medium term.22 The cant international interventions—sizable aid rents durability would rest on two capabilities: patronage, along with potential security interventions—in the longer term. 21 The Programme of the Sixth Constitutional Government, 2015–2017 signals at several points commitments to transparency and accountability (through social audit procedures, leadership codes of conduct, whistleblower legislation, transparency portals, etc.) 22 Timor-Leste is by no means unique in this scenario. 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