I am convinced that farmland is going to be one of the best investments of our time"
George Soros, June 2009
Amid accusations of "farmland grabs" and "neo-colonisation" and against the background of widespread world hunger and a food crisis, which is being exacerbated by loss of land to biofuels, rising consumer expectations and world population growth, the next great natural resource play is under way – large scale, often government-to-government promoted, agricultural development in both food and biofuels. This paper addresses the practical issues which will need to be addressed in reconciling national policy and the needs of both foreign and domestic investors investing in large scale agricultural development projects, involving the grant of rights by a government or its agencies.
The categories of investors in the agricultural sector include traditional agricultural and plantation companies, fund managers, agricultural product traders, sovereign wealth funds and state sponsored corporations and agencies. In a 2009 report, apart from government and Sovereign Wealth Fund investments, GRAIN identified 120 financial investors active in the field1. The deals range from the private acquisition of single farms – often very large – through to giant government-to-government deals such as the recently frustrated South Korean Daewoo Logistic's lease of 1.3 million ha in Madagascar, the Mauritius government's lease of 20,000 ha of Mozambique farm land to produce rice for the Mauritian market, Libyan investments in Mali (100,000 ha), Liberia (15,000 ha) and Mozambique (20,000 ha), Saudi Arabia and Syria's investment in Sudan and various investments by Qatar in Asia. A recent joint IIED, FAO and IFAD report2 on 5 sub-Saharan countries identified 2,492,684 ha of approved land allocation since 2004. The motives for these investments on the part of the private sector are clearly economic; the motives for the government sponsored investors are often stated to be "strategic" and related to "food security". However, given that the strategic investment is often, if not always, channelled through trading affiliates or commercial entities (Korea: Daewoo; Mauritius: Vitagrain; Libya: Mailbya and Ubuntu S.A), the investments have clear financial purpose as well.
The consequence of this large scale movement is that battle lines are being drawn which are somewhat reminiscent of the evolution of the oil concession and likely to have the same long term results. Therefore the evolving practice in the energy industry provides pointers for a successful and sustainable programme for the encouragement and promotion of foreign investment in agriculture. The arguments for and against this trend are broadly the following:
1. For Large Scale Foreign Investment
- Fallow or scrub land is being brought back to productive use.
- This is accompanied by large scale investment in infrastructure, such as roads, railways and ports, giving better access to markets.
- New technologies, particularly hybrid rice and grain seed and cattle breeding programmes are unlocking land use and increasing productivity.
- Jobs are being provided for local people, training provided and the local economy stimulated.
- Food production can be targeted at the local market as well as the export market thus enhancing food security, producing a more varied diet and reducing hunger.
- Any large scale inward investment is bound to have macroeconomic collateral benefit. such as GDP growth and increased tax revenues.
2. Against Large Scale Inward Investment
- It is leading to a loss of sovereignty and control over vast tracts of land.
- Workers and farmers are being imported to do work for which locals should be being trained.
- Existing farmers are being displaced and communal grazing rights lost.
- There is lack of consultation with affected local communities.
- The existing pattern of sustainable development is being usurped, with incalculable risk to the water table, indigenous vegetation, environment and community cohesion.
- Large scale agriculture is a high carbon consuming and emitting enterprise with its machinery, processing plants and transportation requirements.
- Intensive farming practices are inhumane to animals.
- Genetically modified crops are being introduced which are proscribed elsewhere.
- Few value added investments are being made, leaving the producing country as a producer of raw materials with the real value chain benefits being realised offshore.
- There is no promotion of women in farming and women's position generally is being weakened by loss of community land rights.
There is truth in both sets of arguments, but offshore investment has always been an essential part of the international food business. The tea or coffee in our cup, the fruit in our bowl, the prawns and rice in our curry, the grain in our bread and the flowers on the table are produced for us as consumers by international companies with no geographical restrictions or limitations, other than the suitability of terrain and climate and the availability of transport. Technological development from glasshouses, through fertilisers to new grain forms have potentially opened up huge areas of the world to intensive food production which would have been impossible 50 or 100 years ago. At the same time, lack of domestic investment and political weakness have adversely affected some of the most productive agricultural areas of the world from the Ukraine to Zimbabwe.
It is therefore inevitable that, as the world population inexorably climbs, the tastes of an increasingly global body of consumers broaden, technology improves and commodity price increases shift risk from production to processing and distribution, the momentum under way will increase and we will see more and more globalisation of agriculture in more and more countries. In this sense, trends in agriculture will follow trends in other natural resources development globally, which, in itself, opens up lessons and experience which can be applied to make the programmes generally acceptable and beneficial.
The UN Food and Agricultural Organisation and World Bank are grappling with this issue and working on a non-legally binding "Code of Conduct" to be introduced in the next two years. This will doubtless build upon key aims/principles intended to improve food security and alleviate hunger which have been enunciated in a series of food conferences, programmes and declarations, such as the First Millennium Development Goal (MDG)3 of halving hunger in the world by 2015, the Rome World Food Summit declaration4, the Accra Agenda for Action5, the Comprehensive African Agriculture Development Programme (CAADP) under the New Partnership for Africa's Development (NEPAD)6, the Latin American and the Caribbean Without Hunger (ALCSH) 2005 implementation strategy7, the ASEAN Integrated Food Security (AIFS) Framework and the Strategic Plan of Action on Food Security in the ASEAN Region (SPA-FS)8, the FAO Good Agricultural Practices (GAP) and Sustainable Agriculture and Rural Development (SARD) initiatives9, the Riyadh Declaration to Enhance Arab Cooperation to Face World Food Crisis10, the International Conference on Agrarian Reform and Rural Development (ICARRD)11 and others. Doubtless the Code of Conduct will, to a degree, also follow the pattern of the Extractive Industries Transparency Initiative12 which describes itself as "an effort to make natural resources benefit all"; "a coalition of governments, companies and civil society" and "a standard for companies to publish what they pay and for governments to disclose what they receive". It will also build on the World Bank's strong historic pressure to improve land tenure by moving away from community land rights.
What are the aims and requirements of each of the parties to this new industry – the host state, the local people, the global investor and lenders – and how can they be reconciled in practice?
It is likely that the host state will base its approach on certain principles:
1. The Framework for investment must be controlled and regulated by the laws of the host state.
This may appear obvious since agriculture is about land and land law will always be the Lex Situs – the law of the place where the land is located. However, in the not so distant past, we have seen concessions created which in effect created a "legal enclave", exempted from some or all local laws. This is unlikely to be a viable concept going forward. Of course, exemptions and exclusions permitted by the law, such as tax holidays or access to international arbitration under treaty, will be sought and granted, but it is barely conceivable that a legal enclave will be permitted. This goes some way to answer the "neo-colonisation" argument. The colonial way was to ignore local laws and practices. The modern agricultural investment will be embedded in local law, whether by lease, licence or the acquisition of freehold or equivalent property rights.
However, the corollary of this requirement is that the national laws must provide international standards of transparent protection for investors. These will include non-discriminatory laws when it comes to taxation, employment and the acquisition of rights in land, access to water and utilities and the use of infrastructure. The energy experience indicates that a body of exemptions from aspects of local law tailored to encourage inward investment should be built into the legislative and regulatory system, including permitting exemption from import duties on capital equipment, adequate availability of visas for expatriate management and staff, exemptions for withholding tax on distributions and dividends and access to international arbitration. Often these protections will be enshrined in a bilateral investment treaty, international treaties, framework agricultural cooperation agreements or other government arrangements. As at December 2006, African countries had signed 687 BITs13.
The local law should also allow for the transaction to be transparent and open to public scrutiny. The lessons of the Pakistan power station debacle and the Korean investment in Madagascar are clear. If an investment is seen to be unduly onerous, non-transparent or outside market practices, it will be vulnerable to challenge, particularly on a change of government; indeed, if it is considered to be too egregious, it can itself trigger a change of government, as happened in Madagascar.
2. There must be a transparent and realistic economic rent attached to the project.
To produce a contracted framework which makes food unaffordable to the host government or to fail to pay an economic rent for the use of land is to invite political problems, even through many recent deals attribute no value to the land. Further, the price must be transparent. The essence of the Extractive Industries Transparency Initiative is to encourage the parties to publish what is paid and what is received, so that corruption is exposed.
3. The investment must enhance food security.
First we must define what is meant by "food security". The World Food Summit (1996) defined it as follows:
"Food security exists when all people, at all times, have physical and economic access to sufficient, safe and nutritious food that meets their dietary needs and food preferences for an actual and healthy life".
The SPA-FS states:
"This widely accepted definition points to the following dimensions of food security:
Food availability: The availability of sufficient quantities of food of appropriate quality, supplied through domestic production and/ or imports (including food aid).
Food accessibility: Access by individuals to adequate resources (entitlements) for acquiring appropriate foods for a nutritious diet. Entitlements are defined as the set of all commodity bundles over which a person can establish command given the legal, political, economic and social arrangements of the community in which they live (including traditional rights such as access to common resources).
Utilization: Utilization of food through adequate diet, clean water, sanitation and health care to reach a state of nutritional well-being where all physiological needs are met. This brings out the importance of non-food inputs in food security.
Stability: To be food secure, a population, household or individual must have access to adequate food at all times. They should not risk losing access to food as a consequence of sudden shocks (e.g. an economic or climatic crisis) or cyclical events (e.g. seasonal food insecurity). The concept of stability can therefore refer to both the availability and access dimensions of food security.
Emergency: An emergency means the state or condition having suffered extreme and unexpected natural or man-induced calamity, which is unable to cope with such state or condition through its national reserve and is unable to procure the needed supply through normal trade."
The ALCSH implementation strategy makes a telling point:
"The principal cause of under nourishment in Latin America is not a lack of capacity to produce enough food. The region as a whole has a surplus in international food trade. The main problem lies in having access to food".
Food security may be affected by a range of issues of long or short term duration. These include price increases of agricultural inputs, such as fertilisers and seeds caused by oil price increase, currency devaluation or economic dislocation; rural flight to the cities, rupturing normal supply patterns and natural events and disasters, including man made environmental damage due, for example to deforestation.
The host country will seek to ensure that, so far as possible, any large scale agricultural project will promote food security by providing good farm practices through training and education, promoting local farming including female farmers, improving access to markets and cutting costs of input by reducing transport costs and delays. It may also seek assurances that foodstuffs designated for export will be made available to the local market in the event of economic or natural disruption of regular supply.
This type of requirement may conflict with the intentions of the investor, in particular where the purpose of the project, such as the Mauritius/Mozambique one, is to be a source of food for the investing country.
4. The investment must advance or provide social objectives.
Social objectives may include the provision of training, the relief of the gender discrimination in agriculture, environmental issues, minimising carbon emissions and allowing the fair treatment of displaced indigenous peoples. It may include wider social issues, such as improving medical and veterinary support.
The investor, for its part, will be seeking to satisfy itself on the following principal issues:
- preparatory meeting when the District Administrator and investor arrive to introduce the issue and set a date and time for the first community meeting
- a first "consultation", to:
- explain the project and what land and other resources the investor wants to use (investor role)
- inform the community about their rights and other relevant aspects of the various laws (state role)
- a second "consultation", when:
- the community representatives, having duly consulted with the other title-holders, community members, begin the negotiation
- a third "consultation", when:
- the community, through its representatives and after they have consulted internally to explain what is proposed and what is on offer, gives its decision on the proposals and any deal that has been negotiated."
Framework for cooperation
The framework for cooperation for Foreign Direct Investment in agriculture for food and biofuels will include domestic law and any relevant Direct Investment Treaty and Framework Cooperation Agreement. The former may govern such things as tax exemptions, non-discrimination, non-nationalisation and dispute resolution. The latter will normally be aimed at encouraging technical cooperation, joint research and exchange of information, but it may extend to the promotion of private or quasi-private sector investment in agriculture. Increasingly, government-to-government deals are extending to other infrastructure developments and the grant of soft loans for development.
Taking the various policy and commercial strands together, what can we foresee as being the likely checklist for a long term, large scale, sustainable agricultural investment in an emerging country? Whilst such a framework will be most applicable to government land grants, it can be extended to large scale private farm acquisitions by a system of leasing or licencing inward investment or licencing private land ownership above a chosen threshold of size.
- A clear and unambiguous business and investment plan for the investment must be created and given contractual effect which will outline the scope and timing of investment, the infrastructure to be committed, jobs to be created, treatment of local communities, government revenue share, environmental safeguards and gender discrimination safeguards. This is akin to the minimum work obligation outlined in oil and gas contracts or licences.
- An environmental impact statement must be prepared clearly identifying such issues as the source and quantity of water extraction, timber felling and clearances, effect of proposed nutrient input, approval of grain types, use of pesticides and impact on bio-diversity.
- All necessary parties must sign the agreement. This may involve more than one government agency and may include representatives of the local community in accordance with local law and practice.
- If the various studies have not been completed, the land may be exclusively optioned for the necessary time to complete them. The concession period must be sufficient to make and amortise a substantial investment in land clearance, access roads, drainage, irrigation, terracing, servicing facilities for machines, storage and processing plant. Not for nothing does the UK's system of agricultural leasehold security provide for security through two generations. Agriculture is a very long term investment. 50 year leases are becoming quite standard, but up to 99 years is available in some countries.
- Full political support at central and local level, including general or specific laws supporting the investment and full local consultation. Achieving the twin aims of transparency and local consultation and support must be the aim. The granting of licences and permits may be facilitated by a government investment promotion agency.
- A suite of incentives and investment protection, applying best international practice, including concessions on import duties for fixtures, plant and equipment; tax holiday during the investment build-up; freedom of payment of loan principal and interest abroad; visa and work permits.
- A clear and non-discriminatory tax regime.
- A recognised system of law on ownership of land and registration of title.
- Clear title to moveable assets, including, for preference, the ability to use plant and machinery as security for loans.
- Allocation of responsibility for access infrastructure, building and improvement of ports, roads and airports, including an economic rent.
- Adequate supplies of water and power including economic rent on new investment.
- Recognition of the needs of local communities. This should include contractually binding obligations such as relocation/housing of indigenous community; provision of land for their use; access to fertiliser and other inputs; access to transport facilities; access to markets for their produce; compensation for loss of land use and grazing and access; joint cropping schemes, local labour contract requirements and sharing of rents.
- Local employment and training; capacity building; investment in training programmes.
- Investment in diversification of local skills and livelihoods and enterprise development e.g. servicing of vehicles and machinery, drivers, machine operators.
- Investment in local infrastructure including roads, schools, houses, churches, mosques, community centres, market place, health centres and veterinary services.
- Calculation of economic rent. This may take many forms e.g. production sharing, including joint marketing of produce; property rents; service charge on utilities; signature bonus.
- Availability of work permits/visas.
- Allocation of carbon credits, including under the Clean Development mechanism and in the long term, consequent upon adoption of the Reduced Emissions from Deforestation and Forest Degradation (REDD) scheme.
- Minimum planting programme/investment.
- Approval process for use of pesticides, chemicals and genetically modified seeds.
- Reporting and regulation of agricultural outputs.
- Capacity building in local and central government and local communities particularly in the agency charged with enforcing the project agreements.
- Defaults and remedies, including failure to pay rents or failure to observe the investment plan.
- Mechanism for dealing with disputes in the community and ongoing local consultation. Clarification of who has remedies – individual land owners or the broader community?
- Stabilisation clause. Such a clause is aimed at preventing future legislation with adverse effects on the agreed terms. There is a legitimate scope for such clauses, if correctly focussed.
- Force majeure and its effect on the investor's ability to perform its project obligations. In energy and infrastructure projects, a party is often relieved from its obligations by force majeure, such as adverse weather. This may not be fully appropriate to an agricultural project, where the economic model will assume the occasional storm or flood over the project life. Similarly, the normal provision allowing termination after one year of continuous force majeure may not be appropriate, if there is a single cropping or breeding cycle.
- International arbitration of investment disputes (e.g. ICSID).
- Sovereign immunity in government-to-government transactions on the grounds that this is a commercial transaction.
Global investment in agriculture will increase significantly and should bring substantial benefits to producing and consuming countries alike. However, the framework for investment requires care in the drafting of applicable laws, care in striking the right balance between the state and investor and a realistic contractual and economic balance in order to support long term investment.
1 "Corporate investors lead the rush for control over overseas farmland": http://www.grain.org/
2 "Land grab or development opportunity? Agricultural investments and international land deals in Africa" (2009): www.lled.org/pubs
9 http://www.rlc.fao.org/Foro/bpa/pdf/good.pdf and http://www.fao.org/sard/en/init/2224/index.html
13 UNCTAD World Investment Report (2008 b:24 and 26): http://www.unctad.org/en/docs/wir2008_en.pdf
14 http://www.fao.org/. LSP Working Paper 28
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.