More on African land deals

Global Dashboard | May 13, 2009

by Mark Weston

Further to recent Global Dashboard posts on the attempts by rich countries to buy up African agricultural land (here and here for example), an article I wrote for this month’s EMEA Finance magazine explores the subject in more detail.

The main problem with the deals, I argue, is the difficulty of valuing them in a rapidly-changing global food market. For African countries which lack expertise in such matters, there is a huge danger that they will be ripped off. But the risks are also great for investor countries, as the recent collapse of South Korea’s bid to buy up land in Madagascar has shown. For the deals to work, they will need to be radically different to those made so far - more transparent, properly regulated, beneficial to local people and shorter. More important still, however, is for Africa to realise its own potential for food production, which would in the long-term negate the need for these deals.

For the full article, see after the jump.

The New Scramble for Africa

Mark Weston
EMEA Finance, May 2009

Imagine if China, following a brief negotiation with a UK government desperate for foreign cash after the collapse of the British economy, bought up the whole of Wales, replaced most of its inhabitants with Chinese workers, turned the entire country into an enormous rice field, and sent all the rice produced there for the next 99 years back to China. Imagine that neither the evicted Welsh nor the rest of the British public knew what they were getting in return for this, having to content themselves with vague promises that the new landlords would upgrade a few ports and roads and create jobs for local people (it is not clear how many, as most of those working in the rice fields will be imported).

Then imagine that after a few years - and bearing in mind that recession and the plummeting pound have already made it difficult for the UK to buy food from abroad - an oil price spike or an environmental disaster in one of the world’s big grain producing nations drives global food prices sharply upwards, and beyond the reach of many Britons. While the Chinese next door in Wales continue sending rice back to China, the starving British look helplessly on, ruing the day that their government sold off half their arable land. Some of them plot the violent recapture of the Welsh valleys.

Such a scenario may appear far-fetched, but its early stages are already being played out on the fields of Africa. Wealthy countries with cash surpluses but a shortage of cultivable farmland have been buying up large tracts of land-rich but cash-poor Africa. Qatar is negotiating to lease 40,000 hectares in Kenya; the United Arab Emirates has acquired 30,000 hectares in Sudan; Saudi Arabia has leased land in Ethiopia and Sudan; and in the biggest deal so far, South Korea’s Daewoo Logistics reached agreement with the government of Madagascar to lease 1.3 million hectares - half of Madagascar’s arable land - for the next 99 years. Encouraged by its own government, which paved the way for the deal, Daewoo plans to use most of the land for growing corn for export back to Korea.

The details of most of these arrangements are sketchy. Qatar has pledged to build a $3.5 billion port in Kenya as its part of the deal, while the United Arab Emirates appears to have been given its Sudanese lease for nothing. The UK’s Financial Times reported that despite promises to invest in infrastructure to support its investment, the direct costs of the Daewoo Logistics deal in Madagascar would be zero. Some observers believe the deal was partly responsible for the recent coup d’état in Madagascar.

The scramble for food security

Although the deals themselves are opaque, the reasons behind them are clear. Governments like those of Korea and Qatar believe the acquisitions will guarantee their countries’ food security in an uncertain future. The world’s population continues to mushroom - by 2050 the United Nations expects it to be almost 50% larger than it is now - and growing the food to feed nine billion people will place enormous pressure on the earth, eroding soils and draining rivers and lakes. Climate change is likely to ramp up the threats to agriculture, triggering more frequent extreme weather events and further disrupting water supplies.

It is far from certain that technological improvements will be sufficient to help global food production keep pace with the population explosion. According to Alex Evans of New York University’s Centre on International Cooperation, there is a real risk that population growth, climate change, rising oil prices and water scarcity will combine to spark a global “food price crunch.” “The potential impact of long-term scarcity trends,” he says, “will represent a major challenge for global food security. This is likely to fall primarily on import-dependent countries and on poor people.”

In 2008, the world was given a foretaste of what a crunch might look like when food prices shot up in response to a spike in the oil price (oil is used in fertilisers, farm machinery and transport, and its price is therefore closely linked to the cost of food). Food-producers like Argentina and India responded, and exacerbated the crisis, by escalating export tariffs to protect their own supplies. Russia and Ukraine imposed export bans on wheat. The World Bank estimated that the crisis added 100 million to the number of undernourished people worldwide.

The Gulf States and parts of East Asia are particularly vulnerable to food price increases and protectionist measures. Only 1% of Qatar’s land is cultivable, for example, and the emirate is one of many Arab countries that rely heavily on food imports. Hedging against future price inflation is therefore an attractive option. The Harvard economist David Bloom explains: “In a globalised world you should be able to rely on the market for your food supplies, but these moves are an indication that countries are worried that globalisation will be pushed back. If protectionism increases and markets shrink, buying arable land abroad is a rational way around that.”

The strategy has other advantages for investors. By investing in land, wealthy countries can guard against future inflation eroding the value of their cash reserves. As David Bloom observes, “as well as being an investment in your food security, the land is also an asset that you can sell later.”

Africans, too, could benefit from land deals. Most of the continent suffers from a desperate lack of jobs. If foreign investors employ local labour to cultivate their crops, African farmers who have previously been at the mercy of the weather and fluctuating global commodity prices will instead receive a steady income. If the investors build or upgrade the infrastructure that supports their farms, more jobs will be created and the benefits could spill over to other local industries. The knowledge and technology wealthy countries bring in could also help their hosts, while the direct cash proceeds of the deals, if used wisely, could give African governments much-needed funds to invest in developing their countries.

What price the future?

The risks for Africans, however, are manifold. Most of the deals struck so far require people to leave their homes. Daewoo Logistics intended to bring in farmers from South Africa to oversee its program in Madagascar; families will have to be moved to make way for the new arrivals and to clear space for farming. Protesters in Kenya have focused on a similar threat from the Qatar deal. Formal consultation and compensation mechanisms in most African countries are underdeveloped where they exist at all, and there is a high risk that local people will lose out from the land deals.

The acquisitions may also bring political risks for Africa. If a foreign partner owns half your arable land, it will have a strong interest in your trade, labour, environmental and possibly even foreign policies. If Kenya goes to war, for example, Qatar’s agricultural programme may be interrupted - what role will Qatar have, or wish to have, in formulating Kenya’s policies, and how will Kenya maintain its sovereignty in the face of pressure from its powerful and wealthy investor?

But the fundamental problem with the land deals is the difficulty of valuing them. African governments are not heavily endowed with the technical capabilities for such calculations, and more resourceful investor governments may outmanoeuvre them. Valuing half a country’s arable land for the next 99 years, however, would tax even the most sophisticated analyst. While it was negotiating with Qatar, Kenya’s government announced a state of emergency over food shortages. In Madagascar, Mark Jacobs of the NGO Azafady reports that his organisation, which had been working on education programmes in the south-east of the country about nutrition, has had to refocus its work towards distributing food, as food price rises and prolonged drought have left thousands at risk of starvation. There is not enough food to go around now, and population growth, the increased demand for food in China and India, and other factors linked to resource scarcity mean Africa could face much more severe food shortages in the years to come.

The extent of these shortages is impossible to predict, however. Who knew that the cost to the Gulf States of food imports would more than double in the last five years, or that the oil price would collapse so suddenly in 2008? Long-term forecasting of food supplies and prices - and therefore the worth of a country’s arable land - is more difficult still. Even countries with plentiful supplies at present cannot be sure that these will be sufficient 70 or 80 years hence, and a scenario where starving Africans watch on as foreigners export food from under their noses would be dangerous for all parties. Putting a fair value on the land in the face of all these unknowns is an enormously complex task. The uncertainty is such that in any long-term deal one of the parties is highly likely to lose out, with potentially devastating consequences for communities’ survival.

Buyer beware

The perils of agreements such as those in Madagascar, Sudan and Kenya are not limited to Africans. Investors, too, face multiple risks. Infrastructure in Africa is generally so weak that foreign companies will have to spend heavily to get their investment up and running. Daewoo Logistics planned to spend $6 billion on irrigation and transport infrastructure, for example. But the chronic instability that plagues the continent means there is no guarantee that firms will be around long enough to reap a return on this outlay.

It did not take long for Daewoo Logistics to learn this lesson. The Madagascan government that signed the deal has since been ejected in a coup d’état. The new government cancelled the contract with Daewoo, saying that selling off land would require changing the country’s constitution, so the public would have to be consulted first.

Elizabeth Stephens of the risk management adviser Jardine Lloyd Thompson Ltd warns that investors looking to tie up land for many years should be prepared for many such hiccups: “To invest in agricultural production you have to have a long-term contract, but in any emerging market - in terms of the probability for dramatic change in the political and economic environment - long-term means three to five years. Companies need to understand the risks of these deals.”

Even where governments are stable, there is no guarantee that they will honour contracts. If food becomes scarcer and Africans hungrier, it will be hard for their governments to resist pressure to reclaim the land. “The time you really need to export this food is going to be when there are food shortages or high prices,” says Elizabeth Stephens, “and that’s going to be just the time when the government decides you can’t export it for domestic reasons. Does the government renege on the contract to keep its people happy, or does it honour the contract but risk being overthrown?”

If a deal were to fall through, investor nations would be left without a vital source of food imports. Saudi Arabia is planning to stop producing wheat by 2016, while South Korea hopes imports from Madagascar will supply half of its corn needs. Depending on crops produced in poor, unstable countries could weaken rather than shore up wealthy nations’ long-term food security.

Where next?

Following the collapse of the Korea-Madagascar deal, and controversy over similar acquisitions in Africa, a new approach to outsourcing land is clearly needed. First, negotiations and contracts must become more transparent. In none of the agreements so far has it been clear what the host country would receive. According to the director of a Madagascan environmental consultancy, “misinformation was the biggest mistake the government made over the Daewoo deal. They should have clearly explained to the public and the press the steps that would be taken. They never did that, and now the country’s reputation with investors has suffered.” Clarifying what is being paid to whom, and ideally what the money will be spent on, is essential for the long-term success of a deal.

Second, consultation with the public should be formalised. Rushing deals through without proper dialogue and fair compensation will, as in Madagascar, end in failure. Many donor-country governments have expertise in consulting the public, and all parties to land deals will benefit if they pass on some of that knowledge to their African peers.

Third, companies investing in overseas farmland should ensure their involvement benefits local people. Providing services such as schools and hospitals will protect firms’ reputations and thereby make projects more likely to last. Making sure that those living in surrounding areas are well fed is also important. Direct support for communities may be more effective than indirect assistance. Elizabeth Stephens explains: “Giving money to the government to do this is not always the best idea as it often doesn’t reach local people. Companies should do the projects themselves, so they’re seen to be contributing.”

Fourth, regulation is needed. Neither host governments nor investors can always be trusted to ensure that local people gain from the deals. If land outsourcing becomes more widespread, an international overseer may be required to enforce contracts, ensure consultation and compensation, and assess the likely environmental impacts of the agreements, including the impacts on host countries’ water supplies.

Fifth, and given the near impossibility of valuing land in the long-term, investors and hosts should shift their focus towards shorter deals. A ninety-nine year lease is clearly far too long - that deal lasted only a few months - but fifteen- or twenty-year contracts periodically reviewed by both sides may be feasible. The deals should contain emergency provisions that guarantee that food from the outsourced land will be delivered to local people during shortages.

More important than any of the above, however, are the usual policy prescriptions for Africa and the international community’s dealings with it. Raising the productivity of African farmers so that they can compete internationally and boost global food supplies; encouraging increased production by freeing up the international food market; and stricter World Trade Organisation sanctions on countries that restrict or ban exports are among the most urgent measures. Korea and the Gulf States recognise that Africa has the potential to produce more food. If the continent can at last fulfil that potential and pull its weight as a contributor to global food supplies, there will be less need for worried rich countries to buy up its land.

Related posts

1. South Korea’s Madagascar land lease: it gets worse - much worse
2. Madagascar land grab: how the South Koreans see it
3. Landgrab deals: actually water grabs
4. From landgrab to coup d’etat
5. South Korea leases half of Madagascar’s arable land
Original source: Global Dashboard

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