Global land investments Evidence and implications

1. Global land investments Evidence and implications Klaus Deininger, World Bank

2. The ‘land rush’ & its drivers • Rapidly increasing demand for food, fiber & fuel • Population growth in developing countries • Income growth & associated shift in diets, raw material use • Urbanization: Processed food demand • Biofuel mandates imply big shifts • Slowdown of growth & variability of supply • Marked decline in yield growth (little R&D) • Limits on land & water in key countries (China, India) • Climate change & extreme weather events • General prediction for prices to be higher in future • Greater variability & political sensitivity of food • Supply shocks (incl. from energy & financial markets) • Policies (export bans) cause wide price swings • Food riots in Arab countries • Lower confidence in trade in key commodities • Lack of alternative investment opportunities • Land as a ‘safe haven’ in times of crisis • Plentiful availability of land in some countries • Could present a unique development opportunity

3. Concerns – based on history • Neglect of local use rights -> Violence and civil unrest • Centr. America end 19th century: Land that is ‘not used’ state land (abolish communal tenure) • Low gov’t capacity to enforce rights & contestation undermines investment incentives • Retarded development & resulted in nearly a century of violence & land reform • Similar to current legislation/practice (weak safeguards) in many countries • Lack of economic viability -> Monopsonisitc behavior & political lobbying • Large farms based on wage labor with high coordination cost & little productivity advantage • Elites want to keep wages down: Prevent human capital accumulation or access to finance • Adverse long-term impact well documented (e.g. between ‘smallholder’ & ‘large’ farm countries) • Policy-induced environmental destruction • Deforestation in Amazon with very little productive land use • Oil palm development in Indonesia: 2/3 of concessions deforested but not planted • Irreversible soil mining in many areas of Africa (e.g. Sudan) • Lack of institutions to dissolve failed business • If incentives right & markets work, they can break up easily (Dakotas ‘Bonanza farms’ 1860s) • Failure rate is high (up to 2/3 even for concessional financing) • But if not, idle resources cannot be accessed & create incentives for lobbying & bad governance

4. Mozambique as an example • Favorable conditions • 5/35 Mn ha cultivated (FAO figures); favorable rain • Ports & infrastructure (mining) • Advanced legislation (1998 law recognizes com. tnr) • Huge investor interest (13 mn ha in 18 mths) • But institutional/capacity weaknessses • Only 10% of land actually demarcated w. DUAT • Consultation requirement weak • Some ex ante screening but no monitoring • Very low lease fees & land taxes

5. Mozambique as an example • Favorable conditions • 5/35 Mn ha cultivated (FAO figures); favorable rain • Ports & infrastructure (mining) • Advanced legislation (1998 law recognizes com. tnr) • Huge investor interest (13 mn ha in 18 mths) • But institutional/capacity weaknessses • Only 10% of land actually demarcated w. DUAT • Consultation requirement weak • Some ex ante screening but no monitoring • Very low lease fees & land taxes • Not optimal environment for investment • 1.4 Mn ha (50%) overlaps – insecurity & conflict pot. • Dispersed/enclave investment projects • Speculative land acquisition: > 50% not adhere to plan • Land sales impossible; unused concs. back to state • Cancellations difficult politically (patronage) • Encourages rent seeking & corruption • Overlaps: • 1.4 m ha; 418 cases

6. What scope for intensification/expansion? • Use crop growth simulation + prices to identify potential/pixel • Data on soil, slope, elev., rainfall, temp. to simulate crop growth • For rainfed maize, soy, wheat, sugar, cassava, groundnut, oil palm; high input intensity • Output prices for ‘local’ output value; transport cost for global price -> ‘best’ crop • ‘Local’ Input prices to compute net profit & implicit land rental value • Compute ‘yield gap’ (actual/potential) on cultivated land Potential return from getting existing smallholders organized Yield gap can be decomposed into technology, infrastructure & institutions • Identify ‘uncultivated’ land possibly available/of interest to investors Exclude forested & protected areas; levels of population density (5, 10, 25/km2) Not truly uncultivated/unclaimed - identify areas of potential/threat, need for scrutiny Priority areas for tenure regularization; land rentals can form a basis for negotiation Investors benefit from that knowledge – and make lots of money from it • Can be refined at country level – but a good approximation

9. What scope for intensification/expansion? • Use crop growth simulation + prices to identify potential/pixel • Data on soil, slope, elev., rainfall, temp. to simulate crop growth • For rainfed maize, soy, wheat, sugar, cassava, groundnut, oil palm; high input intensity • Output prices for ‘local’ output value; transport cost for global price -> ‘best’ crop • ‘Local’ Input prices to compute net profit & implicit land rental value • Identify ‘uncultivated’ land possibly available/of interest to investors • Exclude forested & protected areas; levels of population density (5, 10, 25/km2) • Not truly uncultivated/unclaimed - identify areas of potential/threat, need for scrutiny • Priority areas for tenure regularization; land rentals can form a basis for negotiation • Investors benefit from that knowledge – and make lots of money from it • Compute ‘yield gap’ (actual/potential) on cultivated land • Potential return from getting existing smallholders organized • Yield gap can be decomposed into technology, infrastructure & institutions • Can be refined at country level – but a good approximation

10. Land ‘availability’ by country • World total • 445 Mn ha (< 25/km2) • 306 Mn ha (< 10/km2) • 198 Mn ha (< 5/km2) • Key characteristics • Highly concentrated • > 90% in 32 countries • Half of these in Africa • Large rel. to cultivated area • > double in 11 countries • > triple in 6 countries • Sheer size is instructive • Multiple constraints likely • Need sophisticated investors • Potential social dislocation

11. Differences in yield gaps Area expansion makes sense in Latin America - but much less (if any) in Africa Strategies in Africa to be based much more on closing yield gap (technology, NES)

12. Area & yield expansion potential by crop Top countries with maize expansion potential (<25/km2) • Latin America’s advantages • Technology & land for expansion • Human capital • Infrastructure & market access • Institutions: • Property rights secure • Thriving land markets • Transparency • Contract enforcement • Financial markets • Africa’s opportunity • Borrow technology • Focus on regional markets • Expand from existing production • Rel. low opportunity cost of land * • Challenges to be overcome • Institutions • Mix of large & small • Public and private sector roles

13. Country typology • Type 1 (Korea, China, Vietnam, India) • Significant gains from technology & institutional change by smallholders in the past • Intensification & (private sector) value addition as only sources of on-farm growth • Off-farm employment a main engine for increases in farm sizes via (rental) markets • Type 2 (Brazil, Argentina, Peru) • Technological barriers to large farm expansion low - big recent investment inflows • Land markets function relatively well, currently danger of bubbles • Regulation needed to avoid distributional, environmental & social externalities • Type 3 (Malawi, Rwanda, El Salvador) • High yield gap often a consequence of past underinvestment in agriculture • Land is a key safety net; danger of people being pushed out with no alternative • Private investment to complement public initiative; contract farming • Type 4 (Sudan, Tanzania, Zambia, Mozambique) • Mechanization & larger farm size can be sustainable; incentive for private sector • Investment can result in dualism & conflict if institutions inappropriate • Institutional development (property rights & land markets) a key challenge

15. Evidence on actual transfers Difficult to get (secrecy & complexity): Best estimate 18 Mn ha in Africa 2006-11 Total area transferred, no of projects and share of domestic investors, 2004-2009 (using administrative data at country level) Investment not always predominantly foreign Many ventures did not start production – limiting potentially positive impacts Demand huge, although it peaked in 2009 Many countries do realize the challenges involved – and are trying to minimize effects

16. Putting figures in perspective & link to demand

17. What makes countries attractive?

18. Det’s of bilateral interest in land deals Results from Poisson regression In line with evidence from large no of case studies Troubling precedents of investors enforcing property rights themselves

19. What is needed? I: Institutional innovation • Recognition & demarcation of existing rights • Mapping & participatory land use planning • Do not need to be individual if decision-making clear (Mexico) • Delineation of state land • Often lacks clear rationale for state ownership (e.g. environment); transferability • Expropriation as a last resort, not routine; appeals procedures & full compensation • Inventory & demarcation to identify encroachment & deal with it quickly • Transparent ways for divestiture • Ensure tenure security & low-cost land transfers • Comprehensive, current & cost-effective registries to identify land ownership • Allow transfers & use of land as collateral (critical to raise funds) • Procedures to liquidate bankrupt ventures & put assets on the market • Land taxation/lease fees to signal true opportunity cost of land • Charging low land rents encourages unprofitable ventures • Mechanism design issue: Need to look at revenue stream over time

20. What is needed? II: If land demand exists • Clustering of investment in areas of complementary infrastructure • Piggy-back on infrastructure developed for mining (corridors); link to environmental zoning • Confirm existing rights before any investment comes in • Provide complementary public goods (infrastructure, technology, rights demarcation, planning) • Facilitate a wider array of organizations that integrate smallholders (NES, upstream investment) • Transparent screening of investment proposals • Justification: Lack of capacity, irreversibility, reduction of transaction cost (one stop shop) • PA in Mexico: Assess proposals technically & supervise transparency of decision-making • Investment promotion agency with auctions in Peru • Dispute resolution and arbitration • Many investments involve innovation, not all contractible ex ante; conflicts likely • Delays waiting for decisions very costly for all (Uganda); agreed arbitration bodies can help all • Can be linked to standardized incentive compatible contract format (JVs & partnerships) • Scope for investor certification • Ag. is very capital intensive, so cost of capital may matters • Country-, commodity-, and investor-specific risk should be priced into capital cost • Allowing investors to develop reputation can be very attractive (RSPO, green protocol)

21. A need for greater transparency • Rationale • Provide ongoing information that will affect ability to attract good investors • Allow learning and eliminate secrecy & bad governance surrounding the issue • Can help push the envelope if multi-stakeholder (e.g. initiatives in extractive sector) • Land governance at country level a key factor for competitiveness • Legal setting: Security of rights (mas), state land registry, management, acquisition, divestiture, ease of transfer, land use planning & land taxation, conflict resolution • Transactions (transfers by type/gender & size), expropriations, revenue, conflicts • Project level: Leases and regular outcome monitoring • Critical transparency requirement for projects above certain size • Investment envisaged, jobs created, value added (for domestic & export) • Regular follow up & public reporting at least in aggregate • Global monitoring of large land investment • Lack of information undermines reputation of the sector • Different sources possible (incl. web/newspaper based)

22. Areas for research • Farm sector dynamics in large farm countries (Ukr. Arg, Bra, Rus) • Revisit/quantify farm-size productivity at large sizes, w. market imperfections • Relate to supply of public goods – and subsidies • Determinants & impacts of monpoly/monopsony • Land rent models & yield gap determinants • Spatially identify unrealized potential, overlaps with other data (e.g. poverty) • Cross-country comparison to identify contributing factors & magnitudes • Use this to identify public goods needed to make investment feasible • Model stream of benefits & design incentive compatible ways of charging • Contractual models to integrate smallholders into value chains • Business models differ for backward vs forward integration • Unresolved design issues especially for bulk commodities • Distinguish components (finance, technology, profit sharing) • Assess direct & indirect impacts on productivity & local well-being

23. Summing up • The ‘land rush’ provides opportunities for agricultural economies • Unexploited potential is high (yield gap & expansion), differs by region • Bring technology, capital, employment in production & value addition • Awareness of risks & proper measures to deal with it needed • Institutional limitations often prevented full utilization of this potential • 1st round mostly speculative, dispersed, high transaction cost, many failures • No proper assessment of technical/environmental viability • Weak incentives for benefit sharing (taxes, lease fees, labor, tech. transfer) • Unlocking potential will require coordinated response • Improved land governance in general • Increased transparency (knowledge, enforcement, monitoring) • Put public goods to strategically attract investors rather than speculators • Link to broader strategy (& governance agenda) beyond agric. prod. • Retreat of commodity prices from their highs provides opportunities for action