A global thirst: How water is driving the new wave of foreign investment in farmland

It is no longer a secret that there is a new wave of foreign investment in farmland, predominantly in Africa. An explosion of media reports and a series of studies by the World Bank, Food and Agricultural Organisation (FAO), International Fund for Agricultural Development (IFAD), United Nations Conference on Trade and Development (UNCTAD) and International Institute for Environment and Development (IIED), have confirmed the scale and consequences of this new influx of foreign investment. The World Bank report, by far the most comprehensive, found that reported deals amounted to 45 million hectares in 2009 alone. [i]

That is compared with an average land expansion rate of 4 million hectares a year in the decade leading up to 2008. The top four targets for investors were Sudan (4 million hectares), Mozambique (2.7 million hectares), Liberia (1.6 million hectares) and Ethiopia (1.3 million hectares).

After decades of neglect, rural areas and the agriculture sector desperately need investment. However, not all foreign investment contributes to development nor increases employment. In fact, the World Bank report found that investors targeted countries with weak land governance, resulting in land transfers that often neglected existing land rights. All the reports pointed to a culture of secrecy in which communities, and even government officials, were not consulted or informed about land deals until after they had been signed. The World Bank also found that investment projects failed to generate employment.

The motivation for this new wave of investment is strongly driven by water. States with scarce or depleted water resources are looking to outsource their water use by growing crops abroad, and private investors are seizing the opportunities. At a recent investor conference in Geneva,[ii] water was one of the key issues on the agenda. Neil Crowder from Chayton Africa, an investment fund, said, “in Africa the value is not in the land. Water is the key aspect for what we are looking for with our investments.” Judson Hill from NGP Global Adaptation Co, a private equity fund, said, “when a country imports one ton of wheat it is saving about 1300 cubic meters of domestic water.”

In an article in the Foreign Policy journal, the chairman and former CEO of Nestle, Peter Brabeck-Letmathe, called it “the great water grab.” He wrote: “purchases weren’t about land, but water. For with the land comes the right to withdraw the water linked to it, in most countries essentially a freebie that increasingly could be the most valuable part of the deal.”[iii]

Nestle’s statement captures the essence of the problem: that so-called “land grabs” are in fact “water grabs.” Why? First, because the countries pursuing farmland investments are deeply concerned about domestic water scarcity as a result of agriculture production. Second, and more importantly, because the current global regime of investment treaties and host government agreements provide foreign investors with the legal guarantee needed to safeguard and operationalise their investment (and to take states to international arbitration if they do not honour contracts.) Yet, in many of the countries experiencing an influx of foreign investment in agriculture, these protections for investors are not counter-balanced with adequate domestic regulations to safeguard the land and water rights of citizens.

When it comes to agriculture, land is only a small part of the equation. Water is the key ingredient to operationalise agricultural investments. Without water, the land has absolutely no value to the investors.

Putting water into the equation

Agriculture is by far the most water-intensive activity. Close to 70 percent of all freshwater appropriated for human use goes to agriculture. In the last century, while the world population has tripled, water use has been growing at more than twice that rate.

Increased agricultural production for biofuels has also put pressure on water resources. In 2008, more than one-third of maize production (one of the most water-intensive crops) in the United States was used to produce ethanol and about half the vegetable oils produced in the European Union was being used for biodiesel.[iv]

An increasing number of regions are chronically short of water. By 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world population could be under conditions of water stress. Climate change is expected to account for about 20 percent of the global increase in water scarcity.

According to the FAO, water shortage is probably the single most important problem facing China’s agriculture today and may affect 36 percent of China’s grain production.[v] Saudi Arabia is rapidly depleting its non-renewable water resources despite the fact that it already imports 70 percent of the country’s food needs. Even in Europe, which is considered to have adequate water resources, water scarcity and drought is now more frequent and widespread.[vi]

Investing in water abroad

It is no surprise, therefore, that there is a strong correlation between the countries looking to preserve their water resources at home and the investors who are leasing farmland abroad, including private and state-owned investors from the United States, European Union, Japan, Gulf states, China, Korea and India.

A US-based pension fund TIAA-CREF, for example, has US$2 billion allocated for farmland investment.[vii] The Singapore-based Duxton Asset Management has raised US$330 million. The London-based Agrifirma Brazil has raised US$179 million.[viii] In January 2009, Saudi Arabia launched the King Abdullah Agricultural Initiative, a government-sponsored investment fund, backed by US$800 million, to help private Saudi businesses invest in agricultural projects.[ix] The Saudi Minister of Agriculture, Fahad Abdul-Rahman Balghunaim, said “the country is now giving priority to water security over food security… this was a cabinet decision, which also directed us to stop producing wheat locally.”[x]

Does Africa have abundant water supply?

Two-thirds of reported land deals have taken place in Africa because of the perceived abundance of fertile land, water and natural resources. According to the FAO, Africa uses barely 5.5 percent of its renewable water resources, and only two percent of its freshwater resources for irrigation. The FAO estimates the irrigation potential of the continent at more than 42.5 million hectares of land.

But while parts of Africa have significant water resources, of the estimated 800 million people who live on the continent, more than 300 million live in a water-scarce environment.[xi] Only 64 percent of the population has access to improved water supply, the lowest coverage of any region in the world. The situation is much worse in rural areas, where access to improved water supply is only 50 percent compared with 86 percent in urban areas.[xii] Some farmers only grow one or two kinds of crops and risk starvation if not enough rain falls. The projections for climate change show that by 2050 the African continent will face a decrease in the amount of rainfall, a rapid increase in soil erosion and increased desertification.

African governments are responding to this crisis, but the new wave of foreign investment could undermine these efforts.[xiii]

The consequences of international investment law

The scale and nature of the current wave of investment increases the potential to shift rights from domestic to foreign actors and to undermine local communities’ access to land and water. This is because of the current frameworks of domestic and international investment law. In many of the states where farmland investments are taking place, there is either no, insufficient or vague domestic law concerning land and water rights. On the other hand, the international investment-law framework provides hard contractual rights to protect foreign investors. Where this happens, prior land and water users may have no legal recourse while investors will have contractual rights to fall back on, enforceable under an international dispute settlement mechanism.

Some of the key provisions enabling foreign investors to secure water rights when they invest in land are as follows:

• Investment treaties often include a standard of fair and equitable treatment. This standard contains the concept of a “legitimate expectation” of the investor to secure not only title to the investment but also rights to maintain its operations, for example to draw water for agricultural purposes. This international law right could provide a secured right to foreign investors, even if it conflicts with existing or future local water needs.
• Investment treaties include a prohibition against expropriation without compensation. The issue of compensation is murky when certain rights for operating an enterprise are reduced but not fully taken away. This is a foreseeable situation in relation to farmland investments, all of which rely upon the availability of water, and many of which are for 50-99 year lease periods. If water resources drop to a level below the requirements of the investment, the host state will not be able to do much and compensation could not be foreseeable. However, if there is sufficient water available, but the amount allocated to the investor is reduced to meet the needs of other users, reducing water allocations to the investor may be defined by a tribunal as an expropriation of the right to operate the business.[xiv]
• Investment treaties may include pre-establishment rights (or liberalisation commitments), which means foreign investors must be treated the same as domestic investors, including being allowed to purchase land and access water on the same terms.
• Investment contracts between the state and the investor may contain a stabilization clause, which will enable the investor to avoid complying with, or be entitled to compensation, when new regulations come into force, for example environmental measures to reduce pollution or to protect against runoff of pesticides and fertilizers.
• Finally, almost all investment treaties today include a dispute settlement mechanism to allow foreign investors to challenge governments if there are any changes that substantially affect an authorized foreign investment and its profit levels. Where rights to water are granted, any changes to those rights could trigger an investor-state arbitration.

Conclusion

If governments are interested in using their natural resource base to achieve sound economic development, it is essential to have a strong set of domestic laws to protect land rights, water use, environmental regulations and labour rights. International investment agreements protect the rights and interests of foreign investors. Domestic laws to protect the rights and interests of individuals and communities are vital to ensure a level playing field.

An often-identified approach to improve the development impacts of host government agreements is to include certain requirements on investors to contribute to the local community in economic and social terms. These can include hiring a designated number of local workers, purchasing a percentage of local inputs, providing technology transfer and training, minimum levels of contract farming, selling a percentage of production to local markets, building schools, houses and medical clinics, and other requirements which can guarantee a positive impact locally.[xv]

Host government agreements should also provide for periodic reviews of water rights and allocations for investors so as not to undermine citizens’ access to water. In addition, host government agreements should not undermine the ability of government to introduce new domestic regulations that serve the public interest, for example pollution controls, or banning certain chemicals to protect human health.

For foreign investment to benefit poor countries, it must be part of a broader development strategy, including improved water management. The current wave of investment is operating in a vacuum and can easily undermine development goals. If governments can shape the current investor-frenzy to feed into existing agricultural and rural development strategies, they will be able to transform decades of neglect into an engine of growth.

Finally, processes that seek to value land for the purpose of foreign investment must fully account for the value of the water. It is unacceptable that foreign corporations can, in the words of Mr Brabeck-Letmathe, “essentially [receive] a freebie that increasingly could be the most valuable part of the deal” while developing countries give away the world’s most valuable resource.

Author: Carin Smaller is advisor to the International Institute for Sustainable Development (IISD) where she specializes on issues related to agriculture and investment. She is former head of the Geneva office for the Institute for Agriculture and Trade Policy (IATP) where she assisted developing country governments in the WTO negotiations on agriculture. She holds a Bachelor of Laws and a Bachelor of Arts in development studies.

[i] World Bank, Rising Global Interest in Farmland: can it yield equitable and sustainable benefits? World Bank, September 2010

[ii] Global Aginvesting Europe 2010, 9-10 November in Geneva, organized by HighQuest Partners and Soyatech.

[iii] Peter Brabeck-Letmathe, The Next Big Thing: H2O, Foreign Policy, 15 April 2009

[iv] 3^rd World Water Report, Water in a Changing World,

[v]FAO Unlocking the Water Potential of Agriculture, FAO, 2003

[vi] By 2007, at least 11 percent of Europe’s population and 17 percent of the territory had been affected by water scarcity. Between 1976 and 2006 the number of people and areas hit by drought rose by almost 20 percent. EU, Water Scarcity and Drought in the European Union, August 2010

[vii] Tom Sullivan, TIAA-CREF bets the farm, 16 October 2010

[viii] Marcelo Ballve, Chinese Investors Look to Brazil for farmland, water, 21 July 2010

[ix] John Sfakianakis, Turki A. Al Hugail and Daliah Merzaban, Saudi Arabia Economics – Pressure on Prices, Banque Saudi Fransi, August 2010

[x] Nadim Kawach, Arab food gap crosses $180bn over past decade, Emirates Business June 2010

[xi] UNECA, Water in Africa, UNECA 2006

[xii] African Union, Water for Agricultire in Africa, Ministerial Conference on

Water for Agriculture and Energy in Africa: The Challenges of Climate Change, December 2008

[xiii] In 2002, NEPAD’s Comprehensive African Agriculture Development Programme (CAADP) offered a framework for investment in agriculture in Africa, with special emphasis on water control. In Maputo, in 2003, the Heads of State and Governments of the African Union committed themselves to allocating at least 10 percent of their national budgetary resources for agriculture and rural development. In 2004, the Sirte Declaration focused on ways to implement integrated and sustainable development of agriculture and water in Africa.

[xiv] Carin Smaller and Howard Mann, A Thirst for Distant Lands: foreign investment in agricultural land and water, IISD, May 2009

[xv] ibid.