Land in investmentNavigating the risks and opportunities of a challenging agenda

Investors, fund managers and companies are currently reconsidering how to manage issues associated with the development of land. In the last year, land conflicts have hit the share price of a publicly-listed rubber company in Asia; 1 forced asset owners to divest from agricultural projects in sub-Saharan Africa; 2 generated losses of up to US$2 million a day for mining projects 3 and even contributed to the ousting of a President in South America.4

Land is political and the spotlight on these issues is intensifying. Conflicts can last for years and can damage both the value of an asset and the reputation of the company and its investors.

Effective and highly emotive NGO campaigns have brought land issues onto the global agenda. Mobile phones and social media have changed the visibility of otherwise remote local tensions. The media coverage inevitably bundles together companies that have deliberately ignored local sensitivities with those that complied with local laws and made an effort to engage, but found they unwittingly infringed the legitimate rights of local communities.

Capital investment in infrastructure, agricultural intensification and resource productivity is badly needed in developing countries. If done in a responsible and sustainable way, which creates value for local people and the environment, companies, fund managers and investors will be better able to participate in these markets, raise more capital and have confidence that their assets will remain secure over the long-term.

This briefing note aims to help investors and companies understand the risks and begin to move the land agenda from one of fear and risk management to one of inclusive, sustainable investment opportunities.

Why land?

“One must consider how companies can support local governments in community consultations for a land acquisition since the processes involved will affect a project’s implementation.” Ashok Emani, India Infrastructure Fund, IDFC Ltd.

The Kilombero Valley Teak Company (KVTC) is Africa’s largest private teak plantation. It was established in 1992 and is Tanzania’s largest exporter of wood products. 8,000 hectares are planted with teak, and 20,000 hectares combine high value conservation areas or idle land unsuitable for teak. KVTC land is a vital part of animal migratory routes. The last remaining wildlife corridor between two national parks passes through the company’s land.

Resource pressures An influx of farmers and pastoralists from other parts of Tanzania are putting pressure on the remaining natural resources in the Kilombero Valley. The project has 14 nearby villages with an estimated population of 60,000 people, 30% of which are below the poverty line. Their main source of income is subsistence (rice) farming. Locals and migrants see the substantial area of land being left idle by the company as land that should be available for local agriculture. This is becoming an issue in the political context where local and national politicians are critical of foreign investors seen to be holding on to land that they are not using.

The operating context for investors in agriculture, extractives and infrastructure is changing, as land becomes a nexus for competing resource demands and demographic pressures. In some cases, weak property rights systems and poor law enforcement make the land agenda politically challenging. Four emerging issues illustrate why investments in land today require a new approach:

1.1 Resource scarcity

Many investment opportunities in these sectors are increasingly situated in areas where the demand for food, driven by demographic growth, is putting political pressure on governments to scrutinise foreign land investments. In East Africa, for example, companies owning land that is not being actively developed are facing mounting political pressures to ‘use it or lose it’. Competition for the use of often limited local water sources, further stressed by growing human demands and climate change, also creates tensions.

1.2 Political pressures

Local political support is essential for a project’s success. Politicians face numerous competing pressures when it comes to land and resource allocation. Land development decisions must balance the competing agendas of tax generation, local community interests, food security concerns, economic development and job creation. These in turn affect companies seeking government approval for their developments. Conflicts between operators and local communities, in some cases reinforce the appetite of politicians for resource nationalism or to try to renegotiate “fairer” contracts with companies. For example in Nigeria, the Petroleum Industry Bill 2012 aims to create a Petroleum Host Communities Fund that will provide local economic and social infrastructure and to which oil companies must contribute 10% of their net profits.6

1.3 Customary land rights

In sub-Saharan Africa, parts of Asia and Latin America, local people often rely only on informal rights to their land, which may be only partially recognised and protected in local law, if at all. Local people with legitimate customary rights over their land will rarely have knowledge of how the legal property system works, or how to seek redress in the event of contested rights. This basic asymmetry of knowledge and the political nuances associated with rural development may be invisible to financial analysts and fund managers assessing a project’s feasibility. Navigating the gap between customary and legal rights to land is complex, not least due to the accountability gaps that may exist within communities, for example between the traditional Chiefs and the interests of the broader community.

1.4 Conservation demands

Often in direct conflict with demands to develop land for food or resource production, companies and investors are also under pressure to preserve important ecological and cultural areas in order to protect biodiversity, endangered species, large carbon sinks, ecological services and significant cultural sites such as burial grounds. Understanding areas of ecological sensitivity is crucial, not least because these may be providing investment projects with important services that are not fully accounted for by their balance sheets. For example, forests help increase the resilience of land to extreme weather by regulating water flows and protecting soils from erosion. These issues are growing in importance. In some cases, these priorities may be aligned with the interests of local communities, but not always, as demonstrated by the Kilombero Valley Teak Company case study.

1 Emerging issues

Balancing act for a greenfield teak plantation in Tanzania 7

A win-win mentality KVTC understands that some of its idle land may have to be allocated to grow food in order to reduce local encroachment pressures and the risks of fire to the plantation. Expanding into agriculture is not without operational and business risks for a forestry company, but if implemented with local support, the agriculture project could increase the company’s security of land tenure, benefit the local agriculture sector, and create a source of additional revenue for the company. ‘The key for us is to find a commercially viable path which both respects international conservation goals but is also sensitive to the realities of local communities,’ says Ole Sand, one of the managing partners at the Global Environment Fund (GEF), which has an equity stake in the project.

Lost in one day by the Chairman of the Vietnamese rubber company Hoang Anh Gia Lai (HAGL) as its shares plunged 6% the day after a high-profile land campaign by Global Witness, 14th May 2013.5

US$ 20 million

Investors and companies can attest that in many developing countries these pressures cannot be dealt with just by complying with local laws. The concern of institutional investors with this agenda has in some cases affected the ability of fund managers to raise capital from pension funds and other public investors to invest in areas where there is weak land governance. Providing investors with assurances of an enhanced due process for land management, and showing how these may go beyond compliance with local laws, is likely to grow in importance for fund managers and companies.

The sources of guidance on responsible land investments are numerous and evolving (see next section). However, standards will work best when combined with a genuine interest and constructive approach towards improving the lives of local people. Practical steps that can be taken by investors and companies to manage this agenda are:

2.1 Investors

See for yourself Investors cannot take for granted what a government or company says about the status of local property rights and environmental priorities. They should take extra care when reviewing the land management processes that a company has in place and should seek assurance that a company is effectively implementing the issues discussed for companies below.

Seek professional advice Any investments involving the acquisition of land should be informed by due diligence, which should involve specialist consultants that are experienced in the relevant issues and may include local experts and civil society organizations. They will review the existing plans, management systems and any ESIAs (see below) already in place and will be able to advise investors of the scale and nature of likely conflicts which could become costly from a financial and reputational perspective.

Negotiate legal terms Fund managers and investors can require that companies achieve compliance with internationally recognised standards (see next section), and implement an agreed action plan to address identified gaps as part of their investment agreement.

Monitor implementation There is no guarantee that an action plan will be implemented by a company once it is agreed or that it will be effective at addressing all future issues that may arise. Investors therefore need to ensure they have effective monitoring in place.

2.2 Companies

Anticipate the impacts A high quality Environmental and Social Impact Assessment (ESIA) conducted to internationally recognised standards is essential for the effective mitigation of risks. ESIAs should cover the environmental impacts of a project as well as the likely impacts on local communities, including an in-depth investigation into legitimate land and resource rights covering those who live on, and those whose livelihoods are supported by, the land. The report should include an Environmental and Social Management Plan that details how potential impacts can be avoided or mitigated and in cases where resettlements are involved, outlines specific plans for how best to manage the process fairly. If the government is responsible for land acquisition and resettlement, consideration should be given to how the company can support or enhance that process in line with best practice.

Build relationships of mutual respect Seeking the consent of local people for developing a project on their land is about building relationships of mutual recognition and respect with local communities. The available standards can only offer general guidance; in order to be effective, engagement has to build trust and find ways to deliver benefits for all parties involved. A common mistake of project developers is making the assumption that they know what local communities want. Taking the time and the interest to listen to local people can make the difference between the success and failure of a project. Finding someone to manage this process that is genuinely interested in finding solutions and wants to spend time thinking about these issues is important. Affected communities need to be given sufficient information in a format they can understand in order to enable them to make informed decisions regarding their options and rights. The principle that local people must give their ‘free, prior and informed consent’ (FPIC) for projects to go ahead is increasingly recognised as best practice, particularly when working with indigenous people. Any compensation agreed should consider the market value for the land and any assets on it at full replacement cost. However, good community relations are not just about adequate compensation.

Finding mutually beneficial solutions Inclusive business models for land and natural resource development are about making everyone involved better off. With creative thinking the land agenda can be moved from one of fear and risk management to one of mutually beneficial value creation. In some extractive industries projects, local communities have been invited to become shareholders. Other companies focus on promoting local enterprise by procuring goods and services from local suppliers. In the agriculture sector, production models and value chains that rely on production agreements with, and support for, smallholder farmers can also help them to raise their productivity and improve their living conditions.9 There are many possibilities and no one-size approach fits all situations. The immediate opportunity for investors, companies and fund managers is to shift their mentality to a partnership approach and begin to consider ways in which land-related investments will create value for shareholders, local communities and the environment.

2 Proactive management

In Sumatra, Indonesia, violent attacks on a gold mine have threatened to stall an investment of US$1 billion by the Hong Kong-listed G-Resources. Dozens of armed soldiers are now required on site to monitor the operations. The conflict originated from the company’s plans to build a waste water pipe feeding into the Batang Toru river, the life-blood of the densely populated neighbouring community. The conflict escalated as the company allegedly failed to have a frank discussion with the community regarding the benefits and risks of the proposed pipeline.

How conflicts can escalate 8

The International Finance Corporation’s Performance Standards are considered a benchmark of choice by many international banks, asset owners and development finance institutions. Updates to the performance standards in 2012 place more emphasis on a variety of factors relating to land and community engagement. The IFC’s Handbook for Preparing a Resettlement Action Plan, provides guidance on how to approach these difficult decisions. www.ifc.org/performancestandards

UN Food and Agricultural Organisation (FAO) Voluntary Guidelines on the Responsible Governance of Tenure and the current negotiations of the Responsible Agricultural Investment (RAI) Principles at the Committee on World Food Security set, among other things, an important precedent for a principle of respect for all ‘legitimate’ land tenure rights as opposed to only those that are legally recognised. www.fao.org/nr/tenure/voluntary-guidelines

Oxfam’s Guide to Free Prior and Informed Consent (FPIC) is a practical tool developed by Oxfam Australia, which is designed to assist organisations that are supporting communities that have been affected by large-scale development projects and to facilitate dialogue between communities and the project developers, including companies, government and financiers. It may also prove useful to companies considering how best to engage with project affected communities. www.oxfam.org.au

The High Conservation Value (HCV) Resource Network encourages collaboration, provides tools, information and support on the evolving management of High Conservation Value areas in different industry sectors, and aims to ensure that a consistent approach to HCV is understood and applied throughout the world. www.hcvnetwork.org

The Principles for Responsible Investment in Farmland were developed in 2011 by a group of asset owners who are signatories to the Principles for Responsible Investment (PRI) as a way to more proactively engage with social and environmental areas of concern in farmland investments. http://www.unpri.org

CDC Group plc is the UK government-owned development finance institution that uses its own balance sheet to invest in the developing countries of south Asia and Africa. It has net assets of £2.8bn. CDC’s mission is to support the building of businesses in the poorest countries, creating jobs and making a lasting difference to people’s lives. From 2004–2011 CDC operated primarily as a fund-of-funds investor, investing in companies through intermediary fund managers. In 2012 CDC announced a new strategic plan, with a geographic remit focused on sub-Saharan Africa and South Asia. As well as acting as a fund-of-funds investor, CDC now also provides debt and direct investment to businesses in these regions. www.cdcgroup.com

Earth Security Initiative works to improve how global business and investors support the good governance and sustainability of land and resources in the countries where they operate. The growing demographic and political pressures surrounding natural resources in key regions of the world mean that private sector companies seeking to retain their political license to operate will increasingly have to focus on addressing local resource challenges. The ESI’s research and dialogue projects provide corporate and public decision-makers with the practical and operational proposals, the relevant underlying datasets across disciplines, and the strategic opportunities to improve public-private partnerships that will unlock progress and collective security for this agenda. www.earthsecurity.org

Land in InvestmentFacing the Risks and Opportunities of a Challenging Agenda © Earth Security Initiative 2013

AuthorAlejandro Litovsky, Earth Security Initiative

ContributorsSamantha Lacey, CDC Group Naomi Smith, Earth Security Initiative

References1 ‘Vietnam stocks fall led by speculative

stocks’, Business Times of Vietnam, May 14th, 2013.

2 ‘Vanderbilt University Divests from “Land Grab” in Africa’, Oakland Institute, February 13th, 2013.

3 ‘Newmont Mining Re-evaluating Conga Mine’, International Business Times, March 14th 2012.

4 ‘Paraguay’s president Fernando Lugo ousted from office’, The Guardian, June 22nd, 2012.

5 ‘Vietnam stocks fall led by speculative stocks’, Business Times of Vietnam, May 14th, 2013.

6 Petroleum Industry Bill 2012, National Assembly of the Federal Republic of Nigeria, http://www.nigeria-law.org

7 http://www.kvtc-tz.com and http://www.globalenvironmentfund.com

8 ‘Environment protest hits Sumatra gold mine’, Financial Times, January 2nd, 2013.

9 Vermeulen, S. and Cotula, L., 2010 ‘Making the most of agricultural investment: A survey of business models that provide opportunities for smallholders’, IIED/FAO/IFAD/SDC, London/Rome/Bern.

10 WWF Report: ‘Profitability and Sustainability in Palm Oil Production: Analysis of Incremental Financial Costs and Benefits of RSPO Compliance’, March 2012.

PhotographyBack cover © Jürgen Freund / WWF-Canon

A palm oil company that suffered protests and roadblocks costing an estimated US$15 million in lost revenue in their first plantation calculated that early engagement with communities could generate a Return on Investment (ROI) of 880% just by avoiding a single day of disruption. A typical 10,000-hectare plantation requires a mill that processes up to 60 metric tonnes of fresh fruit bunches (FFB) per hour.

In peak season the mill will run for 22 hours per day, 6 days a week making it extremely difficult to catch up any lost days. Assuming FFBs sell for US$200 per metric tonne, the avoidance of a single day of disruption following community engagement costing $30,000 implies an ROI of 880%. They also found that early engagement helped to build trust with the community and to identify existing land ownership structures before land brokers have a chance to get involved, which can complicate matters for the community and the company.

Further guidance

Cost of 1 day’s disruption 60 MT per hour capacity mill x 22 hours per day x $200 FFB value per MT = $264,000

Cost of community engagement= $30,000

Return on investment=

880%

Million-dollar disruptions in Indonesian palm oil 10