Establishing a win-win framework for foreign investment

Opinion

 
by and

Agriculture plays a key role in Africa’s growth and economic development, employing about 60% of the workforce and accounting for a third of its GDP. Yet the continent remains the most food-insecure region in the world, with more than 232 million out of its one billion people categorised as under-nourished.

Effectively, one out of every four Africans is affected by the scourge of hunger and malnutrition.

The continent also spends too much – slightly over $35 billon (€28 billion) every year – on food imports. This import bill is projected to grow to $110 billion (€98 billion) by 2025, if left unchecked. To reverse the looming scenario of heightened food insecurity, substantial investment in Africa’s agriculture is required to transform the sector into a highly productive engine – producing for Africa and for the rest of the world.

Filling the investment gap

Studies conducted by FAO show that additional investments in excess of $80 billion (€71 billion) are required annually to meet targets for reducing poverty and the numbers of malnourished Africans. Despite the Comprehensive Africa Agriculture Development Programme goals and Malabo Declaration commitment to increase agricultural spending to 10% of public expenditure, most African countries still spend much less of their public budget on agriculture. Against this background, foreign direct investment (FDI) will definitely play a complementary role.

Agricultural investments from domestic sources alone are simply inadequate to cover growing demand for food and fibre in Africa. FDI will therefore play an important role, supplementing domestic investment requirements, boosting productivity, and serving as a conduit for knowledge and technology transfer to African economies. Foreign investment in agriculture may also expose African countries to international best practices and cutting-edge technology. Beyond the learning and knowledge advantage, FDI will certainly provide the channels to integrate local businesses into national, regional and global value chains. Such investment provides room for local agribusinesses to learn new business practices, management techniques and concepts that help them develop an ecosystem and access new markets.

The last 3 years have seen a surge of interest in international investment in African agriculture, particularly investments in land, agribusinesses, and water entitlements. The drivers of this growth include the increasing demand for food and feed in major importing countries; the need to secure adequate food supplies internationally; the growing demand for biofuel feed-stock; and concerns about potential vulnerability to volatility in global food markets.

Risks and mitigants

Increasingly, skeptics are raising concerns about the possible adverse impacts on African countries of some new forms of FDI. They point to one growing phenomena: the acquisition of large-scale land by foreign players, leaving indigenous players and farmers with the short end of the stick. With land owners seeking to optimise their assets, foreign competition often acquires the best parcels of land, with the best soil quality and irrigation, while local farmers are left with less desirable choices. Smallholder farmers are displaced, grazing land for pastoralists is diminished or totally lost, rural families and communities suffer loss of income and livelihoods, and natural resources and biodiversity degenerates.

These are some of the potential adverse impacts of FDI.

To mitigate these challenges, policymakers, development agencies and local communities need to maximise the benefits of foreign agricultural investment, while minimising the risks. This approach must be methodical and requires the organisational capacity to orient foreign investors towards the right type of projects. This will, however, depend on several factors and variables, namely, transparency and good governance, appropriate linkages with smallholder farmers and agrarian communities, and the quality of institutions and institutional frameworks in place at national and sub-national levels in the FDI host countries.

Investment projects that combine the strengths of the investor (capital, management and marketing expertise, and technology) with those of local farmers (labour, land, local knowledge) are likely to be most successful. It is also important to establish a win-win framework. The business model must leave farmers in control of their land, provide incentives for all parties to invest in land improvements and also favour sustainable development.