AGRICULTURE GLOBAL PRACTICE DISCUSSION PAPER 03 INVESTMENT CONTRACTS FOR AGRICULTURE: MAXIMIZING GAINS AND MINIMIZING RISKS WORLD BANK GROUP REPORT NUMBER 94895-GLB JUNE 2015 AGRICULTURE GLOBAL PRACTICE DISCUSSION PAPER 03 INVESTMENT CONTRACTS FOR AGRICULTURE: Maximizing Gains and Minimizing Risks © 2015 World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Email: feedback@worldbank.org All rights reserved This volume is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank Group, 1818 H Street NW, Washington, DC 20433, USA, fax: 202-522-2422, e-mail: pubrights@worldbank.org. Cover photo: Asuka Okumura/World Bank. Recommended Citation: Smaller, C., and W. Speller, with H. Mirza, N. Bernasconi-Osterwalder, and G. Dixie. 2015. Investment Contracts for Agriculture: Maximizing Gains and Minimizing Risks. Washington, D.C.: World Bank Group; New York: United Nations; and Win- nipeg: International Institute for Sustainable Development (IISD). CONTENTS Acknowledgments v List of Abbreviations vii Chapter One: Introduction 1 Chapter Two: The Role of Contracts in Promoting Responsible Agricultural Investments 3 Chapter Three: Three Key Stages in the Contracting Process 5 Chapter Four: Top Five Positive Outcomes from Farmland Investments 7 Employment Creation (1) 7 Integration of Local Farmers (2) 9 Expansion of Market Opportunities (3) 10 Establishment of Community Development Programs (4) 11 Increased Incomes Improve Food Security (5) 12 Chapter Five: Top Five Downsides to Farmland Investments 15 Loss of Land and Poor Resettlement Plans (1) 15 Lack of Openness and Engagement with Local Communities (2) 17 Weak Assessment of Commercial Viability (3) 17 Poor Management of Environmental and Social Impacts (4) 19 Insufficient Mechanisms to Raise Grievances (5) 20 Chapter Six: Conclusions 23 References 27 BOXES Box 4.1: Example of Training and Skills Development Programs for a Palm Oil Plantation 8 Box 4.2: Example of Including Outgrower Schemes in a Contract for a Rubber Plantation 10 Box 4.3: Example of a Community Development Agreement for a Tree Plantation in Central Africa 12 Box 5.1: Consultative Land Acquisition Process 16 Box 5.2: Elements to Include in a Feasibility Study 18 Box 5.3: Elements to Include in Environmental and Social Management Plans 20 FIGURE Figure 3.1: Stages in the Contracting Process and Key Elements 6 TABLES Table 6.1: How to Maximize Key Benefits of Agricultural Investment through the Contract Process 24 Table 6.2: How to Minimize Key Risks of Agricultural Investment through the Contract Process 25 Maximizing Gains and Minimizing Risks iii ACKNOWLEDGMENTS This report was written by Carin Smaller and William Speller, with Hafiz Mirza, Nathalie Bernasconi-Osterwalder, and Grahame Dixie, under the overall guidance of James Zhan (UNCTAD), Scott Vaughn (IISD), and Mark Cackler (World Bank). Peer review and invaluable insights were provided by Richard Bolwijn, Mark A. Con- stantine, Axèle Giroud, Jonathan Mills Lindsay, Jorge A. Munoz, Asuka Okumura, and Elisabeth Tuerk. This report is based on background research by UNCTAD and the World Bank, and the IISD, to which many communities, companies, governments, civil society and oth- ers provided their invaluable time, and without which the insights contained in these pages would have been impossible. The World Bank, UNCTAD, and IISD are also indebted to the government of Japan for funding the stream of work of which this is a part, as well as the Swiss Agency for Development and Cooperation. Maximizing Gains and Minimizing Risks v LIST OF ABBREVIATIONS CFS Committee on Food Security IISD International Institute for Sustainable ESIA Environmental and Social Impact Development Assessment OECD Organisation for Economic Co-operation and FAO Food and Agriculture Organization Development IFAD International Fund for Agricultural PRAI Principles for Responsible Agricultural Investment Development UNCTAD United Nations Conference on Trade and IFC International Finance Corporation Development Maximizing Gains and Minimizing Risks vii CHAPTER ONE INTRODUCTION Private investment in agriculture in developing countries, both domestic and foreign, has been on the rise for nearly two decades. This paper focuses on large-scale agri- cultural projects in developing countries, involving the lease of farmland, which rose sharply after the food crisis of 2008. It is important that such investments are sustain- able not only in the long term, but also beneficial in the short term with minimal risks or negative effects. This paper looks at one approach to achieving this, namely, carefully devised contracts with investors, and in doing so offers a number of concrete solutions. The paper marries two substantial bodies of research to show how investment con- tracts can be set up to promote sustainable development. The paper presents the top five positive outcomes and the five downsides from private sector investments in large- scale agricultural projects. This is derived from empirical evidence gathered by the United Nations Conference on Trade and Development (UNCTAD) and the World Bank after visiting large-scale agricultural projects (UNCTAD and World Bank 2014). The paper then proposes legal options to maximizing the main positive outcomes and minimizing the main downsides through better drafting of contracts between investors and governments for the lease of farmland.1 This is derived from work conducted by the International Institute for Sustainable Development (IISD), which studied almost 80 contracts and produced a guide to negotiating contracts for farmland and water, including a model contract (Smaller 2014a). Investment contracts are one of a number of tools and exist within a broader decision- making process. This includes different stages in the investment process, which require proper sequencing, prioritizing of issues, and an understanding of the economic con- text. Getting this right can be decisive for the success of the investment and can deter- mine the extent to which a contract can contribute to generating positive sustainable 1 In this context, most often the contract will be between a national government and an investor; however, depending on the federal structure and land tenure system of a country, it may be between an investor and another party such as a state government, a communal leader, or a customary land holder. The configuration of parties thus needs to be adapted to different contexts. Maximizing Gains and Minimizing Risks 1 outcomes for governments, communities, and investors. agricultural investment to help governments, investors, Above all, the relationship between investments and sus- and communities turn investor interest into an oppor- tainable development requires a careful adherence to key tunity for rural development and poverty reduction. For principles, such as the investment policy framework for instance, the Principles for Responsible Agricultural sustainable development (IPFSD), and contractual provi- Investment (PRAI), drafted by the Food and Agricul- sions therefore must be carefully drafted (UNCTAD 2012). ture Organization (FAO) and the International Fund for Agricultural Development (IFAD), UNCTAD, and the Similarly, leasing farmland, especially on a large scale— World Bank, guided the policy research of UNCTAD albeit often at the heart of an agricultural investment—is and World Bank, which is presented in this paper, as well not the only option for investment in agriculture. There as other work by the four agencies. More recently, the UN is a range of farming and business models that can be Committee on World Food Security (CFS) endorsed 10 economically profitable or more socially and politically Principles for Responsible Investment in Agriculture and acceptable than farmland investments (IFAD and Tech- Food Systems. The CFS is the top UN forum for review- noserve 2011; UNCTAD 2009). They should be consid- ing and following up on policies related to food security. ered, either as alternatives or in conjunction with farmland Other recent initiatives include the African Union’s Guid- investments, both by governments and investors, and ing Principles on Large-Scale Land Based Investments in through engagement with communities. Joint ventures, Africa, and the work of the Organization for Economic farmer-owned cooperatives or businesses, management Co-operation and Development (OECD) and FAO to contracts, contract farming or “outgrower schemes,”2 and provide guidance to the private sector on Responsible revenue-sharing arrangements can provide farmers with Business Conduct Along Agricultural Supply Chains, secure income while allowing them to maintain owner- among a range of others (Smaller 2014b). ship over their land and water resources. This paper is one element of a programmatic approach Local communities are critical at all stages of the invest- being undertaken by the interagency working (IAWG) ment process: prior to and during the negotiation process, group of UNCTAD, the World Bank, FAO, and IFAD and through the life of the project. The long-term success that aims to operationalize the responsible conduct of of an investment project is dependent on the acceptance agricultural investment through practical guidance. of the terms of the deal by the local community. Achieving The IAWG has embarked on a new phase of field success is tied closely to the contract negotiation and a sense research, working with 12 to 16 early stage investors in the community that members’ interests are taken seri- in Africa to infuse responsible business principles and ously throughout the process. This is particularly important practices into operations from the outset. This will because community wishes and interests are not always well involve establishing good practices in implementing aligned with those of the host government or the investor. responsible business practices in agriculture; providing demonstration effects for other investors; and develop- This paper contributes to the growing body of interna- ing concrete tools for their use in early phases of other tional norms and guidance on the conduct of responsible future investment. 2 An outgrower scheme is “a contractual partnership between growers or land- holders and a company for the production of commercial products” (Mead 2001, 7). 2 Investment Contracts for Agriculture CHAPTER TWO THE ROLE OF CONTRACTS IN PROMOTING RESPONSIBLE AGRICULTURAL INVESTMENTS There are three areas of law that are relevant to foreign investment in agriculture: domestic law, contracts, and investment treaties. The best guarantee to achieve positive benefits from foreign investment is a solid foundation of domestic laws that are prop- erly enforced. For example, where rights to land, water, and other natural resources are clear and recognized in domestic law, rights holders will be entitled to have a say in how to allocate those resources to investors. Domestic laws also govern any other issues that may arise in relation to an investment, such as customs procedures for importing machinery and exporting finished products, taxes, permits for using chemicals and fertilizers, and employment. In many developing countries, however, the necessary domestic laws may not be in place or may not be sufficiently detailed. Even when they are in place, they may not be implemented or enforced. Domestic laws for environmental and social impact assess- ments (ESIAs), for example, exist in most countries, but are either not undertaken or treated as a box-ticking exercise (Deininger and Byerlee 2011; UNCTAD and World Bank 2014). Ideally, domestic laws will develop to address all issues that may arise in relation to an agricultural investment. For now, though, many states still do negotiate investment contracts with investors to lease farmland, so they remain a relevant and important legal tool. The second source of law is contracts signed between governments and investors, also known as host government agreements. Contracts can help fill the gaps in domestic laws by providing more detailed guidance on what should be contained in the assess- ments, and using international standards and best practice as the reference point. How- ever, contracts need to be drafted carefully to maximize benefits and reduce risks. This includes clearly defined rights and obligations, benefit-sharing arrangements, a plan for what happens if things go wrong, and measures to take if one of the parties does not fulfill their commitments. A key challenge when drafting an investment contract is to ensure it works in harmony with existing domestic laws. The contract should not become a vehicle to bypass or undermine domestic laws, or prevent the development Maximizing Gains and Minimizing Risks 3 of new laws. Readers, however, need to be aware that no investment treaties and investment chapters in free trade matter how carefully a contract is drafted, ultimately the agreements (UNCTAD 2014, UNCTAD IIA Database). success of the arrangement depends on the relationship, Treaty rights are layered over domestic law and the in particular the level of trust between all stakeholders. contract. Importantly, they provide an international arbitration process through which an investor’s rights A highly controversial provision found in many investment can be enforced, a process that has been used by inves- contracts, particularly in developing countries, is known as tors against states nearly 600 times to date (UNCTAD a “stabilization” provision. These are clauses in the con- 2014). It is advisable to refer to domestic courts as the tracts that freeze domestic laws at the time the contract forum of choice for disputes arising under the contract, is signed. This means that the investor is either exempt rather than resorting to international arbitration. Invest- from applying new laws, or that the investor can request ment treaties should not become a vehicle used to bypass compensation for new laws that increase costs or decrease domestic laws or courts. Treaties should play the smallest profits. This can include, for example, new environmental role in the investment process, dealing essentially with measures to protect against runoff of pesticides and ferti- egregious violations, for example, in the case of a gov- lizers, chemical bans, or increases to the minimum wage. ernment expropriating an investor’s land without paying Stabilization provisions can also discourage governments any compensation. that wish to enact new legislation but that fear being sued in international arbitration. Designing and negotiating the right contract is only the starting point in the relationship between governments, Broad stabilization provisions that include all areas of investors, and communities. There is no guarantee that government regulation are now widely considered to be commitments made will be implemented by the investor unacceptable. There is, however, still some support for and enforced by the government. As with weak enforce- limited stabilization provisions on certain fiscal issues, ment of domestic laws, implementing the commitments most commonly taxes, to protect investors from arbitrary and obligations contained in the contract is a much or discriminatory acts by the host government (Interna- tougher and longer-term challenge, particularly with tional Bar Association 2011). limited capacity, as is often the case in developing coun- tries. Governments should not underestimate the time The third area of law relevant for agricultural invest- and cost involved in monitoring agricultural investments ments is investment treaties. These are agreements and implementing commitments. Communities and signed between states that provide investors from one civil society organizations can play an important role as state investing in the other state with special protections “watchdogs” and should be assisted by governments and under international law (Bernasconi-Osterwalder and investors through access to information and open chan- others 2011). There are now more than 3,000 bilateral nels of communication. 4 Investment Contracts for Agriculture CHAPTER THREE THREE KEY STAGES IN THE CONTRACTING PROCESS There are three key stages in the contracting process: (1) preparing for contract nego- tiations; (2) negotiating the contract; and (3) monitoring and enforcement of the con- tract. Figure 3.1 provides an overview of key issues to be dealt with in each stage. These issues are elaborated in chapters 4 and 5 of this paper. Preparing for the negotiations requires a proper assessment of the suitability and availability of land, soil, and water; meaningful inclusion of communities living on or around the proposed site; the preparation of feasibility studies and business plans; and prescreening or vetting of prospective investors by the host country government. Negotiating the contract involves defining the rights and obligations of the investor and the government, stating the applicability of domestic laws, including assignment and termination clauses to deal with potential failures, engaging with local communi- ties in drafting terms and contract provisions, and defining what information about the investment will be made public. Monitoring and enforcement can be the most challenging stage for governments because of limited resources and capacity. The UNCTAD–World Bank study found that moni- toring by host governments was weak, especially where allocation of land had proceeded at a fast pace. Visits by and reporting to government officials tended to focus on produc- tivity issues rather than monitoring the socioeconomic and environmental impacts. Setting out clear reporting requirements and indicators in a contract ensures that gov- ernments and communities can regularly track whether an investor is fulfilling its obli- gations and commitments to the local community. Setting aside a percentage of the revenue from the project for implementation issues will help ensure that the govern- ment has the capacity to monitor and evaluate the project effectively. Transparency is a key part of the process of implementing and monitoring the obligations of the parties to a contract. Transparency also enables local communities and civil society organizations to keep an eye on how the investment is actually playing out on the ground and whether promises made in the contract are being kept. Maximizing Gains and Minimizing Risks 5 FIGURE 3.1. STAGES IN THE CONTRACTING PROCESS AND KEY ELEMENTS • Consider which business models, types of investor, crops, and so on to prioritize. • Consider how prospective investors fit with national and agricultural development plans of host country. • Map out and verify all existing users of land and water. • Engage the local community in a full and transparent way. • Conduct business feasibility studies and prepare a business plan based on outcomes. Preparing for • Screen investors with respect to technical and financial capabilities. contract • Conduct social and environmental impact assessment and implement findings into management plans. negotiations • Ensure transparency about the process to access land and make investments. • State applicability of domestic laws, for example, labor, health and safety, environment. • Define rights of investor to use and access project site, including maps. • Include binding commitments for feasibility studies and business plans, impact assessments and management plans, and incorporate milestones in the contract. • Include, as appropriate, targets/requirements for job creation and training, outgrower schemes, technology transfer, processing facilities, purchase of local goods and services, and destination of produce. Drafting the • Include commitments for agreed-on community development programs. contract • Include provisions for grievance mechanisms and dispute settlement. • Include assignment and termination clauses to deal with potential failure. • Define what information will be made public. • Monitor adherence to domestic laws. • Monitor that investor uses land, water, and other resources in accordance with agreement. • Report on and monitor adherence to business plan and environmental and social management plans, and agree to any material changes. • Report and monitor adherence to other commitments and targets. • Ensure ongoing dialogue between local communities, investor, and government, with means Monitoring and for communities to raise grievances. enforcement • Enforce sanctions for noncompliance with domestic laws or material breach of contract provisions. • Apply contingency plans in the case of failure. Source: Smaller 2014a. 6 Investment Contracts for Agriculture CHAPTER FOUR TOP FIVE POSITIVE OUTCOMES FROM FARMLAND INVESTMENTS UNCTAD and the World Bank conducted a field survey of 39 large-scale, mature agri- business investments in Sub-Saharan Africa and Southeast Asia (UNCTAD and World Bank 2014). The study found that some of these investments have generated positive outcomes for host countries and local communities, particularly in terms of employment creation. But the benefits were not automatic or guaranteed. There were significant negative impacts in some investments, particularly related to land rights. The majority of investments were generating a combination of positive and negative outcomes. This section summarizes the key positive findings from the UNCTAD–World Bank study and shows how they can be enhanced through provisions in the contract. It is about turn- ing the investor’s promises into reality. The legal options indicated are not intended to be a blueprint. Rather, the aim is to create a “wish list” for governments, investors, and commu- nities, which will be agreed to in the context of a negotiation. The wish list will be different for each project and depend on the size and nature of the project, the domestic legal sys- tems, and the country’s needs and realities. Consultation with communities is essential to ensure their voice is heard in developing a wish list that matches local needs and priorities. EMPLOYMENT CREATION (1) Positive outcome 1: Employment creation • Employment creation is the key benefit, and can involve provision of housing, educa- tion, and health care for employees and their families. • More is needed to improve working conditions, better integrate women, build the skills of the workforce, and increase employment of nationals in senior positions. Legal options: • Give preference to projects that prioritize women’s employment when preparing for con- tract negotiations. • Reference domestic and international labor laws in the contract, including conventions for health and safety and the use of forced or child labor. • Include a provision on employment with specific targets and requirements to employ locally, hire a percentage of nationals for senior positions, and train the workforce. Maximizing Gains and Minimizing Risks 7 Employment is the top outcome from the UNCTAD– BOX 4.1. EXAMPLE OF TRAINING AND World Bank study. The 39 projects, directly employed SKILLS DEVELOPMENT PROGRAMS around 39,000 people in host countries (with 150,000 FOR A PALM OIL PLANTATION employed indirectly), often in rural areas where the popu- lation had few other opportunities for formal employment. In a contract for a palm oil plantation reviewed by IISD, For example, a rubber project in a postconflict country in the investor is required to prepare detailed plans and pro- grams for on-the-job training. The timetable and schedule Africa generated more than 1,500 permanent jobs and are listed in the contract. Vocational training and adult lit- 2,000 seasonal jobs in a remote community. Furthermore, eracy programs are available to all employees as well as the employment of local communities contributed to better local community. The investor is required to contribute at relations with the investor, and hence provided a greater least US$20,000 per year for vocational training programs chance of the operation being a commercial success. and US$40,000 per year for scholarships for members of the local community to attend a nearby technical college. Most employees interviewed were appreciative not only of The investor is required to provide job training and teach the income and ability to shift from subsistence farming but employees new techniques, which would allow them to take also of ancillary benefits such as provision of food, housing, on more senior-level and skilled positions in the company. and education and access to health services. Foreign inves- Source: Smaller 2014a. tors tended to pay better and offer superior working con- ditions compared with local employment options. Where housing, education, and health benefits are part of the busi- Employment of local people can be challenging in rural ness plan, these elements should be converted into contrac- areas where people may not have the required skills. In tual obligations, including standards for construction and some cases, preference was given to migrants from neigh- service provision, eligibility, timelines, and budgets. boring countries or from other regions within the host However, employment benefits were not guaranteed and country because of perceptions that the local workforce did not materialize in all investments studied. People resid- did not have the requisite skills or experience with for- ing in the immediate vicinity of the investment were not mal employment, especially in postconflict zones. This always employed or were restricted to relatively low-skilled led to tensions between the local community and migrant or casual jobs. Management and supervisory positions workers. To address this problem, the contract can build tended to be held by expatriates from the home country. in provisions for dedicated training programs to assist with local communities’ integration into the workforce. In these situations, the contract can play an important Box 4.1 provides an example of how a contract for a palm role. An employment provision can be included in the oil plantation incorporates training and skills development. contract with specific targets for number of jobs created, based on the results of the feasibility study and business A gender imbalance in employment was evident in most plan (see chapter 5, Weak Assessment of Commercial investments studied. Overall, around 35 percent of Viability), as well as requirements to employ locally, unless employees were women. Women were more likely to be it is not possible to do so. The contract can also include given temporary, low-skilled jobs and were largely absent targets for filling management positions with nationals. A from higher levels of company management. They were number of contracts reviewed from West Africa contain paid less. There were few policies or programs to promote employment provisions whereby the investor can hire only better inclusion of women. The contract can specify pref- nationals from the host state for unskilled positions and erences for employing women, but none of the contracts must give preference to them for all skilled and manage- reviewed by IISD contained such preferences. This issue rial positions. In one country, the contracts contain spe- may be better addressed when screening investors and pre- cific targets for the investor to ensure that within 5 years paring for negotiations. The government may decide to at least 50 percent of the 10 most senior management prioritize investments in crops that are more suited to wom- positions are held by nationals, and within 10 years at least en’s employment or may choose a location where women’s 75 percent of positions are to be held by nationals. skills and participation in the workforce is stronger. 8 Investment Contracts for Agriculture In a very few investments studied, wages and working The most successful land investments contracted with conditions were not sufficient for employees to maintain nearby small-scale farmers to sell their produce to an acceptable standard of living. Around half the jobs the plantation or processing plant. This is known as created were temporary, offering limited stability and an outgrower scheme. A third of the projects from the typically worse terms and conditions than permanent UNCTAD–World Bank study had outgrower schemes as jobs. To address these problems, the contract should part of the investor’s business model, and contracted with state the applicability of domestic labor laws and occu- almost 150,000 outgrowers. These investments were well pational health and safety laws. To improve standards received because the presence of a reliable buyer for local even further, the contract can make reference to inter- farmers’ produce contributed positively to increasing rural national standards, such as the Occupational Safety incomes. Outgrowers generally thought they received bet- and Health Convention (1981), the Safety and Health ter prices for produce as well as useful training and techni- in Agriculture Convention (2001), and the International cal support from the investor. Labour Organization’s Code of Practice for the Agricul- ture Sector. The investor should also establish and main- The projects with outgrower schemes were also the best tain effective systems for monitoring and reporting on business model for the transfer of technology and know- health- and safety-related incidents, and notify appro- how, such as technical advice on growing practices and priate government bodies of incidents. Only one of the disease minimization, preparing the land, setting up dem- contracts reviewed by IISD included specific provisions onstration plots, irrigation methods, and better yielding on labor standards and health and safety. For this con- seed varieties. Outgrower schemes allow farmers to retain tract, the focus was on preventing the use of forced labor control over their land and can create more employment and child labor. than what is available on a pure land investment. Invest- ments with outgrower schemes created one job for every Finally, it is important to require the investor to report 3 hectares of land, whereas pure land investments created annually on whether the organization is achieving one job for every 19 hectares of land. employment targets and the implementation of training However, the gender impacts from outgrower schemes were programs. This will help to monitor the results and ensure poor. Only 1.5 percent of outgrowers were women. Another promises are kept. challenge is in how to include more marginalized farmers rather than those that are already relatively well off. One INTEGRATION OF LOCAL option is to include outgrower schemes that prioritize women FARMERS (2) and marginalized farmers as part of the Community Devel- opment Agreement (see further information in chapter 4, Positive outcome 2: Integration of local farmers Establishment of Community Development Programs). • Investments in land that also integrated nearby farmers (through outgrower schemes) were the most successful Establishing outgrower schemes usually requires a separate business model and the only investments in which there contract between the investor and the farmer that is not nec- was a significant transfer of technology. essarily linked to the main contract. Nevertheless, to ensure Legal options: that the outgrower scheme comes into force, there should • Include a provision in the contract requiring the estab- be a provision in the contract that requires the establish- lishment of an outgrower scheme with local farmers ment of an outgrower scheme. The lessons from palm oil alongside the land investment. plantations in Southeast Asia show that if the government • Create a separate contract between investors and out- insists on including outgrowers in the project then outgrow- growers, linked to the main lease agreement. • Specify who should be included, the support and assis- ers are included, but if they do not, then the companies are tance to be provided, and how to establish a fair price- unlikely to pursue this option in their business plans. setting mechanism. • Give preference to outgrower schemes that prioritize Outgrowers need to be integrated at the appropriate time. women and marginalized farmers. Given the high risks of new investments, it is unwise to Maximizing Gains and Minimizing Risks 9 incorporate outgrowers before the production model and BOX 4.2. EXAMPLE OF INCLUDING market are fully tested. If outgrowers are integrated too OUTGROWER SCHEMES IN A early, they can be exposed to financial risks they may be CONTRACT FOR A RUBBER unable to bear. One of the vitally important roles of large private investors is that they have the means and capacity PLANTATION to shoulder early stage investment risks. In a contract for a rubber plantation reviewed by IISD, the investor is required to set up an outgrower scheme within However, this does not mean risks should not be taken. In three years. The government agrees to provide land for the some instances, an agricultural investment has a pioneer- outgrowers, select the outgrowers, secure the financing, ing, catalytic impact whose benefits extend far beyond the and address all environmental and social issues that might arise. The investor agrees to manage and develop the land, investment in question. For example, the Commonwealth assist the government in securing finances, provide support Development Corporation (CDC) was instrumental in and assistance for the purchase of equipment and fertiliz- introducing smallholder tea production to Kenya and palm ers, provide technical knowledge and management skills to oil to East Asia. But it was particularly important in these outgrowers, and purchase all the produce. The government cases that the investor bore the risks associated with new also provides a guarantee to the investor that the outgrow- practices or crops and resolved the business model before ers will become members of a cooperative, pay certain fees, participate in training programs, and accept the working outgrowers were introduced (Tyler and Dixie 2012). methods and standards set by the investor. The provision in the contract should define the basic frame- Source: Smaller 2014a. work of rules, rights, and responsibilities that will govern the outgrower scheme. For example, the contract can give pref- to be honored by all parties. Pricing formulas, when appli- erence to outgrowers from the local community, particularly cable, are valuable, as they can remove the power element women. The contract can also require the investor to provide in negotiation. The contract should also require the com- support and assistance to outgrowers in the form of equip- pany to report annually to the government on the imple- ment, machinery, seeds, fertilizers, and training on improved mentation of the outgrowers’ scheme, which will help to production methods. The contract can define at what point monitor performance and resolve issues that might arise. it would be appropriate to conclude a separate agreement with outgrowers to shield them from excessive risk. EXPANSION OF MARKET Five contracts reviewed by IISD contain provisions requir- OPPORTUNITIES (3) ing investors to set up outgrower schemes. Two of the contracts specify the amount of money that the investor Positive outcome 3: Expansion of market will put into these schemes. Box 4.2 provides a description opportunities of the way in which an outgrower scheme is integrated • The investors who set up a processing facility were per- into a contract for a rubber plantation in Africa. ceived more favorably. • A number of investments provided new markets for local contractors and suppliers of fuel, fertilizer, and The UNCTAD–World Bank study found that despite machinery. investors’ efforts to be transparent, many outgrowers did not understand how prices were set and voiced concerns Legal options: • Prioritize investments that involve the establishment about how their produce was quantified and assessed for of processing facilities. The contract can specify the quality. The contract can provide a framework for estab- details for setting up such facilities. lishing a fair price-setting mechanism between the out- • Require the investor to set up a local business develop- growers and the investor that is appropriate, inclusive, and ment plan to promote the integration of local contrac- transparent. In Indonesia, for example, prices for palm oil tors and suppliers. First preference should be given to are set on a monthly basis by the investor, government, local goods and services. • Report annually on the implementation of the process- and outgrowers. When the price is agreed each month, the ing facility and local business development plan. three parties sign a formal notification requiring the price 10 Investment Contracts for Agriculture Closely linked to outgrower schemes are the creation a list of local suppliers in the company offices and the gov- of processing facilities and the possibility of adding ernment can help identify local suppliers and contractors. value to primary production. Of the 39 projects in the The investor will then report annually on the implemen- UNCTAD–World Bank study, seven of them were pure tation of the Local Business Development Plan and the processing operations and were directly responsible for the government will monitor the situation. creation of 2,665 jobs. These investments were perceived more favorably than other business models, primarily ESTABLISHMENT OF because of the absence of negative effects associated with land acquisition. COMMUNITY DEVELOPMENT PROGRAMS (4) Priority should be given to investments that add value Positive outcome 4: Establishment of community to production and include processing facilities. This can development programs be done at the stage of screening and selecting poten- • Where investors built relations with the community, and tial investors. The contract can include a provision for provided social and economic development programs, establishing such facilities. Of the 80 contracts that IISD they were more likely to be financially successful. reviewed, six—for rubber, palm oil, and rice—require the Legal options: investor to build processing facilities. In three of the con- • There is a need for enforceable community-based tracts the provisions contained significant loopholes. Two agreements that are integrated into the contract. The of the contracts required only that the investor “explore contract can define the parameters for a separate agree- ment between the investor and the community that is the possibilities” of establishing a processing facility. One annexed to the contract. contract required only that the investor build a process- • Failure to subsequently set up a community agreement ing facility if the investor deemed it commercially viable. and comply with the terms should amount to a material However, two other contracts required the investor to breach of the contract. build a processing facility within a specified time period, and even indicated how many tons the facilities should The UNCTAD–World Bank study found that investors process per hour. The sixth contract specified the amount who were financially and operationally successful tended of money to be invested in the processing facility and the to have the most positive impact on their host economies number of people to be employed. and surrounding communities. Similarly, those invest- ments that were well integrated with the host country Creating knock-on effects to the broader economy is and surrounding community were most likely to be another important contribution that foreign investment financially successful. The possibility of establishing a can bring to a country. The UNCTAD–World Bank study virtuous cycle was one of the most important insights found positive market spillovers for local suppliers of in the report. In one case, the investor operated a finan- fuel, fertilizer, and machinery. But these spillovers did not cially inclusive business model in which the revenues occur in areas where competent local suppliers did not from the project are explicitly shared with the commu- exist in the first place. Indeed, most investors imported nity. For example, a rice plantation in Ghana pays 2.5 inputs because of unavailability of local supplies at com- percent of monthly turnover into a community trust, petitive prices. which the community can spend on development proj- ects at its own discretion. Preparing a Local Business Development Plan is one way for the investor to better integrate local contractors and A number of investors put in place community develop- suppliers into the project. The provision in the contract ment programs. These typically included building medi- can require the investor to give first preference to goods cal centers, schools, housing, water pumps, or community produced in the host state and services provided by host infrastructure such as town halls or crop storage facilities. state citizens or businesses. This should be subject to tech- The construction of roads in particular was seen as a key nical acceptability and availability. The investor can keep benefit and improved access to markets. Maximizing Gains and Minimizing Risks 11 There was, however, an important variation in the extent BOX 4.3. EXAMPLE OF A COMMUNITY to which local communities were consulted about the DEVELOPMENT AGREEMENT FOR community development programs, and the extent to A TREE PLANTATION IN CENTRAL which investors made a binding commitment. The most AFRICA successful programs were those in which the local com- munity had been consulted, had a say both in terms of In one contract in Central Africa reviewed by the IISD, the choice of project and how funds were spent, and had a the Community Development Agreement sets out a time- written agreement signed by both parties. Unfortunately, line for what is required in five-year intervals. The agree- ment specifies how many classrooms, houses, offices, toilets, the inclusion of gender issues was lacking in the design and boreholes should be built. It even specifies the number and choice of programs provided. of soccer balls and volleyballs to be given to the primary school each year. The main obligations fall to the investor, These findings point to the need for enforceable com- but there are also obligations for the community to help munity-based agreements, as part of the principal con- maintain rural infrastructure, such as roads. tract to ensure an effective outcome. Such agreements Source: Smaller 2014a. are commonly referred to as Community Development Agreements and are standard practice in the mining sec- tor. The contract should contain a provision for the inves- INCREASED INCOMES tor to enter into a Community Development Agreement IMPROVE FOOD SECURITY (5) with the local community. Such a provision can define Positive outcome 5: Increased incomes improve the process and parameters for the agreement, such food security as who should be included and consulted, what should • Some investments had a positive impact on food secu- be included, how decisions should be made, how much rity because of increased incomes for those employed money will be put aside, appropriate grievance mecha- or contracted by the project. • However, only a third of investments were producing nisms, and a requirement for annual reports on the imple- food crops for the host country market, and there were mentation of the agreement. Gender considerations can also negative impacts on food security. be integrated throughout to ensure that women are rep- Legal options: resented in decision making, have an equal voice, and are • Promoting food security should primarily take place in beneficiaries of the activities. For example, one investor set the preparatory phase. Potential negative impacts, such up a community liaison committee and insisted that youth as through changes in access to land, should also be and women were represented on the committee. Further- identified and addressed. more, the contract can include a provision whereby failure • Prioritize and select investors who will help achieve the to conclude a Community Development Agreement and national food security goals and strategies. This can be to comply with the terms of the agreement amounts to a determined based on crop choice, business model, or proposed location of the investment. Give preference material breach of the contract and can lead to termina- to business models that include outgrower schemes and tion if not remedied. expand local employment and incomes. A number of the contracts reviewed by the IISD contain Investments in agriculture affect local food security in dif- provisions related to community development, but they ferent ways. The most direct way is through food produc- remain vague and largely unenforceable. There were two tion for the host country market. One-third of investors countries in Africa, however, where the provisions were surveyed fell into this category. Some investments also had detailed, with a specific list of activities, quantifiable indi- a positive impact on local food security because the rise in cators, a time period for completion, and a budget. In one rural incomes derived from direct employment and out- contract, the Community Development Agreement was grower schemes improved people’s purchasing power. annexed to the contract, ensuring that it was part of the overall contract. Box 4.3 describes the Community Devel- Many of the issues related to food security should be dealt opment Agreement for a tree plantation in Central Africa. with in the preparatory phase of the contract negotia- 12 Investment Contracts for Agriculture tions. National food security strategies are crucial. They grow food, or was relied on by pastoralists to graze cattle. will help government negotiators identify the target areas, One female community member explained that she and groups, and crops to promote and prioritize to strengthen other women in the village used to collect wild spinach food security. Identifying potential impacts on local food and a variety of other edible plants on land to which they security prior to entering into negotiations is also crucial no longer had access because the investor erected an elec- to avoid or minimize the potential for harm to existing trified fence. These issues should be identified and dealt food security. with in the preparatory phase of the negotiations when the investor and government are identifying suitable and But there were also negative impacts on food security, available land, conducting impact assessments, and deter- mainly from investments in which access to land was mining who is either living on or using the land that is reduced and where this land had previously been used to being considered for investment. Maximizing Gains and Minimizing Risks 13 CHAPTER FIVE TOP FIVE DOWNSIDES TO FARMLAND INVESTMENTS There were a number of negative impacts identified in the UNCTAD–World Bank study. Some of these negative impacts could have been avoided or minimized through better preparations prior to negotiating the contract, through improved drafting of contract provisions, or through better monitoring and enforcement. This section examines the top five downsides from the UNCTAD–World Bank study and how they can be addressed through the contracting process. LOSS OF LAND AND POOR RESETTLEMENT PLANS (1) Downside 1: Loss of land and poor resettlement plans • The standout negative impact on local communities was reduced access to land, cou- pled with poorly executed resettlement plans. Legal options: • Map out and identify formal and informal land rights before contracts are signed, using the results of the social impact assessment to assist. • Verify through the consultation with communities that no residual land disputes exist before operations commence. • Design a proper resettlement plan, in consultation with resettled persons, that is annexed to the contract and binding on the parties. The standout negative impact on local communities was reduced access to land. The most common source of conflict was between an investor who was granted formal rights to land by the government and the local people who had been living and working on land for years, but with rights to land that were typically not surveyed/demarcated and/or formally registered. The rights of pastoralists were also seldom recognized and therefore a source of conflict. Many investors were spending significant time and resources dealing with land disputes, which could and should have been identified ear- lier through a proper preparatory process. Land disputes were closely and directly Maximizing Gains and Minimizing Risks 15 related to other negative impacts or community consulta- BOX 5.1. CONSULTATIVE LAND tions, social impacts, and grievance mechanisms. ACQUISITION PROCESS For every land-based investment, clear land tenure The steps outlined here describe a Zambian domestic investor’s path to acquiring land through a consultative arrangements are essential for determining the terms and process. These discussions took place over a three-year conditions in the contract. The rights of local landowners period, involving multiple stakeholders. and users must be clearly identified before the contract is negotiated. Where land tenure systems are well developed 1. Investor approached the District Council—the local government—in search of land. and where rights are clear and vested in local owners or 2. Council directed the investor to an area with agricul- users, they will be entitled to have a say in how the land and tural potential that the local government perceived as water will be allocated to the investor. They will be able to underutilized. The Council requested a meeting with participate in the contracting process, either directly with the chiefs. the investor or as a party to an investor-state negotiation. 3. The chiefs consulted with the local people through sub- chiefs and village headmen who represented the people. 4. After an initial and broad acceptance to allocate an area Where land rights are not clear or properly surveyed or of land for the development of a plantation, a Commu- registered, it is essential to identify, recognize, and map nity Development Trust was formed. It was made up of out all legitimate land tenure rights holders before the the local community and leaders. contract is signed, in close consultation with local com- 5. The Community Development Trust, the investor, and munities. This includes not only people living on the land the district council worked together to establish a value but also those using it for grazing livestock, as shifting cul- for the property and crops of people that needed to be relocated. tivators, or as routes to access water, firewood, or other 6. The Ministry of Agriculture carried out the tree and forest products. It should include both formal and infor- crop valuation. Government experts on buildings and mal rights to land, whether formally recorded or not. The construction carried out the valuations of houses, huts, process of community consultations will also help verify and other buildings. whether land disputes exist that need to be resolved before 7. Agreements were reached between the investor and operations commence. A map with geographical bounda- individuals about compensation for assets and crops. 8. A memorandum of understanding was signed by the ries that has been verified by the government, investor, and investor, trust, and local community. the local community should be annexed to the contract. Some positive examples of investors following processes Source: UNCTAD and World Bank 2014. that respecified local rights and helped advanced the land tenure system were seen in the field research (box 5.1). were in a worse living situation as a result of moving. In A number of global initiatives have been established to one case, they still had not been paid compensation five provide useful guidance for investment negotiators who years after the resettlement. want to avoid negative impacts, most notably the Volun- tary Guidelines on the Responsible Governance of Ten- Resettlement should be avoided or minimized to the max- ure of Land, Fisheries and Forests and the African Union imum extent possible. Where resettlement is deemed nec- Framework and Guidelines on Land Policy in Africa. essary, provisions should be made for developing a plan, having regard for global principles and standards. Persons Another issue related to land disputes are cases in which who may be resettled must consent, and must be provided resettlement was undertaken, but the process was not with necessary information. The livelihoods of resettled sufficiently consultative or transparent. However, there persons must be restored to a minimum equivalent level were some positive outcomes. Several investors arrived or better, including adequate housing and secure land on site to unexpectedly find communities living there and tenure. And they must be paid fair and reasonable com- decided to work with or alongside them, rather than reset- pensation. The resettlement plan should be annexed to tling them. But in most cases, resettled persons felt they the contract and be binding on the parties. 16 Investment Contracts for Agriculture The Community Development Agreement can create a LACK OF OPENNESS AND framework for ongoing engagement, dialogue, and discus- ENGAGEMENT WITH LOCAL sion with the community, particularly in the event of con- COMMUNITIES (2) flict or grievances. It can also provide for periodic reviews of the project and its impact on the community and sur- Downside 2: Lack of openness and engagement rounding environment. with local communities • Lack of transparency surrounding land deals and Some investors noted that their ability to be transparent inadequate consultation with local communities led to was complicated by the controversy surrounding “land a sense of fear, mistrust, and resentment, and created grabs” and the tendency of the media and civil society to operational and financial difficulties for investors. manipulate the information, focusing only on the nega- Legal options: tives. Other investors, however, used greater transpar- • Engage with the community prior to and during the ency as a way to counter fallacious reporting about the negotiations in an open and transparent way. • Establish a Community Development Agreement. investment. A rubber producer in Liberia chose to make • Include a disclosure provision that makes the contract a an extensive public disclosure about its operations in public document. response to a critical third party report, which had alleged serious human rights violations. In many cases, there was inadequate consultation and engagement with local communities. It was particularly It is important to include a disclosure provision in the con- dangerous for investors to assume that the host government tract that makes the contract and all related documents had adequately conducted consultations and resolved all (such as environmental and social impact assessments and community issues prior to the arrival of the investor. It management plans) public and open to inspection at the led to project delays, increased costs, and worsened rela- state’s offices, the investor’s offices, and on a website. This tions with local communities, which affected operational should be subject to the redaction of truly confidential and financial viability. One investor arrived on site having business information. been told that local government had conducted consul- tations and “prepared the land” for the investor. It was There are governments that have taken important subsequently discovered that the local people had been steps toward more openness, Liberia being the leader. coerced into moving with the promise of jobs and were It publishes all payments, contracts, and licenses with irate with the investor for not providing them. investors on an official website. Ethiopia’s ministry of agriculture publishes many agricultural contracts on its Real engagement with the community is important prior online Ethiopian Agriculture Portal. Government tak- to and during the negotiation process. Engagement is ing the lead in being more open also reduces the likeli- only possible when a deal and the process leading to it hood of a situation in which one investor can be singled are transparent. Situations in which there was a lack of out. However, information must be reliable, accurate, publicly available information about investments created and up to date. a sense of fear, mistrust, and resentment in local com- munities about the investor’s intentions and activities. It worsened working relationships between the investors and WEAK ASSESSMENT local communities. Information was particularly sparse OF COMMERCIAL VIABILITY (3) regarding the terms and process of land acquisition and incentives provided to foreign investors. In one community Downside 3: Weak assessment of commercial stakeholder interview, a smallholder asked researchers viability whether the investor planned to take his land, which is • Many projects fail or are struggling because of factors illustrative of a total lack of communication between the that could have been identified by better preinvestment screening, feasibility studies, and due diligence. investor and communities. Maximizing Gains and Minimizing Risks 17 Legal options: BOX 5.2. ELEMENTS TO INCLUDE IN A • Conduct feasibility studies to test the commercial via- FEASIBILITY STUDY bility of the project and prepare a business plan based on the outcomes. • A market survey or analysis to determine whether • Ensure that the feasibility study and business plan are there is demand for the product verified by an independent third party and subject to • Technical feasibility to determine whether the envi- government approval. ronmental, hydrological, and climatological condi- • Include provisions on returning unused land, assign- tions are favorable in the location and with the chosen ment (transfer of rights), and termination to deal with crop project failure or significant delays in commencing • Financial feasibility to know how much capital is operations. needed, costs and projected income, staffing require- ments, and contingency plans for unforeseen events • Social and environmental feasibility to determine whether land disputes might arise and the environ- A significant number of agricultural investments fail, mental risks, which could threaten the project particularly when they are new investments. In the UNC- • Organizational feasibility to determine the most TAD–World Bank study, around half of investors were appropriate business model for that particular project unprofitable and behind operation schedules at the time Source: Smaller November 2014a. of survey. In another World Bank study, half the projects were classified as failures or moderate failures in financial terms (Tyler and Dixie 2012). Most of these examples and reasons for failure could have been identified at the outset of the project through better Most failed because the concept was flawed, for exam- screening of prospective investors by the host government ple, because of wrong location, wrong crop, or overly and better due diligence and planning by investors. optimistic planning assumptions. A coffee plantation in Vanuatu failed because of exposure to cyclones. An Feasibility studies are essential. They principally address operation to supply the UK with Gambian eggs failed the commercial and technical viability of the proposed because it did not anticipate that UK consumers would project. They also address the key social and environ- be reluctant to buy Gambian eggs. A rubber plantation mental factors, such the probability of cyclones or the in Cambodia was struggling because of unsuitable soil quality of soils, which may undermine commercial even though surrounding communities were quick to viability. Box 5.2 presents some key elements to include point out that the soil was more suited to other crops, in the feasibility study. Feasibility studies should be con- such as cassava. ducted by the investor and verified by an independent third party before the contract is signed. The results of Around one-quarter of investors were using less than the feasibility study are to be used to develop a business 10 percent of the land allocated to them. This was plan. Both the feasibility study and business plan should sometimes owing to poor business planning, leading to be approved by the government prior to concluding con- operational difficulties such as land disputes or unex- tract negotiations. There was one reference to feasibility pected environmental conditions. In other cases, it studies in a contract for a sugar plantation reviewed by was owing to insufficient financial resources to develop the IISD. It commits the investor to finance technical the operation once the land was acquired for a small studies but does not specify the terms of such a study amount. In the worst examples, it appeared possible and would be difficult to enforce. that there was no serious intention to develop the land as agreed—that it was either being held for speculative Some domestic laws and regulations make projects contin- purposes or that it was used for other purposes than gent on feasibility studies and business plans. However, in that to which it had been agreed with the host govern- most cases the laws do not exist. Furthermore, even when ment (for example, for timber from forests rather than laws exist, they tend to be undermined by weak monitor- crop production). ing and implementation. 18 Investment Contracts for Agriculture The investor should continue to submit business plans Legal options: to the host government on a regular basis based on • Integrate impact assessments and management plans changing market conditions or other circumstances. The into the contracts with specific instructions and guide- contract should also build in a degree of flexibility to lines about what needs to be assessed and included in allow the investor to rapidly modify plans if there are the management plans. changes in the market, price, or agronomic conditions. • Ensure verification by an independent third party and government approval. However, if the investor needs to materially alter the • Failure to conduct impact assessments and develop man- business plan, this should be subject to further approval agement plans should amount to a material breach of by the host government. the contract and be grounds for termination. A number of countries in Africa and Asia are currently in the situation in which they gave away too much land too The good news is that 70 percent of investors conducted quickly. At least one East African country and one South- an environmental and social impact assessment and east Asian country are considering caps on how much almost 50 percent developed an environmental manage- land can be allocated to an investor in the initial contract. ment plan. The bad news is that in most cases they were Both these countries would like the investors to first prove treated as “box-ticking” exercises, meaning they were they can be successful on a smaller plot of land before giv- largely symbolic and not incorporated into the contract. ing them a larger surface. The quality of environmental management plans was weak and they were for the most part not informing busi- Assignment—the transfer of rights from one company to ness plans or operations. another—and termination provisions in the contract are also essential to provide the government and the investor The result was that investors often missed important with an exit strategy if the project fails or is struggling recommendations, which in turn had consequences financially. The contract can give the investor the possi- for the investment. For example, a rice farm in Ethio- bility to transfer its rights to an affiliate or a third com- pia had its crop repeatedly eaten by birds and had to pany. But this must be on condition that the new investor hurriedly employ 500 bird chasers. The presence of assumes all the obligations under the contract and is sub- a large endemic bird population was identified in the ject to prior approval by the government. impact assessment, but it was conducted by a consult- ant and sat on the shelf at the head office in Addis The contract can provide for termination if commercial Ababa, without the farm managers ever having seen or operations do not begin at a specified date, if rent is not paid, read it. Another World Bank study found that “imple- or if the company goes into bankruptcy. The contract can mentation of environmental and social impact assess- also be terminated if there is a material breach of the key ments is deficient in many settings. Even where they provisions of the agreement by the government or investor. are required by law, environmental and social impact assessments are often not conducted” (Deininger and Byerlee 2011, 57). POOR MANAGEMENT OF ENVIRONMENTAL AND Stakeholders interviewed mentioned various negative SOCIAL IMPACTS (4) environmental impacts, most commonly water pollu- tion from chemical drift and the transfer of conservation Downside 4: Poor management of environmental areas to make way for agricultural investments. The study and social impacts found that in around half the investments, water use by • Impact assessments are treated as “box-ticking” exer- the investor was totally unregulated. One local commu- cises and not translated into management plans and nity complained that at the investors’ present extraction not monitored. rates, local water sources would be exhausted within Maximizing Gains and Minimizing Risks 19 months. Water issues, such as extraction and chemical BOX 5.3. ELEMENTS TO INCLUDE IN pollution, must be identified in the impact assessments ENVIRONMENTAL AND SOCIAL and management plans. MANAGEMENT PLANS These shortcomings combined with the frequency of pro- Some elements that can be included in the environmental ject failures point to the need for paying more attention plan are the following: to integrating impact assessments and management plans • Main areas of environmental concern into investment contracts. The UNCTAD–World Bank • Plans for managing impacts on biological diversity, study found the most effective impact assessments were surface water and groundwater, and soils those conducted by the investor, with monitoring and ver- • Plans to minimize greenhouse gas emissions and adapt to climate change ification from the host country government and an inde- • Plans for handling and storing chemicals, pesticides, pendent third party. fertilizers, and fuel • A plan to restore the area postinvestment In principle, before a contract is signed and imple- • A description of the monitoring and assessment mech- mented, an environmental and social impact assess- anism ment should take place. It can involve more than one Some elements that can be included in the social plan are stage to avoid excessive delays. An initial high-level the following: screening can determine whether launching a formal • Recognition of existing land owners and users and assessment is needed and can define the scope of issues their rights to continue using the land for subsistence to be covered in a more rigorous assessment. The con- purposes tract negotiations can then be adapted based on the • Plan to avoid or minimize displacement or involun- findings of the ESIA. The possibility of an ESIA lead- tary resettlement ing to abandoning the project should not be ruled • Plan to avoid or minimize unreasonable interference out. The investor should use the results of the ESIAs in living conditions of people living on or around the to develop management plans, one for environmental project site • Plan for resettlement, which includes consultation, issues and the other for social issues. Box 5.3 outlines disclosure of information, how the investor will replace the key elements to include in the environmental and or restore livelihoods, and payment of fair and reason- social management plans. able compensation Source: Smaller 2014a. In practice, impact assessments are often done after the contract is signed but before the investor starts construc- tion and operations. This is not the ideal situation, but at a INSUFFICIENT MECHANISMS minimum, the investor should not be granted the licenses or permission to start production until the ESIA and man- TO RAISE GRIEVANCES (5) agement plans are completed, independently verified, Downside 5: Insufficient mechanisms to raise griev- and approved by the government, in accordance with the ances applicable laws. • There were insufficient mechanisms for local commu- nities to raise grievances and seek redress. Failure to comply with these conditions must amount to a Legal options: material breach of the contract. The contract should also • Include a provision in the contract for the establish- contain a requirement for annual reporting on the imple- ment of company grievance mechanisms based on mentation of the two plans, with the reports to be made International Finance Corporation (IFC) Performance Standards. public and accessible to local communities. 20 Investment Contracts for Agriculture In most cases, people negatively affected by an invest- channel between the investor and local community ment did not have sufficient means to raise grievances to deal with issues quickly and before they escalate. with the investor or government and to seek redress. This Nevertheless, there are incidents that may be beyond is a key means through which local communities and the scope of the grievance mechanisms that are in place. other stakeholders have a voice. Many stakeholders who Therefore, it is also important that the grievance mecha- mentioned grievances during interviews said they had no nism does not prevent access to judicial or administrative way of raising those grievances. Some positive examples remedies, such as mediation and arbitration. Grievance did exist, such as a Community Liaison Committee at a mechanisms are also an important tool for employees palm oil plantation in Ivory Coast. and a separate grievance mechanism should be set up to deal with employee grievances. Investor grievance mechanisms are an important tool that allows the investor to receive and resolve concerns The IFC’s Performance Standards 1, 2, and 5, provide and grievances by local communities on social and guidelines for setting up proper grievance mechanisms. environmental issues. It should be designed in consul- These guidelines should be incorporated as provisions tation with the community and should be understand- in the contract and the investor should report annu- able, accessible, transparent, and culturally appropriate. ally on grievances that have arisen and how they have There should be an ongoing and open communication been addressed. Maximizing Gains and Minimizing Risks 21 CHAPTER SIX CONCLUSIONS Given the right legal and policy frameworks, investments in farmland can generate benefits and minimize risks for local communities, host states, and investors. The right legal framework can help those benefits materialize and act as a buttress against poten- tial negative impacts. Investment contracts are one tool among a range of other legal and policy instruments available. Tables 6.1 and 6.2 summarize the findings of this paper in terms of the ways in which the different stages of the contract process can be used to maximize the benefits and minimize the risks identified by field research. The key message is that decisions should be made based on sound evidence and research about what works and what does not. This foundation of knowledge should then be translated into concrete and detailed provisions in contracts or through other legal frameworks and mechanisms applying to the investment. A significant amount of groundwork is needed prior to entering into negotiations. Even more work is needed after the investment has begun to ensure both parties live up to their commitments. Getting all this right is an important step in generating positive sustainable outcomes for governments, communities, and investors. Maximizing Gains and Minimizing Risks 23 TABLE 6.1. HOW TO MAXIMIZE KEY BENEFITS OF AGRICULTURAL INVESTMENT THROUGH THE CONTRACT PROCESS Preparing for Contract Drafting the Monitoring and Negotiations Contract Enforcement Employment • Give priority to business models • Include targets for employment of • Monitor adherence to creation that maximize job creation. locals and/or nationals. domestic labor, health and • Consider likely composition of • State applicability of domestic labor, safety laws. employees and jobs, for example, health and safety laws. • Monitor job creation, local/national people, gender, • Require training programs for local training, and employee benefit permanent/temporary jobs. staff. commitments. • Consider investor plans for • Ensure commitments for employee • Require annual reporting training, employee benefits. benefits (housing, education, health on employment targets and benefits, and so on) are included. training programs. Integration of • Give priority to investors that • Include provision requiring • Monitor outgrower scheme local farmers have outgrower schemes. establishment of an outgrower scheme. and support provided. • Ensure the business model is • Set requirements for technical support • Require annual reporting on resolved before outgrowers are or provision of inputs to outgrowers. the performance of outgrower introduced. • Set framework for establishment of a schemes. • Treat new crops, technology, fair, transparent pricing mechanism. • Participate in and monitor business models with caution, but price-setting mechanisms. do not exclude them entirely. Expansion • Give priority to investors that will • Establish commitments for setting up a • Monitor adherence to local of market set up local processing facilities, processing facility. business development plan. opportunities where commercially viable. • Require the investor to give preference • Monitor development of • Consider whether the investor to local suppliers, where available. processing facility. plans to import inputs or • Require the investor to establish a local • Require annual reporting purchase them locally. business development plans. on implementation of local business development plan and processing facility. Establishment • Consider investors’ plans • Require investors to establish • Monitor adherence to of community for community development community development agreements community development development programs. that are annexed to the contract. agreements and financially programs • Give priority to financially • Establish terms of and process for inclusive business models. inclusive business models. community development agreements • Failure to set up and comply • Ensure proper consultation, or financially inclusive business models. with community development engagement, and access to agreement amounts to information for local community. a material breach of the contract. • Require annual reporting on implementation of community development agreement. Increased • Consider all food security • Include a provision on local • Monitor adherence to local incomes implications of investments. community food programs. community food program improve food • Give priority to investors whose • Require a certain percentage of food commitments. security operations support local and crops to be sold in the national market, • Monitor impact of investment national food security strategies. where appropriate. on local food security. 24 Investment Contracts for Agriculture TABLE 6.2. HOW TO MINIMIZE KEY RISKS OF AGRICULTURAL INVESTMENT THROUGH THE CONTRACT PROCESS Preparing for Contract Drafting the Negotiations Contract Monitoring and Enforcement Loss of land • Map out and identify all existing • Define rights of investor to use • Monitor that investor remains within and poor users of the land, including and access the project site. allocated land and uses land for the resettlement formal and informal rights. • Annex map with geographical agreed purposes. plans • Verify through community boundaries and special features • Create mechanism for local consultation that no residual land to be left intact. community to raise grievances about disputes exist. • Prepare resettlement plan, land issues. • Consider investor plans for if needed, with consent of • Require investor to report on land resettlement and/or working with resettled persons. disputes that arise. existing users of the land. Lack of • Conduct full and transparent • Engage with local communities • Make contracts and other related openness and consultations with communities during the design of the project documents public, excluding engagement prior to negotiations. and drafting terms of the confidential business information. with local • Ensure transparency about the contract. • Ensure commitments made during communities process for investors to access land • Include a disclosure provision consultations with communities are and make investments. that outlines what documents upheld. will be made public. Weak • Screen investors with respect • Specify elements to be included • Failure to prepare feasibility studies assessment of to their technical and financial in the feasibility study and business plans is a material breach commercial capabilities. • Incorporate milestones of the of the contract and is grounds for viability • Give priority to business models business plan. termination. that are most likely to be a • Require that material changes • Monitor financial and operational financial and operational success. to the business plan be performance of the project. • Conduct business feasibility reported. • Report changes to the business plan. studies and prepare a business • Include assignment and • Design contingency plans for cases in plan based on outcomes. termination clauses to address which investors fail, including return • Ensure feasibility studies and potential failure. of unused land, transfer of rights to a business plans are approved by third party, or contract termination. government and verified by an independent third party. Poor • Conduct social and • Supplement domestic • Failure to conduct impact assessments management environmental impact assessment legislation with specific and prepare management plans of and incorporate findings into guidance for elements to be amounts to a material breach of environmental management plans and wider included in assessments and the contract and is grounds for and social business plan. plans. termination. impacts • Ensure assessments and • Incorporate findings of impact • Require annual reporting on management plans are approved assessments and management implementation of social and by government and verified by an plans. environmental plans. independent third party. • Include social and • Monitor water quantity and quality, environmental impact soils and changes in climatic assessments as binding conditions. obligations. Insufficient • Design grievance and redress • Include a provision for • Report annually on grievances and mechanisms mechanisms in line with the establishment of grievance and how they have been addressed. to raise community consultations. redress mechanism, based on grievances • Establish ongoing channel of IFC performance standards. communication between investor and community. Maximizing Gains and Minimizing Risks 25 REFERENCES African Union, UN Economic Commission for Africa, and African Development Bank. 2010. Framework and Guidelines on Land Policy in Africa. Addis Ababa, Ethiopia: AUC-ECA-AfDB Consortium. Arias P., D. Hallam, S. Koroma, and P. Liu, eds. 2013. Trends and Impacts of Foreign Investment in Developing Country Agriculture: Evidence from Case Studies. Rome: FAO. Bernasconi-Osterwalder, N., A. Cosbey, L. Johnson, and D. Vis-Dunbar. 2011. Invest- ment Treaties and Why They Matter to Sustainable Development: Questions and Answers. Win- nipeg, MB, Canada: IISD. 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Winnipeg, MB, Canada: IISD. ———. 2014b. The Global Response to Foreign Investment in Agriculture. Winnipeg, MB, Canada: IISD. Tyler G., and G. Dixie. 2012. Investing in Agribusiness: A Retrospective View of a Development Bank’s Investments in Agribusiness in Africa and Southeast Asia. Washington, DC: World Bank. UNCTAD. 2009. World Investment Report 2009: Transnational Corporations, Agricultural Pro- duction and Development. New York: United Nations. ———. 2012. World Investment Report 2012: Towards a New Generation of Investment Policies. New York: United Nations. ———. 2014. World Investment Report 2014: Investing in the SDGs: An Action Plan. New York: United Nations. UNCTAD and World Bank. 2014. The Practice of Responsible Investment Principles in Larger Scale Agricultural Investments: Implications for Corporate Performance and Impact on Local Communities. Washington, DC, and New York: World Bank Group and United Nations. Maximizing Gains and Minimizing Risks 27 A G R I C U LT U R E G L O B A L P R A C T I C E D I S C U S S I O N P A P E R 0 3 W O R L D B A N K G R O U P R E P O R T N U M B E R 94895-GLB 1818 H Street, NW Washington, D.C. 20433 USA Telephone: 202-473-1000 Internet: www.worldbank.org/agriculture