A g r i c u lt u r e G l o b a l P r a c t i c e N o t e 08 100052 Investment Contracts for Agriculture Maximizing Gains and Minimizing Risks* The recent increase in private investment in large-scale agricultural projects in developing countries has raised concerns about the implications for longer-term sustainability and food security in host countries. Recent research reveals the importance, both for developing countries and investors, that such investment be beneficial not only in the short term, but most importantly sustainable in the long term with minimal risks or negative effects and contributing to host country’s development objectives. Practical legal guidelines to the success of agricultural investment projects. This Note combines two bodies of research: 1) evidence of based on considerable the impacts of investments based on field surveys of empirical evidence large-scale matured agricultural investments conducted by Carefully negotiated contractual arrangements between UNCTAD and the World Bank, and 2) practical guidance on investors and governments can contribute significantly legal options for maximizing the main beneficial outcomes and minimizing the main downsides through better Asuka Okumura / World Bank drafting of contracts based on work conducted by IISD. It contributes to the growing body of international norms on the conduct of responsible agricultural investment to help turn investor interest into an opportunity for rural development.1 Detailed examination of key stages in contract negotiation Contracts are the most directly relevant legal instrument for agricultural investment, and greater attention is needed to the role that they play. They define rights and obligations, benefit-sharing arrangements, exit strategies, and modali- ties for redress. They help to fill the gaps in domestic laws. 1 The stream of research that provided a basis for this report was funded by the Government of Japan and the Swiss Agency for Development and Cooperation. *Note: This Note is the summary of the latest report: Smaller, C., and W. Speller, with H. Mirza, N. Bernasconi-Osterwalder,and G. Dixie. 2015. “Investment Contracts for Agricul- ture: Maximizing Gains and Minimizing Risks.” Washington, D.C.: World Bank Group; New York: United Nations; and Winnipeg: International Institute for Sustainable Develop- ment (IISD). AGRICULTURE GLOBAL PRACTICE NOTE — OCTOBER 2015 The preparatory stage is fundamentally important Table 1. Top five positive outcomes from farmland for maximizing the chances of positive outcomes, investments not only in commercial terms but also for longer- term sustainability. Aside from technical produc- Positive outcome 1: Employment tion and market assessments, feasibility studies and creation business plans, it’s important to carefully evaluate • Employment creation is the key benefit, and can involve provision of housing, education, and healthcare for employees and their families the economic and social impacts on nearby communities. Host country governments should • More is needed to improve working conditions, better integrate women, build the skills of the workforce and increase employment of nationals in carefully vet prospective investors. senior positions The actual negotiation of the contract involves Positive outcome 2: Integration of local farmers defining the rights and obligations of the investor Investments in land that also integrated nearby farmers (through outgrower and those of the government. It should also reflect schemes) were the most successful business model and the only investments the interaction with local communities and other where there was a significant transfer of technology stakeholders initiated during the preparatory stage. Positive outcome 3: Expansion of Monitoring and enforcement are often the most market opportunities challenging stages for governments because of • The investors who set up a processing facility were perceived more limited resources and capacity, but it is essential to favourably assess whether investment obligations are being • A number of investments provided new markets for local contractors and suppliers of fuel, fertilizer, and machinery fulfilled for the benefit of all concerned stakeholders. Positive outcome 4: Establishment of community Clear guidelines on how development programs to maximizing positive Where investors built relations with the community and provided social and economic development programs they were more likely to be financially outcomes and minimize key successful risks Positive outcome 5: Increased incomes improved The key five positive outcomes and the top five food security downsides from farmland investments are listed in Some investments had a positive impact on food security due to increased incomes for those employed or contracted by the project Tables 1 and 2, respectively. Guidelines on how to maximize the individual key Table 2. Top five downsides to farmland investments benefits through the contract process (preparation, negotiation, and enforcement) are given in Table 3, Downside 1: Loss of land and poor resettlement while similar information to minimize the key risks plans of agricultural investment are presented in Table 4. The standout negative impact on local communities was reduced access to land, coupled with poorly executed resettlement plans The legal options indicated in Tables 3 and 4 are Downside 2: Lack of openness and engagement with not intended to be a blue print, but rather a guide local communities to possible best practices to assist negotiations by Lack of transparency surrounding land deals and inadequate consultation governments, investors, and local communities. with local communities led to a sense of fear, mistrust, and resentment, creating operational and financial difficulties for investors Suggestions on how to get Downside 3: Weak assessment of commercial viabil- it right ity Many projects fail or are struggling due to factors that could have been Decisions should be made based on sound identified by better pre-investment screening, feasibility studies, and due evidence and research about what works and what diligence does not. This foundation of knowledge should 2 | AGRICULTURE GLOBAL PRACTICE NOTE — OCTOBER 2015 then be translated into concrete and detailed Downside 4: Poor management of environmen- provisions in contracts or through other legal tal and social impacts frameworks and mechanisms applying to the Impact assessments are treated as “box-ticking” exercises and not investment. A significant amount of groundwork translated into management plans and not monitored is needed prior to entering into negotiations. Downside 5: Insufficient mechanisms to raise Even more work is needed after the investment grievances has begun to ensure all parties live up to their There were insufficient mechanisms for local communities to raise commitments. Getting this right is an important grievances and seek redress. step in generating positive, sustainable outcomes for governments, communities, and investors. Table 3. How to maximize key benefits of agricultural investment through the contract process Preparing for contract Monitoring and negotiations Drafting the contract enforcement Employment Give priority to business models which Include targets for employment of locals Monitor adherence to domestic creation maximize job creation and/or nationals labor, health, and safety laws Consider likely composition of employees State applicability of domestic labor, Monitor job creation, training, and and jobs, e.g., local/national people, gender, health, and safety laws employee benefit commitments permanent/temporary jobs Require training programs for local staff Require annual reporting on Consider investor plans for training, and employment targets and training employee benefits Ensure commitments for employee programs benefits (housing, education, health benefits, etc.) are included Integration of Give priority to investors that have Include provision requiring establishment Monitor outgrower scheme and local farmers outgrower schemes of an outgrower scheme support provided Ensure the business model is resolved Set requirements for technical support or Require annual reporting on before outgrowers are introduced provision of inputs to outgrowers the performance of outgrower schemes Treat new crops, technology, and business Set framework for establishment of a fair, models with caution, but do not exclude transparent pricing mechanism Participate and monitor price- them entirely setting mechanisms Expansion of Give priority to investors who will set up Establish commitments for setting up a Monitor adherence to local market local processing facilities, where com- processing facility business development plan mercially viable opportunities Require the investor to give preference to Monitor development of process- Consider whether the investor plans to local suppliers, where available ing facility import inputs or purchase them locally Require the investor to establish local Require annual reporting on business development plans implementation of local business development plan and processing facility Establishment Consider investors’ plans for community Require investors to establish com- Monitor adherence to community of community development programs munity development agreements that are development agreements and annexed to the contract financially-inclusive business development Give priority to financially-inclusive business models programs models Establish terms of, and process for, community development agreements or Failure to set up and comply Ensure proper consultation, engagement, financially-inclusive business models with community development and access to information for local agreement amounts to a material community breach of contract Require annual reporting on implementation of community development agreement Increased Consider all food security implications Include a provision on local com- Monitor adherence to local income of investments munity food programs community food program improved food commitments Give priority to investors whose Require a certain percentage of food security operations support local and national crops be sold in the national market, Monitor impact of investment food security strategies where appropriate on local food security AGRICULTURE GLOBAL PRACTICE NOTE — OCTOBER 2015 | 3 Table 4. How to minimize key risks of agricultural investment through the contract process Preparing for contract Monitoring and negotiations Drafting the contract enforcement Loss of land Map out and identify all existing users of the Define rights of investor to use and access Monitor investors to ensure they and poor land, including formal and informal rights the project site remain within allocated land and use land for the agreed purposes resettlement Verify through community consultation that Annex map with geographical boundaries plans no residual land disputes exist and special features to be left in tact Create mechanism for local community to raise grievances Consider investor plans for resettlement Prepare resettlement plan, if needed, with about land issues and/or working with existing users of the consent of resettled persons land Require investor to report on land disputes that arise Lack of Conduct full and transparent consultations Engage with local communities during Make contracts and other related openness and with communities prior to negotiations the design of the project and during the documents public, excluding drafting of its terms confidential business information engagement Ensure transparency about the process with local for investors to access land and make Include a disclosure provision which Ensure commitments made during communities investments outlines which documents will be made consultations with communities public are upheld Weak Screen investors with respect to their Specify elements to be included in the Failure to prepare feasibility studies assessment of technical and financial capabilities feasibility study and business plans is a mate- rial breach of the contract and is commercial Give priority to business models that are Incorporate milestones of the business grounds for termination viability most likely to be financial and operational plan successes Monitor financial and operational Require that material changes to the performance of the project Conduct business feasibility studies and business plan be reported prepare a business plan based on outcomes Report changes to the business Include assignment and termination plan Ensure feasibility studies and business plans clauses to address potential failure are approved by government and verified Design contingency plans for cases by an independent third party in which investors fail, including return of unused land, transfer of rights to a third party, or contract termination Poor Conduct social and environmental impact Supplement domestic legislation with Failure to conduct impact management assessments and incorporate findings into specific guidance for elements to be assessments and prepare management plans and wider business plan included in assessments and plans management plans amounts to of environmen- a material breach of the contract tal and social Ensure assessments and management plans Incorporate findings of impact assess- and is grounds for termination impacts are approved by government and verified ments and management plans by an independent third party Annual reporting on implementa- Include social and environmental impact tion of social and environmental assessments as binding obligations plans Monitor water quantity and quality, soils, and changes in climatic conditions Insufficient Design grievance and redress mechanisms Include a provision for establishment of a Report annually on grievances and mechanisms to in line with the community consultations grievance and redress mechanism, based how they have been addressed on IFC performance standards raise Establish ongoing channel of communica- grievances tion between investor and community Internet: www.worldbank.org/agriculture, Twitter: @WB_agriculture