Investors buying farmland in Africa need to take note of the political and emotional risks involved, and it is essential that they do their homework before making any purchases.
A growing number of international investors are looking to buy farmland on the continent in order to meet the global demand for agricultural commodities.
In a recently published research paper, Jacques Taylor, Standard Bank Africa’s director for agricultural banking and Karin Ireton, the Bank’s director for group sustainability, say that buyers need to be aware of the potential risks associated with land deals.
They say that land in Africa is an emotive as well as survival issue. “The potential risks associated with these deals include cash-strapped local people losing not only their homes but also their source of food and future income as buyers secure the full rights to crops and land,” say Taylor and Ireton.
They note that domestic law, as well as legislation relating to foreign investments, taxation, property, water rights, environmental protection and labour should be used as the basis for all investments in farmland. These deals should be done within the framework of direct agreements between the foreign investor and the respective host government.
“These contracts should set out the price, quantity and duration for the buying or leasing of land. They determine which laws should apply in the event of a dispute and often have international arbitration provisions associated with them,” explain Taylor and Ireton.
In addition, investors need to be aware of international agreements dealing with issues such as biodiversity, conservation, use of pesticides and climate change. Taylor and Ireton say a starting point for financiers in this regard is the Equator Principles, a set of global standards for managing social and environmental issues in project finance. The principles apply to all new project finance deals above US$10 million.
They also noted that risk mitigation is a key component of financing foreign investment in Africa’s agricultural land, and they offer a range of insights on managing risks that include political, price and climate factors.