2011   How to Create Win-   Win Land Deals in   Mozambique   Strategic Review of Daewoo Land Deal in   Madagascar as a Cas...
Table of Contents1     Introduction .........................................................................................
4      Analytical Framework .................................................................................................
Introduction      11 IntroductionFacing the growing demand for food and the decrease in available arable land due to envir...
2    How to Create Win-Win Land Deals in Mozambique    2 Background    2.1 Global trends in land deal    The past decade h...
Background       3the summer of 2008, food prices are still 30-50% above their averages over the past decade (TheEconomist...
4    How to Create Win-Win Land Deals in Mozambique    2030, meeting 4 – 7% of world road-transport fuel demand by the end...
Background       5investments to agricultural production including the acquisition of land, not only from agribusinessplay...
6    How to Create Win-Win Land Deals in Mozambique    neo-liberalism and experienced increased growth and greater economi...
Background       7Liversage et al. 2009). Furthermore, it has been demonstrated that the export of agricultural raw materi...
8    How to Create Win-Win Land Deals in Mozambique    3 Case Study on Daewoo Deal in Madagascar    3.1 Madagascar (CIA 20...
Case Study on Daewoo Deal in Madagascar           9been pursued in prior land deals, representing from 15-20% to 37% of al...
10    How to Create Win-Win Land Deals in Mozambique     3.3 Terms of the deal     The exact terms of the deal are not kno...
Case Study on Daewoo Deal in Madagascar            11Partially orchestrated by international intermediaries, opposition mo...
12    How to Create Win-Win Land Deals in Mozambique     et al. 2011). Some investors, particularly in agri-food processin...
Case Study on Daewoo Deal in Madagascar        13central authorities than with the local populations and the regional and ...
14    How to Create Win-Win Land Deals in Mozambique     3.6.3   Political Instability     Given colonial history, most Af...
Case Study on Daewoo Deal in Madagascar           15Furthermore, Daewoo Logistics managed its reputation poorly amidst the...
16    How to Create Win-Win Land Deals in Mozambique     poverty alleviation. The opposition then leveraged the disconsent...
Case Study on Daewoo Deal in Madagascar                                                 17Table 1 Distributive PoliticsSup...
18    How to Create Win-Win Land Deals in Mozambique     4 Analytical Framework     The analysis of the Daewoo land deal i...
Analytical Framework       194.2 TransparencyMany developing countries, especially in sub-Saharan Africa, do not have adeq...
20    How to Create Win-Win Land Deals in Mozambique     4.3 Previous Deals     This element of the framework assesses ove...
Analytical Framework        214.6 Analytical FrameworkCombining the five dimension of the framework, we can compare differ...
22    How to Create Win-Win Land Deals in Mozambique     5 Recommendations     5.1 Due Diligence     Before investing a si...
Recommendations        23For instance, contract farming and out-grower schemes that involve existing farmers and land user...
24    How to Create Win-Win Land Deals in Mozambique     Bibliography     Blas, J. (2008). Land leased to secure crops for...
Bibliography   25Marcus, R. R. (2010). "Marc the Medici? The Failure of a New Form of     Neopatrimonial Rule in Madagasca...
Analysis of Daewoo Land Deal in Madagascar: Paper
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Analysis of Daewoo Land Deal in Madagascar: Paper

  1. 1. 2011 How to Create Win- Win Land Deals in Mozambique Strategic Review of Daewoo Land Deal in Madagascar as a Case Study By Kevin Cyrus Hong INAF U6355 Globalization Spring 2011 School of International and Public Affairs, Columbia University
  2. 2. Table of Contents1 Introduction ..................................................................................................................................... 12 Background ..................................................................................................................................... 2 2.1 Global trends in land deal ......................................................................................................... 2 2.2 Driving forces .......................................................................................................................... 2 2.2.1 Increasing food price and food security ............................................................................. 2 2.2.2 Biofuel boom.................................................................................................................... 3 2.2.3 Investment in land and soft commodities .......................................................................... 4 2.3 Land deals as ―win-win‖ vs. ―neocolonial land grab‖ ................................................................ 53 Case Study on Daewoo Deal in Madagascar ..................................................................................... 8 3.1 Madagascar (CIA 2011) ........................................................................................................... 8 3.2 Prior land deals and other FDIs in Madagascar ......................................................................... 8 3.3 Terms of the deal ................................................................................................................... 10 3.4 Timeline................................................................................................................................. 10 3.5 Impact of the Daewoo Scandal ............................................................................................... 11 3.6 Analysis - What went wrong .................................................................................................. 12 3.6.1 Lack of Transparency ..................................................................................................... 12 3.6.2 Deal structure and terms ................................................................................................. 12 3.6.3 Political Instability ......................................................................................................... 14 3.6.4 Mediatization and Poor Public Relation Management ..................................................... 14 3.6.5 Distributive politics ........................................................................................................ 15
  3. 3. 4 Analytical Framework ................................................................................................................... 18 4.1 Political Stability .................................................................................................................... 18 4.2 Transparency.......................................................................................................................... 19 4.3 Previous Deals ....................................................................................................................... 20 4.4 Deal Structure (affects Wilson/Lowi matrix) .......................................................................... 20 4.5 Deal Size and Length ............................................................................................................. 20 4.6 Analytical Framework ............................................................................................................ 215 Recommendations ......................................................................................................................... 22 5.1 Due Diligence ........................................................................................................................ 22 5.2 Transparency and Inclusion of Local Population in Decision Making ..................................... 22 5.3 Alternative business models ................................................................................................... 22 5.4 Reputation and Media Management ....................................................................................... 23Bibliography ......................................................................................................................................... 24
  4. 4. Introduction 11 IntroductionFacing the growing demand for food and the decrease in available arable land due to environmentaldegradation and urbanization, China has increasingly looked outwardly to stabilize its food security. Inconjunction with a rising level of infrastructure investment in developing countries, especially in sub-Saharan Africa, various state-owned enterprises from China have considered agricultural land deals inAfrica. Since the Chinese state owned Exibank granted $2 billion in soft loans to the Mozambicangovernment to build the Mpanda Nkua mega-dam on the stretch of the Zambezi in Tete province, Chinahas been requesting large land leases to establish Chinese-run mega-farms and cattle ranches in the region.In June 2007, a memorandum of understanding was reported to have been signed to move 3,000 Chinesesettlers to the Zambezi Valley. But Mozambicans have resisted the settlement of thousands of Chineseagricultural workers on leased lands—a situation that would limit the involvement of local labor in thenew agricultural investments and following a public uproar, the government of Mozambique denied sucha deal, leading to the suspension of the land investment. According to the Mozambican government, only9% of the country‘s 36 million hectares of arable land are currently being used and there is the possibilityof cultivating an additional 41.2 million hectares of marginal land (Namburete 2006). Given theinvestment opportunities in the country combined with the acceleration of growing demand and risingfood prices, our client, a state-owned enterprise in China, is reconsidering a land investment inMozambique. In the light of the previous failed attempt, our client requested us to analyze the recenttrends in foreign direct investments in land and agriculture and to propose a re-entry strategy. In thisreport, we analyzed the land deal by Daewoo Logistics, a South Korean firm, in Madagascar as a casestudy and proposed how to mitigate risks often faced in land deals in sub-Saharan Africa.
  5. 5. 2 How to Create Win-Win Land Deals in Mozambique 2 Background 2.1 Global trends in land deal The past decade has seen an upward trend in both the number and the size of international land deals. One study quantified that between 2005 and 2009, nearly 2.5m hectares (6.2m acres) of farmland in just five sub-Saharan countries have been bought or rented at a total cost of $920m (Cotula, Vermeulen et al. 2009). Globally, it is estimated that since 2006 between 15m and 20m hectares of farmland in poor countries, the size of France‘s agricultural land, have been subject to deals or negotiations involving foreign investors, valued at $20 billion-30 billion (The Economist 2009). In addition to the European Union and the United States, many countries in East Asia and Gulf such as China, South Korea, Saudi Arabia, Qatar, and United Arab Emirates have emerged as the main sources of these investments in agricultural land in developing countries (Cotula, Vermeulen et al. 2009; Von Braun and Meinzen-Dick 2009). Numerous nations in sub-Saharan Africa, especially Sudan, Ethiopia, Madagascar and Mozambique, have been identified among key recipients of the land deals. Outside Africa, Pakistan, Kazakhstan, Southeast Asia (Cambodia, Laos, Philippines, Indonesia) and parts of Eastern Europe (e.g. Ukraine) have also experience a significant increase in foreign direct investments in land (Cotula, Vermeulen et al. 2009; Von Braun and Meinzen-Dick 2009). It is possible that the recent downturn in the global economy may have slowed down or reversed these trends. But the driving forces that have increased these investments are likely to persist. 2.2 Driving forces 2.2.1 Increasing food price and food security One of the main driving forces behind the upward trends in international land deals is the increasing food price and food insecurity. For example, the prices of maize and wheat doubles between 2003 and 2008 (von Braun 2008). Even though the prices of grain and other food items have dropped from the highs in
  6. 6. Background 3the summer of 2008, food prices are still 30-50% above their averages over the past decade (TheEconomist 2009).The rising food price is driven by both global food supply and demand (Cotula, Vermeulen et al. 2009).For the past decade, agricultural production has experienced diminishing productivity due to variousenvironmental degradations in soil and water availability. Climate change is expected to accelerate landdegradation and water scarcity around the world and to increase the frequency of extreme weather eventswhich reduce harvests. The increase in oil price will also affect agricultural production by affecting costsof transportation and nitrogen fertilizers. On the demand side, rapid population growth, increasingurbanization which reduces food production but increases food consumption through rural-urbanmigration, and changing diets to greater consumption of meat particularly by middle classes in largeindustrializing countries such as China and India have driven global food price up.Facing decreasing supply and increasing demand, many countries are experiencing heighten level of foodinsecurity. For example, while the population in the Gulf States will double from 30 million in 2000 tonearly 60 million by 2030, cereal production in the region, which is already suffering from scarce waterand soil resources, is expected to decline irreversibly. These countries currently meet 60% of total fooddemand with import (Woertz 2009) and need to increase food import from $8bn to $20bn from 2002 to2007 (GRAIN 2008). In response to the rising food price which threatens to drive inflation in the widereconomy and cause social unrest, they have started investing in food-producing lands abroad (Daniel2011). Other countries such as China, Japan, and South Korea are also adopting a similar strategy tomaintain food security.2.2.2 Biofuel boomAlthough biofuels such as bioethanol and biodiesel currently account for a very small fraction of globalenergy consumption in developed countries, their share is growing fast. International Energy Agencyestimated that the world output of biofuels will grow annually at 7 – 9% on average between 2005 and
  7. 7. 4 How to Create Win-Win Land Deals in Mozambique 2030, meeting 4 – 7% of world road-transport fuel demand by the end of 2030, up from 1% in 2005 (IEA 2006). The fundamental driving forces for biofuel boom is high and volatile oil price in recent years and the increasing awareness about climate change. Around the world, many countries have proposed or implemented government policies to promote production and use of biofuels as a means of mitigating climate change and more importantly of achieving energy security. In contrast to the popular belief, the recent hikes in world food prices have not been caused primarily by biofuels but by weather-related under-production, reduced global stock, and increased food demand especially from emerging economies (Cotula, Dyer et al. 2008). Competition between biofuels and food for land uses and same agricultural outputs such as maize and sugarcane, however, is expected to intensify over the coming years, driving up the price of food and threatening food security around the world (Cotula, Dyer et al. 2008). In fact, the increased demand for biofuel in 2000-2007 is estimated to have contributed to 30% increase in cereal price on average (von Braun 2008). IEA projected that the share of the world‘s available arable land used for the production of biofuels will rise to over 2.5%-3.8% in 2030, up from about 1% or 14 million hectares in 2005 (IEA 2006). As biofuel production compete with or replace food production around the world, many countries with limited amount of available arable land are looking outward, driving up the global land deals. 2.2.3 Investment in land and soft commodities Traditionally, land and agriculture have not presented most attractive investment options. The recent trends, however, shifted attention from investors from ―hard‖ to ―soft‖ commodities. Conventional agricultural value chains have provided higher returns in processing and distribution while exposing most of the risks to primary production, discouraging direct investment in land. With the rising prices of agricultural commodities driven by strong demand from emerging economies and new demands from biofuel production, however, risks are being re-distributed downstream to processors and distributors who are concerned about sourcing raw materials and increasing production returns. This shift has attracted
  8. 8. Background 5investments to agricultural production including the acquisition of land, not only from agribusinessplayers who have been traditionally involved in food processing and distribution but now are looking tovertically integrate its value chain but also from new investors looking for high returns (Cotula,Vermeulen et al. 2009). In fact, ―soft‖ commodities overtook ―hard‖ counterparts as the prime performersin the commodities investment market in 2007 and the upward trends to invest in land and operationalfarming around the world continued throughout 2008 (Daniel 2011).Furthermore, there has been growing speculation that while land in many parts of Africa is currently verycheap to acquire or lease, productive land will become relatively scarcer over time. This expectation hasincreased the value of land for both domestic and foreign investors. Given the recent global financialcrisis which has resulted in a rapid decline in equity and bond markets, land has presented a promisingalternative in both higher returns from agricultural production and speculated rise in the value of landitself (Cotula, Vermeulen et al. 2009).Another factor to consider is the change in investment climate in many African countries. Althoughpolitical risks persist in most of these countries, policy reforms including investment treaties and codesand sectoral legislation on land, banking, taxation and customs regimes have reduced risks of makinginvestment, presenting relatively nascent investment opportunities (Cotula, Vermeulen et al. 2009).2.3 Land deals as “win-win” vs. “neocolonial land grab”Foreign direct investments in land have been touted as win-win for both investing and investee countries.As early as 1999, UNCTAD (United Nations Conference on Trade and Development) reported that ―thepotential for highly profitable foreign investment in Africa is enormous‖ (UNCTAD 2009) and then-United Nations Secretary-General, Kofi Annan, urged African leaders to change the ―negative image [thatwas based] in wars and economic difficulties that afflict[ed] some countries‖, by opening up andattracting foreign investment into the resource-rich continent (Stephan, Lobban et al. 2010). In thefollowing years, many African countries implemented notable policy reforms guided by the principles of
  9. 9. 6 How to Create Win-Win Land Deals in Mozambique neo-liberalism and experienced increased growth and greater economic stability. As a result, foreign investment gained enormous political clout, premised on the idea that it was ―helping Africans help themselves‖(Stephan, Lobban et al. 2010). While investing countries can stabilize food and commodity supply from acquisition of farm land and agricultural production under their direct control, recipient countries may experience macro-level benefits while raising local living standards. In many developing countries, a lack of capital, technological expertise, infrastructure and mismanagement of agricultural resources have resulted in the underutilization of land resources (FDI Magazine 2008). For poorer countries with relatively abundant land which has not realized its productive capacity, land deals can bring much needed investment in infrastructure and agricultural technology and market access, catalyzing economic development in rural areas (Cotula, Vermeulen et al. 2009). They can also generate employment for infrastructure development and maintenance, and agricultural cultivation. Land deals do generate government revenues via rental fees and taxes but in many cases, local governments do not charge or only a nominal rate. This demonstrates that the importance and value of such direct financial transfers is relatively low compared to the expected broader economic benefits in the perspective of local governments (Cotula, Vermeulen et al. 2009). To the contrary, others view these land deals as neocolonial land grab with very little tangible benefits to investee countries. First, the employment of rural population to work on large-scale industrial farms implies that the land deals force subsistence farmers off their land (GRAIN 2008). Those most at risk of losing access to land as a result of land deals are smallholder producers, women, and indigenous people who do not have formal tenure over the land they use. Given that many countries do not have sufficient mechanisms to protect the rights of these people and that local communities are rarely informed or engaged about on-going land negotiations that will affect them, foreign investments on land disproportionately affect poor subsistence farmers (Cotula, Dyer et al. 2008). In fact, the United Nations Permanent Forum on Indigenous Issues estimated that the land rights of 60 million indigenous people may be at risk as a result of the expansion of large-scale biofuel production worldwide (Haralambous,
  10. 10. Background 7Liversage et al. 2009). Furthermore, it has been demonstrated that the export of agricultural raw materialsfrom Africa has worsened the food security situation in the region. Given that most land deals in sub-Saharan Africa plan to export or repatriate agricultural production from the acquired land, it is expectedthat the rising trends in land deals may translate into deterioration in current food insecurity and povertyin sub-Saharan Africa (Ingwe, Okoro et al. 2010). Some even view land deals as governments out-sourcing food at the expense of their most food-insecure citizens (Daniel 2011).
  11. 11. 8 How to Create Win-Win Land Deals in Mozambique 3 Case Study on Daewoo Deal in Madagascar 3.1 Madagascar (CIA 2011) Located in the Indian Ocean off the coast of Mozambique, Madagascar became a French colony in 1896 but regained independence in 1960. The capital of this island nation is Antananarivo. As the fourth-largest island in the world, Madagascar covers 587,041 sq km of which only 5 percent is arable and 1.85 percent is irrigated. At the total of 21,926,2212 (estimated as of July 2011), the Malagasy population is fairly young with the median age of 18.2 years with 43.1 percent of its population under 14 years of age. 30 percent of the population is located in urban areas and the urban population is expected to grow at the rate of 3.9 percent annually between 2010 and 2015. The rate of literacy as defined as the proportion of age 15 and over who can read and write is 68.9 percent among the total population, 75.5 percent among male, and 62.5% among female as estimated in 2003. GDP in Madagascar is $20.73 billion (2010 estimate in 2010 PPP dollars) and per capita GDP is estimated at $1,000 in 2010. Agriculture, including fishing and forestry, is a mainstay of the economy, accounting for more than one-fourth of GDP and employing 80% of the population. Exports of apparel have boomed in recent years primarily due to duty-free access to the U.S. which was terminated in January 2010 due to the compliance issues. Madagascar experienced 12 percent drop in GDP following the 2002 political crisis. The current political crisis which began in early 2009 has further affected the economy with more than 50 percent reduction in tourism compared with the previous year with pessimistic investment climate in the country. 3.2 Prior land deals and other FDIs in Madagascar The estimates of potential cultivatable land in Madagascar vary from 8 million hectares according to the Ministry of Agriculture to 15-20 million hectares according to the FAO (Ratsialonana, Ramarojohn et al. 2011). According to announcements made by the operators, approximately 3 million hectares of land have
  12. 12. Case Study on Daewoo Deal in Madagascar 9been pursued in prior land deals, representing from 15-20% to 37% of all arable land. This is significantconsidering that 2 million hectares are being cultivated by 2.5 million family farms in Madagascar(Ratsialonana, Ramarojohn et al. 2011). An analysis of land operations, however, reveals that on-goingprojects cover no more than 150,000 hectares while effective usage represents only 23,000 hectares forthe moment (Ratsialonana, Ramarojohn et al. 2011).Because of the soil quality, the favorable rainfall for crops, the presence of vast relatively flat surfaces,and above all the proximity to the sea to export products, the coastal lands have been most demanded forinvestments, especially in the regions of Boeny, Sofia, Melkay, Menabe, Antsinanana, SAVA, andAtsimo-Andrefana (Ratsialonana, Ramarojohn et al. 2011). More than two-thirds of the investors between2005 and 2010 are foreigners, half of which are from European countries such as United Kingdom,France, Germany, Italy, Holland and others from South Africa, India, Australia, and South Korea(Ratsialonana, Ramarojohn et al. 2011). Most on-going projects focus on biofuels as the majority of theagribusiness projects have been abandoned. While foreign projects have emphasized the production ofjastropha, a source of jatropha oil to produce a high-quality biodiesel, on surfaces between 10 and 30,000hectares based on a wage system, most Malagasy projects have concentrated on the industrialtransformation of sugar cane into ethanol in rural areas. Exportation is the common goal among theseprojects (Ratsialonana, Ramarojohn et al. 2011).An analysis of all announced land deals in Madagascar suggested that the attraction of foreign investors toMadagascar was linked to the Government‘s efforts to create a favorable investment climate, a challengeresulting from a World Bank evaluation in 2005 on the investment climate in six countries, includingMadagascar, China and four other African countries (Ratsialonana, Ramarojohn et al. 2011).
  13. 13. 10 How to Create Win-Win Land Deals in Mozambique 3.3 Terms of the deal The exact terms of the deal are not known but according to the most media reports, Daewoo Logistics was in negotiation with the Malagasy government to lease 1.3m hectares of farmland – about half of all arable land in Madagascar – in 4 coastal regions for 99 years. It planned to produce 500,000 tons of palm oil in the eastern parts of the country and 4,000,000 tons of corn in the western parts and export most of the production back to South Korea. Daewoo Logistics announced that they would mobilize about $6 billion over the first 20-25 years to invest heavily in infrastructure development including 60 power plants, 8 airports, 30 factories and silos, 8 ports in addition to 1,170 schools, 170 private hospitals, 250 markets, and 120 churches for locals. It also mentioned the creation of numerous jobs (Park 2008). The spokesman at Daewoo Logistics originally indicated that leasing the land would cost as much as $5 per hectare per year according to the local law. Later a report surfaced that Daewoo Logistics had negotiated with the Madagascar‘s government to pay no rental fee. 3.4 Timeline In November 2008, the Financial Times published a report about the deal between Daewoo Logistics and the Malagasy government, propelling the deal to the frenzy of the international media (Blas 2008). According to the report, Daewoo Logistics signed a memorandum of understanding with Madagascar‘s government in May, 2008 and a contract in July, 2008. Following the publication of the Financial Times article, the accusation of selling off ―the land of the ancestors‖ or the tanindrazana to a foreign company led to public outcry, especially from the opponents to Ravalomanana‘s regime.
  14. 14. Case Study on Daewoo Deal in Madagascar 11Partially orchestrated by international intermediaries, opposition movements began to mobilize inDecember 2008. Internet and the international media continued to play an important role in attractingWestern attention in January 2009 and the Malagasy Diaspora, particularly the Collective of MalagasyLand Defense Collective, played a major role in the mediatization of the protests taking place inMadagascar (Ratsialonana, Ramarojohn et al. 2011). The international media attention then circled backto Madagascar and the opposition party to Ravalomanana‘s regime used this sensitive issue to galvanizethe public.On January 27th, 2009, riots started in Antananarivo. Following the closure of opposition TV and radiostations, dozens were killed during violent protests in Antananarivo. Andry Rajoelina, who was the mayorof Antananarivo and owner of a radio station (which was closed by the government), called theresignation of Ravalomanana and proclaimed himself as the leader of the opposition movement. Violenceand casualty continued in February 2009 when dozens of people were killed after policy opened fire on anopposition demonstration in the capital and the political turmoil accelerated.In March, 2009, together with military intervention and the back of high court, Rajoelina assumed poweras President of the High Transitional Authority. With the political transition, the new regime effectivelycanceled the land deal with Daewoo Logistics.3.5 Impact of the Daewoo ScandalFollowing the new government‘s assumption of power and the abrupt suspension of the Daewoo deal,land investment has slowed down in Madagascar. For instance, 2.9 million hectares of land have beenrequested since 2005 by 52 different agribusiness companies. In 2010, only 11 projects are underway,covering only 23,500 hectares – less than 1% of the area sought (Ratsialonana, Ramarojohn et al. 2011).During the same period, Madagascar also experienced a considerable decline in FDI ranking 146th out of177 countries. In addition the global financial crisis, the investors attributed the slow-down to the politicalsituation and the difficulties in accessing land following the Daewoo Scandal (Ratsialonana, Ramarojohn
  15. 15. 12 How to Create Win-Win Land Deals in Mozambique et al. 2011). Some investors, particularly in agri-food processing sector, abandoned their projects because they could not obtain the guarantees required by the banks to secure financing. 3.6 Analysis - What went wrong 3.6.1 Lack of Transparency In Madagascar, particularly during the Ravolamanana regime, most of the information on agribusiness projects was not made publicly available (Stephan, Lobban et al. 2010). Furthermore, the government was alleged to have ―muffled dissent and the free press‖ including shutting down VIVA, television station owned by the opposition leader Andry Rajoelina (Maunganidze 2009). The negotiation between the Malagasy government and Daewoo Logistics took place ―in the greatest secrecy‖ (Stephan, Lobban et al. 2010). In fact, Daewoo Logistics signed a prospecting contract with the Malagasy State in July 2008, containing specific clauses of confidentiality to identify the land with utmost discretion. Furthermore, Daewoo Logistics seemed to have received preferential treatment for gaining quick access to title deeds for land while local farmers struggled to do the same (Stephan, Lobban et al. 2010). Therefore, the lack of transparency in the Daewoo deal served as a breeding ground for suspicion and resentment. For instance, the public started to suspect the personal enrichment of a small number of high-ranking government officials and Ravalomanana‘s extravagant personal purchases, including a $60 million private jet to be used as his official presidential aircraft in 2008, did little to dispel mistrust about regime regardless of whether this purchase was linked to the Daewoo Deal (Maunganidze 2009; Stephan, Lobban et al. 2010). 3.6.2 Deal structure and terms The sheer scale of the Daewoo deal to lease half of all the arable land in Madagascar for 99 years and to convert them to plantation-style farms while paying no rent was a great source of controversy and one of the primary reasons for its demise. Daewoo Logistics could have negotiated for more modest but still commercially significant terms, increasing the likelihood of the success of the deal. It was also problematic that Daewoo Logistics spent disproportionately more time to negotiate land access with
  16. 16. Case Study on Daewoo Deal in Madagascar 13central authorities than with the local populations and the regional and local governments to be affectedby deal. In addition to little time spent, Daewoo Logistics failed to engage the local populations byrecruiting topographic brigades to locate land and plots and intermediaries to negotiate contracts withproducers. As a result, the terms of the land deal appeared to be extremely unfavorable for the localpeople (Ratsialonana, Ramarojohn et al. 2011). Given that 70% of the Malagasy people live in rural area,the Daewoo deal which aimed to lease half of all the arable land in the country meant thousands of peoplewere to be displaced or forced into employment with Daewoo Logistics. In other words, benefits werehighly concentrated around Daewoo Logistics and a few government players while costs largely fell onthe local rural population, creating interest group politics and thus largely hostile public opinion againstthe deal (see Wilson/Lowi matrix in Figure 1, red circle). If it wanted to close a successful deal, DaewooLogistics could have explored alternative structures such as contract farming that could have minimizednegative impact while creating opportunity for value chain upgrading and technical assistance. Such anapproach could have distributed the benefits of the land deal to the rural populations and more broadlyMalagasy citizens through economic development, transforming the deal into entrepreneurial politics (seeWilson/Lowi matrix in Figure 1, green circle). Figure 1 Wilson/Lowi Matrix Benefit Concentrated Dispersed Concentrated Interest Group Entrepreneurial Politics Politics Cost Dispersed Majoritarian Client Politics Politics
  17. 17. 14 How to Create Win-Win Land Deals in Mozambique 3.6.3 Political Instability Given colonial history, most African nations are highly sensitized to the issue of dispossession of land and natural resources to foreigners (Maunganidze 2009). Moreover, Madagascar‘s post-colonial history has been characterized by regime transitions brought on primarily through popular uprising and it has been often accompanied by the cycle of political violence and instability (Stephan, Lobban et al. 2010). Stephen et al. has presented a detailed analysis on the nature of political instability in Madagascar and attributed it to the country‘s extreme poverty combined with the high birth rate (Stephan, Lobban et al. 2010). The authors argue that the migration of large numbers of young people every year looking for jobs in Antananarivo, the capital of Madagascar, has created a volatile atmosphere (the Malagasy population is quite young with the median age at 18.2 years; see section 3.1 for more details). Unemployed youth ―in desperate need of a political savior promising a better future‖ have become an easy target for rent-seeking Malagasy politicians to garner support from the masses and the ability to control the ‗urban mob‘ has become significant in national politics (Stephan, Lobban et al. 2010). In fact, without the public protests that fuelled by Rajoelina, it is unlikely that Ravalomanana would have lost his power, leading to the suspension of the Daewoo deal. 3.6.4 Mediatization and Poor Public Relation Management The Daewoo Scandal was unprecedented in terms of the amount of attention it attracted from popular international media. Foreign direct investments in land have taken place around the world for decades (GRAIN 2008) but they had not aroused much interest beyond the realm of development and policy- making. Following the Financial Times article by Blas (Blas 2008), however, the Daewoo deal was catapulted to the spotlight of the international media even before it became controversial within Madagascar. Outcry from the Western communities and the mobilization of the Malagasy Diaspora then enabled the opposition party to organize public protests in Madagascar (see section 3.4 for more details). Therefore, it becomes evident that the ousting of the Ravalomanana regime following the popular uprising may have not been made possible without the unusual mediatization of the Daewoo deal.
  18. 18. Case Study on Daewoo Deal in Madagascar 15Furthermore, Daewoo Logistics managed its reputation poorly amidst the heightened media speculationfrom around the world. For example, a manager from the company was quoted in another Financial Timesarticle saying that ―We want to plant corn there to ensure our food security. Food can be a weapon in thisworld …We can either export the harvests to other countries or ship them back to Korea in case of a foodcrisis‖ (emphasis added) (Song, Oliver et al. 2008). The choice of words such as ―weapon‖ and theunbalanced emphasis on the exploitative nature of the deal over the benefits to the local communitiesaggravated the activists and international public alike.3.6.5 Distributive politicsDistributive politics framework allows us to synthesize how all the factor analyzed above culminated tothe popular uprising against the Ravalomanana regime instigated by the opposition party led by AndryRajoelina and resulted in the suspension of the Daewoo deal (Table 1). In addition to the commercialinterest of Daewoo Logistics, Ravalomanana represented the interest of the Malagasy government in theperspective of his own business interests which could have benefited from the deal (Marcus 2010). Otherstakeholders such as Malagasy farmers with land tenure, Korean citizens and livestock farmers wouldhave benefited from the deal through compensation and cheaper commodity prices respectively but theycould not provide any substantial collective action to support the deal. The number of land-tenuredfarmers in Madagascar was extremely low and the stakeholders in Korea were physically and politicallyremoved far enough from the deal that they did not have resources or incentives strong enough tomobilize collection action. Some Korean farmers, especially corn producers, did face increasingcompetition from the Malagasy import and opposed the deal (GRAIN 2008) but they faced the similarcollection action problem. The tipping point came from the popular movement by the majority of farmerswithout land tenure and citizens. Malagasy people have deep ties to their land and the Daewoo deal wasperceived by many as a betrayal by their president and a direct threat to their livelihood. Furthermore, dueto the lack of transparency during the negotiation process, most people in Madagascar grew suspicious ofthe deal rather than recognizing potential benefits through job creation, economic development, and
  19. 19. 16 How to Create Win-Win Land Deals in Mozambique poverty alleviation. The opposition then leveraged the disconsent and mobilized protesters, overthrowing the government. It is noteworthy how external factors such as international media and political self- interest of the opposition party led by Andry Rajoelina enabled the collective action among the farmers and citizens who otherwise do not have much political resources to organize themselves and influence government action.
  20. 20. Case Study on Daewoo Deal in Madagascar 17Table 1 Distributive PoliticsSupporting interests Supporting Interests Demand Side Supply Side Prediction Benefits from Supporting Ability to Generate Political Action Interests Substitutes Magnitude Per Capita Numbers Coverage Resources Cost Amount Malagasy Other FDIs Large Considerable Small Moderate Large Moderate Moderate Government Other Daewoo Logistics Large Considerable Small Little Small Moderate Limited investments Malagasy farmers Few Large Large Few Little Small Very high Little with land tenure Korean farmers Lower price Moderate Small Large Extensive Limited Very high Limited (livestock) Korean citizens Lower price Moderate Small Large Extensive Limited Very high LimitedOpposing interests Opposing Interests Demand Side Supply Side Prediction Benefits from Opposing Ability to Generate Political Action Interests Substitutes Magnitude Per Capita Numbers Coverage Resources Cost Amount Opposition party None Large Substantial Small Moderate Large Moderate Large Malagasy farmers None Large Large Considerable Extensive Small High Large w/o land tenure Malagasy citizens None Moderate Small Huge Extensive Small High Huge Korean farmers Few Moderate Moderate Large Extensive Limited Very high Little (agricultural)
  21. 21. 18 How to Create Win-Win Land Deals in Mozambique 4 Analytical Framework The analysis of the Daewoo land deal in Madagascar provides us information to develop a framework which will help determine how to approach a new deal in Mozambique. The analytical framework consists of five dimensions based upon the major factors identified in the case study: political stability, transparency, previous deals, deal structure, and deal size and length. 4.1 Political Stability As the political instability characteristics of Madagascar poses significant threat to the long-term chance of success of the Daewoo deal, any prospective investors must take political stability of a host country into consideration. Land deals have been implemented successfully in many politically unstable countries but this dimension allows us to gauge the expected value of the return from a land deal provided that a regime change or civil unrest can result in discontinuation or disruption of negotiation and on-going operation. This factor can be easily assessed using the Political Instability Index by Economist Intelligence Unit (Figure 2) (Economist Intelligence Unit). Figure 2 Political Instability Index
  22. 22. Analytical Framework 194.2 TransparencyMany developing countries, especially in sub-Saharan Africa, do not have adequate legal or proceduralmechanisms to protect local rights. Mired with decades of corruption and hardship, these countries arehighly susceptible to rent-seeking behavior and civil unrest. Therefore, the lack of transparency incontract negotiation process can become breeding ground for further corruption and for sub-optimal dealsthat do not maximize either the chance of successful land deal or public interest. This dimension oftransparency in the framework incorporates both the external factor of the transparency in host countriesand the internal factor of the transparency in contract negotiation process under the direct control ofinvestors. The level of transparency in recipient country can be extrapolated from the CorruptionPerception Index developed by Transparency International (Figure 3) (Transparency International).Figure 3 Corruption Perception Index
  23. 23. 20 How to Create Win-Win Land Deals in Mozambique 4.3 Previous Deals This element of the framework assesses overall public perception in host countries of the investing countries and companies, predominantly shaped by previous land deals and other FDI activities. Prior deals influence people‘s perception and the likelihood of acceptance of prospective deals. It also accounts for the political economy of previous deals. Regime change and other political circumstances can negatively affect the negotiation of prospective deals in spite of the success of prior investments if they were made in collaboration with the political parties no longer in power. 4.4 Deal Structure The issues of land tenure and property rights in sub-Saharan Africa pose a major threat. When negotiating a new deal, the structure of the land deal must evaluate and reflect the nature of land rights being transferred and between whom. Whether land is nationalized or mainly controlled by the state as in Ethiopia, Mozambique, and Tanzania or open for private ownership as in Kenya, Madagascar, and Mali, investors should consider various deal structures from direct ownership of agricultural operations to contract farming. The key consideration here is to balance financial costs and returns with the protection of local rights and interests. 4.5 Deal Size and Length As highlighted in the case study of the Daewoo deal in Madagascar, the size and length of a land deal can significantly affect the chance of successful negotiation and implementation. Even though a large-scale investment and a long contract term can help achieve the economy of scale and distribute fixed costs over a longer time horizon, political costs of such a deal much be compared with potential benefits and a size and length which are acceptable in local socio-economic and historical contexts should be determined.
  24. 24. Analytical Framework 214.6 Analytical FrameworkCombining the five dimension of the framework, we can compare different deals more quantitatively andassess feasibility of the deals. Figure 4 presents an example of the application of the analytical framework.As represented by the green line, the Daewoo deal inherently suffered from the lack of transparency andpolitical instability in Madagascar. While the relative absence of FDIs in land in Madagascar provided agood investment opportunity, the structure and terms of the deal posed major threats, leading to its failure.Comparatively, prospective land investments in Mozambique are exposed to the similar level of politicalinstability and corruption. In addition, the failed attempt to start a farm run by Chinese farmers hasinflamed the public opinion in spite of extensive infrastructure investments in the country by China.Therefore, the determining factors for the success of future land deals in Mozambique will the structureand terms of the deals. Learning from the failure of the Daewoo deal, our client must considerinvestments which are mutually beneficial with local stakeholders to maximize its likelihood ofsuccessful entry to Mozambique.Figure 4 Sample Analysis Madagascar Political Stability Mozambique (Scenario 1) Mozambique (Scenario 2) Transparency Previous Deals Deal Size and Length Deal Structure
  25. 25. 22 How to Create Win-Win Land Deals in Mozambique 5 Recommendations 5.1 Due Diligence Before investing a significant amount of resources to initiate and negotiate a land deal, investors must do its due diligence to evaluate the amount and current usage of land being offered for investment. For instance, even though many African countries present statistics on the availability of largely unexploited arable land but in many cases, investors are competing with each other to obtain the same un-cultivated land of a limited quantity (Ratsialonana, Ramarojohn et al. 2011). Furthermore, clearer concepts must be defined on idle, under-utilized, barren, unproductive, degraded, abandoned and marginal lands to avoid allocation of lands on which local user groups depend for livelihoods (Cotula, Dyer et al. 2008). 5.2 Transparency and Inclusion of Local Population in Decision Making From the beginning, any negotiation for land access must maintain the highest level of transparency. Existing local landholders must be informed and involved in negotiations over land deals. When feasible and necessary, informed consent should be obtained from affected stakeholders. Particular efforts are required to protect the rights of indigenous and other marginalized ethnic groups. Government officials who are unfamiliar with this practice may resist or undermine the transparency of the negotiation process but in the best interest for both parties, investors should leverage its bargaining power to encourage local governments to improve its practice. 5.3 Alternative business models First, ambitious project proposals similar to the Daewoo deal should be re-evaluated and adjusted in more realistic terms. In fact, smaller projects can allow easier maintenance and management of owner- occupation. Second, investors must shift their mindset away from a traditional model of large-scale farms or plantations operated by foreign labors, which are likely to cause loss of local rights with little employment or technology transfer benefit, to more innovative and mutually beneficial business models.
  26. 26. Recommendations 23For instance, contract farming and out-grower schemes that involve existing farmers and land users canenable smallholders to benefit from foreign investment while giving the private sector room to invest.Under such arrangements, investors provide inputs, technical assistance, credit, and guaranteed market tosmall-holder farmers. In return, the farmers provide guaranteed supply of sufficient quality and quantityto the landowners. This approach can mitigate the risks associated with land tenure and employment,creating a win-win scenario for both local communities and foreign investors (for more details, see (VonBraun and Meinzen-Dick 2009). Reflecting on the Wilson/Lowi matrix presented in Figure 1, dealstructures should embody entrepreneurial politics that can have wide developmental benefits to the localcommunities rather than interest group politics.5.4 Reputation and Media ManagementWith the advance of globalization and the accelerating access to information-communication technology(ICT) such as mobile phone and broadband internet, the media and civil society play an increasinglyimportant role in making information available to the public even in the developing countries (Von Braunand Meinzen-Dick 2009). Therefore, prospective land investors must limit the risks to its reputation byunderstanding the public‘s ability to react and organize themselves and the role of media andcommunication in disseminating information and influencing public opinion.
  27. 27. 24 How to Create Win-Win Land Deals in Mozambique Bibliography Blas, J. (2008). Land leased to secure crops for South Korea. Financial Times. CIA. (2011). "The World Fact Book - Madagascar." from https://www.cia.gov/library/publications/the-world- factbook/geos/ma.html. Cotula, L., N. Dyer, et al. (2008). Fuelling exclusion? The biofuels boomand poor people’s access to land. London, IIED. Cotula, L., S. Vermeulen, et al. (2009). Land grab or development opportunity? Agricultural investment and international land deals in Africa. London/Rome, IIED/FAO/IFAD. Daniel, S. (2011). Land Grabbing and Potential Implications for World Food Security. Sustainable Agricultural Development: Recent Approaches in Resources Management and Environmentally-Balanced Production Enhancement. M. Behnassi, S. A. Shahid and J. DSilva. Netherlands, Springer. Economist Intelligence Unit. "Political Instability Index." from (http://viewswire.eiu.com/site_info.asp?info_name=social_unrest_table &page=noads&rf=0). FDI Magazine (2008). Africa’s silver lining. FDI Magazine. GRAIN. (2008). "Interview with Han Young Me, Chief of Policy, Korean Women Peasants Association (KWPA)." from http://www.grain.org/videos/?id=194. GRAIN (2008). Seized! The 2008 land grabbers for food and financial security. Haralambous, S., H. Liversage, et al. (2009). The growing demand for land: risks and opportunities for smallholder farmers. Discussion Paper prepared for the Round Table organized during the Thirty-second session of IFAD’s Governing Council. Rome, International Fund for Agricultural Development. IEA (2006). World Energy Outlook 2006. Paris, International Energy Agency. Ingwe, R., J. Okoro, et al. (2010). "The New Scramble For Africa: How Large- Scale Acquisition Of Subsaharan Africa’s Land By Multinational Corporations And Rich Countries Threatens Sustainable Development." Journal of Sustainable Development in Africa 12(3): 28-50.
  28. 28. Bibliography 25Marcus, R. R. (2010). "Marc the Medici? The Failure of a New Form of Neopatrimonial Rule in Madagascar." Political Science Quarterly 125(1): 111-131.Maunganidze, O. (2009). Madagascar: Anatomy of a Recurrent Crisis. ISS Situation Reports. Pretoria, Institute for Security Studies (ISS).Namburete, H. E. S. (2006). Mozambique biofuels. Presentation at the African Green Revolution Conference, Oslo, Norway.Park, S. (2008). Daewoo Logistics Says Farm Deal May Cost $6 Billion. Bloomberg.Ratsialonana, R. A., L. Ramarojohn, et al. (2011). After Daewoo? Current status and perspectives of large-scale land acquisition in Madagascar. Rome, International Land Coalition.Song, J.-A., C. Oliver, et al. (2008). Daewoo to cultivate Madagascar land for free. Financial Times.Stephan, H., R. Lobban, et al. (2010). "Land Acquisitions in Africa: A Return to Franz Fanon? ." International Journal for Historical Studies 2(1): 75-92.The Economist (2009). Buying farmland abroad: Outsourcings third wave. The Economist.The Economist (2009). Green Shoots – No Matter How Bad Things Get, People Still Need to Eat. The Economist.Transparency International "Corruption perceptions index."UNCTAD (2009). World Investment Report. Geneva, United Nations.von Braun, J. (2008). Food and Financial Crises: Implications for Agriculture and the Poor. Food Policy Report No. 20. Washington D.C., International Food Policy Research Institute (IFPRI).Von Braun, J. and R. Meinzen-Dick (2009). “Land Grabbing” by Foreign Investors in Developing Countries: Risks and Opportunities. IFPRI Policy Brief 13. Washington D.C., International Food Policy Research Institute (IFPRI).Woertz, E. (2009). Gulf food security needs delicate diplomacy. Financial Times.

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