FDI in food and agriculture in CIS


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Foreign Direct Investment (FDI) Current dynamics in food and agriculture in the CIS

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FDI in food and agriculture in CIS

  1. 1. FOREIGN DIRECT INVESTMENT Current dynamics in food and agriculture in the CIS Ian Luyt www.novirost.com Presentation to the Third International Agribusiness Investment Forum Dushanbe, Tajikistan 25-26 September 2012
  2. 2. Format of presentation• Motives for foreign direct investment (FDI)• FDI in CIS & Georgia• FDI in food & agriculture in CIS• Global trends in FDI in food and agriculture• Key investment drivers in agriculture• FDI in farmland investment• Examples of FDI and key issues: – Poland – smallholders in dairy sector – Kazakhstan – investment attractiveness – Kenya – catalyzing horticulture exports – Olam – global agriculture supply chain investor• Key policy options to attract FDI• Where to with FDI in food and agriculture globally?• Where to with FDI in food and agriculture in Tajikistan? 2
  3. 3. 3 Traditional Motives for FDI1. RESOURCE-SEEKING • Driven by Natural Resources, Low Cost Labor, and Good Infrastructure • Growing interest in Food & Agriculture • Resources alone are not sufficient – needs attractive investment climate and infrastructure2. MARKET-SEEKING • Motive to access the host country’s domestic market – Primary Motive for FDI in CIS • Drivers: Market Size, Per Capita Income, and Market Growth Prospects • In Developed Countries – Market Size; in Developing Countries – Per Capita Income3. EFFICIENCY-SEEKING • Seeks synergies from common management of geographically dispersed activities • To concentrate production in select locations to supply multiple markets • Needs well-integrated and open regional markets• In Central Asia, FDI motives may be to set up regional export platformsSources: Multinational Enterprises and the Global Economy - J.H. Dunning 1993, and The motives and impediments to FDI in the CIS - Kudina and Jakubiak 2008 3
  4. 4. FDI – selected FSU countries Average FDI per annum: 2007-2011 COUNTRY FDI (US$) per annum RUSSIA $52,000M Tajikistan most UKRAINE $8,000M FDI-dependent KAZAKHSTAN $2,500M country in CIS BELARUS $2,200M because of limited domestic GEORGIA $1,100M financing UZBEKISTAN $720M resources KRYGYZSTAN $320M TAJIKISTAN $180MDEFINITION: Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more ofvoting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings,other long-term capital, and short-term capital as shown in the balance of payments. These statistics are net inflows (new investment inflowsless disinvestment) from foreign investors.Source: World Bank data www.data.worldbank.org. 4
  5. 5. CIS & Georgia: 4 levels of FDI recipients Approximate average FDI per annumEnergy, Minerals, Banking, Telecomms are predominant sectors for FDI Russia, Ukraine >$10bn Kazakhstan Belarus, Azerbaijan $5-10bn Turkmenistan, Georgia Armenia, Moldova $1-5bn Uzbekistan Kyrgyzstan $1bn< Tajikistan 5
  6. 6. Globally, FDI in food and agriculture is not a big percentage of total FDI• GLOBAL FDI in 2011: $1.5 trillion• Over 50% to developing and transition countries• FDI food and agriculture in 2011: – in "agriculture, hunting, forestry and fisheries” – 0.3% of total – In "food, beverages and tobacco” – 8.2% of total• Of the 62 FDI largest investments (> $3bn) only 4 deals in food and agri: RANK COMPANY LOCATION INVESTOR DEAL SIZE 5 FOSTERS Australia/ global SAB MILLER $10.8bn 13 DANISCO Denmark DUPONT $7.2bn 47 WIMM-BILL-DANN Russia/ CIS PEPSICO $3.8bn 50 PARMALAT Italy/ global Investor Group $3.6bn Source: UNCTAD World Investment Report 2012 6
  7. 7. Key Investment Drivers in Agriculture• Basic investment premise “A looming imbalance in the supply and demand of food commodities will result in a prolonged period of higher food commodity prices”• Supply and Demand - 3 key factors 1. GLOBAL POPULATION GROWTH: from 7bn to 9bn by 2050 2. CONSUMPTION TRENDS: Middle class from ~ 430m to ~ 1.2bn by 2030 - Switch from carbohydrate-rich to protein-rich diet [1 kg protein = 7 kg grain] - Move from staple foods to higher margin branded foods 3. IMPACT OF BIOFUELS: diversion of crops and farmland - rapeseed (EU), sugar cane (Brazil), corn (USA) – though impact less than expected 7
  8. 8. Recent trends in FDI in Agriculture Resource-seeking (land & water) - rather than market-seeking• FDI in agriculture tripled in last decade ~ $3bn per annum• Growing interest in purchase or lease of farmland• Vertical integration by strategic food companies• Mostly private equity investment, also recently SWFs• Focus on basic foods - rather than tropical commodities• Hands-on management - rather than passive investment• Key Investment Drivers: – Farmland Value Appreciation – Operational returns – Food security Source: Foreign direct investment – win-win or land grab? FAO 2009/ own sources 8
  9. 9. New motives - New funds Over 50 new food/ agriculture investment funds in past 5 years• 2 new motives have emerged for FDI in food and agriculture: – Food security – Potentially attractive Financial Returns in Primary Agriculture• Investment focus currently on: – CEE (Romania, Bulgaria, Poland) ~$250m – CIS (Russia, Ukraine) ~$2.5bn – Latin America (Brazil, Argentina, Uruguay, Paraguay) ~ $1.5bn – Africa (Zambia, Mozambique, Ghana, Nigeria, Tanzania) ~$900m – MENA (Ethiopia, South Sudan) ~$700m – Also: Australia, New Zealand, USA, Canada Source: NOViROST Limited 9
  10. 10. FDI in farmland in Russia & Ukraine Targets operational returns and farmland value appreciation ~$2.5bn invested in CIS since 2006 LEAD FARMLAND COMPANY COUNTRY INVESTOR (HA)NCH USA Russia/ Ukraine 700,000Black Earth Farming EU Russia/ Ukraine 330,000UAFL EU Ukraine 240,000TrigonAgri EU Russia/ Ukraine 206,000Alpcot Agro EU Russia/ Ukraine 205,000RAV AgroPro EU Russia 164,000RZ Agro EU Russia 87,500 Source: NOViROST LimitedHarmelia EU Ukraine 73,000Volga Farming EU Russia 60,000UFG Agro EU Russia 28,000FDI in farmland represents ~ 2% of total farmland in Russia and Ukraine 10
  11. 11. FARMLAND – Comparative Values A stable and predictable investment environment is the most significant impact on valuations COUNTRY AVERAGE $ PER HA Netherlands $65,449 Ireland $29,918 USA $7,487 France $6,919 Brazil $5,245 Romania $5,030 South Africa $2,969 Tanzania $1,900 Russia $1,140 Mozambique $800 Source: Savills - International Farmland Focus 2012www.savills.co.uk 11
  12. 12. Secure Farmland Rights Fundamental to Investment COUNTRY FARMLAND RIGHTS/ SELECTED EXAMPLESUKRAINE Leasehold only/ new land law due end of 2011RUSSIA Freehold/ with restrictions on foreign ownershipTURKEY FreeholdBULGARIA Freehold/Only Bulgarian residents and corporate entitiesROMANIA Freehold/ subject to seven year limit from EU Accession DateGEORGIA Freehold/ subject to limitationsKAZAKHSTAN Leasehold onlyTAJIKISTAN In transitionSuccessful Land Reform in Tajikistan could create a collateral base of potentially $700 million+ 12
  13. 13. Food Security and FDI in agricultureImpact of Sovereign Wealth Funds (SWFs) - $5 trillion in assets• EXAMPLE: Islamic Corporation for the Development of the Private Sector (ICD) - launched $600M food and agribusiness fund in June 2012• Objective to boost supplies by investments in food and agri companies “aimed at boosting yields and minimizing food losses”• Focus on 15 countries in Islamic world – “including Kazakhstan, Turkey, Pakistan, Bangladesh, Malaysia and parts of North Africa”. Food Availability Utilization of Food FDI in primary agriculture impacts all 4 dimensions of Food Security Stability Access to of Supply Food 13
  14. 14. Popular food sectors for FDI in CIS Investors mostly market-seeking - rather than resource-seeking Total FDI in food sectors since transition: ~$15-20 billion SUB-SECTOR GLOBAL INVESTORSMILK Campina, Danone, Parmalat, Lactalis, PepsiCo, OlamCONFECTIONARY Nestle, Mars, Fazer, Dirol, Kraft FoodsJUICES/ BEVERAGES PepsiCo, Coca ColaBEER SABMiller, InBev, CarlsbergVEGETABLES FritoLay, Chumak, Bonduelle, GehaFoodsFRUIT SteireObstHIGH VALUE PROCESSED Arla, Hochland, Valio, Cargill, Kraft FoodsMEAT Campofrio, Atria, Rurik,OtradaGen, MaksimovskyFOOD RETAIL/ SERVICE Auchan, Metro, Marr, UhrenholtSource: NOViROST Limited 14
  15. 15. Market-Seeking FDITypical strategic progression of investments in CIS Exploit host country’s production efficiency to Develop NEW EXPORT to EU markets PRODUCTS for CIS markets Supply EXISTING PRODUCTS to CIS markets 15
  16. 16. Example: FDI in Poland Dairy Sector Size doesn’t (necessarily) matter FDI catalyzed change on small farms• Fragmented production - 1,300,000 milk producers• 86% own less than 5 cows• FDI into milk processing in 1990s• Catalyst totechnical changes and institutional innovation• Transition to full compliance with EU milk standards• FDI had key role in survival and growth of farms indirectly, through production support and leading by example• No evidence that FDI cuts out small farms - 87% continued milk deliveries in spite higher quality demands Source: Vertical Coordination and Foreign Direct Investment: A comparative study of the dairy chains in Bulgaria, Poland, and Slovakia.Liesbeth Dries2004 16
  17. 17. Regional Example: Kazakhstan Results from Ernst & Young 2012 investment attractiveness survey• Most attractive sectors for FDI (mostly extractive sectors) – Oil and gas (30%) – Mining and metals (23%) – AGRICULTURE (14%) – Infrastructure (10%)• Investment environment: Perception versus Reality – Significant perception gap between existing and prospective investors – 85% of existing investors see it as most attractive destination in CIS – BUT only 18% of prospective investors share this view• CHALLENGE TO DIVERSIFY FDI – Manufacturing – Knowledge-based industries• Prerequisites to increasing FDI – Predictable regulatory environment – Good infrastructure – Investment promotion Source: Ernst & Young’s Second Kazakhstan Investment Attractiveness Survey 2012 17
  18. 18. Kazakhstan: survey Reforms needed to improve investment attractiveness Top 3 issues – regulatory environment, infrastructure, skills• Enable transparent and predictable regulatory environment (47%)• Invest in infrastructure and urban projects (31%)• Develop skills with focus on economic needs and innovation (28%)• Ensure independence of court system (24%)• Adopt a proactive approach to attract investors (23%)• Support high tech industries and innovation (15%)• Develop venture capital/ financial tools to support entrepreneurship (12%)• Suppress corruption/ have political stability (4%)• Flexibility for foreign labor (2%)• Improve security (1%)• Other (2%) Source: Ernst & Young - Kazakhstan Investment Attractiveness Survey 2012 Respondents selected three possible answers. 18
  19. 19. Example: Kenya Horticulture Developed a $1bn export industry in 20 years• Fastest growing industry in Kenya• Over 2 million people employed directly and indirectly• Export Growth – from $70m (1991) to ~$1bn (2011)• FDI provided catalyst – from France, USA, UK, Netherlands, Denmark• #2 global exporter of cut flowers (after Colombia)• #2 developing country exporter of vegetables to EU (after Morocco) Exports in Exports % of Exports 2011 (US$) Flowers 66.4% $700M Fruits 4.0% $42M Vegetables 29.6% $313M Total 100.0% $1,055M Source: Horticulture Crops Development Authority, Kenya www.hcda.or.ke 19
  20. 20. Kenya Horticulture Key success factors• Favorable agro-climatic conditions• Basic export infrastructure (airports and port)• Booming tourist industry enabled airfreight space back to Europe• Private sector-led• Emerging class of entrepreneurs with commercial experience• Limited but supportive NGO role• Government role mostly as facilitator• Started with export of vegetables (okra, chillies, etc) to Asian diaspora in UK• External catalysts – FDI and trade partners• Developed strong Quality and Food Safety infrastructure - key• Effective industry body “Fresh Produce Exporters Association of Kenya” (www.fpeak.org)• ~20,000 smallholders supply 85% fresh fruit and 27% fresh vegetablesSources: Exporting out of Africa: Kenya’s horticulture success story. World Bank c2004. www.info.worldbank.org www.fpeak.org www.hcda.or.ke 20
  21. 21. Example: Olam Global supply chain investor in agricultural products FDI – in 4 years, 17 upstream investments in 20 countries in 14 commodities• Manage 44 commodities in 15 supply chain platforms• Strategic transition from trading commodities to “integrated supply chain investment”• Key prerequisite to investment: cost competitiveness• $75m investment in milk production in Russia in 2012 (Rusmolco)• Recent $100M in Nigeria wheat milling – Olam see key country advantages as: – Reform oriented democratic government providing stable regulatory environment – Established legal system based on English common law – Rapid development of physical and industrial infrastructure• Additional investment advantages – Five-year tax holiday to pioneer industries (including agro- processing) – Allows 100% foreign ownership in any Nigerian company – Unrestricted repatriation of profits & dividends – Investment protection guarantee from government• Nigeria FDI - up from US$1.1 billion in 2000 to US$12.5 billion in 2007Source: www.olamonline.com. Also Olam sees more agriculture M&A - FT.com http://video.ft.com/v/1583879207001/Olam-sees-more-agriculture-M-A. Rusmolco: www.rusmolco.com 21
  22. 22. Many start fruit and vegetables exports but few able to sustain early gains - those that do, do these things• Enable stable and predictable macro-economic and investment climate• Invest in infrastructure and export logistics• Enable FDI and/ or strategic partnerships• Strengthen vertical supply chains• Develop effective industry organizations for collective action• Build credible systems of quality management and food safety• Invest in training and R&D• Invest in a national product identity• Develop associated industries – packaging, equipment, freight, technical consulting 22
  23. 23. Why Does FDI Go Where it Goes?• LOCATION DETERMINANTS (3 categories): – Country-specific - low-cost labor, large domestic market, skills, infrastructure – Macroeconomic and regulatory policy and institutions that facilitate private business – Investments driven by agglomeration economies• Most important determinants of FDI are institutions and agglomeration economies - these outweigh other variables• Weak bureaucracy/ rule of law increase transaction costs – discourage investment• In manufacturing - institutions and agglomeration are key issues• In resources - natural resource abundance and infrastructure are key factorsAGGLOMERATION ECONOMIES: Related businesses located close to one another thereby enabling economies of scale and othercompetitive synergies (“clistering effect”) Source: Why Does FDI Go Where it Goes? New Evidence from the Transition Economies NauroF. Campos and Yuko Kinoshita 2003 International Monetary Fund 23
  24. 24. Policy options to attracting FDI• Greater macroeconomic and political stability• Reducing ambiguity of the legal system to enable more active role for FDI in interactions with local businesses• Developing infrastructure (transport, industrial)• Reducing corruption - political willingness is key to effectiveness• Promoting linkages with domestic economy - information• Building local R&D and training institutions• Improving intellectual property rights• Improving predictability in external trade (export bans)• Greater coherence between investment policy and development policy 24
  25. 25. Where to with FDI in food and agriculture?• Increasing importance of CIS in global food and agriculture• Challenge is finding not funding attractive investments• Increasing investment in farmland – CIS undervalued• Greater vertical integration in farmland investments (storage)• Improved management of earnings volatility – market hedging• Increasing investment in logistics infrastructure (storage, ports)• More consolidation of fragmented food production• Increasing regional perspective in agro-processing in CIS• Agro-processing remains attractive to private equity• Increasing direct investments by SWFs• Increasing focus on sustainability 25
  26. 26. Benefits of FDI Bridge to global technology, markets, and capital• Expertise in structuring investments and unlocking value• Improved strategic focus, management, and asset utilization• Sets benchmark in product quality and standards• Facilitates harmonization with global standards• Corporate governance: facilitates development of private businesses into institutionalized companies• Investment discipline - enhanced leverage/ borrowing capacity• Improves efficiency of market information and access• Often strong partner in articulating and lobbying reforms• Spillover effects into allied industries/ other supply chains 26
  27. 27. Where to for Tajikistan ? Implications for FDI in food and agriculture• Current status – Small domestic market and relatively low per capita GDP – FDI prospects - mainly for Resource-Seeking and Efficiency-Seeking – Weakly structured supply chains & outdated skills and technology & poor logistics infrastructure – Weak or absent ancillary industries (e.g. packaging) – Limited or no availability of domestic financing on competitive terms – Lack of understanding and/or targeted promotion of opportunities – Strong potential to increase productivity and production• Trends – FDI more likely from regional investors – Opportunities to source semi-processed and finished products in fruit and vegetables – Russia is most visible partner/ most significant market – Growing potential of southern markets – Afghanistan, Pakistan, Iran – Infrastructure a key determinant – electricity, water, logistics, transport – Key is stable and predictable investment environment – Needs greater coherence between investment and development policy• Central Asia needs flagship investors to catalyze FDI 27
  28. 28. Lessons from Turkey Parallels to Tajikistan - small farms predominate• Turkey regards to “Foreign Investors” as “Global Investors”• Over 3,000,000 farmers• Average farm size 5.9 ha• Moves towards farmland consolidation• Agriculture employs 5.2 million people• FDI into food & agriculture > $1.5 billion• Over 500 FDI investors• Agricultural GDP – up 400% in 10 years• Turkey is one of few countries that are self-sufficient in food Source: Turkish Agriculture Industry Report.Deloittes. June 2010 28
  29. 29. Canada: similar issues FDI in food and agriculture is (also) a key development priority• Canada’s FDI prerequisites: – Level of public sector R&D investment in new products – Good corporate governance and rule of law – Degree of openness of the economy – Skilled labor more important than cheap labor – Low tax rates not a primary motivation for FDI – how tax revenues are applied is more important• Issues apply not only to developing countries• These are universal criteria for FDISource: The effect of FDI on Agriculture and Food Trade – WH Furtan and JJ Holzman - University of Saskatchewan 2004 29
  30. 30. Tajikistan – Center of a Universe of 450m+ consumers Ample land and water, 4 airports, 100s of flights annually .. 30
  31. 31. THANK YOU Ian Luyt ian.luyt@novirost.com NOViROSTLimited Strategic Advisory - Corporate FinanceFood  Agribusiness  Bio-energy  Forestry www.novirost.com 31