24 March 2017 Land and Poverty Conference, Washington D.C. MASTER CLASS: SCREENING PROSPECTIVE INVESTORS FOR LAND-BASED INVESTMENTS 24 March 2017 Land and Poverty Conference, Washington D.C.

In response to the growing interest in agriculture… … the recognition for the need for an evidence-based approach towards “Responsible Agricultural Investments” (RAI) FAO, IFAD, UNCTAD and the World Bank were mandated to work on establishing a pertinent body of knowledge. Supported by the Government of Japan, among others, some outputs include: The Impact of Larger-Scale Agricultural Investments on Local Communities: Updated Voices from the Field (UNCTAD, World Bank 2017, forthcoming) Investment Contracts for Agriculture: Maximizing Gains and Minimizing risks (IISD, UNCTAD, World Bank, 2015) Impacts of Foreign Agricultural Investment on Developing Countries: Evidence from Case Studies (FAO, 2014) The Practice of Responsible Agricultural Investment Principles in Larger-Scale Agricultural Investment (UNCTAD, World Bank 2014) Investing in Agribusiness: A Retrospective View of a Development Bank’s Investments in Africa and Southeast Asia and the Pacific (World Bank, 2012)

Some Context on the importance of screening Review of CDC agricultural portfolio. Half of all projects fail because the “concept was fatally flawed, for example wrong location, wrong crop, or over-optimistic planning assumptions”. Review of 40 mature agribusiness investments. One-quarter using less than 10% of allocated land. Enormous variety in extent of contribution to national development objectives. Intimate relation between operational/ financial success and social/environmental outcomes.

Some Context on the importance of screening Significant share of investments fail for reasons that could have been identified through rigorous pre-investment screening. Signing of investment deals often proceeds too fast for governmental capacity to effectively screen. Minimal guidance available to host country governments to strengthen screening procedures. Hence, UNCTAD & World Bank forthcoming “Knowledge Into Action Note”. Followed by capacity building workshops, organized with FAO and IFAD, initially in Malawi mid-2017.

Objectives of this workshop Share approaches to screening prospective investors and the associated challenges. Identification of aspects of land access that require greater attention in pre-investment screening procedures. Ideas and suggestions for specific tools, processes, guidance documents and other means of improving host countries’ ability to screen investors.

Case study An multi-national corporation with investments in rubber, palm oil and tea wants to venture into coffee production. The company wants to lease 2,000 hectares of land for production and processing in Anzuria. The business plan assumes a capital investment of US$15 million and a 5-year break-even point. The Government of Anzuria, a land-locked country, perceives commercial agricultural investment as an economic growth opportunity, but is also aware of the risks. The national development plan emphasizes cultivation of export crops, employment creation and value-chain development. Anzuria is also committed to the climate change agenda. Population is unfamiliar with coffee production. Population density is high and there is little unused land in the area. High altitude areas in the country have swathes of indigenous forest. The investor promises extensive job creation and the immediate establishment of an outgrower scheme using 500 hectares and involving 1,000 smallholders. The investor is requesting generous fiscal incentives to make the investment. The investor is requesting a decision within eight months to start planting in the right season.

EXERCISE Issues/questions to consider: What areas/topics should the screening focus on? What information should the Government require of investors? What should be the screening process and how should the Government organise the process What entity(ies) should be involved? What kind of screening capacity should be developed, and what support can government draw on for the screening process? What sort of monitoring and follow-up should take place after screening and approval?         

KEY ELEMENTS TO be considered in screening I Alignment of project with national development goals; potential to deliver broader economic and social benefits. Financial structure and capacity of the investor. Organisational structure and experience of Management and Board. Market demand and cash-flow projections. …

KEY ELEMENTS TO be considered in screening II Site assessment, including existing land rights and use. Staffing and HR management plans. Technical feasibility study of business plan and operational model. Approaches to social and environmental responsibility. Approaches to consultations and community relations. …

Screening PROCESS Stage 1: Business Concept and Project Proponent Screening Consideration of investor proposals in the context of the strategic national development plan. Prioritising investors who have long-term practical experience and a successful track record in agribusinesses (on financial, technical, environmental and social aspects alike) in developing countries and/or the proposed enterprise. Prioritising investors who have solid references on ethical conduct and reputation through personal and bank or credit references both for individuals and the legal entity or related legal entities to the company and/or individuals. If the investment is in the arena of a new innovation and/or unproven enterprise type, phasing of investments in the case of new innovations providing an initial approval for an investor to develop a small land area on a pilot basis to prove the concept before considering approval for larger tracts of land is a consideration.

Screening PROCESS Stage 2: Business Case Screening Evaluating the technical and financial proposal in the detailed business plan to assess if the assumptions are realistically grounded given the local context of climatic, infrastructural, tenure and institutional realities. Signing on an MoU at the conclusion of screening of the business case can be a further screening test if clauses of investor willing to be contractually bound to achieving set deliverables? Including appropriate performance metrics in the investment contract between government and investors, including making provision for employment generation, development of outgrower schemes/contract farming/processing operations, with access to investment incentives

Screening PROCESS Stage 3: Due diligence Screening The impacts of the business need to be known and quantified; screening through a due diligence process not only financial and technical aspects, but importantly also the investor’s approach to social and environmental issues. There are a number of impact tools available and host countries should specify to investors in investment promotion guidelines which impact assessments will need to be included in proposals. Different business models require different funding structures and for long-term agricultural projects prioritising investors with access to patient, long-term sources of capital and for whom the investment is integral to, rather than incidental to, the investors entire portfolio is a key consideration and included as part of due diligence. Ensure that a comprehensive due diligence is undertaken on the feasibility study and business plan by an independent third party with the requisite level of expertise in the enterprise under consideration. Over-optimism in planning assumptions and inadequate natural resource assessment for the crop in question are high risk areas. A number of tools include but are not limited to the UNEP toolbox (measuring the economic, social and environmental element), The Arup and Engineers against poverty framework includes a 4th dimension of institutions and the WBCSDs Measuring Impact Framework Methodology includes 8 dimensions.