Don’t Be So Quick to Sell Off the Farmland

Rivandra Royono, Jakarta Globe 18 Jun 09;

This decade has witnessed the advent of what some refer to as the third wave of outsourcing. Following manufacture and information technology, many countries — those that are richer yet short on fertile land — are beginning to subcontract farmland abroad.

Britain, the United States, Kuwait and Saudi Arabia are already renting farmland in Africa, Latin America and Russia. Rich or populous Asian countries like China, India and South Korea have also relied on rented foreign land to ensure their food supply.

The International Food Policy Research Institute, a Washington-based think tank, estimates that an area of 15 million to 20 million hectares of farmland in poor countries have been in transactions or associated with talks with foreign investors since 2006. The value of such investment is estimated at up to $30 billion.

As one of the most fertile agricultural lands in the world, Indonesia is naturally on investors’ radars. As a matter of fact, Saudi Arabia’s Saudi Binladin Group nearly signed a $4 billion deal to grow rice on 500,000 hectares of land here.

The project is currently on hold, but the deferred investment may not necessarily be a bad thing for Indonesia. Large-scale agricultural investment, as lucrative as it may seem at the moment, carries serious risk. For one, it certainly has environmental consequences.

What we need to understand is that farmland is not only about land; it’s also very much about water. Truth be told, water shortage is the main reason why countries are renting farmland abroad.

Saudi Arabia was able achieve self-sufficiency for a time by investing massive amounts of money to grow crops in the desert. The water needed for plantations was pumped out of aquifers below the Arabian sand. But that water source was non-replenishable, and it was little surprise when farmers sucked out the water from under their feet to a point of environmental disaster.

Even countries like China and South Korea, which are not usually associated with water shortages, have pretty much drained their water sources with their aggressive agricultural expansion.

The environmental consequences don’t stop at water use. Massive use of pesticides may disrupt the ecological balance and poison wildlife. Fertilize the land too much and you can ruin it. Farmland has also been known to build up silt in the riverbeds, leading further to numerous environmental problems. True, these risks apply to all farmland, but the massive scale of foreign farmland investment and the lure of big cash would very conceivably exacerbate them.

Land concession is another problem. A factory complex covers only several hectares, while farmland — the kind that the investors are interested in — would cover hundreds of thousands. Land concessions of that scale are prone to be unfair. Host governments may claim that the lands up for lease are state-owned or vacant. However, such “vacant” lands may easily support families who have been using them for generations as farms or grazing areas. Such customary rights are unlikely to be recognized by law, especially when foreign investment is in the picture.

Having said all that, we should note that leasing farmlands to foreign investors also carries huge benefits. Most obviously, it can reverse the decline of public investment in agriculture in developing countries like ours. Research and development in the sector can be boosted, new technologies can be introduced and new jobs would be created. The country’s agricultural sector could be revitalized.

Furthermore, typical deals usually involve some fringe benefits. Investors in Africa have pledged schools, clinics and roads — things that the investors themselves also need. Such facilities and infrastructure would most definitely be appreciated by locals.

If Indonesia decides to go ahead with leasing farmland, it should do so with caution, keeping an eye on both the risks and the opportunities. We need to understand that we have a very strong bargaining position: Other types of foreign investment are still available, and agricultural reform can still be carried out without having foreigners plowing our lands. In other words, Indonesia is not in desperate need of this particular type of investment, while investors like China or the Gulf states may be.

In many host countries, farmland deals involve mainly the land, while the right to withdraw the water comes automatically. Water, perhaps the most essential part of the deal, ironically comes as a freebie. Indonesia would do well to make sure that water use enters the investment’s equation.

Customary rights must be respected, and this would be consistent with Indonesia’s commitment to recognize traditional community laws. Contracts must include stipulation for investors to share benefits with and recruit locals as workers. Insurance must be embedded in the agreement; for instance, investors can only export back to their countries if the crop yield is above a certain threshold, thus ensuring domestic food production. Cooperation with national research agencies and individual researchers in agriculture R&D must be carried out, ensuring transfer of knowledge and technology.

The postponed Saudi investment is a good thing not because Indonesia should not enter international farmland investment deals, but because it gives us time to better prepare. We have ample time to learn from existing practices and develop carefully drafted contracts and codes of conduct. Good practice in this form of foreign investment may well lead to large revenue, revitalization of the agricultural sector and empowerment of local communities at a manageable risk. We should not rush, but we would do well to press forward.

Rivandra Royono is executive director of the Jakarta-based Association for Critical Thinking and a consultant for the World Bank’s education division.