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October 17, 2011

A self-correcting feature of some foreign agro-investments: plain old business failure

by Chido Makunike

Is Africa getting a good deal from the rush of foreign investors to invest in the continent’s farmland? Are the terms of the deals fair? Will the promised and hoped for benefits actually materialize? Will the benefits outweigh the negatives?

It is questions like these that currently predominate in the huge discussion. For better or for worse, the answers will only become clear with time. There is unprecedented worldwide scrutiny of these deals, and a seeming preponderance of doubt that they will be good for Africa. This may be useful in letting investors know that the world is watching, and may serve as an incentive for some to conduct themselves better than the previous major scramble for African land, and better than they might have done unwatched.

Can the deals be structured to avoid abuses of host countries and local communities, or are the most welcoming countries so eager for agricultural ‘development’ that they sidestep this question? How to do this is another question that increasingly informs the debate.

While this discussion is raging, enough time has elapsed since the current wave of agro investments/land grabs (insert your ideological orientation here and choose your favored term accordingly) for a little discussed self-correction of some of the deals to become apparent. That is that many of these deals, as loudly touted and as impressive sounding as the figures involved are, actually are many times not very well conceived from a strictly business sense, let alone all the other aspects that are currently the main focus of controversy and discussion.

By both proponents and opponents alike, it seemed to have been assumed that once an agro-investment was given the go ahead, it would be an easy, virtually automatic and guaranteed license to print money for the entrepreneurs and their financiers. The underlying reasons for this assumption are familiar to anyone who has been following the controversy.  

Among them (spoken and unspoken): ‘’Land in Africa is dirt cheap compared to anywhere else, you would have to be a fool not to become a billionaire there in about two seconds. The main reason for the continent’s agricultural difficulties is that Africans are sitting on their brains; the hot sun might have fried part of their brains. Just bring in some non-Africans to run your project and voila, all problems solved, money in the bank. There is no need to secure markets before investing; the Africans don’t have a clue how to farm so they will all flock to buy whatever the investor decides to grow (‘no problem, we’ll work out the details when we get there.’) The problems of climate change on the continent that we keep hearing about (floods, drought, etc) only affect African farmers; they will bypass the foreign investor, easy money in the bank.’’       
  
And so on and so on. Dear reader, this is really not far removed from what has been said or implied by many excited investors. You might say that it is in the nature of being an entrepreneur to have a positive, sunny disposition to a business they have invested a lot in. But what is surprising is the number of what would normally be expected to be hard-headed financiers to buy a lot of these incredible assumptions.

Business is risky every where, any where. The many risks of tilling the soil are well to even the back yard garderner, le alone one of the world’s foremost business risk takers: the small scale African farmer. S/he’s livelihood depend on whether it rains enough or not, whether the timing of those rains is right, having enough money or labor to adequately tend and harvest the crop, etc, etc.

Because a key premise of today’s agro-deals is that they involve an entirely different model of farming to that practiced by most African smallholders, it has been assumed that the foreign investor would be largely be immune to the business risks that plague the African farmer.

So the thinking of many investors seems to be, ‘just get the chief/minister.prime minister/president to sign the lease, give him his ‘commission’ (wink, wink, heh heh heh) and then walk over to your new field and start harvesting the money. What could be simpler?

Alas (shock, horror), many investors are finding out it may actually not be that simple after all! Farming in Africa is as risky an enterprise as any other business anywhere else, with some unique twist thrown in as well. Up until recently all that would be released to the public by the hopeful agro-investors and their backers were the tens/hundreds (take your pick) of millions of dollars claimed to be involved, and the manifold returns soon expected.

Without any of the fanfare of the announcement of the biggest deals, reports are beginning to trickle in of some of them quietly folding.

One of several recent examples is UK-domiciled Sun Biofuels’ apparent abandonment of its much-hyped jatropha project in Tanzania. The reported reason is ‘the long, severe East African drought.’ Of course, it is entirely possible that severe drought is the main reason for the apparent failure of the project. But it must also be pointed out that other high-profile jatropha (and other crops) projects have collapsed before the current East African drought/famine really hit. Others elsewhere have quietly gone under where there is no ’drought.’

The failure of any business is sad because of all the preparation, investment and hope that goes into it. And yes of course, any plant, including ‘hardy, drought-resistant, marginal soil-growing’ jatropha needs a certain minimum of water to thrive. The investor can’t be blamed when that doesn’t happen, although there are still some tough questions that could be reasonably asked even in that scenario.

Examples: After sinking in tens of millions of dollars years of effort, why give up completely after a two or three year dry spell that scattered reports suggest is beginning to break? Why not now try to salvage the project by investing a little more now, rather than losing everything by abandoning it? If the financiers are not willing to do that, is it perhaps because other inherent, non-drought aspects of the business model are becoming apparent in a way they might not have been at the beginning?

If it is the latter case, this is a plain old business failure somewhere in the chain that led up to the investment, with ‘drought’ perhaps only worsening and quickening those weaknesses. And yet somehow, few people seemed to have contemplated that the failure/attrition rate of these projects may be no different from that of business anywhere else. In other words, even when based on what look like exploitative, give-away terms of lease, it is far from assured that the new agro-deals are virtually cash machines spewing out dollars and euros. Who would have guessed this? Apparently not the investors and their backers!

India-listed flower grower Karuturi seems on a role in Ethiopia. Everything seemsto be coming roses for the company, helped by the host government reportedly almost shoving huge parcels of land into the company’s lap for nothing. If things are good in Ethiopia for Karuturi, it is far from clear yet if the deal is a good one for Ethiopia. Proponents and opponents of these deals are so tightly in their ideological boxes that their comments about what is going on in Ethiopia, net good or net bad, must be taken with a large grain of salt.

But if the Ethiopian operation is or will soon/eventually be a net good for the country, Karuturi seems to now be dangerously cocky and super-confident in a way that may come back to haunt them. They seem hell bent on snatching business failure from the jaws of their current success.

How so? With the huge amounts of land the Ethiopian government put at their disposal, Karuturi now proposes to bring in tens of thousands of Indians as outgrowers!!! You can figure out for yourself how many Ethiopians are going to take this news, cockily delivered by Karuturi’s CEO, not even the Ethiopian government. Read up on the colonial histories and aftermaths of (to name a few) Algeria, Kenya, Namibia, Zimbabwe and South Africa as a reference to why sooner or later, this idea of Karuturi’s will likely blow up in its face.

Ethiopians are likely to welcome this news with about the same level of enthusiasm as would Indians if they were told that 20,000 Ethiopians would be landing on their shores, for whatever purpose. Karuturi’s project will all of a sudden  by seen by many Ethiopians as a scheme to settle Indians, rather than an ‘investment’ that will bring jobs, skills and other benefits for them.

In Zambia, in recent years Chinese investment has outpaced Western investment in the country’s mining (mainly copper) sector. The country welcomed that as much as many others are falling all over themselves to lure agro-investors. By all accounts, it is widely agreed that Zambia has benefited from this, at a time when for various reasons Western investors were no longer interested in the country.

But there has also been simmering, sometimes exploding resentment by many  Zambians about the influx of Chinese people. Somehow, foreigners running chicken  
farms, small scale retail shops and so on were not quite what they had in mind when they though of the ‘investors’ who would come from China. Many such ‘investors’ in many African capital cities is a controversial, explosive issue. Many attribute the September upset of new Zambia president Michael Sata over the extremely China-friendly incumbent Rupiah Banda to Sata’s promise to get tough with the Chines about this issue.
Perhaps Karuturi in Ethiopia didn’t get the report of what happened/is happening in Zambia, and how there might be parallels with its stunning plan to import tens of thousands of Indian ‘experts.’ If so, epic business fail! They should keep on top of these hot issues across Africa, and dissect them appropriately in regards to their own operations.   

So even if all the figures of Karuturi’s business plan seem to add up, this non-numerical miscalculation may very quickly wilt what now seem like the companys’
rosy prospects in Ethiopia. If that happens, it can not be said to be a non-predictable  factor like ‘drought.’ It would, quite simply, be a huge business mistake to do this, even with the endorsement of an allegedly, astonishingly compliant host government. Knowing the likely result of such a politically, socially charged (even reckless) announcement as Karuturi has made, that brings their overall business skills into question as much as any other more traditional reason for business failure.

There are many other similar as well as different train wrecks waiting to happen in the great African land rush. Some will succeed, many will fail for a multiplicity of reasons, some of which are only beginning to be apparent now, about three years after the rush began.      

Amidst the many challenges of doing business in Africa, there are indeed great opportunities for Africans as well as non-Africans to make good money and carve out new business empires. But it might not be quite as easy as picking roses or jatropha berries.      
      
If so far we have mainly heard the public relations hype of excited new foreign miners of African ‘green gold,’ watch this space as the harsh business reality begins to set in for many operators.

Unfortunately, and beyond the scope of this already too long post, the sudden departure of large foreign agro-investors who get burned (or who burn themselves) may leave behind an even bigger mess than if those projects had been nurtured to eventual win-win success. 

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