#10 hunger
Carin Smaller

A Global Thirst

Water is driving foreign investment in farmland. Unfortunately, the international law only strengthens foreign investors' rights while potentially undermining those of local communities.

Farmland and water are increasingly sought-after resources for a growing number of foreign investors. The private sector is looking to capitalise on rising agricultural commodity prices and global demand, as well as speculating on rising land prices. Governments are investing abroad to secure their country's food and energy needs in the context of volatile world market prices, scarce or depleted natural resources at home and the global hunt for water resources.

The World Bank found that in 2009 investors were reported to have acquired 45 million hectares of land, 32 million of it in Africa alone (World Bank 2010). In 2012, the Land Matrix project revised those figures, and now estimates that over the past 10 years investors have acquired 83.2 million hectares of land, mostly in Africa (Anseeuw et al., 2012). The phenomenon has come to be referred to as the global "land grab."

"Without water, the land has absolutely no value to the investors."

The global hunt for water

The motivation for this new wave of investment is strongly driven by water. States with scarce or depleted water resources are looking to outsource their water use by growing crops abroad, and private investors are seizing the opportunities. Water is the key ingredient to operationalize agricultural investments. Without water, the land has absolutely no value to the investors. At the investor summit Global AgInvesting Europe 2012 in Geneva, Neil Crowder from Chayton Africa, an investment fund, said: "In Africa, the value is not in the land. Water is the key aspect for what we are looking for with our investments." Judson Hill from NGP Global Adaptation Co, a private equity fund, said: "When a country imports one ton of wheat, it is saving about 1,300 cubic meters of domestic water".

The chairman and former CEO of Nestle, Peter Brabeck-Letmathe, calls it "the great water grab." He wrote in Foreign Policy that: "purchases weren't about land, but water. For with the land comes the right to withdraw the water linked to it, in most countries essentially a freebie that increasingly could be the most valuable part of the deal."

"The essence of the problem: so-called 'land grabs' are in fact 'water grabs.' "

Nestle's statement captures the essence of the problem: that so-called "land grabs" are in fact "water grabs." Why? First, because the countries pursuing farmland investments are deeply concerned about domestic water scarcity as a result of agriculture production. Second, and more importantly, because the current global regime of investment treaties and government contracts with private companies provide foreign investors with the legal guarantee needed to safeguard and operationalize their investment – and to take states to international arbitration if they do not honour contracts. Yet, in many of the countries experiencing an influx of foreign investment in agriculture, these protections for investors are not counter-balanced with adequate domestic regulations to safeguard the land and water rights of citizens.

Rising pressure on water resources

Agriculture is by far the most water-intensive activity. Close to 70 per cent of all freshwater appropriated for human use goes to agriculture. Increased agricultural production for biofuels has also put pressure on water resources. More than one-third of maize production – one of the most water-intensive crops – in the United States is used to produce ethanol and about half the vegetable oils produced in the European Union is being used for biodiesel (World Water Report 2009).

"By 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity."

An increasing number of regions are chronically short of water. By 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world population could be under conditions of water stress. Climate change is expected to account for about 20 per cent of the global increase in water scarcity.

According to the FAO, water shortage is probably the single most important problem facing China's agriculture today and may affect 36 per cent of China's grain production (FAO 2003). Saudi Arabia is rapidly depleting its non-renewable water resources despite the fact that it already imports 70 per cent of the country's food needs. Even in Europe, which is considered to have adequate water resources, water scarcity and drought is now more frequent and widespread (EU 2010).

Does Africa have abundant water supply?

Two-thirds of reported land deals have taken place in Africa because of the perceived abundance of fertile land, water and natural resources. According to the FAO, Africa uses barely 5.5 per cent of its renewable water resources, and only two percent of its freshwater resources for irrigation. The FAO estimates the irrigation potential of the continent at more than 42.5 million hectares of land.

But while parts of Africa have significant water resources, of the estimated 800 million people who live on the continent, more than 300 million live in a water-scarce environment (UNECA 2006). Some farmers only grow one or two kinds of crops and risk starvation if not enough rain falls. The projections for climate change show that by 2050 the African continent will face a decrease in the amount of rainfall, a rapid increase in soil erosion and increased desertification. African governments are responding to this crisis, but the new wave of foreign investment could undermine these efforts.

The consequences of international investment treaties and contracts

The scale and nature of the current wave of investment increases the potential to shift rights from domestic to foreign actors and to undermine local communities' access to water. This is because of the current frameworks of domestic and international investment law. In many of the states where farmland investments are taking place, there is either no, insufficient or vague domestic law concerning water rights. On the other hand, the international investment-law framework provides hard contractual rights to protect foreign investors. Where this happens, prior water users may have no legal recourse while investors will have contractual rights to fall back on, enforceable under an international dispute settlement mechanism.

"Prior water users may have no legal recourse while investors will have contractual rights to fall back on, enforceable under an international dispute settlement mechanism."

Some of the key provisions enabling foreign investors to secure water rights when they invest in land are as follows:

  • Investment treaties often include a standard of fair and equitable treatment. This standard contains the concept of a "legitimate expectation" of the investor to secure not only title to the investment but also rights to maintain its operations, for example to draw water for agricultural purposes. This international law right could provide a secured right to foreign investors, even if it conflicts with existing or future local water needs.
  • Investment treaties include a prohibition against expropriation without compensation. The issue of compensation is murky when certain rights for operating an enterprise are reduced but not fully taken away. This is a foreseeable situation in relation to farmland investments, all of which rely upon the availability of water, and many of which are for 50 - 99 year lease periods. If water resources drop to a level below the requirements of the investment, the host state will not be able to do much and compensation could not be foreseeable. However, if there is sufficient water available, but the amount allocated to the investor is reduced to meet the needs of other users, reducing water allocations to the investor may be defined by a tribunal as an expropriation of the right to operate the business (Smaller and Mann).
  • Investment treaties may include pre-establishment rights (or liberalisation commitments), which means foreign investors must be treated the same as domestic investors, including being allowed to purchase land and access water on the same terms.
  • Investment contracts between the state and the investor may contain a stabilization clause, which will enable the investor to avoid complying with, or be entitled to compensation, when new regulations come into force, for example environmental measures to reduce pollution or to protect against runoff of pesticides and fertilizers.
  • Finally, almost all investment treaties today include a dispute settlement mechanism to allow foreign investors to challenge governments if there are any changes that substantially affect an authorized foreign investment and its profit levels. Where rights to water are granted, any changes to those rights could trigger an investor-state arbitration.

Recommendations

If governments are interested in using their natural resource base to achieve sound economic development, it is essential to have a strong set of domestic laws. International investment agreements protect the rights and interests of foreign investors. Domestic laws to protect the rights and interests of individuals and communities are vital to ensure a level playing field.

An often-identified approach to improve the development impacts of foreign investment is to include in the contract, certain requirements on investors to contribute to the local community, in economic and social terms. These can include hiring a designated number of local workers, purchasing local goods and services, providing improved technology and training, building schools, houses and medical clinics, and other requirements which can guarantee a positive impact locally (Smaller and Mann).

Investment contracts between governments and foreign companies should also provide for periodic reviews of water rights and allocations so as not to undermine citizens' access to water. In addition, contracts should not undermine the ability of government to introduce new domestic regulations that serve the public interest, for example pollution controls, or banning certain chemicals to protect human health.

"It is unacceptable that foreign corporations receive a "freebie", while developing countries give away the world's most valuable resource."

Finally, processes that seek to value land for the purpose of foreign investment must fully account for the value of the water. It is unacceptable that foreign corporations receive a "freebie" – in the words of Mr. Brabeck-Letmathe –, while developing countries give away the world's most valuable resource.

References:

World Bank: Rising Global Interest in Farmland: can it yield equitable and sustainable benefits? World Bank, September 2010.

Brabeck-Letmathe, Peter: The Next Big Thing: H2O. Foreign Policy, 2009.

3rd World Water Report: Water in a Changing World.

FAO: Unlocking the Water Potential of Agriculture. 2003.

EU: Water Scarcity and Drought in the European Union. 2010.

Sullivan, Tom: TIAA-CREF bets the farm. 2010.

Ballve, Marcelo: Chinese investors look to Brazil for farmland. 2010.

Sfakianakis, John, Al Hugail, Turki A., and Merzaban, Daliah: Saudi Arabia Economics – Pressure on Prices. Banque Saudi Fransi, 2010.

Kawach, Nadim: Arab food gap crosses 0bn over past decade. Emirates Business, June 2010.

UNECA: Water in Africa. 2006.

African Union: Water for Agriculture in Africa, Ministerial Conference on Water for Agriculture and Energy in Africa: The Challenges of Climate Change. December 2008.

Smaller, Carin, and Mann, Howard: A Thirst for Distant Lands: foreign investment in agricultural land and water. IISD, 2009.

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