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Investment Policy Blog

Over the past years agribusiness, (sovereign) investment funds and government agencies have been acquiring long-term rights (either acquisitions or long-term leases, typically between 50-100 years) over large areas of land (typically above 1000 ha), mostly in developing countries.

The development has been underpinned, on the one hand, by home state governmental concerns about food and energy security and, on the other hand, by private sector expectations of increased returns from agriculture due to rising agricultural commodity prices. However, this development also raises concerns about access to food, the displacement of small-scale local farmers by large investments (which may also lead to human rights violations of small landholders) and the related need to preserve the livelihoods of small farmers as well as weak governance mechanisms in host states. Nevertheless, these investments may be beneficial to the host country, provided that the appropriate institutions and safeguards are in place. Investment contracts and international investment law represent two such major institutions.

In this context it is pertinent to point out potential conflicts that may arise from FDI in agriculture and investment law. Conflicts are, inter alia, especially likely to emerge due to the long-term prospects of the investments. Investment law needs to find a balance between the commitments states undertake on the one hand, and their ability to implement measures to ensure sustainable outcomes in times of crisis, on the other. UNCTAD has been at the forefront of analyzing the link between sustainable development and investment. This analysis can be applied to agricultural investments as well. In order to ensure that FDI in agriculture contributes to the welfare of host states, safeguards can be adopted to provide a safety net to protect the interests of local farmers. Such safeguards can be deployed at two levels: first, at the national level of the host state in investment contracts; and second at the public international law level, in the investment treaties.

The UN Guiding Principles on Business and Human Rights approved by the UN Human Rights Council in June 2011 contained an additional report, which introduces “Principles for Responsible Contracts”. The report identifies investment contracts as an important instrument through which states and companies can address the human rights impact of a project. First, there ought to be access to an effective non-judicial grievance mechanism as provided for in the principles. Second, host states should also enjoy contractual rights in case of defective performance on the part of the investor (that is, if certain requirements and safeguards for local interests are not met by the investors, such as land that is left fallow, or when human rights obligations are not respected). States need to be aware, however, that poorly drafted contracts can be potentially enforced through international arbitration against the host state, with the umbrella clause in investment treaties as legal base.

Some investment treaties already contain prudential carve-out clauses for measures taken in response to financial crises. In light of the food crises of the last years, similar clauses should be introduced in investment treaties to cover the agricultural sector. These clauses should caution to be self-judging, as this could invite opportunistic behavior by host state governments. Instead, they ought to be reviewed within the parameters of good faith. Alternatively, a legal innovation found in the new US Model BIT 2012 concerning financial markets might be adopted. This BIT includes provision for the assessment of the prudential measure to be delegated to independent (i.e. non-political) expert authorities of both signatory states of the BIT. Since such authorities usually do not exist for the food sector, states might want to delegate that judgment to international organizations, such as FAO or UNCTAD.

The agricultural sector is characterized by multiple human rights-related facets, which makes this an exceedingly delicate sector. Ample flexibility should therefore be carved out for states to be able to respond meaningfully to food security, human rights and sustainable development concerns, thus minimizing negative outcomes for states and their citizens at large.

See also IPFSD clauses:

3.6 Access to land

5.1.4 Public policy exceptions

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Christian Häberli [ WTI ] Posted on 05 June 2013, at 4:14 PM

"Land Grab" – the impolite and incorrect word for large-scale land acquisitions by foreigners – is a direct consequence of rising world market prices for food. Coming in the wake of the last big food crisis (2007-08) this is a predictable development, after a decade-old lack of investments in a sector where poor countries never got a chance to compete against food dumping by taxpayer-assisted farmers in many developed countries. On the face of it, these new investments are induced by market developments and thus a correct response to the often low productivity of small farmers and underutilised land resources. New investments are also a welcome improvement for global food security (and in the case of biofuels, energy security). Nonetheless, the governance problem is evident when one looks at the map and finds that many such investments go to so-called weak states with a poor and under-regulated investment climate where “better” investments don’t happen (and the local farmers still remain poor). It would be wrong, however, to locate the problem at the national level and in just a few, mainly African and East Asian countries. The international community and investor home states are also involved. The recent UN, UNCTAD, FAO and OECD guidelines for investors are fine, and an extension of the Extractive Industries Transparency Initiative (EITI) to agriculture would be welcome. But international financial institutions and governments are part of the problem when they provide financial and technical assistance without comprehensive ex ante and ex post impact assessments, or by concluding BITs which overprotect investors even in cases of corruption, or violations of social and environmental standards. What is needed is a rebalancing of the international legal and policy environment which presently ignores the special situation of poor farmers in weak states. National treatment and MFN guarantees for investors are not an answer. Nor does the US Model BIT offer remedies, except where national security interests are at stake. We argue instead for a public interest clause for food security in investment treaties and trade agreements, by which human rights violations or environmental degradation can be addressed in courts or between governments, even where they had been sanctioned, for instance by a predecessor government.

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Lorenzo Cotula [ IIED ] Posted on 14 June 2013, at 2:58 PM

Large-scale land acquisitions in lower-income countries bring into contact competing claims underpinned by unequal power – from transnational companies and host governments to affected people. Economic globalisation has been accompanied by extensive developments in national and international norms regulating investment and its impact – including investment law, natural resource law and human rights law.

As I have argued in a recent book (http://www.routledge.com/books/details/9780415609906/) and a forthcoming one (http://zedbooks.co.uk/node/11039), these legal developments have produced skewed legal frameworks that provide unequal protection to competing claims.

Investment treaties and arbitration have gone a long way towards imposing discipline on the exercise of state sovereignty. This reflects the significant developing country efforts to attract foreign investment.

But for the vast majority of rural people whose rights are protected under national legislation and international human rights law, legal protection is often undermined by shortcomings in rule of law, substantive rules and legal remedies. For them, challenging adverse government action is difficult at both national and international levels.

The resulting regime seems more geared toward enabling secure transnational investment flows than ensuring these flows benefit people in recipient countries. As pressures on natural resources increase, more vulnerable groups risk being squeezed out.

Addressing these challenges requires more than rewording the text of investment treaties. There is a need to rethink important aspects of the wider national and international legal frameworks, to ensure that the protection afforded to foreign investment is matched by equally strong safeguards for rights that may be affected by investment flows.

And it is not just about law either. Effective institutions – in government and civil society – are key. More fundamentally, there is a need for recipient countries to develop a shared national vision of development pathways, and of the types of agricultural investment that best respond to local and national aspirations.

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