Dodging disasters

Sixteen years ago, a legal saga started in Uganda. Alleging that they had been forcibly removed from their land, a group of local farmers lodged a criminal complaint against the government, demanding an independent survey to determine the land’s real ownership, its restitution, or adequate compensation. The country’s high court agreed to hear the case in 2003.

Public authorities were not alone on the defendants’ bench: Kaweri Coffee Plantation, a producer owned by Germany’s Neumann Gruppe, had signed a 99-year lease for the disputed land; it stood accused of accepting the expulsions. In March 2013, the court ruled the evictions illegal and ordered payment of about $10 million to the plaintiffs. The defendants appealed; a final decision is still pending.

Neumann has repeatedly denied wrongdoing, stating that accusations of a landgrab by multiple parties are unjustified. Regardless, the company suffered serious reputational damage, and no doubt disruption to its operations (Neumann had not responded to a request for comment at the time of publication). The case illustrates some of the pitfalls faced by outside investors – even experienced corporates – in emerging markets.

Missing title

There is a strong case for investing in Uganda, if you can bear the risk. Jeremy Stroud, a Canadian agricultural analyst who participated and consulted on a project for the World Bank in the country earlier this year, says equity returns can reach 20 or 30 percent. He recalls meeting with the team running Operation Wealth Creation, a national agricultural program launched by the president and co-ordinated by army generals, which told him free leases for their land may be available for investors looking to deploy “maybe $5 million or $6 million.”

That the Ugandan authorities wish to boost investment in agriculture is credible. But there is a snag: Stroud estimates that 80 percent of the country’s land is not titled properly. “No one is the owner of the land, except for the people who are living on the land and whose ancestry has had that land. But it’s not documented adequately.” As the Neumann example illustrates, that calls for “an abundance of due diligence” regarding the land’s current and previous ownership, he argues.

Over the past couple of months, we reported on two other examples of greenfield projects with nobler ambitions: Elyza Daniel’s organic rice project in Senegal, and Aaron Beydoun’s cocoa plantation in Colombia (which we explored in a podcast). In the latter case, investors were confident they could disrupt the local duopoly, which worked in farmers’ disfavor, by offering a better price and low-cost crop financing to cocoa growers. It did not work out: the farmers did not take them up on the offer.

Beydoun thinks it partly came down to cultural hurdles. “A lot of people think that because they have a lot of money, they have a magic wand and can save everybody because they’re doing the right thing.” But in his project’s case, “farmers’ fear of change was bigger than their distrust of the status quo,” he says. He reckons they should have worked harder on convincing growers the venture would have opened up business opportunities – so “they can feel really empowered” – rather than something akin to aid money.

Fallible friends

Both Daniel and Beydoun also anticipated stronger support for their project than they ended up receiving. In principle, the Colombian government, allied with US aid agencies, was firmly behind Beydoun’s idea: the project fitted neatly within the rationale of a program called “cocoa for peace,” under which farmers were incentivized to grow cash crops instead of cocaine. Yet no concrete help materialized on the ground; political contacts, of which, Beydoun and his partner had plenty, did not change the outcome.

“If I would have done it differently, the first thing I would have done was to make sure your partners are not only ready to seriously commit themselves but to make sure that they have the right people in place,” he says. “None of the people we dealt with, whether it be on the Colombian or US side, understood how to create a commercially self-sustaining viable business.”

There are other takeaways, not least the fact ventures tend to progress at a much slower pace than initially envisaged. Stroud says a common mistake is to expect high returns to come in the first few years. A more positive lesson, however, is that tenacious investors often manage to bounce back after initial failures. Daniel told us she’s been contacted by potential clients eager to learn more about her experience; Beydoun is now betting on Colombian coffee. “It’s a whole other market,” he says. And he’s giving it a good shot.

Write to the author at matthieu.f@peimedia.com