ODI aims to guide developing market investors with Tenure Risk Tool

Anna Locke, head of the Overseas Development Institute’s program on agricultural development and policy, says investors too often take government guarantees that land is available for investment at face value.

The Overseas Development Institute, a UK think-tank devoted to development and humanitarian issues, has developed a tool to help agribusiness investors gauge the degree of tenure-rights risk within Africa’s developing markets.

Using a 0-100 classification of environmental, social and governance conditions within specific locations derived from geospatial data and provided by Landscope, a non-profit organization, the Tenure Risk Tool (TRT) allows users to input estimates of a project’s expected capital and operating expenditures, as well as revenue, along with a discount rate at which the investor plans to calculate net present value.

The TRT then calculates the likely impact of delays on the timing of revenues and value of a project, providing separate projections of minimum, median and maximum potential losses due to tenure-risk related delays in specific locations. It also provides estimates of costs due to potential delays during the inception and operation of a project, with distinct readings for greenfield and brownfield approaches.

In a report about the tool, which was developed in partnership with TMP Systems, ODI described the risk of dispute between investors and locals over land or natural resource claims as “endemic” in emerging markets. Such risks, according to the report, are becoming more pronounced due to growing pressure on land and easier access to communication tools, among other factors.

Strategies to avoid such risks – including conducting land entitlement processes or establishing grievance mechanisms – are cost effective when compared with the potential tenure disputes, the report said, but often hard to justify internally.

“Investors do not have a way of putting a figure on the financial impact that tenure disputes can have on their operations, making it difficult to make the business case for implementing mitigation strategies into their investment process,” the report’s authors wrote.

In addition to helping decide where to invest, information provided by the TRT can also help investors shape their approach to agribusiness investment within a specific region, country or crop.

“It may well be possible to pilot a land investment with a less capital-intensive crop with a shorter production cycle before moving into a crop that would be much harder hit by tenure-related delays,” according to the report, which was based on interviews with nearly 80 companies and a database of more than 600 tenure-related disputes across industries.

Anna Locke, head of ODI’s program on agricultural development and policy, told Agri Investor that although land tenure has not been as prominent an issue on the ESG agenda as environmental damage or climate change risk, she expects it will become a more pressing concern of LPs in the future.

To illustrate, Locke highlighted a 2018 USAID survey in which 58 percent of respondents reported that land tenure risks have increased “significantly” or “very significantly” over the past five years.

She said work as an agricultural advisor to the government of Mozambique in the years immediately following the economic crisis exposed Locke to a flood of investor interest in African agriculture that included hedge funds, pension funds and venture capital firms.

Tenure risk is often not a focus for such groups, Locke said, adding that investors tend to take government guarantees that a specific property is available for sale at face value.

“Then they get hit really hard on the bottom line when the disputes start happening,” Locke added. “It can get very, very nasty and very protracted. Half the cases we looked at lasted over 10 years; that’s a lot of lost revenue.”

ODI’s development policy work focuses on programs and business models benefiting investors and the developing world communities where they invest. Its supporters include the UK’s Department for International Development, philanthropies like the Gates Foundation and Omidyar Network and government-linked DFIs from Germany and Sweden, among others, according to Locke.