By Omer Redi | Addis Fortune
The crisis in the power supply has reached such a critical point that blackouts now occur every other day. With the water level in the currently operating hydropower generation dams going down by an average of one to two centimetres everyday, the expected rains in the coming few months will determine whether the power utility can continue supplying energy given the current state of affairs. Nevertheless, Miheret Debebe, chief executive officer of the Ethiopian Electric Power Corporation (EEPCo), says – in an exclusive interview with OMER REDI, FORTUNE STAFF WRITER – that it is not all doom and gloom as there are upcoming power generation stations to be commissioned in a matter of months.
Fortune: It is obvious that Ethiopia is now in such a serious power crisis that you have been forced to introduce load shedding with a frequency that now has reached every other day. What exactly has happened to the power generation sector to make you introduce this schedule?
Miheret: The current situation of power shedding is because of the imbalance in supply and demand. We have short, mid and long term planning. This is the supply-demand forecast and the planning that follows this forecast. From the demand side, this year we anticipated between 17pc to 20pc growth in actual demand, despite the surface demand growth being 24pc.
There is a gap between the demand and supply side growth because forecast depends on different methodologies, knowledge base and experience of the sector. Other major factors, such as economic growth, social development, environmental situations, industrial, commercial and domestic GDP growth, have their own impact on the growth of energy demand. Population growth is a very important factor for the increase in energy demand. To mitigate this demand, definitely there should be supply side planning and this supply side planning starts based on the master plan, which includes all the factors I have mentioned.
Q: Let us discuss the work on the supply side because obviously, the supply has not grown as much as, or at least close to the demand, has it?
The supply side planning follows ways to mitigate this demand growth in the coming five, ten or twenty-five years, focusing on what should be the generation, transmission, distribution and the universal electricity access planning aspects. The generation planning is very critical factor in this regard. But the generation has its own limiting factors to meet its own schedule.
Around the world, generation projects are not completed on time or ahead of schedule; they are delayed significantly due to forced or voluntary situations. For both reasons, our projects are delayed and that is one factor causing the deficit.
The second factor is the hydrology; especially considering that Ethiopia depends on hydrological resources for 95pc of its power generation. This factor was not in our favour; the situation in the existing dams is not in line with the metrological or hydrological forecast anticipated for this year. There is quite a big gap between the water volume we had anticipated and what we actually got from the Belg season. In addition to the low level of water we got in the dry season, the dry season has also aggravated the evaporation at the dams.
The other factor is that though we have had an emergency plan of a capacity the country could afford, the plan was to supply power to meet half of the 24pc demand growth. That means the emergency plan was meant to increase the supply by 12pc. If we had planned to mitigate the entire (24pc) demand growth, that means the country should deploy four times what we have invested today to rent generators. And this is beyond the country’s foreign currency capability.
Q: How did you get the funding for the emergency plan?
It is a complex subsidy element. We initially planned to get financing from the World Bank and the Ethiopian government. Though we started work on the same day with the same objective, financing from the Ethiopian side went efficiently and the emergency generation started in December 2008.
The World Bank financing has been delayed; even the bureaucratic decision making process has not been finalized up to today. Hence, yet again, we now have the capacity to generate only half the emergency plan we had prepared for. The lengthy bureaucratic decision making process at World Bank has delayed half the financing for the emergency plan and thus we rented half the generators we initially wanted to.
The minimum duration of generators rental agreement we can enter to is about six months. So if [the World Bank is going to release the fund afterwards] we enter another agreement for the remaining generators, we will put the country into a serious loan burden for a facility that we can use for weeks or one month [because the rainy season is already closer].
So we have to drop this option and it creates a big gap. All these factors contributed to the big deficit. In any country’s practice, this is [load shedding] how you mitigate the deficit in such situations.
Q: So can we say it is not feasible to rent those diesel generators for six months because it puts a lot of loan burden on the country?
It is not about feasibility. We started the same scheme for six months with Ethiopian and foreign financing. With the Ethiopian financing, the same was completed in a few months and started operations in December last year. With the foreign financing, because of the financiers own conditions and decision making processes, the scheme has been delayed even without approving the tender up to today.
So, even if it is approved today, negotiating, signing a contract agreement and placing orders to rent the generators will take until July and they can be used only after July. By then, the scheme will have lost its service purpose; we have already lost the time we want to fill the gap.
Q: Your plan was for more diesel generators to be rented for the short term and now you are actually using half of your actual plan. Even so, I expect it is a lot of financial burden on the government. Let us talk about this burden. How much do you pay in terms of kilowatt hours for the rent and how much do you charge your customers in the same measurement?
Though the plan was to generate 120Mw from the emergency scheme, we are now getting 60Mw for 20 hours a day continuously.
Of course it creates a lot of financial burden. Yet, for the short term, it is a big scale and feasible practice in any global experience, as in the case of Afghanistan, Iraq and some African countries like Uganda, Kenya, Tanzania, Ghana and almost everywhere because the continent is suffering a huge energy crisis now. This is the best short term solution as the containerized generators are mobilized, installed and synchronized fast.
Their impact – we pay more than 0.20 dollars for a kilowatt hour and collect less than 0.5 dollars from the consumer. This is a huge subsidy from the government and the corporation. We are doing this only to mitigate the negative socio-economic effect, not as a business objective.
So roughly, we are now spending about 100 million Br to 120 million Br per month for fuel, in addition to the capacity costs we have to pay to the owners of the two generators, which is 10 million dollars for each for the six months rental period. The 20 million dollars for the 60Mw is the least cost available. In addition, we have to pay for fuel and other costs. The monthly breakdown of the six months’ rental cost is about three million dollars.
Q: Do you anticipate any possibility of the rental of these generators being extended for a longer period than the six months?
Well, hopefully, since the problem depends on the start of the rainy season, whether it would start in early or late July, the deficit could last a bit longer. In that case, it could extend for couple of weeks or for a month.
Q: You are now almost close to the end of agreement period, which began in December. Do expect any power supply from the almost finalized hydroelectric power generation stations, such as Gilgel Gibe II and Tekeze to replace these generators?
The agreement period ends around June. Already in Gibe II, only about 200m of the 25.85Km tunnel remains to be completed. So you can imagine what huge progress it is. But still, the last one metre is a challenge for us. Once we complete the breakthrough on the tunnel, hopefully in early June, the two tunnels to the powerhouse [penstocks] will join the 25.85Km tunnel.
This is one of the biggest tunnel projects. Cleaning the tunnel; removing the railing and ventilation system, along with qualitative consolidating of electromechanical system and civil works are expected to be completed at the end of July. Immediately after that, we will start filling the tunnel and generate power according to the schedule.
Q: Still on Gilgel Gibe II, which you expect to be the solution to the current situation, now the remaining part of the actual physical works are the about 200m of construction of the tunnel and other tunnel related works. When these are finalized, there is cleaning. Then, there are three stages of testing: dry test, wet test and commercial test, how long will all this take in total?
I think first of all, there is something we should not forget; the highest voltage (400Kv) and the longest transmission line (230Km) is also going to be commissioned. This is the first of its type in Ethiopia. The transmission is completed. It also includes opticfiber communication wire for telecom purposes and two of the biggest substations in the country – Sebeta II and Gibe End – are completed.
Now dry test is going on simultaneously at the power plant and the substation along with the remaining works because we want to save time. The wet test starts when the water is full in the tunnel and the good thing about it is even if it is somehow disrupted, we test it by loading [power] and supplying to the system; that is the advantage. The wet test and the commissioning test, even if in terms of time we stop and start, we can do that by synchronizing to the system. That means by supplying power to the system.
Q: So you are planning to undertake wet test and commercial test at the same time?
We do it simultaneously. We test it by actually feeding the power to the system and that is also what we mean by loading. Even we want the big industries to be on because we have to test it with the highest load in the system.
Q: How long does the cleaning take?
We are trying to make it shorter and expect this to be finalized in about two months. Let us not forget it is a more than 25Km long tunnel which is so unpleasant for human beings. You can’t survive 200m in the tunnel without air and people, in fact, have died because of humidity and high temperature. For that reason, we have been using ventilation with safety standards and very standard technological facilities that we have to take out now.
Q: What elements does cleaning include?
Cleaning the more than 25Km long tunnel includes removing the railing, a very complicated ventilation system, and equipment that helps the Tunnel Bowering Machine for lighting the tunnel. It is after the tunnel that we see consolidated grouting and the tunnel should be solidified by the civil work. This is also called curing time, once you do the concrete wall, you need civil work of cement and concrete, so it is a drying and curing standard engineering time. And there are some works at the intake part before opening the tunnel.
Q: The dry test does not need water because you simply load power (voltage) to the generators from another sources to check its capacity, proper operation and sustainability. So I expect you have started this test alongside other works long before. How long have you been doing that test and what elements do the dry system include?
It is an every day job. In the past months, we were doing it on the turbines system, the control system, the protection system and the SCADA system. It includes the turbine (turbo machine) system and its functionality, generator, other hydraulic and electromechanical systems which have measurement, control, protection and safety systems. And the SCADA system, where you can control the whole plant using a computer, and where you can see the plant synchronized with the national grid, is also part of this test. This is a high-tech system that we stimulate by installing and feeding some false data to test the whole system. It is a matter of high evaluation on how stable the plant is with a very high standard quality that requires professional work.
Q: Once the dry test and cleaning are finalized, you go on to the wet test along with the commercial test, which is actually commissioning the power, is that right?
Yes, we clean and test the tunnel first. This includes testing the pressure, the water flow, the intake structure, the penstocks (the two 1.2Km each long steel pipes) and the turbo machine system with water. After these works are completed, we will make sure the whole system is ready, by feeding and supplying power from zero to the maximum capacity, then after that the commercial test goes on.
Q: I am aware that what you referred to as an internationally accepted standard and procedure of testing power generation plants demands the three levels of tests to be undertaken one after the other. It is only after these tests that the contractor will handover the project to you for actual commissioning. And of course, you test the plant for sometime before you release the performance guarantee bond. In total, it takes about six months. Now you are telling me that you are going to finalize the tests in about two months or so, while undergoing wet and commercial tests at the same time. I can understand the immense pressure you have been under due to the power crisis and how quick you want this project to be commissioned. But won’t that be risky? Will the project contractor be willing to hand you over the project without going through the normal practice?
No! Not that way! You do not have to isolate some part of the system. You can do some separate tests but you synchronize them to the system. I am sure EEPCo’s capacity and experience in the past 60 years in the power system is competitive and the contractor has to rely on our capacity on the particular matter. So I’m sure we know our business and we will do it to the best interest of the public. Since it is team work, we will achieve our timing and keep the one year warranty with the contractor. After that, we can stop the plant and check everything before taking out its liability. But we will not undermine the safety rules because of the pressure.
Q: Let me take you back to the blackout issue. There used to be a line dedicated for businesses engaged in export trades. There are reports that you have stopped that. Along with the current situation of the power shedding arrangement, which is at least every other day’, that indicates the shortage of power supply and the level of water at the dams has reached a critical level. Considering the worst case scenario, for example, if the expected rain turns out to be negative, how long will you be able to supply power with the current amount of water?
With regard to the consumer grouping, it is based on the economic and social impact of the power outage. We have classified consumer groups. In terms of the industrial aspect, we have heavy industry consumers who have a dedicated line or one mixed with the other domestic or commercial consumers. We have export industries which have a dedicated line or one mixed up with the other from domestic or commercial consumers. When it is the social aspect, we have very sensitive consumers, like hospitals, schools, clinics, as well as water supply and telecom facilities.
The significant power demand is from the industry with commercial and domestic sectors. Thus, the saving is also from these sectors. Those heavy industries are warned to plan their maintenance in this time of shortage to mitigate the impact with the possible demand side management.
Most of them are to be appreciated for obeying the notice, and they are doing major inspection and maintenance works. Some of them are preparing their emergency supply for this period. They will be able to survive by doing their critical activities. Export industries are classified under a clearly committed market. They have been given power, whether through a line dedicated to them or in between consumers; since they are the major aspects of the Ethiopian economy they are given priority.
But as citizens of this nation, sometimes they should share the burden by using their own internal capacity. Since they have the financial capacity, they have to be part of the solutions by using their resources.
About the water level, on our part, we are very vigilant not to let the volume go below the lowest acceptable level. Though we have been successful in maintaining that level of water, the peak hour is still challenging us. Nevertheless, our optimistic plan is to keep to the same situation up to July. It also depends on consumers’ behaviour, like in workshops, garages, and bakeries. They have to shift to stay with today’s consumption for tomorrow, and it also requires consumers’ behaviours to live with discipline for short periods and hope for a bright future. This is the fact of life in the whole continent, even in the world.
Q: From the report on your desk, I can see that the red line indicates the lowest acceptable level of water, while the black line indicates the actual water level in the dams. But I also see that for most of the dams, for the most part, these lines are overlapping. Has the current aggregate water level throughout the dams across the country reached the lowest level?
Now we want to keep the aggregate reduction per day to an acceptable centimetre. This [the report I have] is of hourly reductions for every 24 hours. But the net effect, we want to keep where it should be. [For example] if we want to maintain a one centimetre reduction a day in Melka Wakena Dam, we will avoid further reduction by cutting power because we cannot compromise any other way. We have been successful so far and we have to monitor levels 24 hours. Every one at the dams, the transmission lines, sub-stations, the distribution centres and the consumer must be vigilant.
Q: What is the daily acceptable level of reduction?
Well in Melka Wakena, say one centimetre, while in Gilgel Gibe II, it is about two centimetres.
Q: In normal times, how much is the daily average reduction?
It depends on the season, the time, the day, the volume of water in the dams; but it could be 10cm to 20cm.
Q: What about the water supply to Gigel Gibe (GG) II. Obviously there is a problem with the level of water in all the dams, including Gilgel Gibe I, which is the source of water for the former. So, if the volume of water in the source dam (GG I) is low, if it remains at that level in the coming months, how you will you be able to generate power from GG II even if it is commissioned?
In the first operation, hopefully by the end of July, which is also a good season, the dam would get sufficient water. But even with the minimum water level with which GG I can’t operate, there is a possibility of opening the bottom outlet gate and filling the tunnel and getting power from GG II. Its hydrological harmony is taken care of in earlier design steps. So we still have room to play in and July is a still a reasonable time when even in the worst case scenario, we can generate power from GG II.
Q: There are experts who argue that though the plans for the currently under construction hydroelectric power generation projects have long been on the shelves of EEPCo’s offices, they have not been implemented and initiated until recently when you started this aggressive and intensive works on about six hydroelectric power projects. Why have those plans waited for so long while the demand was obviously expected to increase when the country entered into a free market economy?
Unfortunately, it is not wise to blame the past. We have to learn from our mistakes and weaknesses in the past because it is the best way to benefit from the future. In this aspect, we can look at where we were in the early 90s. There were only 320Mw with only 3,000Km of high voltage and about 7,000Km of medium and low voltage networks and about 320 towns with access to electricity.
But now, including the emergency 270Mw, we have 9,000Km high voltage lines, 75,000Km medium and low voltage lines and 3,200 towns under service. The delay has internal and external factors. While following a very sluggish and conventional way of expansion in the planning, feasibility, designing, implementation and financing phases, what we had achieved in 50 years was about six, seven or a maximum of 10Mw per annum. Hydro plants came into operation at about 10 to 15-year intervals with hundreds of megawatts. But there were no complete and full-fledged feasibility study and bankable document.
Q: There are also arguments that before indications of the possible power crisis started to float – the time the current power generation projects were started – there was less commitment at the highest level of the government about power generation. That means the sector had not been given the emphasis it deserves at the beginning of the free market system. Do you share this view?
It is not always the same. There is no complete homogeneity in such thinking. But as far as I know, there is a far-sighted vision and commitment from top leaders. But there were also those in the top level of the government who thought otherwise. There were, thus, two conflicting ideas.
For example, though our financiers had said that Gibe I would be enough for 10 years, and thus, advised us to invest the money in other sectors, the government continued to work on the other projects. In fact, it was before we consumed Gibe I for only 10 months that the power problem started, let alone being enough for 10 years.
Q: For example, the infrastructure development area the government is known to be successful in is the road sector. This is due to the emphasis the sector has enjoyed from the government. Do you believe that your sector has been given equal attention?
Here there is a mixed approach. Like you said, the road sector gets a lot of attention and is attractive to financiers since it is a main development infrastructure. But in the case of power, the financiers want us to be stable financially and work as a business entity on one hand. On the other hand, they want us to be development-oriented businesses. So in this respect there is a dual approach and definitely this sector faces two challenges in bringing these to one.
Q: When do you expect to reach a level where EEPCo and you, as a senior official of the corporation, enjoy compliments following your successful achievements in developing the energy sector as the road sector doe now?
Handling the power sector is a very tough issue, which, sometimes, is higher than the socio-economic crisis. Unfortunately, power is a very determinant factor in every bit of life. Every single life in every second is dependent on energy. So has the fast development move. Our big challenge is the dependence on foreign resources. When we are out of this dependence, definitely this will mean we can achieve all our national objectives.
Q: When do you expect EEPCo to take Ethiopia out of the current situation?
To be frank, we have a very bright future. If we finish the three projects ahead of us – Beles, Tekeze and GG II – and when we come out of the daily challenges we have to face over GG III, then we are likely to be free from the current problems.
Beyond that, we have another cascade of projects in line; I am not going to mention the details because these will be announced by the government soon. And our strong foreign market will start in January 2010. Then our dependence on foreign financing will end.
Q: EEPCo has been under different structures under the current government. In the first ten years since EPRDF has come to power, it was under the former Ministry of Infrastructure, along with 12 other government agencies. Now it is under the Ministry of Mines and Energy. Do you feel that you should have been under a ministry which deals only with energy issues, as in the case of some other countries like Kenya? Do you believe that such structural issues and instability have hindered you from achieving what you could and should have achieved, perhaps, if you were under a ministry that is directly responsible only for energy or power generation?
As you know, there is a major national level restructuring process going on in the country right now. The national transformation covers all sectors; the energy or power sector is one of them.
If you see the development [over the years] the infrastructure ministry was multi-disciplinary, now it is reduced to a few focused sectors. The structural issue is a top government level, macro-level policy makers’ issue. If you see the natural progress more focused sectoral ministries have been making; after that, the national reform program has been launched.
As a result of the past and current development, as well as the dynamism of the power sector, now we are also entering a new restructuring phase. For my own sector, within my own mandate, I could say it very much demands very basic restructuring. We need a more focused, optimum, customer-oriented and sectoral structure based on the core process. The construction and the operation should be separate businesses; the generation, transmission and distribution should be organized into a bundle under public ownership.
Q: So have you suggested these changes? Does that mean it should have its own ministry?
The natural growth of the sector leads us to the restructuring, and I think the issue is being discussed by higher officials in the government.
The Economist
The Chinese and Arabs are buying poor countries’ farms on a colossal scale. Be wary of the results.
OVER the past two years, as much as 20m hectares of farmland—an area as big as France’s sprawling farmland and worth $20 billion-30 billion—has been quietly handed over to capital-exporting countries such as Saudi Arabia, Kuwait and China. They buy or lease millions of acres, grow staple crops or biofuels on it, and ship them home. The countries doing the selling are some of the world’s poorest and least stable ones: Sudan, Ethiopia, Congo, Pakistan. Usually, when foreigners show up in these places, it is with aid, pity and lectures (or, in one instance, arrest warrants for war crimes). It must make a nice change to find their farms, so often sources of failure and famine, objects of commercial interest instead.
Yet while governments celebrate these investments, the rest of the world might reasonably ask why, if the deals are so good, one of the biggest of them helped cause the overthrow of the government that signed it—the one in Madagascar. Will this new scramble for Africa and Asia really reduce malnutrition, as its supporters say? Or are critics right that these are “land grabs”, “neocolonialist” rip-offs, different from 19th-century colonialism only because they involve different land-grabbers and enrich different local elites?
Protectionism or efficiency?
It would be graceless to write off in advance foreign investment in some of the most miserable places on earth. The potential benefits of new seeds, drip-feed irrigation and farm credit are vast. Most other things seem to have failed African agriculture—domestic investment, foreign aid, international loans—so it is worth trying something new. Bear in mind, too, that worldwide economic efficiency will rise if (as is happening) Saudi Arabia abandons mind-bogglingly expensive wheat farms in the desert and buys up land in east Africa.
Yet these advantages cannot quell a nagging unease. For a start, most deals are shrouded in mystery—rarely a good sign, especially in countries riddled with corruption. One politician in Cambodia complains that a contract to lease thousands of acres of rice contains fewer details than you would find in a house-rental agreement. Secrecy makes it impossible to know whether farms are really getting more efficient or whether the deals are done mainly to line politicians’ pockets.
Next, most of these deals are government-to-government. This raises awkward questions. Foreign investment helps countries not only by applying new technology but also by reorganising the way people work and by keeping an eye on costs. Few governments do this well, corrupt ones least of all. One of the biggest problems of large-scale commercial farming in poor countries is that well-connected farmers find it more profitable to seek special favours than to farm. These deals may exacerbate that problem. Worse, the impetus for many of them has not been profit-seeking by those who want to turn around failing farms. Rather, it has been alarm at rising food prices and export bans. Protectionism, not efficiency, has been the driving force. It would be better to liberalise food markets and boost trade than encourage further land grabs.
Third, there are serious doubts about whether countries acquiring land are paying the true cost of it. Host governments usually claim the farmland they offer is vacant, state-owned property. That is often untrue. It may well support smallholders who have farmed it for generations. They have no title, only customary rights. Deals that push them off their land or override customary rights cannot be justified. International bodies, such as the African Union, are drawing up codes of conduct to limit such abuses. They are sorely needed.
Even then, land deals will never help the poor as much as freer trade and stronger property rights. But if the deals eventually raised yields, spread technology and created jobs, that would at least be some cause for celebration. At the moment too many seem designed to benefit local elites more than local farmers; they use foreign labour and export most of their production, harming local food markets. Until they show otherwise, a dose of scepticism should be mixed with the premature hopes the land deals have engendered.
Buying farmland abroad
EARLY this year, the king of Saudi Arabia held a ceremony to receive a batch of rice, part of the first crop to be produced under something called the King Abdullah initiative for Saudi agricultural investment abroad. It had been grown in Ethiopia, where a group of Saudi investors is spending $100m to raise wheat, barley and rice on land leased to them by the government. The investors are exempt from tax in the first few years and may export the entire crop back home. Meanwhile, the World Food Programme (WFP) is spending almost the same amount as the investors ($116m) providing 230,000 tonnes of food aid between 2007 and 2011 to the 4.6m Ethiopians it thinks are threatened by hunger and malnutrition.
The Saudi programme is an example of a powerful but contentious trend sweeping the poor world: countries that export capital but import food are outsourcing farm production to countries that need capital but have land to spare. Instead of buying food on world markets, governments and politically influential companies buy or lease farmland abroad, grow the crops there and ship them back.
Supporters of such deals argue they provide new seeds, techniques and money for agriculture, the basis of poor countries’ economies, which has suffered from disastrous underinvestment for decades. Opponents call the projects “land grabs”, claim the farms will be insulated from host countries and argue that poor farmers will be pushed off land they have farmed for generations. What is unquestionable is that the projects are large, risky and controversial. In Madagascar they contributed to the overthrow of a government.
Investment in foreign farms is not new. After the collapse of the Soviet Union in 1991 foreign investors rushed to snap up former state-owned and collective farms. Before that there were famous—indeed notorious—examples of European attempts to set up flagship farms in ex-colonies, such as Britain’s ill-fated attempt in the 1940s to turn tracts of southern Tanzania into a limitless peanut prairie (the southern Tanganyika groundnut scheme). The phrase “banana republics” originally referred to servile dictatorships running countries whose economies were dominated by foreign-owned fruit plantations.
But several things about the current fashion are new. One is its scale. A big land deal used to be around 100,000 hectares (240,000 acres). Now the largest ones are many times that. In Sudan alone, South Korea has signed deals for 690,000 hectares, the United Arab Emirates (UAE) for 400,000 hectares and Egypt has secured a similar deal to grow wheat. An official in Sudan says his country will set aside for Arab governments roughly a fifth of the cultivated land in Africa’s largest country (traditionally known as the breadbasket of the Arab world).
It is not just Gulf states that are buying up farms. China secured the right to grow palm oil for biofuel on 2.8m hectares of Congo, which would be the world’s largest palm-oil plantation. It is negotiating to grow biofuels on 2m hectares in Zambia, a country where Chinese farms are said to produce a quarter of the eggs sold in the capital, Lusaka. According to one estimate, 1m Chinese farm labourers will be working in Africa this year, a number one African leader called “catastrophic”.
In total, says the International Food Policy Research Institute (IFPRI), a think-tank in Washington, DC, between 15m and 20m hectares of farmland in poor countries have been subject to transactions or talks involving foreigners since 2006. That is the size of France’s agricultural land and a fifth of all the farmland of the European Union. Putting a conservative figure on the land’s value, IFPRI calculates that these deals are worth $20 billion-30 billion—at least ten times as much as an emergency package for agriculture recently announced by the World Bank and 15 times more than the American administration’s new fund for food security.
If you assume that the land, when developed, will yield roughly two tonnes of grain per hectare (which would be twice the African average but less than that of Europe, America and rich Asia), it would produce 30m-40m tonnes of cereals a year. That is a significant share of the world’s cereals trade of roughly 220m tonnes a year and would be more than enough to meet the appetite for grain imports in the Middle East. What is happening, argues Richard Ferguson, an analyst for Nomura Securities, is outsourcing’s third great wave, following that of manufacturing in the 1980s and information technology in the 1990s.
Several other features of the process are also new. Unlike older projects, the current ones mostly focus on staples or biofuels—wheat, maize, rice, jatropha. The Egyptian and South Korean projects in Sudan are both for wheat. Libya has leased 100,000 hectares of Mali for rice. By contrast, farming ventures used to be about cash crops (coffee, tea, sugar or bananas).
In the past, foreign farming investment was usually private: private investors bought land from private owners. That process has continued, particularly the snapping up of privatised land in the former Soviet Union. Last year a Swedish company called Alpcot Agro bought 128,000 hectares of Russia; South Korea’s Hyundai Heavy Industries paid $6.5m for a majority stake in Khorol Zerno, a company that owns 10,000 hectares of eastern Siberia; Morgan Stanley, an American bank, bought 40,000 hectares of Ukraine in March. And Pava, the first Russian grain processor to be floated, plans to sell 40% of its landowning division to investors in the Gulf, giving them access to 500,000 hectares. Thanks to rising land values and (until recently) rising commodity prices, farming has been one of the few sectors to remain attractive during the credit crunch.
The great government grab
But the majority of the new deals have been government-to-government. The acquirers are foreign regimes or companies closely tied to them, such as sovereign-wealth funds. The sellers are host governments dispensing land they nominally own. Cambodia leased land to Kuwaiti investors last August after mutual prime-ministerial visits. Last year the Sudanese and Qatari governments set up a joint venture to invest in Sudan; the Kuwaiti and Sudanese ministers of finance signed what they called a “giant” strategic partnership for the same purpose. Saudi officials have visited Australia, Brazil, Egypt, Ethiopia, Kazakhstan, the Philippines, South Africa, Sudan, Turkey, Ukraine and Vietnam to talk about land acquisitions. The balance between the state and private sectors is heavily skewed in favour of the state.
That makes the current round of land acquisitions different in kind, as well as scale. When private investors put money into cash crops, they tended to boost world trade and international economic activity. At least in theory, they encourage farmers to switch from growing subsistence rice to harvesting rubber for cash; from growing rubber to working in a tyre factory; and from making tyres to making cars. But now, governments are investing in staple crops in a protectionist impulse to circumvent world markets. Why are they doing this and what are the effects?
“Food security is not just an issue for Abu Dhabi or the United Arab Emirates,” says Eissa Mohamed Al Suwaidi of the Abu Dhabi Fund for Development. “Recently, it has become a hot issue everywhere.” He is confirming what everyone knows: the land deals are responses to food-market turmoil.
Between the start of 2007 and the middle of 2008, The Economist index of food prices rose 78%; soyabeans and rice both soared more than 130%. Meanwhile, food stocks slumped. In the five largest grain exporters, the ratio of stocks to consumption-plus-exports fell to 11% in 2009, below its ten-year average of over 15%.
It was not just the price rises that rattled food importers. Some of them, especially Arab ones, are oil exporters and their revenues were booming. They could afford higher prices. What they could not afford, though, was the spate of trade bans that grain exporters large and small imposed to keep food prices from rising at home. Ukraine and India banned wheat exports for a while; Argentina increased export taxes sharply. Actions like these raised fears in the Gulf that one day importers might not be able to secure enough supplies at any price. They persuaded many food-importing countries that they could no longer rely on world food markets for basic supplies.
Panic buying
What to do instead? The obvious answer was: invest in domestic farming and build up your own stocks. Countries that could, did so. Spending on rural infrastructure is the third largest item in China’s 4 trillion yuan ($585 billion) economic-stimulus plan. European leaders said high prices showed the protectionist common agricultural policy needed to be preserved.
But the richest oil exporters did not have that option. Saudi Arabia made itself self-sufficient in wheat by lavishing untold quantities of money to create grain fields in the desert. In 2008, however, it abandoned its self-sufficiency programme when it discovered that farmers were burning their way through water—which comes from a non-replenishable aquifer below the Arabian sands—at a catastrophic rate. But if Saudi Arabia was growing more food than it should, and if it did not trust world markets, the only solution was to find farmland abroad. Other Gulf states followed suit. So did China and South Korea, countries not usually associated with water shortages but where agricultural expansion has been draining dry breadbasket areas like the North China Plain.
Water shortages have provided the hidden impulse behind many land deals. Peter Brabeck-Letmathe, the chairman of Nestlé, claims: “The 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.” He calls it “the great water grab”.
For the countries seeking land (or water), the attractions are clear. But what of those selling or leasing their resources? They are keen enough, even sending road shows to the Gulf. Sudan is letting investors export 70% of the crop, even though it is the recipient of the largest food-aid operation in the world. Pakistan is offering half a million hectares of land and promising Gulf investors that if they sign up, it will hire a security force of 100,000 to protect the assets. For poor countries land deals offer a chance to reverse decades of underinvestment in agriculture.
In developing countries as a whole, the average growth in cereal yields has fallen from 3-6% a year in the 1960s to 1-2% a year now, says the World Bank. This reflects, among other things, a decline in public investment. In the 14 countries that depend most on farming, public spending on agriculture almost halved as a share of total public spending between 1980 and 2004. Foreign aid to farming also halved in real terms over the same period. Farming has done worst of all in Africa, where most of the largest land deals are taking place. There, agricultural output per farmworker was the lowest in the world during 1980-2004, growing by less than 1% a year, compared with over 3% a year in East Asia and the Middle East.
The investors promise a lot: new seeds, new marketing, better jobs, schools, clinics and roads. An official at Sudan’s agriculture ministry said investment in farming in his country by Arab states would rise almost tenfold from $700m in 2007 to a forecast $7.5 billion in 2010. That would be half of all investment in the country, he said. In 2007, agricultural investment had been a mere 3% of the total.
China has set up 11 research stations in Africa to boost yields of staple crops. That is needed: sub-Saharan Africa spends much less than India on agricultural R&D. Even without new seed varieties or fancy drip-feed irrigation, investment should help farmers. One of the biggest constraints on African farming is the inability to borrow money for fertilisers. If new landlords just helped farmers get credit, it would make a big difference.
Yet a certain wariness ought to be maintained. Farming in Africa is hard. It breaks backs and the naive ambitions of outsiders. To judge by the scale of projects so far, the new investors seem to be pinning their hopes on creating technologically sophisticated large farms. These have worked well in Europe and the Americas. Paul Collier of Oxford University says Africa needs them too: “African peasant farming has fallen further and further behind the advancing commercial productivity frontier.”
But alas, the record of large farms in Africa has been poor. Those that have done best are now moving away from staple crops to higher-value things such as flowers and fruit. Mechanised farming schemes that grow staples have often ended with abandoned machinery rusting in the returning bush. Moreover, large farmers are often well-connected and spend more time lobbying for special favours than doing the hard work.
Politics of a different sort poses more immediate problems. In Madagascar this year popular hostility to a deal that would have leased 1.3m hectares—half the island’s arable land—to Daewoo Logistics, a South Korean company, fanned the flames of opposition and contributed to the president’s overthrow. In Zambia, the main opposition leader has come out against China’s proposed 2m-hectare biofuels project—and China has threatened to pull out of Zambia if he ever came to power. The chairman of Cambodia’s parliamentary foreign-affairs committee complains that no one has any idea what terms are being offered to Kuwait to lease rice paddies.
The head of the UN’s Food and Agriculture Organisation, Jacques Diouf, dubs some projects “neocolonialist”. Bowing before the wind, a Chinese agriculture-ministry official insists his country is not seeking to buy land abroad, though he adds that “if there are requests, we would like to assist.” (On one estimate, China has signed 30 agricultural co-operation deals covering over 2m hectares since 2007.)
Objections to the projects are not simply Luddite. The deals produce losers as well as winners. Host governments usually claim that the land they are offering for sale or lease is vacant or owned by the state. That is not always true. “Empty” land often supports herders who graze animals on it. Land may be formally owned by the state but contain people who have farmed it for generations. Their customary rights are recognised locally, but often not accepted in law, or in the terms of a foreign-investment deal.
So the deals frequently set one group against another in host countries and the question is how those conflicts get resolved. “If you want people to invest in your country, you have to make concessions,” says the spokesman for Kenya’s president. (He was referring to a deal in which Qatar offered to build a new port in exchange for growing crops in the Tana river delta, something opposed by local farmers and conservationists.) The trouble is that the concessions are frequently one-sided. Customary owners are thrown off land they think of as theirs. Smallholders have their arms twisted to sign away their rights for a pittance.
This is worrying in itself. And it leads to so much local opposition that some deals cannot be implemented. The Saudi Binladin Group put on hold a $4.3 billion project to grow rice on 500,000 hectares of Indonesia. China postponed a 1.2m hectare deal in the Philippines.
Farms control
Joachim von Braun, the head of IFPRI, argues that the best way to resolve the conflicts and create “a win-win” is for foreign investors to sign a code of conduct to improve the terms of the deals for locals. Various international bodies have been working on their versions of such a code, including the African Union, which is due to ratify one at a summit in July.
Good practice would mean respecting customary rights; sharing benefits among locals (ie, not just bringing in your own workers), increasing transparency (current deals are shrouded in secrecy) and abiding by national trade policies (which means not exporting if the host country is suffering a famine). These sound well and good. But Sudan and Ethiopia have famines now: should they be declining to sign land deals altogether? Many of the worst abuses are committed by the foreign investors’ local partners: will they be restrained by some international code?
There are plenty of reasons for scepticism about these deals. If they manage to reverse the long decline of farming in poor countries, they will have justified themselves. But like any big farming venture, they will take years to reveal their full impact. For the moment, the right response is to defer judgment and keep a watchful, hopeful but wary eye on their progress.
ADDIS ABABA, ETHIOPIA (