Analysis of Daewoo Land Deal in Madagascar: Paper

2011

How to Create Win-
Win Land Deals in
Mozambique
Strategic Review of Daewoo Land Deal in
Madagascar as a Case Study

By Kevin Cyrus Hong

INAF U6355 Globalization

Spring 2011

School of International and Public Affairs, Columbia University

Table of Contents

1 Introduction ..................................................................................................................................... 1

2 Background ..................................................................................................................................... 2

2.1 Global trends in land deal ......................................................................................................... 2

2.2 Driving forces .......................................................................................................................... 2

2.2.1 Increasing food price and food security ............................................................................. 2

2.2.2 Biofuel boom.................................................................................................................... 3

2.2.3 Investment in land and soft commodities .......................................................................... 4

2.3 Land deals as ―win-win‖ vs. ―neocolonial land grab‖ ................................................................ 5

3 Case Study on Daewoo Deal in Madagascar ..................................................................................... 8

3.1 Madagascar (CIA 2011) ........................................................................................................... 8

3.2 Prior land deals and other FDIs in Madagascar ......................................................................... 8

3.3 Terms of the deal ................................................................................................................... 10

3.4 Timeline................................................................................................................................. 10

3.5 Impact of the Daewoo Scandal ............................................................................................... 11

3.6 Analysis - What went wrong .................................................................................................. 12

3.6.1 Lack of Transparency ..................................................................................................... 12

3.6.2 Deal structure and terms ................................................................................................. 12

3.6.3 Political Instability ......................................................................................................... 14

3.6.4 Mediatization and Poor Public Relation Management ..................................................... 14

3.6.5 Distributive politics ........................................................................................................ 15

4 Analytical Framework ................................................................................................................... 18

4.1 Political Stability .................................................................................................................... 18

4.2 Transparency.......................................................................................................................... 19

4.3 Previous Deals ....................................................................................................................... 20

4.4 Deal Structure (affects Wilson/Lowi matrix) .......................................................................... 20

4.5 Deal Size and Length ............................................................................................................. 20

4.6 Analytical Framework ............................................................................................................ 21

5 Recommendations ......................................................................................................................... 22

5.1 Due Diligence ........................................................................................................................ 22

5.2 Transparency and Inclusion of Local Population in Decision Making ..................................... 22

5.3 Alternative business models ................................................................................................... 22

5.4 Reputation and Media Management ....................................................................................... 23

Bibliography ......................................................................................................................................... 24

Introduction 1

1 Introduction

Facing the growing demand for food and the decrease in available arable land due to environmental

degradation and urbanization, China has increasingly looked outwardly to stabilize its food security. In

conjunction with a rising level of infrastructure investment in developing countries, especially in sub-

Saharan Africa, various state-owned enterprises from China have considered agricultural land deals in

Africa. Since the Chinese state owned Exibank granted $2 billion in soft loans to the Mozambican

government to build the Mpanda Nkua mega-dam on the stretch of the Zambezi in Tete province, China

has been requesting large land leases to establish Chinese-run mega-farms and cattle ranches in the region.

In June 2007, a memorandum of understanding was reported to have been signed to move 3,000 Chinese

settlers to the Zambezi Valley. But Mozambicans have resisted the settlement of thousands of Chinese

agricultural workers on leased lands—a situation that would limit the involvement of local labor in the

new agricultural investments and following a public uproar, the government of Mozambique denied such

a deal, leading to the suspension of the land investment. According to the Mozambican government, only

9% of the country‘s 36 million hectares of arable land are currently being used and there is the possibility

of cultivating an additional 41.2 million hectares of marginal land (Namburete 2006). Given the

investment opportunities in the country combined with the acceleration of growing demand and rising

food prices, our client, a state-owned enterprise in China, is reconsidering a land investment in

Mozambique. In the light of the previous failed attempt, our client requested us to analyze the recent

trends in foreign direct investments in land and agriculture and to propose a re-entry strategy. In this

report, we analyzed the land deal by Daewoo Logistics, a South Korean firm, in Madagascar as a case

study and proposed how to mitigate risks often faced in land deals in sub-Saharan Africa.

2 How to Create Win-Win Land Deals in Mozambique

2 Background

2.1 Global trends in land deal

The past decade has seen an upward trend in both the number and the size of international land deals. One

study quantified that between 2005 and 2009, nearly 2.5m hectares (6.2m acres) of farmland in just five

sub-Saharan countries have been bought or rented at a total cost of $920m (Cotula, Vermeulen et al.

2009). Globally, it is estimated that since 2006 between 15m and 20m hectares of farmland in poor

countries, the size of France‘s agricultural land, have been subject to deals or negotiations involving

foreign investors, valued at $20 billion-30 billion (The Economist 2009).

In addition to the European Union and the United States, many countries in East Asia and Gulf such as

China, South Korea, Saudi Arabia, Qatar, and United Arab Emirates have emerged as the main sources of

these investments in agricultural land in developing countries (Cotula, Vermeulen et al. 2009; Von Braun

and Meinzen-Dick 2009). Numerous nations in sub-Saharan Africa, especially Sudan, Ethiopia,

Madagascar and Mozambique, have been identified among key recipients of the land deals. Outside

Africa, Pakistan, Kazakhstan, Southeast Asia (Cambodia, Laos, Philippines, Indonesia) and parts of

Eastern Europe (e.g. Ukraine) have also experience a significant increase in foreign direct investments in

land (Cotula, Vermeulen et al. 2009; Von Braun and Meinzen-Dick 2009).

It is possible that the recent downturn in the global economy may have slowed down or reversed these

trends. But the driving forces that have increased these investments are likely to persist.

2.2 Driving forces

2.2.1 Increasing food price and food security

One of the main driving forces behind the upward trends in international land deals is the increasing food

price and food insecurity. For example, the prices of maize and wheat doubles between 2003 and 2008

(von Braun 2008). Even though the prices of grain and other food items have dropped from the highs in

Background 3

the summer of 2008, food prices are still 30-50% above their averages over the past decade (The

Economist 2009).

The rising food price is driven by both global food supply and demand (Cotula, Vermeulen et al. 2009).

For the past decade, agricultural production has experienced diminishing productivity due to various

environmental degradations in soil and water availability. Climate change is expected to accelerate land

degradation and water scarcity around the world and to increase the frequency of extreme weather events

which reduce harvests. The increase in oil price will also affect agricultural production by affecting costs

of transportation and nitrogen fertilizers. On the demand side, rapid population growth, increasing

urbanization which reduces food production but increases food consumption through rural-urban

migration, and changing diets to greater consumption of meat particularly by middle classes in large

industrializing countries such as China and India have driven global food price up.

Facing decreasing supply and increasing demand, many countries are experiencing heighten level of food

insecurity. For example, while the population in the Gulf States will double from 30 million in 2000 to

nearly 60 million by 2030, cereal production in the region, which is already suffering from scarce water

and soil resources, is expected to decline irreversibly. These countries currently meet 60% of total food

demand with import (Woertz 2009) and need to increase food import from $8bn to $20bn from 2002 to

2007 (GRAIN 2008). In response to the rising food price which threatens to drive inflation in the wider

economy and cause social unrest, they have started investing in food-producing lands abroad (Daniel

2011). Other countries such as China, Japan, and South Korea are also adopting a similar strategy to

maintain food security.

2.2.2 Biofuel boom

Although biofuels such as bioethanol and biodiesel currently account for a very small fraction of global

energy consumption in developed countries, their share is growing fast. International Energy Agency

estimated that the world output of biofuels will grow annually at 7 – 9% on average between 2005 and


2030, meeting 4 – 7% of world road-transport fuel demand by the end of 2030, up from 1% in 2005 (IEA

2006). The fundamental driving forces for biofuel boom is high and volatile oil price in recent years and

the increasing awareness about climate change. Around the world, many countries have proposed or

implemented government policies to promote production and use of biofuels as a means of mitigating

climate change and more importantly of achieving energy security.

In contrast to the popular belief, the recent hikes in world food prices have not been caused primarily by

biofuels but by weather-related under-production, reduced global stock, and increased food demand

especially from emerging economies (Cotula, Dyer et al. 2008). Competition between biofuels and food

for land uses and same agricultural outputs such as maize and sugarcane, however, is expected to

intensify over the coming years, driving up the price of food and threatening food security around the

world (Cotula, Dyer et al. 2008). In fact, the increased demand for biofuel in 2000-2007 is estimated to

have contributed to 30% increase in cereal price on average (von Braun 2008).

IEA projected that the share of the world‘s available arable land used for the production of biofuels will

rise to over 2.5%-3.8% in 2030, up from about 1% or 14 million hectares in 2005 (IEA 2006). As

biofuel production compete with or replace food production around the world, many countries with

limited amount of available arable land are looking outward, driving up the global land deals.

2.2.3 Investment in land and soft commodities

Traditionally, land and agriculture have not presented most attractive investment options. The recent

trends, however, shifted attention from investors from ―hard‖ to ―soft‖ commodities. Conventional

agricultural value chains have provided higher returns in processing and distribution while exposing most

of the risks to primary production, discouraging direct investment in land. With the rising prices of

agricultural commodities driven by strong demand from emerging economies and new demands from

biofuel production, however, risks are being re-distributed downstream to processors and distributors who

are concerned about sourcing raw materials and increasing production returns. This shift has attracted

Background 5

investments to agricultural production including the acquisition of land, not only from agribusiness

players who have been traditionally involved in food processing and distribution but now are looking to

vertically integrate its value chain but also from new investors looking for high returns (Cotula,

Vermeulen et al. 2009). In fact, ―soft‖ commodities overtook ―hard‖ counterparts as the prime performers

in the commodities investment market in 2007 and the upward trends to invest in land and operational

farming around the world continued throughout 2008 (Daniel 2011).

Furthermore, there has been growing speculation that while land in many parts of Africa is currently very

cheap to acquire or lease, productive land will become relatively scarcer over time. This expectation has

increased the value of land for both domestic and foreign investors. Given the recent global financial

crisis which has resulted in a rapid decline in equity and bond markets, land has presented a promising

alternative in both higher returns from agricultural production and speculated rise in the value of land

itself (Cotula, Vermeulen et al. 2009).

Another factor to consider is the change in investment climate in many African countries. Although

political risks persist in most of these countries, policy reforms including investment treaties and codes

and sectoral legislation on land, banking, taxation and customs regimes have reduced risks of making

investment, presenting relatively nascent investment opportunities (Cotula, Vermeulen et al. 2009).

2.3 Land deals as “win-win” vs. “neocolonial land grab”

Foreign direct investments in land have been touted as win-win for both investing and investee countries.

As early as 1999, UNCTAD (United Nations Conference on Trade and Development) reported that ―the

potential for highly profitable foreign investment in Africa is enormous‖ (UNCTAD 2009) and then-

United Nations Secretary-General, Kofi Annan, urged African leaders to change the ―negative image [that

was based] in wars and economic difficulties that afflict[ed] some countries‖, by opening up and

attracting foreign investment into the resource-rich continent (Stephan, Lobban et al. 2010). In the

following years, many African countries implemented notable policy reforms guided by the principles of


neo-liberalism and experienced increased growth and greater economic stability. As a result, foreign

investment gained enormous political clout, premised on the idea that it was ―helping Africans help

themselves‖(Stephan, Lobban et al. 2010).

While investing countries can stabilize food and commodity supply from acquisition of farm land and

agricultural production under their direct control, recipient countries may experience macro-level benefits

while raising local living standards. In many developing countries, a lack of capital, technological

expertise, infrastructure and mismanagement of agricultural resources have resulted in the

underutilization of land resources (FDI Magazine 2008). For poorer countries with relatively abundant

land which has not realized its productive capacity, land deals can bring much needed investment in

infrastructure and agricultural technology and market access, catalyzing economic development in rural

areas (Cotula, Vermeulen et al. 2009). They can also generate employment for infrastructure development

and maintenance, and agricultural cultivation. Land deals do generate government revenues via rental fees

and taxes but in many cases, local governments do not charge or only a nominal rate. This demonstrates

that the importance and value of such direct financial transfers is relatively low compared to the expected

broader economic benefits in the perspective of local governments (Cotula, Vermeulen et al. 2009).

To the contrary, others view these land deals as neocolonial land grab with very little tangible benefits to

investee countries. First, the employment of rural population to work on large-scale industrial farms

implies that the land deals force subsistence farmers off their land (GRAIN 2008). Those most at risk of

losing access to land as a result of land deals are smallholder producers, women, and indigenous people

who do not have formal tenure over the land they use. Given that many countries do not have sufficient

mechanisms to protect the rights of these people and that local communities are rarely informed or

engaged about on-going land negotiations that will affect them, foreign investments on land

disproportionately affect poor subsistence farmers (Cotula, Dyer et al. 2008). In fact, the United Nations

Permanent Forum on Indigenous Issues estimated that the land rights of 60 million indigenous people

may be at risk as a result of the expansion of large-scale biofuel production worldwide (Haralambous,

Background 7

Liversage et al. 2009). Furthermore, it has been demonstrated that the export of agricultural raw materials

from Africa has worsened the food security situation in the region. Given that most land deals in sub-

Saharan Africa plan to export or repatriate agricultural production from the acquired land, it is expected

that the rising trends in land deals may translate into deterioration in current food insecurity and poverty

in sub-Saharan Africa (Ingwe, Okoro et al. 2010). Some even view land deals as governments out-

sourcing food at the expense of their most food-insecure citizens (Daniel 2011).


3 Case Study on Daewoo Deal in Madagascar

3.1 Madagascar (CIA 2011)

Located in the Indian Ocean off the coast of Mozambique, Madagascar became a French colony in 1896

but regained independence in 1960. The capital of this island nation is Antananarivo. As the fourth-largest

island in the world, Madagascar covers 587,041 sq km of which only 5 percent is arable and 1.85 percent

is irrigated. At the total of 21,926,2212 (estimated as of July 2011), the Malagasy population is fairly

young with the median age of 18.2 years with 43.1 percent of its population under 14 years of age. 30

percent of the population is located in urban areas and the urban population is expected to grow at the rate

of 3.9 percent annually between 2010 and 2015. The rate of literacy as defined as the proportion of age 15

and over who can read and write is 68.9 percent among the total population, 75.5 percent among male,

and 62.5% among female as estimated in 2003.

GDP in Madagascar is $20.73 billion (2010 estimate in 2010 PPP dollars) and per capita GDP is

estimated at $1,000 in 2010. Agriculture, including fishing and forestry, is a mainstay of the economy,

accounting for more than one-fourth of GDP and employing 80% of the population. Exports of apparel

have boomed in recent years primarily due to duty-free access to the U.S. which was terminated in

January 2010 due to the compliance issues. Madagascar experienced 12 percent drop in GDP following

the 2002 political crisis. The current political crisis which began in early 2009 has further affected the

economy with more than 50 percent reduction in tourism compared with the previous year with

pessimistic investment climate in the country.

3.2 Prior land deals and other FDIs in Madagascar

The estimates of potential cultivatable land in Madagascar vary from 8 million hectares according to the

Ministry of Agriculture to 15-20 million hectares according to the FAO (Ratsialonana, Ramarojohn et al.

2011). According to announcements made by the operators, approximately 3 million hectares of land have

Case Study on Daewoo Deal in Madagascar 9

been pursued in prior land deals, representing from 15-20% to 37% of all arable land. This is significant

considering that 2 million hectares are being cultivated by 2.5 million family farms in Madagascar

(Ratsialonana, Ramarojohn et al. 2011). An analysis of land operations, however, reveals that on-going

projects cover no more than 150,000 hectares while effective usage represents only 23,000 hectares for

the moment (Ratsialonana, Ramarojohn et al. 2011).

Because of the soil quality, the favorable rainfall for crops, the presence of vast relatively flat surfaces,

and above all the proximity to the sea to export products, the coastal lands have been most demanded for

investments, especially in the regions of Boeny, Sofia, Melkay, Menabe, Antsinanana, SAVA, and

Atsimo-Andrefana (Ratsialonana, Ramarojohn et al. 2011). More than two-thirds of the investors between

2005 and 2010 are foreigners, half of which are from European countries such as United Kingdom,

France, Germany, Italy, Holland and others from South Africa, India, Australia, and South Korea

(Ratsialonana, Ramarojohn et al. 2011). Most on-going projects focus on biofuels as the majority of the

agribusiness projects have been abandoned. While foreign projects have emphasized the production of

jastropha, a source of jatropha oil to produce a high-quality biodiesel, on surfaces between 10 and 30,000

hectares based on a wage system, most Malagasy projects have concentrated on the industrial

transformation of sugar cane into ethanol in rural areas. Exportation is the common goal among these

projects (Ratsialonana, Ramarojohn et al. 2011).

An analysis of all announced land deals in Madagascar suggested that the attraction of foreign investors to

Madagascar was linked to the Government‘s efforts to create a favorable investment climate, a challenge

resulting from a World Bank evaluation in 2005 on the investment climate in six countries, including

Madagascar, China and four other African countries (Ratsialonana, Ramarojohn et al. 2011).


3.3 Terms of the deal

The exact terms of the deal are not known but according to the most media

reports, Daewoo Logistics was in negotiation with the Malagasy

government to lease 1.3m hectares of farmland – about half of all arable

land in Madagascar – in 4 coastal regions for 99 years. It planned to produce

500,000 tons of palm oil in the eastern parts of the country and 4,000,000

tons of corn in the western parts and export most of the production back to

South Korea.

Daewoo Logistics announced that they would mobilize about $6 billion over

the first 20-25 years to invest heavily in infrastructure development

including 60 power plants, 8 airports, 30 factories and silos, 8 ports in

addition to 1,170 schools, 170 private hospitals, 250 markets, and 120 churches for locals. It also

mentioned the creation of numerous jobs (Park 2008).

The spokesman at Daewoo Logistics originally indicated that leasing the land would cost as much as $5

per hectare per year according to the local law. Later a report surfaced that Daewoo Logistics had

negotiated with the Madagascar‘s government to pay no rental fee.

3.4 Timeline

In November 2008, the Financial Times published a report about the deal between Daewoo Logistics and

the Malagasy government, propelling the deal to the frenzy of the international media (Blas 2008).

According to the report, Daewoo Logistics signed a memorandum of understanding with Madagascar‘s

government in May, 2008 and a contract in July, 2008. Following the publication of the Financial Times

article, the accusation of selling off ―the land of the ancestors‖ or the tanindrazana to a foreign company

led to public outcry, especially from the opponents to Ravalomanana‘s regime.


Partially orchestrated by international intermediaries, opposition movements began to mobilize in

December 2008. Internet and the international media continued to play an important role in attracting

Western attention in January 2009 and the Malagasy Diaspora, particularly the Collective of Malagasy

Land Defense Collective, played a major role in the mediatization of the protests taking place in

Madagascar (Ratsialonana, Ramarojohn et al. 2011). The international media attention then circled back

to Madagascar and the opposition party to Ravalomanana‘s regime used this sensitive issue to galvanize

the public.

On January 27th, 2009, riots started in Antananarivo. Following the closure of opposition TV and radio

stations, dozens were killed during violent protests in Antananarivo. Andry Rajoelina, who was the mayor

of Antananarivo and owner of a radio station (which was closed by the government), called the

resignation of Ravalomanana and proclaimed himself as the leader of the opposition movement. Violence

and casualty continued in February 2009 when dozens of people were killed after policy opened fire on an

opposition demonstration in the capital and the political turmoil accelerated.

In March, 2009, together with military intervention and the back of high court, Rajoelina assumed power

as President of the High Transitional Authority. With the political transition, the new regime effectively

canceled the land deal with Daewoo Logistics.

3.5 Impact of the Daewoo Scandal

Following the new government‘s assumption of power and the abrupt suspension of the Daewoo deal,

land investment has slowed down in Madagascar. For instance, 2.9 million hectares of land have been

requested since 2005 by 52 different agribusiness companies. In 2010, only 11 projects are underway,

covering only 23,500 hectares – less than 1% of the area sought (Ratsialonana, Ramarojohn et al. 2011).

During the same period, Madagascar also experienced a considerable decline in FDI ranking 146th out of

177 countries. In addition the global financial crisis, the investors attributed the slow-down to the political

situation and the difficulties in accessing land following the Daewoo Scandal (Ratsialonana, Ramarojohn


et al. 2011). Some investors, particularly in agri-food processing sector, abandoned their projects because

they could not obtain the guarantees required by the banks to secure financing.

3.6 Analysis - What went wrong

3.6.1 Lack of Transparency

In Madagascar, particularly during the Ravolamanana regime, most of the information on agribusiness

projects was not made publicly available (Stephan, Lobban et al. 2010). Furthermore, the government was

alleged to have ―muffled dissent and the free press‖ including shutting down VIVA, television station

owned by the opposition leader Andry Rajoelina (Maunganidze 2009). The negotiation between the

Malagasy government and Daewoo Logistics took place ―in the greatest secrecy‖ (Stephan, Lobban et al.

2010). In fact, Daewoo Logistics signed a prospecting contract with the Malagasy State in July 2008,

containing specific clauses of confidentiality to identify the land with utmost discretion. Furthermore,

Daewoo Logistics seemed to have received preferential treatment for gaining quick access to title deeds

for land while local farmers struggled to do the same (Stephan, Lobban et al. 2010). Therefore, the lack of

transparency in the Daewoo deal served as a breeding ground for suspicion and resentment. For instance,

the public started to suspect the personal enrichment of a small number of high-ranking government

officials and Ravalomanana‘s extravagant personal purchases, including a $60 million private jet to be

used as his official presidential aircraft in 2008, did little to dispel mistrust about regime regardless of

whether this purchase was linked to the Daewoo Deal (Maunganidze 2009; Stephan, Lobban et al. 2010).

3.6.2 Deal structure and terms

The sheer scale of the Daewoo deal to lease half of all the arable land in Madagascar for 99 years and to

convert them to plantation-style farms while paying no rent was a great source of controversy and one of

the primary reasons for its demise. Daewoo Logistics could have negotiated for more modest but still

commercially significant terms, increasing the likelihood of the success of the deal. It was also

problematic that Daewoo Logistics spent disproportionately more time to negotiate land access with


central authorities than with the local populations and the regional and local governments to be affected

by deal. In addition to little time spent, Daewoo Logistics failed to engage the local populations by

recruiting topographic brigades to locate land and plots and intermediaries to negotiate contracts with

producers. As a result, the terms of the land deal appeared to be extremely unfavorable for the local

people (Ratsialonana, Ramarojohn et al. 2011). Given that 70% of the Malagasy people live in rural area,

the Daewoo deal which aimed to lease half of all the arable land in the country meant thousands of people

were to be displaced or forced into employment with Daewoo Logistics. In other words, benefits were

highly concentrated around Daewoo Logistics and a few government players while costs largely fell on

the local rural population, creating interest group politics and thus largely hostile public opinion against

the deal (see Wilson/Lowi matrix in Figure 1, red circle). If it wanted to close a successful deal, Daewoo

Logistics could have explored alternative structures such as contract farming that could have minimized

negative impact while creating opportunity for value chain upgrading and technical assistance. Such an

approach could have distributed the benefits of the land deal to the rural populations and more broadly

Malagasy citizens through economic development, transforming the deal into entrepreneurial politics (see

Wilson/Lowi matrix in Figure 1, green circle).

Figure 1 Wilson/Lowi Matrix

Benefit
Concentrated Dispersed
Concentrated

Interest Group Entrepreneurial
Politics Politics
Cost
Dispersed

Majoritarian
Client Politics
Politics


3.6.3 Political Instability

Given colonial history, most African nations are highly sensitized to the issue of dispossession of land

and natural resources to foreigners (Maunganidze 2009). Moreover, Madagascar‘s post-colonial history

has been characterized by regime transitions brought on primarily through popular uprising and it has

been often accompanied by the cycle of political violence and instability (Stephan, Lobban et al. 2010).

Stephen et al. has presented a detailed analysis on the nature of political instability in Madagascar and

attributed it to the country‘s extreme poverty combined with the high birth rate (Stephan, Lobban et al.

2010). The authors argue that the migration of large numbers of young people every year looking for jobs

in Antananarivo, the capital of Madagascar, has created a volatile atmosphere (the Malagasy population is

quite young with the median age at 18.2 years; see section 3.1 for more details). Unemployed youth ―in

desperate need of a political savior promising a better future‖ have become an easy target for rent-seeking

Malagasy politicians to garner support from the masses and the ability to control the ‗urban mob‘ has

become significant in national politics (Stephan, Lobban et al. 2010). In fact, without the public protests

that fuelled by Rajoelina, it is unlikely that Ravalomanana would have lost his power, leading to the

suspension of the Daewoo deal.

3.6.4 Mediatization and Poor Public Relation Management

The Daewoo Scandal was unprecedented in terms of the amount of attention it attracted from popular

international media. Foreign direct investments in land have taken place around the world for decades

(GRAIN 2008) but they had not aroused much interest beyond the realm of development and policy-

making. Following the Financial Times article by Blas (Blas 2008), however, the Daewoo deal was

catapulted to the spotlight of the international media even before it became controversial within

Madagascar. Outcry from the Western communities and the mobilization of the Malagasy Diaspora then

enabled the opposition party to organize public protests in Madagascar (see section 3.4 for more details).

Therefore, it becomes evident that the ousting of the Ravalomanana regime following the popular

uprising may have not been made possible without the unusual mediatization of the Daewoo deal.


Furthermore, Daewoo Logistics managed its reputation poorly amidst the heightened media speculation

from around the world. For example, a manager from the company was quoted in another Financial Times

article saying that ―We want to plant corn there to ensure our food security. Food can be a weapon in this

world …We can either export the harvests to other countries or ship them back to Korea in case of a food

crisis‖ (emphasis added) (Song, Oliver et al. 2008). The choice of words such as ―weapon‖ and the

unbalanced emphasis on the exploitative nature of the deal over the benefits to the local communities

aggravated the activists and international public alike.

3.6.5 Distributive politics

Distributive politics framework allows us to synthesize how all the factor analyzed above culminated to

the popular uprising against the Ravalomanana regime instigated by the opposition party led by Andry

Rajoelina and resulted in the suspension of the Daewoo deal (Table 1). In addition to the commercial

interest of Daewoo Logistics, Ravalomanana represented the interest of the Malagasy government in the

perspective of his own business interests which could have benefited from the deal (Marcus 2010). Other

stakeholders such as Malagasy farmers with land tenure, Korean citizens and livestock farmers would

have benefited from the deal through compensation and cheaper commodity prices respectively but they

could not provide any substantial collective action to support the deal. The number of land-tenured

farmers in Madagascar was extremely low and the stakeholders in Korea were physically and politically

removed far enough from the deal that they did not have resources or incentives strong enough to

mobilize collection action. Some Korean farmers, especially corn producers, did face increasing

competition from the Malagasy import and opposed the deal (GRAIN 2008) but they faced the similar

collection action problem. The tipping point came from the popular movement by the majority of farmers

without land tenure and citizens. Malagasy people have deep ties to their land and the Daewoo deal was

perceived by many as a betrayal by their president and a direct threat to their livelihood. Furthermore, due

to the lack of transparency during the negotiation process, most people in Madagascar grew suspicious of

the deal rather than recognizing potential benefits through job creation, economic development, and


poverty alleviation. The opposition then leveraged the disconsent and mobilized protesters, overthrowing

the government. It is noteworthy how external factors such as international media and political self-

interest of the opposition party led by Andry Rajoelina enabled the collective action among the farmers

and citizens who otherwise do not have much political resources to organize themselves and influence

government action.


Table 1 Distributive Politics

Supporting interests

Supporting Interests Demand Side Supply Side Prediction

Benefits from Supporting Ability to Generate Political Action
Interests Substitutes Magnitude Per Capita Numbers Coverage Resources Cost Amount
 Malagasy
Other FDIs Large Considerable Small Moderate Large Moderate Moderate
Government
Other
 Daewoo Logistics Large Considerable Small Little Small Moderate Limited
investments
 Malagasy farmers
Few Large Large Few Little Small Very high Little
with land tenure
 Korean farmers
Lower price Moderate Small Large Extensive Limited Very high Limited
(livestock)
 Korean citizens Lower price Moderate Small Large Extensive Limited Very high Limited

Opposing interests

Opposing Interests Demand Side Supply Side Prediction

Benefits from Opposing Ability to Generate Political Action
Interests Substitutes Magnitude Per Capita Numbers Coverage Resources Cost Amount
 Opposition party None Large Substantial Small Moderate Large Moderate Large
 Malagasy farmers
None Large Large Considerable Extensive Small High Large
w/o land tenure
 Malagasy citizens None Moderate Small Huge Extensive Small High Huge
 Korean farmers
Few Moderate Moderate Large Extensive Limited Very high Little
(agricultural)


4 Analytical Framework

The analysis of the Daewoo land deal in Madagascar provides us information to develop a framework

which will help determine how to approach a new deal in Mozambique. The analytical framework

consists of five dimensions based upon the major factors identified in the case study: political stability,

transparency, previous deals, deal structure, and deal size and length.

4.1 Political Stability

As the political instability characteristics of Madagascar poses significant threat to the long-term chance

of success of the Daewoo deal, any prospective investors must take political stability of a host country

into consideration. Land deals have been implemented successfully in many politically unstable countries

but this dimension allows us to gauge the expected value of the return from a land deal provided that a

regime change or civil unrest can result in discontinuation or disruption of negotiation and on-going

operation. This factor can be easily assessed using the Political Instability Index by Economist

Intelligence Unit (Figure 2) (Economist Intelligence Unit).

Figure 2 Political Instability Index

Analytical Framework 19

4.2 Transparency

Many developing countries, especially in sub-Saharan Africa, do not have adequate legal or procedural

mechanisms to protect local rights. Mired with decades of corruption and hardship, these countries are

highly susceptible to rent-seeking behavior and civil unrest. Therefore, the lack of transparency in

contract negotiation process can become breeding ground for further corruption and for sub-optimal deals

that do not maximize either the chance of successful land deal or public interest. This dimension of

transparency in the framework incorporates both the external factor of the transparency in host countries

and the internal factor of the transparency in contract negotiation process under the direct control of

investors. The level of transparency in recipient country can be extrapolated from the Corruption

Perception Index developed by Transparency International (Figure 3) (Transparency International).

Figure 3 Corruption Perception Index


4.3 Previous Deals

This element of the framework assesses overall public perception in host countries of the investing

countries and companies, predominantly shaped by previous land deals and other FDI activities. Prior

deals influence people‘s perception and the likelihood of acceptance of prospective deals.

It also accounts for the political economy of previous deals. Regime change and other political

circumstances can negatively affect the negotiation of prospective deals in spite of the success of prior

investments if they were made in collaboration with the political parties no longer in power.

4.4 Deal Structure

The issues of land tenure and property rights in sub-Saharan Africa pose a major threat. When negotiating

a new deal, the structure of the land deal must evaluate and reflect the nature of land rights being

transferred and between whom. Whether land is nationalized or mainly controlled by the state as in

Ethiopia, Mozambique, and Tanzania or open for private ownership as in Kenya, Madagascar, and Mali,

investors should consider various deal structures from direct ownership of agricultural operations to

contract farming. The key consideration here is to balance financial costs and returns with the protection

of local rights and interests.

4.5 Deal Size and Length

As highlighted in the case study of the Daewoo deal in Madagascar, the size and length of a land deal can

significantly affect the chance of successful negotiation and implementation. Even though a large-scale

investment and a long contract term can help achieve the economy of scale and distribute fixed costs over

a longer time horizon, political costs of such a deal much be compared with potential benefits and a size

and length which are acceptable in local socio-economic and historical contexts should be determined.

Analytical Framework 21

4.6 Analytical Framework

Combining the five dimension of the framework, we can compare different deals more quantitatively and

assess feasibility of the deals. Figure 4 presents an example of the application of the analytical framework.

As represented by the green line, the Daewoo deal inherently suffered from the lack of transparency and

political instability in Madagascar. While the relative absence of FDIs in land in Madagascar provided a

good investment opportunity, the structure and terms of the deal posed major threats, leading to its failure.

Comparatively, prospective land investments in Mozambique are exposed to the similar level of political

instability and corruption. In addition, the failed attempt to start a farm run by Chinese farmers has

inflamed the public opinion in spite of extensive infrastructure investments in the country by China.

Therefore, the determining factors for the success of future land deals in Mozambique will the structure

and terms of the deals. Learning from the failure of the Daewoo deal, our client must consider

investments which are mutually beneficial with local stakeholders to maximize its likelihood of

successful entry to Mozambique.

Figure 4 Sample Analysis

Madagascar
Political Stability
Mozambique (Scenario 1)
Mozambique (Scenario 2)

Transparency Previous Deals

Deal Size and Length Deal Structure


5 Recommendations

5.1 Due Diligence

Before investing a significant amount of resources to initiate and negotiate a land deal, investors must do

its due diligence to evaluate the amount and current usage of land being offered for investment. For

instance, even though many African countries present statistics on the availability of largely unexploited

arable land but in many cases, investors are competing with each other to obtain the same un-cultivated

land of a limited quantity (Ratsialonana, Ramarojohn et al. 2011). Furthermore, clearer concepts must be

defined on idle, under-utilized, barren, unproductive, degraded, abandoned and marginal lands to avoid

allocation of lands on which local user groups depend for livelihoods (Cotula, Dyer et al. 2008).

5.2 Transparency and Inclusion of Local Population in Decision Making

From the beginning, any negotiation for land access must maintain the highest level of transparency.

Existing local landholders must be informed and involved in negotiations over land deals. When feasible

and necessary, informed consent should be obtained from affected stakeholders. Particular efforts are

required to protect the rights of indigenous and other marginalized ethnic groups. Government officials

who are unfamiliar with this practice may resist or undermine the transparency of the negotiation process

but in the best interest for both parties, investors should leverage its bargaining power to encourage local

governments to improve its practice.

5.3 Alternative business models

First, ambitious project proposals similar to the Daewoo deal should be re-evaluated and adjusted in more

realistic terms. In fact, smaller projects can allow easier maintenance and management of owner-

occupation. Second, investors must shift their mindset away from a traditional model of large-scale farms

or plantations operated by foreign labors, which are likely to cause loss of local rights with little

employment or technology transfer benefit, to more innovative and mutually beneficial business models.

Recommendations 23

For instance, contract farming and out-grower schemes that involve existing farmers and land users can

enable smallholders to benefit from foreign investment while giving the private sector room to invest.

Under such arrangements, investors provide inputs, technical assistance, credit, and guaranteed market to

small-holder farmers. In return, the farmers provide guaranteed supply of sufficient quality and quantity

to the landowners. This approach can mitigate the risks associated with land tenure and employment,

creating a win-win scenario for both local communities and foreign investors (for more details, see (Von

Braun and Meinzen-Dick 2009). Reflecting on the Wilson/Lowi matrix presented in Figure 1, deal

structures should embody entrepreneurial politics that can have wide developmental benefits to the local

communities rather than interest group politics.

5.4 Reputation and Media Management

With the advance of globalization and the accelerating access to information-communication technology

(ICT) such as mobile phone and broadband internet, the media and civil society play an increasingly

important role in making information available to the public even in the developing countries (Von Braun

and Meinzen-Dick 2009). Therefore, prospective land investors must limit the risks to its reputation by

understanding the public‘s ability to react and organize themselves and the role of media and

communication in disseminating information and influencing public opinion.


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