FDI in food and agriculture in CIS

FOREIGN DIRECT INVESTMENTCurrent dynamics in food and

agriculture in the CIS

Presentation to the Third International Agribusiness Investment Forum

Dushanbe, Tajikistan 25-26 September 2012

Ian Luytwww.novirost.com

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Format of presentation

• Motives for foreign direct investment (FDI)• FDI in CIS & Georgia• FDI in food & agriculture in CIS• Global trends in FDI in food and agriculture• Key investment drivers in agriculture• FDI in farmland investment• Examples of FDI and key issues:

– Poland – smallholders in dairy sector– Kazakhstan – investment attractiveness– Kenya – catalyzing horticulture exports– Olam – global agriculture supply chain investor

• Key policy options to attract FDI• Where to with FDI in food and agriculture globally?• Where to with FDI in food and agriculture in Tajikistan?

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3 Traditional Motives for FDI1. RESOURCE-SEEKING

• Driven by Natural Resources, Low Cost Labor, and Good Infrastructure• Growing interest in Food & Agriculture• Resources alone are not sufficient – needs attractive investment climate and

infrastructure

2. MARKET-SEEKING• Motive to access the host country’s domestic market – Primary Motive for FDI in CIS• Drivers: Market Size, Per Capita Income, and Market Growth Prospects• In Developed Countries – Market Size; in Developing Countries – Per Capita Income

3. EFFICIENCY-SEEKING• Seeks synergies from common management of geographically dispersed activities• To concentrate production in select locations to supply multiple markets• Needs well-integrated and open regional markets

• In Central Asia, FDI motives may be to set up regional export platforms

Sources: Multinational Enterprises and the Global Economy - J.H. Dunning 1993, and The motives and impediments to FDI in the CIS - Kudina and Jakubiak 2008

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FDI – selected FSU countriesAverage FDI per annum: 2007-2011

COUNTRY FDI (US$) per annum

RUSSIA $52,000M

UKRAINE $8,000M

KAZAKHSTAN $2,500M

BELARUS $2,200M

GEORGIA $1,100M

UZBEKISTAN $720M

KRYGYZSTAN $320M

TAJIKISTAN $180M

Source: World Bank data www.data.worldbank.org.

DEFINITION: Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. These statistics are net inflows (new investment inflows less disinvestment) from foreign investors.

Tajikistan most FDI-dependent country in CIS because of limited domestic financing resources

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CIS & Georgia: 4 levels of FDI recipientsApproximate average FDI per annum

Energy, Minerals, Banking, Telecomms are predominant sectors for FDI

>$10bn

$5-10bn

$1-5bn

$1bn<

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Globally, FDI in food and agricultureis not a big percentage of total FDI

• GLOBAL FDI in 2011: $1.5 trillion• Over 50% to developing and transition countries• FDI food and agriculture in 2011:

– in "agriculture, hunting, forestry and fisheries” – 0.3% of total– In "food, beverages and tobacco” – 8.2% of total

• Of the 62 FDI largest investments (> $3bn) only 4 deals in food and agri:

RANK COMPANY LOCATION INVESTOR DEAL SIZE

5 FOSTERS Australia/ global SAB MILLER $10.8bn

13 DANISCO Denmark DUPONT $7.2bn

47 WIMM-BILL-DANN Russia/ CIS PEPSICO $3.8bn

50 PARMALAT Italy/ global Investor Group $3.6bn

Source: UNCTAD World Investment Report 2012

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• Basic investment premise“A looming imbalance in the supply and demand of food commodities

will result in a prolonged period of higher food commodity prices”

• Supply and Demand - 3 key factors1. GLOBAL POPULATION GROWTH: from 7bn to 9bn by 2050

2. CONSUMPTION TRENDS: Middle class from ~ 430m to ~ 1.2bn by 2030

- Switch from carbohydrate-rich to protein-rich diet

[1 kg protein = 7 kg grain]

- Move from staple foods to higher margin branded foods

3. IMPACT OF BIOFUELS: diversion of crops and farmland - rapeseed (EU), sugar cane (Brazil), corn (USA) – though impact less than expected

Key Investment Drivers in Agriculture

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Recent trends in FDI in AgricultureResource-seeking (land & water) - rather than market-seeking

• FDI in agriculture tripled in last decade ~ $3bn per annum• Growing interest in purchase or lease of farmland• Vertical integration by strategic food companies• Mostly private equity investment, also recently SWFs• Focus on basic foods - rather than tropical commodities• Hands-on management - rather than passive investment• Key Investment Drivers:

– Farmland Value Appreciation– Operational returns– Food security

Source: Foreign direct investment – win-win or land grab? FAO 2009/ own sources

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New motives - New fundsOver 50 new food/ agriculture investment funds in past 5 years

• 2 new motives have emerged for FDI in food and agriculture:

– Food security– Potentially attractive Financial Returns in Primary Agriculture

• Investment focus currently on:– CEE (Romania, Bulgaria, Poland) ~$250m– CIS (Russia, Ukraine) ~$2.5bn– Latin America (Brazil, Argentina, Uruguay, Paraguay) ~ $1.5bn– Africa (Zambia, Mozambique, Ghana, Nigeria, Tanzania) ~$900m– MENA (Ethiopia, South Sudan) ~$700m– Also: Australia, New Zealand, USA, Canada

Source: NOViROST Limited

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FDI in farmland in Russia & UkraineTargets operational returns and farmland value appreciation

~$2.5bn invested in CIS since 2006

COMPANYLEAD

INVESTORCOUNTRY

FARMLAND (HA)

NCH USA Russia/ Ukraine 700,000

Black Earth Farming EU Russia/ Ukraine 330,000

UAFL EU Ukraine 240,000

Trigon Agri EU Russia/ Ukraine 206,000

Alpcot Agro EU Russia/ Ukraine 205,000

RAV AgroPro EU Russia 164,000

RZ Agro EU Russia 87,500

Harmelia EU Ukraine 73,000

Volga Farming EU Russia 60,000

UFG Agro EU Russia 28,000

Sou

rce:

NO

ViR

OS

T L

imit

ed

FDI in farmland represents ~ 2% of total farmland in Russia and Ukraine

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FARMLAND – Comparative ValuesA stable and predictable investment environment

is the most significant impact on valuations

COUNTRY AVERAGE $ PER HA

Netherlands $65,449

Ireland $29,918

USA $7,487

France $6,919

Brazil $5,245

Romania $5,030

South Africa $2,969

Tanzania $1,900

Russia $1,140

Mozambique $800Source: Savills - International Farmland Focus 2012 www.savills.co.uk

Secure Farmland RightsFundamental to Investment

COUNTRY FARMLAND RIGHTS/ SELECTED EXAMPLES

UKRAINE Leasehold only/ new land law due end of 2011

RUSSIA Freehold/ with restrictions on foreign ownership

TURKEY Freehold

BULGARIA Freehold/ Only Bulgarian residents and corporate entities

ROMANIA Freehold/ subject to seven year limit from EU Accession Date

GEORGIA Freehold/ subject to limitations

KAZAKHSTAN Leasehold only

TAJIKISTAN In transition

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Successful Land Reform in Tajikistan could create a collateral base of potentially $700 million+

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Food Security and FDI in agricultureImpact of Sovereign Wealth Funds (SWFs) - $5 trillion in assets

• EXAMPLE: Islamic Corporation for the Development of the Private Sector (ICD) - launched $600M food and agribusiness fund in June 2012

• Objective to boost supplies by investments in food and agri companies “aimed at boosting yields and minimizing food losses”

• Focus on 15 countries in Islamic world – “including Kazakhstan, Turkey, Pakistan, Bangladesh, Malaysia and parts of North Africa”.

FDI in primary agriculture

impacts all 4 dimensions of Food Security

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Popular food sectors for FDI in CISInvestors mostly market-seeking - rather than resource-seeking

Total FDI in food sectors since transition: ~$15-20 billion

SUB-SECTOR GLOBAL INVESTORS

MILK Campina, Danone, Parmalat, Lactalis, PepsiCo, Olam

CONFECTIONARY Nestle, Mars, Fazer, Dirol, Kraft Foods

JUICES/ BEVERAGES PepsiCo, Coca Cola

BEER SABMiller, InBev, Carlsberg

VEGETABLES FritoLay, Chumak, Bonduelle, GehaFoods

FRUIT SteireObst

HIGH VALUE PROCESSED Arla, Hochland, Valio, Cargill, Kraft Foods

MEAT Campofrio, Atria, Rurik, OtradaGen, Maksimovsky

FOOD RETAIL/ SERVICE Auchan, Metro, Marr, Uhrenholt

Source: NOViROST Limited

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Market-Seeking FDITypical strategic progression of investments in CIS

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Example: FDI in Poland Dairy SectorSize doesn’t (necessarily) matter

FDI catalyzed change on small farms

• Fragmented production - 1,300,000 milk producers• 86% own less than 5 cows• FDI into milk processing in 1990s• Catalyst to technical changes and institutional innovation• Transition to full compliance with EU milk standards• FDI had key role in survival and growth of farms indirectly,

through production support and leading by example• No evidence that FDI cuts out small farms - 87% continued

milk deliveries in spite higher quality demands

Source: Vertical Coordination and Foreign Direct Investment: A comparative study of the dairy chains in Bulgaria, Poland, and Slovakia. Liesbeth Dries 2004

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Regional Example: KazakhstanResults from Ernst & Young 2012 investment attractiveness survey

• Most attractive sectors for FDI (mostly extractive sectors)– Oil and gas (30%)– Mining and metals (23%)– AGRICULTURE (14%) – Infrastructure (10%)

• Investment environment: Perception versus Reality– Significant perception gap between existing and prospective investors – 85% of existing investors see it as most attractive destination in CIS– BUT only 18% of prospective investors share this view

• CHALLENGE TO DIVERSIFY FDI– Manufacturing– Knowledge-based industries

• Prerequisites to increasing FDI– Predictable regulatory environment– Good infrastructure– Investment promotion

Source: Ernst & Young’s Second Kazakhstan Investment Attractiveness Survey 2012

Kazakhstan: surveyReforms needed to improve investment attractiveness

Top 3 issues – regulatory environment, infrastructure, skills

• Enable transparent and predictable regulatory environment (47%)• Invest in infrastructure and urban projects (31%)• Develop skills with focus on economic needs and innovation (28%)• Ensure independence of court system (24%)• Adopt a proactive approach to attract investors (23%)• Support high tech industries and innovation (15%)• Develop venture capital/ financial tools to support entrepreneurship (12%)• Suppress corruption/ have political stability (4%)• Flexibility for foreign labor (2%)• Improve security (1%)• Other (2%)

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Source: Ernst & Young - Kazakhstan Investment Attractiveness Survey 2012Respondents selected three possible answers.

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Example: Kenya HorticultureDeveloped a $1bn export industry in 20 years

• Fastest growing industry in Kenya• Over 2 million people employed directly and indirectly• Export Growth – from $70m (1991) to ~$1bn (2011)• FDI provided catalyst – from France, USA, UK, Netherlands, Denmark• #2 global exporter of cut flowers (after Colombia)• #2 developing country exporter of vegetables to EU (after Morocco)

Exports in 2011 % of Exports

Exports(US$)

Flowers 66.4% $700M

Fruits 4.0% $42M

Vegetables 29.6% $313M

Total 100.0% $1,055MSource: Horticulture Crops Development Authority, Kenya www.hcda.or.ke

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Kenya HorticultureKey success factors

• Favorable agro-climatic conditions• Basic export infrastructure (airports and port)• Booming tourist industry enabled airfreight space back to Europe• Private sector-led• Emerging class of entrepreneurs with commercial experience• Limited but supportive NGO role• Government role mostly as facilitator• Started with export of vegetables (okra, chillies, etc) to Asian diaspora in UK• External catalysts – FDI and trade partners• Developed strong Quality and Food Safety infrastructure - key• Effective industry body “Fresh Produce Exporters Association of Kenya”

(www.fpeak.org)• ~20,000 smallholders supply 85% fresh fruit and 27% fresh vegetables

Sources: Exporting out of Africa: Kenya’s horticulture success story. World Bank c2004. www.info.worldbank.org www.fpeak.org www.hcda.or.ke

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Example: OlamGlobal supply chain investor in agricultural products

FDI – in 4 years, 17 upstream investments in 20 countries in 14 commodities

• Manage 44 commodities in 15 supply chain platforms• Strategic transition from trading commodities to “integrated supply chain investment”• Key prerequisite to investment: cost competitiveness• $75m investment in milk production in Russia in 2012 (Rusmolco)• Recent $100M in Nigeria wheat milling – Olam see key country advantages as:

– Reform oriented democratic government providing stable regulatory environment– Established legal system based on English common law– Rapid development of physical and industrial infrastructure

• Additional investment advantages– Five-year tax holiday to pioneer industries (including agro- processing)– Allows 100% foreign ownership in any Nigerian company– Unrestricted repatriation of profits & dividends– Investment protection guarantee from government

• Nigeria FDI - up from US$1.1 billion in 2000 to US$12.5 billion in 2007

Source: www.olamonline.com. Also Olam sees more agriculture M&A - FT.com http://video.ft.com/v/1583879207001/Olam-sees-more-agriculture-M-A. Rusmolco: www.rusmolco.com

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Many start fruit and vegetables exports but few able to sustain early gains - those that do, do these things

• Enable stable and predictable macro-economic and investment climate• Invest in infrastructure and export logistics• Enable FDI and/ or strategic partnerships• Strengthen vertical supply chains• Develop effective industry organizations for collective action• Build credible systems of quality management and food safety• Invest in training and R&D• Invest in a national product identity• Develop associated industries – packaging, equipment, freight, technical

consulting

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Why Does FDI Go Where it Goes?

• LOCATION DETERMINANTS (3 categories):– Country-specific - low-cost labor, large domestic market, skills, infrastructure– Macroeconomic and regulatory policy and institutions that facilitate private

business– Investments driven by agglomeration economies

• Most important determinants of FDI are institutions and agglomeration economies - these outweigh other variables

• Weak bureaucracy/ rule of law increase transaction costs – discourage investment

• In manufacturing - institutions and agglomeration are key issues• In resources - natural resource abundance and infrastructure are key factors

Source: Why Does FDI Go Where it Goes? New Evidence from the Transition Economies Nauro F. Campos and Yuko Kinoshita 2003 International Monetary Fund

AGGLOMERATION ECONOMIES: Related businesses located close to one another thereby enabling economies of scale and other competitive synergies (“clistering effect”)

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Policy options to attracting FDI• Greater macroeconomic and political stability• Reducing ambiguity of the legal system to enable more active role for FDI

in interactions with local businesses• Developing infrastructure (transport, industrial)• Reducing corruption - political willingness is key to effectiveness• Promoting linkages with domestic economy - information• Building local R&D and training institutions• Improving intellectual property rights• Improving predictability in external trade (export bans)• Greater coherence between investment policy and development policy

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Where to with FDI in food and agriculture?

• Increasing importance of CIS in global food and agriculture• Challenge is finding not funding attractive investments• Increasing investment in farmland – CIS undervalued• Greater vertical integration in farmland investments (storage)• Improved management of earnings volatility – market hedging• Increasing investment in logistics infrastructure (storage, ports)• More consolidation of fragmented food production• Increasing regional perspective in agro-processing in CIS• Agro-processing remains attractive to private equity• Increasing direct investments by SWFs• Increasing focus on sustainability

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Benefits of FDIBridge to global technology, markets, and capital

• Expertise in structuring investments and unlocking value• Improved strategic focus, management, and asset utilization• Sets benchmark in product quality and standards• Facilitates harmonization with global standards• Corporate governance: facilitates development of private

businesses into institutionalized companies• Investment discipline - enhanced leverage/ borrowing capacity• Improves efficiency of market information and access• Often strong partner in articulating and lobbying reforms• Spillover effects into allied industries/ other supply chains

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Where to for Tajikistan ?Implications for FDI in food and agriculture

• Current status– Small domestic market and relatively low per capita GDP– FDI prospects - mainly for Resource-Seeking and Efficiency-Seeking– Weakly structured supply chains & outdated skills and technology & poor logistics infrastructure– Weak or absent ancillary industries (e.g. packaging)– Limited or no availability of domestic financing on competitive terms– Lack of understanding and/or targeted promotion of opportunities– Strong potential to increase productivity and production

• Trends– FDI more likely from regional investors– Opportunities to source semi-processed and finished products in fruit and vegetables– Russia is most visible partner/ most significant market– Growing potential of southern markets – Afghanistan, Pakistan, Iran– Infrastructure a key determinant – electricity, water, logistics, transport– Key is stable and predictable investment environment– Needs greater coherence between investment and development policy

• Central Asia needs flagship investors to catalyze FDI

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Lessons from TurkeyParallels to Tajikistan - small farms predominate

• Turkey regards to “Foreign Investors” as “Global Investors”• Over 3,000,000 farmers• Average farm size 5.9 ha• Moves towards farmland consolidation• Agriculture employs 5.2 million people• FDI into food & agriculture > $1.5 billion• Over 500 FDI investors• Agricultural GDP – up 400% in 10 years• Turkey is one of few countries that are self-sufficient in food

Source: Turkish Agriculture Industry Report. Deloittes. June 2010

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Canada: similar issues FDI in food and agriculture is (also) a key development priority

• Canada’s FDI prerequisites:– Level of public sector R&D investment in new products– Good corporate governance and rule of law– Degree of openness of the economy– Skilled labor more important than cheap labor– Low tax rates not a primary motivation for FDI – how tax revenues are

applied is more important

• Issues apply not only to developing countries• These are universal criteria for FDI

Source: The effect of FDI on Agriculture and Food Trade – WH Furtan and JJ Holzman - University of Saskatchewan 2004

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Tajikistan – Center of a Universe of 450m+ consumersAmple land and water, 4 airports, 100s of flights annually ..

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THANK YOU

Ian [email protected]

NOViROST Limited

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