Thursday, September 17, 2009

Foreign Investors Eye Pakistan's Agricultural Land

Pakistan is seriously pushing ahead with a plan to sell or lease over 700,000 acres of agricultural land to foreign investors in the face of growing opposition at home. A Saudi delegation is due in the country this month for further talks on a plan to lease an area of land more than twice the size of Hong Kong, a Pakistani official told Reuters this month. Similar reports have surfaced earlier, indicating UAE investors have been quietly buying Pakistani farm land.

In June, news agency Reuters reported that the government of Pakistan had offered 404,700 hectares (ha) of farmland for sale or lease to foreign investors. It is the usual suspects of the Gulf states and South Korea who are the likely targets of the government's drive for investment. Oil rich, food poor states from the Middle East and food deficit prone South Korea have been spurred by the high food prices of 2007 and 2008 to increase their food security by investing in agricultural land abroad.

Also in June 2009, Swedish multi-national food company Tetra Pak announced the signing of an memorandum of understanding with local company Engro Foods to create a dairy hub in the Sahiwal district of the Punjab. The hub will serve 15 villages in the district and aims to promote more efficient production and bring smallholders into the formal dairy market chain.

In July, the Pakistani minister for investment said that the country would be happy to provide land for Korean companies to build food and dairy processing facilities, according to Pakistan Agribusiness Report. Also in July, the chief minister of the Punjab said that there was a large amount of interest in investing in the province's agriculture from Qatar.

It is not just Arab states that are buying up farm land in other nations. 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 workers will be working in Africa this year, reports the Economist.

In order to assess the situation and develop serious policy recommendations, it is important to have a basic understanding of how Pakistan's agriculture sector operates. Here are some of the important facts about it:

1. Feudal Land Ownership and Farm Productivity: The size of Pakistan's total arable land is about 22 million hectares (1 hectare=2.47 acres), the 15th largest in the world. Most of the best farm land is held by feudal landowners who use poor sharecroppers or illiterate tenant farmers to cultivate their land. As a result of the nation's landowning system, not only are the landholdings in Pakistan much larger than almost all of Pakistan's neighbors (average farm is Pakistan is about 10 acres vs only 4.5 acres in India), but the productivity and crop yields have been neglected by the absentee landlords. In spite of the massive public investments in building the irrigation and support infrastructure for Pakistan's farm sector and expensive incentives such as no taxation of farm income, Pakistan's farm productivity has been lagging, turning Pakistan from a food-surplus nation to a food-deficit nation in the last sixty years.

2. Water Scarcity: With only about 1000 cubic meters per person per year water resources, Pakistan is a water-scarce country. Out of the 169,384 billion cubic meters of water withdrawn since 2000, 96% were has been for agricultural purposes, leaving 2% for domestic and another 2% for industrial use. By far the most water is used for irrigated agriculture. With the world's largest contiguous irrigation system, Pakistan has harnessed the Indus River to transform 35.7 million acres for cultivation in otherwise arid conditions. Yet,the sector contributes less than 20% of the Pakistan's GDP and Pakistan remains a food-deficit nation. Rather than flood irrigation used in Pakistani agriculture, there is a need to explore the use of drip or spray irrigation to make better use of nation's scarce water resources before it is too late. As a first step toward improving efficiency, Pakistan government has launched a 1.3 billion U.S. dollar drip irrigation program that could help reduce water waste over the next five years. Early results are encouraging. "We installed a model drip irrigation system here that was used to irrigate cotton and the experiment was highly successful. The cotton yield with drip irrigation ranged 1,520 kg to 1,680 kg per acre compared to 960 kg from the traditional flood irrigation method," according to Wajid Ishaq, a junior scientist at the Nuclear Institute for Agriculture and Biology (NIAB).

3. Growing Urbanization Trend: Pakistan is already the most urbanized nation in South Asia where the farm sector contributes about 20% of the GDP, less than the 27% contribution by the industrial sector and the rest by service sector. And as the urbanization process accelerates, the farming techniques, emphasis on water-saving irrigation methods and productivity need to increase significantly to feed the growing population with fewer farmers.

If the foreign investors bring modernization to Pakistani farms, then the interest by foreign investors is worth considering. But the leases must be written up to ensure significant investment in the land and water management techniques, as well as much higher farm productivity benchmarks with the first right of refusal to the harvest given to Pakistanis.

A carefully crafted lease arrangement with foreign investors can accomplish the following:

1. Industrialization: Transform Pakistan from the traditional feudal society to an industrial society with modern agribusiness capable of not only feeding its growing population, but exporting surplus to add to the much-needed foreign exchange stream of earnings.

2.Productivity Enhancement: Increase productivity and improve Pakistan’s food security. There is significant room for increasing farm productivity in Pakistan. For example, Ahmed, Chaudhry and Iqbal of Pakistan Institute of Development Economics argue that per hectare wheat yield in Pakistan can be raised from about 2000-2500 kg to about 3500 kg with improved farming inputs and techniques. Since Mexico and Pakistan are located in analogous ecological zones, the introduction of Mexican varieties of high-yielding wheat by American agronomist Norman Borlaug in the country in sixties ushered an era of green revolution. But unfortunately the pace of development has not been maintained and Pakistan now lags significantly behind the Mexican yields, who are producing 3900 kg of wheat grain per hectare as compared to 2491 kg for Pakistan in the year 1999, the best season in recent memory. According to FAO data reported by Pakissan.com, among spring wheat growing countries Egypt has the highest yield, producing 5422 kg of grain per hectare and Indian Punjab produces 4090 kg versus 2500 kg per hectare in Pakistan.

3. Public Revenue Enhancement: Grow Pakistan’s tax base from the annual leases and the farm income tax received from foreign investors. This additional revenue can help boost spending on the critical education and health care programs to develop Pakistan's lagging human resources.

The terms for any land lease agreements must protect the best interest of all Pakistani stakeholder, including the farm workers, farmers, the domestic consumers, local communities, and ensure improved food security for Pakistanis and the protection of the land, water resources and the environment, while helping the foreign investors meet their basic objectives of food security in their nations.

In my view, it is not a good idea to summarily dismiss foreign investor interest in leasing farm land and investing in Pakistan's agriculture sector. What is important is to carefully assess the opportunity and come up with the best possible terms for such an arrangement to be mutually beneficial to both parties. 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 this year.

While I do think some skepticism is justified here, doing nothing is not an option. Pakistan faces potentially severe food and water shortages in satisfying the needs of its growing population. Significant investments are urgently required to avert potential famines and droughts. The best course of action now is to try and pressurize Pakistan's leadership and negotiating team to proceed cautiously and craft the best possible terms for a few pilot deals they can to ensure Pakistanis' food security and looking after Pakistan's best long term interests, while offering reasonably attractive returns to investors.

Related Links:

Foreign Investors Buying Pakistani Farm Land

Is Leasing Agricultural Land to Foreigners a Good Idea?

Pakistan's Sugar Crisis and Dietary Habits

Wheat Research and Development in Pakistan

Pakistan's Water Crisis

Wheat Productivity, Efficiency and Sustainability

Agrarian Reform in Pakistan

Urbanization in Pakistan

Pakistan Agribusiness Report 2009

Pakistan to Lease 700,000 Acres to Arab States

Pakistan's Total Arable Land

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