EVENT: On April 14, Riyadh announced the launch of a $800-million state company to support Saudi private sector investments in agricultural projects abroad.

SIGNIFICANCE: GCC countries' initiatives to safeguard food security by investing in agricultural projects abroad had stalled, illustrated by the Saudi Bin Laden Group's decision to postpone a planned $4.3-billion investment in Indonesian rice production. Last week's announcement by Riyadh represents an attempt to reinvigorate the search for food security in the face of financial difficulties.

ANALYSIS:

Cereal cultivation in the Gulf is in terminal decline because of depletion of water resources. At the same time, the population is expected to rise from below 40 million today to nearly 60 million in 2035. The need for food imports, which already meet 60 per cent of total demand, will grow.

Subsidised agricultural schemes with non-renewable fossil water are unsustainable. They were initiated in the 1970s and made Saudi Arabia the world's sixth largest wheat exporter at the beginning of the 1990s. In 2008, it decided to phase out wheat production by 2016. The aim is to use scarce water resources for more value-added crops such as fruits and vegetables and use water-saving technologies such as greenhouses and drip irrigation.

In the wake of recent international food price hikes, the GCC countries announced a plethora of agricultural projects abroad in order to meet future food import needs.

From Brazil to the Philippines and Kazakhstan to Ethiopia, there have been discussions about potential agricultural investments. Memoranda of understanding between governments have been drafted and first projects have been announced, but actual implementation has proved elusive.

There has been a preference for countries that are geographically close and offer logistical advantages, such as Sudan and Pakistan. Established political channels and cultural ties have also played a role in the choices.

However, such countries are net food importers themselves and have rapidly growing populations. This means that their potential role as major providers of food exports is questionable. Established food exporters such as Australia, Thailand or Eastern Europe have featured less prominently in negotiations. Purchases of food trading houses that would cut procurement costs have not been contemplated so far.

The natural endowments of targeted countries vary considerably: In Central Asia and Pakistan, there is a physical water shortage - withdrawals of renewable water are higher than replenishment rates and the full potential of irrigation has been largely achieved.

Many countries in East Africa, such as Mozambique and Tanzania, have only an 'economic' water shortage. Once large-scale investments in infrastructure have been undertaken, usage of their vast untapped water resources and ensuing production increases are conceivable.

The GCC countries have limited experience in managing agro-industrial projects abroad. The climatic conditions, prevailing crops, and legal and socioeconomic frameworks of most of the targeted countries are new to them. In the 1970s, there were plans to develop Sudan as a bread basket for the Gulf, but such initiatives were confined to pilot projects and were not developed further in the 1990s when oil prices were low.

The declared goal of the GCC initiatives is to pave the way for the private sector. The state would supply framework agreements with host governments and ensure co-financing at preferential rates by institutions such as the Saudi Industrial Development Fund (SIDF) and the new Saudi Company for Agricultural Investment and Animal Production (SCAIAP).

In addition, the King Abdullah Initiative for Saudi Agricultural Investment Abroad was launched in January and aims at public-private partnerships (PPPs). Leadership of this initiative rests with the Ministry of Commerce and Industry, while the SCAIAP is owned by the Public Investment Fund (PIF), which is the domain of the Ministry of Finance. (The Ministry of Agriculture represents the interests of the domestic agricultural industry.)

Supranational institutions, such as the Arab Authority for Agricultural Investment and Development (AAAID), the World Bank and the Food and Agriculture Organisation (FAO) are also likely to play a growing role. They have been asked to assist GCC countries in investing in agricultural projects overseas.

Saudi Arabia has initiated a strategic storage system for rice and wheat equal to three to six months of consumption through SCAIAP. So far, Oman has the most advanced system of strategic food storage in the GCC, storing basic staples for three to four months' needs. The United Arab Emirates is starting such a system in order to reduce exposure to market volatility.

GCC investors have run into opposition to planned agro-industrial projects from local stakeholder groups.

The UAE asked for a blanket exemption from food export restrictions when it negotiated potential agro-projects in Pakistan, but the government was only willing to grant exemptions for specific agro free zones, because it was worried about its own domestic food security.

Qatar's plans to lease 40,000 hectares in Kenya for agricultural production have met resistance from the Eastern Africa Farmers Federation Union and pastoralists.

Conflicts of interest can only be avoided if stakeholders obtain a fair deal from agricultural projects in the form of business, reimbursements and job opportunities.

Declining oil prices and losses of foreign assets of Gulf sovereign wealth funds (SWFs) have made the financial position of Gulf countries less comfortable than last year when many of the projects were announced. Should oil prices average below $50 in 2009, budget surpluses will be reduced or even turn into deficits in some states. SWFs in Abu Dhabi, Kuwait and Qatar have lost some 30-40 per cent of their assets in 2008 as their portfolios were heavily geared towards equities, in contrast to the Saudi Arabian Monetary Agency (SAMA), which mainly invested in government bonds.

The reduced asset base has to be mobilised at home to stimulate the economy. Kuwait has initiated a bailout fund to help its battered stock market, Qatar has bought stakes in local banks, and Abu Dhabi has helped out Dubai with a $10-billion bond purchase, after the latter's real estate bubble burst.

The private sector in the Gulf has been hit by the indirect impact of the financial crisis in the form of steeply increased costs of finance. While the public sector in the Gulf has been a net capital exporter over recent years, the private sector is heavily dependent on the international banking system for funding, especially for large-scale project finance. There is a lack of domestic project finance and corresponding financial institutions.

The Gulf countries also face competition overseas. Financial investors are active, while other Western companies have developed an interest in biofuel production. The China-Africa summit in November 2006 led to agreements to set up ten agricultural centres in Africa.

The Gulf countries' announcements last year attracted media attention, but on the ground, little has happened thus far. Most projects have not gone beyond feasibility studies. With the drop in oil and food prices, the urge and ability to invest in such projects are both less pronounced, and the resolve of GCC countries to overcome problems of technical implementation and opposition of local stakeholder groups has yet to be tested.

CONCLUSION:

The strategic rationale for agricultural investments remains strong as GCC food import needs will rise dramatically in the future.

The cooperation of the public and private sectors will be crucial, with the state supplying political support and co-financing to support entrepreneurial initiatives.

Besides African countries which offer development potential and geographic proximity, established food exporters in Europe, Asia and the Americas will gain importance for Gulf countries.