Land-use concessions on three continents were found to have at least 31 percent overlap with territory claimed by local users, creating risk for investors, according to an analysis by consultancy Munden Project.
Overlapping claims that reduce the value and viability of concessions are a statistically significant source of investment risk, Munden wrote in a report for Rights and Resources Initiative, a Washington-based group that seeks to improve land rights for local communities. The consultancy looked at concessions in Africa, South America and Southeast Asia.
Investor interest in land was sparked by the 2007-08 food crisis, and rising commodity prices and growing demand for biofuels and timber are driving agreements, the Land Matrix research group wrote in an April 2012 report.
“The fundamental investment case for commodities produced in emerging-markets economies is still there,” wrote Munden, which has offices in New York. “The existence of overlapping claims is not a reason to avoid emerging-market economy concessions, it is a reason to seek more data about them.”
Munden analyzed geospatial data for 153.5 million hectares (379 million acres) of commercial concessions in 12 countries and found 48.4 million hectares to have some overlap with a demarcated local territory, the report showed.
The report looked at five countries in South America, three in Africa and four in Southeast Asia. In nations that made more effort to determine local land rights, the researchers found larger overlaps with local territories, reaching 95 percent in Peru and 83 percent in Cambodia.
The figures suggest that tenure risk identified based on publicly available geographical systems data is the “tip of the proverbial iceberg,” according to Munden.
“Political-risk insurance is not attuned to these issues,” Andy White, research coordinator at the Rights and Resources Initiative, said by phone. “It costs more to insure a project in Mexico than in Malaysia, but if you drill down from a land-rights perspective, it’s much riskier in Malaysia.”
Mexico has a system of communally held village lands with individual use that dates back to the Aztec era and was included in the country’s constitution in 1917, according to the report.
Companies investing in land with insecure property rights may face rising operating costs or forced abandonment of activities in progress due to local opposition, with financial risks including construction delays and loss of both insurance coverage and cash flow, Munden wrote in a February report.
There’s a “major difference” in awareness of land tenure between industries, with mining and energy companies more attuned to risk than forestry and agribusiness investors, according to White.
“The information advantage offered by understanding land-tenure risk may well provide a competitive edge in selecting emerging-market-economy investment targets,” Munden wrote. “The key for investors is to ask questions and develop risk-management processes.”