Palm oil development in Africa: how to reconcile realities with expectations

As the palm oil industry in Africa continues its expansion, how can companies operate in ways which both address local realities and ensure companies meet international compliance and ethical standards?

Leading palm oil companies are very keen to do the right thing in Africa as elsewhere, in-line with their stated values, operating practices and the need to respond to scrutiny.

But how should this be done, given the real challenges Africa presents? This article offers a few ideas. By Dr Peter Stanbury-Davis.

The travails of Golden Veroleum in Liberia have been widely reported. Despite the company’s best efforts, a range of allegations have been made against them over a number of years. According to a recent Ensia article these include claims that ‘crops have been destroyed, shrines desecrated, burial grounds and grave sites denigrated, rivers diverted or dammed, and precious wetland areas polluted.’

In July this year, the company’s CEO announced a new sustainability action plan to address these concerns.

As the palm oil industry continues to develop in Africa, it is interesting to look a couple of brewing issues, and examine in a little more detail the sorts of questions a wise company would ask in order to avoid the types of challenges that have plagued Golden Veroleum.

The challenge of smallholder farmers

In Cote d’Ivoire, Ghana and Malawi there is anecdotal evidence from a number of that the behaviour of smallholder farmers is driving labour abuses, including the use of child labour. According to this evidence, farmers are sub-letting their land to tenant farmers to grow, in tea (Malawi), and cocoa (Cote d’Ivoire and Ghana). These tenants’ poor practices and farming techniques are driving human rights abuses and environmental degradation. Given the already problematic reputation of agribusiness, this is something that the companies buying from these farmers would wish to avoid: what questions might they ask.

Most obviously, at this stage it is not actually clear how widespread this behaviour is. Are these claims based on few localised reports which been made to seem more significant than they are, or is what is reported anecdotally genuinely reflective of a more generalised movement amongst smallholder farmers?

But If this is happening: why is it? The simple explanation would be that farmers are moving to the cities to seek paid employment in addition to the rent they receive on their land. However, Cote d’Ivoire, Ghana and Malawi are very different countries, and so incentives in each location are also likely to be different.

The fact that behaviours may be the same does not mean that the motivations for those behaviours are the same. The situation in each country will be different if for no other reason than the systems of land tenure (and therefore a farmer’s ability to sub-let ‘his’ land) will be very different.

In most countries in Africa formal land ‘ownership’ as it would be understood in Europe and North America is not widespread. Instead the use of land by farmers and others is governed by traditional norms and structures. However, these structures vary considerably between, and even within countries, and these differences would need to be understood if the behaviour of farmers is to be understood.

Also, important to understand is whether these people moving voluntarily, and are they getting a ‘fair’ rent for their land. Or, perhaps are they being pressured by other interest groups to rent to tenants who will then use any tactics necessary – including the use of forced and child labour – to maximise income from palm oil.

The answer to this question is extremely important for the course of action taken by companies. If farmers are moving of their own volition, because they want to improve their incomes, then there are many opportunities to engage the tenant farmers to improve farming techniques. In many parts of Africa outgrower schemes have been successful in expanding the quantity and quality of a range of agricultural products: this experience could be straight-forwardly applied to palm oil.

If on the other hand some degree of coercion is involved, then a different approach would be needed. In such a scenario it is not unlikely that those involved would be looking to maximise profits over the short-term. In this case, it would be necessary to establish the drivers and incentives behind this and identify ways in which those incentives could be met without the concomitant social and environmental damage.

Developing palm oil in Nigeria

Palm oil is a species native to West Africa, and in the 1960s and 70s Nigeria was one of the world’s largest exporters of the product – in the late 60s, Nigeria produced nearly half of the world’s palm oil. However, as the country’s hydrocarbon boom began in the late 70s this industry, as many others, was left to whither.

Nigeria is now seeking to reverse this trend, and aims to increase its output of palm oil seven-fold between now and 2027. The announcement from the Government, reported by Bloomberg, promises it will ‘boost local production to about five million tons from 600,000 tons a year by investing as much as 180 billion naira ($500 million) beginning this year.’

In principle, this announcement should be of considerable interest to companies seeking to expand their palm oil business in Africa. However, the Government’s announcement contains a number of issues that any wise investor should examine further.

The first is the Government’s commitment to remove the 75% duty rebate granted on refined palm oil imports and extend a current three-year tax holiday for all producing and processing companies to five years. In Nigeria, import tariffs are frequently used as a highly effective tool to benefit key interest groups. Cement tariffs, for example, are very high, as a means of benefitting large domestic producers. Tariffs on refined oil products are relatively low in order to benefit those who import these products.

Thus, any promise to remove duty rebates will greatly impact on those who currently import palm oil into Nigeria. Such is the nature of politics in the country that this pressure is highly likely to be effective, at least in the short term. Investors in domestic palm oil production may therefore continue to see themselves undercut by cheap imports.

Secondly, the Government further announced that ‘farmers will be given access to loans at 9% per year through a central bank-administered lending to expand cultivation…’ Here too, there are reasons for scepticism. The most obvious potential challenge lies in the fact that real power in Nigeria lies not with formal states structures, but with a network of relationship-based networks.

The country is, to use Shaomin Li’s term, more of a relation‐based rather than rule‐based polity. Any loans being offered are therefore highly likely to be distributed in the interests of those network groups, rather than to those best placed to be effective palm oil farmers.

Furthermore, even if some loan finance makes its way to small-scale farmer, their effectiveness will depend on how those loans are structured. Most loans require the borrower to make monthly repayments: a structure which does not work with the realities of farming life.

Farmers need money to buy and plant their crops, but cannot repay any loans needed to do that until the crop in question is harvested. The loan scheme proposed by the Nigerian Government therefore sounds very generous, but its effectiveness will depend on the detail of its implementation.

Despite the flak that Golden Veroleum has taken, the company has not given up. It has done its best to respond positively both to the criticisms levelled at it, and to the logistical and other challenges posed by a country as complicated as Liberia. However, GVA’s experience perhaps demonstrates the real importance of using political economy analysis to anticipate problems, and to help manage them effectively.

In principle, there is no reason why palm oil cannot be sustainably and profitably grown and produced in Africa. However, as even the cursory analysis presented here shows, potential investors need to examine in great detail the realities of the countries in which they might operate. None of these problems need be intractable, but they do need to be understood if decisions are to be made in an informed way, and pragmatic but sustainable actions taken on the ground.

Here’s another recent comment piece by Peter that may be of interest: Seeing the world differently: Political economy analysis and sustainable land use and a podcast with him, on the topic is also here.

Dr Peter Stanbury-Davis has spent most of his career working in some of the world’s more challenging environment, to help clients to reconcile the realities of local environments around the world with good corporate governance. He has worked all over Africa, including Zimbabwe, Rwanda, Sierra Leone and Nigeria, for clients as diverse as The World Bank, Anglo American and Shell. For more details visit www.TheFrontierPractice.com, email PeterStanburyDavis@TheFrontierPractice.com, or call +44 7802 421191