Ban on Foreign Ag-Ownership in Georgia — Why Leases are Not the Solution

To start with, when discussing the ban on foreign ownership, let’s acknowledge that it is a sensible sentiment that Georgians do not want their agricultural land to be overtaken by foreign investors. One fear that has been voiced goes along the following lines: China is rich, Georgia is poor, in the worst-case the Chinese might buy the land, and bring their own workers, not even creating employment. Most likely this fear is exaggerated, but the basic concern is understandable.

All that said, the ban on foreign land ownership as it stands, via the Constitution, is not a well-crafted policy. It will reduce future investment, and impede the operation of existing businesses. It thus will contribute to perpetuating rural poverty.

The government has said that the impact of the ban will be offset, at least in part, by long-term bankable leases. These leases, however, do not solve a problem that actually exists.

First, such leases only are for land that is anyway owned by the government. If the government does not want foreign investors to buy the land, it could simply refuse to sell, or structure leases accordingly.

Secondly, leases are unattractive for precisely the kind of investment that Georgia should attract. A good agricultural investment often requires a multiple of the land price to be invested, on the land. When you put up a $15,000+ investment (soil preparation, irrigation system, plants, wind shelter, fencing, for example) on a single hectar, a lease simply is not an attractive proposition, since it gives you less certainty on property rights that you need to maintain for at least 8–10 years to recoup your investment. By insisting on leases, exclusively, the government will ensure that the kind of investment Georgia should have is much less likely to come.

Third, leases do not apply for any of the land that is owned by private owners, or at least would be entirely unattractive and cumbersome for both parties. Foreigners, or foreign-owned companies, thus cannot access privately held land. This will greatly constrain the development of existing companies, or any new investment. It will also lower the price of land, and, thereby, most likely reduce the capital that existing agribusinesses in Georgia can raise, as the collateral is worth less.

There are a range of other risks, including that existing businesses may not be able to sell some of their shares, and that it now becomes much harder to gain capital, expand existing businesses, and build partnerships with the kind of experienced international partners that would help develop agriculture in this country.

In summary, the ban will turn out to be a big problem for Georgian agriculture, even while it is dressed up as a solution to a problem that, on closer inspection, does not really exist. Georgia has two big hopes, on exports and earning foreign revenue: tourism and agriculture. Through this ban, it is about to badly damage the prospects for the latter.

What is regrettable, in this context, is that the understandable concern — no land grabs, only foreign investments that contribute to employing people — could easily have been addressed with a well-crafted policy, for example by insisting on investment obligations, or by offering reciprocal arrangements to European investors, based on the DCFTA, who likely come to Georgia precisely to develop exports to the European market that Georgia can now access. Unfortunately, that route was not taken. Among the biggest losers will be people living in rural areas, as foreign investment could have been complementary to them developing their own fields and plantations.

As the final law is not yet cast in stone, one can only hope that the government reconsiders, and refines the policy it ends up adopting. Excellent solutions are available. Finding them requires a dialogue that includes the existing agricultural sector.

[Disclosure: I am active in Georgian agriculture.]