Saudi Star Project On Track Despite Setbacks
We believe the plan by Saudi investment firm Saudi Star to lease and cultivate land in Ethiopia will remain mostly on track despite a few recent setbacks. The plan, which would eventually involve production of up to 1mn tonne of rice, has been several years in the making and would result in the company sending some rice back to Saudi Arabia. Despite several problems in recent months and a bout of public criticism, key investors have continued to support the project. We believe that barring any significant setbacks, the project will be online sometime in 2013.
In June 2011, Saudi Star Agricultural Development Plc acquired 10,000 hectares (ha) of land in the western state of Gambella in Ethiopia with the desire to produce rice in the region for 60 years. The aim of what is considered the first phase of the project is to ultimately send a portion of all grains produced back to Saudi Arabia.
The company is looking to acquire roughly 500,000ha of land in the next several years in order to grow rice, wheat and teff, a local cereal. The plan is part of a wider initiative by the Ethiopian government to lease up to 4mn ha of farmland as part of its desire to improve local production. As part of the deal, Saudi Star has said it would hire 5,000 people for the initial project and could employ up to 250,000 once all 500,000ha are acquired. Rice production has begun on 350ha, and the company expects a further 2,650ha to be cultivated in January 2014. The rest of the initial phase will be online by mid-2014. Although roughly 40% of the project's rice production will be exported, the rest will be sold on domestic markets. At potentially 1mn tonnes, even 40% of total production kept in the country would be a significant improvement on the 25,000 tonnes of paddy rice Ethiopia produced in 2009/10.
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Although the project is expected to pay significant dividends over the long term, it has faced several short-term obstacles. Despite government pronouncements that there has been minimal local disruption, advocacy groups say there have been human rights violations and forced relocations. Furthermore, in April, five employees of a Pakistani engineering company associated with the project were killed by gunmen while building a canal. According to the company, work has since resumed, and the government has increased the security presence in the area.
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Overall, we believe that the project will continue despite the setbacks. The key risk at this point is that the initial plan of rice cultivation on 500,000ha could be rolled back if Saudi Star believes the investment is not worth the cost. Ultimately, even if the project is successful, Ethiopia will remain a small producer on world markets. Furthermore, Saudi Arabia would still require rice imports given that consumption was around 1.1mn tonnes in 2011. Nonetheless, the deal, if successful, could be a watershed moment in African land acquisitions and serve as a template to future projects.