Failing land deals in Ethiopia: a real options analysis

Abstract

The last decade has been characterised by an increasing interest for large-scale land acquisitions (LSLAs) in Africa. The economic, energy and food crises started in 2007 encouraged the sealing of a relevant number of land contracts. However, only in a few cases, these contracts led to investment for the development of the agreed land project. In this paper, we adopt a standard real options model to study the impact that commodity price volatility has on an investor's decision to develop a specific land project. The model is applied using, as a case study, a land lease agreement signed by Saudi Star Agricultural Development Plc and the Ministry of Agriculture and Rural Development of the Federal Democratic Republic of Ethiopia for the development of 10,000 hectares to be destined to the production and export of rice. We show how failure, understood as a delay in the development of the contracted land, is justified by economic reasons. Indeed, foreign investors will decide to exercise the option when their returns are maximised.