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Forest sector investments in FLEGT VPA countries

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CATEGORY
Special Study

PUBLISHED DATE
August 2019

AUTHORS
UNIQUE forestry and land use, Christan Held, Katalin Solymosi, Lincoln Davis, Veronica Alonso

DESCRIPTION

Forest Sector Investments in FLEGT VPA countries. Scoping study on investors´perspectives and investment monitoring.

KEY FINDINGS

There is increasing investors ́ interest in VPA countries ́ forest sectors. Latin American and Asian countries are in the forefront of this development, while the African forest investment space has not yet reached a level of maturity that triggers large-scale investments.

FLEGT VPA countries receive increasing interest from international forest sector investors. This is mainly in Asia and Latin America, while Africa is still maturing. International investments are mainly targeting industrial plantations and large wood industries. Average annual investment volume in of these investors is estimated at USD 8.5 Bn: the lion’s share of this is invested in Asia.

Besides international investors, there is a huge number of domestic enterprises (i.e. SMEs) in VPA countries, investing in a wide spectrum of forest sub-sectors and value chains (both natural forests and plantation based). Total value of these investments is not known. However, country data indicates that average annual investment volumes may be as high as USD 3.7 Bn in Indonesia and USD 2.7 Bn in Viet Nam. Investment volumes in African countries are considerably lower, e.g. USD 120 M per annum in Ghana.

Although investment volumes in natural tropical forest management are not known, this asset type receives presumably much lower investments. This, because (1) capital intensity is not as high as in plantation forestry and wood industries, and (2) because large international investors are reluctant to invest in tropical natural forests due to reputational risks, and social and environmental concerns.

There is no specific evidence that the VPA process has had significant positive influence on forest sector investments to date. However, positive impacts are expected in the future when more countries will initiate FLEGT-licensing and when important Asian consumer countries will adopt legislation banning illegal timber from their markets.

The underlying assumption for this study was that implementation of FLEGT VPAs attracts legal and sustainable forest sector investments. The study surveyed domestic and international investors in eight VPA countries to analyses this nexus.

In terms of investment volumes in the forest sector, VPAs only have strong influence on a minor share, i.e. on investors who target international markets and are invested in natural forest-based value chains. These investors rated the relevance of VPAs higher than other actors did.

Large-scale investors in plantation-based operations did not perceive VPAs as being of major significant relevance to them. Thus, the potential positive impact of VPAs on attracting major investments flows and influencing investment strategies seems limited at present, which may be partly due to the fact that actual and/or potential benefits of VPA implementation have not been well communicated in the past.

VPAs may positively influence investment decisions of domestic SMEs if the implementation process improves access to capital, raw material access and market opportunities. On the other hand, investors articulated that SMEs might also divest or exit the sector, if VPAs restrict one of these factors.

Generally, investors recognize that the FLEGT process is an initiative to primarily combat illegal logging and enhance the export of sustainable wood products. FLEGT’s impact on enhancing the enabling environment for investments is rather perceived as being a by-product. Most investors do not perceive themselves being major direct beneficiaries of the process.

Actions related to VPA implementation that directly affect the enabling environment for investments are not widely known in the investors ́ landscape. Partly because these actions are not implemented, and partly because these actions are not visible or not communicated.

Investors acknowledge the positive impacts the process may have on sector reforms in the VPA countries, though the lengthiness and the limited effectiveness of the process to date was stated as well. There is a general perception that the process is not inclusive enough.

Investors do not consider ongoing VPA implementation or negotiation processes being a major investment risk mitigating factor. However, they rate an operational VPA being an encouraging factor for allocating investments.

The FLEGT VPA process may have an indirect impact on enhancing the maturation of emerging markets ́ forest sectors and making them more attractive for international investments. Since the implementation of VPAs is promoting the formalization of enterprises in VPA countries, making them bankable, the universe of investable projects for international investors is gradually increasing. This, however, is also linked to enhancing the technical and managerial capacities of these enterprises.

This has also positive impacts for the overall economy, since formalized enterprises are contributing to the national tax revenue and are more likely to generate decent work opportunities than informal enterprises.

Monitoring forest sector investment flows is only useful for VPA countries that have entered the licensing phase. To assess FLEGT’s influence on forest sector investments, monitoring needs to include monetary investment flows and qualitative investment criteria.

Monitoring of investment flows will be a useful approach to analyze investment dynamics in countries where FLEGT licensing has started. Besides monetary investment flows, the monitoring will need to assess qualitative aspects of the VPA system to establish the FLEGT-investment nexus and differentiate it from other investment driving factors.

In general, investment data availability in VPA countries  ́is limited. Most countries do not record and capture investment information regularly. In some cases, data has been captured, but is not publicly available. Only Vietnamese and Indonesian sources allow for an easy access of current and historical data. However, with continuing improvements of the national statistical systems, availability may improve in the future.

Due to the limitations in available data, it may be worthwhile to consider a primary data collection approach, using available ITTO industry and investors ́ contacts. The primary aim of this would be to assess the attractiveness of VPA partner countries for investments, with a specific view on activities related to VPA implementation.

Results could help prioritizing the implementation of FLEGT action areas with regard to investors’ requirements, i.e. investment safeguards, forest tenure reforms, enterprise formalization, capacity development, and taxation and incentive system reforms.