0953-C2
Kari Keip1
Forestry can be a very profitable business in Latin America. This is evident in the increasing flows of international investments in the forestry sector of the region. In looking at the profit issue, the question of time horizon is of utmost importance in promoting sustainable forest management. The time frames for sustainable forest practices are often longer than for other types of investments, and affect their relative profitability compared with other land uses. Yet the returns on this type of investment accrue much more broadly than solely to the private investors' pocket book. The returns also accumulate in the form of ecological and environmental benefits to local, regional and global societies.
In some cases, business interests can coincide with conservation efforts, provided the appropriate regulatory framework is in place. The forest sector's capability for self-financing is significant, but the potential is far from being reached due to the undervaluation of forest resources. Underlying policy and market failures should be corrected. An increasing number of business leaders now agree that the environment (and its problems) can be looked upon as one of the most important commercial opportunities of the coming decades. The past ten years have seen the creation of companies with missions that are both good for business and good for the environment. This development is especially important when it relates to innovative small and medium-sized enterprises, because the collective impact of these enterprises on the economy can be huge.
Private sector operations can range from timber production to non-timber forest products, ecotourism, and producing various services (such as watershed protection and prevention of natural disasters). While many types of investments strategies involve the public sector, the international community and various public/private partnerships, this article focuses on two mechanisms: conservation financing through user fees at regional or local level and private sector investment via venture capital funds by individual companies. The paper also analyses ways to improve the rural credit systems in Latin America. New private sources and mechanisms are needed as public sector funding is falling short of the financing demands for forestry development and conservation.
Forestry can be a very profitable business in Latin America. This is evident in the increasing flows of international investments in the forestry sector of the region. In looking at the profit issue, the question of time horizon is of utmost importance in promoting sustainable forest management. The time frames for sustainable forest practices are often longer than for other types of investments, and affect their relative profitability compared with other land uses.
The forest sector's capability for self-financing is significant, but the potential is far from being reached due to the undervaluation of forest resources. Underlying policy and market failures should be corrected. Private sector operations can range from timber production to non-timber forest products, ecotourism, and various services, such as watershed protection and prevention of natural disasters. Emerging financing instruments in support of the trade of benefits from forest environmental services have unexplored potential. The funding role of businesses in the private sector should be enhanced through innovative financing instruments. Two mechanisms are examined here: conservation financing through user fees at regional or local levels, and private sector investments via venture capital funds by individual companies. This paper also analyzes ways to improve the currently failing rural credit systems in the region, which, if made adequate, could fund both traditional timber based and new conservation oriented forest investments.
Credit is the most common funding source for business development in any sector. However, the reasons why forestry and agro-forestry financing do not appear in rural credit funding is due to a lack of access to stable, long-term sources of capital. There is a need to change the legal framework so that a greater variety of collateral, including forests, can be used to secure credit transactions. In order to use forests as collateral, land titling and registration efforts should be developed.
Other means to improve the performance of rural credit include (IDB 2002):
The strengthening of financial retail capacity is a clear and fundamental need. The goal is to extend the frontier of formal finance to incorporate rural areas based on principles of sustainability, efficiency, and significant outreach. The alternatives include:
Even with improvements in the rural credit system there may be reasons why sustainable forest management and conservation would call for the use of innovative financing schemes. The returns on this type of investment accrue much more broadly than solely to the private investor's pocket book. They also accumulate in the form of ecological and environmental benefits to local, regional and global societies.
In some cases, the interests of business can coincide with forest conservation, provided the appropriate regulatory framework is in place. An increasing number of business leaders now agree that the environment (and its problems) can be looked upon as one of the most important commercial opportunities of the coming decades. The past ten years have seen the creation of companies with missions that are both good for business and good for the environment. This suggests that new and innovative financial instruments can be developed which will encourage these developments and further this trend. This will be especially important when it relates to innovative small and medium-sized enterprises operating in developing countries, because the collective impact of these enterprises on the economy - and on the global environment - can be huge.
There are some well-defined investment opportunities and revenue generation means that can be employed by public or private sectors in the countries of Latin America and the Caribbean. The sector may also be partly self-financed by the income generated through the harvesting of forest products. Revenue generation is possible also in protected areas such as through user fees and payments produced by eco-tourism concessions.
There are a number of methods available for financing parks through taxes, fees, private investment, and set-aside agreements, among others. Creative public-private cooperation for park management and the establishment in forest concessions management, represent interesting opportunities for forest protection and conservation.
If the 59 million ha of protected forest reserves were to be managed correctly and the total of protected areas raised to slightly over 10% of the total forest area of the region, or to 105 million ha, investments in forest preservation would amount to some US$8.3 billion (Figure 1). This would correspond closely to one tenth of the total estimated investment potential of US$88.2 billion between 1998 and 2020 (Simula et al. 2002). The same study estimates tentatively that the investment needs in sustainable natural forest management in some 185 million ha would be US$ 16.3 billion and in plantations US$ 1.4 billion. Of the overall potential, the bulk or about 71 percent (US$62.2 billion) would be for industrial investments. Clearly the largest industrial investment requirements would be in pulp and paper industry (US$39.9 billion) and sawmilling (US$ 11.8 billion).
To realize the full development potential of its resource and utilization endowment, the countries of Latin America must invest not only in the sustainable management of their forest resources, but also in forest conservation, in order to benefit from the biological diversity of the region. What mechanisms exist to facilitate this kind of investment? How can public and private money be channeled to help finance what has been, until now, a free good? This article will not attempt to fully answer these questions, but aims at providing an overview of some tools and options for financing sustainable forest management.
While there are ways of using market mechanisms to pay for conservation, most aspects of ecological services will always be difficult to "market". Society will ultimately have to foot the whole bill for some these services (e.g. clean air, nutrient recycling, pollination, etc.). There are other cases where the emphasis is on correcting existing negative externalities. User fees are one mechanism employed for this purpose, as will be discussed later in this article.
Non-timber forest products such as resins, bark, nuts, and medicinal plants are commodities that can sometimes be extracted from natural forests with minimal structural impact. Specifically, designated reserves, cooperatives, and community titles to land for harvesting such products, represent burgeoning and relatively non-invasive economic uses of primary and secondary forests. Because these practices may not significantly compromise the biodiversity of a forest, they are also consistent with bioprospecting efforts and some level of protected area status. While non-timber forest products offer economic alternatives to timber extraction, their ability to provide large populations with widespread economic opportunity is probably limited.
Figure 2 indicates the size of world markets for various non-wood forest products. The largest values of the trade of these products belong to medicinal plants and forest based nuts, while the other eight product groups also show annual trade of over US$100 million (IUCN and Transglobal 1998). There are only few desegregated data for these products for Latin America. However, there is some information such as recorded, for example for Brazil, according to which the value of non-wood forest products has grown at an annual rate of 9% in the 1980s (Richardson and Ass. 1995).
At present, only a fraction of the costs related to the generation of environmental benefits from forests is being paid by the consumers. Panayotou (1994) argues that that full cost pricing of the public goods and services would send the correct signals to the market and therefore help conserve natural resources. In the following, two types of users fees related to forestry are given: water usage and ecotourism services.
Water. Arguments for public intervention in watershed management decisions have been made based on market failure. Farmers upstream do not necessarily choose environmentally desirable investments to protect downstream populations from damages because it may not be profitable. So compensation may be needed to induce environmentally more benign practices (Hueth 1995). Beneficial practices can be promoted by financing them with income generated downstream. Water user fees and tariffs that, in addition to covering water distribution costs, would also pay for watershed management, are contemplated in San José, Costa Rica. The government is considering charging approximately US$6 million annually to the water company and US$3 million per year to the national power company in order to finance upstream watershed management. These fees would be used to finance the conservation of some 1.3 million hectares of forest in the watersheds producing water for the city (McNeely 1997).
An example of how user fees can help raise revenue for sustainable development comes from Ecuador. In the city of Quito, the government has been working with local NGOs and The Nature Conservancy to charge a more appropriate fee for providing water. The revenues raised by the user fee will be used to capitalize a trust fund designed to finance the conservation of the watershed that provides most of the water for the city. In this way, an attempt is being made to charge a more reasonable price for one of the most important goods (fresh water) provided by forest ecosystems (TNC 1997; Echavarria 1999).
Ecotourism. Nature related tourism investment both on private and public lands has become big business in the region. Costa Rica is a successful case of promoting ecotourism - one of every four tourists visiting the country could be classified in this category. The overall foreign exchange from tourism was US$623 million in 1994, higher than from bananas sold overseas (US522 million) or coffee exports (US$500 million) (Southgate 1997). But the Caribbean countries, Argentina, Brazil, Colombia, Ecuador and others are following suit. Chile is considering major changes in its policies in order to provide long term, 30 year concessions of protected areas. The contracts would guarantee the conservation of the leased areas while part of the income generated from these concessions could be used to finance improved management of other state-owned areas (Hardner and Rice 1998).
Visitor fees for ecotourism are a very straightforward way to finance conservation and management of parks and other protected areas with public access. Charging different fees according to visitor origin and other characteristics (with and without vehicles, large groups, etc.) is common in the region (e.g. Secretaría Nacional de Turismo 1994, Southgate 1997). The principal objective of fee differentiation is to maximize park revenue based on tourists´ capacity to pay.
Concessions for tourism related operators and different types of permit fees (e.g. for filming in protected areas) are other sources of income. Differentiated airfares and hotel fees achieved via special taxes for international tourists are common (e.g. Belize, Guatemala and Ecuador). In Costa Rica, the income from entrance fees to parks increased dramatically after the park system was allowed to retain 75% of the collected income, allowing an improvement in financial sustainability of park management. (Brandon 1996).
User fees need not be limited to water or tourism. One can envisage situations where user fees could be charged for some of the other goods and services provided by nature, such as, among others, protection against erosion, or against natural disasters. Clean Development Mechanisms and carbon sequestration offer other opportunities.
A way of addressing the special needs of biodiversity-based businesses is through investments via dedicated venture capital funds or sector investment funds (Asad 1997). Like traditional venture capital funds, these tools are designed to provide capital in return for equity or quasi-equity positions in promising biodiversity-based businesses. While green venture capital funds can be high-risk/high-return operations, they can also serve to provide much needed capital (as well as business expertise) to small, biodiversity-based start-ups. An example of such a source of financing is the Terra Capital Fund.
The regional Terra Capital Fund covering the whole of Latin America, and others such as the EcoEnterprise Fund established for Central America, are pioneering initiatives designed to experiment with the role that venture capital can play in supporting biodiversity conservation. Depending on their success and profitability, they may help stimulate other such undertakings in the region. The two initiatives are also mutually supporting. Whereas the EcoEnterprises Fund will focus on start-up ventures, which tend to be smaller, riskier and more difficult transactions, Terra Capital Fund will probably end up working with larger projects. This means that projects started by EcoEnterprises may eventually "graduate" into support from Terra Capital Fund (Bayon et al. 2000).
The Terra Capital Fund was established partially with financing from GEF, International Finance Corporation (IFC) of the World Bank Group and Multilateral Investment Fund (MIF) of the Inter-American Development Bank. The Fund initially had a total of US$20-50 million to invest in sustainable forestry, agriculture, and ecotourism projects in Latin America (Keipi 2000). Possible local and international private sector investors will bring further resources to the fund (Figure 3).
With the Fund, the group of international private sector investors bring together investment management expertise (Banco Axial, Environmental Enterprises Assistance Fund, Sustainable Development, Inc., the IFC and the MIF), advanced sector know-how, and local and foreign capital. US$5 million in grant funding from the GEF was approved for the higher than normal project review and biodiversity screening costs, the costs of an advisory board, and monitoring and evaluation activities.
Forest management and conservation provide a number of public benefits that tend to be partially "free" for the common good, regardless of who has paid for them. As such, it is difficult to convince the private sector to invest in forests reserved to provide principally public goods. In addition, the general lack of long-term credit, market inefficiency and weak financial retail capacity in Latin America all impede investment in conserving intact forests. However, certain financial mechanisms, such as user fees and venture capital funds explored in this paper, can be used creatively to generate financial resources for such an important goal. Investing in the forest sector to ensure continued biodiversity conservation can be both profitable and competitive with other sectors and worthy of the effort.
The interest to invest and the demand for financing largely depend on expected profitability. It is important to make it clearly understood how forestry sector operations can be made profitable and competitive with other sectors. The purpose is not to create new direct subsidies for lower interest rates and other softer financing terms. Neither is the goal to establish expectations of lower profitability requirements for new direct subsidies for forestry investments but directing the financing to areas with high levels of private and socioeconomic profitability. Because of the strong role of positive externalities, which are present in many forest investments, there is a need to broaden the view of profitability assessment beyond the traditional financial measures.
The key measures to induce private sector investments in forestry are related to reducing barriers caused by inadequate policy frameworks or operational constraints concerning markets, information on production potential, participation of stakeholders, etc. National policies and legislation need to provide an internationally competitive business environment. Secure land tenure is fundamental, but reducing unnecessary regulations and bureaucracy (licenses and permits), and tax reforms, are also important issues in many countries of the region. However, a conducive business environment does not mean laissez-faire. Adequate forest management standards need to be in place and enforced to ensure sustainability.
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1 Senior Natural Resource Specialist, Environment Division, Inter-American Development Bank (IDB), 1300 New York Avenue, N.W. Washington, D.C. 20577. USA. [email protected] Website: www.iadb.org/sds/env