CHALLENGE

In the forestry sector, small and medium-scale enterprises (SMEs) are often considered a vehicle for development, jobs, and poverty alleviation among forest-dependent households. SMEs are thought to constitute 80–90 percent of enterprises in the forest sector, with an estimated over 40 million people employed (either part-time or full-time) through such enterprises. SMEs also primarily service the domestic markets for wood and non-wood products—markets that in many regions of the world are growing in tandem with the growing middle class.

Despite widespread support for SMEs, the success of such enterprises in the forest sector has been mixed. Forest sector SMEs, like SMEs more generally, suffer from limited access to business and financial services, lack of support to enhance their competitiveness, regulatory measures that constrain their ability to operate in a "legal" space or that create perverse incentives, and limited access to markets. These and other challenges and constraints for SMEs have been widely identified, but recommendations and efforts to address them have been fragmented and are often sectorally bounded, limiting the effectiveness of the intervention.

APPROACH

This programmatic activity proposes to adopt a “sector-neutral" approach to determine how to create jobs and growth in a sustainable manner. The step-wise approach involves first examining if forestry can contribute to a broader national sustainable development agenda compared to other sectors, especially when sustainability (including life cycle analysis) is considered. This is followed by examining if, where, and how SMEs can be part of the forestry contribution to the development objective. Where SMEs are well positioned to contribute to sustainable development agenda, the activity will provide guidance on how to enhance their competitiveness and to develop the needed regulatory, financial, and technical environment. Accordingly, such an approach starts with understanding the optimal uses of timber and non-timber products, given national and subnational development objectives, followed by assessing which subsectors of SMEs could be competitive in and how to help them accomplish this.

The long-term development objective of the proposed programmatic activity is to create market and policy environments that support competitive SMEs in the forest sector that are sustainable and contribute to job creation and growth. The long-term development objective is to increase the client’s ability to generate jobs, promote climate resilience and environmental sustainability, and fuel domestic growth through competitive SMEs. This programmatic activity will involve working with colleagues from the Finance and Markets Global Practice and from the Trade and Competitiveness Global Practice.

The work will be done under with three pillars. The first pillar will involve a high-level analysis of issues and experiences and documentation of methodologies. The aim is to bring together the evidence and justification for adopting the approach (compared with the more common approach of identifying how to make SMEs competitive independent of the trends and changes emerging in the subsector). The second pillar will involve in-depth analyses in a small set of countries. The third pillar will focus on knowledge sharing and uptake throughout the activity. The second phase will involve to roll out the approach. The second phase will have four pillars.

Pillar 1: Analysis of issues and experiences and methods  

This pillar will capture existing knowledge from:

• Prior applications of the proposed approach in the forest sector
• Cases in which competitive forest SMEs have helped create sustainable jobs and growth
• Evidence of how financial and technical services are delivered to SMEs in the forest sector and lessons learned from effective efforts (this will involve drawing on experiences from rural finance initiatives and activities in the trade and competitiveness field)
• Approaches for assessing the impact of regulations, and enhancing competitiveness.

Pillar 2: Country level analysis of demand, supply and business environment

This pillar will conduct country level analysis in 3 countries. The analysis will involve the application of tailored approaches and tools identified in pillar 1. The country level work will analyze if, where and how forest sector SMEs can contribute to the national sustainable development agenda, carry out demand, supply and business environment analysis , and propose concrete actions for enhancing the competitiveness of SMES by lifting regulatory constraints, and improving access to financial services, technical support and markets .

Pillar 3: Capture and broadcast in a targeted manner the knowledge on opportunities to engage with SMEs.

This pillar will involve:

• Augmenting existing briefs and infographics on the extent of forest sector SMEs in countries and information on their role in meeting the demand for wood and non-wood products/services in domestic markets and any information on the employment and job creation;
• Bringing together the work that PROFOR and partners have supported on investing in locally controlled forests, opportunities for investing in SMEs, and Forest Connect and making it more user friendly way for Bank TTLs (working in partnership with LLI); and
• Bringing together the findings and tools developed in the other pillars into user friendly outputs and working with systems available through LLI for dissemination

A fourth pillar may be added to this activity in the coming year. This pillar would focus on enhancing the link between SMEs/community enterprises and job creation in the natural resource sector. This would entail three activities: a stocktaking on which demographic segment benefits from forest-sector SME employment and job opportunities; an assessment of the skill development needs for rural enterprises plus cost-effective models for meeting these needs as part of broader initiatives on young people and job creation; and ideas on how to increase opportunities for young people to engage in innovation in rural areas and forest-based enterprises (examples of applying models used in developing and developed countries). An alternative approach will be to fold these activities into the existing three pillars.

RESULTS

Global/knowledge work: The background note on small and medium forest enterprises (SMFEs) presents trends and key findings. The key findings include evidence on the levels of informality in SMFEs (in the 22 countries that account for the majority share of wood production, using the latest Bank enterprise survey information), ranging from 1 to 52 percent. The findings also include evidence on trends in different subsectors of forestry. By way of illustration, in the subsector of wood processing, SMEs provide the most significant share of formal employment.

For wood processing, the employment impact per unit (m³) wood products is higher in countries with low industrialized processing industries. Thus, with advancing technology, the expected impact is reduced employment. In Eastern Asia (Japan, Republic Korea and China), for example, industrialization of the forestry sector is taking place, triggered by strong demand for wood processing; in these, reduced employment through SMEs in forest sector could decline. The growing demand, however, could compensate for losses in employment due to technology. There currently is no analysis that has determined how much increased demand can buffer the impact of technology.

Some lessons learned from the cases examined in the global study include the following: 

• Value chain development programs are effective when they are designed to address several bottlenecks in the value chain simultaneously.
• Smallholders are willing to invest in tree planting—even for relatively long rotations of teak—provided they receive initial financial and technical support. 
• The role of the lead company is key to facilitate financial and technical support and open access to the market for smallholders who will invest in tree planting.
• A few key reasons for the establishment and funding of the incubation model to support SMEs:
• Incubation helps overcome market failures through strategic and planned access to information, workspace, services, technology, finance.
• It extends government role in providing public good –knowledge, research, infrastructure, innovation.
• The incubation models generally (not forestry-specific) have 80-plus percent success; other methods of small business development have a 35 percent success rate on entrepreneurs evaluated 3 years after incubation process.

Vietnam country diagnostic: Some of the initial findings from the work to date: In 2017, Vietnam’s export value of major forestry products was US$7.97 billion (increasing 9.2% year-on-year). In Vietnam, wooden products have a higher growth rate in terms of export share than the national average (though it is lower than the average world trade growth rate). 

The Vietnamese government has promoted increased recognition of land tenure (a common institutional barrier in Vietnam) for households involved in the linkage model. The wood products export is recognized to be of strategic importance. Through models such as that of Ikea and Scancia in Vietnam, 564 smallholders organized in groups and managing plantations totaling circa 1,700 hectares were enabled to participate in export market value chains and improve their overall competitiveness.

This activity indirectly influenced the design of the Ghana FIP project focused on private sector. The SMFE project informed the design of the $7 million loan component of $20 million Ghana FIP additional financing, which would support private sector involvement in forest plantation development. It contributed to the adoption of public-private partnership approach to manage the loan fund. Under the envisaged design, a competitively selected regulated financial institution will manage the loan fund, making long-term loans to small and medium-scale plantation enterprises (SMPEs); the Forest Commission will provide technical assistance to the SMPEs, monitor technical performance of the plantations, and ensure that the timber buyers pay any outstanding loan funds to the financial institution before they pay the SMPEs; and the Ministry of Land and Natural Resources will provide overall management of the project. The change that resulted by being able to bring the expertise from FCI to the Ghana project resulted in a shift from the original approach—a loan being managed by the line ministry—to a more mainstream approach.

This activity is ongoing.