CHALLENGE: A Global Imbalance in Forest Investments

The forest community recognizes that the private sector has a role to play in financing sustainable forest management (SFM). There is a considerable gap between the US$70-160 billion that SFM needs each year, and official development assistance to forestry, which only covers about 1 percent of the estimated total financing need.

Despite the private sector’s importance to forests, information on private forest financing remains scarce and inadequate. Data on private forest financing is not systematically reported in either global or regional databases and the quality remains inconsistent. The information that is available, however, points to an uneven distribution of forest investment across regions and countries.

Total private sector plantation investments in developing countries are estimated at US$1,763 million in 2011 (excluding REDD). Latin America accounts for a vast majority of annual investments, with US$1,464 million or 83% of the global total amount. Investments in Asia and Oceania are estimated at US$279 million or 16% of the global total, while private investments in plantation forests in Africa are estimated at US$20 million, or just 1% of total value.  Although Latin America draws the most private forest investment, it is unevenly allocated—Brazil accounts for more than 80% of the regional total.

There is a similar trend of regional imbalance in the estimated 66 million hectares of commercial, production-oriented forest plantations in developing countries, about one third of which are privately owned. Privately-owned plantations are spread over 18.7 million hectares in Latin America and comprise 78% of total commercial-production plantations. In contrast, there are only 5.1 million hectares of commercial plantations in Asia and Oceania and 0.3 million hectares in Africa.

APPROACH

Some countries are struggling to access private forest financing. What factors cause private forest investment to flow to certain countries, and not others? What can countries do to unlock more opportunities?

When assessing potential investments, forest investors compare expected returns and risks. Tree growing conditions, access to markets, growth potential, physical and institutional infrastructure, and the business environment -- including political and economic stability and security of land tenure -- are major determinants of investment flows. The main barriers to financing private investments in SFM in developing countries include high, real and perceived risks such as those related to land tenure; weak availability of both domestic and foreign equity and loan financing; unfavorable terms for financing; and finally, high up-front costs of preparing investment projects in the forestry sector.

To attract more forest investment, the government can take steps to make the investment environment better -- by improving policy and legislation, governance, transparency and infrastructure.  There are also many ways for the public sector to facilitate long-term investments in sustainable wood production. These include strengthening the information base on forest resources and finance, recording and publishing information on domestic investments and improving access to private financing.

FINDINGS

This report makes a number of recommendations to unlock private financing opportunities. These actions include:

Strengthening land tenure systems.

• Policy and legal reforms clarifying the role of the private sector, creating a policy framework for private sector investment in forestry and processing, and active investment promotion with targeted incentive schemes.
• Reducing investment risks, both real and perceived, through guarantees, public-private partnerships, and innovative financing (fund) schemes as well as through provision of information.
• Improving access to financing, for example, by developing new financial instruments favoring long-term investments.
• Collecting and improving access to information around the availability of suitable land for investments, growth and yield, growing conditions in general, risks, and others.
• Improving forest sector governance and transparency.
• Improving transport and other infrastructure.
• Supporting research and development to increase productivity.
• Helping to organize smallholders and communities so that they can enjoy economies of scale, become more eligible for accessing finance, and gain negotiating power.

The publication of this report is forthcoming. Please visit our website or visit our Twitter and Facebook accounts for updates.