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Dr. Kevin Grace

Dr. Kevin Grace is the Forestry Services Division Manager of SGS
Malaysia, Kuala Lumpur, Malaysia, a position he has been handling
since 1996. His main tasks are the management of forestry division
regarding auditing and certification of forest management practices,
provision of consulting to develop quality forest management systems,
meeting certification requirements, and the conduct of assessment of
forest management for QUALIFOR programme of SGS and evaluate
the chain of custody to verify movement of certified forest products

from forest to consumer. Dr. Grace obtained his Ph.D. in
Agroforestry/Forest Ecology from the University of Hawaii in 1995;
Master of Science major in wildlife/range management from Sul Ross
State University, Alpine Texas in 1983; and Bachelor of Science major
in Forestry Wildlife and Biology from Stephen F Austin State University,
Nacogdoches, Texas.


Certification of forest management has developed through consumer demand to ensure that purchased timber originates from well managed forests or plantations based on internationally recognized standards for sustained yield and maintenance of environmental and social benefits. As of 31 August 2000 there is now slightly over 18 million ha of forest area certified under the FSC system in 33 countries. Approximately 11.5 million ha is from plantation or semi-natural forest areas. Only 128,000 ha of forest and plantations combined have been certified in SE Asia. Certification for forest management is based on independent evaluation of the documentation and field operations against an accepted standard for forest management such as the FSC Principles and Criteria. FSC contains 10 basic broadly defined principles of forest management that can be applicable to all types of forests. The last principle under the FSC focuses on plantations. Process of certification for small holders tend to be through a Group Certification that allows for a large number of small scale landowners to participate as one management unit under a recognised organisation. Group Certification provides an economy of scale to small landholders to reduce certification costs to individual land units. SGS (M) Certification Support Programme (CSP) is an auditing programme to enable a forest management organisation to develop and implement their own management system under an agreed schedule that fulfils the requirements of relevant international (FSC, ISO 14001), and national standards. The CSP provides market incentives through a Certificate of Origin System to enable the market to obtain material for forest areas participating in the programme based on the agreed schedule for development and implementation.


It is well known that forests throughout the world have been poorly managed by both governments and private companies, which has resulted in significant depletion of forest resources. There is significant amount of recorded information indicating continual reduction in the area of forests and the poor quality of existing areas that have been previously logged. Some examples include:

Certification of forest management has developed through consumer demand to ensure that purchased timber originates from well managed forests or plantations based on internationally recognized standards for sustained yield and maintenance of environmental and social benefits. Consumers in many countries are demanding evidence that the products they buy do not damage the environment. An increasing number of retailers in Europe, North America and Asia are committed to phasing out wood and paper products which do not come from independently certified well-managed forests or plantations. Therefore, increasing concern about deforestation and poor management of forests and plantations throughout the world has focused consumer interest on verifying that the raw material used to produce wood and paper products originate from recognized certified sources.

The Forest Stewardship Council (FSC) was set up in 1993 to establish international standards for forest management certification, consisting of `Principles and Criteria for Forest Management'. These concern the environmental, social and economic impacts of forest management. The FSC also evaluates, accredits and monitors forest certification organisations, which are authorized to certify in accordance with its Principles and Criteria. The FSC is supported by the main environmental organizations such as WWF, Greanpeace, Friends of the Earth, etc as the best means to verify good forest management. Independent certification to FSC standards provides credibility to genuine claims that wood products come from well-managed forests. The SGS Forestry QUALIFOR Programme holds FSC accreditation for forest management and product certification along with 6 other organisations throughout the world.

Certified Forests under FSC :

As of 31 August 2000 there is now slightly over 18 million ha of forest area certified in 33 countries. Approximately 11.5 million ha is from plantation or semi-natural forest areas. Only 128,000 ha of forest and plantations combined have been certified in SE Asia.

Forest Management Certification

Certification for forest management is based on independent evaluation of the documentation and field operations against an accepted standard for forest management such as the FSC Principles and Criteria. FSC contains 10 basic broadly defined principles of forest management that can be applicable to all types of forests. The last principle under the FSC focuses on plantations.


Plantations shall be planned and managed in accordance with Principles and Criteria 1 - 9, and Principle 10 and its Criteria. While plantations can provide an array of social and economic benefits, and can contribute to satisfying the world's needs for forest products, they should complement the management of, reduce pressures on, and promote the restoration and conservation of natural forests.

10.1 The management objectives of the plantation, including natural forest conservation and restoration objectives, shall be explicitly stated in the management plan, and clearly demonstrated in the implementation of the plan.

10.2 The design and layout of plantations should promote the protection, restoration and conservation of natural forests, and not increase pressures on natural forests. Wildlife corridors, streamside zones and a mosaic of stands of different ages and rotation periods, shall be used in the layout of the plantation, consistent with the scale of the operation. The scale and layout of plantation blocks shall be consistent with the patterns of forest stands found within the natural landscape.

10.3 Diversity in the composition of plantations is preferred, so as to enhance economic, ecological and social stability. Such diversity may include the size and spatial distribution of management units within the landscape, number and genetic composition of species, age classes and structures.

10.4 The selection of species for planting shall be based on their overall suitability for the site and their appropriateness to the management objectives. In order to enhance the conservation of biological diversity, native species are preferred over exotic species in the establishment of plantations and the restoration of degraded ecosystems. Exotic species, which shall be used only when their performance is greater than that of native species, shall be carefully monitored to detect unusual mortality, disease, or insect outbreaks and adverse ecological impacts.

10.5 A proportion of the overall forest management area, appropriate to the scale of the plantation and to be determined in regional standards, shall be managed so as to restore the site to a natural forest cover.

10.6 Measures shall be taken to maintain or improve soil structure, fertility, and biological activity. The techniques and rate of harvesting, road and trail construction and maintenance, and the choice of species shall not result in long term soil degradation or adverse impacts on water quality, quantity or substantial deviation from stream course drainage patterns.

10.7 Measures shall be taken to prevent and minimize outbreaks of pests, diseases, fire and invasive plant introductions. Integrated pest management shall form an essential part of the management plan, with primary reliance on prevention and biological control methods rather than chemical pesticides and fertilizers. Plantation management should make every effort to move away from chemical pesticides and fertilizers, including their use in nurseries. The use of chemicals is also covered in Criteria 6.6 and 6.7.

10.8 Appropriate to the scale and diversity of the operation, monitoring of plantations shall include regular assessment of potential on-site and off-site ecological and social impacts, (e.g. natural regeneration, effects on water resources and soil fertility, and impacts on local welfare and social well-being), in addition to those elements addressed in principles 8, 6 and 4. No species should be planted on a large scale until local trials and/or experience have shown that they are ecologically well- adapted to the site, are not invasive, and do not have significant negative ecological impacts on other ecosystems. Special attention will be paid to social issues of land acquisition for plantations, especially the protection of local rights of ownership, use or access.

10.9 Plantations established in areas converted from natural forests after November 1994 normally shall not qualify for certification. Certification may be allowed in circumstances where sufficient evidence is submitted to the certification body that the manager/owner is not responsible directly or indirectly of such conversion.

Process of Forest Management Certification:

1) Application to Certification body for intent to proceed with certification process.

2) Pre-Assessment by Certification body, (optional by FSC)

3) Verification of compliance to non-conformance identified at the pre-assessment to proceed with main assessment

4) FSC system requires stakeholder review prior to main assessment

5) Main Assessment by Certification body.

6) Issuance of Certificate - based on adequate compliance to standard and peer review

Group Certification

Process of certification for small holders tends to be through a Group Certification that allows for a large number of small scale landowners to participate as one management unit under a recognised organisation. Group Certification provides an economy of scale to small landholders to reduce certification costs to individual land units.

The Group Certification and Resource Manager Programme requires that small-scale producers join together under an umbrella organisation or Group Management. The Group Management may be:

The elements of the Group Certification Program, which all need to be addressed by the Group Management are:

1. Management responsibility

2. Group management system

3. Membership of the group

4. Monitoring of group members

5. Document control

6. Identification and Traceability of Products

SGS - Certification Support Programme (CSP)

Many forest concessionaires and plantation companies in developing countries want to work towards certification but do not understand how to develop a management system to meet the standards. In addition, the certification process is considered a major cost without benefits until the organisation actually receives a certificate.

The objective of the SGS (M) Certification Support Programme (CSP) is to provide both:

The CSP will serve to assist organisations in their efforts to meet the requirements of FSC Principles and Criteria (and if requested ISO 14001). The CSP consists of three (3) stages

Stage 1: Initial evaluation

Involves evaluation of environmental aspects of the organization relative to the requirements of the standard and assessment of the existing documentation and forest management practices. The main purpose is to identify the significant environmental aspects of the organization and the "gaps" or deficiencies in terms of management systems that need to be fulfilled against the requirements of FSC (ISO 14001). This will include a report describing all the key elements that need to be addressed to comply with the requirements for all standards. Approximate time frame one month.

Pre-Audit Activities

Prior to the commencement of the initial evaluation, the assessment team will conduct a desk study to clarify their understanding of the current management system and the Forest Management Unit (FMU) to be assessed relevant to the requirements of all standards.

Audit Activities

The on-site assessment will consist of a systematic examination of documentation and management practices relating to the entire range of operations carried out in the FMU to determine the extent of compliance to each standard. The assessments will attempt to be both specific to each of the components of the standards and holistic in terms of the overall management capability of the organization.

The assessment will begin with an opening meeting to clarify the context, objectives, methodology and itinerary of the assessment. The assessment will consist of two main sections:

1. Document review, which involves a thorough examination of the FMU's documentation relating to central control of its operations.

2. Field visits to each actively managed area within the FMU which will involve :

The on-site assessment will end with a closing meeting to present the overall compliance with each standard, focusing on an identification of the main issues and weaknesses.

Post-Audit Activities

Following the assessments, assessors will meet to review and confirm all elements. The final activity will consist of the preparation of a final report and Audit Statement. Following the fieldwork the assessment team will prepare a full report detailing the results of the assessment based on the requirements of each standard. The report will include a list of objectives and targets and tentative schedule for stages 2-3.

For organizations that want to attain both FSC and ISO 14001 standards, the report will also include the basic "framework" design of how the current management system and documents could be utilized in development of an environmental management system.

Stage 2: Development of management system

Development of the forest / environmental management system will be based on an auditing programme of training on understanding requirements and auditing of documents. Training provided to staff on the understanding of the relevant certification standards and requirements. This is to ensure all relevant staff and other personnel are fully prepared to design, develop and implement the system. Training can also be provided to staff on techniques of establishing a system of documentation and control to meet the ISO 14001 standard if required.

The organization's staff and consultants will prepare all required forest management plans and operational documents. For ISO 14001 standard the organization would provide for development of the environmental management system that includes: preparation and drafting of an environmental manual, documentation of existing forest management plans, procedures and work instructions etc.

SGS Malaysia will provide a review of all relevant documents to evaluate compliance to the standards as well as provide Audit Statements for reporting progress on development of the initial and final drafts of the documentation system based on agreed schedule. Approximate time frame 4-12 months.

Stage 3: Implementation, and Review

This stage involves the implementation of the system (i.e. to put the system into actual practice). The implementation will be monitored and reviewed through a programme of auditing to identify and eliminate any "gaps" or deficiencies in the management system. SGS Malaysia would audit the review of the management system based on audit results and corrective actions. SGS Malaysia would provide Audit Statements for each implementation audit. Approximate time frame 3-6 months.

For ISO 14001 environmental management systems, this will include training for all relevant personnel on the practical aspect of the quality system and procedures so far prepared. Specific skills training will be given to potential internal system auditors.

Product Certification - Chain of Custody - Certification of Origin

Certification of Origin is based on a formal system to track processed material to the forest of origin. The main objective is to ensure that the products manufactured use material from forest that are deemed to be certified as "Well Managed" or in the process of developing a certifiable system as in the Certification Support Programme. Certification of Origin starts at the forest and goes through the manufacturing and export to consumers.

The Chain of Custody used by SGS involves assessment of wood processing companies and timber exporters to verify their system of identification and traceability of material to ensure the timber reaching the consumer is derived from forest areas which have been certified under FSC. Certificate of Origin System has the same requirements to track material traded by organizations participating in the SGS (M) Certification Support Programme.


Certification of forest and plantations is growing under the FSC system. Product certification under the FSC is a powerful marketing tool to provide incentives for forest and plantation management systems through independent evaluation of practices against internationally accepted standards. Costs of certification for smallholder management units, which are prevalent in the Philippines, can be reduced significantly through a Group Certification process where a large number of small units can be certified under a single group management organization.

Certification of Origin provides for verification that the material used in production does in fact originate from forests that have been certified or are actively moving towards certification. Use of Certification of Origin systems used under FSC system can provide for labeling of manufactured products that can be identified by the retailer and consumer. The system of certification of origin can also be used to ensure that the material used is harvested legally and is either from a certified Well-Managed Forest or under a structured programme such as the SGS CSP to attain certification in the near future.



Dr. Alastair Fraser

Dr. Alastair Fraser is the Director of LTS International Ltd, an
independent forestry consulting company based in Edinburgh,
Scotland which he founded in 1973, focusing on sustainable
forest management and conservation issues from 1973 up to
present. He has recently completed an 8-year period Programme
Coordinator, DFID funded Tropical Forest Management Programme
in Indonesia. This program included policy advice at the national
level, field testing of sustainable forest management for production
and conservation forests in 4 provinces, research, and training.
Presently, Dr. Fraser works for the Asian Development Bank
as a consultant.


Over the past three decades, most countries in the region have been exploiting their forests, and those fortunate enough to have had extensive areas of forest have been able to convert their forest capital into more liquid assets. Very little of the capital realised from logging forests has been ploughed back into the resource base to maintain its productivity and protect it. Most of the finance generated from forest exploitation has been invested in other sectors and has contributed towards the rapid economic growth of the region. This is a perfectly legitimate strategy to adopt, provided the funds generated are used more efficiently than they could be by re-investing them in the forest. Some countries have unfortunately wasted much of their forest capital, both by inefficient exploitation and by using the capital for consumption rather than for investment. However, that is another story, but the consequence is that the forest capital has now been reduced in many countries to a point where the interest that it provides, in the form of volume growth is insufficient to maintain the current levels of demand.

Continued economic growth in the region will certainly increase the demand for forest products if the less developed countries follow the pattern of the developed countries, where per capita consumption of forest products is two or three times higher than in most of the producer countries in the region.

In order to realise the hoped for economic growth and meet the needs of future generations, which will be more numerous than the present, it will be necessary to have a resource base capable of sustaining higher levels of output than the present. Forest plantations produce much larger volumes of a single wood species than the natural forests, in most climatic regions, because the growth in natural forest includes many non-commercial species, and much of it is recycled within the ecosystem.

Plantations are therefore seen as an important component of the forestry sector in many countries, both as a means of reducing the pressure on the natural forests that remain and to increase the resource base for producing wood to meet anticipated growth in demand. This will require that the flow of capital between the forest and the rest of the economy is reversed, or at least changed so that adequate capital is retained in the forestry sector to meet the need for capital for plantation establishment.

Banks and Financial institutions are in the business of managing capital flows and investments, and so clearly have a central role to play in facilitating the provision of capital for plantation establishment. The Asian development Bank has the additional developmental role, and so looks beyond purely commercial considerations to consider the social and economic benefits that investment can bring.

1. ADB experience with financing timber plantations.

During the last decade, the Asian Development Bank has committed loan finance for three projects for industrial forest plantations, totalling US$ 69.5 million, in Indonesia, the Philippines and Laos. Experience with these projects has been mixed, with some successes and some disappointments. However, even where performance has been below expectations, lessons have been learnt that we can apply in the future.


In 1991 a Loan was approved for the Industrial Forest Plantation (Sector) Project, amounting to US$ 25 million, to which US$ 16.1 million would be added by local investors, giving an expected total investment of US$ 41.1 million to establish 30,000 ha. of industrial plantations. This investment represented an average of US$1,370 per ha., which was expected to yield a Financial Internal Rate of Return (FIRR) of 10.8 -12.6%, according to the species mix actually used and the growth rates achieved. Implementation began in March 1992, and the project was closed in January 1998.

The project was executed by the Land Bank of the Philippines (LBP), to whom the ADB lent the funds, and the LBP in turn re-lent funds to investors wishing to establish industrial plantations that met criteria established by the LBP and the Department of Environment and Natural Resources (DENR).

The Completion report for the Project records that only US$ 13.223 million was actually disbursed, to which the local investors added US$ 6.618 million, giving a total investment of US$ 19.841 million. However, a total of only 6,100 ha. of plantations were actually established, which represents an actual establishment cost of US$ 3250 per ha.. Much of this additional cost was attributed to the cost of settling disputes over the land for the plantations. The additional costs were partially offset by the yields from those plantations actually established, being about 25% higher than that assumed at the time of appraisal, averaging about 20 m3 /ha. compared with the assumed yields of 16m3/ha. This additional yield was insufficient to offset the higher establishment costs and the FIRR actually achieved was only about 6%, or about a half of that expected.

The rationale for the project was provided by the consequences of the alarming rate of deforestation between 1960 and 1990 and the growth in population and living standards over the same period, that had finally created awareness in government that the remaining areas of natural forest could no longer sustain the existing wood processing industry or meet even domestic demand for forest products. The establishment of plantations was seen as the only way to reduce the rate of destruction of the fast dwindling natural forest while maintaining an adequate supply of timber for domestic consumption.

The Project supported one component of a three-pronged approach to the restoration of forest cover and the creation of a resource for the wood processing industry. The other two components, also supported with loans from the Bank were the establishment of small woodlots, and reforestation of denuded lands in upland areas, both carried out by local communities.

The disappointing performance of the industrial plantation project was attributed to a number of problems that will be summarised here and discussed in more detail in later sections where lessons are drawn from the experience.

The government's policy at the time was to try to rehabilitate logged natural forest, by allowing only selective logging, and to convert highly degraded natural forest and bare land to forest plantations, to become the primary source of wood raw material for the future. It consequently introduced a new tenurial instrument called the Industrial Forest Plantation Management Agreement (IFMA). These would apply to areas of between 10 and 20,000 ha., and would include a mixture of residual forest and bare land to be managed according to the policy referred to above. The IFMAs were to be awarded through competitive bidding and would require a performance bond to be deposited. For the companies that were expected to bid for the IFMAs, an important incentive was the access to the natural forest for the logs that could be harvested until such time as the plantations were ready for harvesting.

As mentioned above the FIRR for the plantations was not commercially attractive, and so the need for access to concessionary finance was considered important to provide the additional incentive to establish the plantations. One of the major reasons for the low FIRR of the plantations was the very low price of logs for both sawmilling and pulping. The prevailing price of saw logs and pulp logs was US$34 and US$16 respectively delivered to the mill, which are very low by international or even regional standards, and reflect the very high level of illegal logging that was prevalent, and also the monopoly position of the only buyer of pulp logs. However, despite the concessionary finance only five companies submitted applications for loans, and one of these later dropped out without planting any.

A second major reason for the poor performance was disputes over rights to the land within the IFMAs. These covered both the cleared land, where the local communities that had cleared the forest claimed it as their land, and the forest where local indigenous communities claimed rights to the land and NGOs that wanted to protect the forest for environmental reasons. Three of the borrowers under the project, managed to resolve these conflicts on their area, by negotiation and the offer of employment and a share of the proceeds, and these were the areas successfully planted.

Other reasons given relate to the procedures for selection of borrowers and processing and administering loans, but these are mainly related to the commercial attractiveness of investing in plantations even with the concessionary finance, which seems to have been the key issue, and will be discussed in more detail in later sections.


In 1994 a Loan was provided to the Lao Peoples Democratic Republic for a seven year Industrial Tree Plantation Project amounting to US$ 11.2 million, to which an additional US$ 2.8 million was expected from the government and the private sector. The project was expected to fund the establishment of 9,000 ha. of industrial plantations, together with a pilot block of smallholder plantations, and the upgrading of access roads. The estimated costs of establishing the plantations were expected to be around US$ 688 per ha. for the industrial plantations, and US$ 422 for the smallholder plantations.

The appraisal of the project estimated the FIRR for the industrial plantations to be 13% and for the smallholder plantations to be 17%. These are higher than those of the Philippines, mainly because of the much lower estimated establishment costs, as the prevailing log price, at US$ 17 per m3, were similar to those in the Philippines. It was expected that much of the early production would be exported to a pulpmill in Thailand, but there were also prospects for a pulpmill to be constructed in Laos.

The Bank of Laos was Executing Agency for the industrial plantation component and relent the funds to the Agricultural Promotion Bank, which in turn provided loans to private companies and smallholder farmers. The other components of the project were implemented by the Department of Forestry.

By late 2000 over 8,000 ha. of plantations had been established, and some of the plantations had reached the harvesting stage. Despite some problems with the credit management systems of the Agricultural Promotion Bank, that were eventually overcome by additional training and capacity building, the participation of both farmers and private sector commercial companies was considered good. Some of the private companies involved in the project established other plantations on their own initiative elsewhere.

The rationale for the project was the importance of the forestry sector to the economy of Laos, which had developed because two major neighbouring countries (Thailand and Vietnam) had become wood deficit countries, and were importing increasing amounts of timber products from Laos. The high level of logging, combined with forest clearance and fires had reduced forest cover by about 30% since 1960, and this was reducing the sustainable level of production for the future.


The Bank approved a loan amounting to US$ 33.3 million in 1990 for a Timber Plantation project to establish about 51,000 ha. of plantations on unproductive scrubland and grassland. The project costs included an additional US$ 20 million to be provided by the borrower giving a gross cost of around US$ 1,000 per ha. The EIRR of the plantations was estimated to be 18% at the time of project appraisal.

The project was executed by three State Owned Enterprises, each operating in a separate geographical region. These Enterprises are semi-commercial, but their activities are mainly confined to operating logging concessions, selling the production to private sector timber processors. Being state owned, and under the supervision of the Ministry of Forestry, they can be directed to carry out government policies, such as plantation establishment, that private sector companies are unwilling to undertake.

The completion report for the project shows that a net area of 26,920 ha of plantations were established, after allowing for the loss of about 7,200 ha. due to fire, poor maintenance and disease. The total projects cost actually incurred, was US$ 28.7, of which US$ 17.3 was loan financed from the Bank, and the balance from the borrower's funds. Thus, the actual gross establishment costs per ha. were very close to that estimated at appraisal. The log prices used in the financial appraisal were US$ 24 per m3 for sawlogs and US$ 16 per m3 for pulpwood, very similar to those in the other two countries.

The main reason given for the shortfall in area planted compared with the original plans was difficulties over acquiring land, despite the fact that the project was being implemented by government agencies. One of the planned project areas was rendered unusable by the construction of an irrigation dam, planned by another government agency, and other areas became the subject of disputes with local communities, resulting in a very fragmented distribution of planted areas. This made them difficult to protect, and contributed to the fire and maintenance problems. There were also problems associated with the choice of species, which contributed to the failure of some of the plantations, and raised doubts about the eventual use of the final products.

At the time of the project implementation, the wood processing industry in Indonesia was primarily manufacturing plywood and sawn timber, but the species selected for this end-use (Paraserianthes falcataria) proved to be an unsuitable choice for the sites available. Consequently, the main species planted were mainly suitable for pulp. Subsequently, a huge investment was made in pulp capacity by the private sector that was intended to be based on plantation grown raw material. However, none of the plantations established by the project were in the provinces where the pulpmills were eventually constructed. Two of the project plantation sites were in a neighbouring Province to one of the new mills, but the distance between them is more than 1,000 km, making transport expensive and reducing the residual price at the plantation.

As in the Philippines and Laos, the rationale for the project was in response to the rapid loss of forest cover throughout Indonesia, and the importance of maintaining a raw material supply for the wood processing industry, which was, and still is important to the national economy. There was also social and environmental justification, in terms of the need to create employment in rural areas and rehabilitate the vast areas of unproductive scrubland and grasslands.

The project completion report estimated the FIRR at 11%, compared with the 14% at the time of appraisal. This is better than the cost of the funds under the concessionary rate of interest, but would not be enough to make the plantations a commercially attractive proposition, especially with the current high cost of finance. As with the other two projects, the very low price for the final product is the main reason for the low returns.

Table 1 gives a summary of the funds committed and actually disbursed for the three industrial plantation projects with target and actual planting areas and forecasts and actual financial rates of return. It shows that the local contribution of funds was a lower proportion of the planned amount than the ADB's, and that the area actually planted was a smaller proportion of the target than the funding; that is the average cost per unit area was higher than estimated.

Table 1: Funds committed and actually disbursed for three industrial plantation projects with target and actual planting areas and forecast and actual financial rates of return (figures in brackets in the lower half of the table are the percentage of the committed funds and targets, actually disbursed and achieved)






ADB Loan committed (US$mil.)





Local funds committed (US$mil.)





Total Investment committed (US$mil.)





Target planted area (ha.)





FIRR at appraisal (%)





ADB Loan disbursed (US$mil.)









Local funds disbursed (US$mil.)









Total funds disbursed (US$mil.)









Area planted (ha.)









Actual FIRR





* estimate only based on review mission as project not yet completed,

2. Commercial and social welfare functions of forest plantations.

The three projects were all established principally to provide raw material for existing commercial wood processing industries, but all three depended on funds at below market rates of interest to be implemented. Although the returns from the projects were better than the cost of the funds at the concessionary rates, they were still below the prevailing cost of funds for a commercial investment. These low returns are due to the low price of the plantation-grown wood. Put another way, the cost of plantation wood will be very high if the plantations are established as a commercial enterprise using normal commercial funds. With the establishment costs actually incurred and the yields actually achieved with the three projects, the wood would have to be sold at about US$ 83 per m3 in the Philippines, US$ 28 per m3 in Laos and US$ 37 per m3 in Indonesia in order to achieve a commercially viable return.

This is almost certainly the main reason why the private sector has not made significant investments in plantations in any of the countries, although under management of a commercial investor, costs could almost certainly be greatly reduced and yields increased. In Laos, only a modest increase in yields would be needed to be able to grow wood at a commercially acceptable cost with private funds, and similarly in Indonesia with yields currently achieved in some well-managed plantations on appropriate sites.

A recurring factor in the three projects has been problems with land. Conflicts over the use of land for the plantations either led to the failure to complete the targets for areas to be planted, or to increased costs due to the time spent negotiating, and as in the Philippines the need to compensate the local communities in some way. In countries where land titles do not exist, and where the government claims the right to administer the land, but local communities claim rights of use or ownership based on either traditions or de facto occupation, there are bound to be disputes. It is probably significant that the model used in Laos, with smallholder plantations, where the farmers either owned the land, or their rights to the land were implicitly recognised, was successful in achieving the targets and did not suffer from land disputes.

The evaluation of all three projects had EIRRs substantially higher than the FIRRs because of the additional economic benefits arising from them. Some of these benefits are social in terms both of direct employment in the establishment, maintenance and harvesting of the plantations, and indirect employment in the transport and processing of the produce and servicing the industry. In Asian countries, this employment will be particularly important in the future for raising living standards for rural populations. If plantations are established on unproductive or unutilized land, the economic benefits are greatest, because the employment created is additional, compared with plantations on land currently used for some other purpose, where it is merely substituting one form of employment for another.

The fact that there were conflicts over land implies that the local communities valued the land, because either they were using it, or they had some expectation of using it in the future. Some of the Indonesian plantations were not subject to land dispute, because the land was already degraded and had been abandoned, and had no economic value for any other purpose.

None of the projects described has yet reached the stage where harvesting and marketing the produce has become an issue, but already there are signs that this will present additional problems. Although all three countries have well established wood processing industries, or in the case of Laos, neighbouring countries do, this is no guarantee that the produce will find a market, since the potential buyers of the wood have no direct interest in the plantations; that is they have not invested their own funds. The principal product from the plantations will be small roundwood, at least in the initial stages, and apart from the possibility of a modest local market for poles and firewood, the main market must be the pulp industry. The Philippines and Indonesia both have a pulp industry, and there is a pulpmill in Thailand that is a potential purchaser of pulpwood from Laos, but the growers will have to negotiate prices and delivery contracts with these industries. The low prices prevailing for pulpwood have already been referred to, and this reflects the fact that the mills are to a large extent in a monopolistic position and have access to illegally felled timber. This puts the plantation growers in a weak position, and particularly the smallholders, who will need to organise themselves, if they are to negotiate a fair price.

The rationale for each of the projects was the need to do something about the rapid loss of forest cover, and the growing demand for timber, and plantations were seen as a rational solution to these problems. They would utilise degraded land, produce industrial raw material, employ people and help to prevent further deterioration of the environment resulting from deforestation. In principle this is a sound argument but as the description of the outcome of the projects has shown, it is, unfortunately not as simple as that. The points about product prices, land tenure and land-use, and marketing the products are not raised as an argument against plantations, but to draw attention to the particular problems that exist in many countries in the region that will make plantations a difficult solution to implement for these pressing problems.

3. Assessing the financial and economic returns

The three projects described were assessed to be able to produce financial returns better than the cost of financing under the concessionary rates, but less than that needed to provide a commercially attractive return. Achieving a commercial return on an investment in forest plantations, as indicated earlier would require a substantially higher price for the end product than those prevailing at the present time in most Asian countries. The low prices for logs reflects the fact that the supply side is more or less unconstrained, and has expanded in line with demand as a consequence of the forest clearance and illegal logging.

This creates a dilemma, since creating plantations will further increase the supply and tend to hold prices down, but if prices remain low, the plantations will need to be subsidized to make them commercially attractive. Until the supply of logs from forest clearance and illegal logging can be constrained, the financial returns from plantations will generally be insufficient to attract normal commercial investment.

The project showed that the economic returns from plantations are higher than the financial returns, but these estimates did not take account of the economic costs of continued deforestation and degradation resulting from illegal logging. Studies in Indonesia (Fraser and Whiteman 1997) showed that the environmental cost of deforestation when account is taken of its impact on flood patterns and erosion and the effect that these have on agriculture, and especially infrastructure such as power and irrigation dams could be several times greater than the immediate benefits derived from logging.

There is thus a good case for subsidising plantations in many countries, but unless it is combined with serious efforts to manage the remaining natural forests sustainably and deal with the illegal logging, the cost of such subsidies will be very high and may not be the most efficient use of resources. Thus plantations are not an answer on their own to the problems facing the forests of Asia, but can be an important supplement to efforts to do something about the management of the region's natural forests.

4. The normal role of Financial and Banking Institutions

Commercial Banks have a number of instruments for providing finance for investments such as plantations, but they will charge market determined rates of interest, which are largely determined by the returns that can be achieved in other sectors such as industry, construction or commerce. Forest plantations with a relatively long payback period and a high level of risk are generally unattractive to commercial banks but a few banks have provided loans. Details of such loans are not readily available, but factors that are likely to be important are:

A project that scored well in an assessment of the above factors, i.e. low risk, a guaranteed market for the produce, a sound promoter and a short payback period, would attract funds at a lower rate than one with the opposite characteristics and therefore scored badly.

In view of the generally low returns from forest plantations in most countries in the region, for the reasons discussed earlier attracting commercial finance is likely to be difficult without some additional subsidies. Some countries have successfully promoted plantation development by using grants or tax rebates or other fiscal measures to pay for the social benefits that the plantations provide, so that the return to a commercial investor becomes attractive. Thus, the government shares the investment cost in return for the social benefits, and the investor receives a fair return on his share of the investment from the sale or use of the produce. It may be cheaper for government to have people employed on a plantation project than to provide a social safety net or to pay for the adverse effects of unemployment in crime and civil unrest. It may also be cheaper to contribute towards the reforestation of denuded land, than pay for the consequences of erosion and flooding.

These economic questions are for governments to decide, but banks and financial institutions can help in assessing the commercial viability of plantation projects and in determining the level of social support that results in the most efficient use of both the government's and the investor's contribution. The ADB, having a development role, as well as a financing role can help governments in the same way, and in the right circumstances can assist with meeting the government's share of such a joint funding exercise, when the government's current resources are inadequate.

What is needed is for governments to address the issues raised on forest protection, illegal logging and land-tenure, so that sound investment opportunities can be developed that will attract commercial funds.

5. The justification for timber plantations as a special case.

Much has already been said about the social benefits that forest plantations could provide, and there is the additional potential benefit that forest plantations are among the best ways of sequestering atmospheric carbon. Even where the plantations are to grow wood for pulp, the trend towards recycling paper extends the period for which the carbon is locked up. The same provisos apply to attracting carbon offset payments as for attracting other types of funding; that is low risk and a high guarantee of achieving the growth rate forecast, since that determines the amount of carbon that is sequestered.

It is now widely appreciated that the forests throughout much of South East Asia in particular are under serious threat, and if left entirely to market forces, the price of wood will continue to remain low for some time to come, making investment in plantations unattractive without very high subsidies. The time is not far off when the remaining forest capital will be so reduced that supply shortages in several countries will start to push prices up. While there seems to be no immediate threat of a global shortage, importing from other parts of the world will be both more costly, less secure in times of crisis and the types of wood being different will require investment in different processing technologies.

The estimates above, based on the Laos and Indonesian projects suggest that a doubling in wood prices would make plantations as attractive as, say oil palm or rubber. Without some intervention, the remaining natural forests in the producer countries will have more or less disappeared by that time. For the environmental, conservation, biodiversity and spiritual values that forests have, it cannot be left to the market, and some concerted action by governments, with assistance of banks and financial institutions, private investors and above all the forest products industry are urgently called for.


Fraser, A.I. and A. Whiteman, 1997, The contribution of the forestry sector to National income. Indonesia-UK Tropical Forest Management Programme Report No SMAT/EC/97/1

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