8. Managing the Risks of Community-based Processing: Lessons from two Community-based Sawmills in Nepal

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8. Managing the Risks of Community-based Processing: Lessons from two Community-based Sawmills in Nepal




The development of community owned and operated sawmills is often proposed as a way for local communities to increase their returns from harvesting community forests. However, sawmills represent significant investments that, if they do not succeed, can create a substantial burden for local communities.

This paper examines the experiences of the Chaubas and Shree Chhap sawmills in the Kabhre and Sindhu districts of Nepal. These sawmills were established to process timber originating from community forest plantations. The plantations have been established by community forest user groups with assistance from a series of Nepal Australia forestry projects since the 1970s.

The experiences of the Chaubas and Shree Chhap sawmills illustrate some key factors that should be considered when planning and implementing such investments. These include financial and economic returns of alternatives, risks associated with the investments, community business skills, market access and the policy environment. The lessons learned from these experiences are presented in the form of a checklist of issues that could be used in the planning of future community sawmill investments.


This paper draws on the experience of two community owned sawmills in the Kabhre and Sindhu districts of Nepal, east of the Kathmandu valley. The sawmills were established as community owned operations to add value to logs produced from community owned plantations.

There are currently around 20,000 ha of community owned plantations in these two districts of Nepal. They were established by local communities with the support of a series of Nepal Australia forestry projects. Australian support commenced in the 1960s and developed into a number of projects dating from the 1970s that emphasized reforestation of degraded land, forest protection, and establishing community forest user groups (CFUGs). The final project, the Nepal Australia Community Resource Management and Livelihoods Project (NACRMLP), has recently been completed, bringing an end to more than 35 years of assistance in this area. The experience of Nepal with community forestry, and particularly activities in these two regions, has made a vital contribution to the development of approaches to community forestry around the world.

The establishment of the plantations has delivered both landscape changes leading to environmental benefits, as well as providing a source of income for very poor communities. Local communities have benefited through increased availability of wood and non wood forest products. However, Collett et al. (1996) note that more complicated value added processing can place a strain on CFUGs.

While utilization of the community forests in the project districts is still in its early stages, a baseline survey conducted by the NACRMLP in 2003 illustrated the importance of logs and timber products in income generation by CFUGs. Over the five years to 2002/03, the sale of logs and sawn timber accounted for 45% of the total income of NRs. 5.8 million (i.e. $US 35,900 of a total income of US$ 79,800) generated by the CFUGs that were included in the survey (Table 1).

Table 1: Sources of CFUG income (proportion of total income)










Visitor Fees

Annual levy






























































Source: NACRMLP (2003a)

Most of the plantations were established between the early 1980s and the early 1990s and are now 15–25 years old. They consist mostly of pine (Pinus roxburgii or P. patula). The need for thinning of the plantations, together with the desire to produce income after years of investment in plantation establishment, protection and management, led to the idea of community owned sawmills.

Development of the sawmills

Following feasibility investigations (Jackson, et al. 1995; Ladley 1995), the Chaubas sawmill was established in 1996 in Kabhre district. It was jointly owned by four CFUGs (Chapani Kuwa, Faga Khola, Dharapani Hile and Rachhama). Another CFUG sold logs to the mill but was not an owner. Operation of the sawmill was managed by a committee of representatives from the CFUGs that owned the sawmill. The sawmill management committee employed a number of managers over its life, including individuals from outside of the local community and the region.

The establishment of the sawmill was supported by a loan from the Nepal Australia forestry project, as well as funds from the participating CFUGs. The mill subsequently was upgraded from a 24” to a 36” band saw with funds raised by the CFUGs themselves through the sale of logs.

The Chaubas sawmill has a capacity to process around 150 ft3 (approximately 4 m3) of round logs per day based on an 8-hour day. Operation of the mill is limited to a maximum of around eight months because of limitations imposed by the wet season, meaning that its annual capacity (based on a single shift) is around 25,000 ft3 ( approximately 710 m3) per annum or a sawn timber output of around 10–12,000 ft3 (approximately 285-340 m3) per annum. Logging generally occurs over four months in the dry season.

The Chaubas sawmill was initially established with a view to producing sawn timber for local sale and to create a revolving fund for community development activities. However, it was soon realized that local demand was not sufficient to consume the quantity of timber produced, and that sales to outside markets would be required.

The Shree Chhap sawmill was established in 2002 by a single CFUG (Shree Chhap Deurali CFUG), which utilized its own funds to build the mill. A manager was employed to run the day-to-day operations of the mill.

Production capacity of the Shree Chhap sawmill is similar to that of the Chaubas sawmill. The investment funds for the sawmill were generated from the sale of logs. Some assistance was also provided from the Nepal Australia forestry project in the form of training and associated capital expenses. The decision to invest in a sawmill followed a tour by CFUG members of sawmilling operations in the western areas of Nepal. However, no detailed feasibility study or business plan was completed prior to investment in the mill. The sawmill processed its own logs as well as logs from nearby CFUGs.

Both sawmills generally produced as large a dimension timber (flitches) as was possible from the small logs they were utilizing. This sawing strategy was consistent with the available markets for the timber produced and the simplicity of the sawmills.

Performance of the sawmills

The major motivation for both sawmills was the desire to generate income for the local communities from direct employment in harvesting, transport and milling of the plantation resources. Another important motivation was the reinvestment of profits from the sawmill operations into community development activities according to the collective wishes of the people. However, as illustrated in Table 2, the financial performance of the sawmills proved to be variable and generally did not live up to expectations.

Table 2: Financial performance of the Chaubas and Shree Chhap sawmills (‘000 NRs.)

  1996 1997 1998 1999 2000 2001 2002 2003 2004
Caubas sawmill
Timber 192 1,503 1,788 449 1,207 77 790 856  
Other 42 1 1 1 1 6 0 0  
Total income 234 1,504 1,789 449 1,208 83 791 856  
Logs   777 620 520 534 109 477 193  
Other 223 816 883 373 642 254 570 406  
Total costs 223 1,593 1,503 892 1,176 363 1,047 599  
Net profit/loss 11 -88 286 -443 32 -280 -256 257  
Net Profit/loss (US$) 150 -1,196 3,864 -5,989 427 -3,781 -3,458 3,470  
Shree Chhap sawmill
Timber   389 15 13
Other   263   2
Total income   652 15 15
Logs   185 19  
Other   85 44 39
Total costs   270 63 39
Net profit/loss   382 -48 -24
Net profit/loss (US$)   -5,159 -650 -320

Source: NACRMLP (2005), exchange rate US$ 1 = NRs. 74, costs for Shree Chhap include costs of running CFUG.

The Chaubas sawmill made a profit in four of the eight years for which data were available, but over this time made a cumulative loss. The Shree Chhap sawmill made a sizeable profit in the first year, followed by two years of losses as the volume processed dropped, but had a cumulative net profit over three years. A large contribution to the profit in its first year of operation was from sawing logs on behalf of CFUGs other than the sawmill owner. However, the CFUGs supplying logs suffered large losses since there was difficulty in selling much of the sawn timber produced, and thus returns were much lower than expected. Consequently, at least two of the CFUGs decided the sawmill should not process their logs in subsequent years; rather, they would sell logs only.

The longer term viability of either sawmill is unclear. The Chaubas sawmill continues to operate as a community owned sawmill but is considering alternatives that might provide better returns. Options being considered by the Chaubas sawmill management committee include potential management by a private sector contractor as well as future sale of the sawmill. The Shree Chhap sawmill has recently been taken over by a consortium of private owners. As a mill owned by only a single CFUG, it appears that it was easier for it to make the decision to have private operators take over the sawmill, particularly as the sawmill had been largely inactive since its first year of operation.

Factors influencing financial performance of the sawmills

An overriding factor that reduced the ability of both sawmills to operate effectively was the uncertain security environment caused by Maoist rebels operating in each district. In general this disrupted the ability to buy and sell logs and to sell timber (access markets). Notwithstanding this situation, a number of other factors contributed to the financial performances of both sawmills being lower than expected. These included:

The management committees responsible for both sawmills appear to have suffered from insufficient focus on financial outcomes, and did not adequately respond to factors that adversely impacted on profitability. However, it appears that other external factors outweighed management capacity as the key reason behind relatively poor financial performance by the sawmills.

Comparisons with log sales

Because the profit performance of the sawmills has not met expectations, the relative value of the next best alternative, the sale of logs, was examined by the NACRMLP. In both districts private log buyers were active and generally purchased logs at the roadside or on the stump. It should be noted that the security situation in both regions generally curtailed these activities.

The relative attractiveness of log sales versus sawn timber was conducted though analysis of the residual value of each operation. In purely financial terms, that point along the production chain at which the greatest net value can be realized by the forest owner is the point at which the product should be sold. Thus the CFUG could sell stumpage (i.e. the standing tree), logs at roadside, logs delivered to a sawmill or sawn timber depending on how much profit they want to make and how much they want to invest and extend their activities (i.e. take on risk). The product value along the production chain increases, but so also do the production costs and related risks.

Table 3 provides the data for such an analysis. The residual value estimated for sawn timber production is based on operational costs of a community sawmill, while that for log sales is based on typical prices received from sales to agents acting on behalf of sawmills from Kathmandu and surrounding areas. The analysis shows that log sales are likely to provide a greater return to forest growers than sawn timber from a community sawmill assuming 50% recovery.

Table 3: Indicative residual value analysis for log sales and community sawmilling


Sawn timber NRs. Per ft3

Sawn timber values converted to NRs. Per ft3 log volume

Logs NRs. per ft3


Price of sawn timber at roadside


(US$ 95 per m3)


(US$ 48 per m3)

Assume 50% recovery

Transport cost of sawn timber from sawmill to roadside


(US$ 12 per m3)


(US$ 6 per m5)

Ex mill door value per ft3 sawn


(US$ 84 per m3)


(US$ 42 per m3)

Sawmill processing cost (NRs. Per ft3 log vol)

50 (US$ 24 per m3)


(US$ 12 per m3)

Log value perft3 in the mill yard


(US$ 30 per m3)

Transport of logs from roadside to mill yard per ft3 log vol.


(US$ 7 per m3)


(US$ 33 per m3)

Col. 4 gives value of logs for sale at forest roadside to a private buyer

Harvesting costs (logs stacked at forest roadside) per ft3


(US$ 14 per m3)


(US$ 14 per m3)

Residual log value/ft3


(US$ 8 per m3)


(US$ 19 per m3)

Stumpage (value of standing tree)

Source: NACRMLP (2005); dollar per m3 equivalent is shown in brackets.

This residual value analysis suggests that the sawmills from Kathmandu and surrounding areas buying logs at roadside can afford to pay more than community based sawmills. The former have economies of scale and are also sawing higher quality logs from sal (Shorea robusta) and native chir pine (Pinus roxburghii). In addition, they have more sawmilling experience and lower marketing costs than the community sawmills.

Whether or not the poor returns to forest owners can be offset by additional local employment and income generated by community sawmills is not easy to determine, but the history of the sawmills suggests not. Residual price analysis suggests that communities would need to value the additional benefits of local employment at NRs. 22.5 per ft3 (NRs. 794 or US$ 11 per m3) of logs processed to offset stumpage differences. Based on an input of 10,000 ft3, the sawmill would need to employ labour to the value of NRs. 225,000 (US$ 3,040). For an average rural wage of NRs. 70 per day (US$ 1), this equates to around 3,200 working days. If the sawmill worked for half the year, it would have to employ around 18 people, which is considerably more than are actually employed. The Chaubas sawmill at full production only employed around 10 people (four laborers, four machine operators, one guard and one manager). Log harvesting and transport actually employs more, particularly poor people, further reinforcing the attractiveness of selling logs, compared to sawmilling.

Risk associated with alternative activities is another factor to consider. An activity providing lower returns may be more attractive if it is also associated with lower risk. The capital required for a sawmill suggests there is considerably more risk borne by communities making such investments than those involved in log sales only. Furthermore, while there is considerable risk of not being able to sell stocks of sawn timber if there is a market down-turn, trees can be left to grow without deteriorating when demand falls off.


Despite the financial performance of the sawmills not meeting expectations, the local communities have learnt much from their construction and operation, particularly the importance of marketing and business planning. The sawmills also provide valuable lessons for other community forestry sawmilling operations. The major lessons arising from the experience of the Chaubas and Shree Chhap sawmills are:

Many of these lessons are well known and would not be new to those involved in assisting the development of community owned enterprises. However, there is a risk that the assessment of such investments is sometimes undertaken on a one dimensional basis, i.e. only a single option is considered based on an already formed view of what the investment should entail. In this case, there is a real danger that the feasibility analysis unconsciously sets out to confirm preconceived ideas and does not adequately examine alternatives or relevant risks. This tends to go hand in hand with unrealistically raising the expectations of communities, which then makes it difficult to make decisions not to proceed. These decisions become even harder once investments have been made.

The costs and difficulties associated with changing investments and the potential adverse impacts of failed projects on poor communities emphasize the importance of a thorough feasibility assessment. Such assessments should involve local communities as well as independent advice from experienced operators in local markets. While this may add to the time and costs of investment, it would appear worthwhile to fully understand the risks and alternatives. The following checklist (Table 3) has been prepared to assist those considering community sawmill investments.

Table 3: Checklist for community sawmill investment analysis

Component Key issues Approach
Feasibility analysis
  • Clarify goals of forest management and sawmill enterprises
  • Estimate costs for each component of the sawmill operation including log price, harvesting and transport costs, processing cost, and marketing costs
  • Estimate returns based on identified markets, product specifications, customers and prices
  • Where possible base estimates on actual cost information from other operations
  • Involve people with direct experience in local markets and sawmill operations
  • Ensure communities understand the opportunities and constraints of forest based enterprises, and involve them in preparing and analyzing the estimates
Alternative investment options
  • Conduct value chain analyses of alternatives to sawmilling – sale of logs (at roadside or stumpage) and other processing options (where applicable)
  • Use actual market prices in the analysis
  • Ensure communities understand the relative risks and returns associated with alternative options
Risk analysis
  • Quantify risk along the production chain
  • Detail specific actions to mitigate risks
  • Ensure communities understand risk and develop approaches to its management
  • Quantify risk analysis in feasibility assessment
Business planning
  • Prepare a business plan prior to making any investment
  • Continually review the business plan to deal with changing circumstances
  • Use local commercial sawmill operators in training and development of community business skills
Management skills
  • Ensure that management arrangements are clearly articulated and agreed by the community
  • Examine alternative management and ownership structures for the investment e.g. joint ventures, contract management of sawmill
  • Use local commercial sawmill operators to provide management training
Marketing skills
  • Clearly articulate arrangements and responsibilities for marketing of products including quantity, customers and prices
  • Identify costs associated with marketing of sawn timber
  • Where possible base estimates on prevailing market values
  • Understand the costs and services provided by middlemen
Policy environment
  • Identify any government requirements for approvals associated with sawn timber production and marketing
  • Assess the impact of approval processes on the cost of operations
  • Identify potential policy changes that could impact on the sawmill business
  • Include formal and informal costs
Management structures
  • Ensure there are clear lines of responsibility and accountability for financial performance
  • Provide regular monitoring and evaluation of financial outcomes
  • Ensure consideration of alternative management options such as contracting out management to private sector operators


Collett, G., R. Chhetri, W.J. Jackson and K.R. Shepherd, (1996), Nepal Australia Community Forestry Project Socio-Economic Impact Study, Technical Note No. 1/96, ANUTECH Pty Ltd, Canberra, Australia

NACRMLP, 2005. Nepal Australian Community Resource Management and Livelihoods Project, Milestone 5, Facilitating Timber Marketing and Enterprise Development to Generate Income for Poor Communities in Nepal, AusAID, Canberra, Australia.

NACRMLP, 2003. Nepal Australia Community Resource Management and Livelihoods Project, Milestone 7, Baseline Survey Sindhu Palchok and Kabhre Palanchok, AusAID, Canberra, Australia.

Jackson, W., 1995. A Feasibility Study for Timber Processing by Forest User Groups in the Middle Hills of Nepal, Nepal-Australia Community Forestry Project, Kathmandu, Nepal.

Ladley, J., 1995. Opportunities for Income Generation from Pine Plantations in Kahhre Palanchok and Sindhu Palchok, Nepal-Australia Community Forestry Project, Kathmandu, Nepal.

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