Forest Concessions in the Brazilian Amazon The Sleeping Giant of Timberland Investment Opportunities
Steve Gretzinger
Timber Invest Europe - London October 9, 2013
Objectives
Recognize the Brazilian Amazon as an investment opportunity
Understand the role forest concessions play in Brazil
Spark interest in the Itaituba forest concession areas
The Brazilian Amazon as an investment opportunity
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Why invest in forestry in Latin America? Better conditions than Africa or Asia Pacific
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World’s 6th largest economy
Domestic market w/ internal consumption of US$ 1.1 trillion
Growing investment rate between 18-20% of GDP with goal to continue increasing fixed capital investment
Clean and abundant renewable energy
(65% hydro / 8.4% biomass)
True, free democratic system with little threat of terrorism
Why invest in Brazil? Political & economic stability
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Why invest in the Northern Amazon? Governmental priority
Largest area of Amazon forest
Manaus Duty Free Zone in Amazonas
Major Ports – Belem / Miramar – Outeiros / Santarem / Vila do Conde with planned expansion
Cheap river transport- Jamaxim and Tapajós linked to roads
Roads- BR 163 and BR 230 (partly paved)
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10% of the world’s total forest cover: 463 million ha
308 million ha public forest
Commercial volumes:
20-30 m3/ha/yr
Deforestation rate dropped by 84% from 2004-2012
Why invest in the Brazilian natural forests? Huge source of raw material
Why invest in Brazil’s Amazonian forests? Concessions are small, yet key, part in government strategy
Source: Brazilian Forestry, 2013
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Why invest in Brazil’s Amazonian wood products? Large & robust…particularly in Para State
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Why invest in Brazil’s Amazonian wood products? Diversity of healthy markets from local to foreign
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Why invest in Amazonian wood products? Diversity of products with room to grow
The role of forest concessions in the Brazilian Amazon
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What is a forest concession? Not business as usual
Long term rights & responsibilities granted to carefully chosen private sector partner
Not simply a harvest license (as is used on small private holdings)
Federal (although there are state concessions)
Industrial not community (although community operations exist)
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What can be harvested in a forest concession? Wood, wood and more wood
No title to land (its public) but long term exclusive use rights
No access to genetic resources
No commercialization of H20
Minerals excluded
No commercial use of native wildlife
CO2 belongs to government
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Why does the government want concessions? Pragmatic conservation and economic development
Active management keeps forest standing (complementary to protection)
Formal job creation in underserved areas (training, medical, benefits)
Develop infrastructure
Maintain public goods: water / biodiversity / CO2
Finance monitoring & control functions
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Why did SFB come to IFC? Logical partnership…provide a business perspective
Need for reform
IFC as a partner with a track record
o Brazil
o Forestry
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What will IFC accomplish? A realistic and workable concession system
• Minimum bid price based on complete cost structure, site specific costs, and financial model that incorporates all costs
• Accurate representation of what an investor will get
• Pragmatic delineation of concession units that reduces potential conflicts and is operationally logical
• Improvements in process and reduction of overlaps
• No public misinformation and rapid response to issues (if any)
• All leading to a functional concession that accomplishes the complementary objectives of investors and government
Itaituba I & II: Forest concession opportunity
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Concession design Logical pricing
KEY CONCEPTUAL POINT
The government has the right to require of a concessionaire whatever it wants since the forest is a public resource…
But the costs of complying with such requirements must be incorporated into the price paid for the concession…
Amazonian forestry requires investment under harsh conditions that the government must respect and account for in its system
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Concession design What is the timber resource?
Inventory
o Contracted to 3rd party
o Independently reviewed
Which species?
What is commercial?
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Concession design What threatens the timber resource?
Land tenure and overlapping rights
Actual land use
What people are planning to do
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Concession
design What threatens the
timber resource?
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Concession design How to manage the timber
resource?
Size of concession varies with goals
o > 1 small (< 40,000 ha)
o various medium (40-80,000 ha)
o various large (> 80,000)
Cutting cycle dictated by law (20-30 years)
Allowable volume of 20-30 m3/ha
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Concession design How to access the timber resource?
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Concession design Transparent and fair bidding system
Evaluation criteria- environmental impact, social impact, log production efficiency, local processing
Requirements of bidder
Registered Brazilian entity
No environmental crimes or social debts
Audited financials
Technical team in place
No more than 2 winning bids per process
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Concession design Transparent and fair bidding
system
Guarantees- To ensure compliance
Bid bond (US$1 x hectare)
Performance bond (60% of reference value =
Bid price ($/m3) x
Annual harvest area (ha) x
Harvestable volume (m3/ha)
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Concession design Logical pricing
Global review- Virtually no clear methodologies for determining price
Discounted cash flow vs.
Stumpage vs.
Multivariate Analysis
Concession preparation costs (document actuals & not arbitrary)
Taxes- production & profits
Payment schedule - staggered
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National record public forests
Annual Plan of Forest
Concessions
Management Plan for
Conservation Units
Public consultation cycle
Consultation with
CGFLOP
Publication of
preliminary bid docs
Public Consultation
Publication of final version of
bidding documents
Preliminary
visits
Workshops Sectorial Meetings
Technical qualification
Proposal Evaluation
Contract signing
Drafting of the Sustainable
Forestry Management Plan
Pre Bidding Stage - Phase I
Includes all stages up to publication of
final version of bidding documents
Evaluation and Signing Stage
- Phase II
Execution Stage - Phase III Includes drafting of management plan and
monitoring activities
All steps to sign a forestry
concession contract
Concession design Streamlining process
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Itaituba I & II Why here and not there?
Scale: 300,000 ha within 600,000 ha conservation unit
Public acceptance of land use as part of matrix
Wood manufacturing culture
Multi-species = multi products = portfolio diversification
No major outlay in land purchase (nor restrictions on foreign capital)
Exit strategies due to increase in interest by Brazilian pension funds
Government has a coherent strategy for the Amazon
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Thank you for your attention!
For more information:
Mahomed Bashir: [email protected]
Steve Gretzinger: [email protected]