Role of Different Investors in Forestry and Wood Processing in Africa Financial, Strategic, Local, Global, Private or Public? DANA African Timberland and Wood Processing Investment Conference Durban; 2 September 2015 Petri Lehtonen, Senior Partner, Indufor Oy 2 September 2015
Indufor and Timberland Investments Indufor was founded in 1980 Independent staff owned Advisory services in forest and forest industry development Private and public sector clients Located in: Helsinki, Finland Auckland, New Zealand Melbourne, Australia Washington DC, USA 2
Indufor in Africa Due diligence and valuations Feasibility studies Sustainability assessments Strategic advice in forest and wood processing investments High level reviews of government strategies Development of private forestry Recent projects in: Cameroon Congo, DRC Ethiopia Ghana Kenya Liberia Mozambique South Africa Tanzania Uganda Zambia Mauritius Cape Verde 3
Contents 1. Why Africa is Interesting? 2. Lessons Learned from the Past 3. Role of Different Investors 4. Cases of Interesting Development 5. Take-home Messages 4
Rationale to Invest in Africa in Forest Plantations and Wood Processing Demand of forest products fuel wood and other woody biomass for energy, construction materials, pulp wood, other fibre products and ecosystem services is inevitably growing due to local, regional and global drivers. There are potential and suitable areas for forest plantations that do not threaten food security, biodiversity or availability of water. Overall economic and social situation is getting better in a number of African countries, despite the unrest, conflicts and development challenges. 5
Is it Possible to Mitigate the Risks and Achieve the Expected Returns? When forest plantations are developed according to the best technical, social and environmental practises with financial discipline Investments can be profitable allowing value added development of downstream processing Local stakeholders benefit significantly - addressing the key risks related to social issues Or is it so? Are the risks still too high for financial investors? How about strategic investors? What about the role governments and development financing institutions? 6
Africa has Significant Area and Huge Population The working age population will be the highest in the world in a few decades 7
More conflicts and Social Unrest? Not in all countries apparently there is more stability in Sub-Saharan Africa Countries not too prone to recent conflicts: Ghana, Ethiopia, Uganda, Zambia, Tanzania, Mozambique, 8
Economic Growth Continue to be Significant in Africa 2011-2015 Mature markets GDP Growth (%/a) USA 2.2 Germany, France 2.1 France 2.1 Australia 3.2 2011-2015 GDP Growth (%/a) Some African countries Ethiopia 8.1 Mozambique 7.7 Tanzania 7.2 Ghana 7.0 Nigeria 6.8 Several sub-saharan countries are growing faster that mature markets In some countries the growth has been going on over a decade and appear to continue with 6-9%/a 9
GDP Growth is not All that Matters The social wellbeing is improving in many countries over the past 15 years measured by UNDP Human Development Index The greener the colour the more the index has improved over the past 15 years; vice versa with red colour 10
Why Would all These Countries be Interesting? Area of current plantations and GDP growth 11
The Potential Supply of Wood from Existing Plantations and Sustainable Supply of Wood from Natural Forests will not be Enough to Satisfy the Increasing Consumption of Industrial Roundwood even in the Optimistic Scenario Plantation investments and overall development will be fundamental or deforestation will inevitably continue Million m³ 300 250 200 150 100 50 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Supply of plantation wood Demand of industrial roundwood 12
1. Why to Invest in Africa? 2. Lessons Learned from the Past 3. Role of Different Investors 4. Cases of Interesting Development 5. Take-home Messages 13
Africa has a Long History of Forest Plantations with Failures and Successes Total area 5 million ha South Africa Ethiopia Madagascar Ghana Malawi Kenya Tanzania Angola Zimbabwe Swaziland Zambia Congo Mozambique Uganda 1000 ha 0 500 1000 1500 2000 Ghana Angola Tanzania South Africa Madagascar Mozambique 14
Failures Poor management Governments have failed to manage their own plantations many old plantations have deteriorated. Technical errors in the early stages of plantation development. Lack of logistics, processing and markets Location selection has not taken into account cost effective infrastructure and access to markets Neglect of environmental considerations Plantations have been established without consideration of biodiversity conservation and impacts to hydrology Sometimes selected species and regimes have failed Neglect of social aspects Related mainly to land tenure and community involvement Leasehold land - unclear land tenure top down planning Neglect of the rights of local people 15
Successes Outsourcing management Company community partnerships Professional planning and state-of-the-art technologies Governments have recently outsourced management of forest plantation to third parties under lease arrangements and productivity has increased Out grower's / tree farming schemes with varying experiences have involved local communities and private tree growers into forest value chains Tree Growers Associations: organize small- and medium scale tree growers Serious plantation developers apply state-of-the-art planning of the new plantations aiming at high international standards that comply with technical, social & environmental criteria Private investments Such companies as Green Resources, GEF, New Forest Company, Form, Miro and other as well as private companies in South Africa have been pioneering in African timberland investment scene Success stories are still limited, however, there are promising cases. 16
1. Why to Invest in Africa? 2. Lessons Learned from the Past 3. Role of Different Investors 4. Cases of Interesting Development 5. Take-home Messages 17
Investor Typologies Operator Entrepreneurs, communities, smallholders Micro operators SMEs, organized communities and large farmers Strategic investors: Forest industry companies Energy/mining/ agro-industries Financial investors: International/ Regional timberland funds and TIMOs Special cases: family offices, other direct investments e.g. by banks Other: prestige ENGOs: social and environmental objectives Nature of operators Informal, not capable to comply with business reporting nor accessing finance. Often family entrepreneurs, difficulties to expand operations and comply with international standards to obtain financing. Raw material sourcing for industrial production. Mainly largescale but also medium-scale operators - international and local. SMEs might provide a range of services. Raw material sourcing for industrial production. Many new operators, energy companies looking at feedstock. For financial profit, portfolio diversification. Many cases keen on direct involvement e.g. in teak. Long term conservation driven interest, however, want to make positive bottom line. 18
Development Curve of Successful Forest and Forest Industry Based Economics High Frontier Market Emerging Market Developed Growing Market Mature Market Level of economic development No industrial infrastructure Limited existing planted forest assets Unsecure land tenure Limited information Private investments are more important than aid Development driven by agricultural soft commodities and minerals Emerging infrastructure Unsecure land tenure Limited information Driven by private investments Industrial infrastructure in place Export of low value added wood products Developed land tenure still unbalanced landownership with social pressure Decent level of information Lack of internal growth Developed infrastructure and logistics Balance land ownership Nearly perfect information Most African Sub-Saharan countries South East Asian countries Colombia, Paraguay South Africa Brazil, Uruguay USA, Australia, New Zealand, Finland, Sweden Low 19 Copyright 2015 Indufor
Role of Local Entrepreneurs, Governments and Donors Frontier Market Emerging Market Developed Growing Market Mature Market Development financing has important role in improving the infrastructure and governance Tap local investment opportunities Establish associations Role of government, donors and development financing Government can catalyse development with incentives Reduced need for development financing Turning from developer to regulator Key driver of sustainability Role of local entrepreneurs Establish partnerships with strategic investors in technologies and market access Growing position in supply chains Regulator Important players in solid wood product industries 20 Copyright 2015 Indufor
Role of Strategic and Financial Investors Frontier Market Emerging Market Developed Growing Market Mature Market Limited access Possibility to create long term unique position Limited role Few possibilities without strategic investors and industrial infrastructure Role of strategic investors Important role in creating industrial infrastructure Crucial in technology and market development Role of financial investors Opportunities for high risk/returns assuming that strategic investors are entering Need for institutional capital Need to outsource assets Partnerships with other forest owners Increasing opportunities and transactions Entering less mature markets Established presence 21 Copyright 2015 Indufor
What Action are Expected to Accelerate Responsible Investments? DFIs: WB or IFC, AfDB, EIB, Finnfund, FMO, Norfund, etc Financing to compensate the long exit periods and social risks Donors Incentive schemes for local tree growers Governments Innovative policies in leasing land for responsible investors Governments and donors together Policy support, risk sharing, developing infrastructure that facilitate forest investments, or provide complementary financing or guarantees Strategic and financial investors Take seriously the opportunities in Africa and look for local partners 22 Copyright 2015 Indufor
Timberland Returns and Market Efficiency Return/ Risk 15 % Mozambique, Tanzania, Ghana, Liberia, Angola Malaysia, Indonesia, (China) 10% N/NE Brazil, Colombia, Paraguay S/SE Brazil, Uruguay, Chile, South Africa Baltic countries US, Australia, NZ, Nordic countries, UK 3 % Market Efficiency (Information) Emerging markets: Opportunities for higher returns are present but coupled with limited market information as well as country risks Mature markets: Various transactions have allowed for nearly perfect information, and opportunities for exceptional returns have diminished. Return is largely determined by the highest risk/return rates in the target market 23
1. Why to Invest in Africa? 2. Lessons Learned from the Past 3. Roles of Different Investors 4. Cases of Interesting Development 6. Take-home Messages 24
Return Benchmarks in Tanzania, Ghana, Mozambique, and South Africa 18% Financial Internal Rate of Return (real, 2011-2015) 16% 14% 12% 10% 8% 6% 4% 2% 0% Tanzania Teak Tanzania Eucalyptus Ghana Teak Mozambique Eucalyptus South Africa Eucalyptus South Africa Pine 25
South Africa Timberland Historical Returns Government and companies outsourcing plantation assets Opportunities for financial investors Transactions continue 16% 14% 12% 10% 8% 6% 4% 2% 0% Estimated real returns based on observations by Indufor 1990 2000 2001 2010 2011 2014 26
South Africa Key Features Strengths, opportunities + Long tradition with forest plantations + High level know how and technology + Increasing number of transactions + Increasing demand for forest products Weaknesses, threats - No opportunities for plantation expansion, net plantation area decreasing due to environmental regulation - Uncertainty over land reform - High transactions costs due to social liabilities 27
South Africa Future Expectations Key conventional drivers Biological growth: Good growth improved technology Markets: Future prospects on timber market are positive. Land: So far inexpensive; appreciation expected; land reform represent considerable risks. Additional factors Maturity of the market Transactions Availability of investable assets Plantation expansion opportunities Expected real returns Strategic investors have a long history; financial investors recently entered the market Frequent transactions in small assets; some in large assets Large areas still owned by industry; consolidation of small plantation ongoing; opportunities for investors None; plantation area decreasing Currently 5-10%; expected to remain. 28
Mozambique and Tanzania Timberland Historical Returns Only government owned plantations. Strategic investors start prospecting opportunities. 12% 10% 8% 6% 4% 2% Strategic and financial investors enter. Leasehold land with low upfront investments. Estimated real returns based on observations by Indufor Operations improving. Evidence on returns is still limited and vary among players. Good growing conditions and access to markets. 0% 1990 2000 2001 2010 2011 2014 29
Mozambique and Tanzania Key Features Strengths, opportunities + Reasonable productivity and potential for new plantations + Attractive cost-level + Land and degraded forests in need for rehabilitation + Increasing demand for forest products Weaknesses, threats - Political and social risks - Land tenure customary rights - Competing land uses - Poor management skills - Shortage of skilled labour - Low knowledge base to develop plantations low technology 30
Mozambique and Tanzania Future Expectations Key conventional drivers Biological growth: Potential for higher growth with proper management and enhanced technology. Markets: High domestic demand, growing demand from regional markets (Rwanda, Kenya etc.) and Asia. Land: Majority of the land rented; land is cheap but transaction costs are high. Additional factors Maturity of the market Transactions Availability of investable assets Plantation expansion opportunities Expected real returns Frontier market; imperfect information; potential for exceptional opportunities combined with high risks. Very few transactions. Emerging, first investors looking for exit. Exist in large scale; potential for land tenure and social conflicts. Potential for high returns 10%+; risks remain high. 31
Ghana Timberland Historical Returns 13% Only government owned plantations. Strategic investors start prospecting opportunities. Strategic and financial investors enter. Leasehold land with low upfront investments. Estimated real returns based on observations by Indufor Operations improving. Evidence on returns is still limited and vary among players. Good growing conditions and access to markets. 12% 12% 11% 11% 10% 10% 9% 1990 2000 2001 2010 2011 2014 32
Ghana Key Features Strengths, opportunities + High productivity and potential for new plantations + Attractive cost-level + Land and degraded forests in need for rehabilitation + Increasing demand for forest products Weaknesses, threats - Land tenure customary rights - Competing land uses - Poor management skills - Shortage of skilled labour - Low knowledge base to develop plantations low technology 33
Ghana Future Expectations Key conventional drivers Biological growth: Potential for higher growth with proper management and enhanced technology. Markets: High domestic demand, growing demand from regional markets (Nigeria, etc.) and Asia. Land: Majority of the land rented; land is cheap but transaction costs are high. Additional factors Maturity of the market Transactions Availability of investable assets Plantation expansion opportunities Expected real returns Frontier market; imperfect information; potential for exceptional opportunities combined with high risks. Very few transactions. Emerging, first investors looking for exit. Exist in large scale; potential for land tenure and social conflicts. Potential for high returns 10%+; risks remain high. 34
Specific Considerations in Africa All investors are needed to create critical mass - especially for strategic investors as forerunners and governments with DFIs to improve the industrial infrastructure Importance of partnerships with local stakeholders Significant role of development finance institutions to overcome the social risks, poor liquidity, required long time horizon (long exit periods), long turnover of capital and overall short-sightedness 35
Contents 1. Why to Invest in Africa? 2. Lessons Learned from the Past 3. Development of Forest Plantations 4. Cases of Interesting Development 6. Take-home Messages 36
Take-home Messages (1) Growing African economies as well as global fibre shortage megatrend supports investments in forest plantations and development of wood processing industries Forest plantations are seen as an important vehicle to improve living standards and reduce poverty when established together with different partners: communities, smallholders and other local entities Only few strategic and financial investors have entered Africa It is expected that the operating environments are improving Critical mass of plantations and value added processing is gradually being developed Infrastructure is improving 37
Take-home Messages (2) The key question is to manage and mitigate the unique risks Building up right partnerships particularly with local partners Developing business and forest management skills at local level Appropriate technology, scale and logistics in place Diverse market channels access to market Management of social dimension involvement and commitment of the local stakeholders to the forest value chain is a prerequisite to get even started Reported returns vary, however, there is proof of good performance Public sector, donor and development financing community will still have a fundamental role in developing the needed infrastructure. 38
Contact us Indufor Oy, Töölönkatu 11 A FI-00100 Helsinki, Finland Tel. +358 9 684 0110 Email petri.lehtonen@indufor.fi Web www.indufor.fi 39