Traders of Illusions

Julio Cesar Centeno

July 16, 1996

A serious controversy has been raging in The Netherlands, regarding public investments in teak plantations. Several companies are involved, with total sales approaching half a billion dollars. The validity of promises made to investors has been questioned on TV and newspaper reports. The case involves several ministries, an important insurance company in the country, and the World Wide Fund for Nature. The Dutch parliament has questioned several ministers three times on the issue, and the intervention of the Central Bank has been requested. The case has been brought to the attention of HRH Prince Bernhard. Here is an account of the story behind the news.

Introduction
The Dutch public
The species
Growth patterns
Price trends
Conclusions
References

topINTRODUCTION

The green market is in. People want to purchase goods and services proven to be kind to nature, good for the environment, socially responsible. Refrigerators and aerosols friendly to the ozone layer. Agricultural goods from "organic"sources. Cosmetic and medicines from "natural shops".Cars that minimize the emission of harmful gasses into the atmosphere. Wood products from responsibly managed forests.

Consumers are also becoming better informed. Many can perceive the hollow substantiation behind many marketing and policy slogans, and are increasingly demanding genuine commitment to the fundamental principles upon which they are supposed tobe based.

A significant proportion of the consumption of wood products in some European countries has for long been based on the exploitation of forests in the tropics. The destruction of forests in this part of the world has become a major international concern. In an attempt to avoid the historical, political and international dimensions at the root of this problem, some have attempted to blame it on the production of industrial timber intropical countries.

Discriminatory boycotts against tropical timbers have thus been promoted by "responsible" environmental groups in some European countries, under the esoteric assumption that blocking the international trade of tropical timber would save forests in the tropics from destruction. Others have tried to achieve this same goal through the establishment of regulatory mechanisms, meant to discriminate against the use of tropical timbers in public works. In other countries curious agreements have been established between government, industry and environmental groups, to impose discriminatory and unilateral conditionalities to their imports of tropical timber products. All in the name of nature, and the protection of tropical forests.

In The Netherlands this trend has taken peculiar dimensions. The Dutch come second only to the Japanese in per capita consumption of tropical timber. For nearly ten years they have tried to define a coherent policy towards tropical forests and the tropical timber trade. In 1991 the government adopted a policy according to which only tropical timber from "sustainable sources" would be imported, starting in 1995. Despite its discriminatory nature, and its open contradiction with international trade regulations, this policy was reinforced in mid 1993 with the "tropical timber covenant", involving the government, the timber industry, WWF and other NGOs. According to the covenant, only sustainably produced tropical timber would be imported into The Netherlands after 1995.

This unilateral decision was in contradiction with the Year 2000 agreement subscribed by The Netherlands at ITTO, and was paralleled to the introduction of the principle of apartheid in the international trade of timber products. The Netherlands was strongly criticized by tropical countries during the negotiations on forest at the United Nations Conference on Environment and Development [UNCED]. It was also exposing itself to being summoned at GATT [now WTO] for infringing international trade agreements, and for discriminating against developing countries, in addition to possible retaliatory measures by key tropical trading partners. The government decided to withdraw its policy in November of 1994.

The local office of the World Wide Fundfor Nature [WWF-NL] now proposes to reduce in half the national consumption of all timber products, including paper products, within five years [5]. The government, part of industry and an array of NGOs insist that all timber imported into the country, particularly tropical timber, must be certified as coming from "well managed" sources. This is expected to happen "voluntarily" in the immediate future [a couple of years]. Some NGOs dictate that all such certification must necessarily take place through the Forest Stewardship Council. Industry proposes that a seal of approval by the new KEURHOUT FOUNDATION should suffice, to guarantee that timber products sold within the Dutch market come from well managed forests.

Despite the highly unrealistic proposal to reduce national consumption of wood products in half in the immediate future, there is a concern that there may soon be a shortage of "green" timber. One way to overcome this potential problem is the establishment of "well managed",ecologically responsible plantations. In the tropics, of course.

What to plant? Fine timbers, naturally.This is what the Dutch market is accustomed to, after centuries of extraction and trade of the finest timbers from the finest forests on Earth. Among these fine timbers one clearly stands out, for its beauty, strength and durability; for the versatility of its applications; for its dimensional stability under a wide array of environmental conditions; for its natural resistance to weathering and biological attacks; and for its ability to grow well in plantations: Teak.

Although not devoid of risks, Teak plantations also happen to have a good potential to become a profitable business.A pioneer was needed to show the way. And so it happened. A Dutch entrepreneur bought a piece of land in Northern Costa Rica to grow and export flowers to The Netherlands. Soon he discovered nearby a teak plantation, established by a couple of North American adventurers, with a peculiar system to encourage investments from the general public, particularly from American tourists visiting Costa Rica. And so the first new-age teak plantation was established by a Dutch owned company in Costa Rica: Flor y Fauna.

Flor y Fauna soon found two highly convenient partners: a well known and reputable insurance company by the name of OHRA, and the Dutch office of the World Wide Fund for Nature, WWF-NL. The details of how investments in this plantation has been promoted to the Dutch public have already been well documented [1,2,3,4].

Plantation started in 1989. By 1993 the Dutch public had invested over 200 million dollars in 3,000 hectares of plantations. Others soon wanted a share of the pie. And so, under the shade of Flor y Fauna and OHRA, at least ten other Dutch companies started their own teak plantation businesses, most of them in Costa Rica. Oscar Arias, an honest President and Nobel Price winner, who had ruled the country a few years back,had declared the country in "forestry emergency".This decision was prompted by the dramatic and widespread destructionof the countries natural forests in previous years. The new wave was to reforest the land, with national policies strongly encouraging investments in the sector.

topTHE DUTCH PUBLIC

Investment in teak plantation was promoted amongst the general public in The Netherlands through well orchestrated campaigns, which not only highlighted rates of returns on investments from 15% to 25% a year. They also tapped on the sensitivity of the Dutch public to environmental and social concerns. A parallel was made between investments in "green" trees, the creation of wealth and badly needed jobs in poor developing countries, the "reforestation" of the tropics, the "alleviation of pressure" on natural tropical forests, plus the bonus of a pretty good profit.

It all looked too good to be true. In almost all cases, the huge rates of return promised to investors were unfortunately construed on highly unlikely projections on the yield and price of the timber to be produced. The forecasts upon which the success of these forestry projects had been built had little to do with technical knowledge and professional judgement.They had been largely based on speculation. The Dutch public soon became the victim of traders of illusions.

topTHE SPECIES

Teak [Tectona grandis] is a tree original from an area encompassing parts of India, Thailand, Myanmar [Burma] and Laos. It seems to have been introduced to Java in the 14th century. Some scientists consider this part of Indonesia as part of the original range for the species. It has performed well in plantations not only in its South-East Asian original range, but also in other parts of Asia, in Africa and Latin America.

The total area under Teak plantations is today estimated at 3 million hectares. Good growth and high quality is associated to deep and well drained alluvial soils, rich in calcium; an annual precipitation from 1,500 to 2,500 millimeters, and a marked dry season of 3 to 5 months with up to 50 millimetersof rain.

Teak has been cultivated for centuries in the tropics. There are references to plantations established in India in the early 1800s, and in tropical America about 100 years later. Although it is not devoid of silvicultural and management difficulties, it may be fairly said that it is a well known timber species, relatively benign and successful to grow in plantation environments in the tropics.

topGROWTH PATTERNS

The growth and quality of Teak in plantationsis largely dependent on seed provenance, soil conditions, topography and drainage, rainfall, temperature, humidity, and management techniques. Although a wide range of growth patterns have been recorded in different part of the world, they all tend to fall within a well defined range [Figure 1]. Nevertheless, there are many cases of poorly established and managed plantations with growth levels below the low estimate indicated in this figure.

Figure1.gif

The "mean annual increment" is a convenient technical term which could be considered a measure of the productivity of a plantation. It is the average annual growth at a given age. At the age of 20 years, for example, a reasonable estimate for the cumulative amount of timber from a teak plantation, on good soils and under appropriate management, taking into account what has been extracted, could vary from 180 cubic meters per hectare, to 400 M3 per hectare. This is equivalent to a mean annual increment from 9 to 20 M3 per hectare per year, and does not imply that the same growth rates can be applied atother ages of the same plantation. These figures also include non-tradable timber, particularly from the first thinnings. Only under highly exceptional circumstances, isolated figures as high as 22 M3 per hectare per year have been reported or can be inferred from literature references for that age [see Figure 1].

The behavior of Teak in plantation sis rather well defined, and although there is room for variation and experimentation, it is highly speculative to assume that a new plantation will out perform the highest world yield records by 50% to 200%, as has been the case. This is particularly worrisome when there is an absolute lack of credible substantiation of suc hprojections, and when the interest and credibility of the general public is at stake.

One of the teak plantation projects promoted among the general public in The Netherlands, FORESTALES INTERNATIONAL, for example, speculates that its teak plantations can achieve a net growth of 950 cubic meters of tradable timber per hectare in 20 years. This is equivalent to 47.5 M3 per hectare per year as mean annual increment, about three times what should be normally expected [Figure 1].

Another company, GLOBAL GREEN, promotes investments based on the production of 700 to 900 M3 per hectare.The GREEN FUND sells to the public in The Netherlands and Germany, based on a projected yield of 480 M3 per hectare as the product of the final harvest, at the age of 15. This is equivalent to 32 M3 per hectare per year of mean annual increment, or about twice what would be considered good growth at that age. If the necessary intermediate harvests were to be included, the total projected yield would be far higher. No such data was available at the time this paper was prepared.

TROPECO presents a harvesting schedule with a final cut at year 20, and several not clearly defined thinnings in between. Only from the final cut a total of 320 to 460 cubic meters of sawn timber is expected. It is upon these figures that financial returns to investors are projected. This implies that, only from the final cut, the company expects from 640 to 920 M3 in the form of logs. The product from the necessary thinning could duplicate these figures.

TECA VERDE offered returns based on a projected yield of 1,350 M3 per hectare in 20 years. It later introduced a drastic correction to this figure, bringing it down to 436 M3 per hectare. Another company, EURO GREENMIX FUND, projects a more acceptable yield: 388 cubic meters of roundwood per hectare in 20 years. Unfortunately, it also pretends that it will be able to convert these logs into sawn timber without losses, to produce 374 cubic meters of sawn wood per hectare. It is upon this figure that financial returns to investors are based. In actual practice, in the conversion from logs to sawnwood a net loss of 40 to 50 percent is to be expected.

There is only one clear exception to this trend of unsubstantiated and severely inflated growth rates: the AMAZON TEAK FOUNDATION. It operates based on an average yield of 370 M3 per hectare under a 25 year rotation, equivalent to a mean annual increment of 14.8 cubic meters per hectare per year. This is in the middle of what is considered a normal range for teak plantations on good soils and under appropriate management [Figure 1].

The case which has been mainly exposed so far is that of the company FLOR Y FAUNA, now involving the insurance company OHRA and WWF-NL. This exposure was triggered by a special broadcast in one of the most respected television news programs in The Netherlands: NOVA, aired on November 23,1995.

For the plantations established during the first four years [1989 to 1992, under the names Teakwood I to V], according to the corresponding brochures and publicity material, Flor y Fauna assumed it would achieve the production of 1,000 M3 per hectare in 20 years, with a mean annual increment of 50 cubic meters per hectare per year [6]. These projections have never been substantiated. Neither have they been modified. The economic ownership of the trees in most of these plantations was sold to the public under such allegations.

Nevertheless, the controversy has centered on the plantations established in 1993 [Teakwood VI] and subsequent years, due to the fact that they formally involve the insurance company OHRA and WWF-Netherlands. Teakwood VI promotional brochure [7], published jointly by Flor y Fauna and WWF-NL, is based on the production of 933 to 1130 cubic meters of timber per hectare, 85% of which is for investors. This is equivalent to a mean annual increment from 46 to a 56 M3 per hectare per year.

After the critical exposure of this case through the NOVA television broadcast, and the subsequent press coverage, yield projections have been considerably modified. Nevertheless, they remain highly speculative. On November 30, 1995, a few days after the program, OHRA wrote to NOVA that the new expected yields were from 400 to 800 m3/ha over the 20 year cycle, "without doubt", according to their scientists [Figure 2]. The huge magnitude of this range seems to indicate the improvisation and lack of reliability in the projections themselves. It also seems to indicate that it was considered convenient to maintain the upper end of the new range within original projections, while sinking the lower end to less than half of its initial estimate, so that it would touch realistic levels of production [see Figure2].

Figure 2

At a press conference on March 4, 1996, OHRA produced a highly unusual collage of separate paragraphs of a report by an organization in Costa Rica by the name of Centro Cientifico Tropical [CCT]. OHRA calls this collage a "summary" of the report [8]. Strangely enough, the report itself has never been made available, raising doubts about the real nature of its findings. In this highly unusual "summary", CCT seems to estimate that Flor y Fauna's plantations will produce 527 to725 cubic meters of tradable timber per hectare at the age of 20 [at least 12 years in the future]. It is not indicated how this estimate was made, or how it is substantiated. The "summary" does highlight that conclusions are based on data supplied by Flor y Fauna. Nevertheless, the report suggests that a mean annual increment ranging from 26 to 36 M3 per year at the age of 20 is to be expected, far lower than the original estimates by Flory Fauna and OHRA, but still considerably beyond what would be very good growth for a teak plantation at that age [Figure 2].

There would be no concern with these figures if the related investments were solely those of the companies involved. But the "economic ownership" of the trees is sold to the general public, who is normally unaware of the technicalities involved, and who lack the necessary tools to judge the validity of the projections in question. The general public tends to base its decisions on trust and credibility in the organizations encouraging them to make such investments, including the insurance company OHRA and WWF. The Dutch public is thus led to believe in highly speculative projections on growth and price trends,and in consequently inflated rates of return. The impunity with which this has happened is partly due to the remarkable hands-off position taken by government regulatory officials, and the silent complicity of the Dutch forestry profession.

topPRICE TRENDS

The high rates of return promised to investors are not only a consequence of unjustifiably high projections on the yield of timber to be expected, but on equally exaggerated projections on the prices at which such timber could be sold. There are several flaws associated with these figures. One refers to the high base price from which they are projected. Another is the assumption that the base price and its projections apply equally to all the timber to be produced, to the timber from intermediate harvests, as well as from the final cut. Yet another possible flaw refers to the unusually high yearly price increments assumed to take place within the next 20 years, from 5% to 10% a year.

The base price used by most of these initiatives ranges from 450 to 500 dollars per cubic meter standing in the forest, or as log by the road side. This price can hardly apply, for example, to the production from the first couple of thinnings, scheduled to take place within the first 4 to 12 years in the cases mentioned in this report.

The products derived from each thinning have in fact their own price structures. They are also meant for different markets and end-uses. These differences are so marked that they could best be considered as different products [Figure3].

Figure 3

The base price for 5 to 8 year old poles should optimistically be estimated between 50 and 80 dollars the cubic meter in the round, mainly for consumption in the local market. It tends to increase only slightly with time. While 25 year old logs could fetch as much as 400 dollars the cubic meter ,depending on form, length and quality. Their price tends to increase more rapidly with time [Figure 3].

The unfortunate combination of high yield and high price projections end up in highly unlikely rates of return. This is nevertheless a key factor motivating most of the investments made by the general public in such projects.

topCONCLUSIONS

There is a marked need to establish plantations in many a tropical country, using a variety of species, to produce industrial timber, to protect watersheds, to reclaim degraded lands, to produce firewood and other forms of energy, and to improve the productivity and economic viability of agro-forestry practices. Teak is a precious timber which performs well in plantations. The establishment of industrial teak plantations ought to be encouraged, specially through joint ventures involving private interests from both industrial and developing countries.

The productivity and price trends of teak from plantations is high enough to guarantee a profitable business without further speculation. What is mostly needed is good seed sources, appropriate soils and topographic conditions, good drainage, appropriate heat, humidity and precipitation, and good management. Under such conditions, successful projects can and should be established, with rotations preferably from 25 to 40 years.

The present turmoil in the Dutch marke tis necessarily transitory. It will raise awareness of what needs to be done to avoid similar situations on a far larger scale in the future. It highlights the need for an efficient and transparent regulatory framework when the interest of the general public is involved. It brings to the surface the double standards applied by certain groups to forestry projects in the tropics, and the obsessive concern of some environmental groups with corruption in tropical forestry practices, while ignoring what is going on in their own backyard.

Hopefully these cases will also awaken the forestry profession into a far more active participation in development projects of this nature, whether related to plantations of Teak, Eucalyptus, Acacia or other species, or whether related to the management of natural forests. There is an ethical and professional responsibility involved in cases of this nature which should not continue to be avoided, no matter how difficult this may prove in practice for the parties involved.

topREFERENCES

1]. Centeno, J.C: TEAK CONTROVERSY FLARESUP IN THE NETHERLANDS. Posting to Internet, February 05, 1996.

2]. Centeno, J.C: TEAK STING. Posting to Internet, Feb. 19, 1996.

3]. Centeno, J.C: WORLD RECORD ON TEAK GROWTH: TRUTH OR TRICKERY? Posting to Internet, March 12, 1996.

4]. Centeno, J.C: THE ELUSIVE CREDIBILITY OF FOREST MANAGEMENT CERTIFICATION CLAIMS. June 20, 1996.

5]. Wereld Natuur Fonds: NAAR EEN HOUTBARE WERELD. WWF-Netherlands, 1995.

6]. Flor y Fauna: TEAKWOOD III: AN INVESTMENT IN A GREENER FUTURE.

7] Flor y Fauna & WWF-NL: TEAKWOOD VI: EEN INVESTERING IN EEN GROENERE TOEKOMST. March 1993.

8]. Centro Cientifico Tropical: TECHNICAL AUDITING ON THE GROWTH AND YIELD PROJECTIONS FOR Tectona grandis PLANTATIONS ESTABLISHED BY FLOR Y FAUNA S.A. Costa Rica, Febrero26, 1996. Summary of the Report.


Dr. Julio Cesar Centeno is a forestry specialist from Venezuela. He was one of the key negotiators ofthe International Tropical Timber Agreement, at the United Nations Conference for Trade and Development [UNCTAD], Geneva, serving for several years as spokesman for tropical countries. Has served as forestry advisor to the Secretariat of the United Nations Conference for Environment and Development [UNCED 92], as Director of theLatinamerican Forestry Institute between 1980 and 1990, as professor of the Graduate School of Forestry at the University of the Andes,Venezuela, and as member of the Board of Directors of the Forest Stewardship Council. Has represented Venezuela at multiple international negotiations on forests, forest industries and timber trade. Was invested by Prince Bernhard of The Netherlands with the Golden Ark Award for his work in the forestry sector. Serves as a member of the Governing Board of SGS-Forestry in Oxford, United Kingdom,as acting vice-chairman of the TROPENBOS Foundation in The Netherlands, and as an international forestry consultant.


PO Box 750
Merida - Venezuela
Fax: +58-74-714576
topE-mail: jcenteno@ciens.ula.ve