Mozambique Trade and Investment Project

1. Mozambique Trade and Investment Project IMPROVING THE COMPETITIVENESS OF THE TIMBER AND WOOD SECTORPresented to the Confederation of Mozambican Business Associations (CTA)Alan Ogle & Isilda Nhantumbo, 11 August 2006

2. Outline of Presentation On Preliminary Findings • Terms of reference and objectives of assignment • Overview of the sector • Policy and Regulations • Eight main topics for discussing findings and issues relating to the sector

3. Terms of Reference - Objectives The project aims to cover three main objectives: • Identify constraints to sustainable forestry and wood production • Looks for ways to increase exports of wood products • Develop policy recommendations to improve sector competitiveness and implementation of the Forestry and Wildlife Regulations

4. Terms of Reference - Tasks The main tasks under the scope of work of the project can be summarised as: • A background aassessment of the Forestry & Wildlife Regulations (FWR) and Action Plan (PARPA) and National Agricultural Program (PROAGRI) • An analysis of the current land concession system • An analysis of wood production and trade practices with a view to encouraging domestic added value • An assessment of management by National Regulatory Body in Maputo • Examine why the FWR are not being fully implemented and what CTA can do to help • Assist CTA in addressing issues arising

5. Methodology Our review has involved 2 consultants working for 3 weeks. This has included: • Extensive background reading • Discussions with selected national level stakeholders • Visits to 5 provinces and discussions with approx. 30 GoM and private sector operators in sector *Given the limited time, the review cannot be regarded an an exhaustive study of the sector, but rather one focusing on strategic issues surrounding competitiveness and sustainability

6. Terms of Reference – Approach Eight main topics have been chosen for discussing findings and issues relating to the sector: • The resource base – inventory and sustainable cut level • The sector is out of balance with an unhealthy reliance on export of logs • Annual licensing and concession systems: the conflict between short term profits and long term use and management of natural forest • The difficulties of adding value and promoting employment generation • Government Capacity • Community Benefits From and Involvement in the Sector • The Reforestation Levy • Plantation Forestry

7. Overview of the Sector • The forestry sector in Mozambique: • provides direct employment to around 200,000 people (excluding charcoal, fuelwood and village based hand-sawing for timber) • provides around 10% of industrial production • contributes around 1% of GDP (excluding wood used for fuel) • In 2004 exports from the sector were US$30 million – about 2% of total exports • The Sector earns the Government approximately US$6 million in royalties on logs harvested

8. Overview of the Sector – Annual Log Cut

9. Overview of the Sector – Annual Production of Sawn Timber

10. Licenses Issued by Species Groups

11. The Resource Base – Inventory and Sustainable Cut Levels: Guessing Quotas and Informed Decision Making Background • 1994 – Forest Inventory – based on satellite imagery • 20 million ha of productive forest, 20 million m3 of commercial stock. • 500 000 m3 allowable cut for all commercial species • 120 sp in the Reg. of FW, only 15 species form 80% have high commercial value • GERFFA project – Forest inventory in Northern Sofala and Cabo Delgado concentrating in the Productive Forest Areas (potential for concessions. • Recent forest inventories in Zambezia and Inhambane – Sustainable Forest Management project funded by Finland

12. The Resource Base – SWOT Analysis(1) Strengths • The Inventory Unit of DINATEF has qualified people and with experience in resources assessment • The Department of Forestry has gained experience on analysis of results of inventories for concessions and their management plans – particularly to: • Identify poorly designed management plans • Licensing of companies and consultancies • Forest inventory guides the decision making regarding harvesting levels. However, ‘expert opinion’ is also important. In Cabo Delgado, the province that pioneered the design of management plans for concessions, now recognizes the deficiencies of the data and the annual allowable cut in the concessions, therefore caution is exercised in approving licenses for the wood suggested in the MP

13. The Resource Base – SWOT Analysis(2) Weaknesses • Annual allowable cut of 500 000 m3 is an overestimation considering that the harvesting is only concentrated in a handful number of species. There is no capacity to sustain both export logging and large scale processing • Most decisions on quotas are still based on the 1994 inventory (satellite imagery) and this is particularly so for the simple licenses, while the concessions harvest according to the management plan, supposedly using more recent information • Management plans for forest concessions are not based on reliable data. In most cases, the inventories done did not follow a correct method, and there has been a tendency to overestimate the commercial volume. For example, a concessionaire in Manica indicated that he harvested 1100 m3 of commercial timber within a year in a 45 000 ha concession, which has 50 years contract

14. The Resource Base – SWOT Analysis(3) Weaknesses (Continued) • DNFFB takes a long time to process inventory data • Sofala and Cabo Delgado benefited from recent inventories done through the GERFFA project, however the processed data only recently reached the Provincial Services, while in the case of Cabo Delgado most (around 80%) of the inventoried area in now within the boundaries of Quirimbas National Park. Zambezia and Inhambane had an inventory done with support of Fininda

15. The Resource Base – SWOT Analysis(4) Opportunities: • A guideline for designing management plan is being developed by DINATEF • DINATEF – Inventory Unit with Finish support to test a Forest Monitoring System • DINATEF – Inventory Unit – plan to star a national inventory this year. • The Dutch Government is funding a global project for Rapid forest assessment using satellite imagery and modeling to monitor change of biodiversity due to logging, bush fires and other factors – Mozambique is one of the pilot countries.

16. The Resource Base – SWOT Analysis(5) Threats: • Delays in implementation of the inventory plans and long processing period may continue to hamper the improvement in resources allocation and control of sustainability of the licensed quotas • Guess estimates by many companies and individuals indicate that the valuable species are increasingly scarce and in 5-8 years, may not be available to continue the current level of harvesting level • Requirement of processing industry for concessionaires has led to proliferation of small industries with low capacity, low quality products and some operating at negligible capacity. The existing capacity is sufficient to exploit the allowable cut in the provinces with productive forest resources • Inventory and management planning: whose responsibility is it? Government or private sector? => what is the basis for long term planning of the concessions • Selective harvesting done by the annual licenses impoverish further the areas that could be exploited as concessions

17. The Resource Base – Summary/Recommendations • DINATEF-The Inventory unit should offer annual training to consultancy companies and other interested in the design of management plans on the inventory methodology, guidelines, monitoring systems, etc. • There is an urgent need to update and consolidate the national forest inventory. This update should then be utilized to review all quotas/ cutting plans and be the basis for monitoring of annual cuts in each province.

18. The Sector is Out of Balance With an Unhealthy Reliance on Export Logs (1) Background • Mozambique allows both log exports and cutting for local processing • Export of logs for the past 3 years: • 2003 59,100 m3 • 2004 73,200 m3 • 2005 51,000 m3 • Over the past 3 years log exports have been 48% to 52% of log cut • Export is largely of “precious” species with a higher level of royalties (Mts 2 mill/m3) compared with the Mts 0.5 mill/m3 for Class 1 species that are reserved for local use or export as sawn timber

19. The Sector is Out of Balance With an Unhealthy Reliance on Export Logs (2) Strengths: • Mozambique has several “heavy hardwood” species that are difficult to saw domestically but are sought after in Asian Markets for traditional furniture making • It is an activity that Mozambique nationals can readily participate in as it requires a relatively low investment and yields high profits • The higher profitability on export of logs is claimed to cross subsidize the less attractive processing activities • The GoM has progressively tightened quotas for export of logs over the past 3 years in recognition of the declining resource

20. The Sector is Out of Balance With an Unhealthy Reliance on Export Logs (3) Weaknesses: • The current logging system is a “gold rush” with “cherry-picking” or a“creaming” exploitation system with the most valuable/ most accessible species being rapidly removed for log exports • Most of the abuses of regulations and problems of enforcement relate to log exports – these include: • Cutting without a license • Over-cutting the authorized cut • Pressure by consultants to prepare unreliable inventory/ management plans that maximize export species • Concessionaires logging outside the annual block planned for harvesting to get higher volumes of export logs • Incorrect identification of species prior to export which allows Class 1 species to sometimes be exported in log form

21. The Sector is Out of Balance With an Unhealthy Reliance on Export Logs (4) Weaknesses (continued): • Logging for export is clearly the least sustainable aspect of the sector • The chase for export logs has affected the desire to invest in longer term processing • Provincial government forestry staff do not have the capacity to effectively control this aspect of the sector

22. The Sector is Out of Balance With an Unhealthy Reliance on Export Logs (5) Opportunities: • Scope for the GoM to obtain higher resource rent and reduce the imbalance of profitability between export logging and processing • Scope to link the volume exported by a license holder or concessionaire to the volume of logs sold into the local market • Scope to remove certain species from being allowed for export to Class 1, to increase the level of local processing

23. The Sector is Out of Balance With an Unhealthy Reliance on Export Logs (6) Threats: • Legislating for decreased log exports/ increased domestic processing of export logs reduces GoM royalty revenue and foreign exchange earnings

24. The Sector is Out of Balance With an Unhealthy Reliance on Export Logs (7) Threats (Continued): • There is a strong believe amongst many Mozambican nationals in the sector that the profitability from export logging is their right and should not be undermined • If the current level of export logging continues many in the sector see resource depletion of economically accessible export logs, within a 5 to 10 year period. Already logging distances have markedly increased & log sizes reduced over the past 5 years • Mozambique has a relatively small natural forest resource and is at high risk of joining the many countries that have allowed log exports to continue at a too higher level for too long and undermined their chance to have a sustainable domestic processing industry

25. The Sector is Out of Balance With an Unhealthy Reliance on Export Logs (8) Threats (Continued): • Intermediaries (log buyers and their agents) are currently taking most of the “super profit” element from logging through their financing activities, under-measurement, transfer pricing, limited international competition and lack of transparency in their buying • Even with higher resource taxes there are few ways for Mozambique to effectively control the level of profit taken by intermediaries

26. The Sector is Out of Balance With an Unhealthy Reliance on Export Logs (9) Summary • Clearly export of logs is rapidly depleting the most valuable/ most accessible species in an unsustainable manner Strategy and Recommendations • A national forum is recommended to reassess: • What is the current resource situation resulting from log exports • What vision does the country have for its natural forests in 5, 10, 20 and 50 years time • What steps are necessary to ensure that sufficient resource is preserved long term domestic needs • An urgent resource rent reassessment, to examine the scope for the GoM to (1) obtain higher resource rent (2) reduce the imbalance of profitability between export logging and processing, (3) encourage loggers to cut more logs for the local market (4) reduce the species exported as log to help increase the level of local processing

27. Annual licensing and concession systems: the conflict between short term profits and long term use and management of natural forest (1) Background • The 1999 Forestry and Wildlife regulations provide for two types of harvesting of forests natural forests for commercial purposes • Exploitation by annual simple licence • A forestry concession • During 2005 there were 462 Simple license holders (SLHs) and by July 2006, 43 approved concessions • SLHs are have simplified inventory & management planning requirements. They are reserved for Mozambican nationals. Different areas can be licensed each year • Forest concessions are based on a 50 year sustainable logging program over a designated area of forest. Foreign concession holders are allowed. Processing must also be installed

28. SWOT Analysis for Simple License Holders (1) Strengths: • SLHs are an important avenue for Mozambican nationals to commence & participate in business opportunities in the sector • They can be useful to harvest smaller areas of forest that are insufficient in size to warrant a concession • In most provinces (except Nampula) there has been a reduction in the number of SLHs over the past 2 years

29. SWOT Analysis for Simple License Holders (2) Weaknesses: • The SLH system encourages loggers to be target volume driven only, with little concern for quality of forest remaining • As a result, SLHs show little commitment to long term sustainable management of forests. The license is merely seen as a cost or fee for access for short term gain • Their activities “pick the eyes” from the resource and making large areas less viable as future concessions • Many of the weaknesses previously mentioned under export logging are in fact attributable to the poor performance of SLHs • A disproportionate percentage of the enforcement problems/ capacity issues of provincial government forestry staff relate to the activities of SLHs. Overall the proportion of SLHs following the rules is considered to be small

30. SWOT Analysis for Simple License Holders (3) Weaknesses (Continued) • Illegal logging practices are common including: • Encouraging village cutting of logs outside license area and purchasing the logs • Cutting and discarding undersized logs • Most have problems moving to be a concession holder because of limited capital (to pay for the inventory/ management plan) and a lack of business orientation • Some complain that all the best natural forest has already been allocated to concessionaires and they would rather carry on as SLHs • Most are now heavily in debt to Chinese intermediaries who then use debt as a means of under pricing and leveraging over-cutting

31. SWOT Analysis for Simple License Holders (4) Opportunities: • To improve sustainability there is strong belief by many in the sector that stronger incentives should exist to encourage SLHs to become CHs • A draft proposal for accelerating the conversion of SLH to concessions, was discussed during fieldwork. The suggested package of conditions being: • The GoM resolve to phase out SLHs over say 5 years • It offers a reduced size/ maximum of say 10,000 ha concession to SLHs • No processing be necessary • Restricted to those SLH that have been operating for 5 years • Mozambique nationals only • 50% donor assistance with inventory and MP cost/ the balance be payable by the applicant (or possibly as a loan utilizing the NDF facility) • This proposal was generally supported by most SLHs interviewed and provincial forestry/ environmental authorities. Several thought it should be trialed in one province first

32. SWOT Analysis for Simple License Holders (5) Opportunities (Continued) • This proposal could be modified to allow groups of SLH to operate one concession and/or communities to become joint venture business partners in concession management • It would need backing with business and sustainable forestry and environmental management training Threats • Phasing out of annual licenses was not a goal stated by the FFW law and regulations, rather the goal was to facilitate the engagement of the entrepreneurs in long-term use and management of the resources (which has largely failed) • A number SLH do not want to become concessionaires as they prefer to continue to pick smaller rich areas of forest. • There is a fear by some SLH that phasing out of SLHs will force them to merely be contractors for CHs

33. SWOT Analysis for Concession Holders (1) Strengths: • There is a general belief within the sector that the policy and regulations encouraging concessions is sound and the best hope for sustainable long term retention of well managed natural forests • As well as restricting the annual cut, concessions have important advantages in terms of working more closely with communities and in fire prevention • Concession management plans are also a necessary and important business planning tool for CHs

34. SWOT Analysis for Concession Holders (2) Weaknesses: • Many concession holders (CHs), in common with SLH’s, often show little commitment to long term sustainable management of forests. The concession is again often seen as a cost or fee for access for short term gain • Most CHs are only harvesting the seven most valuable “precious” and Class 1 species • Most CHs are merely targeting the richest, closest and most profitable areas of their concessions first, with a number of concessions likely to be abandoned after the first 5 years • Many of the inventory surveys and resulting management plans have been prepared by consultants based on “what their client wants to hear” rather than being based on the forest capability to yield a long term sustainable cut • CH licenses are conditional upon processing capacity being installed, but in practice many put in small portable mills that are not operated as no minimum level of processing is set

35. SWOT Analysis for Concession Holders (3) Opportunities: • There is still considerable scope for improving the quality of concession management plans and CH supervision • Forest third party certification is still in its infancy in Mozambique – it offers a virtual guarantee of sustainability and stronger markets for products • There is considerable scope for greater cooperation between CHs and SLHs to encourage sustainable logging and business training through subcontracting to Mozambican nationals who are SLHs

36. SWOT Analysis for Concession Holders (4) Threats: • Many in the sector see concessions as a system that is gradually encouraging foreign companies to dominate logging in the sector as the current requirements to become a CH are beyond the reach of most SLHs • Without improved provincial forestry staff surveillance the benefits of the concession system could be largely lost before it is too late

37. Annual licensing and concession systems: the conflict between short term profits and long term use and management of natural forest Strategy and Recommendations • The concession management system is central to sustainable forest management. The quality of management of Mozambique’s natural forests is still a long way from the policy and legislative goals that promote sustainability • Again a national forum is recommended to reassess: • What is the current status of forest management in Mozambique • What practical steps can be taken to rapidly improve management including the replacement of simple licenses with concessions

38. Processing: A Challenge to Add Value Background • Mozambique has approximately 140 registered wood processing industries (including carpentry workshops) • The 100 sawmills produced approx. 32,000 m3 of sawn timber in 2005 • Concessionaires are required to install sawmills • The most valuable (“Class 1”) species are reserved for local processing

39. Processing: SWOT Analysis (1) Strengths: • Access to some of the finest wood species in the world • Adequate installed primary sawmilling capacity for the resource available • A fast growing domestic market for added value wood products

40. Processing: SWOT Analysis (2) Weaknesses: • Most of the existing sawmilling capacity has been installed as a fee for access to a concession area to export logs, rather than as a commitment to added value processing • Processing comes at a cost to GoM royalty revenue and export revenue

41. Processing: SWOT Analysis (3) Weaknesses (Continued): • Only approx. 50% of the installed sawmilling capacity is operating • A large (but unquantified) proportion of the sawmilling is to cut 100 mm flitch for export markets with minimal added value • The current requirement to install sawmills for each concessions does not encourage economies of scale in processing – most mills are old, wasteful labour intensive technology • Mozambique has no plywood, particle board, or medium density fibreboard industries, and very limited kiln drying to support tertiary added value joinery and furniture-making • Several sawmillers are already complaining of insufficient log supply because of the focus on export logging

42. Processing: SWOT Analysis (4) Weaknesses (Continued): • The 40% rebate on processed parquet and veneer is too tightly focused and could further distort processing decisions • Only 1 furniture manufacturer has managed to secure export orders • Difficulties obtaining work permits for foreign technical staff • Little cutting or market testing of lesser known species to fill the market being satisfied by imported pine • Most sawmills get licensed without environmental approvals

43. Processing: SWOT Analysis (5) Opportunities: • The supply of some of the finest wood species in the world should continue to attract a small number of high quality “craftsman” furniture manufacturers to target the domestic and export markets • The growing tourism industry should provide a increasing demand for higher value added joinery and furniture • The domestic market for household joinery and furniture will also be expected to outgrow economic growth rates in the medium term, but must compete with cheap panel products imports

44. Processing: SWOT Analysis (6) Threats: • Poor infrastructure and increasing distances to obtain logs means high landed costs at mills located in major centres for all but the highest value species (typically US$100 to US$150) • Only one concession is certified (FSC) by international 3rd party certifiers – certification is important for EU and US exports • Mozambique’s sustainable tropical hardwood log supply is small and fragmented compared with a number of other African and Asian countries. It is unlikely to attract a major export joinery or furniture manufacturers • The current log export and processing policies are not encouraging an expanded domestic open market for logs that could be the basis of larger scale sawmilling/ higher added value processing

45. Processing Strategy and Recommendations • Establishing an appropriate processing policy and incentives for a small resource of the type found in Mozambique involves relatively complex trade-offs • Clearly the current supporting policy and incentives need updating; particularly in the areas of export logging, SLH activity, and the requirement to continue installing further sawmilling capacity on new concessions. A larger open competitive domestic market for logs should encourage more efficient processing investment • Also the 40% rebate on royalties needs rethinking to broaden the range of products and encourage kiln drying, plywood manufacture, machined cut stock for furniture, joinery and furniture making

46. Government Capacity BACKGROUND • PROAGRI II – institutional capacity – what has changed since? • Article 112.1 of the forestry and wildlife regulation establishes that guards can benefit 50% of the penalties

47. Government Capacity: SWOT Analysis (1) Strengths • A high commitment from DINATEF staff at provincial level to control the situation (e.g Sofala) • Staff at provincial level are creative in defining ways in which they can control the illegal activities: • Sofala has a permanent post at the harbour to control the log export (species, quantity, minimum diameter); • Manica limits the number of simple licenses issues every year; • Cabo Delgado does not follow ‘blindly’ the management plan to issue licenses for the concessionaires; the staff also uses their knowledge and evaluates the processing capacity to define the annual allocation. • All stakeholders interviewed recognize that there has been improvement in the number and dimension of illegal logging and indiscriminate export as a result of better control in the past three years.

48. Government Capacity: SWOT Analysis (2) Weaknesses • Law enforcement continues to face challenges: • Limited quantity and qualification of personnel, • Lack of transport and communication means • 1 to 2 guards per district supported by a ‘mobile brigade’, the fixed control posts and others in the harbor in Sofala. • In Zambezia there are 32 guards of which sixteen in districts, 8 in the fixed post of Nocoadala, while 4 are in the ‘’mobile brigade’ and the rest in the harbor. Cabo Delgado has 34 guards. • Manica has over 30 guards of which 25 are based in Chimoio. • The AIDS pandemic is also affecting the population of trained guards. • Poor management systems, especially planning and monitoring the law enforcement activity • The common problems include harvesting without licenses, harvesting outside the boundaries, harvesting more quantity or different species that those in the license. • Not all concessionaires are committed, responsible and self motivated entrepreneurs to implement the legislation

49. Government Capacity: SWOT Analysis (3) Threats: • Foreigners, particularly Chinese, exploit the weaknesses of the local government in enforcing the law, to deliberately destroy the forest resources and unfairly compete with the local entrepreneurs. They are monopolizing especially the log export market: finance the harvesting (especially for the annual licenses) and reduce competition in price fixing • Political power is being used in the forestry business environment to override the existing legislation. This interference from well positioned people affects the motivation for effective law enforcement in the provinces • The allocation of 50% royalties to the guards perceived (by the private sector, particularly operators of annual licenses) to have a negative effect, i.e., promote unfair and high penalties as well as corruption • Without further improvements in capacity, concessionaires may continue to harvest as much as possible, in the shortest time possible and then prematurely abandon large the areas

50. Government Capacity Recommendations: · Promote certification as self management and enforcement tool; this would relax the government demand for enforcement of the law. · Part of the penalties and royalties should be allocated to training and support of law enforcement in the field. · Review the incentives to the guards including the salary and other non-monetary incentives (e.g. training) · The laws and regulation should be applicable to all. Politicians involved in the wood business should take their responsibilities for sustainable use of the resources.