INVESTMENT OPPORTUNITIES FOR SUSTAINABLE FOREST INDUSTRY: An ADB Perspective

1. INVESTMENT OPPORTUNITIES FOR SUSTAINABLE FOREST INDUSTRY: An ADB Perspective Ambassador N. Cinnamon Dornsife U.S. Executive DirectorAsian Development Bank Shanghai, China, September 12-13, 2001

2. ADB’s Strategy - Long-Term Strategic Framework 2001-20151 • Three core areas of intervention: • Sustainable economic growth, including an environment program that promotes environmentally sound development; • Inclusive social development, which includes a policy and reform agenda that will promote equity and empowerment; and • Governance for effective policies and institutions. _______________________________________ 1ADB’s long-term strategic framework for 2001 through 2015 draws attention to the following realities: “The Asia and Pacific region is still home to two-thirds of the world’s poor despite the significant progress in the past three decades. A lesson learned from the 1997 Asian crisis is that even gains made in poverty reduction through long years of rapid and sustained growth can be quickly reversed. The challenge of reducing poverty in the region remains more daunting than ever and requires new approaches and commitments.”

3. The three core areas will be complemented by three crosscutting themes: • Promoting the role of the private sector in development • Supporting regional cooperation and integration • Addressing environmental sustainability

4. ADB’s Strategy - Asian Economic Outlook, 2001, Call to Action • Economic Reform Actions • Institutional Reform Actions • Governance Reform Actions • Sector-specific Actions • Land and Forest Sector • Water Sector • Energy Sector

5. ADB’s Forestry Policy and Record in Forestry Lending and Operations • Invested $1.06 billion since 1977 in loans and TA operations. • Record mixed-sector investments have had minimal positive impact on forest loss and degradation. • Current policy approved by the Board of Directors in1994. • Based on a balance of production, promotion and participation. • Prevention of commercial logging in primary tropical moist forest.

7. Currently under review: issues being looked at include challenges for Asia and Pacific forests: • Overall demand for forest products • Growing imbalance in demand and supply within region • Domestic energy requirements • Forest governance • Access to resources • Integrated natural resource management • Preservation and protection of environment

8. Private Sector Operations • Private capital flows dwarf the resources available for development purposes provided by all official market-based and concessional sources. • Total of $18 billion (146 projects) invested • Instruments available: • Loans without government guarantee. • Equity investment - up to $75 million or more of less 25% of total costs • Facilitate financing. • Guarantees: PRG and PCG • Innovations planned: • Move into frontier countries and frontier sectors • Increase leverage • Expand partnerships and strategic alliances

9. Good Governance and Anti-Corruption • Good Governance policy was approved in 1995 - principles: accountability, transparency, participation, and predictability • Governance Action Plan was implemented in 2001 includes joint governance assessments, regional and country-specific initiatives, development of governance indicators. • Anti-corruption policy was approved in 1998 - zero tolerance for corruption. • Office of the General Auditor is the initial point of contact for allegations of fraud and corruption in ADB-financed projects and among ADB staff. • There are 12 firms and 2 cooperatives sanctioned. • Random audits/spot audits • Strengthening and reinforcing specific anti-corruption agencies, regulations, and disclosures.

10. Obstacles or Constraints to Private Capital Investment in Sustainable Forest Management (SFM): market, policy, institutional failures • Limited amount of public sector resources to leverage a higher amount of capital from the private sector. • Imperfect markets for SFM outputs: • Lack of information • Either poor government policies or failure to implement good policies • Lack of governance • Higher short-term costs of SFM (as compared with unsustainable forest harvesting). • Some in the private sector view, demand for SFM outputs as still insufficient to allow private investors to capture additional costs of certification.

11. On the other hand, certification is viewed by others as lowering the risk for investments, as well as opening new environmentally conscious markets. FSC sees it as an essential condition, not just a useful tool or voluntary option.1 • The costs of certification must be identified and covered. • Public payments may be needed for non-market forest services. • Land tenure rights. • Corruption and bribery. _____________ 1Certification and Sustainable Forest Management by M.K. Muthoo, Executive Director Designate-FSC - International workshop of experts on financing sustainable forest management (Oslo, Norway, January 22-25, 2001).

12. Some ways in which Multilateral Development Banks are Working in Cooperation with Governments, Private Sector, and Civil Society which can Promote or Support Investments in SFM • Available instruments and options include: • Lending operations, private sector investments, guarantees (PCG and PRG) • Technical assistance • Capacity building - TA budget of $145-$175 million per year. • Policy dialogue - cultivating the enabling environment. • Economic reform actions • Institutional reform actions • Governance reform action • Promoting locally-owned initiatives for governance (with incentives and protection). • Inclusionary and ongoing dialogue and consultation with local governments and local communities.

13. Supportive actions in compliance with national commitments to CBD, CITES, UNCFCCC (especially if major carbon sequestration issues are involved), CCD. • Promoting adoption of voluntary or mandatory certification schemes for harvesting and production. • Evaluate effectiveness of conservation funds in carbon trading and other financial tools in evaluation of plans for carbon sequestration. • Seek bilateral, private and other sources of co-financing to support. • Information sharing. • Development of investment opportunities --- investment promotion mechanism (IPM); proposed by eco-securities, or similar service and finance delivery mechanism.

14. Distinguish between types of investors and their needs: • There is a shortage of IPE-type services for potential SFM investors. • Many (apart from the most innovative) limited to plantations in low risk countries. • Capital protection schemes as needed to reduce risk. • Country coverage beyond low risk countries. • Packaging proposal – assist in brokering deals. • Some concerns by DMCs about proposed IPE supplanting existing mechanisms and existing or proposed funds such as global forestry fund – need to demonstrate additionality – to existing funds, including national forest funds (recognizing their potential pitfalls, including trapping funds in the forest sector, prevent ideal allocation, opportunities for corruption).

15. Methods to Promote Innovation in Helping Mobilize New and Additional capital for SFM • Collaborate with existing organizations fora and leaders. • Proposed “consortium approach” - proposed by CIFOR and Barin Ganguli.1 • Build on investment forum discussions to evaluate specific guidance and expand opportunities involving private sector, lenders and investors, governments which have interest, support and conducive policy environments, MDBs, and NGOs. • An investment promotion entity (IPE) to help overcome barriers to investment has been proposed by Pedro Morera Costa,2 Managing Director of Ecosecurities at the Oslo Workshop on Financing SFM (January 2001). ______________________________ 1 Global Forest Funding - Exploring Consortium Financing of Sustainable Forest Management, International Workshop of Experts on Financing Sustainable Forest Management (Oslo, Norway, January 22-25, 2001). 2 Feasibility and Operationalisation on an Investment Promotion Entity (IPE) for Sustainable Forest Management - Highlights from the Main Papers, International Workshop of Experts on Financing Sustainable Forest Management (Oslo, Norway, January 22-25, 2001).

16. There is great interest, and some precedent for innovation and commercial development of a market for environmental services from forests (ICDM, Emissions Trading and Joint Implementation) – carbon sequestration funds are being proposed, e.g. Hancock Natural Resources Group (Australia). • Other innovations also exist – Australia - pioneering effort to address land degradation, a salinity credit trading scheme --- pilot trade in 2000 --- downstream irrigation cooperative contracted to pay a fee of AUD$17 million of additional verified transpiration by forests established by a forestry agency. • Currently, there is significant effort to design a large scale investment vehicle that could capture both carbon sequestration benefits, salinity credit benefits and non-traditional forest product markets such as biomass energy and activated charcoal. • The third and most conceptually difficult environmental market would relate to conservation or enhancement of biodiversity. Many recent innovations in biodiversity conservation.

17. Focus on Idea for Investment Promotion Entity • Advantages: • Information flow • Identify opportunities • Investment package • Risk Mitigation • Promote enabling environment • Certification as market incentive (but who covers costs – as SFM adds 10-13 per cent to costs).

18. Focus on Consortium Approach (global, regional and sub-regional) • It seems a good idea because: • Little hope for additional resources given ODA and financial trends. • SFM has dimensions beyond the range of interests of any one investor/funder. • Public/Private partnerships can deliver to a greater range of countries. • Given different objectives/mandates – could raise funds ecological/social attributes.

19. Focus on PRC • PRC is one of ADB’s largest borrowers. • As of December 31, 2000, cumulative net lending to PRC amounted to $9.8 billion, and TAs worth approx. $180 million. • Strategy • Policy developments

20. Several TAs developed with support of ADB, e.g. to develop natural resources accounting, environmental management, and legislation. • Logging ban – positive impacts within China – but neighboring countries tapped to meet huge demand in PRC. • Some thoughtful responses developed: • Ensure open, accurate, transparent data • Provide accurate and reliable documentation • Strengthen customs control • Crack down on corruption and bribery • Promote greater cross border cooperation.

21. Summary of Recommendations • Promising new trends and developments at ADB, other MDBs, private sector, and civil society. • With new sources of finance, support creative locally-owned initiatives and policies. • Work with all relevant sectors, including the private sector, to identify and promote new investments in SFM. • Enabling policy environment - work closely with governments, MDBs, IMF and objective third parties. • Implementing capacity is key.

22. SFM is strongly associated with reforms in governance: • Depends heavily on accurate, transparent data and information. • Participatory approaches can improve transparency and accountability. • Disclosure and public availability of all policy and transaction related information, coupled with positive incentives for uncovering fraud. • Other successful strategies include: • Consumer action • Shareholder awareness • Media, information dissemination.