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: MBashir2@ifc.org

Steve Gretzinger: SGretzinger@ifc.org