Peru's new forest strategy has high potential gains

The long-neglected forests of Peru are near the top of the agenda in 2016, with a package of reforms developed in cooperation with the private sector and launched in September 2015 set to give one of the country’s most promising industries momentum.

Surging Demand

According to the UN’s Food and Agriculture Organisation (FAO), global trade in forest products reached $245bn in 2013, up from $188bn in 2009. Driven by global demographic and economic growth, demand for wood products has been rising at more than 7% per year, meaning the industry doubles in size every decade, and in Peru it is no different. The country’s timber imports grew by 55% in just four years, from $536m in 2009 to $833m in 2013.

“The global timber industry is a valued at $240bn and growing rapidly. Peru can become a key player in this market by properly managing its vast forest reserves and increasing investment in reforestation,” Enrique Toledo, president of Reforesta Perú, told OBG. “Local poverty reduction has resulted in an increase in demand for wood-related products.”

Potential

Despite the rapid growth in global trade of forestry products, Peru’s timber exports have stagnated over the last 15 years. According to FAO data, the country exported $121m in wood products in 2013, down from $151m in 2009. The industry accounts for just over 1% of GDP, yet with 68m ha of forested land Peru has the world’s ninth-largest forest resource and the second-largest in Latin America after Brazil. However, only 2m ha out of 10m-12m ha of Amazon rainforest are exploited by commercial forestry, according to the minister of production, Piero Ghezzi. Chile, with a far smaller forested area, has quadrupled its forestry exports since the early 1990s – reaching $4.7bn in 2013 – and today accounts for 8% of the world’s paper-pulp market.

Topography accounts for some of this difference. Chile’s forests are close the Pacific coast, while 90% of Peru’s forests are in the Amazon basin, separated from the coast by the Andes. Lumber has to be trucked to Callao port via Tarapoto or shipped down the Amazon from Iquitos then exported north. Onethird of Peruvian exports go to China, with other key destinations including the US (20%) and Mexico (19%). However, Peru’s climate gives it an advantage over its southern neighbour. Teak, capirona and eucalyptus grow in abundance, and the Peruvian Bolaina reaches maturity in eight years, while its direct competitor, the Chilean pine, requires 23 years.

Government Push

The forestry industry has become a key point of focus for the National Diversification Plan of the Ministry of Production ( Ministerio de la Producción, PRODUCE). In September 2015, after four years of consultation with communities, Peru passed four rulings that recognise the role of native groups and local communities in the development of the forestry sector. The completion of this process was necessary to allow the Forestry and Wildlife Law No. 29763 to take effect.

Ghezzi and the minister of agriculture and irrigation, Juan Manuel Benites, used the occasion to outline government strategy for the sector, developed in consultation with PRODUCE’s “mesa técnica”, a group convening ministers and private sector representatives. “We have removed all the bottlenecks that have prevented the forestry sector from taking off,” Ghezzi said. The government expects to double forestry exports to $300m by 2017, with a goal of $3bn by 2021, by which time it aims to cut timber imports by half. In addition, 2m ha of land are to be reforested. With each hectare requiring inflows of $5000, this project alone will generate $10bn in investment. Benites said that the regeneration of the industry will create 500,000 direct jobs.

Much was achieved before September’s announcement. The mesa técnica had already advised PRODUCE on how to speed up the exporting process and improve rulings on sanctions for illegal logging. International organisations have also had a role. In December 2014 the Inter-American Development Bank extended a $40m loan to an $80m scheme to improve land registration in the Peruvian Amazon. The project is set to provide formal land titles to more than 700,000 holdings, alleviating uncertainty over property ownership that can delay projects.

Another obstacle – accessibility to the forest regions – is soon to be mitigated by the development of highways, especially the IIRSA Norte, which runs from Yurimaguas in the jungle department of Loreto to Paita on the north coast. However, in order to fulfil the sector’s potential and meet the government’s targets, improvements in productivity, private investment and access to finance will also be required.

Finance

Forestry projects are capital intensive and require long repayment periods. Firms enter the rainforest at the end of the wet season, bringing in machinery to build their own private roads and bridges as well as equipment for saw mills and trucks to transport timber. This process, combined with the harvesting of timber, takes six months. During the rest of the year the heavy rains allow timber to be floated or shipped out along rivers.

Forestry companies therefore need substantial start-up capital, both to finance infrastructure and for the first six months of the season. Typically, Peruvian banks provide a three-month period of grace and a two-year repayment timeframe. According to Toledo, a forestry project needs a two-year period of grace and four or five years to clear the credit line. Plantations require even bigger investments, with an eight-year grace period and 12 years to pay off the loan. These proposals were made at the mesa té cnica, and in September 2015 COFIDE, the national development bank, announced the creation of a $62m fund for forestry projects. Writing in El