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Alternative Commercial Investment Models for African Forestry
Despite the immense potential of Africa’s vast, resource-rich forests, commercial investments in forestry have nearly ground to a halt across the continent over the course of the past decade. Since 2000, for instance, the commercial private sector has established only about 125,000 hectares of new plantations, whereas smallholders have planted a mere 250,000 hectares. To make matters worse, government-owned forests shrank by approximately 100,000 hectares during the same period. All this has occurred in spite of continued infrastructural improvements in the sector and sustained commercial access to additional land areas for afforestation (i.e. establishment of new forested areas).
Sustainable Forestry, Development, and Climate Change Mitigation
For the African Development Bank, investing in Africa’s forests is not considered a question of competing interests between environmental conservation and depletion of natural resources for economic growth. We support sustainable commercial forestry, which has the unique ability to catalyze economic, social, and climate-smart transformation in a broad range of areas:
- Afforestation and reforestation of degraded lands;
- Financial returns for private sector and economic growth;
- Natural resource value chain development;
- Carbon sequestration and climate change mitigation;
- Job creation and improved livelihoods for women and men living in forest-adjacent communities;
- Positive gains for countries’ policy objectives toward meeting Sustainable Development Goals (SDGs) and National Determined Contributions to the Paris Agreement; and
- Private sector development
Forests play an especially important role in our shared global climate action. As natural carbon sinks, they help us to mitigate the negative effects of anthropogenic (human-caused) CO2 emissions, which are leading to a rise in global temperatures, increases in the frequency and severity of extreme weather events, and threats to the ecosystems that many – especially poor and rural communities – depend upon for their livelihoods.
At the same time, Africa’s forests have significant potential to supply timber and other forest-based products to growing demand within domestic markets and abroad. Sustainable practices ensure that such harvesting is undertaken in environmentally appropriate cycles, often following large afforestation and/or reforestation efforts, close collaboration with local communities, and public infrastructure investments in surrounding areas.
So What’s the Problem?
Investments in this area simply aren’t flowing at the scale needed.
Real and perceived financial barriers – such as low historic returns on investments – and stubborn technical barriers continue to dissuade investors from entering the market and developing Africa’s forests to their full potential. Other common barriers include: high establishment costs, lack of sufficient operational scale, insufficient silvicultural infrastructure, lack of management expertise, the need for planting material and silvicultural practices that remain untested in local environments, and lack of downstream industrial processing facilities.
What is the African Development Bank Doing To Help Solve the Problem?
The African Development Bank is moving the needle in private sector forestry for Africa. With support from the Forest Investment Program under the Climate Investment Funds (CIF), the Bank approved in 2016 a total of $24 million in the Public-Private Partnership for the Afforestation of Degraded Forest Reserves project in Ghana – one of very few successful debt transactions in African forestry over the past decade, and one in which concessional finance played a catalytic role. The initial promise of this innovative project design led to a series of important questions:
- What conditions enabled the successful structuring of this private sector investment in Africa’s forestry sector?
- What is the market potential for commercial forestry in Africa?
- What alternative investment models could drive further development in the sector?
- What can the Bank do to promote new and additional private investments in the sector?
Launch of Study
Thanks to support from the CIF Evaluation and Learning Initiative, in partnership with the World Wide Fund for Nature, we are pleased to launch an in-depth study commissioned to answer the above questions and more.
This study draws from the wide expertise of over 40 stakeholders in African forestry, representing development finance institutions and development agencies, forestry companies, fund managers, and investors. The research draws from case studies of recent successful transactions to inform a full market assessment, structural analysis of funding models, and recommendations for future funding design considerations.
Current investment potential for planting on land already held/managed/leased by commercial-scale forestry firms hovers around $1.25 billion alone with the most immediate investment opportunities for the African Development Bank covering approximately 100,000 hectares of land concentrated in 10 African countries.
Please stay tuned as we begin discussing these exciting opportunities for Africa’s sustainable development with interested investors!
Gareth Phillips is a Manager for Climate and Environment Finance at the African Development Bank