feasibility study to assess the options for mobilising private investment in carbon-intensive...

IUCN - Investing in FLR - Feasibility Study (2013)

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GLOBAL PARTNERSHIP ON FOREST LANDSCAPE RESTORATION Feasibility study to assess the options for mobilising private investment in carbon-‐intensive landscape restoration

Dominic Elson1 Seventy Three Pte.Ltd.

2nd May 2013 Contents

1 Introduction .......................................................................................................................... 2

2 Documentation, mapping and identification of existing information and examples of investment into landscape restoration ........................................................................................ 5 2.1 Knowledge .............................................................................................................................................................................. 5 2.2 Project examples .................................................................................................................................................................. 5 2.2.1 Carbon finance projects .................................................................................................................................................. 6 2.2.2 Conservation projects (international funding) .................................................................................................... 7 2.2.3 General Country Examples ............................................................................................................................................ 8 2.2.4 Historic Examples of land restoration ................................................................................................................... 10 2.2.5 Investment Funds ........................................................................................................................................................... 11 2.2.6 Large Donor-‐funded projects .................................................................................................................................... 12 2.2.7 Private Sector companies & projects ..................................................................................................................... 13 2.2.8 Project Sponsors / Investors ...................................................................................................................................... 14 2.2.9 Projects led by Local NGOs and cooperatives ..................................................................................................... 15 2.2.10 Public-‐Private Partnerships .................................................................................................................................... 16 2.2.11 Company-‐community partnerships ..................................................................................................................... 17

3 Key conditions, analysis frameworks and knowledge gaps for the main study ..................... 18 3.1 Defining private sector investment .......................................................................................................................... 20 3.2 What is the role for private sector investment in landscape restoration? .............................................. 21 3.2.1 The scale of the problem is beyond the public purse ....................................................................................... 21 3.2.2 Improve the incentives for private sector investment .................................................................................... 22

3.3 Aligning private sector investment goals with local – and global -‐ needs ............................................... 23 3.4 Grow rural economies, not just trees. ...................................................................................................................... 24 3.5 Rural economies need local businesses .................................................................................................................. 25 3.6 Rural economies need healthy ecosystems ........................................................................................................... 26 3.7 The Layered Investment Approach ........................................................................................................................... 28 3.8 How investment decisions are made ....................................................................................................................... 29 3.8.1 Mismatches between external private investors and local rights-‐holders ............................................ 31

3.9 Possible investment frameworks and financing structures ........................................................................... 31

4 Designing the main study ..................................................................................................... 34 4.1 Objective ............................................................................................................................................................................... 34 4.2 Methodology and Scope ................................................................................................................................................. 34 4.3 Knowledge Pathways ...................................................................................................................................................... 35 4.4 Study outlines ..................................................................................................................................................................... 35

5 Bibliography ........................................................................................................................ 41 1 Author can be contacted at: d.elson@73-‐Ltd.com


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1 Introduction The Global Partnership on Forest Landscape Restoration (GPFLR), hosted by IUCN generates and disseminates knowledge for frontline policy makers and practitioners to take action that helps quicken the pace by which deforestation is controlled, land-‐based carbon stocks are enhanced and the concentration of atmospheric CO2 is stabilized. One of the most significant sources of global CO2 emissions is from land use (e.g. agricultural practices) and changes in land use (e.g. conversion of forestry to cropland). The recent focus of international efforts to reduce emissions has tended to dwell on forestry, for instance REDD+ projects for avoiding further deforestation and degradation, as this has been seen as the first least-‐cost method for cutting emissions. However, as these project have been tested on the ground, it has become clear that forests are not often so easily categorised and delineated. In reality, the line between primary forests, secondary forests, agroforests, trees on farms, woodlots and plantations is often blurred. Seen from above, this is a mosaic of land types. Seen from below -‐ from the point of view of the local person dwelling there -‐ this is a continuum of different land uses, all of which have different functions and useful outputs. But landscapes need to be understood in time as well as place. In the context of socio-‐economic change, these landscapes change over time. Formally this is known as the forest transition [see diagram], whereby land use (and especially tree cover) changes over time, firstly through deforestation, and then later into recovery of trees and ecosystem functions. Therefore, any landscape we encounter is somewhere along this transition. However, socio-‐economic change is not always the same as development. It is possible to have reversals of human development (for instance war and famine), which puts strain on landscapes and ecosystems, and leads to rapid degradation of land and soil. Even when change happens in the name of economic progress, in a peaceful and prosperous times, the impact on landscapes and the people that occupy them can be destructive, as in the case of conversion of natural forests to oil palm plantations. At some point in the transition, the landscape can be regarded as ‘degraded’, and thus in need of restoration. This may happen naturally (as in the case of Puerto Rico), or it may require deliberate intervention to bring it about. Such interventions may often require investment, either from government, investors, donors, or by local people themselves. There are still many unanswered questions about how such investment can be attracted into landscape restoration, and how it should be structured to best serve the needs of local people, ecosystems, economic development and mitigating climate change.


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Initially, it is necessary to discuss the definition of land that needs to be restored. This may be served by a physical description of the landscape as degraded, denuded or in a critical condition. But this view of degradation depends on the beholder. Not long ago it was regarded as an improvement when forest land was cleared for cropland, or peatland drained, and it would have been strange to describe such improvements (which often required substantial investment) as somehow degrading to the landscape. For some people, oil palm plantations are beautiful in their orderliness, as well as representing prosperity and development. The level of land degradation may not be visible to many people, as it could be a scientific measurement of carbon stocks, biodiversity or ecosystem services. In order to restore the landscape, one may first need to agree which attribute is worth restoring. It is not always the case that these goals are mutually supporting: landscapes restored for maximum carbon sequestration may reduce the presence of hemiepiphytes, shrubs and lianas that are crucial for animal habitats and biodiversity. From the perspective of economic development, landscape restoration may focus on different outcomes and thus have different notions about what is most important (see table of restoration types). An exhausted logging concession may be seen as degraded because it lacks density of valuable hardwoods, and yet in all other respects it is still a healthy forest, with good carbon stocks. Local people may often focus on food, fuel and fibre as desirable landscape outputs, and thus alter landscapes to an agroforestry system. This is increasingly being seen as a positive restoration intervention, yet for years national parks and forest conservation areas have seen agroforestry (e.g. jungle rubber, cocoa, sago) as an invasive destructive activity. Where investment is required for landscape restoration, the first question likely to be asked is: where is the cashflow? REDD+ projects are being viewed warily by investors as is becoming clear they are in fact a risky derivative investment masquerading as a simple commodity (indeed, what could be simpler than carbon?). Landscape restoration, on the other hand, holds the prospect of real revenue from tangible tradable commodities. However, just as a singular focus on carbon may have unintended consequences for local people and ecosystems, a demand for maximum early cashflow may not lead to the kind of landscape restoration indicated by the ‘forest transition’ model. Monoculture tree plantations may be an improvement on abandoned scrubland, but may not be the most suitable intervention for that landscape. Who pays (or invests) in landscape restoration will often determine the goods and services that will be targeted, and these value judgements will be contested. Successful interventions will thus be site-‐specific and take account of the whole landscape, which is not just a physical survey, it also requires an understanding of how people currently use the land, and how they perceive its potential. Although the term ‘restoration’ implies returning the landscape to some previous point in history, in some cases, the land will actually be improved rather than simply restored. As rural landscapes come under further pressure to increase food production, and good farmland is lost to urbanization, it will become more important to bring unconventional landscapes into production. Areas once though barren may be restored by using trees, engineering and soil science. The Bonn Challenge set a target to restore 150 million hectares of deforested and degraded lands by 2020. Putting in place these measures will contribute net benefits to local economies worth more than 84 billion USD per year.2 Even if the political will was present in all the countries where such restoration is necessary, the cost is probably beyond the scope of government budgets, even with external donor assistance. Private investment, from both local people as well as external investors, will be necessary to pre-‐finance the work required to bring these landscapes back into a shape whereby they can deliver economic outputs, social amenity and environmental benefits. 2 GPFLR Operational Work Plan: Knowledge, tools and capacity for implementing the Bonn Challenge (IUCN, 2013)


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However, the concept of ‘Private investment’ remains, in essence, the holy grail for the NGO and donor community and its mythical status obscures its true meaning. There is a tendency to link the desirable outputs from landscape restoration to the apparent huge stock of private capital, and to suggest that private investors ‘ought’ to invest, or that private assets can somehow be ‘unlocked’ in order to meet the Bonn Challenge target. This magical thinking is counterproductive, as it gives the impression that landscape restoration is an end, in and of itself. History suggests that, in order to work, investment in landscapes will be the means to an important end that is desirable to both government and the locals. The private sector invests to make a profit, not in a collective effort to restore landscapes. This is as true of the smallholder building terraces on a steep hillside in Kenya as it is of the London investment fund financing the planting of trees in Uganda. Taken en masse, and with tolerable conditions of governance and accountability, the aggregate effect of the multitude of private investors, both small and large, is that landscape restoration just ‘happens’, as the pursuit of commercial interests is aligned with the wider economic, social and environmental objectives. To bring about this confluence of private and public interest requires collective action by governments, communities, firms and civil society. Allowing any one group to prevail at the expense of another will probably not lead to legitimate landscape restoration. Certain instruments of public policy or donor action may play a part in de-‐risking certain kinds of investments, or incentivising one type over another. In many ways, the process of mobilising private investment is the most important and beneficial aspect of landscape restoration, as to achieve it requires the sort of convergence of public policy, democratic legitimacy and institutional reform that is associated with successful and resilient economies. Table: Types of landscape restoration Focus Example Natural forest restoration • Rehabilitation of logged-‐over & badly managed forest

• Enrichment planting of valuable species Landscape rehabilitation • Reforestation of degraded areas

• Agroforestry -‐ upgrading and market access • Re-‐wetting of peatlands

Conservation & Bio-‐diversity • Habitat rehabilitation, wildlife corridors • Reserves and parks

Carbon sequestration • REDD+ or VCS projects with main focus on enhancing C stock Landscape Enhancement • Afforestation

• Improving unconventional landscapes • e.g. sand dune stabilization in Niger, hillside terracing in Eritrea

The purpose of this document is to summarise the broad state of knowledge on private sector investment in landscape restoration, key knowledge gaps and options for mobilising private investment in forest and landscape restoration. This will provide the basis for the terms of reference of a larger study. The main study will therefore review landscape restoration projects that have taken place in the past, those that are being implemented today, and plans for future projects. The aim is to develop some practical frameworks that allow project developers, investors, NGOs, donors and community based organizations to evaluate options for landscape restoration projects, and ensure they are likely to be successful in the terms of financial, economic, ecological and socio-‐cultural benefits and sustainability.


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2 Documentation, mapping and identification of existing information and examples of investment into landscape restoration

2.1 Knowledge

i) Reports

Some recommended resources are listed in the bibliography, but this is just a small sample of the large amount of literature in the subject.

ii) Key Informants and project developers

Organization Contact person Notes Climate & Land Use Alliance (CLUA)

Chip Fay Evaluated the Ecosystem Restoration Concessions in Indonesia

Eco-‐Agriculture Partners Sara Scherr Arose out of the ‘Nairobi Declaration’. Foremost research organization promoting landscapes that support both agricultural production and biodiversity conservation

ICRAF

Frank Place Agroforestry resources

Profor

Peter Dewees Investment meetings (e.g. Nairobi 2011) and background papers

Ford Foundation Penny Davies Developing global landscape approaches & climate smart agriculture projects

Enviromarket Simon Petley Design of Forest Bonds http://www.enviromarket.co.uk

Munden Project Lou Munden Designing fund structures for landscape restoration and management: a) Dryad Project b) Inari Project (with FAO)

Seventy Three Pte.Ltd. Dominic Elson, Matthias Rhein

Developed investment model for community reforestation projects, also developing the Papua Green Investment Facility.

UNEP FI Ian Henderson Mobilising finance sector capital to stimulate REDD+ and sustainable land use http://www.unepfi.org/work_streams/redd_and_sustainable_land_use/index.html

Global Mechanism at UNCCD

Camilla Nordheim-‐Larsson

The OSLO approach involves assessing the net socio-‐economic benefits of sustainable land and ecosystem management (http://www.unccd.int/)

2.2 Project examples The examples listed below may be regarded as reference points for learning about the success factors, risks and outcomes to establish a broad profile of the existing public or private sector investment models in landscape restoration that result in enhanced biomass and soil carbon. Because of the diversity of projects and circumstances where landscape restoration has – or is in the process of – taking place, the examples have been grouped under various categories.


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This list is a starting point for study and is not yet complete – there may be important projects not listed, and there could also be projects listed here that are not worth further study. The GPFLR has already identified a number of projects as ‘learning sites’, and these are included in this list and marked with an asterisk.3 In each case, some ‘knowledge gaps’ are identified that could form the subject of further study.

2.2.1 Carbon finance projects Conventional avoided deforestation projects are reliant on the counter-‐factual performance in a natural forest setting against a theoretical ‘business as usual’ baseline (what would have happened if no project was in place), and therefore they are somewhat abstract and hard to value. The focus has therefore shifted to landscape restoration or forest rehabilitation, whereby carbon credits can be sold based on the amount sequestered in the changing landscape, either through VCS or as part of speculative REDD+ project. The attraction of such a scheme is that they seem to provide a source of cashflow early in the project before the restored landscape is able to provide any other income. However, the uncertainty in the carbon market, and the problems of leakage and non-‐permanence, may mean these schemes will struggle to survive on carbon revenue alone. Critical questions

• To what extent are REDD+ projects including FLR in their goals? • How do the projects integrate FLR in the financial model for the carbon investors – is it

an implementation cost, an investment for cashflow, or an additional ‘project expense’ to be covered by a donor?

• How do the projects manage trade-‐offs between carbon sequestration and local livelihoods, e.g. do they accept less carbon-‐rich restoration options if they have better income opportunities for local people? Who negotiates these trade-‐offs?

Examples Earth Carbon voluntary carbon initiative Mexico, Uganda, Mozambique Livelihoods Fund India, Indonesia, DRC, Senegal, Kenya PT Rimba Makmur Utama (Katingan) Indonesia Terra Global Capital Cambodia Ecosystems Restoration Associates Inc. DRC Godwana Link (Threshold Environmental) Australia

3 Projects in EU and USA have been excluded from the list, but may later be brought back into the study


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2.2.2 Conservation projects (international funding) International conservation projects seem to be evolving from the national parks model to a more flexible landscape model with less rigid boundaries. However, their approach to livelihoods and enterprise may not be wholly successful. Some of them are important scientific research sites, reflecting their heritage as arising from the conservation movement. The Birdlife Harapan case is interesting for study as it is the attempted restoration of a 100,000 hectare former timber concession, partly funded by RSPB in UK. It has encountered local difficulties and has needed to shift priorities and encompass real local livelihoods in its planning. This is an example of how landscape restoration may be less successful if it takes a purely conservation approach. Critical questions

• What is the long-‐term revenue model post-‐restoration? • Who pays for the ongoing restoration and maintenance, and who then benefits from the

revenue streams (if any)? • How do the projects manage trade-‐offs between biodiversity and local livelihoods, e.g.

do they accept less bio-‐diverse restoration options if they have better income opportunities for local people? Who negotiates these trade-‐offs?

Examples *Birdlife Harapan Indonesia Conservation farming in southern Zambia Zambia Lake Victoria Ecosystem Management Project (LAVEMP) East Africa *Mount Elgon National Park (IUCN) Uganda

*PRESENCE South Africa *Minshan Panda Reserve China *Tahura Bukit Soeharto (Tropenbos)

Indonesia


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2.2.3 General Country Examples In some cases, a country-‐wide or cross-‐boundary approach to landscape restoration has led to very impressive results in aggregate. They have often been a case of government-‐directed intervention, but may also be grass-‐roots action that was unplanned by any central body, but was also unhindered by regulatory obstacles or poor governance. In either case, the role of government is key, whether active or passive. Of particular interest is the deliberate expansion of planted forest in China, which has been driven by the state for both ecological reasons (e.g. reducing air-‐borne pollutants from sand storms, and reducing flooding) and commercial considerations (supply of pulp wood). The Niger example is remarkable for the way it ‘re-‐greened’ a fragile dryland landscape, with 200 million trees planted by smallholders. This was facilitated by revised government regulation (The Niger Rural Code), but largely driven by NGOs and smallholders. The rehabilitated landscape has led to yield improvements for staple crops. Vietnam shows how the government can successfully combine agrarian reform with a credit scheme for tree planting, transferring about a quarter of Vietnam's forestland to households during the past 15 years. This has led to a significant increase in planted forests, of which 40% (1 million ha) is owned by smallholders. Contrast this with Indonesia’s HTR scheme, which had very similar aims to the Vietnam plan but has yet to meet its goals. The most recent forest restoration plan has been announced by the President of Haiti, in and attempt to double forest cover by 2016 from the current level of just 2% – one of the lowest rates in the world. However, it will do this with a coercive approach: using environmental legislation dating back to 1920 and enforce fines and prison terms for cutting down trees, and aims "to turn every Haitian into a forest guard". It will be interesting to see how this project can simultaneously stimulate tree planting whilst also cutting off the market access for timber. An ecologist from IUCN-‐SSC Global Tree Specialist Group was quoted as saying: “Reforestation would proceed more effectively without tree-‐planting if mechanisms were enacted to restrict access to land”. This raises an important question: are humans the enemy of forest restoration, or the enablers? Critical questions

• What are the success factors for the large restoration schemes? • What causes some schemes to fail despite state-‐backing? • How is finance channeled to where it is most needed? • How high are the transaction costs when the state is managing the finance? • What matters more: regulatory ‘push’, or market ‘pull’? • To what extent do coercive laws such as logging and extraction bans impede or

facilitate FLR? • To what extent is local participation important for successful forest restoration

compared to the enforced removal and exclusion of people from forest areas?

Examples *Alto Acre Extractive Reserve Brazil Amazon Fund Brazil *Bosque Modelo Colinas Bajas Dominican Republic Ethiopia Strategic Investment Program Ethiopia FMNR -‐ Niger Niger Kagera River Basin: Transboundary Agro-‐Ecosystem Management

Uganda, Tanzania, Rwanda, and Burundi

*Doi Mae Salong Watershed Thailand


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Resource Management Service China *Gishwati Area Conservation Programme Rwanda Vietnam smallholder forestry programme Vietnam Hutan Tanaman Rakyat Programme Indonesia Haiti Forest Restoration Programme Haiti *COCOB – Bikoro Project DRC *ITTO/FORIG Community Collaborative Restoration Ghana *Tasmania Forest Restoration Australia *Miyun Watershed China


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2.2.4 Historic Examples of land restoration The forest transition theory suggests that over time, and in pace with economic development, forest loss will be reversed and a new equilibrium will arise. Looking at historical examples helps us understand how this comes about, to establish if this is an immanent process or if there were underlying policy drivers and investment events that made it possible. Landscape restoration in the past has often been more accurately termed landscape development, with the objective of maximizing productivity or economic returns. Such programmes were characterized by high levels of integration between macro and micro policy issues, and between policy, regulations, financing, implementation. They would also seek a good balance of state, private and collective interests, and overcome the tension between local and national needs. Following from this, it is fair to assume that initial conditions, including culture and history, will matter to landscape restoration, and so will policy. Pathways leading to successful landscape restoration programmes, are therefore very likely to be unique. The oldest example here is the Prussian system of ‘landscape bonds’, used in the late 18th Century to help farmers restore their land after several years of destructive war. It introduced the innovation of ‘covered bond’ financing, that could today be seen as a model for forest bonds. It also tied the financing to certain obligations on the part of the lender to care for the long term health of the landscape. The Swedish forest law of 1903 is an example of a deliberate policy intervention, but it was accompanied by private investment and action that led to Sweden doubling the standing volume of the forest (large parts of which were very degraded) whilst becoming a dominant player in the international timber market, and now using sustainable timber as part of its power generation mix. It was thus an ideal mix of economic, social and environmental goals, and it was led by the smallholders themselves. In contrast, the Costa Rica experience was an example of how broader social and economic changes lead to the forest transition. The strong forest regrowth during the 1990s may have been due to the fall in the price of agricultural commodities. Pastures were abandoned in response to declining beef markets and better economic opportunities becoming available in the urban areas. The abandoned land regenerated naturally. Critical questions

• Is land reform (to redistribute land from large landowners to smallholders) a pre-‐condition of more sustainable land use?

• To what extent is FLR compatible with human social and economic development? • How can public finance mechanisms be made compatible with private landowner

interests in the cause of FLR? • Is the forest transition an inescapable artifact of the long term development process,

which should not be short-‐circuited? Examples Costa Rica Forest Recovery Costa Rica Puerto Rico Forest Recovery Puerto Rico The 1903 Swedish Forest Law Sweden 18th Century Prussian Landscape Bonds Germany


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2.2.5 Investment Funds Investment funds invest capital on behalf of others. They usually have a fiduciary responsibility to maximise financial returns, and thus may not be compatible with sustainable landscape restoration. They will also need predictable cashflow. Thus they may focus on fast-‐growing timber rather than mixed agroforestry. They may have difficulty modelling the financial returns from a more complex mixed landscape. The GSFF invests money on behalf of the Lutheran church and thus has a remit to include social and environmental goals in its planning. The African Agricultural Capital Fund has a structure that includes first-‐loss cover from USAID and equity finance from various philanthropic foundations, which may allow it to invest in more complex landscape deals. Other funds may be more overtly commercial, and thus focus only on timberlands. It would be instructive to compare these different fund management approaches, to see if ‘impact’ investment really is leading to different types of landscapes being formed. Critical questions

• To what extent are timber investment funds differentiated by their approach to balancing timber yield with forest biodiversity? Do investors care?

• Are non-‐timber forest products seen as part of the business model, or a co-‐benefit outside the model (i.e. not part of the target rate of return)?

• To what extent are local livelihoods a core driver of investment value, or are they a co-‐benefit to satisfy CSR needs?

• Where are there examples of projects where profit-‐oriented investment funds have led to successful FLR?

Examples Actis Africa Agribusiness Fund Tanzania African Agricultural Capital Fund Cambium Fund Brazil, Australia Global Solidarity Forest Fund (GSFF) -‐ Lutheran Church of Sweden

Mozambique, Angola

International Woodland Company (IWC) New Forests Tropical Asia Forest Fund Malaysia, Indonesia, and Vietnam. Phaunos Timber Fund


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2.2.6 Large Donor-‐funded projects Multilateral and bilateral donors have been involved in landscape restoration for some time, but their programmes were often not conceptualised in that way. Instead, they were very often seeking other goals, such as poverty alleviation. Recently, their focus has been on climate change – either mitigation or adaption. The Nepal LFP was an example of a project that had good outcomes for the landscape but was firmly focused on the livelihoods of the poorest. In contrast the AusAid Kalimantan Forests & Climate Partnership is a largely scientific approach to restoring a large peatland area that was destroyed by the infamous ‘mega-‐rice project’ and thus reduce emissions. A recent evaluation reported that only 50,000 trees have been planted against the initial target of 100 million, and that the project has been subject to some protests from indigenous and community groups. Scale and soft money does not seem to be a precursor for success, for instance the ADB Laos project was an ambitious attempt to finance smallholders that would start woodlots, but has apparently led to indebtedness and not much tree-‐planting. Critical questions

• Are donor projects more successful if they focus on livelihoods first and FLR as a co-‐benefit?

• How sophisticated is the financing structure? • To what extent is donor finance blended with private capital?

Examples ADB plantation programme Laos AusAid -‐ Kalimantan Forests & Climate Partnership Indonesia DFID -‐ Nepal Livelihoods & Forestry Programme Nepal UKCCU -‐ Papua Green Investment Facility Indonesia DFID (CDC) -‐ TANWAT Project Tanzania World Bank -‐ Fadama III project Nigeria


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2.2.7 Private Sector companies & projects The ‘private’ sector in this case encompasses non-‐profit organizations and various entities that seem to have broad goals of land restoration (mainly reforestation) and social improvement. For Forest Finance, the local people benefit through skills training and job opportunities, but the land is owned by the company (which is a common requirement for private investment in tree planting). In contrast, Planting Empowerment leases land from local people, and is interested in assisting communities to accrue and manage financial assets. Critical questions

• What is the correlation between local ownership and control, and successful FLR outcomes?

• Does local involvement in landscape planning lead to more diverse planting? • To what extent are investors attracted by the prospect of total landscape restoration, or

by the prospect of timber revenue? • What percentage of financing is dependent on either carbon /PES, or on donor grants?

Examples Cochabamba Bolivia Ecobosques Costa Rica, Argentina Face the Future Uganda, Ecuador, Malaysia Forest Finance Colombia, Costa Rica, Germany, Panama,

Peru and Vietnam Forest Trends -‐ Climate Smart Coffee Ethiopia, Ghana Futuro Forestal Panama Green resources Limited Tanzania Kilombero Valley Teak Company Tanzania New Forests Company (UK) Uganda, Mozambique, Tanzania,

Rwanda Planting Empowerment Panama Precious Woods Reforestation Projects Brazil, Costa Rica, Nicaragua Tatepa Tanzania


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2.2.8 Project Sponsors / Investors These organizations tend to be large, often global, players that have a broad focus on social, environmental and economic development. Some of them, such as CDC and FinnFund originated as bilateral aid projects, whilst others (e.g IFC, GEF) are multilateral initiatives. Others are private banks or investment management companies. They all share a common belief that investing via the private sector is the best route to attaining social and environmental goals. Not all of them have specific plans for FLR, although they all have some impact on the sector, perhaps unintentionally. For instance, IFC has been criticised for investing in companies responsible for landscape degradation. CDC has had to bring its policies on landscape use up to date, re-‐visiting long-‐standing projects (such as TANWAT) to make them more appropriate to well-‐managed landscapes. The CAF project is worth close study: Led by Forest Trends and the Katoomba Group, it aims to design ‘Climate-‐Smart Agricultural Finance’ models that can (a) deliver climate resilience and mitigation gains, (b) improve agricultural productivity, (c) protect natural ecosystems, and (d) leverage public as well as new private sector finance. The project is funded by Rockefeller Foundation: a leading proponent of ‘impact’ investment. In contrast, New Forests Pty.Ltd. (not to be confused with New Forests Company UK) is engaged in attracting private capital for developing sustainable forestry investments focused on existing rubberwood and timber plantations, greenfield timber plantations and mixed land-‐use areas. The Nedbank and BNP Paribas projects are structured around carbon revenue, and it would be interesting to learn how that guides landscape restoration choices, and how it will achieve long term sustainability. Critical questions

• How have investor goals changed over time? Is FLR becoming more common as a deliberate project goal?

• Where investors have switched focus to FLR, what was the reason? What other project goals does FLR support?

• How can complex projects such as ‘climate smart agriculture finance’ be structured to account for multiple revenue streams and timelines?

• In public/private finance partnerships, which is the leader and which is the follower? • How is enabling investment kept separate from asset finance?

Examples Pearl Capital Africa Climate-‐Smart Agricultural Finance (CAF) Ethiopia, Ghana Commonwealth Development Corporation (CDC) Global FinnFund Global Environment Fund (GEF) Global Global-‐Woods International AG Uganda, Paraguay, Argentina IFC Global Nedbank Kenya & Uganda New Forests Pty.Ltd (Australia) Indonesia, Malaysia, Vietnam Private Infrastructure Development Group (PIDG) Global Sindicatum Indonesia Wildlife Works / BNP Paribas Kenya


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2.2.9 Projects led by Local NGOs and cooperatives In the absence of private sector investment, or often in anticipation of it, some local NGOS and cooperatives just organise themselves to undertake various forms of landscape restoration. Often with limited capital, they need to think of smarter ways to achieve their objectives. They may not have started out with a focus on FLR, for instance KHJL was set up to reduce illegal logging by increasing the returns to legitimate teak cultivation on private lands, and then expanded into a project to restore an area of state-‐owned degraded land. NGOs often have to adapt their approach, for instance Reforestamos Mexico wanted to protect priority lands for preservation, so acquired 470 hectares of cloud forest in Sierra Gorda (which is similar to how a private investor may approach the project). But they soon realized that to ensure the recovery of forest landscapes, they had to work with ejidos and communities, who own more than 70% of land in Mexico. Lake Taupo Forest Trust is an indigenous owned and operated forestry enterprise. To overcome the problem of fragmentation and small scale, individual landholdings have been aggregated into a large estate with integrated management. The trust is investing in tree planting, but also accruing a strong asset base by enhancing the value of the landscape whilst also building a business with a strong balance sheet. This approach to asset growth and diversification (rather similar to a Sovereign Wealth Fund, in fact) is a sophisticated way to enable indigenous communities to move from short-‐term rent seeking and build long-‐term sustainable wealth, comprising both natural and financial capital. Critical questions

• What are the financing needs of local bottom-‐up FLR projects? • To what extent is the prospect of timber revenue a driver for local community and

smallholder involvement in FLR? • What types of land tenure are most suitable for an FLR project to be successful? • Do financial constraints lead to innovation in organisational approach or product

development? Examples Agroforestry in Central highlands of Embu, Kenya Kenya Bosques Pico Bonito Honduras Dipantara Indonesia *Gomo (AFED & IUCN) DRC Isles of Harris and Lewis community trust Scotland *Kampar Peninsula Peat Forest Indonesia *Kibera & Mukungu Burundi Koperasi Hutan Jaya Lestari (KHJL) Indonesia Lake Taupo Forest Trust New Zealand Masaranga (Willie Smits) Indonesia *Mukura (ARECO) Rwanda Reforestamos Mexico Mexico Wana Lestari Menoreh Indonesia


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2.2.10 Public-‐Private Partnerships In most tropical countries the state claims ownership of the majority of the forest estate, and has attempted to manage it in the national interest. In general, the state has been a poor landlord, failing to overcome the principal-‐agent problem when allocating concessions to private companies. However, landscape restoration at scale (often of land that has been degraded by the concessions or other private land clearance) requires stable governance and appropriate regulations. It may also need de-‐risking of private investments. The ‘reformed’ state (e.g. Brazil and Indonesia) is therefore in a quandary: how to overcome the failings of historic state control without inadvertently allowing the private sector to capture excess rents. Furthermore, such enlightened governments will be looking for ways to devolve landscape management to local communities, as policy-‐makers come to recognise that local control is one of the keys to successful projects on the ground. The answer may be some form of Public-‐Private Partnership, whereby the state covers the general risk, and private capital and management are deployed to execute the project. This may be a three-‐way partnership with bi-‐lateral donors, government and smallholders, as in the case of the proposed Indonesia Investment Facility. Or it could be a more conventional credit enhancement programme, such as that planned by the Strategic Affairs Secretariat (SAE) of the Brazilian government to stimulate more private financing in the forest sector. This will offer a grace period for repayments for borrowers. At the same time the SAE recognizes that there is a need to provide guarantees to investors since plantation development requires substantial investment for periods that can range from 7 to 35 years before income is generated. Critical questions

• Are public finance mechanisms, for instance concessional loans, subject to the moral hazard problem?

• Are public-‐private partnerships superior to top-‐down state programmes in terms of their success in restoring landscapes and improving livelihoods?

• Has any government been successful in setting up a system to evaluate projects, distribute finance and monitor performance in a large landscape?

• To what extent is finance earmarked for FLR and smallholder development in reality used to finance industrial plantations?

Examples Brazil PPP funding for plantations Brazil PINFOR Guatemala Southern Agricultural Growth Corridor of Tanzania (SAGCOT) Tanzania

Tanzania Public-‐Private Partnership (PPP) Tanzania Catskills Watershed (Catskill Center for Conservation and Development)

USA


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2.2.11 Company-‐community partnerships Private sector companies that rely on a consistent supply of raw materials have in the past set up a vertically integrated supply chain in order to control every aspect of the process from upstream to downstream. However, this approach has not always been efficient in terms of landscape utilisation and rural economic development. Some companies have therefore chosen to develop partnerships with upstream suppliers of raw materials (especially timber, but now moving into other commodities). In the case of Greenwood’s need for high quality timber for guitar parts, this means cultivating a long-‐term relationship with the community in order to foster mutual trust and cooperation. The Novella Partnership was founded to help scale up the production of Allanblackia oil in Ghana, Tanzania and Nigeria and at the same time to reduce poverty, promote sustainable enterprise and biodiversity conservation in Africa. IUCN is also involved, working to integrate forest landscape restoration principles into the different models for increased production of Allanblackia. More conventional partnerships are ‘outgrower’ schemes, whereby the company gives inputs (seeds, fertilizers etc.) and technical training, while local communities agree to set aside a portion of their land for cultivation, and to sell the produce to the company at an agreed price formula. There do not seem to be many schemes that have included landscape restoration. But there is potential for large commercial buyers of cocoa, coffee and other NTFPs to link estate development with broader landscape goals. Cooperative café Timor (CCT) is one example of such a scheme, where teak trees have been planted for shade and to enhance landscapes and livelihoods. Critical questions

• To what extent is tree-‐planting an unintended consequence of improving certain cash crop yields and quality?

• Are commodity buyers capable and willing to tie pre-‐financing deals to ecosystem goals?

• What is the level of awareness amongst buyers of the long term risks facing their product because of degraded landscapes and weaker ecosystems, and what steps are they taking to invest in risk mitigation?

• How can product buyers channel finance for producers to invest in improving their farms and landscapes?

Examples GreenWood Honduras and Peru Kericho tea plantation restoration Kenya Kilimo Trust Uganda & East Africa Mondi South Africa NCBA / Cooperative Cafe Timor Timor-‐Leste Novella Partnership Ghana, Tanzania and Nigeria PhytoTrade Southern Africa


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3 Key conditions, analysis frameworks and knowledge gaps for the main study This paper will not attempt to rehearse the debate over what is the best option for landscape restoration, or cover the historical development of the subject. However, this paper will demonstrate that scaling up FLR is not just a case of understanding ‘what investors want’. There are many different types of investors, and a myriad of combinations of restoration approaches and investment opportunities. Unpicking this requires a holistic approach that recognises the complexity of the system. Landscape restoration concepts have moved on from the bifurcated distinction between monoculture tree plantations on one side, and the goal of recreated natural forest on the other. However, recognising the value of mosaic and agroforestry landscapes has introduced more complexity, both in the physical sense, but also in the social and economic sense. Crudely put, monocultures and homeostatic natural forest are both relatively uncomplex. From an investment perspective, monoculture tree plantations have a clear revenue stream from timber or oils, whilst a protected natural forest may be able to trade carbon or other environmental services. Although there is now more attention given to the diverse forest landscape approach there still seems to be a case of 'pick your goal'. Is it for carbon? Or fisheries? or flood control? or supplying pulp wood to the mill? The sense is that an investor will be led by just one of these things. But this runs the risk of transferring the relative clarity of a monoculture plantation to the complexity of a forest landscape without first recognizing that the whole dimension of the proposition changes in proportion to the diversification, but only up to a point. This can be illustrated with a simplified chart (below) that plots value to local economy, biodiversity and complexity. The ‘sweet spot’ is the centre of the chart, being the best overlap of both economics and diversity. However, the best balance of local economic value and landscape diversity is also the point where complexity peaks. These landscapes are multi-‐functional and multi-‐story, encompassing local people, a broad range of different products and services, and overlapping rights and development plans. Modelling the development cost, revenue streams and benefit sharing is more challenging, and matching investors to opportunities takes more work. On the other hand, landscape approaches are more honest about the trade-‐offs required and the role of local economic development plans. Any landscape change involves trade-‐offs, for instance between national and local economic needs (in the case of mining), local versus export crops (in case of estates and plantations), traditional swidden usage versus conservation (in case of preserved natural forest). In most cases, these trade –offs are between powerful ‘winners’ and powerless ‘losers’. Arguably, mixed forest landscape restoration narrows the asymmetry between interest groups, by balancing economic value with local needs and ecosystem viability. This has been the attraction of ‘landscape approaches’.


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Chart: Mapping complexity in landscapes (‘complexity’ is a composite of social, environmental and economic aspects) However, the theoretical appeal of landscape approaches has not yet led to widespread adoption at scale, except in some notable cases which are highlighted in the previous section. Even in countries where mixed forest landscape restoration has taken place, this is often in spite of the conditions, rather than because of them. For instance, Indonesia has seen some successful pockets of FLR, but the national discourse is in favour of plantations on one side and REDD+ ecosystem restoration schemes on the other. Neither of these options holds much potential for building rural economies, but both of them are undoubtedly simpler to define, finance and implement. The challenge for the GPFLR project will be to clarify the forest landscape restoration business model, whilst recognising that it is both complex and dynamic, meaning, by default, the best solutions will tend to be unique. The rest of this section of the paper will build up an understanding of private sector investment and how to align investor objectives with local and global needs, by placing the local rural economy at the heart of the system. There is no ‘one size fits all’ model at the end of this road, and no simple panacea. A forest landscape restoration project that builds upon the foundation of local social context and economic potential is perhaps more likely to be flexible enough to account for the complexity of the system, and robust enough to account for the ever-‐shifting socio-‐economic and political context. Box: Motivation for investing in Forest Landscape Restoration If we view investment only through the lens of the direct output (e.g. return on financial investment for the external investor, or long term asset growth for the smallholder), then we will miss the many other reasons for restoring landscapes. There is increasing evidence that investing in healthy landscapes will protect other investments and assets (Scherr 2011). In a resource-‐constrained world, reliable flows of ecosystem services are increasingly critical to the business models of a wide range of industries and sectors.

Need / sector Reason to invest in Landscape Restoration Aquaculture Restore mangroves to improve aquaculture and protect

coastline from storm surges and tsunami Fisheries Reduce coral bleaching from run-‐off of nitrates and excess

Bio-diversity / Forest density

Valu

e to

loca

l eco

nom

y

Com

plex

ity

Degraded land

Monoculture Multi-functionForest Landscape

ForestReserve

Best compromisefor financial return

& biodiversity.But:

With most complexity


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sedimentation from erosion Flood mitigation in cities Denuded hillsides leads to flash flooding (e.g. restoration of

Puncak could save Jakarta millions of dollars in annual flood costs)

Watershed rehabilitation As urbanisation increases and city water tables drop, it becomes more important to manage hinterland watersheds.

Reduce exposure to correlated prices Conventional intensive farming is correlated to fuel prices. Agroecology (conservation agriculture using trees in landscapes) is less dependent on fossil fuels, and thus uncorrelated.

Timber concessions (in natural forest)

Investing in buffer zones outside the concession may: reduce illegal logging and slash and burn agriculture within concession, mitigate fire, maintain biodiversity corridors, maintain genetic diversity and protect high value species, prevent market distortions that suppress timber prices.

Arable farmers Landscape restoration can improve pollination, integrated pest management, water management, and soil fertility.

Land owners (including smallholders)

Degraded landscapes and neglected forest frontier reduces land values and thus returns to investment for farming. Landscape restoration improves asset values by: reducing low value / low yield open access land; and improving ecological conditions such as stable water table, reduced erosion, wind breaks and aesthetic value.

Public Infrastructure Protect roads from landslides. Benefits public sector through reduced repair costs, and benefits private sector through keeping market access open.

Processing industry Ensure stable supply of raw materials, at predictable costs (e.g. pulp wood, sawn wood for furniture, tree crops such as coffee, cacao etc.)

Social harmony Improved livelihoods, stronger tenure and more resilient rural economy reduces conflict, and thus lowers risks of investing in other assets.

3.1 Defining private sector investment In this context, private sector investors are distinct from government, NGOs or donors. Note that private investors are not just foreign capital, banks or investment funds. Smallholders and indigenous people are also private investors, and in aggregate actually invest more in forest restoration and management than any other group of private investors (for instance forest communities invest $2.6 billion in conservation, exceeding state funding and all forms of international conservation expenditure combined4). For this study it will be important to maintain a distinction between local private investors (e.g. smallholders, communities, rights-‐holders, indigenous people) and what we may call ‘external’ private investors, as they often have quite different objectives and modes of operation. ‘External’ may mean they represent foreign capital (either directly or as trustees), but it could also describe domestic investors, such as companies. In some circumstances State-‐owned enterprises could be said to be ‘private’ capital as they are operating in the private sector. Conversely, a parastatal that is operating in the public interest (e.g. as a commodity marketing board), would not be regarded as a private investor. Therefore, we need to understand more about how these different types of investment occur in landscapes, how they interact in order to meet their goals, and the extent to which different investors

4 Sherr, S.J., White, A. and Kaimowitz, D. (2003) A new agenda for forest conservation and poverty reduction: Making markets work for low-‐income producers. Washington, DC: Forest Trends


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are mutually exclusive or ‘crowd out’ other types of investment. The different types of investment are summarised in the table below. Private versus public investment in landscape restoration Local private investors External private investors Public sector investment Smallholders Farmers Forest dwelling rights-‐holders Indigenous people Local cooperatives Businesses owned by local people and cooperatives Local entrepreneurs

Foreign investors Investment funds Non-‐local Companies (e.g. timber, palm oil, processing companies) Domestic urban investors Foreign & Domestic banks Some state owned enterprises REDD+ funds Concession holders Conservation NGOs Environmental funds

Public spending and subsidies Bi-‐lateral or multi-‐lateral donors Parastatal organizations Some state owned enterprises

3.2 What is the role for private sector investment in landscape restoration? Engaging with the private sector to invest in landscape restoration is necessary because of the scale of the problem, and also because the private sector is often engaged in activities that work against effective landscape restoration:

3.2.1 The scale of the problem is beyond the public purse It has been estimated that 1.5 billion hectares of lost or degraded forest lands worldwide offer opportunities for restoration as forests, woodlots, or agroforestry (GPFLR 2011). The capital required to restore such a huge expanse of land is beyond the capacity of public sector finance or the various bilateral and multilateral funds committed to REDD+. Furthermore, a large amount of this land, if not actually formally owned by smallholders and local people, is often under their de facto control. Thus the management and restoration of such landscapes will be subject to decisions taken in households and within communities rather than in government offices or global planning meetings. Besides the land managed by local people, there is a large amount of degraded land held in the name of private corporations, either through freehold or lease. In some cases it is the company itself that degraded the land, as in the case of logged-‐over natural forest concessions in Indonesia. In other cases, previously denuded land has been taken over by private companies with a view to investing in it for biofuels, cereals or pasture – which may not lead to its full ecological restoration. Since the global financial crisis, as many other assets have become too risky or bring too little return, the commodity boom has led to wide scale speculation in land. Much of the land allocated in so-‐called ‘land grabs’ has in fact been held in portfolios and not been developed. Of the 464 land acquisitions identified by the World Bank between October 2008 and August 2009, production had begun on only one-‐fifth of them, partly because many deals were made by land speculators, not agribusiness investors. Even the land that is still firmly under the control of the state may still require private investment at scale in order to bring about restoration. In many countries the state has been a careless landlord, allowing one of the country’s most precious assets – fertile and productive forests or mosaic lands -‐ to become degraded. Although concession contracts for forestry or mining may include obligations to the lessee to restore the land after use, in many cases this has not been enforced, and thus the extent of degraded land has increased. Indeed, poor management and inefficient usage of forests has probably done more to devalue certain country’s asset base than straight-‐forward conversion to soy or oil palm. It is therefore clear that in developing countries with weak institutions and lack of resources,


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whoever may be theoretically responsible for land, or formally liable for its restoration, in practice it will require a joint effort to bring about land restoration at scale. And the private sector – both the local people and the external investors – will be critical as suppliers of capital, labour, know-‐how and access to markets. This does not mean that FLR is inherently expensive, or that it is impossible without external capital. There are many examples where local communities have restored forest landscapes because it matters to them. Therefore, we can learn from such examples in order to see how private sector approaches be better designed – and combined with multiple scales of action by the public sector -‐ to ensure both economic and environmental sustainability.

3.2.2 Improve the incentives for private sector investment The scientific literature is filled with compelling examples as to why forest landscape restoration is a rational activity for any kind of investor. It can raise agricultural yields, increase income diversity and resilience, be part of a climate change adaptation or mitigation strategy, raise land values and provide new sources of renewable energy. Yet, over 1.5 billion hectares worldwide is degraded. What is going wrong? In classical economic theory, private sector investment is more advantageous than public action, as it assumes private capital will be invested rationally, in a manner that maximises an individual or firm’s marginal return. This ensures that resources are allocated efficiently for maximum welfare. In practice, of course, this outcome requires a perfect set of conditions, which is never the case even in developed country settings, and is inconceivable in the places where investment in landscape restoration is required. Where conditions are not perfect, investments may be irrational, poorly executed and have unintended consequences. In many cases, the ‘right’ sort of investment may not be possible at all. The forestry sector seems to be especially prone to these kinds of market failures, for example:

• Industrial timber concession are rapidly denuded in order to accelerate early cashflow, even though this greatly diminishes the longer term flow of income from the forest.

• Forest land is cleared – at private expense – but then not deployed to productive purposes such as plantations.

• Vertically-‐integrated industries (e.g. pulp and paper mills) drive down the cost of their own raw material supply to improve apparent profitability in the downstream processing unit, thus diminishing incentives to plant trees in the local area, which later leads to a raw material shortage and possible closure of the mill.

• Degraded land lies unused, while natural forests are felled for new plantations • As nearby fuel wood supplies are depleted, prices rise and smallholders over-‐extract from

their woodlots rather than aim for a sustainable supply, even though this will lead to misery when the fuel runs out.

For some of the these problems, the answer lies in better regulation, tenure reform and confronting monopolies, oligarchs and rent-‐seekers. Where these market failures prevail, landscape restoration may still be possible, but the financial rationale for it will be absent or very thin, and thus subsidy from some public body will be required. Most countries of interest to this study are in some state of transition, both in terms of landscape and governance. Even where good regulations are in place, they may not be implemented. Private investment does not waiting for ‘good governance’ to prevail (if it did, many countries would never attract as much investment as they do), but poor governance increases risk, leads to exclusion of local people and may mean investments that undermine landscape goals rather than supports restoration. The incentives can work both ways: for good or ill. Therefore, analysing where investment in landscape restoration has been possible, and where it has stumbled, will enable us to evaluate the level of ‘good enough’ governance that is required, analyse the capacity gaps in both local and national government and understand more about how incentives may be adjusted in favour of FLR goals, and if so at what cost.


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3.3 Aligning private sector investment goals with local – and global -‐ needs It is clear that private sector investment at scale is required for landscape restoration. But it is also clear from recent history that such investment may not work in favour of either eco-‐systems or the long-‐term interests of local people. It is not sufficient to attract any investment at any cost – that is arguably what has occurred with ‘land grabs’, where governments have failed to account for the long term cost of the asset they are giving away to the investor. It may seem harsh to tell developing countries that ‘you get the investors you deserve’, but there is some truth in it. Where the state sets high standards, insists on social and environmental impact assessments and Free Prior and Informed Consent (FPIC), formal transaction costs rise for the investor, and the time to close a deal lengthens. But only the most tenacious and diligent investors are likely to remain in the field, and they are also those that are most likely to accept their obligations.5 But it would be lazy to characterise profit-‐driven private sector investors as ‘the wrong sort’, and philanthropists, conservation NGOs and corporate CSR projects as ‘the right sort’ of investor. Although conservation NGOs may acknowledge the importance of improving socio-‐economic conditions in order to meet conservation goals, they often encounter contradictions in the execution of their projects. In particular, local livelihood development is often an afterthought, and may in some cases be seen as incompatible with nature conservation.6 This can reinforce the impression that the costs of ecosystem restoration are borne locally (through reduced livelihood options and access to land), whilst the benefits accrue far from the forest, as local usage value is subordinated to global ‘option value.’ Many rights-‐groups are worried that REDD+ projects are likely to suffer from similar conflicting goals. Different investors have different goals for investing in landscapes. In a crude typology: Profit-‐seeking investors wish to maximise risk-‐adjusted return on capital; processing companies want cheap raw materials; conservation investors have ecological goals; social impact investors consider development outcomes such as education and gender; local people are interested in maximising income from the next harvest. For the two groups, the ultimate goals of investing in trees and landscapes might be summarized as follows: For the investor: Acceptable returns on capital (economic, environmental, or social returns, depending on the type of investor) invested in viable entities, often over relatively short time frames with acceptably low transaction costs, where stability, liquidity, and measurable risk are preconditions. For the rights-‐holder: Strengthening of local control (autonomy) over land, resources, and enterprises so that holistic social, environmental, and economic aspirations can be furthered on the rights-‐holders’ terms. In most – if not all – cases of landscape restoration, local people are central to the activity, either as rights-‐holders, smallholders or hired labour. There is a growing recognition that locally controlled forestry (LCF) has clear attractions: it implies local participation, decentralisation and equity. It also claims some rationale as a superior landscape management system (compared to top-‐down state or corporate control), as local people are more likely to have cultural and practical knowledge of the local landscape, and have a vested interest in the long-‐term conservation of its ecological services and income-‐generating features. The definition of locally controlled forestry, that could just as easily apply to any landscape, is:

5 As The Munden Project (2012) demonstrates, there are powerful financial reasons for investors to be diligent when negotiating use of land. Failing to do so can significantly increase costs and even lead to the project being abandoned. 6 For an example of this tendency see the Birdlife Harapan Ecosystem Restoration Concession in Sumatra, Indonesia.


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“The local right for forest owner families and communities to make decisions on commercial forest management and land use, with secure tenure rights, freedom of association and access to markets and technology.”7 The investor’s response to the demand for local control will depend on their goals. There is certainly a rights-‐based argument to be made that all external investment in farming and forestry should place local people at the heart of the matter – giving them a good degree of control and ensuring they are part of a fair benefits sharing plan. In landscape restoration there seems to be a strong practical reason for doing this: the evidence shows that when local people have a degree of control of the project, and benefit directly from its success – landscape restoration is more successful, replicable and scaleable. The next step for research on this subject is to test this hypothesis, and establish what conditions are required to make it robust. BOX: Devolving rights and responsibilities in European forestry In Germany, community forests are often managed by the local government authority, as a democratically representative body it is best-‐placed to navigate the trade-‐offs required to balance public and private claims on the resource. This may work because it is a delegation of powers upwards (from the community to the local political institution), whereas in many tropical forest countries, the decentralization movement has pushed some autonomy over forests outwards to district governments; with little discernible improvement in management, and in many cases much more degradation. The ideal sequence of institutional change may therefore be to start at the bottom and allow self-‐ declared communities to define the boundaries of their forest and negotiate with proximate communities over rights and access (blending traditional norms with modern legal legibility), which may include gazetting smallholdings in some places, and then over time allow these institutions to merge with the local political authorities providing they have legitimacy and accountability. Even where local people do have formal rights, as in most northern hemisphere smallholder forests, they do not necessarily have much influence over how the land is managed. Unlike most other land types, the forest is regarded as either a local amenity, a national strategic asset or a global public good. For instance, community forests in Germany have clear legal title but they are heavily regulated, with sustainability and local amenity value as the objectives rather than economic value. The Norwegian system gives the forest owner ‘freedom with responsibility,’ meaning that in the event of mismanagement the forest will be put under public management, with the costs of any work charged to the owner. (Elson, 2010)

3.4 Grow rural economies, not just trees. Putting local people at the centre of things means more than simply developing a compensation model (as often proposed by REDD+ projects), or employing them as labour. In many cases the land became denuded in the first place as a consequence of a failed rural economic model, for instance unregulated industrial forestry, or clearance for large-‐scale plantations. Where local people live with unclear title, poor rural public goods, no extension service, and the absence of viable local rural non-‐farm economy, then this may be the perfect conditions for marginal subsistence farming, poverty and continued landscape degradation (or at the best, stasis). Any solution to the landscape problem must also tackle these underlying socio-‐economic conditions, or else the project is likely to fail once again. In order to incentivize the planting of such trees, smallholders need reasonably secure tenure, access to capital, technology and markets. Even with these conditions in place, Wiggins (2011) has pointed out that not all farmers are alike, or respond to incentives in the same way. Some of them do not even want to be farmers. See the box below (‘Small farm economics and the agrarian transition’) for some 7 As defined by: the Global Alliance of Community Forestry (GACF), the International Family Forestry Alliance (IFFA) and the International Alliance of Indigenous and Tribal Peoples of Tropical Forests (IAITPTF), known collectively as the ‘G3’.


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background on this issue. It is possible that agrarian transition and landscape restoration are inter-‐dependent. Autonomous and resilient smallholders are more likely to be receptive to landscape restoration projects than down-‐trodden peasants or landless labourers. This could be a positive feedback loop: where the rural economy is boosted – for instance through increased yields brought about through introducing trees into landscapes – this in turn stimulates the rural non-‐farm economy, and enables a benign agrarian transition to take place. This socio-‐economic transition is correlated with the forest transition, but it is not clear which is the cause and which is the effect. Understanding the relationship between these transitions will be an important part of developing the correct set of conditions for private sector investment. Box: Small farm economics and the agrarian transition Productivity may be constrained by the fact that many small farms are simply too small to be viable. The optimal farm size varies according to crop, conditions and location. For farmers with less than 3 hectares, then a quarter to half of these smallholders are in marginal conditions, in terms of land, assets, quality of soil, remoteness, political connections, isolation from markets etc. It is most unlikely that they will ever be capable of investing in their farm in order to become a fully commercial operation from which they can earn a decent living (Wiggins, 2011). The policy response to this in many developing countries has been to favour very large plantations and estates, which are assumed to benefit from economies of scale and thus improve productivity. However, there seems to be no evidence that larger farms -‐ above a certain size -‐achieve any further economies of scale. In developed countries, where the combination of clear property rights and access to finance would enable consolidation into huge farms if that was the best use of capital, most farms are still owned and managed by families (97% of farms in USA are family farms), indicating that they have reached an optimal size. Many developing countries have a large number of very small farms (many of which are barely viable), and an increasing number of huge plantations (many of which are not very productive per hectare). There are very few family farms that are of the optimal size, producing staples at low cost as well as higher value crops and export commodities. This may be because it is difficult to consolidate farm holdings when tenure is informal and legal methods of transferring title are unavailable. This situation may be inhibiting a 'benign transition' from taking place, whereby some farmers would invest in expanding their farms, whilst others gradually move to the rural non-‐farm economy, or they migrate elsewhere (probably to the city), and improve their conditions. They do not lose the rights over their land, instead they probably continue to farm it during the transition, and when alternative income sources become more stable (e.g. returns to labour from rural non-‐farm employment or migration far outstrip value of subsistence production, and vulnerability is reduced) they either sell the land, or rent it to neighbours, or reallocate amongst the extended family. The alternative to this benign transition is where returns to farming continue to stagnate, rising rural populations farm ever smaller an unviable plots, exhausting the soil and straining the ecosystem. As the resource base degrades, poverty worsens, forcing people to migrate to the cities or take up an offer to migrate to a plantation, where over-‐supply of cheap unskilled labour will bring down wages and thus deepen poverty. In this scenario, it is not a case of whether plantations are 'good' or 'bad', but simply that they may not be tackling the key challenge, which is to raise small farmer productivity rather than just to raise national aggregate production. Raising production in absolute terms is of interest politically, as it chimes with the desire to be 'self-‐sufficient', but if it is achieved through expanding inefficient plantations into forests, then it is a chimera. Increasing small farmer productivity will intensify economic returns in rural areas and allow for the benign transition to urbanization.

3.5 Rural economies need local businesses The corollary to the agrarian transition described above, is that it presupposes a local class of entrepreneurs, or at least some locally-‐accountable businesses to be in place (perhaps in the form of company-‐community partnerships). These are the businesses that form the backbone of the rural non-‐farm economy, and thus the support structure for long-‐term landscape restoration. For instance: processing companies (both timber and NTFPs), renewable energy for local power generation, equipment rental and repair,


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Where investment in forest landscape restoration has taken place, it has often been from governments, donors and philanthropists, working through NGOs or state-‐run bodies. In some cases investment has also come from the private sector, under the umbrella of a Corporate Social Responsibility scheme. The downside of these kinds of investment is that they usually aim to achieve non-‐business outcomes, such as social or environmental goals. That may mean they bypass the essential business development steps needed for long-‐term commercial success. For external investment in FLR to be sustainable (financially as well as environmentally), it will need to catalyze co-‐investment by local people and thereby improve the likelihood of effective agrarian transition, local enterprise and socio-‐economic resilience. This will require a strategic combination of grants and capital investment (explained in more detail below). Building local enterprise capacity creates a positive feedback loop that strengthens the entities that are engaged in landscape management, and generates local multiplier effects that enhance rural prosperity. By focusing on building local economic output managed by real small businesses, for instance the enhanced food, fuel and fibre outputs expected from restored landscapes, the project will simultaneously mobilise local people, cooperatives and SMEs to be involved in the scheme, but will also improve the likelihood that FLR projects will be legitimate and sustainable. Therefore, we need to understand where such a focus on building small business sector has worked, how aiming for tangible outputs from landscapes builds a stronger investment case, and the extent to which a growing rural non-‐farm economy improves the legitimacy and resilience of landscape restoration. Box: The rural economy generates the capital base and human resources for equitable, sustainable development The rural economy need not be confined to just cultivation and extraction, and it seems likely that agriculture alone will not lift rural communities out of poverty. In fact, more successful rural economies have a broader base of activities, known as the 'rural non-‐farm economy' (RNFE), that alleviates poverty through multiplier effects. But this state of affairs does not arise out of thin air, but depends on a thriving agriculture (or fisheries) sector to generate demand for goods and services. If smallholders are at the subsistence level, then there will be insufficient surplus income, and thus demand, in the rural economy. Thus improving agriculture is the first step in building a successful rural non-‐farm economy. However, this is not simply a matter of increasing total aggregate output from an area (for instance by replacing small farms with large industrial plantations). Distribution is the key to a stable rural economy. If rural income distribution is too unequal, for instance when a small elite gain disproportionate advantages from land rents or by being insiders on land grab deals, then they take a larger share of rural income, which they spend outside the area (because their consumption patterns are different from people of more modest means), thus inhibiting the benefits of linkages and multipliers. Furthermore, outsiders (or elites that can insulate themselves from local issues) have less of a stake in the long-‐term ecological health of the area. They may therefore engage in deals that undermine landscape restoration goals. Reasonably equitable distribution of land and assets – and local ownership of businesses -‐ may be correlated with improved land management and healthy ecosystem services.

3.6 Rural economies need healthy ecosystems Recent evidence from Brazil shows that the relationship between tropical deforestation and poverty needs to be better understood at the local level, in terms of how it affects communities proximate to a moving frontier of deforestation (Rodrigues et al.,2009). As the land use changes, there is a short-‐term boost to the livelihoods of local people caused by the work available for clearance and other associated economic activities. Thus the human development index (HDI), relative to the district, rises. However, the evidence shows that after the forest is cleared, the economic opportunities diminish, even if the land is now in agricultural use. Thus there is a boom / bust cycle over time, leaving local people more impoverished at the end of the cycle than before the forest was disturbed.


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Box: The New York City Watershed, from coercion to partnership 9 million residents of New York City receive clean drinking water from the upper watershed area of the Catskills. This is the largest unfiltered water supply in the United States, and there is a huge stake in keeping the streams and watersheds that supply the six reservoirs in the Catskills as clean as possible. Until recently, the relationship between New York City government and the communities living in the upper catchment area where the reservoirs are located was acrimonious. Through reduced economic opportunities, land grabs (under the ‘eminent domain’ law) and regulations on land use, the rural communities were in effect paying the costs of the positive externality of clean water for the city. Meanwhile, the city faced the monumental cost of installing infrastructure to mechanically filter the water if the watershed could not be relied upon. In 1997, a new partnership was formed that was able to bridge this gap. By bringing local communities into the deal, for instance by setting up the $60 million Catskill Fund for the Future (CFF) to stimulate rural economic development, the watershed has been restored and is now managed appropriately.8 The key to the deal was for the city to recognise not only the economic value of the ecosystem services (which was self-‐evident), but also the important role that a vibrant and economically viable rural community plays in ensuring a sustainable and stable landscape. One of the reasons for the diminished economic opportunity is that the ecosystem has become degraded by the process of rapid transition, leading to exhausted soil, poor hydrology and erosion. The only viable land use (e.g. pasture) is extensive or marginal, with low value per hectare. In an extractive model of landscape exploitation (seen from the point of view of national GDP), these local effects are barely discernable, although they will have long term consequences. At the local level, they are devastating as they inhibit the possibility of building a viable rural economy. In such circumstances, FLR could have positive co-‐benefits, either by protecting essential ecosystem services, or by restoring services that have been compromised. Furthermore, restoration may improve land productivity and financial performance of farms, as shown in the diagram below.

8 www.catskillcenter.org


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Figure: Restoration improves land productivity and food security9 In many cases, these ecosystem co-‐benefits will have positive impacts far away from the restoration site, as is the case in hillside restoration near cities. In some cases, the value of these services can be far in excess of the cost of restoration, and better value than more technologically-‐driven alternatives (e.g. see the New York watershed example), thus justifying schemes that include Payment for Ecosystem Services (PES). However, the potential income streams from PES in tropical countries can sometimes be over-‐estimated. In many developing countries there is not yet an ethos of public goods delivery (such as water), or the systems to pay for it, and thus no entity that could afford the PES payments. Just because a local ecosystem service has objective ‘value’ (we cannot live without water) this does not mean that it automatically carries a market price. In order to understand this issue better, we need to evaluate relative success of projects that differentiate between global and local value of the ecosystem service, including boosting productivity, and in what circumstances valuing the ecosystem has actually led to landscape restoration, as distinct from preservation.

3.7 The Layered Investment Approach The issues outlined above call for a programme that recognises the need for FLR to entice external private investors, yet also build rural economies, facilitate a benign agrarian transition and cultivate healthy ecosystems that sustain social, economic and environmental wellbeing. No one investor or type of investment is capable of such a broad spread of objectives in one project. There will need to be a combination of different types of investment that will co-‐exist to deliver public goods (e.g. ecosystem resilience, technology, community capacity, infrastructure) and private assets (tradable commodities, value added, non-‐farm economic goods). Based on recent research and the literature on impact investment and enterprise philanthropy, the most appropriate way to characterise investment types is as either ‘enabling’ investments or ‘asset’ investments. In this model, there is no need for a tolerant ‘soft’ investor in the middle, who is neither taking big risks nor getting decent returns. Investment is either channeled to creating the enabling conditions (so it is pure grant), or is engaged in impact investing (where some form of return – however low – is expected). In summary, the enabling investment creates the public goods, which in turn enable asset investments to create private assets. These private assets are not all just carried away by the investors, they are also the assets formed by the rights-‐ holders themselves: in companies, private savings, physical infrastructure, standing trees, healthy eco-‐systems and improved health and education. In the mission to achieve equitable economic growth combined with environmental sustainability, public goods and private assets are co-‐dependent.10 a) Enabling investment Enabling investments are made by governments, donors, NGOs, philanthropists, rights-‐holders and the private sector in order to create the conditions for productive investments in assets. Enabling investments may be the basic nuts and bolts of institution building, but they could also be pioneering investments that create public goods such as SME forestry business models, associations, market linkages and new technology. Enabling investment differs from the usual donor grants as it is made into both public institutions and private businesses. Grants to businesses are not for working capital, but are for a narrowly defined purpose, linked to the main objective of moving the enterprise further towards being self-‐sufficient and thus capable of attracting capital investment. But in each case there is no expectation of a direct financial return on capital deployed and no financial or physical assets are accrued. b) Asset investment An asset investment is not expected to lose the nominal value of the underlying capital, even 9 Liniger et.al (2011, p.41) 10 For a more detailed explanation of this approach to investment, see Elson (2012).


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if the anticipated level of financial return may vary according to the needs and attitudes of the investor. The investor deems the capital invested as an asset, which either has immediate tangible value (for instance through the payment of interest on a loan) or gives the right to receive future cash flow. The aim of this kind of investment is to create private assets. At the project level, asset investments will most likely need to be made via a portfolio of projects, whereby certain risks can be offset. In order to understand the practical interaction of enabling and asset investments, we need to look for examples of how FLR investments have been structured. In some cases the investment types may not have been clearly delineated, or have confused goals. Conversely, there may be some cases where asset investment is not possible until enabling investment is made available.

3.8 How investment decisions are made A brief outline of the some of the conditions is listed in the table below, divided between their importance to local rights holders and external private investors. A more detailed description of conditions for investment can be found in the ILCF Guide,11 and some other resources listed in the bibliography.12 Condition External investors Local rights-‐holders Tenure

This depends on the type of investor and their objectives. Plantation companies and investment funds usually prefer formal (de jure) tenure, such as freehold or very firm leasehold.

Accustomed to de facto tenure, often grounded in local institutional norms. Formal title is preferable, but in practice not always a pre-‐condition. The exception is where smallholders are moving into new land (e.g. former state forest), in which case formal tenure will be a precondition for longer-‐term projects such as tree planting.

Source(s) of Revenue

Asset investors will be looking cashflow. In practice, this will usually arise from a single commodity, but this need not be the case.

Smallholders are more accustomed to multiple sources of revenue from a diverse portfolio.

Return on capital

Asset investors will usually be seeking a risk-‐adjusted rate of return, but some (e.g. impact investors) may be content with merely a real rate of return, or even just to preserve the principal.

Smallholders need a real return on capital, and often will not have the luxury to invest for non-‐economic reasons. However, they may not have the tools or skills to model and measure the predicted rate of return accurately.

Time to break even Investors will have different time horizons, but the ‘patient’ investor has often proved to be elusive. Investment funds can take a longer term view, by ensuring they have sufficient liquidity to pay out to shorter term investors.

Local rights-‐holders often have a shorter ‘time preference’ than investors from cities or abroad. Their discount rate is higher, meaning they place greater value on quicker returns.

Risk

There are many different risks facing an investment that need to be quantified in order to calculate the minimum rate of return needed to justify the investment. Risks can be political, physical, institutional or market-‐driven. Note that whilst measurable risks are acceptable to investors, uncertainty is harder to

In many places, rural communities are accustomed to living in a state of vulnerability where risks are a part of everyday life. When assessing their own investments, bitter experience (by themselves or others) will tend to lead them to be risk-‐averse. For instance, where

11 Elson (2012) 12 e.g. Forest Investment Review (2009), Elson (2010)


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price. Higher complexity means more uncertainty. One way round this is to allocate the heavier risks to the ‘enabling’ investment, for instance through a guarantee scheme.

tenure is weak, it is less rational to plant perennial crops or trees. On the other hand, there are some risks – such as fire and theft – over which local people have a much greater degree of influence than external investors.

Governance

Local and national governance needs to be ‘good enough’ to improve the investment climate in forestry and landscapes. The process of improving governance creates the circumstances for good institutions, which in turn improves the enabling environment for business

Liquidity & collateral Asset Investors will need an exit strategy, so the asset will need to have some market value, or the business will have sufficient cash to buy out equity. In the case of bank loans, the collateral will need to be accessible and marketable – which will not be possible for new FLR schemes, woodlots, plantations etc.

Social impact Some ‘impact’ investors appreciate the importance of evaluating impacts beyond financial return, such as social, cultural and environmental benefits.

Local communities may deem social impact to be more important than either financial or environmental considerations. Poorly designed investments and landscape interventions can have catastrophic impact on social cohesion, and may lead to conflict (which in turn as economic and environmental effects).

Environmental impact As above. As above Investible Entity Investors will be accessing FLR via an

entity that can receive equity or loans (in case of asset investments), or grants (in case of enabling investments. There will be differences of approach on the extent to which this entity will be controlled by the investor or by local communities, or government.

Local communities may be more accustomed to informal entities, but setting up more formal structures will benefit their economic development.

Scale Investors prefer larger scale businesses because the may benefit from scale economies (but not always), and because the transaction costs of planning the investment will be lower in proportion to the capital deployed. In FLR, this may require project aggregation and portfolio design.

From the local perspective, bigger is not always better. Large scale plantations may have better returns on capital, but lower returns to land and labour. Large scale projects may involve over-‐simplification of complex landscapes.

Capacity of local people & organisations

For the investor, one of the key factors that will determine if a business is capable of delivering the outcomes predicted in the business plan is the quality of the leadership and capacity of the organization.

Local organizations will regard access to training and technical skills as one of the key benefits of partnerships with external investors.

Track record In evaluating a business proposition, investors will look at the track record of the country, the enterprise (for example,

This kind of information may not be available in an easily accessible form.


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historic performance in terms of management competencies, planning, implementation and financials), and of the product.

Transaction costs The better the institutions, the lower the transaction costs, the more attractive for investors. Commercially oriented parties will make better deals where there are decent institutions than where governments are left alone with investors to strike deals out of the public eye, as in many of the so-‐called ‘land grab’ deals13

3.8.1 Mismatches between external private investors and local rights-‐holders Based on the table above, the mismatches between investor conditions and local needs can be identified. Most of these will need to be resolved in order to ensure FLR projects are successful. In reviewing previous projects, it may be instructive to find out how a project’s failure may be attributable to a mismatch in conditions. Condition Overlap between external investor and

local rights-‐holder? (Yes, No, Maybe) Notes

Tenure N Source(s) of Revenue M Return on capital M Time to break even N Risk M Governance N Liquidity N Social impact M Environmental impact M Investible Entity N Scale N Capacity of local people & organisations

Y

Track record N Transaction costs Y

3.9 Possible investment frameworks and financing structures This section has outlined the challenges of attracting private sector investment into landscape restoration. It has noted the inherent complexity of mixed landscapes when compared to monoculture or strict conservation models. It has suggested that the answer may lie in what we now call ‘landscape approaches’ or various forms of agroforestry, combined with meaningful partnerships with local communities and a commitment to rural economic development. Landscape restoration takes time, therefore it is best to ensure that the financing is self-‐sustaining by building the underlying economy in parallel to improving the landscape. The farm (or forest) and non-‐farm economy will be the scaffold on which long term forest landscape restoration will be built. This is the ‘triple win’ illustrated in the figure below.

13 von Braun & Meinzen-‐Dick (2009)


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Figure: Win-‐win-‐win solutions for livelihood, ecosystem and productivity14 However, not all practitioners may agree with this analysis, and there may be empirical evidence of successful FLR that has taken place absent of these conditions. Indeed, one of the purposes of a detailed FLR study will be to use evidence to test the proposition set out here. Based on the quick scan of the examples listed in section one, there are a number of different investment frameworks and financial structures that have been applied in the past to achieve some forms of landscape restoration. These may be led from the public or private sector, arise from grass-‐roots action, or be various forms of partnership (e.g. public-‐private, company-‐community). Financing may come from selling carbon credits, or finding ‘impact’ investors that are willing to be patient or accept lower rates of return. Some investment funds may be able to deliver market clearing risk-‐adjusted returns whilst also improving landscapes, thus attracting much larger amounts of mainstream capital. One way to review the case studies and test the hypothesis is use the scoring framework below. The first table evaluates some of the enabling conditions, in order to identify the strong and weak spots that may be predictors of the eventual outcome of an FLR project. The second table assesses the main categories of benefits as they pertain to different stakeholders, using the standard stakeholder interest scoring method (pluses and minuses). Note that financial benefits are distinct from economic benefits as they refer to the private gains (or losses) from a transaction, whereas economic issues are public systemic gains or losses.

14 Liniger et al. (2011, p.41)


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Enabling Condition Score

(0= weak, 5= very strong) Observations

Value proposition Tenure Potential risk adjusted returns Risk mitigation strategies Risk and benefit sharing arrangements. R&D Capacity building Infrastructure Political will Regulations Transaction costs Benefits Local land users

/rights holders National level Enabling

Investment Asset Investment

Financial Economic Ecological Socio-‐cultural


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4 Designing the main study

4.1 Objective The purpose of the study is to discover how best to attract investment into successful landscape restoration, and identify the most appropriate financing structures, ownership and benefit sharing. It will achieve this by filling in the gaps in our knowledge about how and why restoration has taken place in the past (and is currently happening now) in certain places around the world. It will improve the understanding of the complexity of the subject, for instance by answering such questions as:

• How can multiple stakeholders find common ground in their goals, while balancing the distribution of costs and benefits, in order to create new impetus for landscape restoration?

• What are the key conditions that different types of investors, including local people, require to make landscape restoration investments?

• To what extent does local control and benefit sharing ensure that landscape restoration is more successful, replicable and scaleable?

• How can external investment catalyse the local investment and improve the likelihood of effective agrarian transition, local enterprise and socio-‐economic resilience?

• How can Enabling and Asset investments be structured to deliver public goods (e.g. ecosystem resilience, technology, community capacity, infrastructure) and yet still build private assets (tradable commodities, value added, non-‐farm financial assets).

This will be an iterative process, working with researchers and practitioners to understand the background conditions, test certain hypotheses and acquire new knowledge. The final output (after the September 2014 Investment Forum) will be: New knowledge, evidence and analysis on key economic, social and biophysical opportunities and conditions for landscape restoration generated, packaged and disseminated.

4.2 Methodology and Scope One of the insights of this brief feasibility study and background paper is that identifying and categorising the examples of investment in landscape restoration shows the diversity of project objectives, financing and management. One single large study may be broad enough to claim to encompass all relevant projects, but it is unlikely to get sufficient depth to facilitate understanding of what is really happening on the ground. This paper therefore recommends that IUCN commission a series of ‘mini-‐studies’, each of which tackles a particular theme or type of project. This will enable us to find the people who know best how to shed light on a topic. Some of them may be policy researchers, but they could also be project practitioners who are prepared to provide in-‐depth detail on their own project. The list of informants would be a good place to start. This will complement the GPFLR Learning Sites initiative,15 but that is mainly concerned with the management of landscape restoration, rather than how it is financed. For instance, the ‘standardised profile of GPFLR Learning Sites’ is interested in finding out who funds the stakeholders, but does not seem to take an interest in the source of investment. Conversely, the studies envisaged by this project will have a greater focus on how FLR can be best financed. There are of course some overlaps: the focus on local livelihoods in the GPFLR Learning Sites is also a highly relevant focus area for these investment studies.

15 http://www.forestlandscaperestoration.org/case-‐study/learning-‐sites


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4.3 Knowledge Pathways The knowledge pathway could take the form of an ‘action research’ loop, as depicted in the diagram below. This document is the initial background that kicks off a learning cycle, bisected by epicycles where reflection and dialogue move the process to the next stage. The studies will provide the background knowledge and talking points for the proposed ‘partnership’ meeting to be organised by IUCN in September 2013. The purpose of that meeting will be to identify candidates for a collaborative research approach, which in turn will be reported and evaluated at the next World Bank investment forum in September 2014. In the first stage, the studies will be conducted by people with specific expertise on the subject area, and whilst they will draw on empirical evidence of projects, they will still be speculative in their recommendations. The second stage, running up to the next World Bank Investment Forum in September 2014, will combine research with actual projects (that may be already up and running, or in the design phase), so as to test key conditions and results in the field. By this time, real private and public sector investment models will have been tested, for instance in landscape restoration in both semi-‐natural mosaic and heavily modified (industrialized and/or mined) landscapes.

4.4 Study outlines The mini-‐studies will each focus in depth on a particular topic, analyzing the empirical evidence to draw some tentative conclusions and recommendations that can then be tested in the next phase of

Evaluateeffects of action

Inquiry:Illuminate background

Reflection &Dialogue Epicycles

IUCN WorkingGroup

PartnershipMeeting

(Sept. 2013)

WB InvestmentForum

(Sept. 2014)

Data gathering

& Analysis,identify projects

Collaborativeaction &

interaction

ForestLandscapeRestorationKnowledge Pathway

Proposing & planningactions


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the project. Some of the studies will also need to build a theoretical case for how an intervention can take places (this is especially the case for the study into financial structures). Study A: Defining the type of private sector investment and role it plays Condition / theme Knowledge Gaps 3.1 -‐ Defining Private Sector Investment

How do know about different types of investment interact? To what extent do goals clash, leading to poor outcomes? Are the investment goals of local people necessarily at odds with the goals of external investors? To what extent does state-‐led investment, including SoEs, crowd out private capital?

3.2 Role of the private sector investment 3.2.1 – The private sector brings scale

Learn from examples of joint action by local communities, private investors and governments. How can private sector projects be better designed to ensure both economic and environmental sustainability? How can multiple scales of action (e.g. sectoral strategies, district development plans, commodity purchasing agreements, etc) be reconciled/ harmonized efficiently to create new opportunities for landscape restoration?

Relevant case study groups • General country examples • Large donor-‐funded projects • Private sector companies and projects • Projects led by NGOs and cooperatives • Public/private partnerships • Company / community partnerships

Additional questions Learning from Private Sector Investment • To what extent are timber investment funds differentiated by

their approach to balancing timber yield with forest biodiversity? Do investors care?

• Are non-‐timber forest products seen as part of the business model, or a co-‐benefit outside the model (i.e. not part of the target rate of return)?

• To what extent are local livelihoods a core driver of investment value, or are they a co-‐benefit to satisfy CSR needs?

• Where are there examples of projects where profit-‐oriented investment funds have led to successful FLR?

• How sophisticated is the financing structure? • To what extent is donor finance blended with private capital? • How have investor goals changed over time? Is FLR becoming

more common as a deliberate project goal? • Where investors have switched focus to FLR, what was the

reason? What other project goals does FLR support?


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Study B: Governance and incentives Condition / theme Knowledge Gaps 3.2.2 Changing the incentives

Are there institutional models from other sectors that we can draw on? What informal / semi-‐formal frameworks offer the best prospect to fill capacity gaps in governments to support landscape level negotiations? What does 'good enough' governance look like? How can incentives be adjusted in favour of FLR goals, and at what cost?

Relevant case study groups • Historic Examples of land restoration • General country examples • Public/private partnerships • Private sector companies and projects • Projects led by NGOs and cooperatives

Role of Rules and Incentives

• Regulations – e.g. export bans, transport restrictions, rigid rules on planting (controlled list of species, banning cereals or tree crops) , cultivation, extraction

• Law enforcement – positive or negative? Impact of illegal timber on prices and financial incentives to plant trees

• Market incentives: is the ‘market pull’ more powerful than ‘regulatory push’ to stimulate tree planting and restoration?

• Subsidies: When are they necessary to attract investment? When do certain subsidies work against FLR goals?. To what extent is subsidy earmarked for FLR and smallholder development in reality used to finance industrial plantations?

• Are public finance mechanisms, for instance concessional loans, subject to the moral hazard problem?

• To what extent is formal tenure a pre-‐condition for investment?


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Study C: The relationship between the rural economy and FLR Condition / theme Knowledge Gaps 3.3 Aligning investment goals with local needs

Test the hypothesis that when local people have a degree of control of the project, and benefit directly from its success – landscape restoration is more successful, replicable and scaleable. What conditions are required to make this possible?

3.4 Growing rural economies as the key to landscape restoration

What is the role of the ‘benign agrarian transition’ in better landscape management? To what extent are agrarian transition and landscape restoration inter-‐dependent?

3.5 Rural economies need local businesses and a growing RNFE if they are to thrive

Where has focusing on building the small business sector worked? Does aiming for tangible outputs from landscapes builds a stronger investment case, and the extent to which a growing rural non-‐farm economy improves the legitimacy and resilience of landscape restoration.

Relevant case study groups • Projects led by NGOs and cooperatives • Private Sector companies & projects • Company / community partnerships

Additional questions Landscape transition and development • Is land ownership reform (to redistribute land from large

landowners to smallholders), or tenure reform a pre-‐condition of more sustainable land use?

• To what extent is FLR compatible with human social and economic development?

• How can public finance mechanisms be made compatible with private landowner interests in the cause of FLR?

• Is the forest transition an inescapable artifact of the long term development process, which should not be short-‐circuited?

• What is the difference in outcome between FLR on state land and on private land?

Locally Control • What is the correlation between local ownership and control, and

successful FLR outcomes? • Does local involvement in landscape planning lead to more

diverse planting? • To what extent are local investors attracted by the prospect of

total landscape restoration, or by the prospect of timber revenue? • What percentage of financing is dependent on either carbon /PES,

or on donor grants? • What are the financing needs of local bottom-‐up FLR projects? • To what extent is the prospect of timber revenue a driver for local

community and smallholder involvement in FLR? • What types of land tenure are most suitable for an FLR project to

be successful? • Do financial constraints lead to innovation in organisational

approach or product development? • Is successful FLR more highly correlated with increasing land-‐

holding size, or are smallholders more successful stewards? •


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Study D: Incorporating ecosystem services in FLR project design Condition / theme Knowledge Gaps 3.6 Rural economies need healthy ecosystems

evaluate relative success of projects that differentiate between global and local value of the ecosystem service, and in what circumstances valuing the ecosystem has actually led to landscape restoration, as distinct from preservation. Is pricing necessary? Or is ES always a co-‐benefit, which as a public good deserves some public subsidy or co-‐investment to bring about?

Relevant case study groups • General country examples • Carbon finance projects • Conservation projects (international funding) • Investment funds • Private Sector companies & projects • Project Sponsors / Investors

Additional questions Carbon finance

• To what extent are REDD+ projects including FLR in their goals?

• How do the projects integrate FLR in the financial model for the carbon investors – is it an implementation cost, an investment for cashflow, or an additional ‘project expense’ to be covered by a donor?

• How do the projects manage trade-‐offs between carbon sequestration and local livelihoods, e.g. do they accept less carbon-‐rich restoration options if they have better income opportunities for local people? Who negotiates these trade-‐offs?

• Can conservation be compatible with attracting investment to landscape restoration?

• In a national park or conservation area setting, what is the long-‐term revenue model post-‐restoration?

• Who pays for the ongoing restoration and maintenance, and who then benefits from the revenue streams (if any)?

• How do the projects manage trade-‐offs between biodiversity and local livelihoods, e.g. do they accept less biodiverse restoration options if they have better income opportunities for local people? Who negotiates these trade-‐offs?

Conservation • Can conservation be compatible with attracting investment to

landscape restoration? • In a national park or conservation area setting, what is the

long-‐term revenue model post-‐restoration? • Who pays for the ongoing restoration and maintenance, and

who then benefits from the revenue streams (if any)? • How do the projects manage trade-‐offs between biodiversity

and local livelihoods, e.g. do they accept less biodiverse restoration options if they have better income opportunities for local people? Who negotiates these trade-‐offs?


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Study E: Designing investment structures Condition / theme Knowledge Gaps 3.7 Ideal investment structure

In order to understand the practical interaction of enabling and asset investments, we need to look for examples of how FLR investments have been structured. In some cases the investment types may not have been clearly delineated, or have confused goals. Conversely, there may be some cases where asset investment is not possible until enabling investment is made available.

Relevant case study groups • Carbon finance projects • Investment funds • Private Sector companies & projects • Project Sponsors / Investors • Projects led by NGOs and cooperatives • Large donor-‐funded projects

Designing financing structures for FLR

• How can complex projects such as ‘climate smart agriculture finance’ be structured to account for multiple revenue streams and timelines?

• In public/private finance partnerships, which is the leader and which is the follower?

• How is enabling investment kept separate from asset finance? • Are public-‐private partnerships superior to top-‐down state

programmes in terms of their success in restoring landscapes and improving livelihoods?

• What is the cost of FLR? How much external finance does it actually require?

• How to construct diversified and de-‐risked landscape portfolio approach, preferable spreading across several landscapes

• Role of landscape bonds and forest bonds • How can supply chain management, including risk sharing,

leakages, etc., be improved to influence the incentives to invest in FLR?


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