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___________________________________________________
ECONOMIC ANALYSIS OF FLOR Y FAUNAPS
TEAK PLANTATIONS IN COSTA RICA
FINAL REPORT
THIS REPORT SUPERSEDES
THE DRAFT DATED AUGUST 30, 1993
Dr. JULIO CESAR CENTENO
DECEMBER 22, 1993
====================================================
CONTENTS
1. FOREWORD 1
2. ABSTRACT 3
2. BACKGROUND 5
3. OPPORTUNITY COST OF PAYMENTS BY INVESTORS 10
4. SILVICULTURE 11
5. PRICES 15
6. COSTS 17
7. EXPECTED RETURNS:
To INVESTORS 19
To FLOR Y FAUNA SA 26
To OHRA 27
To WWF 28
8. CONCLUSIONS AND RECOMMENDATIONS 30
9. REFERENCES 33
10. APPENDIX 1: TABLES 36
11. APPENDIX 2: SELECTED CORRESPONDENCE 43
====================================================
________________________________________
ECONOMIC ANALYSIS OF FLOR Y FAUNA'S
TEAK PLANTATION IN COSTA RICA
FINAL REPORT
December 22, 1993
Dr. JULIO CESAR CENTENO, PhD
_______________________________________
FOREWORD
This report has been prepared upon request by WWF
Netherlands. Its purpose is to present an
independent review of the economic aspects of the
teak plantations established by the company FLOR Y
FAUNA S.A. in the San Carlos plains, province of
Alajuela, in the northern part of Costa Rica, near
the Nicaraguan border.
This report is based on the information supplied by
WWF-Netherlands, WWF-International, FLOR Y FAUNA -
NATURA VERGUM BV, and the consulting firm VAN ROSSUM
& VAN VEEN, who also represents the interest of FLOR
Y FAUNA in the Netherlands. It is also based on
specialized literature on teak plantations, both in
general and in Costa Rica in particular. Additional
information was collected during a visit to the
plantations in July of 1993, as well as through
interviews with relevant individuals and institutions
in the country.
A draft version of the report was submitted to WWF-
Netherlands and WWF-International on August 30,
1993. The observations of FLOR Y FAUNA to the draft
were submitted through WWF-Netherlands, via telefax,
on October 17 [Copy in Appendix 2]. On October the
20th documentation supporting the observations of
FLOR Y FAUNA to the draft report was requested. This
request included a copy of the management plan for
the plantations, a sample copy of the contract
between OHRA and investors, the type and amount of
fertilizers used by the company, the breakdown of
costs, especially the cost of the land on which the
plantations are established, and supportive evidence
to the growth rates and price trends used by the
company [copy in Appendix 2].
On November the 9th a response was received from
WWF-Netherlands [copy in Appendix 2], which excluded
most of the documentation requested, particularly the
management plan, the sample contract, information on
the use of fertilizers, the breakdown of costs, the
cost of the land, and supportive evidence to the
growth rates and price trends used by the company.
The 7% yearly interest used throughout the report is
the weighed average of the rates of interest on
savings, over a 20 year period, applicable to the
main actors involved: individual investors, for
profit companies, non-profit organizations, and
insurance companies. It is an average skewed to
reflect best the interest of individual investors.
ABSTRACT
FLOR Y FAUNA is a company owned by Ebe Huizinga, a
dutch citizen, who also owns a company in the
Netherlands by the name of NATURA BERGUM BV. Planting
started in 1989. By the end of 1992 a total of 550
hectares had been cultivated. Four hundred hectares
were sold to investors in the Netherlands, in one-
half hectare contracts, under agreements which
entitled investors to the revenues from all or part
of the clearings.
An additional 750 hectares were to be planted in
1993. In this case, contracts were sold to an
insurance company by the name of OHRA, a non-profit
dutch enterprise. OHRA in turn sells contracts to
investors, who are entitled to 85% of the profits
derived from the thinnings scheduled at 12, 16 and 20
years of age. The remaining 15% of the profits is to
be distributed, in three equal parts, among FLOR Y
FAUNA, OHRA and WWF-Netherlands. The profit from the
first thinning, scheduled at age 8, is for FLOR Y
FAUNA.
The scenarios presented by FLOR Y FAUNA and OHRA to
individual investors are found to be out of normal
range for teak, particularly the yields expected
during the 20 year rotation period. One of the
consequences is an exaggerated rate of return.
The returns are distributed over a 20 year period,
ending in the year 2012. The structure of the
agreements among the four main actors involved [FLOR
Y FAUNA, OHRA, WWF-Netherlands and the individual
investors] is such that, for the first three,
returns depend the least on the accuracy of the
projections on yields and prices.
Investors are led to believe that they will receive
returns which are highly unlikely. Two-thirds [2/3]
of all returns to investors depend on the production
at year 20 [calendar year 2012]. This may be
considered fraud.
The returns to FLOR Y FAUNA and OHRA are less
sensitive to variations in the expected yields and
prices. Their returns depend in less than 10% on the
production at year 20, when over 62% of all returns
are expected. Although the returns to all parties
involved would be affected if projections on yield
and prices are not achieved, by far the largest
proportion of the impact is transferred to investors.
The benefits channelled to WWF-Netherlands seem to
imply an endorsement by WWF of the operations of FLOR
Y FAUNA in Costa Rica, as well as an endorsement of
the contracts between OHRA and individual investors.
Even if its logo is not to be openly used, WWF
participation in the operation may fairly be
considered an independent and reliable assurance that
the company's claims are valid.
The consulting firm VAN ROSSUM & VAN VEEN, a
representative of FLOR Y FAUNA in the Netherlands,
affirms [ref. 33]:
"... according to WWF, the plantation of FLOR Y
FAUNA sets a worldwide example"
WWF seems involved in an agreement with questionable
economic, technical, and ethical dimensions. It is
suggested that an immediate revision be carried out,
including:
a] The economic prospects of the plantations.
b] The extent to which such prospects are
reflected in the contracts with investors.
c] The extent to which a better balance may be
achieved between the potential for profits
and the potential risks for each of the
main parties involved.
BACKGROUND
FLOR Y FAUNA SA is a company established in Costa
Rica by Ebe Huizinga, a Dutch citizen. The Huizingas
also own the business NATURA BERGUM BV, through which
the interests of FLOR Y FAUNA are represented in the
Netherlands, in conjunction with the consulting firm
VAN ROSSUM & VAN VEEN.
Apparently with the original intention to export
flowers to the Netherlands, the company purchased
agricultural land in the northern part of the
country, a short distance from the Nicaraguan border.
Many of the acquired fincas [agricultural properties]
had been abandoned, partly due to the effects of the
political and social unrest taking place in nearby
Nicaragua at the time.
Difficulties with the flower market motivated the
company to look into alternative ways to use the
land. Other companies in Costa Rica were already
involved in the tree plantation business. The State
offered highly attractive incentives to those who
ventured into planting trees on abandoned
agricultural lands:
a]. Exoneration of territorial taxes.
b]. Exoneration of income taxes.
c]. Exoneration of taxes on imports of machinery
and equipments.
d]. A refund of 100.000 colones [the local
currency] per hectare planted [about US$
700/ha]. This is known as the Certificado de
Abono Forestal, paid after the plantations are
established. It is expected to cover most costs
during the first year of planting, excluding the
value of the land.
Costa Rican Law also provides resident status to
anyone who invests US$ 50.000 in the country. Such a
status provides, among other benefits, a shelter to
avoid higher income or property taxes in other
countries.
Most reforestation operations in Costa Rica benefit
from these and other government incentives, such as
preferential credits from the National Banking System
[Sistema Nacional Bancario], and debt-swap conversion
agreements.
FLOR Y FAUNA SA seems entitled to the first four
benefits listed above. It actually has benefitted
from the first three. It is understood from the
information supplied by the company that it has not
received the reforestation refund. In fact, the
Company's name could not be found in the record of
individuals and organizations who have received such
refunds, kept by the Direccion General Forestal
[Forestry Directorship].
Phase 1: TEAKWOOD I TO V.
FLOR Y FAUNA's first plantations were established in
1989, a total of 25 hectares. Between 1989 and 1992
the area planted each year increased progressively,
as follows:
YEAR IDENTIFICATION AREA PLANTED
___________________________________________________
1989 TEAKWOOD I 25 Hectares
1990 TEAKWOOD II 10 Hectares
TEAKWOOD III 65 Hectares
1991 TEAKWOOD IV 150 Hectares
1992 TEAKWOOD V 300 Hectares
___________________________________________________
Between 1989 and 1992 a total of 550 hectares were
planted, over a total land area of 700 hectares. The
remaining 150 hectares represent mainly secondary
natural forests [about 145 hectares] and some 5
hectares of wetlands. Both of these are planned to be
protected in their present conditions.
A total of 1600 trees are planted per hectare. The
plantations are to be thinned in four equal stages,
at ages 8, 12, 16 and 20. Each thinning will extract
400 trees per hectare. The last thinning, at age 20,
will thus result in a clear cut. Although it is
apparently the intention to replant with teak after
this period, the necessary measures to do so are not
evident.
None of the sources of information could provide a
management plan for FLOR Y FAUNA's operations in
Costa Rica, nor the corresponding environmental
impact assessment.
Of the area planted, 150 hectares were kept as sole
property of the company. The remaining 400 hectares
were sold to investors in one-half hectare contracts,
under two different modalities:
Contract A: For DFL 27000 [about US$ 15.000].
Entitles the investor to the revenues from the
production at ages 8, 12, 16 and 20, that is,
the revenues from 800 trees, all the trees on a
one-half hectare plot.
Contract B: For DFL 16500 [about US$ 9040].
Entitles the investor to the revenues from the
clearings at ages 12, 16 and 20, that is, the
revenues from 600 trees. The revenues from the
first clearing, at age 8, are for FLOR Y FAUNA.
Most of the contracts actually negotiated were
of this type.
Phase 2: TEAKWOOD VI.
TEAKWOOD VI refers to the plantations to be
established in 1993: a total of 750 hectares. WWF's
formal involvement with FLOR Y FAUNA and OHRA starts
with TEAKWOOD VI. The report thus focuses on this
part of FLOR Y FAUNA's operations.
In this case, all contracts were sold for an
undisclosed amount to the insurance company OHRA, a
non-profit dutch enterprise operating in the
Netherlands. FLOR Y FAUNA sells one-half hectare
contracts [or contracts on 800 trees] to OHRA, who
in turn sells contracts on 200 trees [the trees on
one-eighth of a hectare] to investors, for a
downpayment of DFL 4740, plus 19 yearly payments of
540 DFL each. Investors do not own shares in the
company, nor are they entitled to rights over the
land in which the plantations are established.
Investors are entitled to 85% of the net profits
derived from the thinnings at ages 12, 16 and 20. The
remaining profits are divided into three equal parts,
of 5% each, for FLOR Y FAUNA, OHRA and WWF-
Netherlands. The profits from the first thinning, at
age 8, is reserved for FLOR Y FAUNA.
A sample copy of the contract was not made available.
Nevertheless, according to Van Rossum - Van Veen
[ref. 33] , it is OHRA's policy to guarantee the
refund of all premiums paid during the 20 year period
[DFL 15000 per each one-eighth of a hectare
contract]. In a subsequent memo, dated June 24th,
Van Veen indicates that investors are also guaranteed
"... a small interest allowance, of some 1.5%
annually" on their premium refunds [ref. 34].
The future plans of the company are unclear. There is
no indication that the established plantations will
be maintained for more than perhaps 3 rotations
[ ref. 33]. THE SUSTAINABILITY OF THE OPERATION IS
THEREFORE UNCERTAIN.
Although a copy of the agreement between WWF, FLOR Y
FAUNA and OHRA has not been made available, it is
understood that WWF-Netherlands is endorsing the
operation of FLOR Y FAUNA in Costa Rica. In its memo
of April 8th [ref. 33], for example, the consulting
firm Van Rossum & Van Veen, a representative of FLOR
Y FAUNA, highlights:
_____________________________________________________
"... according to WWF, the teak plantation
of FLOR Y FAUNA
sets a worldwide example "
_____________________________________________________
The nature and extent of WWF's endorsement is
unclear. What is clear is that, in return, WWF-
Netherlands receives funds from FLOR Y FAUNA,
according to the following scheme:
DOWNPAYMENTS. WWF-Netherlands receives DFL 700 for
each one half hectare contract sold by FLOR Y FAUNA
to OHRA, the equivalent of DFL 175 for each one-
eighth of a hectare contract between OHRA and the
individual investors.
THINNINGS. WWF-Netherlands receives 5% of the net
profits from the thinnings at years 12, 16 and 20.
FLOR Y FAUNA presents investors with 3 possible
scenarios for the outcome of TEAKWOOD VI [refs. 1,
11, 33, 34]. These scenarios have been identified in
this report as A, B and C. They are discussed in
further detail throughout the report.
EXPECTED NET RETURNS TO WWF-NE THERLANDS
FROM TEAKWOOD VI
ACCORDING TO FLOR Y FAUNAPS SCENARIOS, IN US DOLLARS
A B C
____________________________________________________
DOWNPAYMENTS 575.250 575.250 575.250
THINNING
AT AGE 12 2.309.040 2.902.335 4.394.907
AT AGE 16 6.408.486 8.689.086 14.183.316
AT AGE 20 17.564.604 25.705.602 45.200.835
____________________________________________________
TOTALS
without
interest 26.857.380 37.872.273 64.354.308
WITH
INTEREST 32.012.590 44.162.381 73.423.945
____________________________________________________
At an exchange rate of DFL 1.825/dollar. From
tables in Appendix 1.
According to these projections, WWF-Netherlands would
receive a net minimum of about 27 million dollars
over the 20 year life-span of TEAKWOOD VI, and a
maximum of 73 million dollars [ Details in the
tables in Appendix 1].
Nevertheless, according to Jos de Wit's memo to
Frances Horne [WWF International] dated April 16,
1993, the financial retribution to WWF-Netherlands
over 20 years would exceed 85 million dollars "...if
the project is as successful as expected." [ref. 16].
____________
* FIGURE 1 *
____________
OPPORTUNITY COST OF PAYMENTS MADE BY INVESTORS
About 85% of the downpayments made by investors to
OHRA are transferred to FLOR Y FAUNA. OHRA retains
11.4%, while WWF's share amounts to 3.7%
[Figure 1, page 7].
The 19 yearly payments made by investors are retained
by OHRA. The net premium paid on each one-eighth of a
hectare contract amounts to
US$ 8.221.
The opportunity cost of such an investment is
considerably higher. Should investors place the same
amounts in a bank at an average interest of 7%, over
the 20 year period, they would be entitled to US$
14.028 at the end of the period, after 40% tax
deductions on their yearly interest [see table
below].
__________________________________
INVESTORS ARE ACTUALLY MAKING NET CASH PAYMENTS OF
US$ 65.770 PER HECTARE. THE OPPORTUNITY COST OF SUCH
AN INVESTMENT AMOUNTS TO 112.221 DOLLARS PER
HECTARE, AFTER 40% TAX DEDUCTIONS ON INTERESTS.
__________________________________
SILVICULTURE
The financial success of this operation is based on
two fundamental variables: the yield of usable timber
obtained, and the price at which it may be sold.
FLOR Y FAUNA plants 1600 trees per hectare. The
company expects to produce 794 cubic meter of usable
timber per hectare under scenarios A and B in the 20
year period of the rotation, and 960 M3 per hectare
under scenario C [refs. 11, 33, 34].
The expected yield is within normal ranges during the
first 8 years, at 15 M3 per hectare per year under
scenarios A and B, and 18.4 M3/ha-yr under scenario
C.
BUT PRODUCTION OF TIMBER IS EXPECTED TO INCREASE
SUBSTANTIALLY AFTER EACH THINNING, IN PROPORTIONS
CONSIDERABLY OUT OF NORMAL RANGE.
Under scenarios A and B it would reach 68 M3 per
hectare per year at the end of the rotation. Under
scenario C it would reach a growth rate of 82 M3 per
hectare per year.
The behavior expected by the company is sketched in
the figure below, composed from the information
supplied in Van Veen's memo of April 8th, and the
dutch version of the companyPs brochure, attached to
Van Kreveld's fax of 17-02-93
[copies in Appendix 2].
_____________
* FIGURE 2 *
_____________
____________________________________________________
Reproduction of page 5 of Van Rossum & Van Veen's
memo of April 08, 1993 [ref. 33]
VALUES FOR ONE-EIGHTH OF A HECTARE CONTRACTS
_____________________________________________________
Example I [Referred to as Scenario A in this report]
Assumptions:
-annual price increase 4%
-diameter growth of 2 cm
investor
m3 per m3 in price in revenue
tree total US$in US$
__________________________________________________
year 12 0.285 10.69 720 6583
year 16 0.676 25.34 843 18256
year 20 1.320 59.38 986 50056
TOTAL 74895
__________________________________________________
Based on the price of the policy sold by OHRA
insurances (and the current $/Dfls exchange rate),
the internal rate of return on this investment is
16.8%
==============================================
Example II [Referred to as Scenario B in this
report]
Assumptions:
-annual price increase 6%
-diameter growth of 2 cm
investor
m3 per m3 in price in revenue
tree total US$ in US$
__________________________________________________
year 12 0.285 10.69 905 8274
year 16 0.676 25.34 1143 24761
year 20 1.320 59.38 1443 73266
TOTAL 106301
__________________________________________________
The rate of return price in revenue
tree total US$ in US$
____________________________________________________
year 12 0.345 12.93 1133 12530
year 16 0.817 30.66 1542 40406
year 20 1.597 71.85 2097 128840
TOTAL 181776
____________________________________________________
The rate of return is 22.4%
The OHRA policy guarantees the return of the premiums
paid during the period.
* * * END OF REPRODUCTION * * *
of page 5 of Van Rossum & Van Veen's memo of April
08, 1993 [ref. 33]
____________________________________________________
THE SILVICULTURAL BEHAVIOR IMPLIED BY THESE YIELD
CURVES IS AN ANOMALY FOR TEAK. Tectona grandis is not
known to produce more than 18 to 20 cubic meter per
hectare per year as mean annual increments (MAI), on
high quality soils, and under management techniquesdifferent from that
contemplated by FLOR Y FAUNA. On
good soils [type I] an average yield of 15 to 16 M3
per hectare per year would be more appropriate,
especially if the initial thinnings are more intense
and practices earlier, at ages 4 or 5. But the
company expects an average yield of 40 M3 per hectare
per year over the 20 year rotation period under
scenarios A and B, and 48 M3/ha-yr under scenario C.
YIELDS OF 40 M3/HA-YR ARE UNKNOWN FOR TEAK. YIELDS OF
60 M3/HA-YR HAVE ONLY BEEN RECORDED ON VERY FAST
EUCALYPTUS AND GMELINA PLANTATIONS UNDER EXCEPTIONAL
CONDITIONS. THEY EXCEED BY A FACTOR OF FOUR [4] WHAT
ARE CONSIDERED HIGH YIELDS FOR TEAK ON GOOD SOILS
[REFS. 4,5,10,13,14,17,26,29,31,35,37,38].
Under the normal conditions observed on site,
reflected as well in the documentation available, and
assuming effective management throughout the 20 year
cycle, the behavior expected is as follows:
_____________
* FIGURE 3 *
_____________
THE UNUSUAL BEHAVIOR EXPECTED BY FLOR Y FAUNA, BOTH
IN THE MAGNITUDE OF THE YIELDS, AND IN THE EFFECTS OF
EACH THINNING, COULD NOT BE CLARIFIED BY THE COMPANY.
EVIDENCE TO SUPPORT SUCH PROJECTIONS COULD NOT BE
OBTAINED, ALTHOUGH SPECIFICALLY REQUESTED [SEE
APPENDIX 2]. THE EXPECTED YIELDS ARE UNJUSTIFIABLE,
REVERTING IN EQUALLY UNJUSTIFIABLE EXPECTATIONS ON
THE FINANCIAL RETURNS TO BE OBTAINED.
The potential consequences should not be under-
estimated. Investors are led to believe that they
will receive returns which are highly unlikely.
THIS MAY BE CONSIDERED FRAUD.
This is more than a hypothetical deduction. In fact,
a similar company [BOSQUE PUERTO CARRILLO], also
involved with teak plantations in Costa Rica, is
facing charges of fraud and violation of US security
laws in a Miami court, under a civil complaint filed
by the US Security and Exchange Commission. The case
for fraud is directly related to the fact that the
company overstated the value of the wood that could
be grown on the plantation, and understated the fact
that Costa Rican law prohibits the export of
unprocessed logs. The company is also liable for
falsely minimizing, or omitting to disclose, known
risks to the cultivation of teak, including the risk
to fire, pest damage and decease. The US agency is
demanding that the company involved makes "an
appropriate return" of the money paid by its US
investors.
_____________
* FIGURE 4 *
_____________
IT WOULD BE CONVENIENT TO CLARIFY IF MAKING
EXAGGERATED CLAIMS SUCH AS THOSE REFERRED TO IN THIS
REPORT IS CONSIDERED A VIOLATION OF LAWS IN THE
NETHERLANDS. Should that be the case, all parties
involved would be affected, including WWF. If it is
not a violation of law, WWF would still be in a
precarious position. It is a technical organization
expected to be aware of these discrepancies,
particularly in the eyes of investors and the general
public. WWF's 'endorsement' of this operation may
justifiably be considered an independent and reliable
assurance that the company's claims are in fact
valid. WWF'S INTEGRITY AND PRESTIGE WOULD BE AFFECTED
IF IT DOES NOT WARN THOSE MOST LIKELY TO LOOSE IF
SUCH PROJECTIONS ARE IN FACT EXAGGERATED. AS WILL BE
SHOWN LATER, THOSE MOST LIKELY TO LOOSE ARE THE
INVESTORS INVOLVED.
end of part I
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