PART II OF REPORT ON FLOR Y FAUNA
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PRICES
Price is the second most important variable which
will affect the returns from the plantations. Here
again we find unusually high expectations by FLOR Y
FAUNA.
The company offers three possible price scenarios
[page 12]. Under it's first and most conservative
scenario, Scenario A, the price of teak is expected
to increase 4% annually over the next 20 years. [
refs. 11, 33]. Although this is an approximation of
the most likely scenario, it does not take into
account that the value of the products from the
first thinning will draw a considerably lower average
price than the product from the last thinning. The
base price should not be taken as that of high
quality logs. That is not what will be produced in
the first 19 years of the operation. The other two
scenarios offered by FLOR Y FAUNA, scenarios B and C,
assume considerably higher price increases through
time.
The estimates used in this report assume an
optimistic development of prices throughout the life
of the plantation, taking into consideration that
quality tends to increase as the plantation ages.
As early as 1990, the average yearly price of teak
logs imported into the main international markets was
900 US$ per M3 at the port of entry [CIF]. In
December of 1990 the average import price had gone up
to 1120 US$/M3. That same year, the average import
price of sawn teak was US$ 1240 per M3, CIF
[ FAO, ref. 9].
However, such prices refer to a far higher quality
material that would be expected from FLOR Y FAUNA's
plantations at age 8 or 12, when mainly poles would
be produced.
As late as August 1993, teak poles from Ghana were
exported for only US$ 205 the cubic meter. Last
November sawn teak was exported from Ghana for as
little as US$ 520 the M3. [ International Trade
Center - Market News Service, ref. 15]. The low
price is due mainly to its low quality, a more
similar situation to FLOR Y FAUNA's during its first
clearings operations.
Teak logs of average quality sold for 400 to 450
dollars in the Costa Rican market during the first
semester of 1993. Considering the price trend, and
the need for FLOR Y FAUNA to export most or all of
its production, this has been optimistically
considered a representative base line on which to
project the development of prices for the rest of the
plantation cycle.
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* FIGURE 5 *
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COSTS
The projected and actual costs of FLOR Y FAUNA's
operations were not available, neither from the
company, nor from WWF. Nevertheless, based on the
collection of loose pieces of information, from FLOR
Y FAUNA and from similar plantations in Costa Rica,
the following cost estimates were made, in US dollars
of 1993:
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ESTIMATED COSTS TO F & F, PER HECTARE, US$
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PROJECT, SET UP 100
LAND ACQUISITION 600
LAND PREPARATION 150
NURSERY [1600 saplings/ha] 100
PLANTING 50
REPLANTING [20% mortality] 10
WEED CONTROL 150
EQUIPMENT 200
ADMINISTRATION 100
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TOTAL COSTS YEAR 1 1460
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WEED CONTROL, YEARS 2-5 750
ADMINISTRATION, YEARS 2-8 450
THINNINGS, YEAR 8 150
TRANSPORTATION, YEAR 8 50
ADMINISTRATION, YEARS 9-12 250
TRANSPORTATION, YEAR 12 80
THINNINGS, YEAR 12 150
ADMINISTRATION, YEARS 13-16 250
THINNINGS, YEAR 16 150
TRANSPORTATION YEAR 16 140
ADMINISTRATION, YEARS 17-20 250
CLEAR CUT, YEAR 20 150
TRANSPORTATION YEAR 20 300
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TOTAL US$/Ha 4580
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THE COMPARISON BETWEEN COSTS AND THE ACTUAL PAYMENTS
MADE BY INVESTORS REFLECTS A GROSS DISPARITY. NET
PAYMENTS AMOUNT TO US$ 65770 PER HECTARE. THE
OPPORTUNITY COST OF SUCH PAYMENTS IS US$ 112221 PER
HECTARE, MORE THAN 24 TIMES HIGHER THAN THE COSTS
INVOLVED DURING THE SAME 20 YEAR PERIOD.
Investors are charged excessively high premiums for
the operation of FLOR Y FAUNA. THE DOWNPAYMENTS [US$
20778 PER HECTARE] WOULD HAVE BEEN MORE THAN
SUFFICIENT TO COVER ALL COSTS, STILL GUARANTEE A FAIR
PROFIT FOR ALL PARTIES INVOLVED, AND DISTRIBUTE MORE
EVENLY THE RISKS INVOLVED. The premiums paid only
increase the profits for both FLOR Y FAUNA and OHRA,
without improving the prospects of the investors
themselves.
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* FIGURE 6 *
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EXPECTED RETURNS
Based on the revised projections of yields and prices
established in this report, the expected returns for
all parties involved were calculated at three levels:
for each one-eighth of a hectare contract, per
hectare, and for the whole of TEAKWOOD VI: 750
hectares.
7.1 RETURN T0 INVESTORS. Investors would start
receiving returns in year 2004, when the plantations
reach age 12. Each one-eighth of a hectare could be
expected to produce almost 5.4 cubic meters at age
12. With a unit price expected to reach US$ 713/M3 in
year 2004 for the low quality material that would be
produced at such an early age, the total revenue
would be 3831 dollars per contract. Investors would
receive 85% of it, or US$ 3256. This is equivalent to
about 10% of all expected returns [see table on page
37].
At age 16, reached in calendar year 2008, each
contract-unit could be expected to produce about 9.37
M3 of usable timber. At a price of US$ 925/M3, the
total revenue would be US$ 8676. Investors would
receive US$ 7375. This is equivalent to about 24% of
all expected returns on each contract [Table, pg 37].
MOST OF THE RETURN TO INVESTORS COME ACTUALLY IN YEAR
20, AT THE END OF THE CYCLE. EACH INVESTOR WOULD THEN
RECEIVE A TOTAL OF US$ 19880, OR 2/3 OF ALL RETURNS.
Such returns are far lower than those claimed by FLOR
Y FAUNA. They are, in fact, only 40% of the most
conservative projection by FLOR Y FAUNA, and only
17% of it's most ambitious scenario.
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* FIGURE 7 *
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The fact that potential returns are so much lower
than those presented to investors by FLOR Y FAUNA and
OHRA should again be a matter of reflection. What are
its possible implications? Since most, or all,
investors are dutch citizens, and contracts take
place in the Netherlands, ARE ANY DUTCH LAWS BEING
INFRINGED?
IS THE COMPANY LIABLE TO SOME KIND OF LEGAL
COMPLAINT, BY INVESTORS OR SOME OTHER INTERESTED
PARTY, FOR OFFERING EXPECTATIONS SO FAR FROM REALITY?
WHAT WOULD BE THE CONSEQUENCES FOR WWF?
It seems to be OHRA's policy to guarantee investors
the return of their net premiums paid, at the end of
the 20 year cycle [ ref 33]. According to Van Rossum
& Van Veen [ref. 34], investors may also receive a
small interest allowance "...of some 1.5% annually".
Without interests investors would receive a total of
US$ 8221 each in year 2013. Taking into account the
1.5% interest mentioned, they would receive US$ 9898
if free of tax.
IN THE LATTER CASE, THE BEST SCENARIO FOR INVESTORS,
THE GUARANTEE ACTUALLY REPRESENTS A NET LOSS OF ABOUT
30% OF THE VALUE OF THEIR INVESTMENT, HAD THEY PLACED
THE MONEY IN A BANK.
Should 20% of all investors die on year 20, just
before the polices expire (worst case scenario) OHRA
would need to return a total of 11.8 million dollars
to the beneficiaries of such policies, including the
1.5% yearly interest mentioned above. This amounts to
only 14% percent (14%) of the revenues OHRA would
have received by then (85.2 million dollars)
according to the assumptions on yield and prices used
in this report. Should the calculation be based on
FLOR Y FAUNAPs projections, the return OHRA would
need to make is equivalent to 11% of the most
conservative scenario (A) and only 8% of its most
ambitious expectations, scenario C (See tables in
Appendix 1).
The guarantee to investors could have been
substantially higher, without significantly affecting
the profitability of the operation to the other
parties involved. It could have fully protected the
investor's interest, by making the guarantee
equivalent to either the opportunity cost of their
investment in a bank [US$ 14.000], or preferably
placing it at US$ 20.000, equivalent to an interest
rate of 7% free of tax. In the latter case, and
under the worst case scenario sketched above, the
guarantee would have represented 23% of the revenues
received by OHRA under scenario A, or 16% of the
revenues under scenario C.
It might be argued that the returns to FLOR Y FAUNA
and OHRA are as dependent on the accuracy of FLOR Y
FAUNA's projections on yield and prices as are the
returns to investors. And that, therefore, a
guarantee which fully protects the opportunity cost
of investors would not be justifiable.
Unfortunately, this is not the case. THE POSSIBILITY
THAT FLOR Y FAUNA MAY FAIL TO REACH ITS OWN PROJECTED
YIELDS AND PRICES WILL AFFECT INVESTORS MOST
SEVERELY. The expected return to FLOR Y FAUNA, OHRA
and WWF, are far less sensitive to the achievement of
those yields.
THIS ADDS AN ETHICAL DIMENSION TO THE CONCERN
EXPRESSED EARLIER FOR THE GROSS DISPARITY BETWEEN
EXPECTED RETURN TO INVESTORS, AND THOSE CLAIMED BY
FLOR Y FAUNA.
The company's financial forecasts are based on the
assumption that logs will be sold in the local
market. Although Costa Rica is expected to import
significant amounts of industrial timber in the near
future, there are several teak plantation projects in
the country. Teak is a high-value timber, and should
not be expected to compete with more common and
cheaper alternatives in the local market. The
internal market may not be able to absorb the
production from the teak plantations already
established in Costa Rica without seriously
depressing the price.
Should there be any intention to export part or all
of the production of these plantations, the company
would need to establish processing facilities in the
country. This is actually advisable. Apparently FLOR
Y FAUNA has decided to invest in a sawmill [ref. 33].
The most convenient for all parties involved,
especially for investors, is to make the processing
facilities large enough to process all or most of the
production from the plantations.
Since the company's financial forecasts are based on
the sale of logs, so are the stipulated returns to
investors. It is not clear if the changes in costs
and returns derived from the decision to establish
processing facilities are properly reflected in the
contracts with investors, or if the decision was made
before part or all of the contracts were signed.
Although the company seems free to establish
processing facilities, Van Veen's memo of June 24th
makes reference to the possibility to sell either
logs or sawn wood. The nature of the decision to
process the material is thus unclear, although it
will significantly affect the costs and revenues
involved.
7.2 RETURNS TO FLOR Y FAUNA.
The operation will also result in profits for FLOR Y
FAUNA, OHRA and WWF-Netherlands. In the calculations
below, as well as in the tables in Appendix 1, all
of FLOR Y FAUNA's operational costs related to the
plantations have been deducted. It is assumed that
both OHRA and WWF can profit from tax free savings,
due to their non-profit status. FLOR Y FAUNA, on the
other hand, can also benefit from tax free operations
in Costa Rica, according to local regulations. It is
estimated that FLOR Y FAUNA can receive at least a
net 7% interest rate on savings in Costa Rica, above
the current inflation rate there.
TEAKWOOD VI represents a net revenue of US$ 31.2
million dollars for FLOR Y FAUNA. If interests are
added, the total revenue would be US$ 72 million
dollars [See table, page 23].
If, on the other hand, calculations are based on FLOR
Y FAUNA's own projections on yield and prices, the
potential revenues expected by the company would be
as follows [for more detail see Tables in Appendix
1]:
TEAKWOOD VI
NET TRANSFERS TO FLOR Y FAUNA
millions of US $
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ACCORDING TO FLOR Y FAUNA THIS REPORT
WITH WITH
SCENARIO NET INTERESTS NET INTEREST
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A 50.1 97.0 31.2 71.9
B 63.4 114.3
C 96.7 158.8
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