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WORLD RECORD ON TEAK YIELD:
TRUTH OR TRICKERY ?
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Julio Cesar Centeno
In a report recently released in The Netherlands, a world record on
the production of commercial teak timber is reported, at the
plantations established by the company Flor y Fauna in Costa
Rica. The oldest of these plantations is only seven years of age. The
Centro Cientifico Tropical of Costa Rica [CCT], based on
information supplied by Flor y Fauna, has concluded:
--- "the average growth-results of the plantations are higher than
ever recorded in scientific literature in or outside Costa Rica"
--- "the expected yield figures, within a reach from some 400 M3
and 800 M3, are in accordance with the present growth
developments".
The figures refer to the expected production of commercial timber
per hectare, in teak plantations with a projected 20 year rotation
period. The figures are equivalent to a mean-annual-increment
[MAI] of 20 to 40 cubic meters per hectare per year.
The report was commissioned by Flor y Fauna. I have had the
opportunity to review an abridged version of the report [9], collated
from parts of the original, and apparently distributed to the media
by the Dutch insurance company OHRA, at a press release on
March 04, 1996. This posting is motivated by its unusual nature
and findings.
BACKGROUND
Flor y Fauna is a Dutch owned company, which has established
approximately 3000 hectares of teak plantations in the province of
Alajuela, Northern Costa Rica, starting in 1989. Flor y Fauna sold
the economic ownership of the timber to be produced from most of
its plantations to the insurance company OHRA, who in turn sold
it to over 13,000 individual Dutch investors, tied to life insurance
policies.
I carried out an evaluation of this investment scheme in 1993,
following a request by the World Wide Fund for Nature [1]. I was
supplied with documentation from the firm Van Rossum & Van
Veen, a representative of Flor y Fauna, according to which it was
OHRA's policy to guarantee investors the return of their net
premiums paid, at the end of the 20 year cycle. According to Van
Rossum & Van Veen, the guaranteed return might also include a
small interest allowance "...of some 1.5 percent annually".
It is argued that what has been placed in the market is an
insurance product. Nevertheless, it is also clear that the life
insurance policies are indivisibly tied to the investment in the teak
plantations. They have also been publicly promoted and advertised
with the character of an investment product.
The insurance product seems now to have a guaranteed minimum
internal rate of return of only 0.5 percent. But these policies were
marketed with specific reference to far higher rates of return,
turning them into particularly attractive financial investments.
According to documentation provided by Van Rossum & Van Veen
to WWF, Flor y Fauna promised investors internal rates of return
from 16 to 22 percent [1]. In its sales brochures, OHRA promised
investors rates of return from 15 to 25 percent.
These rates of return were based on unrealistic projections of
timber yields, and exaggerated expectations on the prices at which
the timber could be sold [1].
Flor y Fauna has been involved in legal complications and public
scandals, due partly to its exaggerated claims on expected rates of
return. The insurance company OHRA, Flor y Fauna and WWF-
Netherlands encouraged the Dutch public to invest in these teak
plantations, partly based on the claim that average timber yield
would range from 40 to 48 cubic meters per hectare per year. At
the time of my evaluation of this case, the company expected to
harvest an average of 800 to 960 cubic meters of commercial
timber per hectare, under 20 year cycles [1].
These projections have been the cause of serious problems for the
company since 1993. Flor y Fauna has been taken to a court of
law, where it presented a document stating that it was not
imaginary that OHRA's wildest dream [960 M3 per hectare] might
be surpassed by a factor of 2, with production reaching over 1810
cubic meters per hectare, equivalent to a mean annual increment
of over 90 cubic meters per hectare per year [5].
More recently the case has been brought to the attention of the
Code of Ethics Committee on Advertising of The Netherlands,
partly due to the false public claim that Flor y Fauna's teak
plantations have been certified as "well managed" by the Forest
Stewardship Council.
A report by the Ministry of Agriculture has been repeatedly
presented as evidence that the company's projections were, in fact,
rather conservative [6]. According to this report, the minimum
expected yield should be 53 M3 per hectare per year. The Dutch
Parliament has questioned the Ministers of Agriculture and
Finance about the validity of such projections, and their
implication to investors.
Flor y Fauna has had serious difficulties to substantiate its
projections on financial returns promised to investors. Teak is a
high-quality tropical timber, which has been grown in plantations
for over a hundred years. In tropical America, on good soils, with
favorable environmental conditions, and under good management,
the production of commercial timber is known to safely range
between 12 and 18 cubic meters per hectare per year, in the form
of logs. There are plenty of references in scientific and technical
literature, and information from commercial plantations
throughout the tropics, supporting the safety and validity of this
range. Exceptional cases have been reported where timber
production has reached 20 to 30 percent above the high end of this
range, during the first years of the rotation.
Flor y Fauna's teak plantations have been officially endorsed by
the World Wide Fund for Nature [WWF-Netherlands]. This
endorsement has provided exceptional credibility to the operation
within the public opinion. In 1993, the World Wide Fund for
Nature asked me to visit the plantations, and prepare an analysis
of its economic dimensions. The final report was presented in
December of 1993, after Flor y Fauna, OHRA and WWF-
Netherlands were given the opportunity to question its findings,
and provide evidence to support their allegations [1]. One of its
conclusions, relevant to the present discussion, reads:
"The expected yields are unjustified, reverting in equally
unjustified expectations on the financial returns to be obtained.
Investors are led to believe they will receive returns which are
highly unlikely. This may be considered fraud".
The fundamental findings of the 1993 report are [1]:
a] Individual investors in the Teakwood project were led to believe
they would receive highly unlikely rates of return.
The rates of return projected by Flor y Fauna were based on two
fundamental variables:
- The yield of timber the plantations could provide.
- The Price at which the timber from these plantations could be
sold in the form of logs.
b] Rates of return were based on the unrealistic assumption that
the plantations would produce from 40 to 48 cubic meters per
hectare per year during the 20 year rotation period established for
the project.
Many investors seem to have signed contractual agreement at the
time this claim was effective.
c] Flor y Fauna based its rates of return on equally unrealistic
projections of the prices at which teak logs of 12, 16 and 20 years
of age may be sold. At the time of my assessment, the company
expected as much as 830 US dollars per cubic meter of 8 year old
poles, and 2,100 dollars per cubic meter of 20 year old logs.
d] The risk of failing to achieve projected returns was largely
transferred to individual investors. Two thirds of all returns to
investors depend on production and prices at the very end of the 20
year cycle. While returns to Flor y Fauna and OHRA depend only
about 10 per cent from such a harvest.
Flor y Fauna and OHRA seem to have partly recognized the
validity of these findings, since the yield range has been
significantly reduced. Expected yields seem to now range from 20
to 40 cubic meters per hectare per year. The average expected yield
has been drastically reduced, from 44 to 30 M3/ha-yr, but remains
unrealistic. Investors are still led to believe they might receive
highly unlikely rates of return.
Parallel to the reduction of the average expected yield, there has
been an unusual and significant increase in the range of such
values. Originally the range was equivalent to 20 per cent of the
lower estimate. But now it has grown to 100 percent of the lower
estimate. The latest yield estimates seem to range between "some
400 and 800 M3" per hectare, equivalent to mean annual
increments of 20 to 40 M3/ha-yr [9].
These values might not have been different if they were due to
possible financial and legal implications. Investors were promised
they should expect rates of return based on a minimum yield of 40
M3 per hectare per year. Deviation from such figures at this stage
could lead to legal complaints, implications of fraud, and possible
huge financial returns to investors. This problem seems to have
been dealt with by simply sinking the original lower estimate [40
M3/ha-yr] to half its original value, making it barely touch the
higher end of normal yield estimates for teak. While at the same
time, holding the upper end of the new yield range within promised
estimates. The result is a highly distorted and exaggerated range
of yield values, which reflects the insecurity and lack of reliability
in what is, in fact, offered.
At least three-quarters of the range of Flor y Fauna new yield
projections are still beyond what should be expected from teak in
the tropics, even considering the best soil, climatic and
management conditions registered to date in actual practice.
One of the most recent reports on yields from teak plantations in
Costa Rica was published by CATIE [Centro Agronomico Tropical
de Investigacion y Ensenanza] in 1995 [7], based on information
collected by CATIE itself, from 24 different sites in the province of
Guanacaste. The province of Alajuela, where Flor y Fauna's
plantations are established, is contiguous to Guanacaste, in
northern Costa Rica.
CATIE is one of the most respected and credible forestry and
agriculture research institutions, not only in Costa Rica, but in
Latin America. It has solid international links, among others a
structural cooperation with the Agricultural University of
Wageningen in the Netherlands. Its report concludes in a
statistically significant mean-annual-increment of 12 to 18 cubic
meters per hectare per year, as is normally the case.
Another recent report on teak was published by the Ministry of
Forestry of Myanmar and the Food and Agricultural Organization
of the United Nations, FAO, and refers to a paper presented at the
second regional seminar on Teak, which took place in early June,
1995 in Yangon, Myanmar [8]. Productivity for plantations 40 to 80
years of age was found to be between 8 and 10 cubic meters per
hectare per year.
OBSERVATIONS ON THE REPORT PRESENTED BY THE
CENTRO CIENTIFICO TROPICAL OF COSTA RICA.
It is mentioned on the cover page that the work leading to the
report is partially based on a one-day visit to the plantations,
which took place on february 21st, 1996, plus three day of
"discussions". By the time of the one-day visit, Flor y Fauna had
planted approximately 3,000 hectares in Costa Rica.
The report reiterates that the data used to come to conclusions was
provided by Flor y Fauna. This is corroborated in Table 2, where
the dates on which the measurements where taken are all previous
to the date of the one-day visit mentioned on the cover page [9].
Flor y Fauna is an obviously interested party, under significant
pressure to produce evidence to support its allegations. Particularly
in such cases, information is normally gathered and processed by
an independent third party. The conclusions of a report based on
information supplied by the company should thus be taken with
extreme caution. This is specially so with regard to information
related to the fundamental issues on which Flor y Fauna is being
questioned. One such issue is growth rates.
The data on which conclusions seem to have been based is
presented in Table 2 of the report [9]. As presented, it is
statistically meaningless, since there is no information on the
variance, or the standard error, of the data used. Without these
variables, it is difficult to attach credibility to the average figures
presented, for they could well include large statistical errors.
There is no information on how Flor y Fauna produced these data,
what sampling method was used, what sort of variation is inherent
to the data collected, how significant are the results.
Under such circumstances, and given the serious controversy in
which Flor y Fauna is involved, to base a report on uncertain
information supplied by the company itself is a perilous adventure
with limited credibility.
The CCT reports highlights, as one of the reasons for the high
expected yields, that the plantations of Flor y Fauna are located in
a "Wet Atmospheric Association, and during some years it is quite
possible that in the area it does not occur any effective dry period"
[9]. When this occurs, growth may be enhanced, but the quality of
the timber is affected. To produce high quality teak, there is a need
for a dry period of 3 to 5 months. A dry month means less than 50
mm precipitation. When a dry period is not present, the quality of
the timber tends to be poor in terms of color, texture and density.
The possibility that timber from 12 to 20 year-old trees, with these
characteristics, will be sold for the unusually high prices projected
by Flor y Fauna, approaches a fantasy.
PRELIMINARY CONCLUSIONS
There are two fundamental conclusion from the abridged CCT
report I've had the opportunity to review. The first is that the
reliability of the data on which the conclusions are founded is
extremely questionable.
The data was collected by the interested party involved, Flor y
Fauna, which in turn is badly in need of evidence to support its
allegations on growth rates. These allegations have drawn the
company into a legal, financial and political storm. Considering
this scenario, and the history of false claims which has paved the
development of this project, the credibility of the information
supplied by Flor y Fauna could be legitimately questioned. One
such false claim indeed is the public allegation that the plantations
have been certified as "well managed" by the Forest Stewardship
Council.
During the last two years, and as far as I am aware, the only one
piece of evidence used by Flor y Fauna and OHRA to support their
allegation about growth rates was a report by the Ministry of
Agriculture of The Netherlands [6]. This report has been
introduced as evidence in a court of law, to the Code of Ethics
Committee on Advertising, and even to the Dutch Parliament.
It is now well understood that this report is based on seriously
flawed method of collecting and processing statistical information
[3]. It is plagued with technical errors of such fundamental nature
that a case of forged evidence could be made based upon it. Its
credibility has been suddenly pulverized.
This seems to have left Flor y Fauna and OHRA in an extremely
perilous position, having lost their only platform of technical
support for their allegations on growth rates. They are seemingly
under urgent pressure to produce some other piece of evidence.
The report commissioned by Flor y Fauna from CCT may provide a
temporary relief to this situation.
There are three fundamental points of controversy: the yield which
may be obtained from the plantations, the price at which teak logs
of 12, 16 and 20 years of age may be sold, and the consequent rates
of return to investors. The CCT report makes no reference to rates
of return, or to the prices at which the production from the
plantations may be sold. The relevance of its conclusions on yield
projections are seriously under question.
Almost simultaneous with the CCT report, OHRA released a
summary of a financial analysis by KPMG Accountants, dated
February 27, 1996. I will make further reference to this analysis in
a future article. At this stage, it is important to highlight that this
report avoids the discussion of the three fundamental variables
mentioned above. KPMG has wisely kept a distance from the
allegations on yield, prices and rates of return, the three issues at
the core of the debate, clearly distancing itself from any form of
endorsement of such projections.
According to the KPMG report, expected returns to investors in
OHRA's Teakwood project now range from 11 to 23 percent. This is
significantly lower than originally projected. Nevertheless, KPMG
does not give an opinion on the actual sales proceeds in years 12,
16 or 20, or on the validity of OHRA's expected rates of return.
CLOSING REMARKS
OHRA has sent a letter to my lawyer in The Netherlands, Bernard
Tomlow, threatening to take legal action if I do not refrain from
making critical comments about their teak business. OHRA seems
particularly sensitive to the findings of my report on Flor y Fauna
[1], and to my consistency in defending them. Its approach to deal
with this issue is not to present credible arguments to support its
allegations, or to encourage a healthy and objective debate on the
subject, but to impose forced silence through legal actions. So far,
neither OHRA nor Flor y Fauna have provided any evidence to
justify modifications of the fundamental findings of the report.
OHRA has publicly released reports and press statements which
make questionable and distorted references to the findings of my
report. At the same time, it pretends to curtail the right to defend
my point of view.
I do not plan to renounce to the right of free speech, specially in a
case where thousands of Dutch citizens may have been lured into
making investments, through misleading and inaccurate
information. I have nothing to gain in this debate, but to let those
people know, and so many others who have invested in similar
ventures, that someone is willing to defend the technical and
ethical dimensions of a forestry project in the tropics. To allow
these irregularities to continue, without raising a responsible
warning to all parties involved, is to endorse what I consider to be
a seriously flawed operation, bordering on fraud. This is
furthermore a forestry project, involving a professional
responsibility in my area of competence, a responsibility I am not
willing to elude.
There is an urgent need to develop plantations in the tropics, and
to encourage private investment in such initiatives. Tree
plantations may create jobs, wealth, and foreign exchange in
countries under severe economic and social limitations. They may
contribute to the alleviation of poverty, and of the related pressure
on tropical forests. Nevertheless, we must make sure that such
initiatives fall within acceptable technical and ethical limits, to
ensure their success and multiplication in the future. Projects such
as Flor y Fauna's may discourage further private investments in
plantation in tropical countries, thereby preventing the alleviation
of the unsustainable pressure on their natural forests, and on their
unique biological, ecological and strategic value.
_________________________________________________________
REFERENCES
1. Centeno, JC: ECONOMIC ANALYSIS OF FLOR Y FAUNA'S
TEAK PLANTATIONS IN COSTA RICA, December 22, 1993.
2. Centeno, JC: TEAK CONTROVERSY FLARES UP IN THE
NETHERLANDS. Internet posting, February 05, 1996.
3. Centeno, JC: TEAK STING? Internet posting. February 19,
1996.
4. Centeno, JC: BLASTING THE FSC IN THE NETHERLANDS.
Internet posting. March 1996.
4. F.H.J. van Schoonhoven [Flor y Fauna]: MEMORANDUM OF
ORAL PLEADING. December 7, 1993.
5. Ministry of Agriculture of The Netherlands: DE TEAK-
PLANTAGES VAN FLOR Y FAUNA S.A. IN COSTA RICA,
December 28, 1993.
6. RENDIMIENTO Y CALIDAD DE SITIO PARA Gmelina arborea,
Tectona grandis, Bombacopsis quinata y Pinus caribaea EN
GUANACASTE, COSTA RICA. CATIE, Informe Tecnico 256, Costa
Rica, 1995.
7. Ministry of Forestry of Myanmar and FAO: THE SECOND
REGIONAL SEMINAR ON TEAK. 29 May - 3 June 1995. Ynagon,
Myanmar. Resource Paper No. 2: Overview Problems in Teak
Plantation Establishment. Dr. Apichart Kaosa-ard, Chiangmai
University, Thailand.
8. Centro Cientifico Tropical: TECHNICAL AUDITING OF THE
GROWTH AND YIELD PROJECTIONS FOR Tectona grandis
PLANTATIONS ESTABLISHED BY FLOR Y FAUNA S.A., Second
Preliminary Report. Abridged version, 7 pages. Costa Rica,
February 26, 1996
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Julio Cesar Centeno is a forestry specialist from Venezuela from
whom WWF requested an economic analysis of Flor & Fauna's teak
plantations in 1993. He was one of the key negotiators of the
International Tropical Timber Agreement, UNCTAD, Geneva,
serving as spokesman for tropical countries. He served as forestry
advisor to the Secretariat of the United Nations Conference for
Environment and Development [UNCED 92], and as Director of the
Latinamerican Forestry Institute between 1980 and 1990. He was
invested by Prince Bernhard of The Netherlands with the Golden
Ark Award for his work in the forestry sector. He serves as a
member of the Governing Board of SGS-Forestry in Oxford, United
Kingdom, and as acting vice-chairman of the TROPENBOS
Foundation in The Netherlands.
Fax: INT + 58-74-714576
E-mail: jcenteno@ciens.ula.ve
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March 12, 1996
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