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WORLD RECORD ON TEAK YIELD



from Dawn Star, Paris 

re
CENTENO . JULIO CESAR wrote:
WORLD RECORD ON TEAK YIELD:
TRUTH OR TRICKERY ?
>            ________________________________________
> 
>                       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
>   ---------------------------------------------------------------------------------
> 
>   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@xxxxxxxxxxxx
>   _________________________________________________________
> 
>   March 12, 1996