Private Enterprise and Financial Markets > Environment > Forestry and Biodiversity Conservation and Management
Forest Financing in Latin America: The Role of the Inter-American Development Bank
By Jyrki Salmi, Markku Simula, Esa Puustajärvi (04/02, ENV-138, En)
The study is related to several strategies developed by the Inter-American Development Bank (IDB), including those on rural poverty reduction, rural finance, agriculture, water resources, coastal resources and energy. The study benefited from the analyses carried out for these strategies, but it clearly concentrates on the Bank?s actions in forestry and forest industry. It deals with private sector investments as well as public goods present in the forests of the region.
The overall objective of this study is to present recommendations for the IDB?s forest-related lending and support to institutional and policy development in its borrowing countries.
There is lack of clarity among decision-makers in Latin America and the Caribbean on what sustainable forest management mean and how they should be financed. The current debate on whether sustainable management of natural forests can compete in profitability with unsustainable practices and other land use options is likely to continue. Forest investments can be a feasible financial proposition for investors. The key issues are (a) how financing can help forest owners and managers shift from unsustainable to sustainable practices, profitable in the medium and long run and (b) how to make the environmental services and values of forests, which are currently considered externalities, to pay for ensuring their future maintenance.
A whole range of financing instruments has become available for forestry investments. They include various economic instruments (taxes, royalties, environmental and forestry fees) and public sector mechanisms (sector and project loans and grants, credit lines, subsidies, debt-related instruments, forest and environmental funds, targeted grants). Such market development instruments as forestry-based carbon offsets, water resource charges, etc., hold even more promise to raise the necessary financing for investments. Private capital mobilization through venture investment is another undertapped opportunity.
The Bank?s involvement in forestry is well established. However, its annual financing level in the forestry sector has dropped in the 1990s, from $100 million to between $20 and $40 million toward the end of the decade. This level is inadequate to address the problems that the sector faces and to tap the investment opportunities offered by sustainable forest management.
The Bank?s current production forestry instruments are well targeted to complement capital market financing, the main source of financing for private investment. Direct support for pilot and pioneer projects can play a particularly important strategic role. Certification of forest management, for example, is a promising sustainability tool that contributes to internalizing social and environmental costs. The Bank should support forest certification efforts in the region.
Social forestry loan projects could target activities such as agroforestry and farm forestry, non-timber forest products and various community-based forest services in order to help generate rural income and create new jobs.
Traditional loan projects in watershed management, establishment and maintenance of networks of protected forest areas, urban forestry and environmental conservation will remain relevant environmental forestry tools. Institutional strengthening and policy development will also be needed to build up the capacity of member countries to design and implement new and innovative schemes for the commercialization of environmental services from forests.
Measures to promote the demand for financing sustainable forest management will be required to increase the Bank?s role in the forestry sector. The main bottleneck is the lack of awareness and understanding of the opportunities offered by forests among decisionmakers in the ministries of finance, national planning agencies, and national financial institutions. Close analysis of success stories indicates that sustainable forest management can be profitable. This can be achieved by following the actions proposed below.
- Create adequate awareness among macro-level decisionmakers of the forestry sector?s potential contribution to sustainable development in Latin America and the Caribbean.
- Use national forest programs as entry points to Bank financing within an appropriate institutional framework.
- Continue to include forest components in the loan programs for other sectors (rural development, infrastructure and energy investments, tourism, urban development).
- Analyze the implications of international forest policy processes and country commitments for IDB assistance to its members.
- Pioneer and promote the use of new financing instruments for sustainable forestry.
- Facilitate and support private sector investment in forest management. This will also create internal pressures for policy reforms and institutional strengthening in member countries which the Bank may support.
- Strengthen existing strategic alliances and develop new ones at national and international levels within the region.
Last updated: 04/20/07
