UNCLASSIFIED

PROG

APPROVED:ADOWDY

DRAFTED:ADOWDY

CLEARED: POLECON/LA PAZ: TCRAIG, USAID/LA PAZ

SENV

AMEMBASSY BRASILIA

SECSTATE WASHDC

INFO BRASILIA ENVIRONMENTAL HUB COLLECTIVE

AMEMBASSY SAN JOSE

AMEMBASSY MEXICO

DOI WASHDC

HQ EPA WASHDC

NASA WASHDC

NOAA WASHDC

USDA WASHDC

USDOC WASHDC

DEPT PASS USAID FOR LAC/RSD, LAC/SAM, G/ENV, PPC/ENV

INTERIOR FOR KATHRYN WASHBURN, DIR. INT. AFFAIRS

INTERIOR PASS USGS FOR INTERNATIONAL PROGRAMS: JEAN WEAVER

EPA FOR INTERNATIONAL ACTIVITIES: CAM HILL-MACON

USDA FOR FOREST SERVICE: J ENGERT & M ZWEEDE

SAN JOSE FOR REGIONAL ENVIRONMENTAL HUB

MEXICO FOR EST

E.O. 12958: N/A

TAGS: SENV, EAGR, EAID, SNAR, EINV, BTIO, XR, PE, BR

SUBJECT: BOLIVIAN FOREST OUTLOOK

1.  This cable is a collaborative effort between the Brasilia regional
    environmental hub and Amembassy La Paz.

2\. Summary: Bolivia has made remarkable progress in sustainable
forestry practices since implementing a new forest law in 1995, and the
country is a leader in the adoption of forest "certification". However,
the move to sustainability has posed difficulties for the forest
industry, marked particularly by a decline in the value of forest
exports and a high level of indebtedness. Moreover, the forest industry
in Bolivia must overcome several inherent disadvantages in competing in
world timber markets, including low harvest volumes per hectare of
forest and high cost of transport. For its experiment with sustainable
forestry to succeed, Bolivia needs to address a lack of capital, old
technology, a lack of qualified technical personnel and a dearth of
management skills. End summary.

3\. During a visit to Bolivia by Brasilia's regional environmental hub
January 28-31, hub and La Paz EST officer had a number of discussions
with local officials on environment and sustainable development issues.
Septel will look at some of the broader issues discussed, while this
cable focuses on developments in the country's forest industry. Key
meetings on the forest sector included one with Preston Pattie, director
of the BOLFOR sustainable forestry project, on January 30, and with Gerd
Resnikowski, executive director of the Amazon Center for Sustainable
Forestry Enterprise (CADEFOR), on January 31. Both projects, which are
funded by USAID, are located in Santa Cruz. Additional data was provided
by a report, "Strategic Plan for the Development of the Bolivian
Forestry Sector", which was prepared for the Bolivian industry group
(Camara Forestal) by STCP consulting group in 2000.

4\. Bolivia has extensive forest resources, with 48 percent of the
country's surface area covered with forests. According to the STCP
report, the country has a total of 20 million hectares, which could be
used for sustainable forestry development, with an existing stock of 317
million cubic meters of wood in commercial species. The report claims
that the country could theoretically produce 20 million cubic meters of
wood annually, on a sustainable basis. This is approximately 40 times
the current official production.

5\. Prior to implementing new forest legislation in 1995, Bolivia's old
forest regime was based on large, politically inspired concessions,
according to Pattie. In 1995, forest concessions in the country totaled
more than 20 million hectares, but these concessions often overlapped
other land claims and only a small fraction of the area was actually
logged. The predominant export product was mahogany, and according to
Resnikowski, cutting and exporting mahogany to international markets was
a quite lucrative business. Pattie told emboffs that the old system was
almost completely unmanaged and that as much as half of the total cost
incurred by lumber producers went towards bribes to local officials.

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PROGRESSIVE FOREST LEGISLATION...

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6\. In 1995, Bolivia adopted a new forest law, which dramatically
reduced the amount of land under concession. By charging concessionaires
annual fees of USD 1.00 per hectare to maintain their concessions,
concessions fell from more than 20 million hectares to approximately 5
million, according to the STCP report. According to Pattie, the new
forest regime relies on four principles to encourage sustainable
forestry:

\-- Cutting cycles of 20-35 years;

\-- Use of seed trees to improve the stock;

\-- Using minimum diameter standards to govern the size of trees that
can be harvested;

\-- Requiring that 20 percent of concessions be set aside as
biodiversity preserves.

7\. One element of the new forest code, encouraging voluntary
"certification" of forests and forest products, has met with
considerable success in Bolivia. (Note: Certification is a process where
independent auditors certify that a specific forest operation is
conducted in an environmentally and socially responsible manner.)
According to Resnikowski, the country has the largest area of forests
certified by the Forest Stewardship Council (FSC) in the world. He noted
that FSC-certified products, which constituted less than one percent of
Bolivia's forest products exports in 1998, accounted for 25 percent of
the country's exports in 2001. Eighty-three percent of Bolivia's
certified production, in turn, is attributable to three vertically
integrated producers, who export finished wood products.

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BUT HARD TIMES IN THE INDUSTRY

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8\. Although certification can provide competitive advantage to tropical
timber producers, Resnikowski cautioned that certification, in itself,
did not guarantee profitability. He pointed out that most of the
benefits of certification had accrued to a few large companies with good
management. Moreover, certification has not helped in the marketing of
lesser-known species, according to Resnikowski, largely because it was
difficult to compete with the enormous supply of traditional species
from Brazil. Finally, certification is no substitute for quality control
by companies. "You can't sell garbage, even if it is certified",
Resnikowski observed.

9\. While the new forest code has had many positive results, the changes
have been difficult for many producers in Bolivia's forest sector. Total
forest exports have declined, according to Resnikowski, from USD 76
million in 1998 to USD 51 million in 2001. This represents a
10-percent/year decline in exports at the same time that worldwide trade
in tropical wood rose 3 percent/year. One cause of the decline has been
the recession in Argentina. However, the new forest code, by reducing
the harvest of mahogany and other high-value species, has also had a
direct effect. The combination of reduced exports and tighter credit
standards in Bolivia has made it extremely difficult for many producers
to pay off existing debt, according to Resnikowski.

10\. Looking to the future, our interlocutors identified several
inherent disadvantages that Bolivia faced in competing with other
tropical timber producers. One disadvantage is the relatively high cost
of transport. Resnikowski told emboffs that the cost to truck hardwood
to Arica, Chile, the traditional route for Bolivian wood exports, ranged
from USD 35-50/cubic meter. Costs to ship to the U.S. west coast from
Arica added an additional USD 37-74/cubic meter. Resnikowski said that,
to avoid these costs, producers in Northern Bolivia had begun trucking
exports directly to Manaus, Brazil.

11\. The anticipated paving of the road from Santa Cruz to Puerto
Suarez, on the Upper Paraguay watershed, may reduce those transport
costs, according to Resnikowski. There is currently a rail connection
between Santa Cruz and Puerto Suarez, but he told emboffs that it is not
used by forest products companies because it is unreliable. (Comment:
The proposed improvement of the Puerto Suarez road has raised concerns
among many Bolivian and international environmental NGOs, though some
argue that development is inevitable and that the key will be effective
mitigation of environmental and social impacts. End comment.)

12\. The second major challenge for Bolivia's forest sector is the very
low volumes of wood yielded per hectare from the country's forests.
According to Preston Pattie, Bolivian forests produce only 1.2-3.0 cubic
meters/hectare of wood during each harvest cycle. This compares with
20-40 cubic meters/hectare for Brazilian forests. The reason for such
low yields is that only a few species in Bolivia are utilized.
Resnikowski illustrated the problem by pointing out that of the 300
species of trees in Bolivia, only 120 have been classified for their
commercial properties. Of these 70 species have been included on
harvesting plans by concessionaires and 31 species are currently being
harvested. Of these, however, only four species, including mahogany,
cedar and south American oak, account for 90 percent of the total
market. By comparison, in Brazil a much larger number of species are
used, with the lesser value species being consumed in Brazil's enormous
domestic lumber market.

13\. Increasing the number of species harvested from Bolivia's forest
will be essential to creation of a viable sustainable forest industry,
according to the STCP Report. The consultants estimate that, under
current conditions, the cost of harvesting and delivering tropical
timber to a sawmill or processing plant averages USD 43.20 per cubic
meter, compared to USD 27.22 per cubic mete in Brazil. The study
calculates that, by increasing forest yields to 12 cubic meters/hectare,
Bolivia's costs could fall to USD 25.80 per cubic meter, below Brazilian
costs. Pattie elaborated on the subject, noting that one Bolivian
company, by using reduced-impact logging techniques and by harvesting a
greater number of species, had reduced its lumber acquisition costs by
50-60 percent.

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CHALLENGES FACING THE INDUSTRY

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14\. According to CADEFOR's Resnikowski, in addition to these
disadvantages, the forest products industry in Bolivia faces several
current challenges. These include:

\-- Old infrastructure: Many of the country's sawmills are 50 years old;

\-- Lack of qualified personnel, particularly degreed foresters;

\-- Lack of financial resources, with the new forest code, capital is
much tighter than previously and interest rates are 16 percent "at a
minimum" for dollar-denominated loans (Comment: Commercial loans are
about five percent lower and may have subsequently come down for
forestry operations as well);

\-- Lack of management skills: Under the old system, it was easy for
companies to be profitable and few of them acquired the business acumen
needed to compete in today's international market;

\-- Lack of proactive state policies to promote sustainable forestry.

15\. CADEFOR has been working to address some of these challenges.
Resnikowski explained that the NGO was focusing on several specific
areas. These include improving the productivity and efficiency of the
private sector forest producers, increasing exports of FSC certified
products, and increasing investments in the Bolivian forest sector. He
also noted that CADEFOR was working to develop relationships between
"community forestry" and the private sector. Resnikowski pointed out
that many communities had received tracts of forest for community
management. However, few of these communities had the equipment or
expertise to effectively harvest their timber, nor markets in which to
sell it. For this reason, the communities needed the private sector to
assist, and the private sector needed the wood these communities could
provide.

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OUTLOOK

\-\-\-\-\-\--

16\. Despite the industry's many challenges, Resnikowski was bullish on
his outlook for the sector. He pointed out that the companies that had
embraced the new industry climate were doing quite well, and had been
successful in introducing finished wood products, such as wooden doors
and flooring, into the U.S. market. Resnikowski stated that in five
years, under good conditions, Bolivia's forest exports could grow from
USD 50 million/year to more than USD 1.0 billion.

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COMMENT

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17\. In many ways, Bolivia has the most progressive forest sector in
South America. The country has adopted a model forest code, gone a long
way in cleaning up abuses promulgated under the old forest regime, and
currently accounts for a good percentage of the world's certified
tropical forest. The transition has been tough on the industry, however,
with reduced exports and high indebtedness. Before Bolivia's noble
experiment is widely emulated in other South American countries, the
industry will have to show that it can be profitable. USG efforts in
this regard, particularly USAID's BOLFOR and CADEFOR projects, appear to
be on exactly the right track. End comment.

OROZCO