Swedforest Consulting AB
There has been considerable activity to help reduce rural poverty in Latin America. Efforts have included policy reform and accompanying field programmes for rural development. Many of these integrated development programmes have had forestry components and it is in connection with work on these that the author has collected the information with follows. Forest-based small-scale processing enterprises (FB-SSIs), having good opportunities for growth, play a very important role as a promising source for increasing employment, for better standard of living and in the long run for developing rural areas. This paper describes and comments on experiences with such enterprises with emphasis on the role, nature and structure of producer organizations and of external institutions set up to assist them. It discusses main strengths and weaknesses in achieving success and identifies key issues relate to the organization of producers and of assisting agencies. Three specific illustrative cases selected from very different types of location will be described.
Experience suggests that in discussing the institutional impact on development of small-scale forest-based processing enterprises, It is necessary to consider the whole production chain from the forest to the market. Problems such as infrastructure, social structure, long-term wood supply, logging and transportation considerations, distribution system and marketing policy and systems, have to be considered as activities closely interrelated with the enterprise.
Most of the small-scale forest-based enterprises reviewed here as case studies are private companies, often owned by individuals. There are, however, also different types of cooperatives, usually supported by governments or other external institutions, some of which receive international assistance.
The traditional and commonest small-scale processing activity besides firewood and charcoal-making is pitsawing and mechanized sawmilling, the later being predominantly the rustic circular sawmill. Many countries have up to 200-300 such small sawmills often operating at well below their installed capacity.
These sawmills are often an essential base for other forest-based processing units, which convent sawn lumber further into different end-use products such as furniture, boxes, parquet, handles, mouldings. This secondary processing is often integrated with the sawmilling on the same location. However, a sawmill often also supplies raw material for a series of separate small wood-based processing units normally owned by families or individuals.
This paper discusses only development of small rural wood-based enterprises as wood is the most important forest product. Other activities, such as resin-tapping, use of fruit-bearing trees, handicrafts from non-wood forest produce tend to have only localized importance, and will not be dealt with here. So far, external support to these small enterprises is very limited: Governmental institutions usually emphasize controlling functions and enforcement of laws. They sometimes also organise special training courses. In general, there is little systematic and direct advisory service on any aspect and no financing or credit is made available.
In response to the limited external assistance, producers of similar products such as sawmill owners, usually have some kind of cooperation with each other. They often form special-interest associations, which are normally a forum for addressing marketing questions, fixing prices etc. The associations are usually not able to achieve much, being usually weak due to limited financing. For this reason they can offer little to their members by way of necessary technical and financial support. A few small enterprises control their own supply of raw materials including their own forest management system and capacity for logging and transportation: they are obviously much stronger than those which depend on other entrepreneurs for their raw materials or for distributing their manufactured products.
Using a chain saw
Case study 1: FB-SSIs IN THE PLAN SIERRA PROJECT IN DOMINICAN REPUBLIC
The Plan Sierra project is an integrated rural development scheme in the pine-forested mountain region in the north. The project covers some 250 000 hectares spread over four watersheds. The project started in 1979 and the national budget has been approximately US $ 700 000 since them. Over the years, the project has been able to attract quite substantial support from abroad - bilaterally from Sweden, Holland, Germany and USA and from international institutions such as Kellogg's Foundation and the World Food Programme of the UN. The more important activities are reforestation with forest trees and perennial crops, soil conservation, annual crops, cattle grazing, and development of wood-based processing industry with raw material from managed forests. Supporting sub-programmes exist, such as development of infrastructure, health services, training and education, and social organization.
One very important element in Plan Sierra's activities is providing credit to the farmers. The project normally grants credits to groups of farmers but the individuals in the group make the commitment to repay with the future harvest and the group's responsibility as the only security demanded by the lenders. Although so far 70 percent of this credit has gone to coffee production, the project started in 1985 to also give credit for forest investment. This complements technical assistance to owners of private forests regarding elaboration and practical application of forest management plans.
In the project area, 400 forest owners have now been identified, of whom 13 own a total of 770 hectares. They are initially involved in development of afforestation, forest management and roundwood production, but some of them can in the future establish small wood-based industries to use their forest resources. To prevent overexploitation of forests for quick revenue, the new forestry law of 1985 requires forest owners to obtain special permits from La Comision Tecnica Forestal for harvesting their forests. The permits will only be issued if a proper forest management plan exists.
Within the framework of the integrated project is a Swedish-funded subprogramme (named Celestina) which implements a forest management plan for about 4 000 hectares of badly cut-over and degraded pine forests (Pinus Occidentalis) and utilizing the harvested products in a processing industry unit with two sawmills and other installed equipment. The main objective of this management plan is to restore and utilize the degraded forests, thus achieving an improved long-term economic yield and also obtaining a social impact on the project by employing and training people in working ages from the 110 families (600 persons) living within the Celestina area. The ultimate goal is to give economic self reliance by processing and marketing forestry products to an annual total of about 6000 m3.
In the Plan Sierra region, about 40 small-scale wood-based enterprises are located and developed, all with a maximum distance from Celestina of 30 km. They produce mostly furniture and handicrafts and most of them are small and individually owned. The processed furniture is of rustic type and is often only poorly finished. However, there is a good local market for the small workshops and the bigger ones sell on the domestic market. Some of these enterprises have up to 15 persons employed and the owners also subcontract people, many times women, to prefabricate furniture pieces or make special operations in their homes, which has a good spin-off employment effect in the neighbourhood.
Institutional problems and support
The main problems encountered include bad internal organization and lack of cooperation between enterprises even to solve common problems relating to financing and marketing; raw material is of poor quality; sawn lumber is usually not sufficiently dry and the board size is normally not related to the need, which results in unnecessary waste and raises costs; the products normally have such defects that they can only be sold on the local market at comparatively low prices. Furthermore, only the biggest enterprises have an organized distribution system and good marketing contacts. Most of the other producers lack a distribution system and have very little contact with the marketing centres. They also lack low-cost credit and so do not invest enough in enterprise expansion.
The institutional support has been very poor up to date. Most of the enterprises could have good opportunities to increase their production and the quality of the products if they got sufficient technical and economic support. Nearly all of the producers buy their raw material from the Celestina Project, which is the only producer of sawn lumber in the region. In order to improve the situation, the Celestina project plans to create a special programme to train owners and employees and try to find manufacturing techniques for improving product quality. National instructors will be trained by international specialists to run training courses, and to advise on production techniques and on new equipment needed to improve production.
While detailed analysis of assistance requirements is only now being done, it is nevertheless possible to say that the greatest need falls under the following elements:
a) assessment of enterprise raw material needs;
b) estimation of local and other markets as well as design of appropriate marketing and distribution systems for maximum reach in the main selling centres;
c) review of transportation problems and assistance in their solution;
d) formulation of measures to improve quality of the products both through skills improvement and by development of technical alternatives and new investments in equipment;
e) provision of investment and working capital; and
f) promotion of better organization systems, especially regarding cooperation between manufacturers of similar products for joint raw material purchase, marketing, price policy, storage and distribution.
Case study 2: SMALL CIRCULAR SAWMILLS ON THE COLOMBIAN PACIFIC COAST
This case will be briefly presented as an example of how some 40 traditional small circular sawmill enterprises have survived under very bad economic conditions almost without external support. The situation for this industry was studied in 1982: it appeared that these enterprises have good development opportunities provided a common strategy is worked out for new structure, marketing, credit possibilities, reliable raw material supply and external assistance.
The Pacific coast has been the traditional area for forest harvesting activities in Colombia. The coastal tropical rain forests constitute the main raw material source for the hardwood-based industry. The characteristics for this coastland is a very high annual rainfall of 6 000-8 000 mm, clay soils, low population and lack of infrastructure. Construction of roads is very expensive under such conditions, which is the reason why all transportation is done on waterways. The area has also a very poor social structure and low standards of living. The case study covers about 40 riverside sawmills in the region of the San Juan river about 50 km north of the harbour town of Buenaventura.
All installations are of traditional rustic circular sawmill type owned by small private companies or by individuals. Sawmill installations and machinery are between 10 and 40 years old, although a few have new machinery, diesel motors and new buildings.
Some of the sawmills obtain yearly permits to cut specified volumes of wood but the most common system of raw material supply is through special logging entrepreneurs mostly natives living upriver who float the logs in bundles of 20 to 200 units to the mill sites where they negotiate with the sawmill owners.
With only a few exceptions, the sawmills operate at only 10-30 percent of their installed capacity. The main obstacles to improving production are:
a) Lack of logs - partly during the dry season when log floating may not be possible, partly because of lack of funds to pay the entrepreneurs delivering the logs, who normally require cash payment. The logging entrepreneurs sometimes have to wait up to three weeks at millsite for payment;
b) Shortage of spare parts - the sawmills being old, they frequently need spare parts, but lack operational capital to keep stocks of these. The sawmills often suspend operations for months while awaiting delivery of spare parts or because they cannot finance the purchase;
c) Product storage and marketing problems - the sawmill owners usually do not possess their own boats to deliver their sawn products and do not have a storage or marketing organization in Buenaventura. Usually they have to wait until purchasers or intermediaries arrive and negotiate to comparatively low prices at millsite; and
d) High waste factor and poor quality - due to poor state of equipment and low operator skills.
Some problems also arise from lack of a structured policy for all wood-based industries where the best managed, equipped and located sawmills with possibility to survive can be developed and be included in a reinvestment plan supported by external assistance. The inferior group of sawmills with insoluble economic problems should then be allowed to close down or not receive external support. The lack of a policy framework is worsened by weak institutional support. The limited external support which is available tends to concentrate on raw materials licencing and similar administrative support. An association of sawmill owners exists whose main activities are price fixing. It gives little technical and financial assistance to its members due to lack of funds.
Possible Role of Support Organizations
If adequate assistance was made available to tackle the above problems, the sawmill owners as a group have good opportunities for growth and development. The access to forest reserves in the region is favourable and there is room on the domestic market for hardwood products at acceptable prices. To be effective, any assistance must be made available over a long period and should be flexible. It must win the confidence of the entrepreneurs; in this respect government assistance agencies appear to attract little trust as they have in the past been frequently associated with politically motivated changes.
To improve the situation, international technical assistance (including training) and financing must be given to the sawmill owners association which is also supported by the Department of Agriculture and Industry and the national association of wood-based industry. These should together form the programme of developing the sawmill enterprises and solving their urgent problems. International technical assistance and financing with a soft loans system to the owners and international assistance cooperation would also be recommended. Execution would be through a selected team of technical specialists which would work out a system how to organize and strengthen the association for greater effectiveness in all fields.
Case study 3: FOREST COOPERATIVES FOR PRODUCTION IN GUATEMALA
This third case study covers a 48-member forestry cooperative for production - San Juan Ixcoy Ltd - which started up in 1978. It is located in the north-western part of the highlands, called Altiplano, where members own small forest lots of generally badly cut and degraded pine trees. The members of the cooperative all belong to the ethnic group nativos of whom 80 percent are illiterates. The region supports 50 percent of the people (3 million) of whom only about 45 percent are economically active.
The highlands have a road density of only 1 metre per hectare (compared with a recommended density of 10-20 metres per hectare necessary for adequate administration of the forests). Because of this, large forest areas cannot be economically utilized. Where logging operations are attempted, transportation costs are very high; this partly explains the very low level of rural development.
It is estimated that over 50 percent of wood is burnt to waste during land clearing for shifting cultivation. Of the balance which is harvested, about 90 percent is converted into firewood and charcoal. The modern forest industry consists of 155 registered sawmills for all of Guatemala. Most of them have an annual production of less than 5 000 boardfeet (one shift) which is much less than the installed capacity. Most sawmills are located close to the capital, on both coasts and in the Province of Petén while in the highlands (where the pine forests are concentrated), there are very few mechanized sawmills. However, pitsawing is frequently done there. There are also a lot of small enterprises for production of wood-based furniture, boxes and handicrafts, especially in the towns.
The Institutional Framework: cooperatives and support agencies
The decree-law No. 1653 of December 1966 controls cooperatives in the state-owned farms and grants the legal mandate to promote cooperatives in the whole country to the Superintendence of the Banks (Ministry of Economy), the Ministry of Agriculture, and the National Institute of Agricultural Transformation (INTA). A federation of only forestry cooperatives does not yet exist. The forestry Institute, INAFOR, therefore has the principal responsibility which it discharges through a special promoter group. The members of San Juan Ixcoy Ltd Forestry Cooperative have participated in courses organized by the Federation of the Agriculture Cooperatives (FEDECOAC).
Guatemalan co-operative workers cutting wood with a chain saw
Based on the forestry law, a new plan for developing the forestry sector was prepared in May 1978 which proposes 26 different programmes including a project to develop activities of forestry cooperatives. The sub-section Forestry Cooperatives under the Promotion and Evaluation Unit in INAFOR has the direct responsibility for developing and promoting forestry cooperatives in close collaboration with the Department of Agriculture Cooperatives under the Ministry of Agriculture and with a special advisor on cooperatives under the Presidency of the Republic. The local offices in the sub-districts of INAFOR participate very little in these promotion and support activities.
The promoter group in INAFOR headquarters has carried out pre feasibility studies, socio-economic studies, and training of the new forest cooperatives. Before August 1978, a special FAO/TCP project gave technical assistance in the developing of this programme. However, this international project which was co-sponsored by the Lutheran Church and an international cooperative federation, finished too early to fulfill its main objectives of advising pilot forestry cooperatives and training national staff or teams. The performance to date has in some cases been commendable but it is clearly necessary to strengthen this section of INAFOR and improve its technical and financial status up to a level which will satisfy the needs. It may be necessary to replace it with a more autonomous special federation for forestry cooperatives which should have the legal power and economic base to take over most of the responsibilities. Such a federation would in the long term be financed by contributions from the different forestry cooperatives, but in the initial 10-15 years, external financial as well as technical assistance support would be essential.
The forest cooperative movement is located in specific areas of the Altiplano with the principal purpose of promoting production, industrialization and marketing of forestry products by means of an intelligent utilization of privately owned and communal forests. The cooperative has aimed to ensure that forest land now divided into very small plots is grouped into bigger units in order to make possible a more rational use of the resources and dispose sufficient raw material for future regional industrialization. Benefits foreseen include better product prices, incentives to a long-term economic management of existing forests, increased level of employment, and a better rural environment generally.
More immediate alms include ensuring rational utilization of forest resources through establishment of forest industries which will permit optimum use of raw materials and promotion of organized participation in roundwood sales to members' own mills as well as to other industry. Creation of profitable markets for all products is also an essential function. In the longer term, the cooperative would also aim to increase production of raw materials in order to support a larger forest industry; and to improve the standard of living in the rural communities.
In order to achieve an adequate development of the forestry cooperatives, experience has shown that initial activities require comparatively big investments. These should in each individual case be adapted to the production and marketing possibilities. The minimum amount for such investments varied between US $ 70 000 and 90 000 in 1980. The new cooperatives usually also lack working capital and it is therefore necessary to obtain local bank credits or international cooperation. A great part of the investments made in the new operating cooperatives has been obtained through international donations through pilot projects.
The national development bank (BANDESA) had the possibility to give loans to cooperatives in the country, based on a contract between the Government and the Inter-American Development Bank (IDB). The conditions for these credits were favourable as to pay-off time and interest rate. However, the steps to obtain such credits have been very complicated, including a series of requirements not always possible to satisfy. For example, two years after presenting its request to BANDESA, the San Juan Ixcoy cooperative has not yet received credits.
A special problem in credit matters is the guarantee. The Government has discussed the possibility to have the growing forest, the wooded land without forest and the products obtained in the future constitute bank guarantees for long-term credits according to periods which will be fixed in advance in the management plan. In such cases, INAFOR should advise in the evaluation of the guarantee if requested by any of the interested enterprises.
The existing cooperatives for production each have a circular sawmill, logging equipment and a forest tractor, which INAFOR rents or lends out for the initial activities. The income resulting from this will be earmarked for a special fund for the development of new cooperatives.
In the forest cooperative San Juan Ixcoy, not all 48 members are forest owners. There are also several people who contribute with their own work in the forest management operations and in the processing of roundwood. The forest owners also participate in the work because this is usually the only source of income for them. In all, the owners have a forest area of about 1 000 hectares with parcels varying between 5 and 100 hectares. Part of the forest belongs to the Municipality of San Juan Ixcoy. The forest management includes an active plan for clear-cutting of degraded pine forests and reforestation.
The forest cooperative tries to achieve the best utilization of the trees and avoid waste in producing logs for its own sawmills, poles, and firewood for sale and for its own lime ovens. The most important non-wood based product is lime whose price is very low. A small circular sawmill was established in 1978 with an installed capacity of 2 000 boardfeet per 8-hour shift, i.e. a yearly production of 450 000 boardfeet. However, two years after start-up, the sawmill still produced only 40-50% of its installed capacity which was due to a lot of defects in the administration and organization of operations.
Among other things, there was a constant change of specialized operators, which was difficult to foresee. Due to the long distance to the domestic market centres, lack of a local market in the region, and low prices, profitability was poor. Some products were also sold at millsite, which made marketing easier, but the prices could be dictated by intermediaries.
INAFOR made an economic financing plan to find a realistic method to improve profitability by a rational utilization of the resources during the period 1978-1983. According to this analysis, it could be possible to increase production from 175 000 to 300 000 boardfeet. It also appeared that breakeven point for 1983 was at an annual production of 160 000 boardfeet. The analysis shows that the cooperative project could have a good feasibility but there is a strong need of long-term technical assistance to reach the goal, probably also supported by international cooperation.
A total of 32 members are employed by the cooperative. A quick analysis of worker costs reveals considerable anomalies in wage levels. Earnings often vary little between unskilled and higher grades. Management seems to be poorly paid. It is likely in general that motivation is poor as a result of a poor pay structure.
Certain specific problems existed in the development and establishment of forest cooperatives for production in Guatemala the most significant of which were as follows:
a) The prospective members often distrusted the objectives of the cooperative. They doubted that the profit would be for the members and thought the cooperative would instead be a centre to establish business with the forest resources in the region;
b) The basic schooling is very low which creates many problems, especially in administrative, skill-transfer, and organizational aspects;
c) In general, the directors do not have the capacity to operate in a satisfactory way;
d) Low salaries and local conflicts cause frequent changes of specialized workers, which reduces productivity;
e) Financing is a problem;
f) The forest cooperatives do not have a long-term programme (10-15 years) and they have inadequate external assistance to start them off on a sound footing;
g) The cooperative movement lacks the legal protection available to private companies which facilitates many administrative and financial matters.
Discussion and conclusions
Cases presented in this paper and experience from other Latin American countries or regions have shown that producers' organizations are often established for small-scale wood-based enterprises. These are needed to promote common interests and give technical and economic assistance to members as well as to serve as a forum to solve joint problems and support the progress of their industries. The ability of many existing associations to fulfill these objectives is, however, quite low due to limited resources in funds as well as in technical and administrative know-how to play an important role in the development of members' industry.
A producers' organization should ideally have a firm anchorage in the region, enjoy confidence among its members. It should become the main forum for addressing common issues, such as production strategies, marketing (including price fixing), delivery and storage of manufactured products, negotiation of credits and organizing technical and administrative assistance to the members. The associations would employ a specialist or a team of trained persons to carry out the activities. They would have a decentralized administration operating close to the members' industry in order to be efficient and to maintain close contacts with members.
The very poor support given by national institutions to privately owned wood-based, small-scale enterprises is due mostly to lack of funds and technical know-how; attempts to run too large and geographically spread programmes with too ambitious objectives in relation to available resources; excessive centralisation of proposed assistance agencies; and lack of inter-institutional coordination in the producers' region causing misunderstandings and conflicts. Furthermore, far too many assistance programmes are approved for short periods which are in many cases not extended. It seems essential to ensure that the assistance be continued over two or three governmental periods with the most intensive support being in the first years.
In view of the many problems facing small enterprises, the prerequisite for a well balanced strategy for implanting support programmes to achieve objectives of progress is strong and well balanced external institutional support. To benefit fully from such assistance, the producers also normally need a sound internal organization whose personnel should be trained by the external agency to take over the support responsibilities to solve and handle members' common matters and give assistance on technical and administrative matters to each enterprise. International cooperation would be needed in many cases in order to finance necessary investments and operational costs and transfer technical, administrative and marketing know-how to national staff, local specialist teams, enterprise owners and employees.