PERU'S TROUBLED FOREST CONCESSION PROCESS

UNCLAS SECTION 01 OF 05 LIMA 002444

SIPDIS

DEPT FOR OES/ETC, OES/ENV, WHA/AND, WHA/EPSC
BRASILIA FOR ESTH HUB - K. KAMBOURIAN
USAID FOR LAC, EGAT
USTR FOR B. HARMANN, M. BURR
COMMERCE FOR MCAMERON

SENSITIVE

E.O. 12958: N/A
TAGS: SENV ETRD EINV ECON PGOV SNAR PE
SUBJECT: PERU'S TROUBLED FOREST CONCESSION PROCESS

REF: A) 04 STATE 121924 B) 04 LIMA 2128 AND PREVIOUS


1. (SBU) SUMMARY. Three years after Peru began implementing
a modern forest concession system - to wide acclaim -
concessions remain unconsolidated and problematic. Lack of
concessionaire funds, delays in management plan approval,
lack of GOP capacity to oversee concessions, and competing
land claims have been obstacles to advancing the process.
Declines in GOP forest management funding, and limited
political commitment to the process, are also of concern.
Some concessions, indigenous lands and protected areas
remain subject to illegal logging in a context of weak rule
of law, poverty, informality and corruption. U.S.-Andean
Free Trade Agreement negotiations have highlighted these
problems but may leverage greater GOP action. USAID Peru,
with Embassy support, is focusing its environment program on
building national capacity to consolidate concessions and
control illegal logging. The challenges in doing so are
large but not unsurmountable. Making the concessions
successful could multiply Peru's sustainable forest
production by many times. END SUMMARY.

PERU'S VAST FOREST RESOURCES UNDER THREAT
--------------


2. (U) Peru is blanketed with vast forests covering 78
million hectares (ha),60 percent of the country. Tropical
forests occupy 65 million ha of the total, among which are
some of the most biodiverse areas in the world. On paper,
Peru has had protected areas, encompassing 13 percent of its
territory, for some time. Many areas lack effective
policing, though, and have suffered habitat destruction,
fragmentation and overuse. A key culprit has been the
forestry industry, which for many years was unregulated,
chaotic, and focused on rapid extraction, resulting in
extensive deforestation.


3. (U) Logging in Peru's Amazon has targeted big-leaf
mahogany and tropical cedar. Four or five major exporters
control the mahogany trade, buying from half a million
impoverished loggers and intermediaries (reftels). Under
the forestry system in existence until 2000, mahogany
logging and land clearing for agriculture denuded nine
million ha (11 percent) of Peru's original forests. Coca
cultivation alone accounted for 2.3 million ha - one-fourth
- of total deforestation. The GOP has not promoted mahogany
regrowth, and reforestation has been minimal.


4. (SBU) Peru continues to lose nearly 300,000 ha of forest
annually. Much logging is unauthorized, with grave social,
environmental, and economic impactsSocial. Forest crime
degrades ecosystems, costs Peru $7 million in lost yearly
tax revenues, undercuts prices of timber taken legally and
depletes resources vital to rural communities. The GOP
reports that illegal loggers harvest 60,000 cubic meters of
timber per year, worth $72 million, creating market
distortions. (Note: official timber and wood products
exports totaled $214.2 million in 2004. End note). By
USAID estimates, the practice has impacted more than 55,000
households and 1,280 indigenous communities across the
Peruvian Amazon. (Note: Two illegal loggers were killed in
a confrontation with native communities May 17. Also, the
Interior Ministry reports growing links between illegal
loggers, narcotraffickers and the Sendero Luminoso terrorist
group, evidenced by greater seizures of coca hidden in
timber shipments and expanding areas controlled jointly by
these groups. End note.)

THE RESPONSE: A MODERN FOREST CONCESSION SYSTEM
-------------- --


5. (U) Facing growing pressure to control the problem, in
2000 the Fujimori Administration secured passage of a Forest
Law creating a new legal framework to foster sustainable
forestry and sector modernization (reftels). The law,
heralded as among the most progressive in the developing
world, mandated that large (to 50,000 ha),sustainable, 40-
year forestry concessions replace the existing patchwork of
small one-to-two-year concessions.


6. (U) Under the Toledo government, natural resources agency
INRENA, an Agriculture Ministry dependency, launched the new
process in March 2002. By end-2003 INRENA had awarded 4.7
million ha in 318 concessions in the Madre de Dios, Ucayali,
Huanuco and San Martin regions. After local opposition
delayed a similar process in Peru's largest region, Loreto,
the GOP awarded an additional 2.5 million ha in mid-2004,
for an end-2004 national total of 7.2 million ha in 524
concessions.


7. (U) In late 2004, INRENA also awarded 20,000 ha in
concessions for ecotourism and 30,000 ha for reforestation
in Madre de Dios. Agency head Leoncio Alvarez announced
plans to award three million ha in forestry concessions in
2005 and two million ha in 2006, to reach 12 million ha
nationwide by the end of next year.

BUT ARE THE CONCESSIONS WORKING?
--------------


8. (U) While concessions now occupy nearly 10 percent of
Peru's forested area, the process has progressed fitfully.
Resistance from small loggers, their political allies, and
coca growers delayed awards in several regions. Anti-
concession protests in Madre de Dios forced the GOP to
extend the old, short-term concessions through March 2003 in
the area. The GOP overcame similar opposition in Ucayali
and Loreto by establishing local working groups (with USAID
help),involving civil society, private sector and public
officials, to monitor concessions.


9. (U) Embassy and USAID analysis reveals that once
concessions have been awarded, making them operational has
been hampered by several issues: a) concessionaire lack of
funds for capital investment and fee payment; b) delays in
completion or approval of management plans; c) lack of GOP
capacity to ensure concessionaire compliance with law; and
d) local group contesting of land rights in concession areas
(see below). Many such problems stem from inadequate and
declining funding for INRENA's forest directorate,
responsible for managing the concession process.


10. (U) CONCESSIONAIRE LACK OF FUNDS. Concessionaire lack
of funds for investment and fee payment, or unwillingness to
pay fees, has been chronic. At the end of 2004, merely 37
percent of fees due had been paid by concession holders,
with $3.1 million still owed to the GOP. Also, 42 percent
of concessionaires had paid less than one-fifth of their
obligations. A World Wildlife Fund Peru (WWF) study of 47
concessionaires showed that 30 percent lacked saws, and that
after the harvest season, only 24 percent of authorized wood
volumes had been taken.


11. (SBU) DELAYS IN PLAN COMPLETION/APPROVAL. INRENA
requires two technical documents from concessionaires, a
General Forest Management Plan and an Annual Operation Plan,
both of which must receive agency approval. INRENA's lack
of staff and capacity to review documents in a timely
fashion, however, has meant many delays in approval. This
has prevented some concessionaires from beginning harvests
during the dry season (April-August) - the only viable
harvesting period - causing them financial losses.


12. (SBU) LACK OF GOP CAPACITY TO ENSURE CONCESSIONAIRE
COMPLIANCE WITH LAW. Oversight responsibility for
concessions rests with INRENA and the Supervisory Entity for
Timber Concessions (OSINFOR). OSINFOR, meant to be an
independent concession oversight entity, was ultimately set
up within INRENA. INRENA funding and field staff shortages,
and OSINFOR's lack of independence, limit GOP capacity to
monitor concessionaire compliance with management plans and
adherence to law. Moreover, INRENA attempts to sanction
violators have been blocked in numerous cases by court
actions instigated by offending concessionaires.

CONTESTING LAND RIGHTS: THE CASE
OF CONSORCIO FORESTAL AMAZONICO
--------------


13. (SBU) A serious challenge to concessionaire land rights
caused the failure of a flagship Spanish-Peruvian concession
in Peru. The Consorcio Forestal Amazonico (CFA) was
composed of two Spanish investors who partnered with two
Peruvians to invest $1.5 million. (Note: The senior Spanish
investor had seven years' experience in Peru. One of the
Peruvian investors later dropped out. End note.) CFA
secured its 184,000 ha concession in Ucayali in July 2002.
The consortium developed management plans, bought machinery,
hired staff and began operations. By early 2004, employment
peaked at 1,580 workers.


14. (SBU) CFA was the first concession in Peru to start the
process leading to forest certification, whereby independent
auditors would certify a forest operation as environmentally
responsible. CFA was also first to establish forest
management committees. Such committees, mandated by the
2000 Forestry Law, are to oversee concessionaire use of
forest resources. CFA formed a committee comprising nine
bordering native communities with a population of 7,000.


15. (SBU) However, in August 2003, a so-called Churinashi
indigenous community claimed ancestral rights over 1,300 ha
of CFA's land. The group raised its claim over time to
112,000 ha (61 percent) of the concession. (Note: Sources
from the Ministries of Agriculture and Interior, the GOP
Ombudsman and NGOs say the Churinashi Community was not
originally resident in the area and had no right to make its
claim. They say the group was manipulated by local leaders
in league with illegal loggers wanting to sabotage the
concession. End note).


16. (SBU) INRENA is charged with resolving such claims. A
December 2003 report by INRENA's then Forestry Director and
Legal Advisor declared that Churinashi's claim to CFA land
was baseless. However, in January 2004, then INRENA
director Cesar Alvarez dismissed the Forestry Director.
(Note: the latter told USAID he was fired because he refused
to alter the report to favor Churinashi's claim. End note.)
INRENA's legal advisor subsequently resigned, stating INRENA
leadership handled the conflict improperly.


17. (SBU) CFA camps were attacked several times by the
Churinashi group. Major damage was done to machinery and
buildings, and equipment was stolen. One attack, in May
2004, targeted CFA staff and WWF consultants. Shortly
afterward CFA suspended operations. A court then issued an
eviction order against the Churinashi group.


18. (SBU) CFA, with Spanish Embassy help, pleaded its case
in two meetings with President Toledo in early 2005.
Reportedly, Toledo acknowledged CFA rights but considered it
politically infeasible to enforce the eviction due to the
social unrest it would trigger. (Note: Peru's Indigenous
Association announced that thousands of armed indigenous
people would prevent police from enforcing the eviction.
End note). Instead, Toledo offered to create a Commission
to negotiate compensation for the consortium. However, the
Commission has yet to be created. The Spanish investors
subsequently withdrew from Peru. (Comment: GOP failure to
prevent the collapse of CFA's concession harms Peru's effort
to attract foreign investment and technology and modernize
the forestry sector. End comment.)

RECENT GOP INITIATIVES AGAINST ILLEGAL LOGGING...
-------------- --------------


19. (U) As a result of strong USAID and Embassy support, in
late 2002 the GOP issued a supreme decree creating a Multi-
Sectoral Commission to Fight Illegal Logging. The
Commission was composed of officials from the Ministries of
Agriculture, Justice, Interior and Defense, plus SUNAT
(National Tax Agency) and INRENA. WWF provided technical
assistance to the group, which had as its mandate the
completion of a National Strategy to Fight Illegal Logging.


20. (U) The National Strategy was released in November 2004.
It focuses on: a) strengthening INRENA institutional
capabilities in forest control and supervision; b) designing
and implementing a system for law enforcement, log tracking,
forest raids and timber trade transparency; and c) promotion
of civil society and local population participation in
forest control and supervision. Under the strategy, INRENA
is developing a computer database to evaluate and manage
concessions nationwide. After producing the strategy, the
Commission dissolved. It became operational again in March
2005, when ex-Minister of Agriculture Alvaro Quijandria was
appointed to lead the group. Mr. Quijandria passed away on
May 17, however, leaving the Commission in limbo.


21. (U) INRENA has begun random concession inspections, to
verify logging plan compliance. The agency conducted 28
inspections in late 2004 and early 2005, with USAID
assistance, in Madre de Dios. The inspections were begun
also to address NGO complaints that the GOP fails to
adequately monitor mahogany extraction, as required by
Appendix II of the Convention on International Trade in
Endangered Species (CITES). INRENA detected violations in
five concessions, finding that $2 million worth of mahogany
had been laundered through them. By law, such concessions
should be nullified and the areas returned to public
control. OSINFOR is supposed to enforce the law, and court
action is prescribed. To date, however, no legal action has
been concluded against the violators.


22. (U) INRENA leadership is making efforts to fight
internal corruption related to illegal logging, and has
broken wood-laundering rings in several regions over the
last two years. INRENA has asked the Finance Ministry for
$5.5 million in additional funding to consolidate
concessions and fight illegal logging. As well, the agency
is considering imposing export quotas on mahogany, based on
annual exports in recent years. (Note: Post will report on
these quotas septel. End note.)

...BUT INADEQUATE GOP FUNDING LIMITS SUCCESS
--------------


23. (U) Despite these actions, three years into
implementation of the new model, progress in consolidating
concessions and reducing illegal logging has been limited.
The effort is hampered by INRENA's low and declining
forestry budget. INRENA's forestry directorate budget fell
to $5.1 million in 2004, 29 percent of INRENA's total budget
of $17.7 million. In 2003, the forestry directorate budget
was $7.5 million, 39 percent of the $19.3 million agency
budget. The nearly 50 percent forestry budget drop last
year led INRENA to close dozens of logging control posts in
the jungle. Nationwide, the agency has only 27 regional
offices dealing with forest issues, and 250 inspectors to
oversee concessions. In April, Peru's leading newspaper
highlighted GOP shortcomings in combating the problem, and
corruption within concessions, where some concessionaires
traffic in fraudulent logging permits.

USAID REFOCUSES ENVIRONMENT ASSISTANCE
--------------


24. (U) USAID has devoted $3.9 million annually on average
over the last nine years to the environment in Peru. USAID
has refocused these resources, however, in the face of
decreasing GOP budgets, rising illegal logging, and the
inability of Peruvian institutions to control the problem.
The revised program stresses GOP partnerships, ownership and
political commitment to address problems, underscoring that
U.S. assistance supplements rather than replaces local
leadership. Institutional capacity building is also a
priority, to help the GOP comply with Peruvian environmental
law and improve coordination across sectors. These
functions will be critical for Peru under a Free Trade
Agreement (FTA) with the U.S. The program also seeks
improved GOP coordination with indigenous and other civil
society groups and with the private sector, to increase the
political salability of GOP environmental enforcement.


25. (U) Program goals are to: advance alternative
development efforts (prevention of coca expansion and
generation of licit economic activities for marginalized
groups); promote conservation and sustainable management of
natural resources for the improvement of livelihoods; and
develop the capacity of GOP institutions to enforce existing
environmental policies and laws.


26. (U) Specific USAID actions under the program include:

a) supporting the concession process (assessing economic
viability and market linkages);
b) combating illegal logging (helping restructure INRENA's
Forest Authority, supporting GOP sanctions);
c) reinforcing alliances with tax and customs agency
SUNAT, the Interior Ministry, and other agencies;
d) strengthening controls over protected natural areas
(partnering with INRENA or anti-drug agency DEVIDA to fight
coca production in parks);
e) supporting Peru's decentralization process; and
f) helping close legal loopholes that weaken natural
resource management.

COMMENT
--------------


27. (SBU) Although Peru's forest concessions system has been
lauded as a developing world model, it remains flawed and
unconsolidated. Lack of concessionaire funds, management
plan approval delays, lack of GOP capacity to adequately
oversee concessions, and rival land claims have slowed
progress significantly. GOP failure to reverse a decline in
forestry management resources is particularly troubling, and
suggests limited high-level GOP commitment to the success of
the process. Current U.S.-Andean Free Trade Agreement
negotiations have cast light on these issues but can
hopefully leverage greater GOP action. Toward this end,
USAID Lima and the Embassy are focusing on institutional
capacity building and partnership with the GOP, private
sector and NGOs to fortify the concessions system in Peru.
The system is salvageable, with time. Post and Washington
agencies will need to coordinate closely to help advance
this goal.


28. (U) Note: This cable was co-drafted with USAID Lima.

STRUBLE