FORESTRY SECTOR REFORM IN THE DRC, PART I OF II

UNCLAS SECTION 01 OF 04 KINSHASA 001037 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ETRD ECON EINV EAGR SENV KGHG CG SUBJECT: FORESTRY SECTOR REFORM IN THE DRC, PART I OF II REF: A. SECSTATE 56792 ¶B. SECSTATE 87904 1.(SBU) Summary: The GDRC is reviewing 156 forestry titles for conversion into new titles as part of its forestry sector reform and economic development plan. This conversion process is intended to encourage sustainable resource management, improved governance, and poverty reduction. As only one of several reforms needed, however, the current title conversion process is limited in scope and risks not meeting the expectations of broader sector reform. As the first of two cables on the DRC's forestry sector reform, this cable describes the process by which existing titles are to be converted. The second cable (septel) describes reactions to this process by the various stakeholders involved. End summary. -------------- -------------- Congo Basin Rainforest: Second Largest in the World -------------- -------------- 2.(U) The Congo River Basin (CRB) includes parts of the Democratic Republic of the Congo (DRC),Cameroon, Gabon, the Republic of the Congo (RC),and Equatorial Guinea, and constitutes the second largest rainforest in the world, after the Amazon rainforests. Although the largest in Africa, the DRC's rainforest has historically been the least commercially exploited in the region due to uncertainty over government policy, security concerns, weak infrastructure for wood processing and exporting, and lack of suitable woods for export in the area. 3.(U) Currently, over 22 million hectares (54 million acres) in the DRC are officially allocated for commercial logging purposes. According to the Congo Basin Forest Partnership (CBFP),deforestation in the DRC is occurring at a rate of 0.26 percent per year, in comparison to 0.19 percent within the Central African region as a whole. The GDRC has designated eight percent of its total territory (234 million ha / 585 million acres) as protected areas and is expected to increase this to 15 percent within the coming years. It is estimated that 40 million people, including indigenous Pygmy communities, depend on the country's 130 million ha (321 million acres) of forests in some way. -------------- The DRC Forestry Industry -------------- 4.(U) Commercial logging in the DRC takes place primarily in the provinces of Equateur, Orientale, Bandundu, Bas-Congo, and the Kasais. Based on data from 17 companies, the industry is working below its sawing capacity, contributing only 0.7 percent to GNP in 2004 -- the last year for which data are available. Estimated total logging production that year was over 3 million cubic feet - the lowest of any country in the Congo River Basin. Revenue is generated primarily from exports to the EU. In 2004, approximately 64 percent (2 million cubic feet) of timber cut was exported -- nearly half of this total was imported by Belgium and Portugal. According to USAID/CARPE's 2006 "State of the Forest" report, a significant portion of the forestry industry also serves the domestic and trans-border markets for low-grade wood through the informal sector, accounting for approximately 17 percent of total exports in 2004. (Comment: Much of the trans-border timber exports is assumed to be illegal given that only two commercial logging concessions exist east of Kisangani. End comment.) 5.(U) Approximately 60 lumber companies are registered with the Ministry of Environment's Directorate-General for Forests. The majority of these producers shut down in the late 1990,s due to insecurity. It is estimated that only 20 companies are operational today. SAFBOIS (A Congolese subsidiary company of the American-owned Blattner Group), SIFORCO (a subsidiary of German-owned Danzer Group),and SODEFOR (member of Portuguese holding company NST) are the industry leaders and account for two-thirds of the titles pending conversion. Medium-sized entities include Trans-M and ITB, both Lebanese-owned subsidiaries. The remainder of companies are primarily small, family-owned firms. KINSHASA 00001037 002 OF 004 6.(U) Sector interests are generally represented by the Fdration des Enterprises du Congo (FEC),the Congolese Chamber of Commerce, and Fdration des Industrialistes du Bois (FIB),a branch of the FEC whose membership requires compliance with specific logging practices and standards. Currently, the FIB includes 14 of the 20 primary logging companies in the DRC which, it claims, employ approximately 15,000 people and which have invested over USD 259 million in the DRC's forestry industry. 7.(U) Private sector representatives reported that, unlike in the past, security issues are not a major hindrance to sector performance in Western Congo today; however, poor road and waterway infrastructure continues to be a major obstacle. As explained by a senior fellow at the World Resources Institute, even if all of DRC's potential forestry concessions were commercially logged, these infrastructural conditions would continue to inhibit the sector's long-term growth. 8.(U) Forestry taxes are levied on the basis of concession surface area, volume harvested, export sales, and area deforested, amongst other factors. Area-based taxes, such as surface area and felling permit taxes, provide the bulk of tax revenue for the State. Few official statistics exist regarding the forestry sector's contribution to the DRC's economy; those which do exist are often conflicting or unreliable. According to a 2004 study by the UN's Food and Agricultural Organization (FAO),tax revenues from the forestry sector were estimated to be USD 1.5 million per year - in stark contrast to the USD 7.5 million FIB claims to have paid between January and September of 2005. 9.(SBU) Applying basic tax rates to estimated land holdings and production rates, tax revenues due to the GDRC should be at least USD 17.7 million when not including other relevant export, equipment, labor taxes etc. Taking FIB's reported tax expenses in 2005 of USD 7.5 million, it becomes clear that the GDRC should be collecting at least two to three times more in taxes than is reported. Though estimating different tax revenues, the 2004 FAO report also found tax payments in the forestry sector to be generally low, but evasion high. It recommended that greater attention be given to monitoring tax collection, taxing the informal forestry sector, and increasing export taxes on unprocessed products (logs). TAX TAX RATE HOLDINGS TOTAL (USD) (ha) (USD) Surface 0.50/ha 22 million 11 million Area* Felling 2.00/ha 360,000 720,000 Permit** Gross 50 % 6 million Revenue*** -------------- -------------- Total: 17.72 million * Currently, surface area tax is USD 0.50/ha; however, the Ministry of Environment has indicated that it will soon increase this to USD 1.00/ha, as in most other African countries. Surface rates are applied here to the entire area of commercial forestry concessions in the DRC (22 million ha). ** The FIB companies cover approximately 9 million ha, of which they say only 4 percent, or 360,000 ha, is exploitable. *** Wood value ranges from USD 50-400/m3. Average value of wood estimate: USD 130/m3. USD 130 x 90,000 m3 logs produced by DRC in 2004 = USD 12 million gross revenue. (Note: FIB claims to earn USD 3.5 million for 12,000 m3 of wood per month. End note.) -------------- Legal Framework KINSHASA 00001037 003 OF 004 -------------- 10.(U) The 2002 Forestry Code provides a legal framework for the DRC's logging industry. It envisions the replacement of older "letters of intent" and "supply guarantees" with a new type of "concession" which requires logging companies to implement sustainable forestry management plans (SFMP) and make contributions to local communities under a specified 'cahier de charge' (business plan) which takes local-community development into consideration. The Code requires concessions to be exploited within 18 months of being issued and allows the GDRC to reclaim concessions unexploited for two consecutive years. It also acknowledges, for the first time, the rights of forest-dependent communities to natural resources and mandates that 40 percent of surface area taxes on concessions be returned to decentralized administrative entities. (Comment: This "retrocession" is intended to support local development. End comment.) 11.(U) Within a year of publishing the Forestry Code, the DRC's Ministry of Environment canceled 25 million of 41 million ha (62 million of 101 million acres) worth of concessions, the majority of which had never been exploited, and implemented a moratorium on granting new forestry concessions. Not officially published until 2004, the moratorium's legal status was unclear for a number of years and concessions continued to be granted until 2005. (Note: According to Greenpeace, 107 new contracts, covering 15 million ha. or 37 million acres, were signed by April 2006. End note.) Following joint recommendations from the World Bank, USG, FAO and European Community, President Kabila issued a decree on October 24, 2005 reinstating the moratorium and establishing a process for canceling titles not in accordance with the 2002 Forestry Code. Under the decree, the moratorium cannot be lifted until the concession conversion process is completed, its results are made public, and a geographic plan for concession allocations covering the next three years has been created. -------------- Conversion Process and Status -------------- 12.(SBU) The title conversion process consists of application, verification, and final assessment phases. Covering 25 million ha (62 million acres),156 applications were received by the GDRC before the January 2006 deadline. Validation of these applications is now being conducted through on-site visits to each concession by a Technical Working Group (TWG) consisting of reps from the Forestry Department, Taxation Department, and Permanent Forest Inventory and Management Service. Validation of applications by the TWG is to be based on: the legal validity of the existing title; conformity with legal, social, economic, and fiscal responsibilities of the title owner since the signing of the title; maintenance of a wood processing plant; and analysis of a proposed business plan. (Note: Legal validity of titles is determined by compliance with rules and regulations existing at the time of signature, such as full payment of area taxes since 2003 and respect for concession limits. No mention is made of legality in terms of the moratorium. End note.) 13.(SBU) The TWG has reviewed 114 titles; however, the process has stalled as funding to assess the remaining 42 titles has been secured only recently through the World Bank. (Note: The World Bank will provide USD 106,000 to complete the review of the remaining 42 titles. The Bank also provided USD 150,000 to review the first 114 titles under Phase I of the reviews. End note.) The World Resource Institute's Global Forest Watch (WRI-GFW) is an independent observer of the TWG and has completed its own assessment of the 156 titles in question. 14.(SBU) Applications approved by the TWG are to be passed on to an Inter-Ministerial Commission (IMC) for a final decision. Based in Kinshasa, the IMC will include representatives from the private sector, GDRC, and forest-dependent communities. Community reps must be elected by their community and be literate. Reps may include up to 1 Bantu (African population majority) and 1 Pygmy KINSHASA 00001037 004 OF 004 representative from each affected community. WRI-GFW, along with the Belgium consulting firm AGRECO, is assisting local NGOs with the selection and training of these representatives. The IMC has yet to convene since President Kabila has not reappointed ministerial representatives following the 2006 national elections and seating of the new government in 2007. (Note: Seats had previously been reserved on the IMC for ministries which were dissolved with elections. End note.) According to USAID/CARPE, the draft decree re-formulating the IMC should pass the president's desk soon. Sector observers from both the private and public sector are confident the Commission can complete its work in a matter of days once it is formed and expect this to be before the end of the year. (Comment: Some outside observers, such as Francoise Van de Van, secretary-general for FIB, have express growing suspicion as to the "true causes" of these delays and have begun to question the GDRC's commitment to this process. End comment.) 15.(U) Companies granted title conversions by the IMC have up to four years to complete a Sustainable Forest Management Plan, at which point permanent boundaries and terms of contract will be determined. According to Greenpeace, the 107 titles granted after the announcement of the moratorium in 2002 should be considered illegal. It is widely expected that over half of these concessions will be canceled for violating the moratorium and/or other major aspects of the Forestry Code such as tax requirements and community development responsibilities. The Minister of Environment, Didace Pembe Bokiaga, implied as much when he told a local news source that, in addition to the 3 million ha already canceled, he was prepared to "cancel at least an additional 12 to 15 million ha (30 to 37 million acres)." Ambiguity as to how the IMC will treat post-2002 concessions has led to increased uncertainty within the forestry industry, particularly amongst private concession holders (septel). -------------- Comment -------------- 16.(SBU) Efforts to reform the DRC's forestry sector through the concession conversion process represent a first attempt by the GDRC to move towards sustainable natural resource management. This approach may provide a model for the reform of other extractive industries in the DRC in order to promote economic growth, social development, and improved governance while protecting the environment. As discussed in septel, the title conversion process can only be considered an initial and necessary first step in what is a much longer and larger reform process needed by the Congolese forestry sector. BROCK