Daniel Mitchell (second from left) in Kampong Speu. Photograph: Phnom Penh Post
Putting reforestation on a paying basis in a country denuded of so many trees might seem a tremendous challenge, but one American, Daniel Mitchell, is doing just that in Kampong Speu.
With so much Cambodian forest logged off the Cambodian landscape during the last 30 years, Mitchell went looking specifically for an area that had been severely deforested, with the knowledge that certain long-term investors could be attracted if the right business model could be achieved.
Mitchell and his team identified an area in Kampong Speu in late 2007 and signed the contract for a 70-year economic land concession with Cambodia’s Ministry of Agriculture on December 31, 2009. The concession includes 9,820 hectares in the rugged hills of Kampong Speu which is being replanted with teak.
“Teak is high value, fast growth, suited to the site and not susceptible to disease,” Mitchell said.
Today, the Grandis Timber operation, with three nurseries, has a total capacity of 9 million trees per year. So far, 2,250 hectares have been planted with 3.5 million trees, with another 3.5 million plantings scheduled during the next two years. The nurseries also plant native species which are used to reforest protected areas within the patchwork of mixed land use, private residences and farms.
Mitchell says Grandis Timber is looking for additional opportunities to keep the nurseries employed when the bulk of the planting is completed.
“We can supply any kind of plant for any kind of purpose,” he said.
The teak trees are planted 2.5 meters apart in rows, on top of the hump made by the tractor. After ten years of growth, when the trees are expected to be 10 to 12 centimeters thick and 20 to 30 meters high, the first thinning will take place.
The thinned wood can be sold as poles and used in making furniture, parts and flooring and the first thinning is scheduled to occur between 2019 and 2024.
“We take fifty per cent at first thinning and we manage down from 1,500 to 400-500 trees per hectare and those remaining trees will go from 25 to 30 years in full rotation with a final cutting and replanting,” Mitchell said.
The unusual thing about Grandis Timber’s operation is the use of institutional funding from Denmark and Sweden, countries accustomed to investing in professionally managed forestry, which put the operation on a paying basis from the start.
“We were looking for an area that was severely deforested, and we wanted to have the site certified under the Forest Stewardship Council, of Bonn, Germany.”
Mitchell figured out a business model that established new timber assets that he thought would be attractive to a particular group of institutional investors.
An ancillary benefit for the investors is they get to help improve the lives of poor, rural Cambodians by putting them to work in the nurseries and in the timber plantation running tractors, weeding, thinning and doing other jobs necessary to the operation.
Grandis Timber’s operation in Kampong Speu employs 228 people full time and 1,600 day laborers. Mitchell has seen a great increase in the number of motorbikes people ride in the area, because of the injection of wages, nicer houses and other benefits to the local population.
“You get to see theoretical economics play out,” he said.
Back in 2000, Mitchell and his associates decided that trends in Cambodia were moving in the right direction.
“There’s no reason that you have to sacrifice financial returns to achieve a socially and environmentally responsible business. You can make money doing the right thing. It requires you to step back and evaluate your model and be innovative at times. If we didn’t do this project the area would turn into something that is not forest, or steadily degrading open land. The land was in the early stages of desertification,” he said.
A key element of Grandis Timber’s success was fitting into Prime Minister Hun Sen’s “leopard skin” approach which is a “workaround strategy” for economic land concessions whereby people are not shoved off their lands.
“We are proud that we’ve been able to take Prime Minister Hun Sen’s idea and implement and show that it works. We provide rural employment. We write a $10,000 check every week into the village in wages. I would not be able to do this if it wasn’t an economic land concession,” Mitchell said.
“Our objective is to be able to provide a model that you can actually make more money doing it the right way. The government guys, once they understood what we were trying to do, they’ve gotten behind us and they have supported everything we do. I don’t wake up in the morning wishing I had anybody else’s job. Not many people can say that. We said we were going to do this and we did it.
“The institutional investors expect a social and environmental sustainability as requirements along with the financial returns. Our business model is to come in and develop these types of assets and make them attractive for a buyout. Investors have different risk appetites. We sell onto to a newer institutional investor who is looking for a foothold in an emerging market like Cambodia and we were the first ones to bring in institutional money to Cambodia,” he said.
Instead of pesticides to control bugs in the nurseries where the young teak plants are being grown from seeds and cuttings, 500 locally-procured geese are employed.
“They walk around and eat the bugs,” Mitchell said. One of his professors from graduate school told him that geese had been used in cotton farming to control boll weevils.
“We tried it and it works. We need one goose per every 3,500 trees in the nursery.”
Mitchell took time to explain how the timber industry has evolved worldwide and how investors take a long-term view of timber assets, which is why the denuded landscape of Cambodia seemed like it might be an ideal fit not only for rehabilitation of the barren land, but to employ people in useful industry and have enough money to pump in that people’s lives improve, not to mention getting a return for the investors.
“From the middle of the 1980s through 2005, ‘economic value add’ and ‘return on assets’ became a key analysis ratio. If you were a lumber or paper company and you had timber land on balance sheet, it wasn’t reflected in your share price. So there was a period of divestments out of timberland assets. The perfect buyer for these timberland assets were investors with long investment horizons: pensions, insurance companies and university endowments. Timber is less correlated with other financial assets. Whatever happens on Wall Street has less impact on timber assets,” he said.
Mitchell identified a large pool of investors who were interested in the long-term timber asset class.
“We were out to create new assets in that class where they could get some good returns. Our threshold return is 15 per cent. There are investors who are interested in this kind of asset class if it hits the financial returns and is socially responsible and environmentally sustainable.”
That’s why Mitchell started the whole process with a certification from the Forestry Stewardship Council, which he says was the easiest way to demonstrate credibility to the class of investors he was targeting.
Grandis Timber is a joint venture between SRP International Group, Mitchell’s venture capital company, and Danish and Swedish pension fund investors.
Early on, Mitchell knew he needed to have control of the operations in order to provide comfort to the investors, so they set up Grandis Timber as an operating company.
Mitchell’s SRP company already has a plantation in Kampong Cham, started in 2001, which is established and growing. An interesting aspect of Grandis Timber is the policy of not moving people who live in residences throughout the economic land concession. Instead, Grandis puts most of them to work. Mitchell says it is actually less expensive to treat people well and have them stay in their homes and work their small farms, rather than pushing people off the land, as we so often see in Cambodia.
“The government supported our policy of not moving any people. There was a list put together of people who had land, and we mapped it. That’s the land that doesn’t belong to us. We didn’t move anybody; we didn’t have to pay anybody. The people who have farms are easy to work with, and most of them end up working with us,” Mitchell said.
Mitchell says the local government is at least as important as the national government. What Grandis Timber is doing could not be done in Thailand or Vietnam, he said, because there are not enough large tracts of land.
“The people here know we’re not going to push them out and they are surrounded by us. They’re more comfortable putting money into their houses with us here because more security there is, the more willing you are to invest. If you treat your neighbour decently, you don’t have a problem.”
Another key difference between Grandis Timber’s operations and others is the responsibility for the management of protected areas, which take up about 20 per cent of the concession.
“We’re planting native species up there. A portion of one of our nurseries is dedicated to native species.”
The end game of the whole operation is to sell the asset, according to Mitchell.
“We would sell part of our holding, but would probably stay on to do the management. Ten years ago it was considered insane even to think about something like this. When we started I questioned my own sanity on a daily basis. Now we’re talking about expansion on the same basis with Burma, Lao and Indonesia. This is a repeatable model in frontier markets.”
In an operation like Mitchell’s Grandis Timber, things get easier once all the trees are planted, which he’s looking forward to in about two years.