Final report Small research and development activity project Australia–Laos Timber Chain of Custody Capacity Building Project



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5.1.Lao PDR


The Lao People’s Democratic Republic (Lao PDR, Laos or Lao) was declared in December 1975 with the establishment of a communist government under the control of the Lao People’s Revolutionary Party. Like Australia, the Lao PDR is essentially a federation which, under Article 75 of the Constitution of the Lao PDR (amended) 2003 provides authority divided into three levels of local administration: provinces, districts and villages (Siphandone 2003). The Constitution defines national government rights and provides districts (states in Australia) with strong and independent authority for land management. Unlike Australia, a village (local government) is also a recognised authority vested in locally elected representatives. There are 16 provinces (khoueng), one prefecture (kampheng nakhon) and the capital city municipality (nakhon luang), 142 districts (muang), and over 11,500 villages (baan) (UNESCO 2000).

Lao’s population is 6.2 million, of which 63% live outside urban centres and 33% live in poverty (World Bank 2010). It has a growing population with ongoing migration from rural to urban centres estimated to be 5.6% annually (CIA 2010). Encouragingly, its population is also increasingly literate, with adult literacy rates increasing from around 5% in 1977 to 69% in 2004 (ILO 2007). However, a United Nations Development Group (Confidential 2011) report identified many areas where 80% of the population of education age was reported as having no educational qualifications, and correspondingly literacy rates were less than 20%. In these areas, annual incomes were usually below US$50, or 6% of the national average income.

Lao is ethnically and linguistically diverse. Lowland Lao (Lao Loum) constitute the majority ethnic group (estimated at 55–68% of the total population) and dominate political and economic structures (LaoPDR 2006). Ethnic minority and/or language groups are estimated at between 100 (CIA 2010) and 236 groups (Hodgdon 2009) depending on distinctions made by researchers. Many of these groups are tribal and have strong regional kinship links. For example, along Lao’s eastern border there are many Lao with Vietnamese background (sao viet), while Thailand’s northern region has a strong Isan population whose language is a dialect of Lao, but written in the Thai alphabet. These links often promote cross border trade/exchange, including agricultural and forest goods (LoC 2009).

As elsewhere in the Asia region, the rise of an educated middle class and associated increase in disposable or discretionary income is also leading to an increase in the consumption of, and demand for, manufactured products such as motor vehicles, mobile phones, fridges and televisions (Morton and Applegate 2007). The majority of these goods are imported, placing further financial pressure on the Lao budget as Lao is now a net importer of goods.

Since 1986, the Government of Lao (GoL) has initiated a series of reform agendas designed to stimulate development while managing impacts on traditional cultural and economic systems. These are referred to as the chin thanakaan mai, or new thinking (Cleetus 2005), and kanpatihup setthakit (reform economy) initiatives (Blejer et al. 2001). Their overall objective is to alleviate poverty and they focus on changing the position of Lao as a Least Developed Country to one more akin with regional economies by 2020 (UNDAF 2002).

These demographic and economic drivers are leading to reliance on expanding and intensifying land use activities to generate wealth to fund an increased demand for services such as health and education, stable food supplies and better infrastructure (Chatterjee 2007). Consequently, pressure is increasing to add value to forests and their associated manufacturing and processing capacity (Midgley 2009; B. Adams, pers. comm.).

These changes are also impacting on the forest estate, with areas being cleared to support the development of infrastructure (such as hydro-electricity dams, roads, and urban and industrial development), expansion of agriculture land and increased food production, or diversification into cash crops such as plantations for wood, oil or rubber. The extent of impacts associated with such clearing or conversion is not fully understood, and remains a challenge for the GoL, and one it is addressing through agencies such as DOFI and supported by legislation (Section 7.3).

5.2.The forest sector in Lao PDR


Forests and forest products are an integral part of Lao society and economy. Fifty per cent of GDP is derived from agriculture, forestry, livestock and fisheries. In 2006, around 12% of total government revenue (US$60 million) was derived from the sale of timber (Barney et al. 2010). Up to 80% of the Lao population is dependent on forests and forest products, and73% of the rural population is reliant on agriculture and forests for its livelihood. In some rural communities more than 50% of family income is derived from non-timber forest products. Wood accounts for 80% of the country’s energy consumption, and 99% of households use wood for cooking and heating, consuming about 3.9 million cubic metres annually.

Sixty-eight per cent of the country’s 26.68 million ha is classified as potential forest. The majority of this forest is classified as ‘natural, modified’ (89%), with only 9% classified as ‘natural, primary’. Of these forests, 41.5% are closed (defined as having a minimum 20% canopy density). Lao’s 18.14 million ha of potential forest is composed of mixed deciduous forest (over 35%), dipterocarp forests (5%), dry evergreen forests (5%), coniferous or mixed coniferous forests (23%), un- or under-stocked forests (25.6%), bamboo forest (2.3%), and fallow land (2.2%).

Under the Land Law 1997 land is classified into eight categories according to use: agricultural land, forest land, water-area land, industrial land, communication land, cultural land, land for national and security defence, and construction land. The Land Law vests responsibility for zoning and demarcation of boundaries for each land category with the GoL. However, owing to the lack of a coordinated system, both macro- and micro-scale land-use plans have yet to be developed. The Ministry for Agriculture and Forestry (MAF) is responsible for further classification, management and development of agricultural land, forest land and water bodies.

Forests in the Lao PDR are classified into five categories, the first three relating to function and the last two to the current situation (Forestry Law, Articles 16 to 21; Table 1).



Production Forests are forests and forest lands used in regularly providing timber and other forest products on a sustainable basis for national economic and social development requirements and for people’s livelihoods without significant negative environmental impacts.

Conservation Forests are forests and forest lands classified for the purpose of protecting and conserving animal and plant species, natural habitats and various other entities of historical, cultural, touristic, environmental, educational or scientific value.

Protection Forests are forests and forest land classified for the protection of watershed areas and prevention of soil erosion. They also include areas of forest land with national security significance, areas for protecting against natural disaster and areas for protection of the environment.

Regeneration Forests are young or fallow areas of forest classified for regeneration and maintenance of forest cover with a view to reaching a natural equilibrium as trees increase in maturity.

Degraded Forests are forests that have been heavily damaged, to the extent that they are without forest or barren, that are classified for tree planting and/or allocation to individuals or organizations for tree planting, permanent agriculture and livestock production or other purposes in accordance with national economic development plans.

Table Area of Production, Protection and Conservation forest in Lao PDR



Forest Category

Administrative Level*

Number

Area (1,000 ha)

Production

National

106

3,207

Protection

Sub-total



Province

District



23

52

75



461

56

517



Conservation

Sub-total



National

Province


District


22§

57

144



223

3,391

932


504

4,827


Total







8,551

* Regeneration and Degraded Forests have also been identified through the village land and forest allocation process but no data are available.

§ Two national conservation forests are corridors.


Large areas of Lao’s forests have become fragmented and less productive. They are often degraded and fragmented, which reduces biodiversity as reflected in reduced species composition and size structure, losses of wildlife and plant diversity, and an overall a decline in wildlife and plant population.

While facing many similar pressures of a developing country with a growing population, Lao PDR is unique in that its forests have been heavily modified through conflict. Over the last 100 years, the people and forests of Lao have been subject to:



  • French and British colonial occupation (1893–1954)

  • a number of critical battles during World War II, including a quasi-civil war between pro-Japanese independence and pro-French forces (1939–1945)

  • post war independence movements (referred to as the First Indochina War, 1946–1954)

  • large scale anti-communist campaigns during the Vietnam War (the Second Indochina War, 1954–1975)

  • civil war and the defeat of Royalist troops by the Pathet Lao (1974–1976)

  • influx of people fleeing the genocide of Pol Pot in Cambodia (1975–1979)

  • occupation by Vietnam during the Vietnam-China War (the Third Indochina War, 1979).

These conflicts have had severe effects on the commercial and environmental value of Lao’s forests. During periods of conflict, forest products provide a convenient and liquid revenue resource, act as a refuge, supply food and shelter which are often heavily exploited to supplement a loss in agricultural production, and are subjected to destruction through bombing, chemical applications or intensification of fire.

The largest, most intense and longest-lasting of these impacts was from the Second Indochina War. During this conflict the United States dropped more than two million tonnes of bombs on Lao between 1964 and 1969. Today there remains an estimated three to four unexploded bombs per hectare in some areas, and around 30 people are killed, and 300 injured annually from unexploded bombs through agricultural or other activities (P. Fogde, pers. comm.).

As a consequence of historical conflicts and the current GoL capacity constraints, forest information is incomplete and inconsistent. Contributing to this situation is that the collection, reporting and archiving of data is undertaken by different organisations at national and provincial levels, often using different or contradictory methods, definitions, imageries, technologies and systems (Confidential 2011). Consequently, classification of the first three forest categories is often established at a large scale and areas may include other land use types in addition to forest. In a strict sense they are not ‘forest’ as defined in the Forestry Law, however, resource constraints within MAF means that it is not feasible to map forests in the strict sense, to fully and sustainably manage the forests, or to develop and implement deforestation and forest degradation initiatives.

      1. Native production forest resources


Lao has over 3 million ha of native forests that are designated for production (Table 1), of which 1.7 million ha are considered to be potentially productive There are 106 production forest areas with the main production provinces: Vientiane province (503,000 ha), Savannaket (429,000 ha), Bolikhamxay (350,000 ha) and Sayaboury (350,000 ha). The remaining area is degraded but, with suitable management and investment, could become productive within 20+ years (X. Samonity, pers. comm.).

Under the Forestry Law, the Department of Forestry (DOF) is responsible for issuing sustainable native forest harvest quotas, which are estimated at 200,000–300,000 m3 annually. However, the quota incorporates around 50% from timbers which are not currently used by the processing sector (in particular crepe myrtle or Lagerstroemia) due to market preferences or a lack of appropriate skills or technology (T. Vannasouk, pers. comm.).

Between 2006 and 2009, DOF had approved collective quotas of around 300,000 m3 to Lao timber-based processing facilities, of which only 80,000 m3 was sourced from sustainable natural forest production. The remainder was from:


  • hydropower electric dam projects: 200,000 m3

  • plantation forests: 2,280 m3 of which the majority was teak (Tectona grandis) plantations in Luang Prabang (1,000 m3) and Saravane (570 m3) provinces

  • clearing of land for agriculture and road construction projects: 1,200 m3.

In comparison with the sustainable yields determined by DOF, trade data reports from importing countries indicate Lao export volumes of 800,000 m3 to 1.1 million m3 per annum between 2001–2007 (Barney et al. 2010). In addition, infrastructure development associated with forest harvesting has generated unsustainable higher volumes of timber as many of these developments result in forest loss and land use changes. These high volumes of timber have supported a number of processing facilities whose capacity is greater than the capacity of the native forest resources to supply at a sustainable level (DOFI 2010).
      1. Plantation resources


To provide a future forest-based industry with the resources necessary to support and attract new investments, the Lao Government has encouraged the establishment of plantation forests and associated processing capacity.

Plantation development is not a new concept in Lao. Small scale, village-focused plantation developments were encouraged under French occupation from the early 1940s, and included species such as teak, takian (Hopea odorata), and mahogany (Swietenia macrophylla). The promotion of rubber (Hevea brasiliensis) and Eucalyptus species was encouraged from the mid-1960s, with the Lao–Australian Reforestation Project (established in 1969) a catalyst for commercial development (S. Midgley pers. comm.; Samonity 2010).

While many of these early planting were unregulated, today plantation investments are regulated under the 1994 Foreign Investment Promotion Law (updated in 2009) which details six principles under which foreign investments are approved. These principles are designed to promote domestic and international investments by creating a favourable investment environment and promote supportive policies which support investments, except those that may seriously affect the environment and jeopardize the future, affecting people’s health or national culture (Chairman of the National Assembly 2004).

The value of early plantings is being realised as the estate matures. Unpublished provincial Industry and Commerce, and Agriculture and Forestry reports indicate that around 24,000 ha of teak plantations had been established by 2007 (Confidential 2011). If this estimate is accurate, this resource could provide 50–70,000 m3 annually by 2025 and support expanded investments (Midgley et al. 2007). However, progress on future investment decisions will require detailed information on quality, quantity, age and geographical location/accessibility of plantations (X. Samonity pers. comm.).

The opportunities for the development of commercial scale plantations were recognised in 1995 when Burapha Agroforestry Co. became the first commercial-scale plantation investor in Lao. Key investment drivers included:


  • strategic location (close to port facilities in Vietnam and pulp mills in Thailand and China)

  • access to suitable land (supported by low population density)

  • low labour and taxation costs

  • trade liberalisation agreements between the Greater Mekong Subregion countries and Association of South-East Asian Nations (ASEAN) partners

  • maturing transportation networks, including friendship bridges linking Lao with Thailand, national highways into Vietnam, and proposals to develop a high-speed train link with China (P. Fogde, pers. comm.; X. Samonity, pers. comm.).

These benefits are actively promoted by the Lao Government and are well understood by investors. For example, Oji Paper Co Limited, indicate that:

Laos is one of the most suitable regions for plantation businesses due to its geographical advantage as it is at a short distance from Japan, the current point of demand, and China, where the demand is expected to grow in the near future. In addition, the conditions in Laos are favourable for the growth of eucalyptus trees in terms of temperature, rainfall and soil conditions.” (Oji 2005)

There are currently 21 plantation investment companies which have collectively invested US$973.5 million in establishing 210,366 ha of commercial tree plantations (Table 2).

Table Foreign investment in plantations in Lao PDR



Company/Activity

Site

Area (ha)

Concession period (years)

Investment (US$ mill)

Rubber plantations/ processing*

Laklak Rubber Company.

Champasak/ Saravan/ Attapu

10,000

50

30.0

Viet- Lao Joint Stock Holding Company.

Champasak

10,000

50

22.0

Quang Minh Rubber Company.

Xekong/ Attapu

4,900

50

14.4

Bidina Rubber Company.

Xekong

9,485

30

24.1

LVF Rubber Company.

Xekong

8,000

50

10.0

Lao Quasa Geruco Joint Stock Holding Company.

Savannakhet

8,650

30

18.7

Goeco Rubber Company

Bolikhamxay

2,092

30

7.4

Hochiminh City Rubber Company.

Champassak

2,000

30

30.5

Huang Anh Attappu

Attapu

10,000

35

40.0

Dautieng Viet Lao Rubber Joint Stock

Champasak/ Saravan

5,419

40

35.4

Foodinco Danang Savannakhet Company.

Savannakhet

925

30

6.0

KunninGaoshen Group Company.

Bolikhamxay

500

30

4.5

Lao Rongxiang Rubber Company.

Savannakhet

2, 407

45

4.6

Ruifeng Rubber Investment Management Company.

Luang NamTha

10,000

30

50.0

Lao Thai Hua Rubber Company.

Vientiane/ Vientiane Capital/ Bolikhamxay/ Khammouane/ Savannakhet/ Saravanh

2,610

50

34.5

Wood Plantations 

Sun Paper

Savannakhet

9, 235

50

199.8

Birla Lao Pulp & Plantation Company.

Savannakhet/ Khammouane

50,000

75

350.0

Oji Lao Plantation Forest Company.

Bolikahamxay, Khammouane

50,000

50

49.0

Oji South Lao Plantation forest Company.

Savannakhet/ Champasak/ Saravanh/ Xekong/Attapu

24,974

40

40.0

Stora Enso Company.

Savannakhet/ Saravanh

811

50

3.7

 TOTAL 

222,008




974.60

* Note that rubberwood investment figures are likely to be under-reported as data on Chinese plantation investments in the northern Louang Namtha province are unreliable (Samonity 2010). For example, two Chinese companies are in the process of establishing at least 40,000 ha of rubberwood in this region (Mann 2009).

The 2020 Forestry Strategy (Lao PDR 2005) targets a forest plantation estate of 500,000 ha by 2020. Current plantings are based on both smallholder and corporate growers, of which the majority are industrial in scale and underpinned by foreign capital through direct ownership or joint venture initiatives. However, the development of the teak estate demonstrates there is a capacity for small farm- or village-based developments which could provide significant financial benefits to these growers.

A report to the Asian Development Bank estimated that larger industrial plantation growers could produce up to 500,000 m3 by 2015 and over 1 million m3 by 2025 (Fraser 2009). The ‘farm gate’ value of a mature plantation estate has been estimated at US$200 million. Further benefits would be achieved if appropriate domestic processing capacity is developed with an emphasis on export markets (S. Midgley, pers. comm.). However, to achieve the full benefits of such investments, existing challenges, constraints and opportunities need to be addressed in order to maximise returns to investors and land managers.

While the opportunities for plantation investments are favourable, there remain challenges which may restrict further development. For example:



  • The Forestry Law. This law bans the export of whole logs. Therefore plantation investors must integrate value-adding options into their business plans, which requires a resource that has the capacity and critical mass to support processing investments.

  • Inconsistent development requirements. There is no national standard or code for the conversion of forest land, nor for the establishment of plantations. This provides for inconsistent approaches to the identification and protection of natural and cultural values which in turn increases sovereign risk and may disadvantage companies or organisations who seek to establish higher standards for such developments.

  • Increasing competition for land. This is due to a number of factors, including that the ‘easier and cheaper to develop’ land is no longer available, and there is increased competition from new and expanded agricultural crop investments (such as rubber, palm oil, sugar cane or expanded irrigated land for rice cultivation). New plantation investments must now compete for land, become established in less accessible locations, or in locations which have high concentrations of unexploded ordinance from historical conflicts.

  • Engagement and approval of local communities. The forestry and investment laws require local community approval before concessional land (which is granted by the government) can be developed. The requirement to engage, and to provide real and tangible benefits to local communities, involves a commitment by plantation companies if they are to gain approval.
      1. Wood processing sector


The GoL considers that increased use of forests resources through value-adding along supply chains is essential if the sector is to sustainably contribute to generating the wealth necessary to reduce poverty and pay for increased services, including improvements in health and education.

The wood processing industry is currently structurally inefficient. The industry is characterised by poor occupational health and safety standards, limited business and accounting skills, variable product quality standards, out-dated or poorly maintained machinery, and low labour skills and productivity. These structural inefficiencies significantly undermine the profitability of the sector and its capacity to market value-added products on international markets, and limit its ability to attract investment capital necessary for expansion and modernisation.

Wood processors and manufacturers are required to operate under a licence issued by the Ministry of Industry and Commerce. These licences are issued independently of sustainability quotas established by DOF and therefore can contribute to unsustainable forestry practices (Samonity 2010).

There were reportedly 2,096 licensed wood processing and manufacturing businesses in 2009, whose products had a value of US$143,557,072 (Confidential 2011). Only two have Chain of Custody systems. Between 2006 and 2009, these facilities possessed approved collective quotas of around 300,000 m3—around 1,500 m3 per facility with an end value of US$45 for each cubic metre of input. The majority of reported processed wood products were exported, with domestic consumption accounting for less than 1% by value.

This highlights that while the timber processing sector is large, the export value of processed wood products to the GoL has yet to be fully realised, and while squared logs or basic sawnwood remain dominant in the export market, the potential gains from the production of high value secondary processed products, such as furniture and flooring, has yet to be realised. ACIAR has been assisting the Lao PDR wood processing sector through its project FST/2005/100 "Value-adding to Lao PDR plantation products".

Encouragingly, the GoL has recognised that the number of existing processors must be rationalised (potentially by over 50%) to address illegal harvesting, and to achieve efficiencies of scale without major intensification of forest harvesting and utilisation (X. Samonity, pers. comm.).





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