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TEAK CONTROVERSY
FLARES UP IN THE NETHERLANDS
JULIO CESAR CENTENO
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I have followed with great interest the controversial public debate
in The Netherlands regarding teak plantations in Costa Rica, in
particular the case involving the insurance company OHRA and
the company Flor & Fauna. A confidential report I wrote over two
years ago for the World Wide Fund for Nature [WWF] on this
particular case seems to be at the core of the debate. It has been
widely circulated and commented upon, on TV, the press and in a
court of law. The report, entitled ECONOMIC ANALYSIS OF
FLOR & FAUNA'S TEAK PLANTATIONS IN COSTA RICA and
dated December 22, 1993, has therefore lost its confidential
nature, allowing me to also publicly comment on its findings.
Many misleading statements have followed the release of the
report, some attempting to disqualify it. This seems due to the
serious conclusions drawn out of the assessment performed on Flor
& Fauna's teak plantations in Costa Rica, in which OHRA and
WWF-Netherlands also have direct financial interests. Since the
dust seems to have settled, at least temporarily, it seems fair that
I should have the opportunity to present my point of view on this
matter.
THE CERTIFICATION OF FLOR & FAUNA BY THE FSC.
One of the issues under consideration is the December 28, 1995
declaration in a court of law in The Netherlands by Flor & Fauna,
to the effect that its plantations in Costa Rica have been certified
as "well managed" by the Forest Stewardship Council [FSC].
It is not within the mandate of the FSC to certify forest operations
anywhere. The FSC is an organization set up to accredit potential
certifiers. This is therefore a fictitious statement, meant to mislead
both the public opinion and the court of law in which it was
presented.
The certificate issued to Flor & Fauna comes from the Rainforest
Alliance, an environmental organization in the USA, not from the
FSC. As of this date, the Rainforest Alliance has not been
accredited by the FSC, or any other organization, as an official
certifier. Therefore, its assessments should not in any way be
considered endorsed by the Forest Stewardship Council. They are
the sole responsibility of the Rainforest Alliance.
Flor & Fauna seems to be using the name of the Forest
Stewardship Council to give some credibility to their uncomfortable
position in the legal and public dispute in which it is involved.
Making this type of fictional statements, with the intention of
misleading both the public opinion and a court of law, is an action
by itself punishable by law. It seems inevitable that this will
eventually backfire on the company itself.
The insurance company OHRA has made claims in brochures and
other promotional material that the Flor & Fauna plantations in
Costa Rica, in which OHRA has direct commercial interests, has
been certified as "well managed" by the FSC. OHRA has also made
public claims to this same effect through the press, as in the one-
page advertisement published in the October 7, 1995 issue of "De
Telegraaf", one of the papers with the largest circulation in The
Netherlands. In conjunction with the statements to the same effect
by Flor & Fauna, this assertion seems intended to mislead
investors and generate credibility through unlawful means.
OHRA's claims to the existence of an FSC certificate for Flora &
Fauna's plantations were brought to the attention of the Reklame
Code Commissie [Code of Ethics Committee on Advertising] of The
Netherlands on January 30, 1996. A ruling is expected within
weeks.
KEY ISSUES OF THE CONTROVERSY
A completely different issue is the controversy stemming from the
contents of the report I wrote on Flor & Fauna over two years ago,
following a request from WWF-Netherlands and WWF-
International. Due to the confidential nature of the report, I had to
remain silent till now, when the public exposure given to it
through the press and TV in The Netherlands allows me to speak
up for the first time.
The certificate issued to Flor & Fauna by the Rainforest Alliance
dates from early 1995. This is more than a year after my final
report on that plantation had been submitted, in December of
1993. Flor & Fauna seems to have deliberately concealed this key
piece of information from the certifier during the evaluation
process. The Director of the Rainforest Alliance has informed in
writing that as late as December of 1995 they were not aware the
final report in question had ever been produced.
Out of consideration for the serious nature of the conclusions of
that assessment, I made a specific effort to provide Flor & Fauna,
OHRA and WWF-NL the opportunity to question its contents, and
to submit evidence to back their claims of possible errors or
misinterpretations. This was done through the presentation of a
draft version of the report, in August of 1993. The final report is
dated December 22, 1993, and was presented only after a full reply
to the contents of the draft was received in writing through WWF-
Netherlands. The Rainforest Alliance had access to this draft. The
fundamental issues at the heart of today's controversy were also
exposed there.
EXPECTED YIELDS
One fundamental point of controversy is the yield expected by the
company, which in turn affects the expected financial returns
offered to investors. In Flor & Fauna's promotional material, as
well as in its correspondence with WWF, the company claimed its
teak plantations would produce an average of 40 cubic meters of
commercial timber per hectare per year under one scenario, and an
average of 48 cubic meters per hectare per year under another,
during the 20 year rotation period of the plantation.
The production of timber was expected to increase substantially out
of normal range after the first thinning, at the age of 8 years.
According to the company, yields would increase to between 40 and
50 M3 per hectare per year between the age of 8 and the age of 12;
60 to 70 M3/ha-yr between the ages of 12 and 16, and an
astonishing 68 to 82 M3 per hectare per year between the ages of
16 and 20. {Thinnings were scheduled at the ages of 8, 12 and 16,
and a final clear cut at the age of 20].
The silvicultural behavior implied by the information supplied by
the company to the public in The Netherlands, to WWF, and to me
during the evaluation process, is an absolute anomaly for teak. The
unusual and unrealistic behavior expected by Flor & Fauna, both
in the magnitude of the yields, and in the effects of each thinning,
could not be clarified or supported by the company. Evidence to
support such projections could not be obtained, although
specifically requested in writing. The report thus highlights:
"The expected yields are unjustified, reverting in equally
unjustified expectations on the financial returns to be obtained.
Investors are thus led to believe they will receive returns which are
highly unlikely. This may be considered fraud".
This issue was highlighted both in my draft report and in the final
report of December 1993. The Rainforest Alliance was therefore
aware of this controversy during their evaluation process.
Nevertheless they decided to issue the certificate to Flor & Fauna,
thereby endorsing the company's claim to fictitious yields and rates
of return.
I expect a qualified certifier to detect these irregularities, and not
provide credibility to professionally unsound allegations,
independent of their origin or nature. A consequence of the
questionable certificate under consideration is a loss of credibility
in the certifier involved. It might also mean a loss of credibility in
the Forest Stewardship Council, drawn into the scene by OHRA's
and Flor & Fauna's allegations. Unless the FSC requests public
disclaimers from Flor & Fauna, OHRA and the Rainforest Alliance,
in the same places and through the same means the original
allegations were made.
Some adjustment to the rate of return seems to have been
introduced in OHRA's promotional material since May 1995, from
15 - 25% to 14 - 18%. However, an official document from the
Ministry of Agriculture, Nature and Fisheries of The Netherlands
was introduced on January 30, 1996, to the Reklame Code
Commissie [Code of Ethics Committee on Advertising] by OHRA,
according to which expected yields are even higher than before [De
Tak Plantagen van Flor y Fauna S.A. in Costa Rica, LNV,
December 28, 1993]. This same document has been introduced in
previous court cases by Flor & Fauna. It determines that, as a
minimum, the company should expect 1057 M3 per hectare during
the 20 year rotation period, or nearly 53 cubic meters per hectare
per year of mean annual increment. This is three to four times
higher than should safely be expected.
On February 02, 1996, a spokesman from Flor & Fauna is quoted
in the Financjeele Dagblad, Holland's leading daily financial
newspaper, as follows:
"The organization Rainforest Alliance, which keeps an eye on the
Flor & Fauna plantations, does not find the projections on growth
and financial returns inaccurate"
This quotations seems based on a report submitted only days
earlier by the Rainforest Alliance to the Forest Stewardship
Council, in which it is stated:
"Based on interviews, field work, and research data collected in
Costa Rica, we did not find that F&F's projections in terms of
growth and yields were inaccurate..."
COSTS, PRICES AND RATES OF RETURN
Another key point of concern is related to the costs incurred, and
the price to which shares were sold to the public, through OHRA's
insurance policies. There is a tremendous gap here, which borders
on extravagant speculation. The estimated total cost per hectare
during the 20 year rotation period is about 5000 US dollars. But
the expected production from each hectare was sold to people in
The Netherlands for a net payment of over 65000 dollars.
One issue I have seen contested in the press is the price paid for
the land where the plantations were established. Flor & Fauna
argues it paid an average of 3000 dollars the hectare. Nevertheless,
it could not provide any evidence to support that claim when
specifically requested, prior to the production of the final report.
The average price indicated in the report [600 dollars the hectare]
was corroborated as at the high end of the price spectrum at the
time of purchase.
The prices at which the production of timber from these
plantations could be sold are also significantly inflated in Flor &
Fauna's projections. In combination with the unrealistic yields
mentioned above, this leads to highly unlikely rates of return.
Investors were led to believe they would receive between 600.000
and 1.4 million US dollars per hectare, according to the three
scenarios presented by Flor & Fauna, the firm Van Rossum van
Veen and WWF-Netherlands during the assessment [exchange rate
of 1.825 DFL to a dollars as of June 1993]. A more realistic
projection would place such a return at below 250.000 dollars the
hectare. Although this discrepancy is already serious enough, it
would not be so damaging were it not for the way risks were
distributed between the different parties involved.
The project has been structured in such a way that the potential
risks of failing to achieve Flor & Fauna's expected yields and prices
would have relatively little impact on Flor & Fauna's and OHRA's
expected returns. The consequences of failing to achieve their
projections were transferred mainly to individual investors. Two
thirds of all returns to investors depends on production at year 20.
While expected returns to Flor & Fauna and OHRA depend only
about 10 per cent from such a harvest. This poses ethical
questions which should be seriously investigated.
WWF'S UNCOMFORTABLE POSITION
WWF Netherlands seems to be in an unfortunately awkward
position due to their involvement in this venture, a situation I and
others tried to prevent from the very beginning. It has allowed its
name to be associated to an initiative with dubious technical,
economic and ethical dimensions. Most important of all, it seems
involved in a situation which may seriously affect the credibility of
the organization within the general public in a key European
country.
The same controversy rumbling now in The Netherlands was
exposed in August of 1994 by "The Tico Times", an English
language newspaper in Costa Rica. In a written declaration signed
by Wim Braakhekke, Director of Conservation of WWF-NL,
addressed to that newspaper on August 30, 1994, it is stated:
"WWF Netherlands has sent copies of Julio Cesar Centeno4s report
to OHRA, Flor & Fauna and Stichting Continuiteit Flor & Fauna,
because we feel that it is important that all parties know of the
report".
A very fundamental and interested party is obviously composed by
the individual Dutch citizens who invested in this venture. It is not
clear the report was ever brought to their attention. The letter
further adds:
"The fact that an independent foundation was set up (Stichting
Continuiteit Flor & Fauna4) to guard the interests of the investors
was essential to WWF-Netherlands before becoming involved in
this project"
I understand that this foundation unfortunately does not in fact
represent the interest of investors. Its Board of Directors is
composed only by the Huizingas [owners of Flor & Fauna], the
insurance company OHRA, the firm van Rossum van Veen [a
representative of Flor & Fauna], and WWF-NL. The first three
hold 80% of the votes, while decisions are taken by majority vote. I
fail to see why this is considered an independent foundation
[independent from whom?], or how the composition of the board is
meant to represent the interests of the individual Dutch citizens
who were convinced to invest in this scheme.
We are thus facing a rather unfortunate situation, which I hope
will be resolved quickly to the benefit of all parties involved.
Specially to protect the interest of the Dutch citizens who trusted
the proposals they received, at least partially due to their
credibility in WWF. An objective resolution of this case is also
necessary to return credibility and trust to other Dutch initiatives
struggling to succeed within realistic projections and fair play. It is
also necessary to return credibility to the concept of certification as
a mechanism to ensure consumers that their purchases or
investments respect basic environmental, social and economic
principles.
A lot is thus at stake, to be resolved by Dutch citizens and Dutch
institutions. The benefits of balanced and objective judgement in
this case will reach far beyond the borders of The Netherlands. I
trust that, in honor to well ingrained Dutch tradition, truth and
justice will eventually prevail.
________________________________________________________________
Julio Cesar Centeno is a forestry specialist from Venezuela from
whom WWF requested an economic analysis of Flor & Fauna's teak
plantations in 1993. He was one of the key negotiators of the
International Tropical Timber Agreement, UNCTAD, Geneva,
serving as spokesman for tropical countries. He served as forestry
advisor to the Secretariat of the United Nations Conference for
Environment and Development [UNCED 92}, and as Director of the
Latinamerican Forestry Institute between 1980 and 1990. He was
invested by Prince Bernhard of The Netherlands with the Golden
Ark Award for his work in the forestry sector. He serves as a
member of the Governing Board of SGS-Forestry in Oxford, United
Kingdom, and as acting vice-chairman of the TROPENBOS
Foundation in The Netherlands.
Fax: INT + 58-74-714576
E-mail: jcenteno@ciens.ula.ve
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