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IFC ENGAGMENT EXAMPLES
COVERING
FORESTRY AND RELATED
TECHNOLOGY
December 2017
CREATING MARKETS
1
A comprehensive approach of partnering with
private sector companies investing in Emerging
Market countries whereby IFC helps:
where necessary, promote regulatory and
policy frameworks that improve public
governance and enable markets to thrive
incentivize competition and innovation
achieve demonstration effects that
encourage replication
introduce new solutions driven by
improved technology and logistics
build capacity and skills to open new
markets
IFC: A MEMBER OF THE WORLD BANK GROUP
2
Conciliation
and arbitration
of investment
disputes
Guarantees of
foreign direct
investment’s non-
commercial risks
Interest-free loans
and grants to
governments
of poorest
countries
Loans to
middle-income
and credit-worthy
low-income country
governments
Solutions in
private sector
development
IBRD
International
Bank for
Reconstruction
and
Development
IDA
International
Development
Association
IFC
International
Finance
Corporation
MIGA
Multilateral
Investment
Guarantee
Agency
ICSID
International
Centre for
Settlement of
Investment
Disputes
WHAT WE DO
Integrated Solutions, Increased Impact
3
INVESTMENT
Loans
Equity
Trade and Commodity
Finance
Syndications
Derivative and Structured
Finance
Blended Finance
ADVICE
Innovative Solutions
Combining IFC’s
Expertise and Tools to:
– Help Create New
Markets
– Unlock Investment
Opportunities
– Strengthen Clients’
Performance and Impact
– Improve Environmental,
Social, and Corporate
Governance Standards
IFC ASSET
MANAGEMENT
COMPANY
Mobilizing and Managing
Capital for Investment
INVESTMENT
4
Loans Project and corporate financing
On-lending through intermediary institutions
Equity Direct equity investments
Private equity funds
Trade and
Commodity
Finance
Guarantee of trade-related payment obligations of
approved financial institutions
Syndications Capital mobilization to serve developmental needs
Over 60 co-financiers: banks, funds, DFIs
Derivative and
Structured
Finance
Derivative products to hedge interest rate, currency, or
commodity-price exposures of IFC clients
Blended Finance Leveraging donor funds to crowd in private financing
ADVICE
5
To Companies
Attracting private investors and partners
Entering new markets
Increasing impact
Improving operational performance and sustainability standards
Advancing gender equality
To Financial
Institutions and
Funds
To Governments
Strengthening risk management, diversifying product offerings
Promoting universal access to finance, strengthening capital markets, and establishing credit bureaus and collateral registries
Developing the private equity industry in frontier markets
Structuring public-private partnerships that improve people’s access to high-quality infrastructure and basic services
Implementing reforms that encourage private investment, spur growth, and create jobs
SELECTED INVESTMENTS IN FWP SECTORS
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Pulp and biomass
Paper and packaging
Natural and plantation forests
Tissue paper
Solid and engineered wood products
INVESTMENT AND ADVISORY SERVICES
THROUGH THE SECTOR’S VALUE CHAIN
7
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IFC Advisory
IFC Investment
Forest Plantations
Integrated Forest
Operations
Wood and Paper
Processing
B2B, Consumer Products
upstream downstream markets
IFC’S SUPPLY CHAIN APPROACH
• Experienced sponsors with solid track record
• Land tenure sustainability
• Sustainable and secure fiber supply
• Incorporation of E&S responsibility and certification
• Clear competitive advantage (high wood paying
capability (WPC) / low delivered wood cost (cash cost
in lower quartile)
• Competitive investment cost per unit
• Proper investment timing (supply-demand balance)
IFC PROJECT SELECTION CRITERIA IN FWP
9
10
• IFC offers commercial-rate investments with a focus on
downstream projects and players
• Terms flexible especially with respect to tenor, grace period,
currency
• IFC can raise additional financing in parallel or in syndicate from
commercial banks or other institutions
• If equity, IFC takes a minority stake along the strategic investor
• IFC is a long-term partner: relationships in a specific transaction
usually last 8 years and more
• Pattern of repeated transactions with clients, including as they
expand into EM countries less familiar to them
• Companies assessed on IFC’s Performance Standards. Where
improvements are warranted, an action plan is developed
• Can be complemented with Advisory Services
IFC FINANCING OFFER
11
IFC FWP PORTFOLIO OVERVIEW
Portfolio by Sub-Sector Portfolio by Region
over $0.5 billion outstanding on $0.9 bn committed
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IFC ADVISORY SERVICES
* Example from IFC Indonesia forestry program
Client Objectives Solution IFC Engagement
Increase efficiency by
water, energy useResource Efficiency
Identify and recommend potential efficiency gains,
payback time of new equipment investments
Meet environmental and
social (E&S) standards
Enhance Client E&S
Systems
Evaluate and set up client ES management
monitoring systems
Improve data systems,
decision-making abilityData Analytics
Develop data capture, reporting tools and processes
to intergrate into client systems
Increase revenues from
concessionsForest Carbon
Assess forest carbon potential; assist in setting up
carbon structure where feasible
Increase forest planting,
harvestingNew Supply Chain
ModelsBroker new contractual and financial arrangements
between CFEs and client firms for re-forestation
Forestry Extension UnitsExtend reach of forestry extension units to work
directly with Community Forestry Enterprises (CFEs)
Improve social,
economic ties with
communities Strategic Community
Investment
Facilitate firm in defining and implementing strategy
around neighboring communities relation
Additional Community
Supplies
Establish new, secondary supply chains (wood or
other) with neighboring communities
13
SELECT FWP TRANSACTIONS
Klabin
US$25 m A Loan
US$36 m B Loan
US$100 m Equity
1994
2014
Brazil
Hwagain
US$15 million A Loan
2011 China
Mexico
Proteak
US$20 m A Loans
2012
2013
Fenglin
US$15 million A Loan
US$22 million B Loan
US$6 million Equity
US$4 million Risk Management
2004
2006
China
Nature Flooring
US$80 million A Loan
US$10 million A Loan
2008
2013
China
IPI
US$32 m in A Loans
2007
2009
Egypt1998
2002
2006
2009
2013
Modern Karton
US$130 m in A Loans
(5 transactions)
Turkey
Kronospan
US$215 m in A Loans
2000
2001
2004
2005
2010
Bulgaria
RussiaMexico2002
2014
Puertas finas
US$26 m A Loans
Duratex
(Satipel)
US$25 m in A Loans
2007 Brazil2011 Vietnam
Vina Eco Boards Co
(Sumitomo)
US$9 million Equity
Stora Enso
RMB357 million Equity
US$88 million A Loan
US$372 million B Loan
2014 China
2012 South Africa
Hans Merensky
Timber & Avocados
US$35 million Equity
2012
Bel Impex
Paper Tissue
US$7.5 m in A Loan
Nigeria Nigeria
Star Paper
Paper Tissue
US$10 m A Loan
2007
South Africa
Sonae Novoboard
Wood Panels
US$10 m A Loan
2007Tanzania2009
Green Resources
Logging
US$18 m A Loan + C Loan
Portucel Mozambique
Plantation Forestry
US$30 m Equity
2014 Mozambique
14
Swaziland
Swazi Paper
Fluting & Liner Paper
US$3.85 m A Loan
2002Mali
Graphique Industries
Printing & Writing Paper
US$10.6 m A Loan
2009Chad
Aubaine Graphic
Multi-Purpose Paper
US$2.8 m A Loan
2010
SELECT FWP TRANSACTIONS (CONT’d)
IFC financed Modern Karton’s expansion, modernization,
debottlenecking and (permanent) working capital financing
needs since 1998 through five investments with an
aggregate amount of US$140 million. The working capital
financing in 2010 right after the global credit crunch in
2008-2009 entailed a C Loan with a very strong return
(21%).
IFC Investment: US$8 million from US$125 million CPLF
approved in September 2009 and its terms has ‘piggy
backed’ the outstanding C Loan at that time.
Objective: The CP Project will
(a) reduce the business risk faced by the company due to
limited availability of ground water in the vicinity of
Modern Karton’s facilities, which are located in an area
with diminishing water levels,
(b) support the option for the company to expand
production by 50% with the construction of the 5th
paper machine with no additional water impact.
Modern Karton Sanayi ve Ticaret A.S. (Modern Karton) is
the flagship company of Eren Group, a leading industrial
group in Turkey operating more than 20 companies in a
diverse range of business lines from textiles, retail,
cement, paper & packaging and energy.
Being the domestic market leader, Modern Karton controls
around 1/3rd of the domestic corrugated paper market in
Turkey thanks to its cost-efficient operations and
economies of scale.
The company is also one of the major players in the
corrugated paper & cardboard industry in Europe and
Middle East & North Africa.
MODERN KARTON (TURKEY)
15
Company Transaction
IFC Role
Development Impact
Medium- / long-term financing & counter-cyclical role
due to limited interest of local banks in 2012 for small-
sized project with medium-term commercial benefits.
Technical expertise thanks to IFC’s extensive experience
in the paper & pulp business and in-house clean
production (CP) experts in the project design and
implementation.
Standard setting, as being a pioneer in implementing a
waste water recovery system in the domestic paper
business.
New product from the Cleaner Production Lending Facility
(CPLF) with a streamlined and simplified approval process.
Resource efficiency: The share of recycled water in total
daily water consumption will be more than 40% vs. nil
before the CP Project implementation.
Demonstration effect: Strong replication potential as a
pioneering investment in the sector with indirect linkages
with ecology and agriculture.
Kronospan is the global leader in manufacturing and
distribution of wood-based panels. It employs over 14,000
people and generates 70% of sales in emerging markets.
KRONOSPAN SRB DOO LAPOVO (“Kronospan Serbia”)
is a local operational company running one of 40
production sites of Kronospan.
Kronospan Serbia is a greenfield particleboard plant built
to better serve the markets of the Balkan countries. It
offers raw and melamine-faced chipboard to Balkan
furniture producers (e.g. Forma Ideal) and for export.
16
Company Transaction
IFC Role
Development Impact
IFC's crisis response investment to support a long-
standing client and help it weather the crisis.
IFC Investment: EUR24 million committed in 2010.
Financing Objective: provide long-term funding for
increased project costs due to difficulties with land
acquisition, regulatory permissions and a decision to
increase capacity to better realize economies of scale.
Access to long-term liquidity: IFC provided financing
on terms that were not available in the Serbian market
and helped Kronospan complete its financial plan.
Counter-cyclical financing, at a time when other
fanciers were unwilling to support the company.
Long-term partnership: IFC has been working with
Kronospan since 1999 financing projects in Bulgaria and
in Russia.
Environmental and social guidance: IFC worked with
Kronospan to extend sustainable forest management
practices to local wood suppliers and improve the
existing standards.
Import substitution: Serbia had only one particleboard
producer, unable to meet the demand in the country
either in volume or quality.
Climate change mitigation: Climate change benefits
included a corporate commitment that wood chips and
sawdust would reach 50% of inputs.
Employment generation: 146 new jobs.
Benefits to local SMEs: increasing the availability of
high volume and high quality value added products at
competitive prices to local customers.
KRONOSPAN (SERBIA)
HANS MERENSKY HOLDINGS (SOUTH AFRICA)
Hans Merensky Holdings (HMH) is a South Africa
forestry and agribusiness company with two
operating divisions: the fruit business under the
Westfalia division (Westfalia) and the timber–related
businesses under the Merensky Timbers division
(Merensky).
HMH’s operations consist of pine and eucalyptus
forest plantations which are certified by the Forestry
Stewardship Council. Merensky’s 74,200 hectares of
forest plantations are spread out in three South
African provinces and supply three self-owned
processing mills.
Company
IFC Investment: US$35 million in equity to a leading
South African forestry company and the largest
producer of avocados in Africa, supplying ¼ of this
fruit’s consumption in Europe.
Objective: the Project financed the upgrading of the
company’s timber processing capacity in South Africa
through (i) a new sawmill; (ii) technology to increase
efficiencies in yields, quality and supply chain and (iii)
expansion of timber product offerings and product mix
with greater value-added.
Transaction
Long term financing: Provision of tailored long-term
funding
E&S standards: Enhancement of environmental,
safety and social standards.
Global expertise: Provision of global expertise in
forestry and knowledge sharing
IFC stamp of approval
IFC Role Environmental and social standards: Support
adherence to high environmental, safety and social
standards, particularly in forest management,
certification, and carbon emissions.
Rural development: Significant contribution to the
development of rural communities in which the
company operates.
Job creation and inclusive growth – through the
creation of >1,200 jobs and promotion of inclusive
growth through value chains in timber, of which more
than 1/3 are for women.
Development Impact
PUERTAS FINAS (MEXICO)
Holding Montealban (Puertas Finas or PF), the
largest door producer in Mexico in terms of sales
volume, is a family-owned business established in
Oaxaca with operations in Guerrero, both frontier
states in Mexico.
PF produces over 500,000 doors annually plus a
wide range of wooden products (closets, bathroom
furniture, kitchens, etc.).
Puertas Finas has been exporting to the US and
Canadian markets since 1992 and has been very
active in the past few years in the Caribbean. In 2014
PF received an award as Great National Exporter
which recognizes the company’s success and efforts
in expanding its operations.
Company
IFC Investments:
US$ 13 million loan (2002)
US$ 13 million loan (2013)
US$ 2 million loan (2015)
Financing Objective:
(i) The first two projects assisted the expansion,
modernization and debt refinancing of Puertas Finas.
(ii) The third project is supporting PFs to implement
energy efficiency measures in two plants related to
energy usage. Specifically, mainly the upgrade of old or
obsolete equipment, and the installation of solar panels.
Transaction
Long-term financing to a mid-sized company: IFC
to provide long-term financing which is scarce from
commercial sources.
Enhancement of E&S standards: Leveraging IFC’s
performance standards and E&S expertise to a long
standing partner.
Advisory services: Climate Change and Cleaner
Production assessment along with needed financing.
IFC Role Frontier regions: PF facilities are located in states
where they serve as important economic stimulators.
Competitive job creation and inclusive growth
Promotion of sustainable forestry practices: PF
provides technical and logistical support to the
communities from where it supplies pine wood.
Reduction of environmental footprint: Continuous
improvement of environmental performance including
cleaner production projects.
Development Impact
One of the world’s fastest growing markets
With Emerging Markets buoying what would
otherwise be languishing global demand for
paper, India stands out as especially fast growing
at an annual average of nearly 5%. The Country’s
paper consumption is about 13.5 million tons
(about 1kg per capita), suggesting potential for
sustained future growth.
Where will the fiber to pulp come from?
Imported pulp will not be all of the solution, but
domestically there are constraints to expanding
the fiber supply. History and local law results in
fragmented land ownership where effectively
there are few holdings of more than 50 ha of
wooded land by a company/ person and average
farmer landholdings well below this scale.
INTEGRATED PAPER COS. (INDIA)
19
Opportunity but Structural Weakness Challenge
Farm Forestry
The fiber challenge is faced by all integrated
paper companies. Over the past ten years, IFC
has worked with 4 of the country’s larger pulp
producers to support their farm forestry
programs.
Considerable Scale:
JK Paper alone has 45,000 farmers in its
outgrower program, of which some are not that
far off from sustenance farming
In this context, managing supply chain is more
than just dropping off seedlings and returning
after years or more years. You are integrated
into your supply chain in a way that goes
deeper than most industrial companies ever
imagine . . .
IFC shared international best practices to modernize
community engagement and engagement with farmer suppliers
Helped to develop innovative communication tools tailored for
outreach to rural populations
Cooperated in researching the messages that resonated most
with farmers on the subject of value proposition of silviculture
for farmers
Helped design short films, graphic how-to manuals and
interactive learning tools on silvicultural practice for farmers
Designed and helped launch a HIV/Aids awareness program
aimed at protecting populations that have relatively little
information and awareness raising has an especially important
role in reducing transmission/seeking medical attention
FARM FORESTRY IN INDIA
20
Solutions
FARM FORESTRY IN INDIA (CONT’d)
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Concrete Example of Testing Messages
Campaign #1: The General Information Script
Tells story about how a farmer could not pay the expenses of his daughter’s marriage and had to
sell his lowlands. Works through the mathematics behind the cost/benefit of tree-farming
Campaign #2: Long-Term Savings Script
Discusses the importance of saving for a home, marriage, and/or another plot of land. Explains
the self-control problem making it difficult for people to save, and positive side of farm-forestry
locking in capital over years
Campaign #3: Rice Script
Reviews rice farming problems (eg., erratic rainfall, monsoons, etc.) and demonstrates stand-
alone tree farming can have better returns
Campaign #4: Case Study Script
Tells the success story of a forest farmer, detailing revenues and profits. Considers other
potential uses for land suitable for forestry, demonstrating profitability of tree farming
Business Case
Globally, unsustainable teak harvest in its natural habitats drives need for new sources where the economics of teak cultivation competitive globally
Locally, sustained demand for fence posts and other revenue opportunties for immature teak trunks, which will result from thinning regimes
Local soils, rainfall patterns and climate characteristics combined with depth of silvicultural know-how permit world-class growth rates, which was substantiated by prior (albeit smaller scale) planters in region
Availability of land degraded beyond prime agricultural use means comparatively low-cost-- critical in light of long asset cycle (~ 22 years)
ARAGUAIA (BRAZIL)
22
22- year growing cycle – exceeds investment horizon of nearly any investor
Solution:
Year 1 -~8 funded largely by equity from ‘family office’ profile investor
Year ~8 - 15 funded largely by mezzanine debt from IFC
Year ~15-22 gradually generating operating cash flow but can also be opportunity forcommercial debt to replace IFC loan
Only able to plant 2/3 of land purchased and for which responsible
Reserva Legal (general land set-aside) and Área de Preservacion
Permanente (land reserves required for watershed or other ecological
protection) mean 1/3 of land not commercially productive, increasing
need for performance on other drivers of project return (e.g. planting cost)
ARAGUAIA – CHALLENGES
23
Project
Manage >6200 ha of teak planted on over 9500 ha of land from 2007 onward through the point at which the plantation becomes cash flow positive (i.e. third round of thinnings)
Full-grown logs will find the highest-value end market in Asia and intermediate thinnings, which increase overall volumetric growth, can find a market domestically.
At maturity, the project will produce an average of about 100,000 m3 annually which represents displacement of hardwood emanating from more than 250,000 ha of natural forest each year.
IFC Investment
US$22 million loan secured by land and trees (legal system has tree pledge)
Final Maturity of up to 10 years
Long grace period with variable loan amortization to begin with rise in operating cash flow
ARAGUAIA – PROJECT AND IFC INVESTMENT
24
ARAGUAIA – BEFORE AND AFTER
25
BEFORE AFTER
POSITIVE EXTERNALITIES
26
Results Indicators
a) CO2 sequestered through
afforestation and reforestation
activities
Approximately 100,000 tCO2e per
year, for a total of 1 million tCO2e
over 10 years of the project and 2.4
million tCO2e over 30 years Project
related GHG emissions are estimated
b) Sustainable management of
forests and forest landscapes to
address drivers of deforestation and
forest degradation
~10,000 Ha of sustainably managed
land including over 6,200 ha of FSC-
cert. plantations
c) Quality Job Creation ~150 direct, formal-sector jobs in a
region with informality and mainly
unskilled opportunities employment,
which includes skilled employment
(wood milling)
POSITIVE EXTERNALITIES
27
IFC sets established requirements and makes recommendations on fire avoidance and
suppression with mutual benefits to project, neighboring farms, and beyond
POSITIVE EXTERNALITIES
28
Greenhouse built for teak seedlings used to prepare native species to plant in
Reservas Legais
Leadership in restoring Reservas Legais sets standards for neighbors who learn from
scientific approach to RL recuperation in specific local environment
KEY IFC CONTACTS
29
Mary Lystad
Global Sector Lead
IFC Warsaw Office
Email: [email protected]
Agribusiness
Senior Manager (Global Agribusiness)
IFC Moscow Office
Tatiana Bogatyreva
Email: [email protected]
Forestry Wood Products Sectors:
Adam Struve
Principal Investment Officer
IFC, Washington DC
Email: [email protected]
