Lessons from last 30 years of forestry investments #1

Sustainable planted forests can drive Sub-Saharan Africa’s economic development and have a critical impact on climate mitigation. So why have investments to date into greenfield, industrial-scale forests in Africa underperformed from a commercial perspective?

In our new study with Gatsby Africa, we analysed investment transactions from the last 30 years using Criterion Africa Partners proprietary data to better understand the drivers of this underperformance. Some key findings include:

🔎 Routes to market are still underdeveloped, and producers are largely confined to informal and lower-value markets. Since the 1990s, $1.4bn has been invested to develop 190,000 hectares of planted forests across 7 countries, but only 11% was allocated to industrial assets and the establishment of downstream processing opportunities.

🔎 Recurring structural and operational challenges have driven low returns and not met upfront expectations by investors. Deployed capital has paid a significant premium to invest in immature projects. A key challenge to the valuation of early-stage forestry projects is that greenfield forestry requires up-front capital expenditure while harvest income is inevitably generated much later (e.g. cashflow break-even after 16 years, with full revenue realised after 30 years).

🔎 Smallholder production remains largely disconnected from industrial value chains. If smallholders are linked to industrial markets, they can offer a cost-effective supply base, with a transformative impact on the sector. But unlike Asia, where the regional wood base is primarily supplied by SME producers, a lack of appropriate market offtake opportunities at viable price points in Sub-Saharan Africa has constrained smallholder forestry.

🔎 The potential of carbon finance in supporting further development of the sector has so far been overlooked. 20% of total investment costs of greenfield projects in Sub-Saharan Africa could be funded using carbon credits. Yet, Africa has one of the lowest climate finance inflows, at only 3% of the global total, and private sector investment remains limited.