Columnists

Why Kenya should consider a forest bond for its forest investment campaign

forest

Deforestation and forest degradation is a global challenge. FILE PHOTO | NMG

Early this month, a multi-sectoral taskforce meant to review the management of forests in Kenya was unveiled. This came hot in the heels of much public outcry on the widespread wanton deforestation and forest degradation in many parts of the country.

A 90 day logging moratorium has also been issued by government and the National Assembly’s Environment Committee is calling for logging to be declared a national disaster and a total ban be enforced.

Deforestation and forest degradation is a largely a global challenge and the largest single cause of forest loss is commercial-scale agricultural expansion often illegal followed by high demand for wood products

Though the two hold water for Kenya, the latter is more prevalent than the former.

To demonstrate how lucrative the logging industry is, in 1999 a 90-day ban on logging in public forest was issued and year a 10 year ban followed later to give the then Kenya Forest Department time to complete the inventory of all plantations.

However, large-scale millers Pan Africa Paper Mills, Raiply, Timsales and Comply that consumed 75 per cent of wood harvested from State forests were exempted from the logging ban.

Ten years down the line, despite 75 per cent of wood continually being harvested, Kenya Forest Service confessed to have 38,000 hectares of over-mature exotic plantations valued at 36 billion due for harvesting and another 18,000 hectares of trees between 10 and 22 years valued at 3.5 billion due for commercial thinning.

Now, from these figures the logging business is worth more than Sh16 billion (with large-scale millers controlling Sh12 billion) a year which is equivalent to around 1.5 per cent of what Kenya Revenue Authority (KRA) collects in a year.

This is without the 46,000 acres of land under private commercial tree planting being factored in.

Moving on, while launching the taskforce the deputy president was quoted as saying that almost three million acres of land need to be planted with trees and close to 120,000 acres of plantation forest with no trees.

READ: Tea companies say logging ban to hit production\

In approximation, this means government has the task of mobilising around Sh70 billion so as to plant more than three billion trees needed to cover the aforesaid mass land.

This is a huge investment and looking at government’s constrained budget as well as the conventional financing through donor-led approach having limits, achieving this scale of financing will require effective use of available finance and the most efficient financing vehicles.

And the promising financing instruments is the use of Green bonds/Forest bonds to meet the 10 per cent forestry cover target which comes with advantageous financing terms.

The concept of green bonds was developed in 2007 in response to increase investor demands for engagement in climate-related opportunities. So far, over $ 9 billion worth of such bonds have been issued since its first issuance in 2008.

Now, with Kenya Forest Services (KFS) collecting around Sh16 billion a year, Kenya is in a stable position to opt for a bond-backed finance for its afforestation investments, supporting small holders’ forest management and reforestation as well as improve governance in the forestry sector, through the revenue-backed model from forest-based revenues.

Earmarking the forest-based revenues helps increase confidence that there are specific revenues of known scale available to repay the bond.

Also, since forest investments require a much longer investment horizon, government can chose to also increase investor confidence further by backing up the forest-based revenues with legally binding grant payments from its sovereign donors, a similar approach used by the Global Alliance for Vaccines and Immunisation (GAVI Alliance) to finance its vaccination programmes.

On the other hand, this will also mean that government will have to demonstrate astute commitment to environmentally responsible investments - mainly reliable long term land and tree tenure arrangements, which will be the primary driver for the demand for such bonds.