“ADDING VALUE TO NICARAGUAN FORESTRY” ASSET RICH BUT CAPITAL POOR!
VALERIA ZELAYA

Background During the 70’s and 80’s, Nicaragua suffered from civil and political unrest. In 1990, the country had its first democratic elections in 30 years, which lead to a process of slow political depolarization, and economic recovery. Nicaragua’s Northern Atlantic Autonomous Region (RAAN) is the largest block of tropical forest in Central America and a key source of high value timber for local and international markets. Land classified as suitable for forestry usage occupies about 6.2 million hectares; divided as 1.8 million ha for conservation and 4.4 million ha for sustainable use1. Despite this endowment, Nicaragua’s annual wood exports are only US$15M2, representing 1.75% of Nicaragua’s total export. From these exports, 95% is unprocessed wood and 5% is manufactured goods, indicating a feeble commercialization of value-added wood products. Other neighboring countries with less forest area and potential have much greater export income from wood products. Additionally, private sector investment is limited and small and medium enterprises (SMEs) in the wood sector have difficulty in accessing legal and certified raw material creating inefficiencies in the wood value chain due to a lack of integration and coordination of the value chain. The LAC Facility identified the wood sector as one of the potential sectors for growth due to the availability of hardwood species and a significant

number of firms working in the sector. The Facility conducted a sector analysis that set the ground for a wood intervention. In 2005, IFC and the World Wildlife Fund (WWF) implemented a pilot project3 to link Nicaraguan timber producers and SME manufacturers to international buyers, and attract private sector investment. The pilot included two main components: 1. Provide technical assistance to (a) two forest communit ies (Layasiks a and SIPBAA) to harvest timber under sound environmental principles; and, (b) to help five SMEs comply with international buyers’ requirements; and 2. Promote/facilitate access to markets by linking forest communities and SMEs to international buyers. 3. The project has developed a market driven business model that links responsible Nicaraguan timber and furniture producers (FSC4) certified to international buyers that commercialize environmentally and socially certified wood. Also, the project has demonstrated that target groups, SMEs and forest communities can reach better
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Source: Project PROFOR (18653-N) 2 Source: Banco Central de Nicaragua

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Project implementation: March 2005-March 2006 Forest Stewardship Council (FSC) is a certification that validates environmental and social compliance.

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business opportunities by following sound environmental principles. Thanks to the project intervention, the beneficiaries (forest communities and SMEs) show the following key results: a) Increased Production of certified lumber: In November 2005, Layasiksa successfully achieved the FSC certification, increasing the total of FSC certified area by 27%. Also, SIPBAA is implementing the required procedures to become FSC certified. b) Increases sales: By adding value to their products and receiving support in marketing intelligence the forest communities increased sales from $20,000 to $160,000 in one year. c) Access to markets: Megamaderas (Guatemala) and Panamerican Woods (Costa Rica) have bought timber from both of the forest communities and are interested in buying timber from the next 2006 harvesting period. The project also supported the forest communities to participate in Nicamueble Expoventa2006, a furniture fair in Nicaragua where they showcased their products to local and international buyers and provided information on species availability and technical properties. d) Create transparency and improve income management: Through general assemblies, the forest communities plan, consult and decide how to invest part of the earned income in initiatives that can benefit the whole community. This included a road improvement project, the purchase of telecommunication equipment, and the upgrade of a local medical center. e) SMEs increase exports: SMEs accessed international markets and reported exports for US$61,000 during project implementation. SMEs closed business deals with Earthsource, (USA) and Precious Woods (Costa Rica).

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Access to market information: Jagwood, a NGO member of the Global Forest Trade Network (sponsored by WWF) led the marketing efforts. On May 2005, SMEs attended the “USA Market for Certified Products” seminar to have information on how to access USA Markets. On August 2005, Jagwood represented Nicaraguan SMEs in a regional fair in Guatemala “Expoforestal” 2005 to provide information on Nicaraguan’s product and species availability.

Lessons Learned: 1. Make sure technical assistance has an economic pay off. Beneficiaries value TA more when it is clearly linked to an economic benefit. Both SMEs and forest communities have followed and valued the TA guidelines because of the economic benefits realized. For example, SMEs received TA to meet buyers' requirements, reached international market niches and increased sales exports for US$61,000. The forest communities followed the TA principles to harvest timber under sound environmental principles, and ultimately sell it, thus realizing an increase in sales. The forest communities achieved an increase in sales from US$20,000 to US$160,000 in a year. 2. Instill a business mindset in forest communities to foster productivity and efficiency by showing financial information such as production cost. In the past, the forest communities invited their families to have lunch in the “working place” and paid high prices for work done on Sundays or overtime. This created higher production costs that could have been reduced. The team carried out an analysis in conjunction with the forest communities by presenting the production cost, sales, and income earned.

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Through this analysis, the forest communities decided to lower the payment for overtime or work done on weekend and if any member wants to have lunch in the working area they must paid. This way, they realized that by making minor changes, they could have more income for social investments. With financial figures at hand, no one told them what to do; they made the decision for their own benefit. 3. Research the market for difficult species to sell such as Less Know Species (LKS) prior to extraction from the forest. If not… ensure a good informative campaign among buyers. This year, the forest communities extracted less known species and it was very difficult to find any market for them. However, Jagwood made significant marketing efforts to sell this LKS. Jagwood researched the property of each LKS and made filing cards that explained the species’ property, advantages and disadvantages of using them. Jagwood also gathered information on the experience of SMEs that have made furniture with LKS. These explanatory cards and SMEs cases on using LKS helped to inform buyers and promoted sales. Jagwood managed to sell US$32,000 of LKS equivalent to 20% of the total wood sales. Thus, it is highly recommended to research the market well in advanced to avoid delays or problems when commercializing LKS. 4. Value local idiosyncrasy –and get the “buy in” of opinionated leaders! It is important to understand the local forest communities’ idiosyncrasies in order to approach beneficiaries in the best way possible and provide relevant TA that is aligned with their customs. In some cases, the forest communities can make decisions that may look unsound or inappropriate from a Western perspective; however, it is key to respect communities’ decisions and understand the cultural factors that drive them. For instance, the forest communities highly value the religious leaders’ opinions and their behaviors are often influenced greatly by such leaders/priests.

For this reason, the social team involved the religious leaders and explained to them the project approach and benefits derived. The leaders in turn, transmitted the message to the forest communities and indeed fostered a positive vision of what was being done. 5. Earn confidence among the forest communities: Involve local people in the project implementation especially in the social work and…foster cultural transparency. To perform the activities, especially the social work, the project brought on board native people from the forest communities so they could facilitate communication with the forest communities and provide WWF’s core team a better understanding of the true local needs and the best approach to conduct the social work and implement the project activities. Being part of the forest communities, the social and technician teams speak the dialect, understand the communites’ needs and cultural issues and have credibility in the eyes of the forest communities. Therefore, it is very important to involve local people as much as possible as a way to remove the cultural barriers and ensure a proper implementation. 6. Cost sharing of TA Beneficiaries need to pay for TA services otherwise they may not value the intervention or may not be involved at the highest level. Cost sharing can be done on a gradual basis; for example, the forest communities and SMEs have realized economic benefits and are willing to pay to continue receiving TA. Upon project completion, the forest communities will cover all the TA cost through the payment of a fee to the Forest Management Company who will continue to provide technical assistance. This is also part of the exit strategy to ensure that someone undertakes what is being done on a sustainable basis. Thus, try to involve some level of the beneficiaries’ resources commitment and plan ahead an exit strategy to ensure the work done will continue even after IFC’s exit.

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7 Listen carefully to the needs… General claim is "we don’t need TA just A2F" Most of the time beneficiaries claim they are already trained and just need financing to move forward. Lessons learned from project implementation showed that approximately 25% actually needed financing to grow while 100% needed TA. For instance, SMEs needed guidelines on specific issues on Chain of Custody Certification, quality and delivery timelines that needed to be addressed to successfully access the international market niches. Even with the resources on hand, SMEs would have been unable to reach these market niches as they were not prepared to comply with the market demands. The project helped SMEs meet market requirements enabling them to sell their products in international markets. It is very important to explore what the underlying factors are that prevent beneficiaries from moving forward and make them understand those factors; otherwise, the TA would be of no value for them.

8. TA + A2F (2+2 =5)- more than a win- win situation! To provide both TA and A2F have proven to have greater impact than providing any element alone. Having financial resources does not ensure success of the beneficiaries' objectives. For instance forest communities received TA to design Annual Operating Plans (AOP) but never had the chance to implement them due to lack of working capital. On the other hand, communities received financed equipment but not the training to operate the machinery thus unable to benefit from it. This statement is also true at the SME level. For instance some beneficiaries received cheap financing from other donors for buying equipment but were unable to fully operate them and reach international markets successfully due to lack of TA. 9. Forest communities…can be integrated to the economy. Nicaragua has an open economy and to increase its competitiveness in international markets, it must confront the commercial challenges of transitioning from a post-conflict country to an integrated society. The project has contributed to integrate marginal indigenous communities, located in the Atlantic Coast, to the national economy.

About the Author Valeria Zelaya Diaz joined the IFC in 2005 to support projects in the Sustainable Value Chain Pillar. Prior to IFC, Maria Valeria worked for the private sector in Nicaragua. (MZelaya1@ifc.org). Approving Manager: Marco Aurelio Gonzalez R. DISCLAIMER
SmartLessons (http://smartlessons) is an awards program developed by the Knowledge Management Unit of the Small and Medium Enterprise Department to share best practices and lessons learned about IFC advisory services operations across various regions and business lines. The findings, interpretations, and conclusions expressed in this paper are the authors’ own and do not necessarily reflect the views of the SME Department and IFC. For internal use only. For external distribution of this article or its portions, please contact the authors or the SmartLessons program at smartlessons@ifc.org.

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