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Cablegate: Forestry Sector Reform in the Drc, Part I of Ii

VZCZCXRO5935
RR RUEHBZ RUEHDU RUEHGI RUEHHM RUEHJO RUEHLN RUEHMA RUEHMR RUEHPA
RUEHPB RUEHPOD RUEHRN RUEHTRO
DE RUEHKI #1037/01 2431227
ZNR UUUUU ZZH
R 311227Z AUG 07
FM AMEMBASSY KINSHASA
TO RUEHC/SECSTATE WASHDC 6779
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUEHXR/RWANDA COLLECTIVE
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY
RUEHLC/AMEMBASSY LIBREVILLE 2669
RUEHYD/AMEMBASSY YAOUNDE 0227
RUEAIIA/CIA WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK

UNCLAS SECTION 01 OF 04 KINSHASA 001037

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD ECON EINV EAGR SENV KGHG CG
SUBJECT: FORESTRY SECTOR REFORM IN THE DRC, PART I OF II

REF: A. SECSTATE 56792
B. SECSTATE 87904

1.(SBU) Summary: The GDRC is reviewing 156 forestry titles
for conversion into new titles as part of its forestry sector
reform and economic development plan. This conversion process
is intended to encourage sustainable resource management,
improved governance, and poverty reduction. As only one of
several reforms needed, however, the current title conversion
process is limited in scope and risks not meeting the
expectations of broader sector reform. As the first of two
cables on the DRC's forestry sector reform, this cable
describes the process by which existing titles are to be
converted. The second cable (septel) describes reactions to
this process by the various stakeholders involved. End
summary.

--------------------------------------------- ------
Congo Basin Rainforest: Second Largest in the World
--------------------------------------------- ------

2.(U) The Congo River Basin (CRB) includes parts of the
Democratic Republic of the Congo (DRC), Cameroon, Gabon, the
Republic of the Congo (RC), and Equatorial Guinea, and
constitutes the second largest rainforest in the world, after
the Amazon rainforests. Although the largest in Africa, the
DRC's rainforest has historically been the least commercially
exploited in the region due to uncertainty over government
policy, security concerns, weak infrastructure for wood
processing and exporting, and lack of suitable woods for
export in the area.

3.(U) Currently, over 22 million hectares (54 million acres)
in the DRC are officially allocated for commercial logging
purposes. According to the Congo Basin Forest Partnership
(CBFP), deforestation in the DRC is occurring at a rate of
0.26 percent per year, in comparison to 0.19 percent within
the Central African region as a whole. The GDRC has
designated eight percent of its total territory (234 million
ha / 585 million acres) as protected areas and is expected to
increase this to 15 percent within the coming years. It is
estimated that 40 million people, including indigenous Pygmy
communities, depend on the country's 130 million ha (321
million acres) of forests in some way.

-------------------------
The DRC Forestry Industry
-------------------------

4.(U) Commercial logging in the DRC takes place primarily in
the provinces of Equateur, Orientale, Bandundu, Bas-Congo,
and the Kasais. Based on data from 17 companies, the
industry is working below its sawing capacity, contributing
only 0.7 percent to GNP in 2004 -- the last year for which
data are available. Estimated total logging production that
year was over 3 million cubic feet - the lowest of any
country in the Congo River Basin. Revenue is generated
primarily from exports to the EU. In 2004, approximately 64
percent (2 million cubic feet) of timber cut was exported --
nearly half of this total was imported by Belgium and
Portugal. According to USAID/CARPE's 2006 "State of the
Forest" report, a significant portion of the forestry
industry also serves the domestic and trans-border markets
for low-grade wood through the informal sector, accounting
for approximately 17 percent of total exports in 2004.
(Comment: Much of the trans-border timber exports is assumed
to be illegal given that only two commercial logging
concessions exist east of Kisangani. End comment.)

5.(U) Approximately 60 lumber companies are registered with
the Ministry of Environment's Directorate-General for
Forests. The majority of these producers shut down in the
late 1990,s due to insecurity. It is estimated that only 20
companies are operational today. SAFBOIS (A Congolese
subsidiary company of the American-owned Blattner Group),
SIFORCO (a subsidiary of German-owned Danzer Group), and
SODEFOR (member of Portuguese holding company NST) are the
industry leaders and account for two-thirds of the titles
pending conversion. Medium-sized entities include Trans-M and
ITB, both Lebanese-owned subsidiaries. The remainder of
companies are primarily small, family-owned firms.


KINSHASA 00001037 002 OF 004


6.(U) Sector interests are generally represented by the
Fdration des Enterprises du Congo (FEC), the Congolese
Chamber of Commerce, and Fdration des Industrialistes du
Bois (FIB), a branch of the FEC whose membership requires
compliance with specific logging practices and standards.
Currently, the FIB includes 14 of the 20 primary logging
companies in the DRC which, it claims, employ approximately
15,000 people and which have invested over USD 259 million in
the DRC's forestry industry.

7.(U) Private sector representatives reported that, unlike in
the past, security issues are not a major hindrance to sector
performance in Western Congo today; however, poor road and
waterway infrastructure continues to be a major obstacle. As
explained by a senior fellow at the World Resources
Institute, even if all of DRC's potential forestry
concessions were commercially logged, these infrastructural
conditions would continue to inhibit the sector's long-term
growth.

8.(U) Forestry taxes are levied on the basis of concession
surface area, volume harvested, export sales, and area
deforested, amongst other factors. Area-based taxes, such as
surface area and felling permit taxes, provide the bulk of
tax revenue for the State. Few official statistics exist
regarding the forestry sector's contribution to the DRC's
economy; those which do exist are often conflicting or
unreliable. According to a 2004 study by the UN's Food and
Agricultural Organization (FAO), tax revenues from the
forestry sector were estimated to be USD 1.5 million per year
- in stark contrast to the USD 7.5 million FIB claims to have
paid between January and September of 2005.

9.(SBU) Applying basic tax rates to estimated land holdings
and production rates, tax revenues due to the GDRC should be
at least USD 17.7 million when not including other relevant
export, equipment, labor taxes etc. Taking FIB's reported tax
expenses in 2005 of USD 7.5 million, it becomes clear that
the GDRC should be collecting at least two to three times
more in taxes than is reported. Though estimating different
tax revenues, the 2004 FAO report also found tax payments in
the forestry sector to be generally low, but evasion high. It
recommended that greater attention be given to monitoring tax
collection, taxing the informal forestry sector, and
increasing export taxes on unprocessed products (logs).

TAX TAX RATE HOLDINGS TOTAL
(USD) (ha) (USD)

Surface 0.50/ha 22 million 11 million
Area*

Felling 2.00/ha 360,000
720,000
Permit**

Gross 50 % 6 million
Revenue***

--------------------------------------------- ---------------

Total: 17.72 million


* Currently, surface area tax is USD 0.50/ha; however, the
Ministry of Environment has indicated that it will soon
increase this to USD 1.00/ha, as in most other African
countries. Surface rates are applied here to the entire area
of commercial forestry concessions in the DRC (22 million
ha).

** The FIB companies cover approximately 9 million ha, of
which they say only 4 percent, or 360,000 ha, is exploitable.

*** Wood value ranges from USD 50-400/m3. Average value of
wood estimate: USD 130/m3. USD 130 x 90,000 m3 logs produced
by DRC in 2004 = USD 12 million gross revenue. (Note: FIB
claims to earn USD 3.5 million for 12,000 m3 of wood per
month. End note.)

---------------
Legal Framework

KINSHASA 00001037 003 OF 004


---------------

10.(U) The 2002 Forestry Code provides a legal framework for
the DRC's logging industry. It envisions the replacement of
older "letters of intent" and "supply guarantees" with a new
type of "concession" which requires logging companies to
implement sustainable forestry management plans (SFMP) and
make contributions to local communities under a specified
'cahier de charge' (business plan) which takes
local-community development into consideration. The Code
requires concessions to be exploited within 18 months of
being issued and allows the GDRC to reclaim concessions
unexploited for two consecutive years. It also acknowledges,
for the first time, the rights of forest-dependent
communities to natural resources and mandates that 40 percent
of surface area taxes on concessions be returned to
decentralized administrative entities. (Comment: This
"retrocession" is intended to support local development. End
comment.)

11.(U) Within a year of publishing the Forestry Code, the
DRC's Ministry of Environment canceled 25 million of 41
million ha (62 million of 101 million acres) worth of
concessions, the majority of which had never been exploited,
and implemented a moratorium on granting new forestry
concessions. Not officially published until 2004, the
moratorium's legal status was unclear for a number of years
and concessions continued to be granted until 2005. (Note:
According to Greenpeace, 107 new contracts, covering 15
million ha. or 37 million acres, were signed by April 2006.
End note.) Following joint recommendations from the World
Bank, USG, FAO and European Community, President Kabila
issued a decree on October 24, 2005 reinstating the
moratorium and establishing a process for canceling titles
not in accordance with the 2002 Forestry Code. Under the
decree, the moratorium cannot be lifted until the concession
conversion process is completed, its results are made public,
and a geographic plan for concession allocations covering the
next three years has been created.

-----------------------------
Conversion Process and Status
-----------------------------

12.(SBU) The title conversion process consists of
application, verification, and final assessment phases.
Covering 25 million ha (62 million acres), 156 applications
were received by the GDRC before the January 2006 deadline.
Validation of these applications is now being conducted
through on-site visits to each concession by a Technical
Working Group (TWG) consisting of reps from the Forestry
Department, Taxation Department, and Permanent Forest
Inventory and Management Service. Validation of applications
by the TWG is to be based on: the legal validity of the
existing title; conformity with legal, social, economic, and
fiscal responsibilities of the title owner since the signing
of the title; maintenance of a wood processing plant; and
analysis of a proposed business plan. (Note: Legal validity
of titles is determined by compliance with rules and
regulations existing at the time of signature, such as full
payment of area taxes since 2003 and respect for concession
limits. No mention is made of legality in terms of the
moratorium. End note.)

13.(SBU) The TWG has reviewed 114 titles; however, the
process has stalled as funding to assess the remaining 42
titles has been secured only recently through the World Bank.
(Note: The World Bank will provide USD 106,000 to complete
the review of the remaining 42 titles. The Bank also provided
USD 150,000 to review the first 114 titles under Phase I of
the reviews. End note.) The World Resource Institute's Global
Forest Watch (WRI-GFW) is an independent observer of the TWG
and has completed its own assessment of the 156 titles in
question.

14.(SBU) Applications approved by the TWG are to be passed on
to an Inter-Ministerial Commission (IMC) for a final
decision. Based in Kinshasa, the IMC will include
representatives from the private sector, GDRC, and
forest-dependent communities. Community reps must be elected
by their community and be literate. Reps may include up to 1
Bantu (African population majority) and 1 Pygmy

KINSHASA 00001037 004 OF 004


representative from each affected community. WRI-GFW, along
with the Belgium consulting firm AGRECO, is assisting local
NGOs with the selection and training of these
representatives. The IMC has yet to convene since President
Kabila has not reappointed ministerial representatives
following the 2006 national elections and seating of the new
government in 2007. (Note: Seats had previously been reserved
on the IMC for ministries which were dissolved with
elections. End note.) According to USAID/CARPE, the draft
decree re-formulating the IMC should pass the president's
desk soon. Sector observers from both the private and public
sector are confident the Commission can complete its work in
a matter of days once it is formed and expect this to be
before the end of the year. (Comment: Some outside observers,
such as Francoise Van de Van, secretary-general for FIB, have
express growing suspicion as to the "true causes" of these
delays and have begun to question the GDRC's commitment to
this process. End comment.)

15.(U) Companies granted title conversions by the IMC have up
to four years to complete a Sustainable Forest Management
Plan, at which point permanent boundaries and terms of
contract will be determined. According to Greenpeace, the 107
titles granted after the announcement of the moratorium in
2002 should be considered illegal. It is widely expected that
over half of these concessions will be canceled for violating
the moratorium and/or other major aspects of the Forestry
Code such as tax requirements and community development
responsibilities. The Minister of Environment, Didace Pembe
Bokiaga, implied as much when he told a local news source
that, in addition to the 3 million ha already canceled, he
was prepared to "cancel at least an additional 12 to 15
million ha (30 to 37 million acres)." Ambiguity as to how the
IMC will treat post-2002 concessions has led to increased
uncertainty within the forestry industry, particularly
amongst private concession holders (septel).

-------
Comment
-------

16.(SBU) Efforts to reform the DRC's forestry sector through
the concession conversion process represent a first attempt
by the GDRC to move towards sustainable natural resource
management. This approach may provide a model for the reform
of other extractive industries in the DRC in order to promote
economic growth, social development, and improved governance
while protecting the environment. As discussed in septel, the
title conversion process can only be considered an initial
and necessary first step in what is a much longer and larger
reform process needed by the Congolese forestry sector.

BROCK

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