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Financial Security (F)
Introduction
Rating and company age
It is, in general, more difficult to acquire a high rating on the financial variables for very young plantations and/or sales companies than for older companies. To a high degree, good quality has to prove itself in time. Many of the variables are even directly related to the period of time still to be covered until the first revenues can be expected.
Prospects of growth
Since the prospects of growth of the trees has an overruling influence on potential revenues, this aspect (F.1) is weighed at least twice as heavily as the other aspects.
Managerial parameters
Although management (F.4) is of course crucial to good performance, it can in principle be replaced or reorganized. Therefore, it is weighed slightly less than the way the maintenance reserves are organized (F.2), and the way the rights of the investors have been legally established (F.3). The latter aspects can hardly be cured, once they have been set up in an insufficient way. Also, the availability and transparency of information (F.5) can hardly be cured contractually in later stages, once it has been organized insufficiently.
Parameters for Financial Security
General rating of Financial Security [maximum total score 54] consists of the following parameters:
F.1 Quality of terrain, maintenance, climate and logistics: [maximum total score 20]
The quality of soil and terrain conditions (F.1.1) and the climate appropriateness (F.1.3) are considered as the most important determining factors and therefore get 60 % more weight than the aspects of the invested work (F.1.2). Compared with this, the other aspects play a minor role.
The actual method of planting and the level of maintenance are considered more important than whether these methods have been registered and worked out properly on paper (F.1.5).
Also the logistics (F.1.4) have to be considered. Good accessibility to and within the plantation as well as to wood-processing units and an international seaport, are all taken into account.
F.1.1 Quality of soil and conditions of terrain: [maximum score 6]
In principle, the soil quality must be determined by soil analysis of each separate site and each soil type. In homogeneous terrain at least one sample per quarter hectare (5,000 square meters) should be taken. If it appears that the composition of the soil varies in a specific area, the density of sampling should be increased. This also concerns deeper layers of up to 2 meters. Depth samples are of great importance, since in later years the soil condition below 0,5 meter is increasingly a determining factor. Barriers of rock or clay at some depth often do not yet cause growth reduction during the first few years, but do so in later stages. Other tests include how deeply the roots can penetrate and the level of the water-table year-round.
For plantations where these data are lacking or only partly available, the actual growth of the trees is used as an indication for future development. Unless other positive information is available about already realized good growth, the lack of depth samples reduces the rating score by 3 points. Considering the foregoing, the following holds:
| Analysis of soil | Points |
|---|---|
| None | For each 2 years of good growth, 1 point is added. The maximum score of 6 can be reached 12 years after having planted the trees. This will only be the case if the trees demonstrably appear to have grown well during this whole period |
| Surface | When the analysis of the surface is positive, the score is 3 points. For each 4 years of good growth, 1 point is added. Also, in this situation the maximum score of 6 can be reached after 12 years of having shown a good tree development |
| Depth | When analysis (of surface and depth) unambiguously predicts good results for the proposed goal, the score is 8 points from the beginning. |
Steep slopes and deep indentations by brooks and rivers may influence the growth negatively and rainfall may cause erosion. Steepness of slopes may therefore cause a deduction of up to 3 points. As a reference, among others, Keogh's book on site suitability is used.
This variable may be rated as a continuous scale.
F.1.2 Method of planting and level of maintenance: [maximum score 5]
If planting method and maintenance are carried out more or less according to general mstandards, the score is 5 points. This is also the case if the density of planting or the planting pattern is somewhat different from the standard approach. There is still too much uncertainty and debate about what is the best density and planting pattern in order to ascribe better or worse growth potential to these different methods.
Points will be subtracted in cases where the method of planting and, in particular, the level of maintenance is endangering the growth of the trees for the final harvest. Not only actually incurred damage will be taken into account but also damage that will be inflicted should the present level of (non-)maintenance be continued. Maintenance that has not been carried out properly is a strong indication off future trouble.
The level of maintenance refers to the trees (e.g. pruning, thinning and plague control) as well as to the terrain (e.g. accessibility, weeding of bushes and drainage). In particular drainage is of crucial importance since flooding can quickly can weaken or even kill many species of tree.
Also the quality of the planting material is taken into account. Wisely selected tree-varieties can increase the growth and the quality of the trees considerably. Using bags or jiffies is preferable over using stumps. Some plantations resort to cloning techniques. In case of cloned materials, a plantation should take care not to end up with too a homogeneous gene pool. Lack of genetic variety tremendously increases the long-term risks for plagues as does the lack of adequate ecological pockets and corridors. The rating will be lowered accordingly.
F.1.3 Climate appropriateness: [maximum score 5]
The influence of climate on the growth of teak, especially the dry periods, is strongly debated. Sicirec follows these discussions and the experimental research data elucidating the various options. Growth site sub-climates are to be taken into account according to Sicirec's most recently updated opinion. A similar procedure holds for other species.
Latitude, altitude, temperature (minima and maxima) and rainfall (distribution and quantity) are considered in Climate appropriateness calculations.
F.1.4 Logistics: [maximum score 2]
The transportation to and from the plantation and the costs involved with it, can be very disadvantageous for the financial output. It is advantageous if a plantation is situated near main roads and at fairly short distances from wood-processing units and from a seaport with international connections.
Moreover, the accessibility to the parcels on the plantation should be guaranteed for the greater part of the year (9 months).
F.1.5 Quality of maintenance planning: [maximum score 2]
Maintenance planning at the level required for FSC certification (for instance) is rated as 1 point.
In case the quality and clarity of the maintenance planning is clearly above the minimum requirement of the FSC another point is added. For this extra point it is an absolute prerequisite that such planning is also communicated to Sicirec.
No sufficient planning rates 0. In case there is maintenance planning which clearly has only administrative value, but lacks adequate implementation in the field, 0 points are attributed.
F.2 Maintenance reserves: [maximum total score 10]
Three factors determine the quality or the vulnerability of the financial reserves for future maintenance:
- Have these reserves been secured in a legally sound way (F.2.1)
- How long a period of maintenance should still be covered (F.2.2)
- Do the amounts of the reserves seem sufficient (F.2.3)
The first-mentioned factor, although crucial, is assigned less weight than the amounts still needed per year (period to be bridged and the reserved finances combined).
F.2.1 How are financial reserves secured?: [maximum total score 4]
The way the financial reserves for maintenance are legally secured (F.2.1.1) has proven to be very important. Equally important however, is how these security constructions are controlled and checked (F.2.1.2).
F.2.1.1 Type of construction: [maximum score 2]
An example of a sufficiently safe construction for securing the maintenance reserves is a trust in which the reserves are kept. Such a trust however, has to be placed under the complete control of a reliable third party. Also, the structure of the trust has to be such that the plantation company cannot draw funds from the trust other than for the planned maintenance activities. It is not even allowed in case of financial emergency situations in the company. "Stichting EcoSafe" is an example of such a safe construction of a maintenance reserve fund.
The reserves may be either liquid securities or assets. In the case of assets, sufficiency is more difficult to establish. If there is a construction for securing the maintenance reserves but it is doubtful whether the construction is safe enough in practice, or if the domicile of the trust is not conducive to easy control procedures, 1 point instead of 2 will be attributed.
F.2.1.2 Quality of control: [maximum score 2]
Sufficient control can be established through e.g. an external auditor controlling the reserve trust, such control having been established in a legal document.
In case of shares in e.g. a Costa Rican company, sufficient control may be realized by the fiscal, who can check and report to the shareholders about the sufficiency of the reserves on a continuous basis.
Use of the EcoSafe construction renders a score of 2 points.
F.2.2 For how many years still needed?: [maximum score 4]
| 4 points | 0 years |
| 3 points | 3 years |
| 2 points | 6 years |
| 1 point | 9 years |
| 0 points | 12 years or more |
These periods represent the time during which the plantation company needs to use the financial reserves. This will normally occur until the commercialization of the wood generates a positive cash flow. The duration is directly related to the age of the trees. If a good trust construction (like "EcoSafe") is used, the score is always 4 points.
This variable may be rated as a continuous scale.
F.2.3 Financial reserves: [maximum total score 2]
As far as the quality of the financial reserves is concerned, it is considered equally important that there is sufficient money per year (F.2.3.1), and that these reserves are available in cash and not in some illiquid form like unsold planted hectares or shares (F.2.3.2).
F.2.3.1 Sufficiency (for whole period in US dollars): [maximum score 1]
| 1 point | more than $ 6,000.- / ha |
| 0,5 point | $ 3,000.- to $ 6,000.- / ha |
| 0 points | Less than $ 3,000.- / ha |
The sums of money as specified above hold for the initial phase of reforestation projects. The required amounts per hectare decrease as the trees grow closer to marketable size.
F.2.3.2 Liquidity (funds and assets): [maximum score 1]
Reserves in safe but marketable securities (A-rating level) and bank accounts are the most secure option. This is rated with 0,8 points. Assets in the form of e.g. land or unsold units in sufficient quantities are semi-liquid and score 0,5 point. If both methods are applied on top of each other, the rating is 1 point. If neither is sufficient, the rating is 0.
Utilization of services of the fully independent "EcoSafe" trust is rated with 1 point.
F.3 Securing rights of investors: [maximum total score 10]
There will in principle almost always be conflicts of interest between investors and the founders / owners of plantations, in particular by the time the revenues are to be distributed. The most elegant way out of these conflicts is when the investors are the legal co-owners of the plantations (F.3.1). Shareholdership is therefore the most elegant and secure way to avoid lengthy disputes over the distribution of revenues. In all other cases it is almost impossible to organize a method of control and influence in such a way that the interests of the investors can be secured convincingly for longer periods of time.
In case there is no shareholdership, ownership of the land combined with a usufruct construction in favour of the investors (F.3.2), added to a sound investors contract, is a passable second best solution.
F.3.1 Ownership of company or shareholdership: [maximum score 10]
Ownership of (shares in) the company that also owns the land deserves 10 points. If there are no shares, 0 points are given.
F.3.2 No ownership of company nor shareholdership: [maximum total score 10]
When the investor isn't co-owner (shareholder) of the plantation company, ownership of the land on which the trees were planted (F.3.2.1) together with a usufruct construction in favour of the investors and a sound investors contract (F.3.2.2), offers the second-best solution. When this is not the case, it is of great importance that there is a sound investors contract. These contracts exist in a large variety and their usefulness in giving guarantees to the investors differs greatly. The lack of usufruct, let alone the lack of shareholdership, can never be fully compensated by a good quality investors contract.
In case of a usufruct construction (F.3.2.3) it is considered important that this construction is legally secured in a proper way and put under sufficient external control by an internationally renowned accountancy firm (F.3.2.4). Co-ownership of the land in combination with a sound investors contract weigh 50 % more than the presence of a solid usufruct construction.
F.3.2.1 Ownership of land: [maximum score 3]
These points can only be attributed in case there is no ownership of (shares in) the company.
If the investor holds direct ownership of the land in which the investment was made, the rating is 3 points.
F.3.2.2 Quality of contracts: [maximum score 3]
These points can only be attributed in case there is no ownership of (shares in) the company.
Since 1993 Sicirec has gathered ample expertise with all kind of contracts and developed an extensive list of quality criteria. Of course these criteria are also used for the design of Sicirec's own contracts with plantations.
In particular it should be guaranteed that the investors can change the management in case of proven negligence. Usefruct regulations are only taken into account in the next parameter (F.3.2.3).
F.3.2.3 Usufruct: [maximum score 2]
These points can only be attributed in case there is no ownership of (shares in) the company.
For a usufruct construction the rating is 2 and no points are added if there is no such construction.
F.3.2.4 How is usufruct secured?: [maximum score 2]
These points can only be attributed in case there is no ownership of (shares in) the company.
The following variables are taken into account:
- who is the usufruct beneficiary?
- is the usufruct well documented?
- has the usufruct been officially registered?
- has the usufruct been registered as a "lien" on the land?
F.4 Management: [maximum total score 8]
In rating the management, the present quality (F.4.1) is considered as important as continuity (F.4.2).
F.4.1 Quality: [maximum total score 4]
The quality of the management of the company itself (F.4.1.1) weighs 3 times more than the co-operation structures with governmental organizations and scientific institutes (F.4.1.2).
F.4.1.1 Quality of management: [maximum score 3]
Management quality is rated relative to the perceived present needs. It is therefore possible that a certain management team is rated highly in the starting phases of a plantation, whereas the same team is considered hopelessly inadequate in a later stage of the operations, or the other way around.
Parameters used to assess the quality of the management are, for instance, the presence of:
- policy towards taking soil samples, towards rotation periods and the ideas about the future use of the land
- clear procedure manuals
- clear job descriptions
- well defined and sufficiently secured communications with the organization and within the organization
- a low turnover rate of the staff
- a certification of the management and organizational quality (e.g. ISO-9000)
F.4.1.2 Co-operation with governmental organizations and scientific institutes: [maximum score 1]
This rating gives credit for steady and structured ways in which the plantation co-operates with local governmental or scientific institutes. Being embedded properly in the structured goals of such organizations provides a better business climate for the company. Moreover, the commitments that are made also can have a positive spin-off with regard to quality and continuity of management.
Dependency on governmental financial support however, will result in deduction of half a point because of the extra risks implied.
F.4.2 Continuity: [maximum total score 4]
Continuity of management can be enhanced by having a sufficient spread (F.4.2.1), so that colleagues can easily fill up gaps in the managerial structure, as well as by special organizational structures for bridging periods of managerial change or loss of vital officers (F.4.2.2). Alliances with established scientific and governmental institutes may also decrease these risks and be of benefit to the managerial quality (F.4.1.2).
F.4.2.1 Present managerial spread: [maximum score 2]
For assessing the continuity of management two parameters are used, one of which is the present managerial spread. 2 points are attributed if the impression exists that the loss of one or a few managing officers can relatively easily be absorbed by the rest of the team.
Should the management structure be considered too narrow to function optimally and immediately, the score is 0. Intermediate situations score 1 point.
F.4.2.2 Structure of measures for continuity: [maximum score 2]
This rating refers to the structural and organizational measures that have been taken and formalized, in order to protect the company against the loss of vital managers.
F.5 Information transparency: [maximum total score 6]
In order to know when and how to exert influence and also to assess the actual value of the investments, it is crucial to have access to all relevant information (F.5.2) of the reforestation companies. Although the actual present information situation is important for rating this aspect, it is considered twice as important that the information "rights" have been contractually secured thoroughly (F.5.1).
F.5.1 Contractual guarantees for information: [maximum score 4]
This parameter scores the measure to which the plantation has been contractually bound to produce sufficient and reliable information pertinent to assessing the actual and future likelihood of revenues. Alternative sources of information are also counted, as far as they are structural.
If there is shareholdership this item scores 4 points.
F.5.2 Present de facto information situation: [maximum score 2]
This parameter scores the actual information sufficiency, independent of whether there are any contractual obligations or guarantees.
There is space to register when Sicirec conducted its latest control visits to the plantation(s), and who carried it out. Control in the field carried out by:
| +++ | Drs. P.P. van der Molen (president of Sicirec, biologist) |
| ++ | Ing. E. H. Kielman (forestry engineer) |
| + | third parties |
| o | remote exchange of information |