Linking smallholder plantations to global markets: Lessons from the ikea model in Viet Nam

rtation. One hectare of Acacia mangium cuttings yields, on average, 72 m3 of sawnwood and approximiately 78-97 m3 of woodchips after 10 years. The Group has agreed to supply certified timber two wood processing companies, first Thanh Hoa Wood Processing Company and currently Scansia Pacific. Thanh Hoa previously committed to purchase sawn timber at US$20 per m3; Scansia Pacific has now committed to purchasing at prices 15-18 percent higher than the market rate for non-FSC timber. The profit from one hectare of FSC-certified forest is approximately VND 20 million higher than non-certified forest of the same age (approximately 8-10 years). In 2010, 35 ha of timber in an 8-year cycle and 4 ha of an 11-year cycle was sold. In 2013, 11 ha of timber in a 10-year cycle was sold. The group plans to sell 14 ha timber from an 8-year cycles in 2017. Sources: (1) Direct interviews, FSC certified plantation group, Kinh Monh village, Trung Son commune, Gio Linh district, Quang Tri Province, October 2016 (2) FM evaluation report (3) To review certificate re-issue – to summarize publicly (4) Association of Quang Tri Household Forest Certification Group (5) GFA certification (6) To review on August 12-14, 2015 15 5. Effectiveness of the IKEA Linkage Model 5.1 Economic Impacts For Wood Processing Companies and IKEA Suppliers Our research demonstrates that wood processing companies ultimately profited from their relationships with IKEA. Association with the company and its high standards for corporate governance enabled companies to meet other buyers’ sustainability requirements and increase their prestige, production capacity, competition, and brand value. This led companies to invest more effectively in sustainable production systems. IKEA’s contracts with wood processing companies were generally of large value. For example, in 2016, IKEA placed orders with NAFOCO that were worth approximately US$32.5 million; the company’s profit subsequently increased by an estimated US$1.3 million – 1.6 million. That same year, Scansia Pacific received orders from IKEA that were worth US$25 million, yielding an estimated profit of US$1 – 1.25 million. IKEA’s long-term commitment with partners also helps ensure that suppliers invest in FSC-certification for raw material inputs. While orders from IKEA are generally stable, in contrast, those from other purchasing partners are less regular. This makes it difficult for processing companies to make long-term business plans, and for suppliers to invest in production costs for the long term (e.g. capital costs, such as factories, machinery, and other equipment; technological innovation; labor recruitment and training of new hires; identifying new partners; and, expanding and improving the area from which raw timber materials are sourced). Finally, IKEA’s product orders are simple and change little in terms of design, which also helps to reduce enterprises’ costs. However, the IKEA linkage model also presents several risks for wood processing companies. These include: • Low net returns: Information obtained from IKEA suppliers showed that the net profits (after tax) per product for companies participating in the linkage model was just four to five percent.23 The processing companies considered this to be much lower than the profit from other partners’ orders (with an average net profit margin of 15 to 20 percent). • Capacity requirements: The IKEA linkage model was found to only be suitable for processing companies with large financial capacity and production scales, given the high capital and production requirements from IKEA. • CoC requirements: IKEA’s sustainability policy requires that processors pay more in order to ensure chain of custody by FSC standards. To do so, IKEA’s suppliers must build or support CoC sawmills and assist forest plantation households (and household groups) with certification costs. For example, both NAFOCO and Scansia Pacific financed assessment expenses for household groups to take part in the linkage model in Yen Bai and Quang Tri, respectively, at a cost of approximately US$8,000 per assessment. NAFOCO also provided office equipment for the Yen Bai household group representative board, and advanced VND 200,000 per hectare for household groups in Thanh Hoa as part of their contract terms. Scansia Pacific also provided low-interest rates for households who maintain certified plantation forests from the sixth year in a growing cycle onward. • Contractual enforcement issues: The cooperative agreements between companies and households legally bind households to sell harvested timber exclusively to the contracted processing company. However, in practice, households have elected to sell timber elsewhere, thus violating these contracts. Companies have little recourse for enforcement because the capacity of local authorities is limited, and because often the authorities themselves will side with households. This poses a very real financial risk to companies. 23 The research team did not have access to the methodology for determining this figure. 16 For Forest Plantation Households As a condition of the IKEA linkage model, wood processing companies commit to purchase all FSC-certified timber materials from households at a minimum price that is 10-18 percent higher than the market price for non-certified timber of the same type.24 Information obtained from some FSC-certified households in Quang Tri shows that the average profit, per household, per hectare of Acacia Mangium is approximately VND 117-140 million. The average profit per m3 or 1 ton of timber material is approximately VND 0.84-0.94 million.25 Households also benefit, in some cases, from access to low- or zero-interst loans from companies. On a more fundamental level, the Vietnamese government’s recognition of household land tenure in forest areas – and incentivization of households through external support, as outlined above – has been essential to households’ participation in export-oriented wood supply chains, whether through the IKEA linkage model or other means. However, this paper does not calculate several expenses that play and important role in the price structure of plantation timber resources for household. These include: (i) the cost of complying with FSC requirements for all stages, from land preparation, planting, tending, protection, to harvesting (at present, outside organizations have generally borne these costs through donor-funded projects or IKEA suppliers); (ii) household labor costs; and (iii) costs of certification. The costs of assessments required prior to granting FSC-certification is paid by IKEA suppliers. Assessments to obtain a five- year FSC certificate total US$28,000, including an initial evaluation (approx. US$8,000) and annual assessment costs for the subsequent four years (approx. US$5,000 per year). These costs vary depending on the time required for the assessment, with the cost per unit of forest area being relatively less if the assessment covers a large geographic area and vice versa. Assessment costs are also lower if more households actively participate in a household group, whose total forest area will be evaluated in one assessment. Several associations of FSC-certified household groups (such as in Quang Tri Province and Binh Dinh Province) have set up membership costs, which raise funds for associations’ annual activities including FSC assessments. The Quang Tri groups stipulate that each member pay an annual fee of VND100,000, which is then utilized along with 7 percent of the additional 10-18 percent price increase paid for FSC-certified timber material. For example, if a buyer pays a 15 percent premium and the average household profit is VND 120 million/ha, household groups only need to harvest 115 ha per year if using 7 percent of the price increase for certified material, or 67 ha per year if using both 7 percent of the price increase and an additional membership fee (VND 100,000 per household per year), to cover certification expenses. Under these conditions, the Quang Tri group needs a minimum of 1,150 ha in order to ensure profits while participating in the linkage model. Currently, the Quang Tri group’s forestland area is above the required minimum area to cover FSC- related costs and still yield a higher profit than if it were uncertified (for details on these calculations, see Appendix 3). However, in most cases it is unclear whether the added value of the 10-18 percent selling price differential enables households to yield a higher profit than they would if their plantation households were uncertified. This is due to several additional factors, as follows (see Appendix 4 for a detailed breakdown of FSC requirements for certified households, compared to common practices among non-certified households practicing traditional forest management): • Requirements for large-diameter timber: Processing companies only buy timber materials that meet certain standards for quality and size. The agreement between IKEA suppliers and households in Yen Bai, Tuyen Quang, and Quang Tri posits that suppliers will only purchase large diameter timber (small-ended diameter must be 14 cm or larger), and will not accept hollow logs. Households thus need to find other markets for the 24 For example, if 100 m3 of logs/hectare (including wood volume from pruning/making paper materials) is harvested from FSC-certified forests and the average selling price on the market is VND 1.5 million per m3 for non-certified timber (yielding a total revenue of VND 150 million/ha), FSC-certified timber would be purchased at VND 1.65-1.77 million/m3 (yielding a total revenue of VND 165-177 million/ha). In this case, households would earn VND 15-27 million/ha. Households with the average-sized certified forestland holdings (3 ha) would earn VND 45-81 million. 25 The Forest Economics Research Center (2016) calculated the selling price of timber materials to be VND 1.8 million per m3 in a10 year harvesting cycle, and FSC-certified household groups in Quang Tri earned a profit of VND 1.35 million/m3 (included the labor cost of households in production costs, excluding the cost of certification). Source: Workshop on “Solutions to develop the appropriate linkage model in the value chain of manufacture and business of plantation forest timber and wood products,” Forest Economics Research Center (under Forest Science Institute of Vietnam). December 21, 2016; Hanoi. 17 any remaining smaller trees, lower-quality wood, and branches. These are generally only marketable at a low price point as wood chips, paper materials, or firewood. • Long harvesting cycle: The large-diameter trees required by FSC-certified, export-oriented wood processors require a growing cycle of eight to 12 years, as compared to the five to seven year cycle required for non- certified plantation wood. Households must have access to capital, or to external credit, in order to invest in these cycles. Requirements for long harvesting cycles, and the stringent technical procedures that often accompany them, also affect the short-term livelihood of households. Traditionally, forest plantation households are able to profit by intercropping trees with agricultural commodities such as maize or cassava within the first three years of a harvesting cycle (when trees are still small and without large canopy cover). FSC-certified have longer periods with no income, during which they cannot rely on sales from intercropping other commodities in forest areas. • Difficulties in complying with FSC requirements: FSC requirements consist of 10 principles and 56 criteria covering: (i) law, policy and administration; (ii) planning and implementation techniques; (iii) economy; (iv) culture and society; and (v) ecology/environment. Compliance with these requirements increases manufacturing and labor costs compared to those of non-certified plantations. 26 Households practicing traditional farming techniques find compliance particularly difficult. In addition, the typical forestland holdings of certified households (which average between 1-3 ha) are scattered among non-certified household land. Management and harvesting within these fragmented landscapes is difficult, and households facing this added challenge find it more difficult to comply with FSC requirements.27 • Diversity of plant cultivars: While households within a forest plantation group may be certified to cultivate different species, the diversity and quality of cultivars directly affects the uniformity and quality of harvested trees. This ultimately impacts households’ marketability, as processing companies tend to specify which varieties of timber they will and will not purchase. Households must therefore be diligent in ensuring that the growing environment does nto impact the overall quality of those species that will eventually make their way into IKEA supply chains. Table 3 provides a comparison of revenues and costs for forest plantation households with and without FSC- certification.28 26 For example, FSC ban the use of herbicides and mass burning, giving preference to “controlled burning,” which requires clearing the vegetation burning only in designated places; mandates that digging holes must be properly sized; and requires that the plastic packaging for pesticides must not be removed in the forest, rather it should be collected and maintained in prescribed places. All of these practices are more labor-intensive than their traditional alternatives. 27 For example, households that are not taking part in FSC certification may not plant in accordance with regulations, may burn indiscriminately, and may use pesticides outside the permitted list. This has had a direct impact on certified forest areas. In addition, transportation between certified plantation area (i.e. across non-certified áreas) may also be time-consuming or difficult. 28 Data for Table 3 were collected through surveys in Quang Tri and Yen Bai provinces. 18 Table 3: Economic Impacts of FSC-certified v. Non-certified Households29 Model FSC-certified Households in Quang Tri* Non-FSC-certified Households in Yen Bai** Acacia cultivars Australia Acacia mangium Acacia Hybrid Plantation density 1,330-2,000 roots per ha 1,600-2,200 roots per ha Harvest cycle 10 years 7 years Indicator Value (million VND/ha) Note Value (million VND/ha) Note Revenue from agricultural crops intercropped with forestry trees in the first 2 years 2 – 3 Cultivating corn, cassava, squash, beans Revenue from the sale of pruning wood in the 3rd or 4th year 10 - 12 Keeping approximately 1,200 trees per ha. Selling price for pruning trees of 0.8-0.9 million VND per m3 Revenue from the sale of pruning wood in the 5th or 6th year 10 – 12 Pruning 400-600 trees per ha 12 - 16 Keeping approximately 900-1,000 trees per ha. Selling price for pruning trees of 0.9 million VND per m3 Revenue from timber sale at the end of cycle 157.5 – 181 10 years, total revenue for 90-100 m3 of small- diameter (10 cm) sawnwood and 30-40 m3 of wood chips. 70% of harvest is sold as sawnwood; 30% as woodchips. Selling price: • Timber with diameter ≥ 14 cm: 1.5 million VND/m3 • Timber with 10-13.9 cm diameter: 1.4 million VND/m3 • Wood chips: 0.9 million VND/m3 72 – 96 7 years, total revenue 60 - 80 m 3 log, average price 1.2 million VND/m3 Total revenue 167.5 – 201 96 - 127 Total cost 50.3 – 60.3 Equivalent cost approx. 30%, including varieties, fertilizers, equipment, labor salary and harvest (outsourced), and transportation; excluding household labor and the FSC grant 32 – 42 Equivalent cost approx. 30%, including varieties, fertilizer, labor salary and harvest (outsourcing), and transportation; excluding household’s labor salary Total profit 117.2 – 140.7 Within 10 years 63 – 85 Within 7 years Annual average profit 11.7 – 14.1 9 – 12.1 Average profit per m3 timber 0.84 – 0.94 140-150 m3 includes the pruning volume, selling lumber and wood chips at the end of the 10-year cycle 0.7 90-120 m3 includes the pruning volume, selling lumber and wood chips at the end of the 7-year cycle Sources: *Calculated from interviews with FSC-cetified forest plantation households who sold their timber in Gio Linh (Quang Tri Province). October 2016; **Calculated interviews with non-certified forest plantation households in Gio Linh (Quang Tri Province) and Yen Binh (Yen Bai Province). September, October 2016. 29 The information provided in this table on timber productivity includes measurements in both tons and m3. According to Ministry of Agriculture and Rural Development (MARD) Circular 01/2012/BNNPTNT, dated January 14, 2012 on the regulation of legal forest product dossiers and inspection of the forest products origin (Item 1, Article 4 on determining the quantity and volume of forest products), we use a conversion factor of 1,000 kg (1 metric tonne) = 1 m3 of logs. This report uses m3 for consistency. 19 For IKEA Finally, the IKEA linkage model ensures that IKEA is able to maintain a steady supply of FSC-certified timber. While third- party certification is not a guarantee of legality under consumer countries’ demand-side regulations such as the US Lacey Act and the EUTR, it minimizes the risks that illegal raw material sources enter the supply chain and ultimately reach sensitive markets. 5.2 Social Impacts The IKEA linkage model has largely produced positive social impacts: • The linkage model facilitates a value chain in which each party is able to capitalize on their strengths, and resolve or mitigate weaknesses, which leads to stable and sustainable business relationships. Mutual support helps parties reduce outside pressures, increase competitiveness, and invest more effectively, thereby enabling more sustainable economic development for society as a whole • The prospect of value addition and access to IKEA’s consumer markets has motivated the Vietnamese government to promote recognition of land tenure by granting land use certificates to forest plantation households. More secure tenure helps reduce conflict within and communities, and incentivizes households to invest proactively. On a related note, the organization of households into groups of forest growers, with clear and transparent regulatory oversight from local authorities, has created a consensus among households and encouraged group participation in the model. • Local authorities have actively implemented regulations to comply with labor, hygiene, and health and safety laws in the harvesting and manufacturing process, which helps employees at these stages of the value chain protect their health. However, some households are suspicious of the model, particularly in areas where linkages have only recently been created and no timber has yet been harvested. In interviews, households expressed doubts that the model was indeed economically beneficial and sustainable in the long term. They worried about whether companies would indeed purchase timber at a higher price and provide technical and financial support to the households; whether the higher financial and labor costs required to produce certified timber (v. costs associated with traditional forest management practices) would be worth the investment; whether they could “take away” their forestland midway through a growing cycle if the model was ineffective or if the land was needed befor hearvesting; and, where to sell smaller-diameter timber that wood processing companies would not accept. In response to these concerns, most households opted to only participate using 40 to 80 percent of their land, and practice traditional (non-certified) forest management on the remainder. 5.3 Environmental Impacts The linkage model requires compliance with a number of environmental standards, including the IKEA Way on Purchasing Products, Materials, and Services (IWAY) and FSC’s Forest Management/Chain of Custody (FM/CoC) regulations. These standards help limit the loss or degradation of forests, water sources, and biodiversity, and include: • Prohibition of illegally-sourced timber (or timber with unverified origin) • Prohibition of timber sourced from High Conservation Value (HCV) forest areas • Prohibition of clear-cut exploitation of large areas • Prohibition on large-scale burning of forest cover (in favor of controlled burning) • Prohibition of conversion timber from natural forests 20 • Prohibition on timber from designated water protection areas • Prohibition of the use of most herbicides, other than those that have been tested and approved for environment and user safety • Prohibition on pollution and littering • Erosion protection • Factory standards, such as those related to space, light, and dust Finally, by promoting sustainable domestic timber sourcing, the linkage model helps Vietnam reduce its dependency on imported timber – particularly timber sourced from countries with poor forest governance and high rates of illegal logging. 21 6. Discussion The IKEA linkage model is expanding, as is the area of FSC-certified forests managed by household groups in Vietnam. As of March 2017, this had reached 6,311 ha, equivalent to 4 percent of the country’s total certified forest plantation area.30 The number of participating households is also increasing. Although the model is still its inception phases in some areas, it has the potential to offer stable, long-term benefits for all parties involved – companies contribute technical and financial assistance and gain a source of certified timber that meets market requirements, and households are able to benefit from this assistance to improve the quality and timber of their forest resources. Consumer demand for certified timber products provides effective leverage, particularly given IKEA’s size and global reach. However, in order for the model to be most effective and address the risks outlined in this report, it must address the following questions: 6.1 Who Administers the Model? The relationships between households and processing companies be strengthened by designating a focal organization that has the financial and technical capacity establish, develop, and oversee the linkage model in a way that effectively responds to the interests of all involved. The linkage model itself is not an administrative organization, and stakeholders participate on a voluntary basis (under a “consent mechanism”). 6.2 Who Pays for Certification? A more viable long-term solution is needed to avoid having households bear the burden of certification costs. While some households and household groups utilize available resources to participate in the linkage model, our research found a wide range of external support from affiliated companies or donor-funded programs. Examples include technical and financial support to form and operate forest plantation household groups, direct guidance for households to comply with FSC requirement, and covering the cost of assessment. These are not included in households’ production price structure, and household interviews reveal that they would be unwilling to participate in the linkage model if they had to cover associated costs themselves. According to some households, factoring in these costs would negate any benefits achieved by cultivating FSC-certified timber. The linkage model, as currently structured, may therefore cease to exist if households are required to bear certification costs. Information obtained from households shows that currently, households are able to derive more economic benefit from FSC-certified forests than non-certified, traditionally-managed forest plantations. However, these calculations do not account for the costs associated with FSC certification. Once those costs are factored in – and if households are required to pay them – it is unlikely that profits would be greater from certified plantations. This partially explains why households participating in the linkage model refrain from contributing their total forestland holdings. In addition, the long growing cycle for large-diameter wood requires households to have financial resources for long-term investments, which most households do not. Access to formal credit to cover these investments is almost impossible. Given these limitations, most of Vietnam’s 1.4 million households with forest plantation holdings would be unable to participate in the linkage model. It is also unclear how, without continued support from external sources and given households’ limitations, would processing companies would be able to cover expenses without impacting their bottom line. 6.3 What Happens when Companies no Longer Need Households’ Supply of Certified Timber? In the linkage model, forest plantation households only obtain certification because of IKEA’s requirement for certified timber. But when an IKEA supplier secures enough raw material (e.g. a large-enough area of certified, planted forests), the scope of trade between households and the company may level off. Some IKEA suppliers reaised this concern, with 30 848 ha in Tuyen Quang province, 1,738 ha in Yen Bai province, 951 ha in Thuaa Thien Hue province, 1,722 ha in Quang Tri province, 1,052 ha in Thua Thien Hue and Quang Nam provinces, had been certified at the time of research. 22 one representative noting: "I also started to worry ... I had promised to purchase all the output wood for households If the supply is beyond our production capacity, I don’t know how to solve this." There are no quantitative data available on wood processing companies’ demand for certified timber, or the price that companies can accept for certified timber. This lack of information makes it difficult to assess the sustainability of the current linkage model. 6.4 How are Companies Impacted if Households Break Contract? A major risk to companies relates directly to the cooperative relationship with plantation households. Contracts between the two parties are legally binding, but if households fail to comply with contract conditions (for example, if households sell timber to buyers other than the wood processing company as committed, or if timber is cut and sold before the designated growth cycle has ended), it is difficult for the company to bring collective legal charges against the households. While a few households breaking small contracts may not impact a large company, if the number of households reaches a tipping point, the company will need to seek new suppliers. As one company representative noted, “households always hold the handle.” Some suppliers accept this risk, with one stating, "I will accept that households may not sell timber at that time, but I will never cooperate with them in the future." 6.5 Could Imports Replace Domestic Certified Timber? In recent years, Vietnam has become more reliant on imported timber. The sustainability of the linkage model also depends on the availability and the cost of imported, certified timber, which could replace domestically-produced supply. Fortunately, imported acacia is more expensive than domestic acacia, and therefore channeled to higher-value manufacturing sectors. However, if the price of imports were to drop below that of locally-produced timber, assuming equivalent quality, the linkage model would be unviable. 6.6 How is the Linkage Model Impacted by Demand-side Timber Import Regulations? In the past decade, a number of countries have developed regulations to exclude illegally-logged timber from their markets for wood prodct imports. Together, the US, EU, and Australia – which have had operational regulations for several years – and a number of Asian countries now developing new measures, including Vietnam, account for over 90 percent of global timber imports in 2016 (Norman and Saunders 2017). Vietnam has put in place import control measures as part of its FLEGT-VPA with the EU in an effort to move away from illegal timber sources and to maintain access to markets with import legislation in place. At present, 60-70 percent of Vietnam’s domestically-produced timber comes from household forestland, with the remainder held by SFCs or cooperatives. Of the timber produced by households, the 20-30 percent with the highest value is exported as processed or semi-processed wood products, and 70-80 percent is used as woodchips. Households in Vietnam thus play a key role in supplying Vietnam’s export market, and Vietnam has prioritized development of large- diameter domestic timber to reduce its dependency on imports from countries with high rates of illegal logging in order to enhance its position on the international market. The IKEA linkage model has the potential to create a source of sustainable, legal material for the furniture industry and export markets with high added value, if households’ needs are met and stakeholder relationships are based on a commitment to fair benefit-sharing. Given Vietnam’s moves towards enhancing its legal timber supply, and the above- mentioned difficulties in meeting FSC requirements, consumer demand for legal timber should be leveraged to further develop the linkage model as a source of legal timber and create a level playing field for households to access high-value markets. Third-party certification schemes such as FSC can function as substitutes for state regulation, but if all timber produced in Vietnam must be certified as legal, they may no longer be as relevant or as in-demand by IKEA and other importers in sensitive markets. However, at the time of this publication, IKEA still requires 100 percent FSC-certified timber. Households will likely still continue seeking certification if economic returns from FSC-certified timber are higher than those for legal timber. 23 6.7 How does Access to Land Impact the Effectiveness of the Linkage Model? Allocation of forestland from the State to households, and the proper issuance of land use certificates, is an important precondition for the linkage model. Currently, many households in mountainous areas lack access to forest plantation land (To Xuan Phuc et al., 2013), and many others have limited landholdings. The benefits of plantation forests are numerous, especially for households, including increasing forest cover and supplying timber for processing (thereby improving household income). Expanding land access to more households brings about integrated economic, social, and environmental benefits – and linking companies and households to produce legal timber has the potential to maximize these benefits. How can Vietnam expand its forestland area controlled by households? One available source is the 2.7 Mha currently managed by the Commune People's Committees. This is not ideal: some households have already accessed and used CPC land, not all of the land is unsuitable for cultivation, and some areas are too far from villages and roads, making them economically inefficient. However, allocating the remaining area to households – particularly landless households – and expanding the linkage model to this area could create a new source of sustainable, legal timber. More importantly, a much greater source of forestland in Vietnam is that which is managed by SFCs. In recent years, the Government has restructured the forestry sector, allocating large swaths of land from SFCs to local governments (to then be allocated to households) as SFCs were deemed inefficient in managing forestland. There should be a mechanism in place to ensure that this land is allocated to landless or land-poor households, not to other actors (e.g., private companies), in order for them to develop plantation forests. In addition, the Government should continue to review and evaluate the effectiveness of land use by the SFCs still operating in mountainous forest areas. If the results of these reviews and assessments show that the aggregate benefits of allocating land to households are higher than those of SFC-managed land, the remaining SFC-managed land should be transferred to households. 24 Conclusion Our research generated several important questions regarding the future of the IKEA linkage model. In the context of limited resources, strict FSC requirements, and current levels of production, is the linkage model actually feasible for households? If forestland owners are not able to participate in certification in the associated value chain with wood processing companies, should the relationship be established between companies and households? And if so, what should the scale of this relationship be to ensure optimal benefit for all participants? Findings showed that if belief in a fair and equitable business model is built and maintained based on responsibilities and resources of stakeholders, value chain relationships will bring greater and more sustainable benefits. This “belief” and “fair share of benefits based on the responsibility of the involved parties” were emphasized throughout the research process, with both companies and households were in favor of establishing the linkage if based on these foundational principles. The viability of the linkage model depends on several factors, including specific market requirements and participant conditions. The model is suitable for households with access to land and sound financial resources, and high levels of intensive farming. It can only succeed if the benefits of certified plantation forest production accrued to households exceed those of traditional production, once all related costs are accounted for. Households with limited production capacity will not have sufficient resources for long-term investments, and are likely better off seeking linkages with companies that do not require certified timber materials. Non-certified but legal timber produced by households could still be marketable to companies wishing to access markets outside of Vietnam with demand-side timber legality requirements. In summary, the linkage between wood processing companies and households in Vietnam has great potential, but it must be pursued intentionally given the large number of households, the limited area for forest plantation, and associated transaction costs, and its current dependence on external technical and financial support. The Vietnamese government has an important role to play. Authorities should not directly engage in linkage activities such as community mobilization campaigns, nor should they issue administrative orders requiring households to participate. Rather, they should promote the linkage model as an investment vehicle and maintain an open institutional environment (with clear regulations related to land use, management, and the issuance of land use certificates) that can attract businesses and households. Authorities should also create and inforce mechanisms to improve business confidence, including stronger sanctions to minimize the risks when households break contract. Finally, the government should establish measures to ensure equitable economic, social, and environmental benefits are accrued to stakeholders who join the linkage model, and prioritize mutual trust and fair benefit-sharing in order to realize these goals. 25 Appendices Appendix 1: Forest Ownership in Vietnam as of December 31, 2015 No. Owners Area (ha) Percentage (%) 1 State-Owned Enterprise 1,454,361 10.3 2 Forest Management Board 4,896,160 34.8 3 Other economic organizations 241,534 1.7 4 Armed Forces 170,161 1.2 5 Households 3,145,967 22.4 6 Communities 1,110,408 7.9 7 Other organizations 342,446 2.4 8 People's Committee 2,700,819 19.2 Total 14,061,856 100.0 Source: Decision 3158/QD-BNN-TCLN signed by Minister of MARD dated 27 July 2016 on forest status in 2015. 26 Appendix 2: Background on the Forest Stewardship Council (FSC)31 The Forest Stewardship Council (FSC) is an international non-governmental organization established in 1993 to encourage responsible forest management. The FSC has established a number of international standards (10 principles and 56 criteria) a system of authorized certification bodies32 to certify forest management organizations, enterprises, producers and traders of forest products in accordance with these standards. The FSC Forest Management Standards are categorized as follows: • FSC-FM (Forest Management certification): For forest plantation and harvesting. The certification of defined forest areas/Forest Management Units (FMUs) is achieved through compliance with the ten FSC principles. • FSC-CoC (Chain of Custody certification): For processing of forest products. Materials or products achieving FSC certification must be designated and labeled as such, and separate from other materials. • FSC-CW (Controlled Wood): For forest management, manufacturing, processing, or trade of timber. FSC-CW is approved by the FSC to eliminate unacceptable wood sources. As of December 2016, there were over 190 Mha of FSC-certified forest in 83 countries (with 1,453 individual certificates). Vietnam has been granted 24 FSC-FM certificates with a total forest area of 203,863 ha and 526 FSC-CoC certificates. FSC-FM certificates in Vietnam, which are granted to forestry companies and forest plantation household groups for manufacturing, are mainly assessed by the GFA GmbH, in accordance with the Interim Standards for Forest Governance Council in Vietnam.33 FSC-CoC certificates in Vietnam, which are granted to processing companies and sawmills, are largely assessed by SGS and RA in accordance with FSC-STD-40-004 V2-1. FSC certificates issued based on an intitial assessment, and re-issued based on periodic re-assessment and evaluation. The duration of certification varies depending on certificate type, usually from one to five years. GFA evaluates each unit according to established principles and criteria, with four potential outcomes: Pass, Critical Error, Mitigation, and Observation. Appropriate corrections / corrective actions requests will be made for those assigned Error or Observation status. A request for critical correctional corrective actions (critical CARs) may be given due to severe errors in achieving the objectives of the relevant standard requirements. The FMU (or representative uint) must carry out immediate and full corrective actions before the certificate is issued or reissued. If the critical error is not remedied within the allowed time, the certificate will be temporarily suspended. A request for minor corrective action (minor CARs) may be given if the standard requirements of the relevant FSC have not been achieved. It is considered to be temporary. This error does not affect whether or not a certificate is issued, but notes that the issue must be corrected before the next evaluation. If not, the status changes to critical CAR, and certification may be suspended if issues remain uncorrected. Observation does not affect certification but draws attention to problems at an early stage. It does not constitute an error, but could be elevated if the issue remains uncorrected.In the event of critical faults, the Forest Management Authority must submit evidence of corrective action and prevention measures to the GFA within a designated time, and maintain this evidence for the next evaluation. 31 Sources: https://ic.fsc.org/en/about-fsc; 32 Examples of authorized certification bodies include SGS, Woodmark, BM TRADA (UK), GFA Terra Systems (Germany), and Smartwood (US) 33 The latest version of this Interim Standard is Version 1.1, updated on September 4, 2015 27 Appendix 3. Scenarios on Covering FSC Costs for Quang Tri Forest Plantation Groups Indicator Unit Commitment of increasing the purchasing price of FSC timber compared to non-FSC timber (common) 20% 18% 15% 10% 5% Total profit of 10 years cycle per ha Million VND 120 120 120 120 120 Profits from differences in timber purchasing prices per ha Million VND 20.0 18.3 15.7 10.9 5.7 7% of the different profit per ha Million VND 1.4 1.3 1.1 0.8 0.4 Annual membership fee (0.1 million VND * 529 members) Million VND 52.9 52.9 52.9 52.9 52.9 The cost of granting the FSC certification one year for the entire area (US$28,000 * 2 review cycles/10 years) * VND22,500) / VND1,000,000) Million VND 126 126 126 126 126 Minimum area to be harvested annually to cover the FSC fee (Use only 7% incremental difference) ha 90 98 115 165 315 Minimum area to be harvested annually to cover the FSC fee (Use 7% incremental difference + membership fee) ha 52 57 67 96 183 Minimum area that the households group need to have in the 10-year cycle in order to have sufficient funds to pay the FSC fee (Use only 7% incremental difference) ha 900 983 1,150 1,650 3,150 Minimum area that the households group need to have in the 10-year cycle in order to have sufficient funds to pay the FSC fee (Use 7% incremental difference + membership fee) ha 522 570 667 957 1,828 Note: Above calculation is based on average profit data (VND120 million per ha) provided by members of Quang Tri FSC plantation groups. The association currently has 529 members who are local forest growers; the total area of the FSC granted plantation forest (September 2015) was 1,392.39 ha. 28 Appendix 4: Comparison of Forest Production Practices for FSC-certified v. Non-certified Households Indicator Forest Plantation Households Following FSC Standards Forest Plantation Households Following Traditional Way (Non-FSC Standards) Density of cultivars Low density (1.333 – 1.660 roots/ ha) Thick density (1.600 – 3.400 roots/ha) Species of cultivars hybrid Acacia auriculiformis, Acacia mangium, Acacia auriculiformis hybrid Acacia Harvest cycle Common 8-10 years Common 5-7 years Land using percentage Removing one part of the area for corridors near rivers and streams, etc. 100% of the area can be planted forest Origin of cultivars Clear purchasing regulation on cultivar origin according to the list provided by the province; having invoice Household self-decided, unclear origin, free trade Planting and caring technique • To plant pure species • To prepare land, dig holes by machine, properly sized holes • To plant trees following contour lines • To manure and cover the hole before planting • To cut grass by hand, no burning of vegetation or controlled collection (controlled burning) • To apply additional fertilisers in the third year • To thin in the third and five year, low density plantation from the beginning without thinning • Density of trees is approximately 900- 1,000 roots per ha • Using plant protection drugs according to the prescribed list • Not use herbicide • Protection patrol combined pruning • Make a fire barrier • To combine agricultural crops in the early stages • To develop soil, to dig holes by hand, not follow specific specifications • To use or not use fertilizer • Patting, burning across the area • Apply or do not apply fertiliser (depending on economic conditions of the household) • To prune the 3rd or 4th year, and 5th year (if following the 7-year exploitation cycle) • The remaining density is approximately 900-1,200 roots per ha • To use plant protection drugs • To use herbicides • Protection patrol combined pruning • Most people do not pay attention to the fire barrier Credit access and technical support • Processing companies sponsor the cost of certification • Processing company provides preferential loans for the FSC plantation forest area from over 5 years, pledges to sell the wood to the processing companies • Households take part in technical training, fire prevention • Technical support from local forestry, but not often • There is a loan program of the State but it is difficult to access • To be informed by the local authorities / forest rangers on the prevention and fight against forest fires Mode and conditions of selling forests • It must have a harvest plan approved 1 year in advance • Only clear harvest with small forest plot of less than 5 ha • Mainly hiring harvest • It is not necessary to have plan for harvesting • There are regulations on applying for harvesting, but they are usually not carried out 29 • To sell directly to the large wood processing companies that have enough qualification for making lumber • Processing companies commit to buy the FSC timber at a higher price of 10-18% than the timber of the same size without the FSC • To sell branches, small wood chips for processing or other purchasing facilities • Households are not required to sell to a particular processing/ purchasing company. • To be white exploited • To sell standing tree or renting harvest • To sell all for processing or purchasing facilities (chip or sawdust) • Self-managed forest growers (find the buyer by themselves and agree on the selling price) Related costs / Required equipment • Costs follow the requirements of certified wood and evaluation • Equipment/tools (sawmill, lawnmowers, cutters, hoes, shovels, labor protection, etc.) must comply with the regulations • Basic equipment, low cost • Used equipment is not required Source: The FSC certified forest plantation group in Gio Linh (Quang Tri) and non-FSC certified forest plantation group in Yen Binh (Yen Bai). September, October 2016. 30 References Decision 3158/QD-BNN-TCLN of Minister of Agriculture and Rural Development dated 27 July 2016 on forest status announcement in 2015. IKEA (2012) IWAY Standard. Minimum Requirements for Environment and Social & Working Conditions when Purchasing Products, Materials and Services. Edision 6. 01/09/2012. Mayfriodt, P; E. Lambin. 2008. “The Cause of the Reforestation in Vietnam.” Land Use Policy 25:182-197. Meyfroid, P. and E. Lambin. 2008. “Forest Transition in Vietnam and its EnvironmentaI Impacts.” Global Change Biology, 14(6) 1319-1336. Nguyen Ton Quyen, Cao Thi Cam, To Xuan Phuc and Tran Le Huy. 2016. Current Status of Using Wood Materials. Hanoi: VIFORES, FPD Binh Dinh, Forest Trends. Norman, M. and J. Saunders. 2017. Regulating the Trade in Illegal Timer: Asian Approaches Compared – State of Play June 2017. Washington DC: Forest Trends. To Xuan Phuc et al., 2013. Land Conflict between Forestry Company and the Local People. Consultancy on Development Institute (CODE) and Forest Trends. To Xuan Phuc, 2017. “Linkage in Wood Processing Industry: Enhancing Opportunities, Reducing Risks for Sustainable Development.” In “Business Dialogue: Linkage for Sustainable Development of Vietnam’s Wood Processing Industry.” Forest Trends, VIFORES and Ministry of Industry and Trade. Ho Chi Minh City, 15/04/2017. To Xuan Phuc, Tran Huu Nghi, 2014. Land and Forest Allocation in the Restructure of Forest Sector: Opportunities for forest development and livelihood improvement in the highland. Hanoi: Forest Trends and Tropenbos International. A global platform for transparent information on ecosystem service payments and markets Business and Biodiversity Offsets Program, developing, testing and supporting best practice in biodiversity offsets Building a market-based program to address water-quality (nitrogen) problems in the Chesapeake Bay and beyond Forest Trade & Finance Bringing sustainability to trade and financial investments in the global market for forest products Using innovative financing to promote the conservation of coastal and marine ecosystem services The Family of Forest Trends Initiatives www.forest-trends.org Learn more about our programs at Building capacity for local communities and governments to engage in emerging environmental markets Linking local producers and communities to ecosystem service markets Incubator Pioneering Finance for Conservation Learn more about our programs at www.forest-trends.org Promoting the use of incentives and market-based instruments to protect and sustainably manage watershed services Water Initiative Public-Private Finance Initiative Creating mechanisms that increase the amount of public and private capital for practices that reduce emissions from forests, agriculture, and other land uses Promoting development of sound, science-based, and economically sustainable mitig tion and no net l ss of biodiversity impacts Biodiversity Initiative Supporting the transformation toward legal and sustainable markets for timber and agricultural commodities Forest Policy, Trade, and Finance Initiative Strengthening local communities’ capacity to secure their rights, manage and conserve their forests, and improve their livelihoods Communities Initiative Demonstrating the value of coastal and marine ecosystem services Coastal and Marine Initiative A global platform for transparent information on environmental finance and markets, and payments for ecosystem services Ecos stem Marketplace Tracking corporate commitments, implementation policies, and progress on reducing deforestation in commodity supply chains Supply Change