What you might not know about the forestry business in Uganda – Part II

Following Part I of our article,What you might not know about the forestry business in Uganda, we wrap it up with Part II…..

How does one come into the business?

Prior to entering this commercial forestry business, it should be mentioned that access to land as well as financial resources are critical starting options.

The breakdown of the areas in which one can join the forestry business depends mainly on ability to raise and inject capital as well as willingness to join in and play the patience game. Just like any other business, it will always take some time between investing time and money and earning a return as a product itself or as a source of money.

The most profitable areas of the forestry business are the upper quality segment of the furniture market – including office and household furniture, doors, windows, shutters and frames. This currently presents the most promising investment opportunities in the sector. But let it be known that you must be willing to take the time and invest deeply in this area and it would be wise to begin by:

  • Installment of adequate machinery, of particular importance is kiln-drying technology with sufficient capacity
  • Well organized work-flows, there is a clear tendency towards batch processing
  • Above all, adequately skilled personnel which is able to produce according to quality standards

The current growth for those quality timber products will result in an increased demand for quality timber on the market and promote the establishment of standards.

Whereas Sawmilling and Timber Dealer do not require high investment they also do not offer promising long-term potential. The profit margins still can be attractive but with more mature markets and a shift towards higher quality the potential seems to be limited.

At the end of tree rotation (maturity period for harvest), considering value addition i.e. furniture production etc. is ideal for return maximization as opposed to timber sales.

There is need to enable private planters access land for commercial forestry. Above all, forestry is a long term investment and therefore those interested commercial forestry business are advised to match their planting plans with their cash flow to avoid disappointments. A management plan is ideal to address this and should be prepared prior to commencement of the project. Planting trees is one thing and taking care of these trees to achieve your financial expectations is another. In commercial forestry, the mentality of trees take care of themselves does not apply.

Investment Criteria for the Links of the Value Chain

Area to invest in Profit Margin (Forestry: Rate of Return) Initial Investment Longevity of the business (sustainability)
Forestry 12 -16% Medium to High High
Sawmilling Highly variable, positive scenario: 15-25% Low Low
Timber Dealers Not determined Low Low
Furniture 25-30% High Medium to High

Sawmilling was very attractive with ample resources in the natural forests but with limited access to resources there is increasing pressure to restructure. With the growing importance of plantations, it is likely that sawmilling and timber trade in the future will be integrated into forestry operations or secondary processing as tendencies in other countries with big plantations show (e.g. Sweden, New Zealand).

In this context, a favourable taxation policy for forestry is of high importance. Considering the cash-flow pattern of a forestry investment, with high initial investments and late returns, it is crucial that losses in the early years can be adequately held against profits at harvesting time to reduce the tax burden. An additional issue is the value adding tax which is waved for agricultural products but is charged for forestry products.

The consequence for the forest investor should be to put strong emphasis on producing high quality timber since only high quality timber guarantees high rates of return on the investment. Even now poor standards of timber achieve significantly lower prices in the market. With improving sawmilling standards timber qualities like straight growth, high per stem volumes and long knot-free shafts will also become more important.

These quality criteria are directly influenced through;

  • Good forest management practices
  • Proper site preparation
  • Use of quality seedlings
  • Professional thinning and timely pruning significantly increase the value of the resource.

It is important to mention that Uganda already has certified tree nurseries that supply good quality seedlings for commercial forestry. In addition, there are also certified forest contractors that specialise in establishing high quality commercial forest plantations. Tree planters need to take advantage of these to achieve good quality results. Careful planning is necessary for successful commercial forestry operations.

In summary, the forestry industry is highly productive, improving in its efficiency and is a growing part of the economy. I believe those willing to play the patience game and earn millions (if not billions) can do so when their first grand child is born, if you did begin by planting trees in your mid to late 30s. If you are keen on entering the other areas, formality will take you far if you are to grow and stay in the business and compete within the industry sustainably. If not, be sure time will make sure you are taken over in the unscrupulous world.

On the whole, planting trees is a really good idea.

Forestry can be equated to social security where your money appreciates over time. Think of it this way, today you produce a child and at the same time you plant 1000 trees. In twenty years’ time, you will harvest at a time your children will be getting ready to go University and the proceeds will provide you the necessary financial relief. After you harvest, you encourage your child to also plant and this will provide them much needed relief in the future. The cycle continues.

Just be wary of the beginning phase and play the patience game.

By Edmund Kamugisha

Edmund Kamugisha Edmund is the Engagement Director at BLEGSCOPE®, and has 10+ years of   management consultancy experience notably in MSMEs, FMCG companies and in the service industry. You can follow him on twitter: @edmokmg

 

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