Southern Hemisphere Forest Industry Journal Vol 18 No 1

Southern Hemisphere forest industry journal Vol 18 No1 -June 2012

ISSN 1173-5899

Brazilian Proposed Platform for Business with Environmental Goods and Services What the Sino-Forest fraud allegations in Canada-China deal mean for NZ forests Southern Hemisphere Forest Industry Journal June 2012 A SouthemTM Publication

Vol. 18 No. 1

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Contents Southern Hemisphere Forest Industry Journal Volume 18 Number 1

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Queen Elizabeth II presents CFA Award to South African Professor for Tree Health Work

Research leader named

Minister welcomes drop in illegal logginge 4

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Southem News Chile national forest service plans ‘delaying’ new projects Klabin hires PwC UPM plans pulp production boost in Uruguay UPM in Uruguay biomass energy deal CMPC says higher energy costs force newsprint cuts ‘More hard than good’ in US wood import law change Government move on NSW Forests raises sale fearsl Gunns views sale of woodchip port to GFP

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Southem Feature Articles Platform for Business with Ecosystem and Environmental Goods and Services: A Bra zilian Proposal for Green Economy Practice (Eder Zanetti and Swapan Mehra) Sino-Forest’s NZ deal in spotlight after fraud alleged in Canada over China forest sales (Mike Smith)

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Cover Photo credit: Large-scale forest nursery, detail of worker. UN FAO Forestry Photo Database, FO-5148

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Southem People

Queen Elizabeth II presents CFA Award to South African Professor for Tree Health Work Queen Elizabeth 11 graciously presented the CFA Queen's Award for Forestry to Professor Jolanda Roux of South Africa.

Professor Roux currently holds the position of Professor at the University of Pretoria in the DST/NRF Centre for Tree Health Biotechnology (CTHB) with the Forestry and Agricultural Biotechnology Institute.

She is also an honorary Professor of the Chinese Academy of Forestry. The focus of her work is tree pathology and mycology and the long-term survival of trees. She has published widely on tree health and successfully supervised PhD, MSc and honours students in Forest pathology and microbiology. She is also a field extension officer responsible for presenting field

days to foresters, training them in disease and pest recognition and management aspects.

The Queen's Award carries

a cash prize of £2000 which Jolanda plans to use for travel to Brazil and Uruguay later this year.

Research leader named

Minister welcomes drop in illegal logging

Forest Engineering Southern Africa (FESA) and the Institute for Commercial Forestry Research (ICFR) are pleased to announce the appointment of Glynn Hogg (above) to the position of Researcher and Programme Co-Ordinator. The position, based at the ICFR, in Pietermaritzburg, is a part-time one year contract post, with scope for further development.

June 2012

Argentina top planning and environment politics official, Silvia Révora (pictured) says the government has been able to cut in half the incidence of illegal logging across the country.

Using satellite images, officials were able to analyse instances of illegal logging in Argentina’s native forests.

However, concern remained regarding the logging’s impact on the Chaco region, the large, dry area in the north-west of the country.

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Southem News

Chile national forest service plans ‘delaying’ new projects

UPM plans pulp production boost in Uruguay

Plans to transform a Chilean government agency into a National Forest Service have raised concerns in the sector.

The bill creating the National Forest Service has been proceeding through the Senate for the past year, with industry now saying it has gone beyond its original remit by transforming Conaf into the new public body.

Fernando Raga Catellanos,

UPM-Kymmene of Finland is talking to the Uruguay Government about the likelihood of lifting product output at its pulp mill in Uruguay. The company says the move reflects its expansion in emerging markets while it cuts production in Europe. UPM said in a Reuters report that it requested the Uruguayan Government's permission to immediately increase production at its Fray Bentos mill to 1.3 million tonnes from 1.1 million.The company also said the increased production would not require additional investment.

Klabin hires PwC Brazil’s Klabin SA has hired of PricewaterhouseCoopers (PwC) to conduct independent external audit of the company and its subsidiaries as a result of the process of rotation of auditors every period of five years. PwC will start its activities from the review of the quarterly financial statements of the first quarter of 2012 fiscal year.

Klabin obtained approval from previous auditors Deloitte Touche Tohmatsu.

President of the Chilean Wood Corporation, said in a think piece in El Mercurio that the bill had been simple in its inception but had had trapped by lobbyists to go beyond its environmental focus to create a ‘sub-secretariat” with increases in salaries for personnel.

“We consider that this could be channelled in other directions, rather than taking steps which add greater complexity, since Conaf already carries out public functions, although it is a [governmentowned] private corporation,” Raga said.

Corma saw with concern how the slow procedure of the bill could be harmful for the forest industry sector, since the Constitutional Tribunal decided it would not new forests laws before the Conaf was transformed into a public entity, possibly slowing down new projects of relevance to for the country.

CMPC says higher energy costs force newsprint cuts Increasing energy costs have forced Chile’s CMPC to cut the production of newsprint.

The newsprint business represents 13 per cent of the sales of CMPC Papeles, the company said in a statement, but output was complicated as a consequence of the rising cost of energy, obliging the forest products company to reduce by 8,000 tons newsprint production during the first quarter of the year.

“During the year 2012, up to

30 May, the reduction in newsprint production has amounted to 16,000 tons due to the higher cost of energy in the spot market during this period,” the company’s analysis statement said.

And the scenario for the rest of the period during 2012 and 2013 was similar, with a likely drop in production of between 140,000 and 135,000 tons, or 30 per cent less than in 2011.

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UPM in Uruguay biomass energy deal The Uruguayan power company, UTE, is discussing with Finnish pulp producer UPM regarding using biomass to generate 40 megawatts of energy.

The aim is to have generation start two years after reaching a definitive agreement, El Pais reported.

"We are very advanced in the feasibility study and we are about to subscribe a ‘pre-accord’ to start work," UTE president Gonzalo Casaravilla said. A ‘pre-accord’ implied a continued study on the feasibility of using existing plant to generate energy from residuals.

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‘More harm than good’ in US wood import law change Legislators in the United States may have done more harm than good by changing a law aimed at curtailing imports of illegal wood products. Instead, southern hemisphere and other exporting countries with legitimate wood supplies may run foul of the law by way of association.

Writing in Rutgers Law Journal (Vol. 42, No. 549, 2011), Francis G. Tanczos, a Juris Doctor candidate, says amendments made by the US Congress to the Lacey Act were too broad for the specific targets it was aimed at.

“Congress has not only taken on the formidable task of putting an end to illegal logging across the globe, but decided to do so using a blunt and overly broad instrument where a more targeted one is appropriate. The burden of this immense chore has fallen on virtually all U.S. importers, who must now become supply-chain policemen or face the threat of criminal prosecution,” he wrote.

Requiring U.S. importers to exercise “due care” should not be a substitute for effective governance in foreign countries, he said.

“Allowing this would create a ‘due care double standard’ and this, in turn, does little if anything to curb illegal logging.”

He said perhaps the most important action Congress could take was to revisit the law, providing necessary technical clarifications and making sure that it once again contains provision from those innocently caught out by the law changes.

Tanczos saw a danger of the law not being able to be upheld in relation to the U.S.’s international trade obligations.

“The United States runs the risk of creating an expansive bureaucratic system that needlessly punishes legitimate operators while the illegitimate ones roam freely and are allowed to continue their operations in other markets,” he wrote.

Gunns views sale of woodchip port to GFP Australian timber group Gunns is reportedly in discussions with the preferred bidder for the sale of its Port of Portland woodchip facilities as the troubled timber company races to finalise a deal ahead of a June 30 deadline, the Australian Financial Review reported.

It’s suggested Port of Portland will be sold to a Global Forest Partners (GFP) subsidiary, Australian Blue Gums, and may fetch

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two to three times the A$25 million Gunns spent to construct the facility in 2009-10.

This sum implied a sale price of up to A$75 million. This amount would deliver “much-needed cash” for the company.

About A$25 million in capital expenditure is also required to expand capacity. Its location was attractive to buyers because Port of Portland is ideally positioned for export to Asia.

Southem News Govt moves on NSW Forests raises sale fears The state government in New South Wales, Australia, has denied a move to corporatise its forests is a forerunner to eventual privatisation.

The corporatisation plan has sparking fears that the move may be the first step towards privatisation of the organisation.

The Primary Industries Minister, Katrina Hodgkinson, has said transforming Forests NSW from a state trading enterprise to a stateowned corporation would improve its commercial performance.

Forests NSW, which has assets worth about A$1.6 billion, manages more than 500 state forests in NSW, and it harvests more than 2.5 million cubic metres of logs and more than 1.5 million cubic metres of pulpwood each year.

A union source said the announcement was the ''first step to privatisation'' and there were fears the government would seek to shift workers from the NSW industrial relations system to a federal award, the Sydney Morning Herald reported. ''As a state-owned corporation under a skilled commercial board, Forests NSW will be able to focus sharply on its core business of growing and harvesting timber to meet the community's needs for hardwood and softwood products, while still providing recreational opportunities for the people of NSW,'' Ms Hodgkinson said.

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Platform for Business with Ecosystem and Environmental Goods and Services: A Brazilian Proposal for Green Economy Practice Forest profile, riverine forest (Source UN FAO)

Eder Zanetti. Forest Engineer, PhD*. eder.zanetti@fulbrightmail.org Swapan Mehra. Forest Engineer, PhD. swapanmehra@gmail.com

Introduction Ecosystem services are provided, but not remunerated. The recognition of their societal role and importance is a form of promoting sustainable development. Environmental and ecosystem goods and services are linked to the Millennium Development Objectives – MDO number 7, in the sense they can be used to integrate sustainable development objectives within national policies and programs and reverse the lost of natural resources. It is a form of making environmental policy and valuing best practices at all levels. The preserved environmental assets conserved and managed by public and private entities become eligible for remuneration. This is a theme advancing contemporary society, with initiatives such as REDD, REDD+, water producers, protected geographical identity, biodiversity banks and a large number of others, turning into the so called “Payment for Ecosystem Services” or PES. The identification, recognition and remuneration of environmental and ecosystem goods and services are crucial for business.

Among companies, the brands with stronger appeal and value are those which represent a favorable consensus of subjectivity – pleasure, quality, proposal and security. To reach that, and

become valued by the public, the brand must stay positive, portraying subtle differentiation contributing to improve the world we live in.

The public does not get convinced momentarily but through a process of identification with the brand aspects. The most valued brands are those reacting to society critics and creating marketing programs and strategies directed at neutralizing their impacts on the planet. The actions must be sustainable, the consumer needs to be always informed of news on activities that bring value to brands, and certification is an important part of this process (BRANDZ, 2010).

Ecosystem services are used by enterprises and this relationship presents a series of risks, including physical (operations interruption related to ecosystem services supplying gap causes – water scarcity, pollinators reduction etc), reputational (have its name connected to environmental destruction) and financial (costs of rehabilitation, maintenance and improving conformity with previous items). The ways companies decide to use for addressing these themes vary, but similarities can be pointed out.

Short term activities are reactive and companies take them as a solution after accidents. They are operational responses to environmental issues. Actions taken to discuss project activities

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Southem Feature with the public and other stakeholders aiming at a long term economic valuation are more pro-active on the sense they bring a tactically model of relating to environmental questions.

The highest level of entrepreneur compromise with the environmental theme is represented by corporate socio-environmental responsibility (CSR), which includes establishing internal regulations and the search for operational and managerial certification. The certification is a way of differentiating products for consumers.

Nowadays the international transit of environmental goods and services (EGS) and PES is the most important focus of an emerging concept: carbon restricted growth. How the international trade can contribute to reduce human activities impacts on the environment turns each day into a function of regulatory instruments. Among such instruments, the measurement of ecosystem services impacts on different production and service chains, and is growing faster within the economy, green or not.

Goods and services with an environmental background have gained interest throughout the civilized world. They include measures such as the water, air, soil impacts prevention, minimization and correction as well as addressing issues related to residues and noise production.

In the international trade arena, the World Trade Organization (WTO) classifies the environmental services sector as sewage services, residues landing services, sanitary services in general and others (including recycling, sound barriers, rural scenery protection and other not classified in any other place).

The EGS global market has grown 14% between 1996 and 2000 (US$453 billion to US$518 billion) and reached US$722 billion in 2009, including equipment (chemical products and water treatment), services (residues management) and resources (water supply nets and clean energies) as the main items. Developed countries dominate the market, with the USA having a 37% share; the EU, 27%; and, Japan, 12% (PLS 309/2010).

In Latin America this market generated US$29 billion in 2009, with Brazil being 47% of the total market. In addition, Brazil has 2% of the global market (US$16 billion), and a recent study on Espirito Santo state revealed an EGS participation of US$1.2 billion (around 2% of GDP) (HASNER et all, 2010).

These EGS are subjected to differentiated taxes and fees and the tendency goes towards overall liberalization of their trade at international

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level, a concept used to favor adoption of equipments, machinery and raw materials with more environmental quality. The machinery, equipment and infrastructure sectors need support from public policies and specific incentives at country level to have their production and consumption stimulated within society. This is a must for public policies’ focus.

Liberalization of international trade in EGS is expected to occur soon and developed countries already have a relatively consolidated market, while the opportunities being presented to developing countries are making them study ways of improving their economic sectors competitiveness.

In the PES arena the UN Food and Agriculture Organization (UN FAO) is directing its efforts to ensure those in the ecosystem sector, including cropping, farming and forestry, are appropriately remunerated for the services they provide. The PES works at production and service chains as a positive incentive for best practices adoption of land cultivation. Individuals, companies and public and private institutions that use or produce any sort of impact at a determined ecosystem service can remunerate the production or service chain to reduce or eliminate this impact.

Ecosystem services have a global value estimated at US$33 trillion per year (WBCSD, 2009) with strong participation by Brazilian entities, considered one of the main global players in a growing green economy. On the other hand destruction of flora and fauna costs US$ 3.1 trillion yearly to the world, around 6% of all nations’ GDP. In Brazil, the Amazon forest alone it is estimated US$ 4 trillion per year can be assigned as the value of ecosystem services. However,

Machinery needed to support policies. Cement factory in Brazil where energy is provided by charcoal (Source UN FAO)

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Southem Feature currently, there are only a few isolated cases of PES in place. Neverthelss the number of local, sub-national, national, regional, international and global public and private institutions and organizations including industry, agriculture, construction, energy concessionaries, transport, reforestation, universities, research centers, NGOs, foundations and others, interested on PES and EGS are growing fast.

Ecosystem Services Credits – Measuring, Reporting and Verifying Ecosystem Services are defined by the Millennium Ecosystem Assessment (MEA) as functions of natural capital socially appropriated in order to maintain the capacity of life system support. Ecosystem services are grouped in Support, Provision, Cultural and Regulatory. The law proposal 309/2010 on a Brazilian National Policy of Environmental and Ecosystem Goods and Services defines ecosystem services as “functions and process of ecosystems relevant for preservation, conservation, rehabilitation, sustainable use and improvement of environment as well as promotion of human well being, and which can be affected by human intervention”.

It also recognizes the MEA approach of grouping them into four blocks.

The World Bank has claimed that traditional measurements used for national accounts figures, such as gross domestic product (GDP), ignore the depletion of resources and damage to the environment. Therefore, it is recommending an inclusion of natural resources on national accounts figures, in order to improve country actions and policies for sustainable development (WORLD BANK, 2005). Including the value of natural capital is a vital step to achieve economic growth that is equitable and sustainable (STEINER, 2005 in WORLD BANK, 2005).

Although one can argue that depletion of natural resources is a path to development , and further on the increase of national wealth would provide for the necessary environmental adaptation, the discourse definitely marks a milestone in the direction of capitalizing on natural resources and the ecosystem functions that support, provide, regulate and culturally sustain livelihoods and national wealth.

This capitalization of ecosystem services is the subject of various multilateral forums over the latest years, from the traditional United

Nations Environmental Program (UNEP) to the World Trade Organization (WTO), and local, sub-national, national, international, bilateral, multilateral and global organizations. Ecosystem services are coming into an era of recognition, when they will be freed from slavery and became remunerable under public and private policies and regulations. The Intergovernmental SciencePolicy Platform on Biodiversity and Ecosystem Services ( IPBES) represents the latest effort on that direction.

Traditionally, humans have claimed nature as their mother, and noone seems to believe that services provided by such would ever be paid for. Now it becomes an integrated part of our economies, therefore it must have its services recognized, valued and remunerated in order to cope with sustainable development. And this means a lot for countries with large natural resource basis.

Brazil, for one, has a large resource base, is home of 20-30% of world biodiversity, 12-20% of potable water and some 14-28% of forest resources. The country possesses competitive advantages as a growing green economy. In fact, it probably has surpluses in most of ecosystem services and would gain with the possibility of trading those excesses at all levels. The trading such ecosystem services in the form of credits, which can be produced under specific circumstances is an emerging concept..

In order to be traded locally, sub-nationally, nationally and internationally, ecosystem services credits need to have their performance measured under an approach recognizable by world audience. This has to be done in a reporting way comprehensible to everyone and it must be overviewed by a third party in order to verify compliance with fundamentals and technical prescriptions. These are the basis for a “measurable, reportable and verifiable” procedure to mainstream ecosystem services and “green” the traditional economy.

Carbon credits first appeared as an asset traded in global markets, making a contribution to regulating climate change measured according with principles laid down by the Intergovernmental Panel on Climate Change (IPCC), providing guidelines for accountability all over the planet. However, biodiversity, habitat, water and other ecosystem services have been negotiated at all levels for even longer, with

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Southem Feature no specific guidelines on how to standardize procedures for their measurement, reporting and validation or MRV. Nowadays, efforts are being made to democratize access to markets on those other ecosystem services as well. Only some highly specialized non-government organizations (NGOs) have had the opportunity to enter those markets so far.

What is more, the competition is about to get wild for them, because once guidelines are published anyone will be able to enter and monetize nature for their own benefit.

Research and development of accountability, or monitoring systems directed towards expanding links to mainstreaming ecosystem services into production and service supply chains, involve: • analyzing trade-off scenarios for enhancing public policies/governance, scoping into terrestrial biomes, • focusing on small but also including medium and large scale producers, and • also include public policies and markets.

It is important to have an economic valuation of sustainable practices and provide private and public sector decision-makers with a range of different scenarios. These scenarios can cover public policy productive strategies and purchasing policy reforms by applying an updated methodology for valuation of ecosystem services provided by sustainable practice adoption within key economic sectors from selected landscapes. The ecosystem services impacted by the production and service chains are provided by healthy landscapes.

This will enable environment for maintenance of ecosystem functionality within productive landscapes of biodiversity importance, facilitate a national level dialogue between government institutions, agribusiness and industry representatives, international commodity buyers, and civil society groups to discuss and design public policy frameworks that support improvements in the environmental performance production and service chains within key productive landscapes of high biodiversity importance.

As such it is important to establish coordinating platforms for the maintenance of ecosystem functions on a commodity-by-commodity basis.

Local and national capacities must be built to ensure maintenance of ecosystem functions within economic sub-sectors. Institution-specific

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Laboratory technician verifies the characteristics of some wood samples at the Brazilian Agricultural Research Corporation (EMBRAPA. (Source: UN FAO) capacity building plans must be built for the implementation of the strategies and policies derived from food and fiber platform dialogues.

This will improve knowledge and skills of staff from key institutions regarding the economic value of the ecosystem services provided by sustainable management practices within specific food and fiber supply chains. Improved skills will help institutions make the business case to producer companies they engage through their respective mandates, about adopting sustainable practices within key supply chains.

Monitoring is to be done by a mix of satellite imagery, field sample and electronic identification. All management procedures applied should measurable, reportable and verifiable in order to generate the required ecosystem services accountability, precision, traceability, transparency and completeness.

Current Practices and the Brazilian National Policy Proposals The Brazilian National Congress has before it some 20 proposal for a national policy on PES, but only two (with exactly the same content in both) address the theme of EGS and PES simultaneously, the PLS 309/2010 is the origin of such approach.

The law proposals presented at the Brazilian National Congress are attesting the convergence between environmental, social and economical demands from sustainable development and the relevance this theme has gain within society.

While public opinion research has portrayed a clear society concern over clean production criteria, entrepreneurs have identified environmental action

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Southem Feature as a new and promising business opportunity.

In the case of EGS and ecosystem services the connection is clear. Human activities affect the quantity and quality of ecosystem services and are reciprocated back by the availability of those to feed their production and service chains.

The environment will benefit from the increase in production and consumption of EGS, from the rational use of natural resources as well as from the valuing and remuneration of ecosystem services. The Brazilian environmental legislation is considered one of the most advanced in the planet, ensuring Brazil has a unique position within the global ecological scenery at the same time it advances towards the goal of becoming one of the world’s largest economies. Social inclusion is a particular challenge to be achieved and with EGS and PES the public policies can further contribute to democratizing access to this market potential.

The strategic objectives of a national policy aimed at enhancing the role of EGS and PES at both local and international levels must pay close attention to maintenance and positioning productive sectors and Brazilian enterprises amongst the world largest, looking into increasing markets, build competitiveness in strategic areas and define programs for the most important economy sectors. Differentiation is a highly valued asset for positioning the Brazilian brand within global markets.

To have those strategies effectively implemented they need to be oriented to service and productive chains focusing on factors that contribute to accelerating adoption of best practices and achieving long-term sustainability. Policies structured in a form that benefit production and consumption of EGS with positive impacts on the quality and quantity of ecosystem services is a way to guide production and service chains over factors assuring long term sustainability.

A single overall orientation from a converging policy instrument of both EGS and PES is highly recommended, increasing the chances of success on implementing more democratic mechanisms to access this new green economy market which is at the same time economically, socially and environmentally inclusive.

With this concept of a single political instrument oriented towards EGS and PES, actions already set on “Acceleration of Growth Plan” or PAC (from Portuguese: Plano de Aceleração do Crescimento),

are drawn from the following: • The National Plan of Capacity Building from the Work and Jobs Ministry or TEM (Plano Nacional de Qualificação do Ministério do Trabalho e Emprego), • the Program for Mobilization of National Oil and Natural Gas Industry – PROMINP (Programa Nacional de Mobilização da Indústria Nacional de Petróleo e Gás Natural), and • the National Policy on Climate Change, the National Policy of Environmental Education, the National Policy of Water Resources, the National Policy of Solid Residues, and the New Industry Education Program • The progams outlined above can be integrated into concerted actions towards national systems and policies of PES. At the same time the effort can gain from participation of efforts developed by the following: • The National Confederation of Commerce – CNC (Confederação Nacional do Comércio), • the National Confederation of Agriculture – CAN (Confederação Nacional da Agricultura), • the Unions, • state federations of industry, and • representatives from local associations.

Many others will have a crucial role in building the permanent capacity by structuring programs, and presenting and discussing private interests with the public sector at existing forums. These include:

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• The National Research & Development & Engineer Association of Innovative Industries – ANPEI (Associação Nacional de Pesquisa, Desenvolvimento e Engenharia das Empresas Inovadoras), • the Brazil Competitive Movement – MBC (Movimento Brasil Competitivo), • the National Association of Entities Promoting Innovative Entrepreneurships – ANPROTEC (Associação Nacional de Entidades Promotoras de Empreendimentos Inovadores), and • the Technology Pro-Innovation at

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Southem Feature Enterprise – PROTEC (Pró-Inovação Tecnológica na Empresa), Market practices with the free initiative providing room for demand and offer balance in a democratic way, valuing social inclusion, environmental respect and maximizing economic benefits need to be regulated and enforced by public power. This is a way of having the value of EGS and PES recognized as an instrument to give trust and transparency to transactions involving ecosystem services.

The PLS 309/2010 containing the proposal for a National Policy on Environmental and Ecosystem Goods and Services was structured observing the necessity to integrate and coordinate sector policies of EGS from industry, commerce, transport, energy, construction, residues, environment, agriculture, farming, forests, fishing, aquiculture and urban development directed to maintain, rehabilitate or improve ecosystem services. This policy is directed at maintaining or positioning production systems, exports, Brazilian brand and Brazilian enterprises at the highest level in international negotiations at the same time as contributing to enlarging the supply of EGS and ecosystem services to the world’s population.

As a public policy, it looks at defining the state’s role as inducer of positive behavior change by using this instrument to influence all national production and service chains in adopting adequate practices when managing their environmental impacts. It also aims at rewarding good conduct as the basis for social, environmental and economical human adjustments, using PES as an instrument for promoting sustainable development. It searches for ways of recognizing the need to use natural resources with responsibility and technical knowledge inputs to ensure the protection and integrated quality and quantity of ecosystem services. This can be achieve, for example, by: • Supporting the forming, improvement and maintenance of corridors, • using territorial strategies as the biomes (IBGE), and • involving promotion of human actions of supply EGS and ecosystem services for enhancing priority areas for conservation, sustainable use and benefit sharing.

The PLS 309/2010 starts by stating within its main objectives, how policy is directed to regulate EGS and PES “to discipline public power actions

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related to recognition of the value of EGS and of the ecosystem services and regulate the registering and inventorying of those goods and services” and “to promote sustainable development with focus on national production chains environmental adequacy, establishing mechanisms for the PES”.

The overall systematic adopted by the proposal is demonstrated in Figure 1: The National Policy of Environmental and Ecosystem Goods and Services has three main instruments:

Source: Author

Figure 1: Diagram of the National Policy on Environmental and Ecosystem Goods and Services proposal (PLS 309/2010) • The National Fund of Environmental and Ecosystem Goods and Services – FNBSAE (Fundo Nacional de Bens e Serviços Ambientais e Ecossistêmicos), • the National Council of Environmental and Ecosystem Goods and Services – CNBSAE (Conselho Nacional de Bens e Serviços Ambientais e Ecossistêmicos), and • t h e U n i t y o f E n v i r o n m e n t a l a n d Ecosystem Goods and Services – UBSAE (Unidade de Bens e Serviços Ambientais e Ecossistêmicos).

The FNBSAE and the CNBSAE are the main institutes responsible for elaborating on values to be paid and other tax and fee subsidies to accomplish the policy goals, with their subsidiary bodies, as follows: • The National Service of Information on Environmental and Ecosystem Goods and Services – SNIBSAE (Serviço Nacional

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Southem Feature de Informações sobre Bens e Serviços Ambientais e Ecossistêmicos), • the Technical Scientific Council on Environmental and Ecosystem Goods and Services – CTCBSAE (Conselho TécnicoCientífico de Bens e Serviços Ambientais e Ecossistêmicos), and • t h e P a n e l o n E n v i r o n m e n t a l a n d Ecosystem Goods and Services – PBSAE (Painel de Bens e Serviços Ambietnais e Ecossistêmicos).

The UBSAE is responsible for establishing mechanisms of transferring payments and certification supply, supported by its subsidiary bodies, as follows: The Register of Environmental and Ecosystem Goods and Services – RBSAE ( Portuguese: Registro de Bens e Serviços Ambientais e Ecossistêmicos), and the Certification of Environmental and Ecosystem Goods and Services – CBSAE/Brasil (Certificação de Bens e Serviços Ambientais e Ecossistêmicos).

This policy proposal understands ecosystem services and EGS as the basis for building competitiveness for Brazilians at green economy era, therefore it expressly address the Ministry of Development, Industry and Commerce – MDIC (Ministério do Desenvolvimento, Indústria e Comércio) as the main institution to hold responsibilities for its implementation and development at all levels, assisted by a series of other ministries (Ministry of Environment, Ministry of Agriculture, Ministry of Agrarian Development, Ministry of Defense, and others).

PNBSAE – Platform for Business with Ecosystem and Environmental Goods and Services There are several different methodologies around the glove available for assessing environmental, social and economic impacts of production and service chains. From the environmental point of view, it is possible to measure impacts on greenhouse gas emissions, quality and quantity of water, biodiversity conservation and genetic variability, scenic beauty, pollinators and a series of ecosystem services. With the emergence of the environmental management systems in the 1970’s, the steps to avoid, minimize and rehabilitate the damage caused to natural resources were started. Nowadays, tools and methodologies are available for assessing a large number of production and services chains, and

the life cycle assessment, or LCA, has become a standard procedure at most companies, especially at the large national and international ones, with the medium and small companies gaining momentum in this area. An institutional approach is needed to provide Brazilian national production and services chains with tools and methodologies to analyze and prepare themselves to meet this new reality, while taking advantage of the country’s large availability of natural resources to improve their competitiveness.

In July, 2010, the Mato Grosso Unity of Environmental and Ecosystem Goods and Services (UBSAE/MT) was created by the following agencies: The Mato Grosso Industry Federation – FIEMT (Federação da Indústria de Mato Grosso) and the Mato Grosso Agriculture Federation – FAMATO (Federação da Agricultura de Mato Grosso) The UBSAE/MT is guided towards the objective of promoting issues regarding the EGS and PES, and positioning the industry, agriculture, farming and forestry sectors with the state regarding the theme. The UBSAE/MT was created under a ‘cooperation term” which includes participation of the following agencies: • The Institute Evaldo Lodi (IEL) • The Mato Grosso Institute of Agrofarming Economy (IMEA) • The National Service of Industrial Learning (SENAI) • The National Service of Rural Learning (SENAR), and • The Instituto Ação Verde.

The UBSAE/MT subsequently determined the need for the installation of a platform for trading ecosystem credits and performing certification of environmental goods and services, which was done by PNBSAE (the Platform of Business on Environmental Goods and Services and Ecosystem Services). The PNBSAE is the operational branch of the UBSAE/MT, and the Instituto Ação Verde, a NGO from Mato Grosso is responsible for its management at this early stage. ,PNBSAE, which searches into strategies for enhancing natural capital values along production chains, works with all sectors and all kinds of landowners, be it small, medium or large ones. The Institute is working on implementing a “green infrastructure project and promoting “green commodities”. It works with small

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Southem Feature landholders to support their environmental adequacy, and by that it enforces, with its institutional partners, so that food and fiber production chains can cope with the biodiversity maintenance across landscape scenarios.

The institute is supported by a range of industry organizations including those from the agriculture sector and the the Wood Producers and Exporters Industry Association (CIPEM).

These institutions represent about of 95% of all state production.

The main project the institute has been involved with since its creation is the Verde Rio Project, with the goal of rehabilitation, preserving and enhancing the nine main state rivers, three at each state biome (Amazon, Cerrrado and Pantanal). The institute has supported the establishment of the Mato Grosso Unit for Environmental Goods and Services and Ecosystem Services (UBSAE/MT) in order to advance the project’s objective and further accomplish the mission of supporting green infrastructure improvements for environmental quality assurance at production and service chains within the state, and furthermore globally, The PNBSAE is involved in identifying ecosystem services that need to be properly managed and it incorporates phases of determining those eligible for the following: • Remuneration, • the providers of such services which receive the payments, • the value of those, • establishing a transfer mechanism, • defining methodologies for measuring their amount and quality and • further supporting the establishment of local Offices of Environmental and Ecosystem Goods and Services, which can accelerate incorporating this systematic and spreading the objectives and procedures towards all municipalities in the state.

PNBSAE has responsibility for norms and regulations, value indicators, buying and selling of ecosystem credits, marketing, managing the system, supervision and technical assistance, investing and financing initiatives and monitoring and certification of companies and rural landowners. The brand used is the “Biome Cultivator (CO2, water, biodiversity and so on):

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Living Ecosystem”.

The institute is performing early transactions with carbon, and has already undertaken two years of payments, involving 19 companies’ GHG inventories compensation. Based on the PNBSAE experience the proposed law was prepared and sent to the Brazilian National Congress in 2010 (PLS 309/2010), and a State Law with similar guidelines presented to Mato Grosso Parliament in 2011.

With those 20 public policies mentioned earlier in this paper being proposed and the current level of activities at the PNBSAE, there are great expectations regarding its predicted achievements. The PNBSAE can be used to estimate the total contribution of environmental goods and services within the state, as well as estimating the total ecosystem services available.

By doing so, it creates an environment to further encourage and promote production and consumption of environmental goods and services, and mainstream ecosystem services within the state traditional production and service chains. This will promote the image of the state as environmentally friendly as well as enhancing competitive advantages of its producers and services providers. On the environmental side, it creates opportunities for further implementing policies for a green infrastructure plan for the whole state, turning its producers into green commodities suppliers.

IPBES Remuneration for ecosystem services such as biodiversity, water quality and quantity, pollinators, scenic beauty, habitat and many others are going through a process of global recognition.

The main objective is the capitalization of natural resources so they can became part of countries’ GDP. One can compare this contemporary movement to the freedom from slavery, which brought a new economy reality to the globe.

Similarly, the time is coming to an end when ecosystem services are considered as the intrinsic property of human kind and are instead starting to be viewed as an economic actor, with specific roles and a value that needs to be properly remunerated to assure continuity of provision.

With the aim of producing scientific and political proposal to incorporate this new reality to daily economic activities, the Intergovernmental Science and Policy Platform on Biodiversity and Ecosystem Services (IPBES) has been assembled and its headquarters are to be implemented

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Southem Feature in Bonn, Germany. The IPBES is the ultimate forum at global level responsible for organizing and supplying information on the theme of biodiversity and ecosystem services to all governments on the planet. It will provide a mechanism of support for decision-making around the theme and identify tools and methodologies relevant for governments. The Figure 2 demonstrates the relationships among functions of the platform and between the platform, policymaking and scientific research: IPBES influences policy making by supplying tools and methodologies for decision making, which by its turn is based on governments and

jointly administrated by the United Nations Environmental Programme, the UN Educational, Scientific and Cultural Organization,, the UN Food and Agriculture Organization–, and the United Nations Development Programme.

The future of the ecosystem services regulations and methodologies for the measurement, reporting and verification of PES are to be placed into the hands of the IPBES, which will have the responsibility of assessing all current procedures and turning them into guidelines and tools able to be broadly accessed and used to incorporate the ecosystem service as part of what contemporary society needs to perform in order to ensure a sustainable way of life. The work of the IPBES will be on interpreting ecosystem services and translating them into assets to be used in the promotion of a balance between economical, social and environmental use of our planet natural resources, ensuring they remain available for this and the future generations.

The Way Forward

Source: UNEP, 2012

Figure 2: Functions of platform and relationships other stakeholders’ requests and inputs from the plenary of the platform. Those requests and inputs are used to promote and facilitate capacity building, as well as developing the tools and methodologies that will be used for policy making at country or regional levels.

Assessment of methodologies and tools are based on the need for promotion and capacity building development, which also provide information to identify knowledge gaps and to catalyze generation of new scientific knowledge. Actually, scientific research – aimed at performing regular comprehensive assessments at various scales, as well as on thematic issues and new topics identified - is the way for understanding the latest trends regarding biodiversity and ecosystem services, the main function of the platform.

IPBES was officially established in April, 2012, by more than 100 countries present at the second general assembly in Panamá, as an independent intergovernmental body,

With the evidence of increasing relevance of ecosystem services, discussions must focus on competitive advantages of having EGS related to ecosystem services. The availability of ecosystem services becomes a differentiation for companies and countries alike, therefore strategic thinking is needed to further access opportunities to improve national planning and sustainable growth. The trade in ecosystem services can be a way of harming competitiveness within the country selling credits. Attention should be paid focused on how countries can provide credits to the market at the same time as conserving environmental quality capacity by favoring their own sustainable development. If too many credits are transferred, the country’s environmental quality is transferred and the industry within its borders cannot apply it to its own sustainable growth.

The green economy is coming into view not only because of a political decision, although political action is fundamental for its establishment, but also because society, and the consumers within it, realized the relevance of paying for the ecosystem services, so they don’t become depleted. It is a result of close observation of relationships between production and service chains’ behavior related to their environmental, social and economical impacts. In the future more and more individuals, companies, institutions, organizations, governments and countries

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Southem Feature will join the new way of producing without harming the planet and this will make room for a tremendous growth of green economy market participation. Those individuals, companies, institutions, organizations, governments and countries must be prepared to greet this new reality, and the most integrated will survive, for the good of the planet.

Conclusion The economic relevance of EGS and PES has evolved and we have reached, with the establishment of the IPBES, a point where the ecosystem services are being recognized as the basis for any growth.

This will demand new approaches for production and service chains and a fast adaptation to the necessity of measuring their impacts on ecosystem quantity and quality, in order to justify their continuity. The participation of green products and services at local, sub-national, national, regional, international and global markets is expected to increase over the coming years, posing new challenges for individuals, companies, institutions, organizations and governments all over the world.

This challenge brings a series of new opportunities to further the involvement of countries in the evaluation and rational use of their natural resources, for their own growth and with the chance of trading ecosystem credits at all levels. This demands new policies, a preparedness to promote the production and consumption of EGS, and establishing rules of procedures for PES mechanism. The IPBES is certainly a landmark within this new process, and close attention

needs to be focused on its developments over the coming years.

Bibliography

BRANDZ. Top 100: Most Valuable Global Brands 2010. Access on site: http//c1547732.cdn.cloudfiles.rackspacecloud.com/BrandZ Top100 2010. pdf on January, 15th, 2011. 73 pages. 2010.

BRAZIL. PLS 309/2010. Institutes the National Policy of Environmental and Ecosystem Goods and Services – PNBSAE and gives other measures.

Senator Gilberto Goellner. 9 pages. Brasília, DF, Brazil. 2010.

HASNER, C. , ROMERO, T.C. , GRIGATO, R. and PERIN, C. Negócios Ambientais: Bens e Serviços Ambientais no Estado do Espírito Santo. Workshop on EGS. Access on site: http://www.slideshare.net/institutoideias/apresentao-ideias-finalworkshop-bsa-so-paulo-tereza on January, 15th, 2011. 35 pages. Sao Paulo, SP, Brazil. 2010.

UNITED NATIONS ENVIRONMENTAL PROGRAM. UNEP. Poster at the 2nd meeting of IPBES in Panamá. Panamá City, Panamá. 2012.

WORLD BANK. Beyond GDP, New Measure of Wealth Shows that Many Developing Countries are in the RED. Access on site: www.unep.orr/ greenroom/documents/WorldBank-WealthOfNationPR.pdf on April, 19th, 2012. 2005.

WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT. WBCSD. Corporate Ecosystem Evaluation: Building the Business Case. 20 pages.

ISBN: 978-3-940388-52-0. Access on site: http:// www.wbcsd.org/DocRoot/sTRJLXdoq8SPdrVilYHq/CorporateEcosystemsValuation-BuildingTheBizCase.pdf on January, 15th, 2011.

Thanks to our writers: We are grateful to our writers for contirbuting this article. Please contact

them if you wish to take discussion on their topics further.

Eder Zanetti: Forest Engineer and Phd on Sustainable Forest Management by Federal University of Parana, with a MSC from Albert-Ludwigs Universitat Freiburg. Fulbright Scholar-inresidence and winner of Samuel Benchimol Environmental Award for the proposal of a rural carbon service for the Amazon region. Five books and hundreds of articles and presentations, registered as a specialist on forestry methodologies at ROE/UNFCCC and member of GCS Technical Panel. Currently acts advising individuals, organizations, institutions, entrepreneurs and governments at local, sub-national, national and international levels on global climate change and ecosystem services.

Swapan Mehra: Swapan Mehra, Founder and CEO of Iora Ecological Solutions, specializes in Environmental Finance for Renewable Energy and Forestry conservation projects. Iora, founded in 2009, is currently focused on designing and implementing REDD+ projects in and around India. Swapan actively advises the Government of India on REDD+ policy and feasibility, also having conducted a study on REDD+ potential in North East India on behalf of the ministry. Iora is currently developing India’s first REDD+ project in Meghalaya in association with the Wildlife Trust of India. Iora has advised corporate clients on feasibility of REDD+ projects in Indonesia and Malaysia. The firm is part of an exclusive consortium of senior advisors and researchers developing a research report titled: “Analyzing Forest Carbon Accounts for Sustainable Policy Options with Special Reference to Livelihood Issue.”

June 2012

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Southem Feature

Sino-Forest’s NZ deal in spotlight after fraud alleged in Canada over China forest sales

By Mike Smith, Editor, hina-based Sino-Forest Corporation appears to have structured a New Zealand forestry deal along the same lines those for which it has been hauled before the court in Canada on charges of massive fraud around forest asset valuations.

The Overseas Investment Office, which cleared transactions involving Sino-Forest Corporation and its Greenheart offshoot in New Zealand, released to the Southern Hemisphere Forest Industry Journal the detailed reports on its decisions around Sino-Forest’s dealings.

Although significant segments of the reports are missing due to confidentiality reasons, sufficient remains to indicate a similar pattern to those transactions in China now attracting fraud allegations in Canada.

In Canada, the Ontario Securities Commission (OSC) alleges Sino-Forest and its top executives took part in a broad-ranging scheme to falsely inflate the company’s assets and revenue. SinoForest traded on the Toronto Stock Exchange and was valued at more than C$6 billion. The charges centre around allegations the executives and the company violated Toronto provincial securities laws by overstating the company’s financial performance.

The alleged fraud includes the unjust enrichment of the company’s co-founder, former chairman and CEO Allen Chan through Sino-Forests purchase of a company he had an undisclosed interest in.

The OSC has subsequently widened its investigation to include scrutiny of how the company was able to raise billions of dollars from Canadian investors. Caught up in the OSC investigation are “gate-keepers”, who oversaw Sino-Forest’s financial statements along with a raft of lawyers and underwriters who helped the company raise funds on the Canadian market.

The “gate-keepers” were all rewarded with fees during Sino-Forest’s raising of more than C$3 billion from investors lured by the promise of riches through accessing the rapid growth of the forest industry in China.

A key element in the alleged fraud was the use of associated companies through which SinoForest executives were reported to have transfer money in a “circular” fashion between various

C

entities in a series of related transactions.

One of the main entities involved in this alleged practice is Greenheart Forestry, which was involved in a transaction involving a pine plantation in New Zealand’s Northland region. The Sino-Forest and Greenheart transactions, which on the face of it appear to follow the same pattern as those involving the attracting fraud charges in Canada, were cleared by New Zealand’s OIO. In a statement provided to the Journal, Annelies McClure, Manager of the OIO in NZ says: “The OIO is aware that the Ontario Securities Commission has initiated proceedings against Sino-Forest Corporation and six of its former officers regarding allegations of fraud. The OIO continues to closely follow the Ontario Securities Commission investigations and once the proceedings have been completed and the findings released, the OIO will decide what next steps to take. The OIO understands that the hearing will be held by the Ontario Securities Commission on 12 July 2012.”

This article attempts to unravel some of what occurred in Canada and China and Sino-Forest’s transactions in New Zealand.

CHINA-CANADA CONNECTION

To put the enormity of the allegations surrounding Sino-Forest activities into some perspectives it is worth noting that the Globe and Mail in Toronto has described the alleged fraud as “the biggest black eye for the Canadian capital markets” since a similar scandal in the 1990s. The newspaper was one of the first to leap on to a report highlighting irregularities in Sino-Forest’s practices which, at its peak, saw the company control more than 800,000 hectares of timber assets in China and reported revenues of more than C$1.9 billion in 2010.

The initial disclosures were contained in a research report published in June 2011 in which short-seller Carson Block of Muddy Waters LLC accused Sino-Forest of engaging in what he described as a “massive Ponzi scheme”.

The Globe and Mail followed this report with its own investigation, exposing a number of inconsistencies raising doubts regarding SinoForest’s statements. The newspaper’s reporters found what was described as “a string of empty

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Southem Feature offices” and they spoke to a “key” Sino-Forest business partner in Yunnan province, who said the company had purchased far fewer trees than the 200,000 hectares promised under a 2007 agreement. Officials in the province in the southwest of China also questioned the size and value of Sino-Forest’s timber assets. (OSC alleges fraud at Sino-Forest, widens probe beyond company, Globe and Mail, 22 May 2012) The combination of the Muddy Waters’ report and the Globe and Mail investigation, and increasing pressure from other sources, led to a plunge in the Sino-Forest share price in Toronto.

In an attempt to defend its position, the company set up an “independent’ committee of directors to investigate. But, after nine months and a C$50 million spend, the committee reported it was unable to provide a comprehensive analysis of Sino-Forest’s business practices and inter/intracompany links and associates. The company subsequently collapsed and its shares were delisted from the Toronto Stock Exchange.

The Sino-Forest story starts as far back as 1994, when Allen Chan, then a Hong Kong entrepreneur, launched a joint venture company to meet an increasing demand in southern China for expanding wood supplies. Partnering the deal with Sino-Forest was the Leizhou Forestry Bureau, described by the Globe and Mail as an arm of the Chinese Government.

Since 1995, Sino-Forest has been a publicly listed company on the Toronto Stock Exchange, with its registered office in Mississauga, Ontario, and its principal executive office in Hong Kong.

(Source: Affidavit of W. Judson Martin – sworn March 30, 2012, Ontario Superior Court of Justice in the matter of creditors’ arrangement or proposal of Sino-Forest) This affidavit states that Sino-Forest holds an indirect majority interest in Greenheart, a Hong Kong listed investment holding company. However, while saying Greenheart is an indirect subsidiary of Sino-Forest, Martin says it has its own distinct operations and financing arrangements, and it was not implicated in the allegations made again the company by Muddy Waters.

However, this seems somewhat at odds with the subsequent allegations contained in the Ontario Securities Commission’s notice of hearing posted on 22 May, 2012. (In the Matter Of the Securities Act, R.S.O. 1990, C. S.5, as amended - and - in the matter of Sino-Forest Corporation, Allen Chan, Albert Ip, Alfred C.T. Hung, George Ho, Simon

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Greenheart logs ready for export from New Zealand (Source: Greenheart photo in Sino-Forest presentation August 2011.

Yeung And David Horsley. Statement Of Allegations. Further to a Notice of Hearing dated May 22, 2012) Section 11 of the notice of hearing states: SinoForest and its former senior executives [naming Allen Chan and co] “engaged in a complex fraudulent scheme to inflate the assets and revenue of Sino-Forest and made materially misleading statements in Sino-Forest’s public disclosure record related to its primary business.

“Chan…also committed fraud in relation to Sino-Forest’s purchase of a controlling interest in a company now known as Greenheart Group Limited. By concealing Chan’s substantial interest in this transaction, Chan and Sino-Forest made materially misleading statements in SinoForest’s public disclosure record.”

The latter point regarding “materially misleading statements” about Greenheart may be important should the transactions involving the New Zealand forest plantation be investigated by authorities.

In the meantime, however, the OSC document does provide a detailed breakdown on the business practices of Sino-Forest, Greenheart and other companies involved in the money go-round that allegedly siphoned off millions raised via the Canadian markets.

FRAUD AND MISLEADING STATEMENTS ALLEGED Sino-Forest purportedly engaged primarily in the purchase and sale of standing timber in the People’s Republic of China [China], the OSC statement says. From February 2003 until October 2010, Sino-Forest raised approximately US$3 billion in cash through the issuance of securities and debt to investors. From 30 June 2003 to

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Southem Feature 31 March 2011, Sino-Forest’s share price grew from C$5.75 to C$25.30, an increase of 340 per cent. By 31 March 2011 Sino-Forest’s market capitalisation was well over US$6 billion. [Unless otherwise stated, the currency quoted in the OSC statement was US dollars.]

Regarding what it calls “The Standing Timber Fraud”, the OSC document states Sino-Forest and Overseas Management (i.e. Chan and three others) “Engaged in numerous deceitful and dishonest courses of conduct that ultimately caused the assets and revenue derived from the purchase and sale of Standing Timber (that constituted the majority of Sino-Forest’s business) to be fraudulently overstated, putting pecuniary interests of Investors at risk contrary to Ontario securities law and contrary to the public interest.”

Regarding what it calls The Greenheart Transaction, the OSC alleges fraud by Chan and materially misleading statements by Chan and Sino-Forest, outlined as follows below.

In 2010, following a complex series of transactions, Sino-Forest completed the purchase of a controlling interest in Greenheart, a public company listed on the Hong Kong Stock Exchange.

“Chan secretly controlled companies that received over US$22 million as a result of the purchase by Sino-Forest of this controlling interest in Greenheart. The Greenheart Transaction was significant to Sino-Forest’s business and cost the company approximately US$120 million.

“Chan fraudulently concealed his involvement in the Greenheart Transaction and the substantial benefit he secretly received. Chan and SinoForest misled the public through Sino-Forest’s continuous disclosure. Chan falsely certified the accuracy of Sino-Forest’s AIFs (annual information forms) for 2008, 2009 and 2010 as these documents did not disclose his interest in the Greenheart Transaction.

Chan’s course of conduct relating to the Greenheart Transaction constituted fraud and the making of misleading statements, contrary to Ontario securities law and contrary to the public interest, the OSC document says.

In a detailed section breaking down aspects of this transaction, the OSC says these misleading statements were also contained in Sino-Forest’s short form prospectus filed in 2009.

GREENHEART TRANSACTION ALLEGATIONS

As noted above, Sino-Forest completed the purchase of a controlling interest in Greenheart in

2010. In 2005, the primary assets of Greenheart’s key subsidiary at the time, GRHL, were previously acquired by the original owners of GRHL for about US$2 million. These assets consisted mostly of natural forest concessions in Suriname, the Latin American country ranked 100 out of 183 in the Corruption Perception Index 2011.

Two of the companies holding shares in GRHL, and benefitting from the Greenheart Transaction, were Fortune Universe Ltd and Montsford Ltd. Both Fortune Universe and Montsford were British Virgin Islands (BVI) shelf companies incorporated in 2004 and subsequently acquired by, or for the benefit of, Chan in 2005.

At the heart of this deal was the use of nominees – identified only as “Person#10” and Person#4. “Chan was the true beneficial owner of Fortune Universe and Montsford,” the OSC says.

Person#10 was the legal representative and director of one of Sino-Forest’s largest suppliers during the material time – at the time in question.

“As a result of the Greenheart Transaction, Fortune Universe and Montsford received over US$22.1 million, comprised of approximately US$3.7 million in cash and approximately US$18.4 million in securities of Sino-Forest.”

The securities the two companies received appreciated in value and were subsequently sold for a total of about US$35 million.

“With the help of Person#1 (Chan’s assistant), these securities were sold through brokerage accounts of Fortune Universe and Montsford which were opened at her direction, on the instructions of Chan.”

The OSC notes that while Sino-Forest disclosed that another of the company’s directors had an interest in the Greenheart Transaction in its AIFs for 2008, 2009 and 2010, it did not disclose that Chan benefitted directly or indirection from the transaction through Fortune Universe and Montsford. Chan certified the AIFs for 2008, 2009 and 2010.

Rounding up the role of Chan and Sino-Forest, the OSC alleged as summarised below: • “Chan knew that he was engaging in deceitful or dishonest conduct in relation to the Greenheart Transaction and knew that he was making deceitful or dishonest statements to investors in Sino-Forest’s continuous disclosure.

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Southem Feature • “Chan place the pecuniary interests of investors at risk and committed fraud…this conduct was also contrary to the public interest.

• “Through Chan, Sino-Forest made materially misleading statements…this conduct was also contrary to the public interest.

• “Given his position as Chairman of the Board and CEO of Sino-Forest, Chan, authorized, permitted or acquiesced in Sino-Forest’s making of materially misleading statements…this conduct was also misleading.

• “As Chairman of the Board and CEO of Sino-Forest, Chan authorized, permitted or acquiesced in Sino-Forest’s commission of fraud and [under the relevant legislation] to have not complied with Ontario securities. This conduct was also contrary to the public interest.”

The OSC also details its allegation regarding how Chan and other named directors misled staff in a way that, in light of the circumstances under which they were made, were “misleading or untrue”.

STANDING TIMBER FRAUD ALLEGATIONS The alleged fraud involving standing timber focuses on China, as no investigation has been undertaken to date on the New Zealand operations of Sino-Forest/Greenheart. Documents filed in Canadian courts illustrate how the company operated and how the money was transferred between each and those with interests linked to either one.

Up until 2004, Sino-Forest used what was called a BVI Model to invest in timber rights in China. As noted above BVI stands for British Virgin Islands, a British overseas territory located in the Caribbean to the east of Puerto Rico that is touted as “a benchmark, which other offshore tax havens strive to emulate”. (http://www.offshorebvi.com/) Due to PRC law, the BVIs were not able to conduct business in China without licences grated by competent government authorities, BVIs must carry on their sale activities through authorised intermediaries (or AIs). Because BVIs were not permitted bank accounts in PRC, it is the intermediaries who entered into the direct sales contracts for standing timber with end customers.

(Source: FTI Consulting Canada Inc. pre-filing

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report to the Ontario Superior Court of Justice, 30 March 2012.)

Over the years since 1994, Sino-Forest used the BVI model to purchase significant amounts of reported timber holdings (about 60 per cent of total holdings). However, one aspect of this model was that there was no way for a BVI to efficiently repatriate cash off shore with attracting significant negative tax consequences. As a result, all profit was re-invested in the BVI model in new trees.

In 2004, the China’s Ministry of Commerce began allowing wholly owned foreign enterprises (WOFEs) to trade timber on shore in China.

Post-2004, almost all of Sino-Forest’s new capital invested in timber assets was employed through the WFOE model. This change meant SinoForest could conduct business on shore without resorting to the use of AIs as intermediaries, so the company was able to transact directly with customers. Additionally, WOFEs were preferable from a foreign investor perspective because of the identifiable process for the repatriation of funds off-shore to the foreign investor parent.

As at 31 December 2010, about US$2.5 billion or about 80 per cent of the total timber holdings was in the BVI Model, totalling 467,000 hectares.

The WOFE Model was said to hold about 97,000 hectares of standing timber valued at US$295.6 million or 10 per cent by value.

The method Sino-Forest used in implementing the BVI Model involved cash-flows associated with the purchase and sale of forests taking place “off book” under a payables/receivables offsetting arrangement, so that BVI subsidiary companies would not directly receive the proceeds on the sale of forests from the purchasing intermediaries, or AIs. “Rather Sino-Forest disclosed that it would direct the AI that purchased the timber to pay the sales proceeds to a new Supplier in order to buy additional timber. Consequently, Sino-Forest also did not make payment directly to Suppliers for purchases of Standing Timber,” the OSC alleged.

It also noted that Sino-Forest did not possess the bank records to confirm that these “off-book” cash-flows in the “offsetting arrangement” actually took place.

“This lack of transparency within the BVI Model meant that independent confirmation of these ‘off-book’ cash-flows was reliant on the good faith and independence of Suppliers and AIs.”

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Southem Feature From 2007 to 2010, revenue from the BVI Model totalled US$3.35 billion, or 94 per cent of Sino-Forest’s reported standing timber revenue and 70 per cent of Sino-Forest’s total revenue.

However, Sino-Forest dealt with relatively few suppliers and AIs in the BVI Model. The OSC noted that in 2010, for example, six suppliers accounted for 100 per cent of the standing timber purchased and five AIs accounted for 100 per cent of Sino-Forest’s revenue generated in the BVI Model.

The OSC detailed several cases in which this system was used to commit alleged fraudulent transactions and valuations. As well as using a small number of suppliers and intermediaries, Sino-Forest also used what the company described in documents and correspondence as “peripheral” companies.

“Sino-Forest established a network of ‘nominee’ companies that were controlled, on its behalf, by various so-called ‘caretakers’.”

The BVI subsidiaries, suppliers, intermediaries, nominee companies and peripheral companies involved in buying and selling of forests in the BVI Model were referred in the allegations as “the BVI Network”.

BVI NETWORK EXAMPLE According to the OSC, one Sino-Forest document listed more than 120 “peripheral” (nominee) companies controlled by 10 “caretakers” on Sino-Forest’s behalf. The “caretakers” included some of the persons noted above but also include: Person#1 (legal representative of Huaihua City Yuda Wood Ltd); Person #2 (a relative of Chan); Person #3 (a former Sino-Forest employee); Person#4 (an acquaintance of Chan and Chan’s nominee in the Greenheart Transaction outlined above); Person#5 (a former shareholder of GRHL and a shareholder of Greenheart); and Person#6 (an individual associated with some of SinoForest’s suppliers).

“The control and influence that Sino-Forest exerted over certain Suppliers, AIs and peripheral companies within the BVI Network brings the bona fines of numerous contracts entered into in the BVI Model into question, thereby placing the pecuniary interests of investors at risk,” the OSC alleged.

Sino-Forest is alleged to have wielded this control and influence through what is described as “Overseas Management” – effectively Chan and

senior executives, including Albert Ip, Alfred C.T. Hung, George Ho and Simon Yeung.

“As well, certain transactions recorded in the BVI Model do not reflect the true economic substance of the underlying transactions. SinoForest’s control of, or influence over, certain parties within the BVI Network was not disclosed to Investors.”

The OSC does recognise that Sino-Forest did disclose in a prospectus that the concentration of authority in Overseas Management and lack of segregation of duties created a risk in terms of measurement and completeness of transactions, as well as the possibility of non-compliance with existing controls.

“However, this disclosure by Sino-Forest was wholly inadequate, failing to reveal the extent of the weaknesses in Sino-Forest’s internal controls.”

Allegations around the impact of this situation are outlined below.

OVERSTATING REVENUE A key element of the OSC’s case against SinoForest and its executives revolves around the impact of the alleged frauds on the company’s revenues. The effects of these “overstated” revenues are highlighted by four examples involving four of the company’s network of offshoots.

The value of “overstated” revenue the OSC claims resulting from the alleged fraud in these four cases is put at US$357.90 million. These are detailed under the heading “Effect of the Dacheng Fraud, the 450,000 Fraud, Gengma #1 and Gengma #2 on the Reported Revenue of Sino Forest”.

Summarising the materially misleading statements regarding ownership of assets and revenue recognition, the OSC notes members of the “overseas management” group created and executed the purchase contracts in the BVI Model in the quarters after the assets related to those transactions were recognised. This resulted in Sino-Forest’s audited annual financial statements, annual information forms (AIF) and management discussion and analysis (MD&A) reports for the years 2006 to 2010 to be “materially misleading”.

SINO-FOREST, GREENHEART AND NEW ZEALAND FORESTS Sino-Forest’s first New Zealand transaction in late 2010 involved 12,587 hectares of forestland owned at the time by one of the investment

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Southem Feature parterships operated by North American-based Global Forest Partners, GFP Mangakahia Forest Venture Ltd. The forest, located in the Northland region, had initially been owned and managed

by Carter Holt Harvey Ltd, the large New Zealand forest products group. CHH had sold Mangakahia Forest when it decided to divest forest assets as part of a corporate stripping programme to realign the company more directly to production, particularly paper and board packaging manufacturing.

No price was officially disclosed for the SinoForest purchase of the Mangakahia forest from the GFP consortium following the approval received on 13 October 2010. However, information circulated in the New Zealand forestry sector after it was announced Sino-Forest had sold the forest to Greenheart Group Ltd. The Overseas Investment Office approval report released to the Journal regarding the SinoForest sale to Greenheart sale included the detail that the “consideration” amounted to NZ$101 million or US$77 million at the time, or about US$53,000.

However, industry sources indicated that once the sale to Greenheart was complete, Sino-Forest booked a profit of $6-$7 million. The OIO approval for this sale was given on 17 February 2011, or a total of 127 days after the original approval for the Sino-Forest purchase of the same forest.

If this figure is correct, and it is not confirmed, it would suggest the Mangakahia Forest appreciated at a value of NZ$55,000 a day, or maybe GFP sold it too cheaply.

The annual report of GFP Mangakahia Forest Venture Ltd lodged with the NZ Companies Office stated the forest assets were valued at US$48.3 million for the year ended 31 December 2009 compared to US$38.2 million in the 2008 year, or a difference of US$10.1 million. On that basis, the forestland increased in value at US$27,671 a day over the 12 months.

Before further outlining how Sino-Forest transacted the Greenheart purchase and sale, it is worth noting how it pitched its application to the NZ OIO. The OIO report says about 58.69 per cent of the shares in the applicant [Greenheart] were held by Sino-Capital Global Inc, which is wholly owned by The Sino-Forest.

Greenheart would act as the dedicated international expansion vehicle for the Sino-Forest group, the report says, noting Greenheart con-

June 2012

trolled about 60.39 per cent of Greenheart Resources Holdings Ltd, reported as being one of the largest natural forest owners and operators in Surname, South America.”

Sino-Forest wished to progress its expansion in areas outside China and Greenheart had been determined as the “appropriate international expansion vehicle” given it already had overseas investments in Suriname.

“Sino-Forest will transfer the investment in the Forest Estate to [Greenheart] at a purchase price equal to Sino-Forest’s acquisition cost. The consideration payable by [Greenheart] to acquire the Shares is expected to be a combination of cash, equity (by the Applicant issuing new shares to Sino-Forest) and the assumption of debt. Following the issuing of new shares in Sino-Forest, Sino-Forest’s shareholding in the Applicant is anticipated to increase to approximately 62 per cent.”

Hence the transaction had a marked similarity to those other transactions outlined in the OSC court document: the combination of cash, equity (being new shares in Sino-Forest) and the assumption of debt.

Based on allegations contained in the court document of Toronto’s OSC, it is possible to question whether or not the New Zealand forest deal amounted to the executives of Sino-Forest/ Greenheart rewarding themselves with cash and shares funded at the expense of Canadian investors.

It should be noted that the law firm acting for Greenheart in Hong Kong, issued a statement to the Journal regarding ownership and the current situation of Sino-Forest.

“Sino-Forest does not currently own New Zealand timber assets. The NZ timber assets that may be mentioned in the press relate to Greenheart,” Dan O'Donnell, CFA, Houlihan Lokey said in the statement. The press had reported the New Zealand timber assets may have to be sold to recoup money for Sino-Forest creditors.

OH, OH! THE OIO’S ASSESSMENT The NZ OIO reports outline the assessment process used to see whether or not those overseas companies and persons involved in purchasing assets in New Zealand under its jurisdiction are suitable.

“We have sought sufficient information from the applicant for us to be assured about the accu-

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Southem Feature racy of the information supplied and have sought evidence from the applicant for us to be able to judge whether the criteria and factors that apply to the relevant category of overseas investment are likely to eventuate,” the OIO said regarding the Greenheart purchase.

“We did not consider it necessary to seek input from third parties in order to verify the information or evidence gathered.”

On the question of whether “the relevant overseas person” demonstrated financial commitment to the overseas investment, the OIO stated that although the investment was in essence an intragroup transfer, Greenheart and Sino-Forest were retaining separate legal counsel to help ensure “a robust process”.

“As such, [Greenheart] has committed significant resources in connection with this investment, including through engaging legal and other advisors to assist in structuring the proposed transaction and negotiating the transaction documents. This criterion is met.

On the question of whether the relevant overseas person, or all the individuals with control of the relevant overseas person, of good character, the OIO reported stated: “A statutory declaration has been received from a director of [Greenheart] that has the effect of stating that all the individuals with control of the relevant overseas person are of good character.”

The OIO assessment was that it was “satisfied that the statutory declaration can be relied on because it complies with the requirements of the Oaths and Declarations Act 1957.”

BENEFITS FOR NEW ZEALDN A section of the OIO report deals with stipulations around whether or how much such a purchase will benefit New Zealand in terms of investments, new jobs, new technology or business skills and increased export receipts.

Regarding investments, the OIO assessment was that the proposed benefits were likely to be substantial and identifiable.

On the question of new jobs, the Greenheart’s claims in this regard are blanked out, as is the OIO assessment. It is questionable whether new jobs could be created on the basis of the transaction, unless harvesting was stepped by the new owner.

Would the Greenheart investment result in, or was it likely to result in, the introduction into New Zealand of new technology or business skills?

“[Greenheart has significant experience and business skills in the forestry business,” is the total available comment under Applicant’s Claims.

The rest of this section is blanked out, as is the OIO assessment.

Would the investment lead to increased export receipts for “New Zealand exporters”? Greenheart’s response to this question is blanked out, but it must have satisfied the OIO, because it commented: “The investment is likely to result in increased exports of timber from New Zealand.

The factor is met.”

Significantly, the OIO judged as “not relevant” whether the overseas investment in this case would lead to added market competition, greater efficiency or productivity, or enhanced domestic services, in New Zealand.

The OIO agreed with the applicant’s claim that the overseas investment would lead to the introduction into New Zealand of additional investment for development purposes. However, once again, Greenheart’s claims and the OIO’s assessment are blanked out so cannot be investigated or challenged.

The OIO also judged as “not relevant” whether the overseas investment would lead to “increasing processing in New Zealand of New Zealand primary products”.

On whether the overseas person was a “key person” in a “key industry” of a country with which New Zealand would, was likely to, benefit from having relations, Greenheart’s claims were again blanked out, but the OIO assessment was as follows: “The Applicant is a key person in the Chinese timber industry. Forestry is a key industry in New Zealand. This factor is met.”

Greenheart’s view on whether or not a refusal would adversely affect New Zealand’s image overseas or its trade or international relations, was also blanked out. They did persuade the OIO, however, as it stated: “Declining consent to the investment may result in New Zealand’s image abroad being adversely affected. This factor is met.”

IT’S POLITICS Greenheart’s view on the impact on political, image, relations between NZ and China would have been very interesting to read. The OIO, as noted, seemed to think the consequences could be quite serious.

In this context, New Zealand was the first country to sign a free trade agreement (FTA)

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Southem Feature with China. So it is fair to say New Zealand does have a lot at stake should anything disrupt the smooth development of trade under the FTA. In April this year, the government announced approval for the Chinese-owned Milk New Zealand Holding Limited to acquire 16 dairy farms (the Crafar farms), against widespread opposition.

Stuff.co.nz reported a Chinese official as saying Kiwis should "be happy" that foreigners want to buy land and invest here. "I think Kiwis should understand that [foreign investment in general] is a positive signal. It showcases foreign countries confidence in your country, in your system, in your people and you should be happy about that."

The Chinese embassy official had previously suggested declining the Crafar deal would make others question investing in New Zealand. Cheng said China also welcomed foreign investment on its shores and it did not matter whether firms bought land there or not, stuff.co.nz reported.

Sino-Forest’s close relationships with government officials were highlighted in another report on the company, when FTI Consulting Canada Inc., was appointed by the Superior Court of Justice as monitor for the legal proceedings.

“Based on conversations that [FTI] has had with members of senior management of the company and various of its advisors, [FTI] understands the PRC government has and will continue to play a key role in any successful restructuring.”

FTI outlined the complicated ownership structure required for private forestry operations in China, including the Forestry Law which provides a limited ability for forest ownership. FTI had also been advised that “it is not clear that the Forestry Law has been fully implemented on a nation-wide basis such that, in some instances, no verification from regional forestry bureaus may be available.”

Sino-Forest had advised the PRC had taken numerous steps in the last years to promote the timber plantation industry, including opportunities for foreign investment. FTI added it was also apparent that navigating timber operations with the PRC had obvious political and state related implications due to the following: • The role of the Chinese government in business generally.

• The geographic location of many of the plantations.

• The reliance upon provincial and other registries for asset verification.

• The uncertainty surrounding certain taxa-

June 2012

tion and other laws in the PRC that could have significant implications on SinoForest’s business structure and/or ability to expand.

This was further underlined, FTI said, by an emphasis put on “business relationship” among parties being “paramount” to any contractual or legal relationships.

“The relationships are relied upon for the conduct of business in this [forestry] industry in the PRC. In the course of its investigation [the independent directors’ committee] reported that it was apparent that integral to Sino-Forest’s business model was its relationships with business partners.”

Noting the relationship between Sino-Forest and the government stretched over 18 years, FTI said “All these factors have resulted in Sino-Forest having a positive and encouraging relationship with the PRC government. “Consequently, the PRC government has, by and large, been facilitative of Sino-Forest’s business. Ongoing support will be required if this restructuring process is to be successful.”

Much of Sino-Forest’s historical success had been due to the leadership Chan, and although Chan had resigned, FTI said he remained involved in Sino-Forest and played a key role in maintaining and building on existing PRC relations.

“It is equally clear to [FTI] that the PRC government has the ability to be a significant impediment to solutions that it does not view as favourable or in furtherance of PRC policy.”

Sino-Forest and Houlihan, the Hong Kong law firm soliciting sales on behalf of noteholders, had both expressed the view that “if attempts were made to break up the company, that could be viewed as being contrary to the general direction of, and have a significant impact on, the PRCs natural resource growth policies and would likely be viewed negatively by the PRC government.”

China’s government was “cognizant” of the location of many Sino-Forest plantations in proximity to state-run facilities and expressed concern about how this would impact operations should the plantations change hands.

On 8 June 2012, Sino-Forest announced that holders of about 72 per cent of the aggregate principal amount of its outstanding notes have agreed with a restructuring support agreement, which would involve either a sale of the company to a third party or the noteholders acquiring all the company’s assets.

Southern Hemisphere Forest Industry Journal Vol. 18 No. 1 23

Southem Supporters FORESTLAND INVESTMENT CONFERENCE Hold the Date! The University of Georgia Center for Forest Business announces its 2013 Forestland Investment Conference, February 27 through March 1, 2013 at the Ritz Carlton, Amelia Island, Florida USA. Key North American and International forestland analysts and investors plan to attend.

For details please contact: Bob Izlar, + 1.706.542.6819, bizlar@warnell.uga.edu More information on our website: http://www.ugacfb.com/ Top Executive with relevant Forestry and Timber Management experience at leadership level required Valcol Executive Appointments, a division of the Valcol Group has been exclusively retained by Border Timbers Limited, a diversified Agro forestry and timber business, based in the Eastern Highlands, Zimbabwe, to assist in the search and selection of applicants to be considered for the role of Managing Director. The company operates three divisions in Forestry, Sawmilling and Manufacturing. The forestry division manages a total of five estates. Logs harvested by the divisions are processed at three sawmills. Today, it is one of the largest and most modern sawmills in Southern Africa. Most of the timber the sawmills produce is further processed into valued added products and exported into both regional and international markets. The company employs over 3000 personnel.

We require a dynamic and seasoned leader and therefore consideration will be given to any semi-retired Executive together with other senior managers seeking new opportunities. Our client offers an exciting and rewarding career and in return will offer an attractive remuneration package, together with exceptional living and working conditions and benefits required. Interested – please send your full CV – together with 3 reference contacts to Colin Roberts, Managing Director (confidentiality assured): colin@valcol.co.zw See below for more information on this Southem Opportunity or go to http://tinyurl.com/southemvalcol1

LASER TECHNOLOGY AWARDED TRUPULSE® 360 COMPASS CALIBRATION TECHNIQUE PATENT It has been years in the making but Laser Technology, Inc. (LTI) has been awarded a patent for the TruPulse 360 compass calibration technique. Jeremy G. Dunne, LTI’s Chief Technology Officer and innovator behind most of LTI's products, came up with the Magnetic Sensor and Accelerometer Calibration Technique. The major benefit of this is that users can quickly and easily calibrate a TruPulse 360 and instantly get a pass or fail confirmation right in the display scope. This is just one of the things that makes this a one-of-a-kind laser rangefinder with a built-in compass. http://www.lasertech.com/blogs/Professional-Measurement/post/2012/05/25/Laser-Technology-IncAwarded-Patent-for-TruPulse-360-Compass-Calibration-Technique.aspx

ESRI FORESTRY CONFERENCE

- The 2012 Esri Forestry GIS Conference was a great success, helped by the willingness of participants to share their expertise. We look forward to seeing you at next year's event, May 14–16, 2013 in Redlands, California. For more information, contact: forestryinfo@esri.com View photos from the event at: http://www.flickr.com/groups/1977293@N21/pool/

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