Pre-investment Technical Assistance by LDN TAF

Country:

Indonesia

Sector:

Agroforestry

Context

In many Indonesian landscapes, including in Central Kalimantan, deforestation, slash-and-burn practices, illegal mining and large-scale agricultural have negatively affected Indonesia’s forests, leaving behind degraded fallow land and a lack of income opportunities for local communities. One policy response has been to grant forest-dependent communities’ access to forest land through social forestry permits. However, not only has the distribution of permits been slow, but concrete economic benefits for households and communities also remain largely absent. There is therefore a need for project developers looking to utilize the social forestry scheme to create attractive economic benefits for local communities in balance with natural resource protection. This project is demonstrating such a scalable commercial model for landscape restoration with community participation on land issued through social forestry permits, and is preparing to attract additional (impact) investment.

The project aims to initially rehabilitate 4,000 hectares of degraded lands through planting fast-growing tree species and cash crops in agroforestry systems, and increasing the value of secondary forests through enrichment plantings with non-timber forest products (NTFPs). This project is a good example of a potential innovative restoration finance case that was initiated by an NGO and turned into a for-profit social venture. The operation is currently looking to secure financing to implement a successful showcase at significant size, followed by initial private investment for scaling impact on LDN and creating income opportunities for local communities.

Smallholder / community engagement

The project cooperates with communities that were granted a social forestry permit from the Indonesian Government. The communities provide the land for the investment case and have the right to provide the largest part of the necessary labour. In return, they receive wages and a part of the profit from the sales. The project operator also deploys staff explicitly to help communities understand their rights and responsibilities and conduct FPIC processes.

Business model

The investment in this project is expected to be recovered through sales revenues from fast-growing light wood after an initial growth period of seven years. Additional income is generated from the sale of intercropped agricultural crops (e.g., peanuts) and NTFPs (e.g., rattan), and sale of carbon credits (potential for sale not yet fully developed). This is combined with active protection of remaining forests. Specifically, the revenue is expected to result from:

  • Sustainable timber (82%);
  • Cash crops (16%);
  • Carbon credits (2%);
  • Potential from NTFPs (not yet included in baseline scenario).

Flow of capital and services

Investment need

This project creates economic value from restoration of previously degraded land via commercial agroforestry, combined with active primary and secondary forest protection. The current business model of this project has a targeted internal rate of return of around 10%. The initial investment in the project amounts to €5 million, largely made up of grants, equity, and soft loans. Seed funding is used to finance the development of the first 4,000 hectares. The main funding need is for growth financing to scale up to 100,000 hectares. The expected investment vehicle is a silent partnership to provide equity financing or soft loans to the project operator to finance capital and operational expenditures for growing the business. In addition, grants or public subsidies as blended finance elements would enable the model to pay for less commercial work and tasks related to the earlier proof of concept for the business.

Risk management

The project is planning to deploy several risk mitigation strategies to reduce investment risk. These include:

  • Direct supply agreements with industry partners to reduce offtake risks for timber sale;
  • Satellite and drone mapping to select degraded areas only for agroforestry, and active monitoring to reduce deforestation risk and fire risk;
  • Diversification of revenue streams to mitigate underperformance of specific crops and risk of defaults on repayments.

Most importantly, the project operator allows for direct support of communities in the social forestry scheme, and the active management and reduction of risks in the underlying model.

Technical assistance

The focus is on cash-crop operations in the project’s agroforestry approach to improve early cash flows of the model as well as to significantly improve the payback period. The technical assistance will consist of a market evaluation, defining soil conditions and fertilizer options, field testing, post-harvest processing, and financial modelling to include cash crops into the overall investment proposal. Specifically, the technical assistance provided will allow:

  1. Selection of the most appropriate (shorter rotating) cash crops with strong market linkages, to ensure offtake and significantly improve cash flows to shorten the payback period and increase repayment security for investors;
  2. Identification of best-practice soil preparation and fertilizer options, to reduce costs and optimize yields, as well as to ensure positive environmental impact;
  3. Field testing of the project’s model, specifically the use of the various cash crops identified, fertilizer options, and soil preparation under local conditions (climate, soils) to strengthen the underlying business model before seeking growth finance;
  4. Provision of research on best-practice post-harvesting processes for the selected cash crops;
  5. Financial modelling of the impact of an intensified cash crop approach under the current business model.

Projected impact

  • LDN
  • Forest
  • Community livelihoods
  • Climate
Short term:
  • 1,500 hectares of degraded land reforested through agroforestry, and measurably improved soil fertility and soil organic carbon (SOC) content;
  • 1,500 hectares of secondary forest managed as protected areas with enrichment plantings of NTFPs in suitable areas;
  • 1,000 hectares of primary forest protected, contributing to the conservation of biodiversity in the area, and restoration of key ecosystem services (erosion control, moisture cycle, microclimate);
  • Job creation and income generation for local communities.
Long term:
  • 11,000 additional hectares of agroforestry, sustainable forest management, and forest protection in five years, and another 85,000 hectares in ten years;
  • Sequestration of up to 212,880 MtCO2eq from restoration (excluding carbon stores in protected forests);
  • Project benefits extended up to 50,000 residents;
  • Replication of the project’s model by other actors.

Technical assistance support from the LDN TAF does not constitute a commitment from the LDN Fund, or Mirova, to finance directly or indirectly the project described above. Any such commitment shall be subject to inter alia, a detailed technical, financial and legal due diligence of the company and the project, as well as all required LDN Fund investment committee approvals and satisfactory documentation.