LDN Fund and LDN TAF Case Study
Country:
Kenya
Sector:
Timber
Context
The continent of Africa is currently the world’s largest consumer of wood; with population increases, this demand is expected to rise even further over the coming decades. 75% of Africa’s primary energy comes from fuel wood, of which most (93%) originates from natural forests. In addition, it is expected that without investments in local production, 75% of the demand for industrial wood will need to be met by imports4. To meet these growing demands in a sustainable manner, alternative solutions to traditional plantation forestry are therefore needed that will also allow for positive social and environmental impact. This project demonstrates such a solution by developing a micro-forestry model to unlock the potential for small-scale farmers to serve industrial wood markets. It leverages existing farmland and labor, allowing farmers to plant trees at lower costs than traditional plantations and yielding positive long-term internal rates of return.
Background
Komaza supports local farmers by providing seedlings, inputs, technical expertise, and training to grow trees on the Kenyan coast, in addition to existing agriculture. It then manages the harvest, industrial processing, and wood product sales. Farmers are paid above-market price at harvest, generating significant income for the farmer. Planting drought-resistant trees provides climate-proof income for farmers. With the long-term income the trees bring, farmers can plan for the future – to buy land, build houses, educate their children, and start businesses.
Business model
Komaza’s business model of forestry without a nucleus plantation is unique. Unlike traditional forestry businesses, this project is executed exclusively in partnership with smallholder farmers to grow trees. As such, it allows for lower initial capital investments (e.g. forestation costs) and more rapid regional expansion to increase volumes. Under current assumptions, the project is expected to break even in three to five years. The trees planted offer decent returns across all opportunity cost scenarios. Combining trees with other crops (e.g. maize) allows for a diversified portfolio, strengthening day-to-day cash flows for farmers and securing long-term returns. Participating farmers are not required to make a cash investment.
The project works in direct partnership with smallholders, also to mitigate risk of land acquisition by the government. Participating smallholders own their own land, and the cost and benefits created by timber production are shared between smallholders and the project operator, while allowing for enough land for farmers’ food production. The project also creates a direct cash stream to empower those who enroll and complete the requisite labor, 50% of whom are women.
Flow of capital and services
Investment
Purpose: expansion of on-going micro-forestry – planting eucalyptus and Melia on degraded land within smallholder farms in the coast region of Kenya; expansion of the supply chain into central Kenya and wood processing and sale, primarily for domestic markets.
Type and amount: in 2020, the LDN Fund invested in Komaza in a form of equity financing as part of a larger investment round of € 15-20 million.
Duration: 8 years.
Risk management
Two key risk-mitigation strategies in this project are:
- Deploying a proven micro-forestry business model that allows for widespread distribution of risks. The underlying business model is based on ten+ years of implementation with thousands of farmers. This allowed the operator to build strong proof of concept and attract investment from prominent donors and investors including DFID, FMO, and Novastar, and key stakeholders in forestry including the Kenyan government (KFS, KEFRI, NEMA) and NGOs (Conservation International/The Nature Conservancy);
- Using technology for risk reduction in operational management: the project utilizes the project operator’s proprietary operational and technological platforms, including an Android-based application that integrates day-to-day operations and farmer data, and is now ready for rapid expansion, including beyond Kenya.
Technical assistance
In the pre-investment phase, technical assistance for this project focused on:
- Third-party cost analysis of the production cycle benchmarked against large plantations, to ensure cost effectiveness and the presence of an attractive risk-return profile;
- Feasibility study for expanding the project’s operations to new sites to de-risk field operations, assess the environmental impact of the expansion model, and evaluate market feasibility.
This helped value the new business model that is key for eligibility for equity investment.
In the post-investment phase, technical assistance for this project focused on strengthening the Environmental and Social Management System (ESMS). The company is at a new stage of growth, with expansions planned within and outside Kenya. As part of the expansion, Komaza is growing its ESMS, through implementation of an ambitious Environment and Social Action Plan (ESAP), developed by the LDN Fund and its co-investors. The LDN TAF supported Komaza to develop a solid ESMS framework, ready to carry the company’s growth. The first deliverables of the ESAP include (list not limitative):
- Environmental, Health and Safety and Social Policy Statement.
- Procedure for identifying and ensuring compliance with applicable environmental and labor requirements (e.g. permits, EIA, employment terms and conditions, etc.).
- Establish an E&S Panel to convene quarterly.
Case study on Komaza, Kenya, which is invested in by the LDN Fund and supported by the LDN TAF both pre- and post-investment. At the time of this case study, the project was still only in the pre-investment stage. Read the report here:
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