The Cochabamba Project Limited - Is it a forestry or impact investment?

The Cochabamba project aims to stop the destruction of the rainforest by helping 1,000 farmers who live and work on the fringes of the tropical rainforest. By making their lives sustainable, John Fleetwood explained, we can stop them needing to slash and burn more rainforest. "It is more about poverty than about forestry" John explained. It is about improving lives and by dealing with poverty, helping our environment. Many of the farmers are ex-miners who have relocated to find a better life, with little to no experience of farming techniques. The Cochabamba project aims to provide the finance and technical know how to these families to enable them to sustainably manage the 25 hectare (on average) famholding.

The Investment Proposition

The farmers own the land and the trees on their typical 25 hectare plot. The Cochabamba project provides the farmer with the seeds and technical assistance to manage this plot and the cooperative scale to achieve higher prices in the future for the timber they grow. In this process the farmer is paid to look after the trees. In return the farmer agrees to give up 50% of the timber revenues to the Cochabamba project.

Only 1 hectare of the 25 hectare (on avarage) plot is given up for forestry and the farmer is able to choose between 18 varieties of local trees, plus the classic hardwood teak tree. Thus Cochabamba are encouraging and developing biodiversity on the edges of the tropical rainforest. John Fleetwood explained that this is not as profitable as a monoculture approach, but it is better for the area and biodiversity will reduce the risk profile. He also explained that to the farmer, because buyers want reliability of supply and scale, 50% of revenues from the Cochabamba project are likely to be greater than 100% of the amount an individual farmer could negotiate.

Cash flows

This is the greatest challenge to any forestry investment, explained very clearly by John. In spite of the fact that trees in Bolivia can grow 18 metres in 4 to 5 months it is 8 years until a forestry plantation can expect any material revenues. The Cochabamba project started small aiming just to raise £250k but since its inception and as a result of the financial and political climate it has expanded to fulfil the projects needs.

John Fleetwood told Worldwise Investor that to keep the project alive they need access to £1m before the project reaches breakeven in 2014. He said, "we have £305,000 in the bank, have contracted carbon credit sales of £100,000 and small timber revenues of £20,000 next year.  That reduces the total required by £425,000 to £575,000, a lot less than £1 million." While David Vincent and John Fleetwood have a track record in raising funds, cash flow remains a big risk to old and new investors alike and relies on new investors, or the pre-sale of carbon credits.

Carbon Credits

The project has 220,000 tonnes of potential carbon credits to sell, which David Vincent explained they have sold at up to £5 per tonne before and have a deal to see US$200,000 of credits in 2012. The maths sounds great. 220,000 tonnes at £5 is over the million pounds they need to 2014, but it is never as easy as all that, particularly now.

David Vincent explained that this project had been one of the few to have been sanctioned under the clean development mechanism under the Kyoto agreement. On this basis the project would have been able to sell the carbon credits on the European market as Certified Emission Reductions (CERs), that is until Bolivia pulled out of Kyoto at Copenhagen. This created somewhat of a crisis in the business model and the rapid need to get the project certified independently by a body selling voluntary credits. This Cochabambe has done through Plan Vivo and is about to undergo a further certification process to tap into the German voluntary carbon credit market.

David Vincent also explained that many carbon credits are sold on delivery i.e at the end of the life of the tree when the carbon sequestered can be physically verified. Of course this is useless to the forestry project who need the cash flow during the life of the project to keep it running. So, despite the size of the project, with the carbon price on the floor at the moment and the uncertainties surrounding the voluntary carbon market David and John need to keep raising investor money.

How do you invest?

Cochabamba offer three ways to invest in the project:

1. Climate Action Plan - As a carbon offset facility at £5 per tree. For a fee of £435 a person can offset the average carbon impact of their UK household i.e. paying for 87 trees.
2. Shares in the Industrial Provident Society - This offers investors a maximum return of 7.5% per annum with all other profits (should they be made) being reinvested in the project. John Fleetwood explained that to date they have raised £1.3m by this method from 300 investors at an average of £5k per investor.
3. 2019 Loan Stock - providing a lender with a 5% interest rolled up or paid out from timber revenues.

As an investor, or lender, John Fleetwood went onto list some of the main risks - cashflow, poor timber revenues, cost inflation, political risk as well as the risk of fire, theft or disease amongst others.

What were my thoughts?

Afterwards I learned that David Vincent gave up being an IFA 3 years ago to make this happen. To date I have not done any due diligence but I left with the feeling that this was a project worth spending some time looking into and seeing if it is something my clients would like to support. The project has not spent money producing glossy brochures, or spending vast amounts of money on advertising. This together with the fact that John Fleetwood and David Vincent are very up front and honest about the risks and the scale of what they are dealing with has made me get over my initial discomfort over third world forestry projects. How can I as an IFA provide enough comfort to clients? The risks are numerous and my experience and knowledge in relation to this minimal. Clients also need to be able to lock money up for long periods of time and ultimately be prepared to lose it. However, as a social and environmental impact investment with a forestry potential upside I believe it has a place for both some investors and IFAs and is worth looking into.