Valtip3 Project

The Government of Lao PDR (GoL) has policies which are directed towards economic growth and poverty alleviation, and has recognised the plantation sector as one of the sectors that can improve economic growth in rural areas. In the 2014 Agriculture Development Strategy to 2025 and Vision 2030, processed wood products are identified as one of the nine priority commodities to contribute to industrialisation and modernisation of the Lao economy. Over the past three decades, the GoL has implemented policies to encourage the development of plantations by smallholders and the private sector and as a result there are now significant areas of plantations in several regions some of which are approaching merchantable age. The plantation estate comprises 446,000 ha, of which 271,000 ha is rubber trees for rubber production (DoF 2015), largely corporately owned. The area of plantations for current timber production remains small, with 163,000 ha under different species, ownership and investment arrangements. Eucalypts comprise the largest area of these timber plantations with 67,000 ha largely owned and used by foreign companies. Teak, with 50,000 ha, is the other main timber plantation species with plantations predominantly owned by Laos smallholders and has been identified as the best opportunity for poverty alleviation and domestic industry development.

Laos already has a small wood-products industry, with plantation resources of teak, eucalypts and other species serving both international and domestic markets. However, the plantation resource is not expanding and the Lao wood-processing industries, which are in their infancy compared to neighbouring countries, have experienced difficulties competing against the advanced secondary and tertiary manufacturing centres in Vietnam and China. Complexities within the planted timber value chain may result in plantation management that is not optimal for wood supply, poor incentives for wood producers and inefficiency in timber resource use. The efficiency of the value chain and wood-products industries in Laos is particularly hindered by the numerous conflicting and confusing regulations imposed by the government (Smith 2014, Midgley et al 2012). Key issues are the need to fully understand the socio-economic dynamics of, and interactions between actors in the value chain, develop new wood processing capability for the production of a variety of wood products, build capacity to enable manufacture of these products from small diameter timbers and enhance the entire timber value chain from plantation to primary and secondary processing plants and markets.

The proposed research builds directly on two previous ACIAR projects: FST/2005/100 “Value-adding to Lao PDR plantation timber products” and FST/2010/012 “Enhancing Key Elements of Value Chains for Plantation-Grown Wood in Lao PDR”. It also links with work in related projects FST/2012/041 “Teak Agroforestry in Lao PDR”, and ADP/2014/047 “Policy Improvements to Balance Smallholder, Industry and Environmental Needs in Lao PDR and Vietnam”.

The proposal is informed by results from these projects and related work. In relation to the Lao teak plantation value chain, the following results from FST/2010/012 (Smith et al. 2016a and Smith et al. 2016b) are relevant:

• Farmer owned and community-based plantation enterprises, capable of harvesting and processing local plantation grown wood such as teak, have great potential to contribute to national policy objectives by generating rural employment, boosting farm income and suppling timber to the processing sector. However, they are currently uncompetitive due to policy barriers associated with perceived risk around processing of timber illegally harvested from natural forests, unnecessarily complex regulatory procedures and high transaction costs.
• Plantation registration was hypothesised to be a barrier to smallholder participation in the legal value chain for plantation grown wood. Analysis found that processes for plantation registration have been complicated by multiple-perceptions of the purpose of registration; for some, plantation registration has become a substitute land titling process, for others it is needed merely to demonstrate source of origin for legal wood sales. For the former a consequence is that the cost and administrative procedures for registration have become prohibitive for farmers, for the latter procedures to register plantations may be seen as not strictly legal. Recommendations for policy review and clarification of the purpose of plantation registration were made. This matter is now even more relevant due to the strict enforcement of PM Order No. 15 currently restricting export of unfinished wood products and raw materials.
• Systems mapping of the regulations along the entire teak value chain and analysis of the transaction costs revealed a complex operating environment. Research found that streamlining and simplifying regulations and reducing transaction costs would likely both increase smallholder returns and improve the competitiveness of plantation enterprises through increased value chain efficiency. These procedures also need to address national and provincial regulatory and revenue requirements.
• Research into farmer attitudes to plantation registration and into the effectiveness of grower groups revealed that there is diversity in plantation ownership arrangements that were not recognised in FST/2010/012. As a result, the supply of this wood to industry is unpredictable. Better understanding of the ownership arrangements and the management intent of owners could facilitate resource availability and a consistent flow of wood to processors.
• Approximately 15,000 ha of plantation teak was mapped in Luang Prabang province, with significant areas likely in adjoining provinces. The plantations were characterised to be dominantly immature, more that 75% in size classes less than 25 cm tree diameter; this has implications for investment in domestic wood processing technology. Plantations are in thousands of small parcels which are geographically dispersed across the province. Proximity to roads, infrastructure and processing facilities has implications for wood flow and costs for owners and industry which are not fully understood.
• The role and legal status of timber traders and brokers (‘middlemen’), who play an important role in consolidating consignments of wood and connecting growers with markets, was not included within the project and are not well understood.
• Improved linkages between growers, traders and processors can enhance the value chain, and innovative collaborative investment and funding approaches are needed to facilitate the supply of plantation grown teak to the market in a way that meets the needs and addresses the constraints of the plantation owners.
• Market requirements for legal or certified wood could be met through simplified procedures that recognise the low-risk nature of farmer-owned plantations when compared to other sources of timber.
• Improved efficiencies and capacity in domestic wood processing will enhance industry competitiveness and demand for the domestic plantation wood resource.
• Opportunities exist in developing technologies for production of EWPs for the rapidly growing construction, furnishing and joinery activities in Laos, neighbouring countries and Australia.
• Consistent product standards coupled with flexible arrangements for product design and simplified certification and legality processes will improve market access.

The proposal is also informed by the first stages of work under ADP/2014/047, which have focused on understanding the dynamic policy framework for plantations in, and export of wood from Lao PDR; characterisation of the value chains from other tree plantations in Lao PDR; and identifying and fostering pathways for policy dialogue about tree plantations and the related governance framework. While in its early stages, this research has highlighted the complex governance arrangements that exist around the plantation value chain.

Project FST/2010/012 focused on the utilisation of plantation timbers for high value-appearance wood products, such as furniture. As in Vietnam, opportunity exists to introduce new value-adding technologies for developing novel appearance and structural wood products based on veneer, sawn wood and composite products (combining wood and other materials) that would provide new markets for the existing plantation resources. These EWPs could be used in domestic and commercial buildings and there is a strong demand in Laos and in international markets, in particular in China for such products (FAO 2009 & 2012).

For such industries to be internationally competitive, the plantation wood resource and its availability and accessibility needs to be known and the enabling policy environment and value chain needs to be well understood and efficient. Therefore, a detailed value chain analysis and competitiveness mapping are required to assess opportunities for using plantation timber as a viable alternative to steel, concrete, bricks and other materials currently used in building, joinery and furniture industries. Specific skills and knowledge for wood processing and improved durability are lacking in Lao’s timber industry, resulting in the use of concrete and steel for construction.

The Government of Lao PDR strongly supports the development of a sophisticated wood processing industry, as expressed in the Forestry Strategy to 2020 and the Agricultural Master Plan (2011-2015). A recent Prime Minister Order (No. 15/PM/2016) specifies that all types of wood must be turned into finished products that meet defined standards before they can be exported. The implementation of this Order will require strong support to wood processing enterprises through capacity building, training and product development.

The wood manufacturing industries in Laos are in their infancy compared to those in neighbouring countries. There is already some 215,00 ha of planted teak, eucalyptus and acacia for which there are limited markets, and the wood processing sector has not yet adopted new processing technologies that are widely used in Vietnam and China. Research and development is needed to support the development of new processing capability and a range of Engineered Wood Products (EWPs) that can be produced from small diameter timbers. Specific skills and knowledge are lacking on the processing of wood for appearance, structural and housing construction purposes and on enhancing termite and decay resistance in the timber products. Further research is needed on aspects of the timber value chain between the plantation and processing industry to ensure efficient supply of wood resources and provide necessary information to support business cases for the investment in new processing facilities.

Two previous ACIAR projects: FST/2005/100 “Value-adding to Lao PDR plantation timber products” (2007-11) and FST/2010/012 “Enhancing Key Elements of Value Chains for Plantation-Grown Wood in Lao PDR” (2012-16) have enhanced knowledge and capacity in wood science and processing and identified policy and administrative issues that impede the development of an efficient and competitive smallholder plantation sector and wood processing industries in Laos. There are opportunities to utilize the smallholder plantation grown wood to produce a range of appearance and structural EWPs for the rapidly growing markets related to construction, furnishing and joinery activities in Laos and the region. In parallel, the Australian industry is still facing major challenges in adding value to underutilised plantation resources, such as low grade pine and hardwoods grown for fibre. The goal of the current proposal is to assist the Lao and Australian forestry sectors to seize these opportunities.

Research questions to be addressed by this project are:

• What are the key elements of the policy, governance and administrative environment that constrain the development of plantation forests and value-adding to their products in Lao PDR, and what are the most important and promising pathways for policy change to address constraints?
• What are the principal value chains for Lao plantation resources, what are the major impediments to resource availability for domestic processing, and how might they be addressed?
• What are the barriers that prevent SMEs in Laos from investing and developing new technologies and how can they be rectified?
• How might new high performance EWPs, based on veneer, laminated wood and other composite materials from small diameter logs be developed from available resources in Lao PDR and Australia?
• How can the gender balance of the Lao plantation and wood industry be improved to increase the role of women?
• What are the factors (including private sector engagement) which need to be in place to achieve significantly higher levels of viable domestic downstream processing to increase the contribution to economic growth, employment generation and greater participation in industry?
• Which of the project capacity building strategies will improve the international competitiveness of the Lao wood industries?

Project aim and objectives

The aim of the project is to support the development of innovative wood processing industries to enhance markets for planted timber resources within Lao PDR.

Supporting Objectives will be to:

1. Identify the key elements of the policy, governance and administrative environment that impact the development of plantation forests and value chains in Lao PDR, and other constraints to improving plantation value chains, and develop strategies for engaging with this environment and improving plantation value chains.
2. Develop and adapt innovative technologies for the production of high performance and commercially competitive engineered wood products (EWPs), based on veneer and laminated wood from small diameter logs, and also composite products based on wood and other materials.
3. Improve capacity, in both Lao PDR and Australia, with respect to the development and production of engineered wood products based on veneer, laminated wood and other composite materials and their profitability and competitive position vis-à-vis other building materials.