Examining the constraints affecting SMES and proposing practical strategies for development. A case study of New Forests Company Uganda

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Business profile

New Forests was Conceived in 2004, and operational from 2005 in Uganda, The New Forests Company has rapidly established itself as one of Uganda’s main tree planter with 54,000 acres of forestry land and is emerging as the country’s pre-eminent sustainable forestry company.

New Forest Uganda can be classified under Small Medium Forests Enterprises (SMFE) and its birth is as a result of international attention in forestry as previously directed towards improving the conditions for large-scale forestry.

The company is now operational on three plantations across the country in Mubenbe, Kiboga and the Bugiri district and plants acres of pine and eucalyptus.

The method used to obtain the findings below are through interviews with Dr. Martin Aliker the board of Directors of New Forest Company, Mr Charles Ocici the Executive director of Enterprise Uganda and through literature obtained from Private Sector Foundation of Uganda (PSFU) during the SMEs exhibition held at Lugogo Exhibition Hall from 19th to 23rd March 2013. 

The New Forests Company is:

  • Establishing commercial and profitable timber plantations of fast growing tree species, indigenous and exotic, which have adapted well to Uganda’s environment.
  • Protecting the remaining natural forests that occur along streams and restoring and regenerating those forests that have been destroyed by encroachers.
  • Providing employment and development to rural communities where unemployment levels are very high.
  • Meeting Uganda’s national development priorities for investment in agro-industry, poverty alleviation and rural development.

New Forests hopes that pine and eucalyptus, will supply sawn timber and building and transmission poles. The company is not only planting commercial species on suitable soils, but will also regenerate badly destroyed existing indigenous trees species like Albizia, Melicia Excelsior and Markhamia as part of the bio-diversity conservation goals. This is in order to rehabilitate the heavily damaged water catchment area.
Sustainable commercial forestry and the protection and promotion of bio-diversity is combined with a carefully designed programme of community participation and benefit which aims to create jobs, boost rural incomes, help lower levels of poverty, improve health and develop a thriving local private sector. The workforce is expected to reach approximately 1800 this year.

 

Conservation

The New Forests Company as an SMFE will maintain the highest level of conservation and environmental protection of the eco-system, safeguarding and enriching areas of natural and indigenous forest to protect unique flora and fauna and promote bio-diversity. This concept of sustainable forest management will ensure a corporate contribution to the country, its people and our future and maximise the company’s carbon sequestration goals, which help combat global warming.

New Forests’ environmental management objective is to:Promote the re-colonization of natural vegetation and biodiversity through enrichment planting regimes in the remaining natural and riparian forests with indigenous species that are or were found in the local environment.

The New Forests Company recognizes the impact of plantation forestry on the environment and commits itself to mitigating these impacts through improved management practices. Furthermore, the need to develop and conserve natural resources according to principles of sustainable management is supported by The New Forests Company. We will meet the needs of the present generation in Uganda without compromising the ability of future generations to meet their own need.

It has been noted that SMEs are key in Uganda’s economy due to the fact that they employ over 2.5 million people, constitute up to 90 per cent of the private sector and contribute over 70 per cent to the total Gross Domestic Product (GDP) of Uganda. The Uganda Securities Exchange (USE) has introduced an investment segment that will cater for the capital raising needs of SMEs (Daily Monitor, March 19th 2013).

The above is one area that New Forests Company hopes to benefit from to grow its business.

New Forest as an SMFE has advantages over some large enterprises in terms of sustainability of forest goods and services and its contribution towards local livelihoods and poverty reduction are significant.

New Forest notes that there is a currently a forest sector reform as part of Uganda’s decentralization process, Uganda’s forest sector is undergoing reform through the creation of National Forestry Authority which supports the development of a more favorable policy, legal, institutional, and administrative framework overall for SMFE in Uganda.

 

The general status of SMFEs in Uganda is viewed as the major vehicle for poverty alleviation (Ministry of Finance, 2000). Theory has it that economic growth leads to the alleviation of poverty through employment opportunities, wealth creation and absorption of labour force.

Forests in Uganda are an important source of employment as well as a source of raw material for wood based industries. The level of employment in forest-based activities in the formal sector has been estimated as at around 100,000 people, while secondary processing (carpentry and joinery) and the distribution and marketing of wood products employs an estimated 250,000 people, (Jacovelli and Carvalho, 1999). The formal sector (sawn timber, poles, charcoal, tourism, and non-timber forest products) is estimated to contribute approximately 1.9% of the GDP, while the informal (nonmonetary sector) contributes to 2.75% of the GDP (Sepp and Falkenberg, 1999).

According to Charles Ocici  the Executive Director of Enterprise Uganda,  Over the last decade there have been significant increases in numbers of forestry related SMEs, as the demands for wood and forest products has increased hence new entrants in the business. For example Nile Ply located in Jinja since 1994 partly owned by Uganda Wildlife Authority. Its main operations include plywood and blockboard manufacturing, sawn timber production, flash door production, carpentry and joinery, timber drying, and forest plantation. Nile Ply is engaged in replanting and has replanted 50 hactres in Kifugo, Oruha, Kagom, Lubany and Namasiga forests in Busoga.

New Forests faces both Internal and external Constraints as an SME in the forestry sector referring largely to problems or challenges that are caused by internal failures or weaknesses, such as capacity, skills, technology or marketing as below: –

Poor skills in financial management and business planning undermine the effectiveness of operations. The Company undertakes effective budgeting but the cash-flow projections to maintain solvency and liquidity remain a challenge due to the nature of products they deal in.

New opportunities such as external support targeted at building the capacity and skills for the development of the forestry SME sector is part of the government of Uganda’s Medium Term Competitive Strategy for the Private Sector support to financial services to SMEs is key.

A specific opportunity that supported includes:  Business Development Services (BUDS) facility within the Private Sector Foundation of Uganda (PFSU), Enterprise Uganda (funded by UNDP) and Uganda Manufacturers Association to mention but a few. These hundreds of other SMEs look up to for support hence making it hard for other players like New Forests to penetrate.   

New Forests faces key issues of low uptake of technology by the human resources yet high investments have been made leading to wastage, inefficiencies and poor quality products because local community prefers to harvest using hand operated technology (or sometimes chainsaws).

High levels of wastage are also caused by rigid market standards and slow rates of adaptations. Commonly timber buyers in Kampala do not accept timber less than 14 feet (4.2 metres) in length. Similarly, due to transportation in seven tonne trucks, sizes tend to be standardized. This inevitably leads to increases in waste as well as decreases in efficiency of harvesting and processing operations, which ultimately affects profit levels.

In terms of technical skills, New Forest faces constraints of skills levels in forestry SMEs due to casual employment nature of many staff, limited training opportunities and investments in human capital coupled with limited inputs and low quality of technology, the limited skills base of employees or producers leads to further losses and inefficiencies. To take the example of pitsawyers – the owners of pitsawyers SMFEs are often not involved in the harvesting operations directly – they typically employ temporary labourers – often drawn from Kigezi area of south western Uganda – to undertake the hard manual labour involved in felling sawing and transporting timber to collection.

Also in Mbarara district, many small woodlot producers grow eucalyptus but would also like to diversify into other species like pine or cypress to meet new market demands. Despite expressing their demand to commercial nursery managers and seed suppliers, their needs are not being met.

Marketing, market information and knowledge remains very poor and constrains diversification and innovation. Low product quality reduces opportunities for reaching high value markets locally and abroad. Dr Aliker notes that this is not an issue specific to SMEs within the forest sector – it cuts across all SMEs in Uganda. However, it significantly undermines the bargaining position of many SMEs, as they have limited options when negotiating prices with buyers.

High land rental/purchase fee which is beyond the initial investment budget to enable establishment of planting trees in larger quantities remains a challenge; where plots are leased, the agreement rarely remains formalized and consequently long term investments in fixed assets remains a risky enterprise for New Forest.

Licensing and legality where Lack of transparency coupled with unclear and bureaucratic procedures for obtaining licenses undermines New Forest’s activities and contributes to market distortions. Obtaining of permits to New Forest has led to significant financial outlays and investments.

Below we explore external constraints that New Forests faces exogenously affecting profitability and sustainability such as; nature of the forest sector, land, environment, investment, fiscal, access to finance, markets, external Support.

The Nature of the forest sector aspects exhibits disorganization with lack of co-operation and co-ordination amongst the different ministries who are responsible for forests. Forest management, to varying degrees, forms part of the main mandates for the Ministry for Water, Lands and Environment, Ministry of Tourism, Trade, and Industry (UWA and national parks), and Ministry of Agriculture, Animal Industry and Fisheries (in terms of management of private forests, agroforestry, and extension provision through NAADS). Then lack of clarity between what is formal and informal provides ample scope for confusion and continued illegality throughout the forest sector. This has instead presented New Forest an opportunity to acquire hundreds of acres of farming land in Bugiri – eastern and western Uganda to enable them manage their forests.

Few linkages and lack of association for example, the larger Small Medium Forest Entrepreneurs are, to a certain extent, in association, either through informal contacts where most of them are Asian for example Nile Ply and in Budongo Forest there by influencing policy.

Few financial products are available other than bank loans. This undermines long-term domestic investment in SMFEs. There are more opportunities for foreign investors, accessed mainly through in-country schemes and also their behavior is driven by confidence in long-term stability of Uganda, not just by availability of finance, although this is significant.

New Forests lacks access to pricing information resulting in lack of awareness of fair local prices for wood which brings about marginalization . With such New Frest creates a monopoly of supply of its wood to UMEME and Rural Electrification Agency (REA) at its pricing.

Unfair competition due to uniform royalty rates, informal dealings to mention but a few. Transparency and enforcement of rules must be the highest priority for the new National Forestry Authority to rebuild investor confidence as affirmed by New Forest.

No policy determining forestry as preferred land use on private and customary land, which make up 70% of Uganda’s total forest and woodlands area, there is no policy specifically determining forestry as the preferred land use. There is a resulting lack of incentives both for off-reserve forest plantations and for the sustainable use of natural forests.

There is a widespread negative perception that corruption prevails within forestry in different forms and scales, and can affect the profitability, sustainability, and livelihood returns of New Forests and SMFEs in general for example the case of the formed MD of NFA who kept money under the bed and the wife stole it and was convicted in the courts of law.

Macro-economic and political stability are necessary preconditions to attract domestic and foreign investors in general and to the forest sector in particular. Although Uganda has been considered relatively stable since 1986 and continues to develop, there is still an over-riding lack of confidence amongst foreigners as to whether Uganda provides the long-term stability and institutional structure required for forestry-related enterprise. This view is particularly notable amongst New Forests and Asians in reference to the Amin regime – who have dominated the legal forestry business.

Uganda’s poor road, electricity and communication infrastructure poses a big constraint for New Forests in executing its tasks.

Strategies

Based on the above key internal and external constraints, a number of priority strategies have been identified as below:

Supporting innovation for product and market development of forestry industry over time, demand for higher-quality wood products (furniture, etc) could be fostered to provide a new domestic market for lower-end artisans and carpenters. Small Medium Forest Enterprises cannot take risks to provide new higher-quality products if they do not see a demand for them.  At present, there is limited demand for middle-quality products, due to poverty which continues to promote a demand for very cheap goods, higher-quality domestically-manufactured products have not yet been available at affordable prices hence no demand for them.

How would this support SMFEs? This would support the development of new products and better finishing through fostering new inquisitiveness amongst smaller SMFEs involved in secondary processing (carpenters, artisans, joiners, paper processors).

 In terms of strategy, collaborating partners of New Forests such as The National Forestry Authority would be encouraged to lead in advocating for favorable policy and to help legitimize and set up a convention in collaboration with Uganda Manufacture’s Association to promote high-end agro-forestry.

Improving awareness of economic and aesthetic value of forest resources; current wastage of forest resources is extremely high in many SMFEs involved in harvesting and primary processing of timber. This is driven to a large extent by competition and lack of awareness of the alternative or new wood products, which can utilize off-cuts, or lower-quality soft and hardwoods. Uganda’s domestic production of plywood, parquet and other flooring, veneer products, and high-end wood packaging, to name a few, could be further encouraged, especially as these products are mainly imported. Non-consumptive use of forests in the form of tourism is also an area not yet fully appreciated or explored as of yet, and should be acknowledged and encouraged by NFA as a potential future revenue source.

Shaping SMFEs to reduce more poverty directly employing more local community population of youths and young families to generate income, and formalizing land and concession tenure may be removing access through to the poorest rural communities who largely depend on forest resources for a livelihood.

Encouraging the formation of associations amongst the smaller SMFEs (carpenters,artisans, pitsawyers, for example) may inadvertently remove any control they had over their own business and further marginalize them from a more “centralized” decision-making if these associations are hi-jacked by the more powerful amongst them.

SMFEs can be supported to improve existing working conditions through being able to offer sufficient and reliable income, access to training to improve skills, and comfortable working environment. Links could be fostered with larger SMFEs and companies whose Corporate Responsibility Programmes could benefit from supporting SMFEs. Nile Ply, BAT, Hima Cement, the various sugar works, and Rwenzori Highland Tea Company, for example, could sponsor training programmes in tree planting, plantation development, improving treatment of sawlogs for timber (drying, storage, treatment), and packaging and finishing.

The USE opportunity of availing capital to SMEs with Growth Enterprise  Market Segments(GEMS) that well suited for SMEs to bolter their growth.

Conclusion

In conclusion, Ugandan forestry is in a state of transition, given the extensive reforms underway in the move towards a ‘new public management’. Private forest enterprise is at the centre of the new approach, and is also expected to provide the drive behind revenue generation for the NFA. The profitability and sustainability of SMFEs is therefore fundamental to the long-term viability of Uganda’s forests.

There is a need to fully quantify and qualify the SMFE landscape in Uganda, there is a need to identify and analyze specific linkages and relationships which are required by Ugandan SMFEs.

There is a need to explore direct and indirect linkages between different SMFEs and their contribution to livelihoods and impact on poverty reduction, in the Ugandan context. Identifying viable options for new markets for wood and NWFP which could benefit Ugandan SMFEs of all types

 

 

 

References

·         Daily Monitor, March 19th 2013

·         Enterprise Uganda

·         Government of Uganda, (2000) The Forest Produce Fees and Licensing Order, Uganda

·         Jacovelli, P. & Carvalho, J. (1999) The Private Forest Sector in Uganda – Opportunities

for greater involvement: a study carried out as part of the Forest Sector Review,UFSCS / MWLE Kampala

·         Land Act, 1998, Law Development Centre, Kampala

·         Local Government Act, 1997, Kampala

·         New Forests Uganda Limited

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