Who is the report targeted at?
Catchment Management Authorities, natural resource management (NRM) agencies, local, State and Federal government policy makers and forestry representatives will find this report useful in considering ways to combine public and private investment to achieve broadscale reforestation.

Background
Substantial private and public investment in NRM and revegetation is occurring in Australia, but a great deal more is required, and will be required for decades to come. Governments are already investing substantial public funds in programs intended to tackle NRM issues, and trialling market based approaches to deliver NRM. These funds are likely to remain insufficient to achieve the scale of revegetation required unless they can leverage substantial private investment. To date in Australia there has only been limited non-landholder, private sector investment in multi-purpose revegetation in the medium rainfall regions (450–700 mm per annum), so more effective approaches to leveraging private investment remain essential.

There is a strong need not only for research into new land use options, but also for robust implementation pathways that include commercialisation. Technical, commercial, institutional, policy and financing innovations are required to accelerate the development and delivery of new land use options. Improved systems and processes for negotiating and implementing investment partnerships are required if these are to support innovative reforestation that generates multiple benefits. The Joint Venture Agroforestry Program (JVAP) recognised this need in funding this project, Designing effective public-private investment partnerships for major regional reforestation initiatives. The project explored the potential of public-private partnerships (PPPs) for structuring the financing of major reforestation initiatives.

Aims/Objectives
This project set out to determine whether PPPs, like those being used in other sectors, are an option for funding multi-purpose reforestation in Australia. The project aimed to:

• Review what has been learnt about PPP principles and processes
• Review emerging policy and investment frameworks that are capable of integrating environmental and commercial drivers
• Develop a set of generic guidelines for use in developing public-private reforestation investment partnerships suitable for regional scale programs, and forestry investment that has a landscape repair component Longer term aims of this project are to:
• Generate interest in multi-purpose agroforestry, landscape change and ecosystem services amongst capital markets
• Understand opportunities and constraints to the effective application of private and public sector investment in multi-purposes afforestation.
• Increase capacity for public programs to leverage private investment in reforestation.

Methods used
The project used the following methods:

1. The production of a comprehensive background paper based on a literature review.
2. The establishment and operation of a project reference committee that acted as a project “think tank”
3. Additional consultation with people involved in research and development (R&D), industry, commerce and NRM
4. An analysis of the findings of both the consultation and the literature and the preparation of this final report.

Section 1 of the report is an overview of issues and opportunities, and summarises the project findings in terms of financial and investment issues; forestry and NRM issues; and opportunities and constraints to PPPs. Section 2 briefly describes the approach and methods used in conducting the research. Section 3 tries to answer the question “Are PPPs suitable for reforestation in Australia?” This section concludes with a set of broad guidelines for advancing the development and use of PPPs. This is timely given that most Australian States are gaining greater confidence in using PPP for major infrastructure projects, and that at the time of writing (April 2005) the Commonwealth announced a major revision to its procurement and PPP policies.

Section 4 looks in more detail at the NRM and policy context and examines the potential role of multipurpose forestry in relation to the NRM challenges. Section 5 sketches out the background and current situation in the Goulburn Broken region of northern Victoria, where the CMA and other agencies are attempting to broker joint public and private sector funding of revegetation. Section 6 documents a range of investment and business activities and several related public programs that individually are promoting increased forestry in Victoria. Section 7 attempts to summarise the extensive literature on PPPs in terms of the potential lessons for reforestation.

In other sectors, both in Australia and overseas, there has been extensive use of PPPs. This has led to the formation of successful public private partnerships for specific projects and the formalisation of processes for negotiating and implementing them. The relevance of this experience to reforestation in Australia is documented in sections 2 and 7.

Results/Key findings
There are opportunities for leveraging private sector investment, and therefore protecting catchments – natural infrastructure – more cost effectively. Achieving industry development and NRM outcomes while generating long term income for investors with patient capital is possible by establishing investment and policy frameworks which more effectively “marry” the capacities and interests of the public and private sectors. PPPs have been used around the world because they offer flexible arrangements for bringing these capacities together to implement a wide range of projects. PPPs should be considered as a potential option for major reforestation initiatives in Australia.

The project identified 23 key findings:

The potential roles and functions of PPPs

1. Existing financial, legal and policy mechanisms for PPPs appear suitable for major reforestation initiatives. Therefore generic PPP guidelines and precedents developed in other sectors could be used for planning and implementing multi-purpose forestry programs that deliver ‘public good’ objectives - such as landscape repair - and private sector investment returns from timber production and carbon sequestration.

 2. Investments in large scale reforestation for catchment management purposes should be regarded as a form of infrastructure maintenance or renewal in order for them to become eligible under the existing guidelines developed by the Department of Treasury (Partnerships Victoria Guidelines).

 3. Government initiatives should recognise the importance of building institutional and professional experience and familiarity with multi-purpose forestry developments and the use of PPPs to address environmental issues. Further pilots should be funded, possibly via the Market Based Instruments (MBI) program, which stimulate market interest, test the capacity of PPPs to leverage private investment for reforestation, and build institutional and professional capacity.

 4. While technical and investment uncertainty are important constraints, these should not be considered the only impediment as factors such as community attitudes; property rights; fire management etc remain important considerations in the success of large scale revegetation.

Credible participatory planning processes should be adopted to minimise negative community responses to landscape change.

 5. Opportunities exist for governments to redirect NRM, greenhouse and forestry program funds to projects that leverage substantial private investment into multi-purpose reforestation initiatives that address NRM, greenhouse and forest industry objectives.

Technical and planning issues
6. Due to regional diversity and landscape complexity, uniform forestry or revegetation prescriptions cannot be applied. Therefore any funding of reforestation initiatives needs to have a strong design and planning focus using detailed, spatially explicit information and explicit project criteria that allows for assessment of individual projects and sites.

 7. Planning and priority setting tools such as salinity mapping and biodiversity benefits are being developed that will increase access to detailed information both for the private and public sectors.

Spatially explicit information obtained by such planning tools is useful to assess technical and other aspects of individual projects and sites.

 8. Uncertainty in technical areas such as species growth rates, timber production, salinity, and hydrology impacts impedes the confidence of both public and private sector investors. This lack of technically rigorous information demonstrates a clear need for ongoing R&D, plus the building of public and private sector capacity in forecasting the risks and returns arising from investment in multi-purpose reforestation.

Carbon markets and their prospects

9. Long-term carbon markets are likely to be the most significant stimulus to multi-purpose reforestation due to their ability to attract regular payments which increase the internal rate of return (IRR) for reforestation projects. A carbon register should be established to facilitate and monitor trade. The current Australian Government position on the Kyoto Protocol excludes forestry projects that achieve carbon sequestration from achieving returns from this potentially large and lucrative international market. This appears to be acting as a major disincentive to large scale revegetation.

10. Carbon sequestration is the easiest of the potential ecosystem services to measure due to the global nature of the market, the standard characteristics of the commodity and the relative ease of its quantification.

Defining the roles of governments

11. Governments need to clearly state which environmental benefits they are prepared to pay for and initiate structured processes of price discovery (e.g. tendering). This would encourage businesses to actively pursue environmental benefit contracts. With experience governments would become smarter purchasers of these services, and help the private sector to make better investment decisions on the type and locations of plantations, or other changes in land use, such as sponsoring natural regeneration.

12. Despite the lack of established markets for environmental services, it is worthwhile focusing on Governments becoming smarter purchasers of these services. Government incentive payments should be focused on explicit outcomes or outputs (e.g. CO2 sequestered, area regenerated/revegetated) rather than inputs, in order to encourage innovation and efficiency.

13. Government has a clear leadership role to play in that it has the capacity to generate private sector interest on the scale required. While in the longer term, government is likely to become a less substantial player, operating more by setting the “rules of the game” than by being the purchasers of services or the facilitator of projects, initially it has a clear and definable role in establishing market confidence in investments which address issues of national significance.

14. The federal government should consider reforestation and other environmental initiatives in its current review of PPP investment structures and tax arrangements.

15. CMAs have limited experience in commercial negotiations on the scale of envisaged forestry or land use change contracts, thus investors may be wary. Roles and responsibilities within government need to be clarified to alleviate this problem, and it is foreseeable that State Treasury may be the best placed agency to undertake financial negotiations with support from forestry and NRM agencies.

Creating a favourable investment environment

16. There is substantial and growing interest in multi-purpose forestry, landscape change and ecosystem services amongst the capital markets and the “investment community”. Multi-purpose forestry may represent a significant investment opportunity for patient capital, particularly that which wants to be tagged as “sustainability investment”. Significant investment in multi-purpose forestry could be achieved by “marrying” private and public sector investment and capacity through well-designed PPPs.

17. There is a need to link together the forecasting of carbon stocks and timber revenue to gain an overall picture of cash flow, internal rates of return and asset values over time, based on assessing different scenarios of changing global circumstances. Government should provide information to support this kind of analysis, while the private sector continues to conduct its own analysis or risks and opportunities.

18. To stimulate reforestation activity on a scale sufficient to have a measurable impact governments can help create a favourable investment environment by:

• establishing bi-partisan political support for long-term projects focussed on multiple outcomes (This will help overcome the problems that can arise during negotiations with different levels of government.);
• clarifying the roles of Government agencies;
• focusing policies and programs on engendering sufficient confidence of landholders and investors in long-term environmental services contracts or equivalents;
• modelling the likely scale and impacts of reforestation on a region by region basis in terms of environment, employment and economic activity e.g.: impacts on landscapes, water, future timber industry etc;
• further R&D and provision of information on emerging forestry options;
• supporting analysis which fosters informed investment in emerging ecosystem services markets, and explores the willingness of the market to participate.

 19. Governments already spend substantial amounts of money on NRM, mainly through large numbers of relatively small grants (e.g. NHT/NAP etc). In order to achieve NRM outcomes cost effectively, strategic projects should be funded which build capacity to leverage private investment through large scale investment projects engaging the capital markets, landholders, timber companies and CMAs.

Addressing institutional constraints

20. While PPPs have been used to fund many initiatives around the world, there are no examples supporting the kind of broad scale environmental repair proposed in this report.

21. Lack of professional, governmental and institutional experience is an impediment to the potential for large-scale partnerships focused on revegetation.

22. The costs and benefits of establishing a special purpose statutory authority charged with overseeing implementation of multi-purpose reforestation should be compared with an existing authority such as Sustainability Victoria in becoming responsible for brokering deals etc.

23. In the event that there is a responsible authority or special purpose fund, project investment guidelines should be developed which are based on clear principles which permit sufficient flexibility to adapt to a range of circumstances.

Recommendations – Guidelines for advancing PPPs for reforestation

The project set out to produce a set of guidelines, which could support the development of PPPs for reforestation. The following are proposed:

1. Establish a flexible framework for PPP development
A framework for PPP development should be flexible so as to be applicable to a wide variety of projects and situations. Public investment should be based on clear principles, including public benefit tests, and individual projects should be assessed on their likely outcomes. Where possible Governments and NRM bodies should specify the outcomes that they are trying to achieve and willing to pay for as over time it is assumed that this will encourage further innovation in both financing, landscape design and reforestation techniques.

2. Explore a range of options for structuring deals
There is a need to look at a wide range of options for structuring deals. Ways of cost sharing, benefit sharing and/or risk sharing are required that bring together public and private sector investments to finance projects with clearly defined and specified objectives. An overall framework which is sufficiently flexible is required to allow for different conditions, project circumstances and risks and rates of returns etc. Negotiation arrangements are required for ensuring that the greater the risk taken by a stakeholder or investor, the greater the potential return. Risk and reward should be allocated proportionally.

3. Segment long term deals with shorter term renegotiation periods
Long-term deals can be broken into shorter “renegotiation” periods based on pre-determined time or trigger clauses. This would help reduce uncertainty for both the public and private sector, and allow for managing expectation and risk, for instance due to changing carbon prices. Good commercial contracts can provide renegotiation triggers. Triggers and timing of any renegotiation of agreements should be predetermined within contracts, by the parties involved.

4. Determine the liability for specific risks
Where there are high levels of uncertainty regarding environmental benefits - e.g. will planting a forest reduce salinity in stream x kilometres away? – Governments or NRM bodies should determine the extent to which they take the risk induced by poor knowledge of the underlying environmental processes. While uncertainty and complexity may reduce confidence governments are able to make contractual options available based on predicted rather than measured outcomes.

5. Establish a carbon register
A carbon register should be established to facilitate and monitor trade. This is a current impediment to the market, but the current proposal by the Australian States to establish a carbon market may over come this1.

6. Underwrite long term contracts
If long term contracts are to be entered into, in addition to short-term grants, funding will most likely need to be underwritten by State or Commonwealth Governments, as the CMAs cannot guarantee funding over the life of an environmental forestry project – e.g. between 10 and 30 years. Other PPP contracts – such as the Spencer Street Station Redevelopment - have been entered into with a time frame of 30 years and therefore offer a precedent for long term contractual arrangements.

7. Fund learn-by-negotiation processes as well as on ground projects
Prior to the development of more mature markets, public funding is required to support “learn by negotiation” processes, in addition to on-ground projects. For example, the Commercial Environmental Forestry (CEF) project is identifying a range of constraints to cost-effective contracting that need to be streamlined (see Section 5).

8. Reduce transaction costs of dealing with multiple agencies
Transaction costs of dealing with multiple agencies and streams of State and Commonwealth Program funding need to be reduced if projects are to cost effectively address multiple NRM, greenhouse and industry development outcomes.

9. Involve all stakeholders from the outset
If multi-purpose plantations are to meet the needs of a range of parties, theses parties should be involved from the outset. For example, negotiation processes need to ensure the presence of a range of prospective investors, including carbon buyers, timber companies, landholders etc to ensure that the perspective of different parts of the market are presented.

10. Establish clear negotiation processes
Negotiation processes need to clearly define the different interests and concerns of private and public stakeholders and need to result in clearly defined roles and responsibilities for all parties.

Negotiation processes need to ensure that respective shares in risks are adequately determined and clearly allocated.

1 At the time of printing, the Task Group on Emissions Trading has submitted a report to the Australian Prime Minister. This includes recommendations regarding a national emissions trading scheme and carbon trading.