This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 LIMA 002444 
 
SIPDIS 
 
DEPT FOR OES/ETC, OES/ENV, WHA/AND, WHA/EPSC 
BRASILIA FOR ESTH HUB - K. KAMBOURIAN 
USAID FOR LAC, EGAT 
USTR FOR B. HARMANN, M. BURR 
COMMERCE FOR MCAMERON 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: SENV ETRD EINV ECON PGOV SNAR PE
SUBJECT: PERU'S TROUBLED FOREST CONCESSION PROCESS 
 
REF: A) 04 STATE 121924 B) 04 LIMA 2128 AND PREVIOUS 
 
¶1. (SBU) SUMMARY. Three years after Peru began implementing 
a modern forest concession system - to wide acclaim - 
concessions remain unconsolidated and problematic.  Lack of 
concessionaire funds, delays in management plan approval, 
lack of GOP capacity to oversee concessions, and competing 
land claims have been obstacles to advancing the process. 
Declines in GOP forest management funding, and limited 
political commitment to the process, are also of concern. 
Some concessions, indigenous lands and protected areas 
remain subject to illegal logging in a context of weak rule 
of law, poverty, informality and corruption.  U.S.-Andean 
Free Trade Agreement negotiations have highlighted these 
problems but may leverage greater GOP action.  USAID Peru, 
with Embassy support, is focusing its environment program on 
building national capacity to consolidate concessions and 
control illegal logging.  The challenges in doing so are 
large but not unsurmountable.  Making the concessions 
successful could multiply Peru's sustainable forest 
production by many times.  END SUMMARY. 
 
PERU'S VAST FOREST RESOURCES UNDER THREAT 
----------------------------------------- 
 
¶2. (U) Peru is blanketed with vast forests covering 78 
million hectares (ha), 60 percent of the country.  Tropical 
forests occupy 65 million ha of the total, among which are 
some of the most biodiverse areas in the world.  On paper, 
Peru has had protected areas, encompassing 13 percent of its 
territory, for some time.  Many areas lack effective 
policing, though, and have suffered habitat destruction, 
fragmentation and overuse.  A key culprit has been the 
forestry industry, which for many years was unregulated, 
chaotic, and focused on rapid extraction, resulting in 
extensive deforestation. 
 
¶3. (U) Logging in Peru's Amazon has targeted big-leaf 
mahogany and tropical cedar.  Four or five major exporters 
control the mahogany trade, buying from half a million 
impoverished loggers and intermediaries (reftels).  Under 
the forestry system in existence until 2000, mahogany 
logging and land clearing for agriculture denuded nine 
million ha (11 percent) of Peru's original forests.  Coca 
cultivation alone accounted for 2.3 million ha - one-fourth 
- of total deforestation.  The GOP has not promoted mahogany 
regrowth, and reforestation has been minimal. 
 
¶4. (SBU) Peru continues to lose nearly 300,000 ha of forest 
annually.  Much logging is unauthorized, with grave social, 
environmental, and economic impactsSocial.  Forest crime 
degrades ecosystems, costs Peru $7 million in lost yearly 
tax revenues, undercuts prices of timber taken legally and 
depletes resources vital to rural communities.  The GOP 
reports that illegal loggers harvest 60,000 cubic meters of 
timber per year, worth $72 million, creating market 
distortions.  (Note: official timber and wood products 
exports totaled $214.2 million in 2004.  End note).  By 
USAID estimates, the practice has impacted more than 55,000 
households and 1,280 indigenous communities across the 
Peruvian Amazon.  (Note: Two illegal loggers were killed in 
a confrontation with native communities May 17.  Also, the 
Interior Ministry reports growing links between illegal 
loggers, narcotraffickers and the Sendero Luminoso terrorist 
group, evidenced by greater seizures of coca hidden in 
timber shipments and expanding areas controlled jointly by 
these groups.  End note.) 
 
THE RESPONSE: A MODERN FOREST CONCESSION SYSTEM 
--------------------------------------------- -- 
 
¶5. (U) Facing growing pressure to control the problem, in 
2000 the Fujimori Administration secured passage of a Forest 
Law creating a new legal framework to foster sustainable 
forestry and sector modernization (reftels).  The law, 
heralded as among the most progressive in the developing 
world, mandated that large (to 50,000 ha), sustainable, 40- 
year forestry concessions replace the existing patchwork of 
small one-to-two-year concessions. 
 
¶6. (U) Under the Toledo government, natural resources agency 
INRENA, an Agriculture Ministry dependency, launched the new 
process in March 2002.  By end-2003 INRENA had awarded 4.7 
million ha in 318 concessions in the Madre de Dios, Ucayali, 
Huanuco and San Martin regions.  After local opposition 
delayed a similar process in Peru's largest region, Loreto, 
the GOP awarded an additional 2.5 million ha in mid-2004, 
for an end-2004 national total of 7.2 million ha in 524 
concessions. 
 
¶7. (U) In late 2004, INRENA also awarded 20,000 ha in 
concessions for ecotourism and 30,000 ha for reforestation 
in Madre de Dios.  Agency head Leoncio Alvarez announced 
plans to award three million ha in forestry concessions in 
2005 and two million ha in 2006, to reach 12 million ha 
nationwide by the end of next year. 
 
BUT ARE THE CONCESSIONS WORKING? 
-------------------------------- 
 
¶8. (U) While concessions now occupy nearly 10 percent of 
Peru's forested area, the process has progressed fitfully. 
Resistance from small loggers, their political allies, and 
coca growers delayed awards in several regions.  Anti- 
concession protests in Madre de Dios forced the GOP to 
extend the old, short-term concessions through March 2003 in 
the area.  The GOP overcame similar opposition in Ucayali 
and Loreto by establishing local working groups (with USAID 
help), involving civil society, private sector and public 
officials, to monitor concessions. 
 
¶9. (U) Embassy and USAID analysis reveals that once 
concessions have been awarded, making them operational has 
been hampered by several issues: a) concessionaire lack of 
funds for capital investment and fee payment; b) delays in 
completion or approval of management plans; c) lack of GOP 
capacity to ensure concessionaire compliance with law; and 
d) local group contesting of land rights in concession areas 
(see below).  Many such problems stem from inadequate and 
declining funding for INRENA's forest directorate, 
responsible for managing the concession process. 
 
¶10. (U) CONCESSIONAIRE LACK OF FUNDS.  Concessionaire lack 
of funds for investment and fee payment, or unwillingness to 
pay fees, has been chronic.  At the end of 2004, merely 37 
percent of fees due had been paid by concession holders, 
with $3.1 million still owed to the GOP.  Also, 42 percent 
of concessionaires had paid less than one-fifth of their 
obligations.  A World Wildlife Fund Peru (WWF) study of 47 
concessionaires showed that 30 percent lacked saws, and that 
after the harvest season, only 24 percent of authorized wood 
volumes had been taken. 
 
¶11. (SBU) DELAYS IN PLAN COMPLETION/APPROVAL.  INRENA 
requires two technical documents from concessionaires, a 
General Forest Management Plan and an Annual Operation Plan, 
both of which must receive agency approval.  INRENA's lack 
of staff and capacity to review documents in a timely 
fashion, however, has meant many delays in approval.  This 
has prevented some concessionaires from beginning harvests 
during the dry season (April-August) - the only viable 
harvesting period - causing them financial losses. 
 
¶12. (SBU) LACK OF GOP CAPACITY TO ENSURE CONCESSIONAIRE 
COMPLIANCE WITH LAW.  Oversight responsibility for 
concessions rests with INRENA and the Supervisory Entity for 
Timber Concessions (OSINFOR).  OSINFOR, meant to be an 
independent concession oversight entity, was ultimately set 
up within INRENA.  INRENA funding and field staff shortages, 
and OSINFOR's lack of independence, limit GOP capacity to 
monitor concessionaire compliance with management plans and 
adherence to law.  Moreover, INRENA attempts to sanction 
violators have been blocked in numerous cases by court 
actions instigated by offending concessionaires. 
 
CONTESTING LAND RIGHTS:  THE CASE 
OF CONSORCIO FORESTAL AMAZONICO 
--------------------------------- 
 
¶13. (SBU) A serious challenge to concessionaire land rights 
caused the failure of a flagship Spanish-Peruvian concession 
in Peru.  The Consorcio Forestal Amazonico (CFA) was 
composed of two Spanish investors who partnered with two 
Peruvians to invest $1.5 million.  (Note: The senior Spanish 
investor had seven years' experience in Peru.  One of the 
Peruvian investors later dropped out.  End note.)  CFA 
secured its 184,000 ha concession in Ucayali in July 2002. 
The consortium developed management plans, bought machinery, 
hired staff and began operations.  By early 2004, employment 
peaked at 1,580 workers. 
 
¶14. (SBU) CFA was the first concession in Peru to start the 
process leading to forest certification, whereby independent 
auditors would certify a forest operation as environmentally 
responsible.  CFA was also first to establish forest 
management committees.  Such committees, mandated by the 
2000 Forestry Law, are to oversee concessionaire use of 
forest resources.  CFA formed a committee comprising nine 
bordering native communities with a population of 7,000. 
 
¶15. (SBU) However, in August 2003, a so-called Churinashi 
indigenous community claimed ancestral rights over 1,300 ha 
of CFA's land.  The group raised its claim over time to 
112,000 ha (61 percent) of the concession.  (Note: Sources 
from the Ministries of Agriculture and Interior, the GOP 
Ombudsman and NGOs say the Churinashi Community was not 
originally resident in the area and had no right to make its 
claim.  They say the group was manipulated by local leaders 
in league with illegal loggers wanting to sabotage the 
concession.  End note). 
 
¶16. (SBU) INRENA is charged with resolving such claims.  A 
December 2003 report by INRENA's then Forestry Director and 
Legal Advisor declared that Churinashi's claim to CFA land 
was baseless.  However, in January 2004, then INRENA 
director Cesar Alvarez dismissed the Forestry Director. 
(Note: the latter told USAID he was fired because he refused 
to alter the report to favor Churinashi's claim.  End note.) 
INRENA's legal advisor subsequently resigned, stating INRENA 
leadership handled the conflict improperly. 
 
¶17. (SBU) CFA camps were attacked several times by the 
Churinashi group.  Major damage was done to machinery and 
buildings, and equipment was stolen.  One attack, in May 
2004, targeted CFA staff and WWF consultants.  Shortly 
afterward CFA suspended operations.  A court then issued an 
eviction order against the Churinashi group. 
 
¶18. (SBU) CFA, with Spanish Embassy help, pleaded its case 
in two meetings with President Toledo in early 2005. 
Reportedly, Toledo acknowledged CFA rights but considered it 
politically infeasible to enforce the eviction due to the 
social unrest it would trigger. (Note: Peru's Indigenous 
Association announced that thousands of armed indigenous 
people would prevent police from enforcing the eviction. 
End note).  Instead, Toledo offered to create a Commission 
to negotiate compensation for the consortium.  However, the 
Commission has yet to be created.  The Spanish investors 
subsequently withdrew from Peru.  (Comment: GOP failure to 
prevent the collapse of CFA's concession harms Peru's effort 
to attract foreign investment and technology and modernize 
the forestry sector.  End comment.) 
 
RECENT GOP INITIATIVES AGAINST ILLEGAL LOGGING... 
--------------------------------------------- ---- 
 
¶19. (U) As a result of strong USAID and Embassy support, in 
late 2002 the GOP issued a supreme decree creating a Multi- 
Sectoral Commission to Fight Illegal Logging.  The 
Commission was composed of officials from the Ministries of 
Agriculture, Justice, Interior and Defense, plus SUNAT 
(National Tax Agency) and INRENA.  WWF provided technical 
assistance to the group, which had as its mandate the 
completion of a National Strategy to Fight Illegal Logging. 
 
¶20. (U) The National Strategy was released in November 2004. 
It focuses on: a) strengthening INRENA institutional 
capabilities in forest control and supervision; b) designing 
and implementing a system for law enforcement, log tracking, 
forest raids and timber trade transparency; and c) promotion 
of civil society and local population participation in 
forest control and supervision.  Under the strategy, INRENA 
is developing a computer database to evaluate and manage 
concessions nationwide.  After producing the strategy, the 
Commission dissolved.  It became operational again in March 
2005, when ex-Minister of Agriculture Alvaro Quijandria was 
appointed to lead the group.  Mr. Quijandria passed away on 
May 17, however, leaving the Commission in limbo. 
 
¶21. (U) INRENA has begun random concession inspections, to 
verify logging plan compliance.  The agency conducted 28 
inspections in late 2004 and early 2005, with USAID 
assistance, in Madre de Dios.  The inspections were begun 
also to address NGO complaints that the GOP fails to 
adequately monitor mahogany extraction, as required by 
Appendix II of the Convention on International Trade in 
Endangered Species (CITES).  INRENA detected violations in 
five concessions, finding that $2 million worth of mahogany 
had been laundered through them.  By law, such concessions 
should be nullified and the areas returned to public 
control.  OSINFOR is supposed to enforce the law, and court 
action is prescribed.  To date, however, no legal action has 
been concluded against the violators. 
 
¶22. (U) INRENA leadership is making efforts to fight 
internal corruption related to illegal logging, and has 
broken wood-laundering rings in several regions over the 
last two years.  INRENA has asked the Finance Ministry for 
$5.5 million in additional funding to consolidate 
concessions and fight illegal logging.  As well, the agency 
is considering imposing export quotas on mahogany, based on 
annual exports in recent years.  (Note: Post will report on 
these quotas septel.  End note.) 
 
...BUT INADEQUATE GOP FUNDING LIMITS SUCCESS 
-------------------------------------------- 
 
¶23.  (U) Despite these actions, three years into 
implementation of the new model, progress in consolidating 
concessions and reducing illegal logging has been limited. 
The effort is hampered by INRENA's low and declining 
forestry budget.  INRENA's forestry directorate budget fell 
to $5.1 million in 2004, 29 percent of INRENA's total budget 
of $17.7 million.  In 2003, the forestry directorate budget 
was $7.5 million, 39 percent of the $19.3 million agency 
budget.  The nearly 50 percent forestry budget drop last 
year led INRENA to close dozens of logging control posts in 
the jungle.  Nationwide, the agency has only 27 regional 
offices dealing with forest issues, and 250 inspectors to 
oversee concessions.  In April, Peru's leading newspaper 
highlighted GOP shortcomings in combating the problem, and 
corruption within concessions, where some concessionaires 
traffic in fraudulent logging permits. 
 
USAID REFOCUSES ENVIRONMENT ASSISTANCE 
-------------------------------------- 
 
¶24. (U) USAID has devoted $3.9 million annually on average 
over the last nine years to the environment in Peru.  USAID 
has refocused these resources, however, in the face of 
decreasing GOP budgets, rising illegal logging, and the 
inability of Peruvian institutions to control the problem. 
The revised program stresses GOP partnerships, ownership and 
political commitment to address problems, underscoring that 
U.S. assistance supplements rather than replaces local 
leadership.  Institutional capacity building is also a 
priority, to help the GOP comply with Peruvian environmental 
law and improve coordination across sectors.  These 
functions will be critical for Peru under a Free Trade 
Agreement (FTA) with the U.S.  The program also seeks 
improved GOP coordination with indigenous and other civil 
society groups and with the private sector, to increase the 
political salability of GOP environmental enforcement. 
 
¶25. (U) Program goals are to: advance alternative 
development efforts (prevention of coca expansion and 
generation of licit economic activities for marginalized 
groups); promote conservation and sustainable management of 
natural resources for the improvement of livelihoods; and 
develop the capacity of GOP institutions to enforce existing 
environmental policies and laws. 
 
¶26. (U) Specific USAID actions under the program include: 
 
  a)   supporting the concession process (assessing economic 
     viability and market linkages); 
b)   combating illegal logging (helping restructure INRENA's 
Forest Authority, supporting GOP sanctions); 
c)   reinforcing alliances with tax and customs agency 
SUNAT, the Interior Ministry, and other agencies; 
d)   strengthening controls over protected natural areas 
(partnering with INRENA or anti-drug agency DEVIDA to fight 
coca production in parks); 
e)   supporting Peru's decentralization process; and 
f)   helping close legal loopholes that weaken natural 
resource management. 
 
COMMENT 
------- 
 
¶27. (SBU) Although Peru's forest concessions system has been 
lauded as a developing world model, it remains flawed and 
unconsolidated.  Lack of concessionaire funds, management 
plan approval delays, lack of GOP capacity to adequately 
oversee concessions, and rival land claims have slowed 
progress significantly.  GOP failure to reverse a decline in 
forestry management resources is particularly troubling, and 
suggests limited high-level GOP commitment to the success of 
the process.  Current U.S.-Andean Free Trade Agreement 
negotiations have cast light on these issues but can 
hopefully leverage greater GOP action.   Toward this end, 
USAID Lima and the Embassy are focusing on institutional 
capacity building and partnership with the GOP, private 
sector and NGOs to fortify the concessions system in Peru. 
The system is salvageable, with time.  Post and Washington 
agencies will need to coordinate closely to help advance 
this goal. 
 
¶28. (U) Note: This cable was co-drafted with USAID Lima. 
 
STRUBLE