VD(3Q L2 Jc3 eoo1O@G~ (tS3 tJo CE ab~ V WTP522 2002 Foran Goace Wo . %HIN Endl[krnq _ _ _ _ _ o A $St fmj Recent World Bank Technical Papers No. 428 C. Mark Blackden and Chitra Bhanu1-, Ceitder; Growth, and PovertY, Re'dIctiO;i: Special Progiaiam of Assistaicec' for Africa, 1998 Statuts Report oti Poverty in Sub-Sahlaran Africa No. 429 Gary McMahon, Jose Luis E.via, Alberto Pasc6-Font, and Jose Miguel SThchiez, Ani E,zhironinental Stutdy of Ar,tisanl(71, Sitiall. /71ad MCdinin/ Mini, ng in Bolivia, Chile, intii PCIeIr No. 430 Maria Dakolias, Court PCIformlDance aroundi#ii the World: A Coimiparative Perspcctive No. 431 Severin Kodderitzsch, Refoiots iu Alban ioti Agricifitrne: Assessinig a Scctor in Trn tsitiun No. 432 Luiz Gabriel Azevedo, Musa Asad, and Larry D. Simpson, Mauegenaeowt of Water Resources: Bulik Water Pricing ibi Brazil No. 433 Malcolm Rowvat and Jose Astigarraga, Latib Amiericnim lnisolveiici, Syste,ns: A Com;:parative Assessmtent No. 434 Csaba Csaki and Johni Nash, eds., Regiona:l andid liternational Trade Policy/: Lessoiis jfr the 1--U Accession mt ti, Rural Sector-World Bankl/FAO WVorkshop, Iiune 20-23, 1998 No. 435 lain Begg, EU Investmuenit Granits Review No. 436 Rov Prosterman and Tim Hanstad, ed., Legal Imipedients to Effectivze Rural Latid Relationis in Easter: Europe antd Central Asia: A Coniparative Perspectizve No. 437 Csaba Csaki, Michel Dabatisse, and Oskar Honiiscih, Food and Agricultuire it: the Czech: Reqtiblic: Front - Velvet " Tranisitiot: to the ChaIleniges of ELi Accessio)n No. 438 George J. 13orjas, Ecottomic Rise:tcel: ci tl:e Dete'rtim ii ts of littinirc:tior: l-essonis for t(it' Etu1opcoia LlI jiot No. 439 ivlustaphia Nabli, Finaiicial littegiatioti, Vulnicrabilities to Crisis, atid ELI Accessio?: it Fi7ve Cetitral Eucrop:ca Countries No. 440 Robert Brmce, loannis Kessides, and Lothar Kneifel, Overconting Obstacles to Libeeralizatict: of the Telecoiti Sector in Estot:ia, Poland, the Czech ReIublic, Slotet ia, at;d H:itiganiri: Ait O7erVieC7O of Key Polic:y Cotcerits ad:d Potettial l;iitiatives to Facilitate thte Transitiot: Process No. 441 Bartlomiej Kaminski, Hucngary: Foreignt Trad' lss::es it: thIe C())text of Accessioci to the ELI No. 442 Bartlomiej Kaminiski, The Role of Foreign. Direct 1,t'estttcei:t c:;:d 7TrdC Policyi int Pola;:d's Acecssion to the Eiuropeain Ltiot: No. 443 Luc Lecuit, Johni Elder, Chlristian Hurtado, Franc,ois Rantrua, Kamal Siblini, and Maurizia Tovo, De4lStif1yiiig MIS: Guidelitis fior Mant ag iciit I forinatioti Si stems it Social Ftnm :s No. 444 Robert F. Townsend, Agricultural Inicetitves itt Sub-Saharuit Africa: Policy Clht:llet:ges No. 445 lan Hill, Forest Managemtet it: Nepal: Ecoomttics of Ecologiy No. 446 Gordon Hughes and Magda Lovei, Economtic Refortt mid Etnvironm,etal Performtance it: Tratsitiot Economties No. 447 R. Maria Saleth and Ariel )inar, Etalitatint Water listittitiot:s atid Water Sector Performtiance No. 449 Keith Oblitas and 1. Ravmcnd Peter in association w,vith Gautanm Pingle, Halla M. Qaddumi, and Jav'antha Plerera, Tratisferri, g Irrigation Maticget;e;t to Farmers hi At dl: tn Pradesl:, /Itdin No. 450 Andres Rigo Sureda and Waleed Haider Mlalik, eds., judicial Chi:ale;:ges iii tlte Ne:70 Mille,utiic: PrceCdi;i\'s of the Secot td Suimmi:it of the Ibero-Amtericitt Supremnte Coitrits No. 451 World Bank, Pricatizatiot: of the PoW'er atid N:tiur al Gas Industries it Hun;gary ii:d Kazaklistait No. 452 Lev Freinkman, Daniel Treisman, and Stephen Titov, Suibtatioiial Budgetitg int Russin: Preemptin:g a Pote;ttial Crisis No. 453 Bartlomie; Kaminski and Michelle Riboud, Foreign Investm:ent atid Restructuritig: The Euidet:ce fryom Hiucgary No. 454 Gordon Hughies and Julia Bucknall, Polat:d: CoMtplybitg With ELI Etiviro tnietal Legislatire No. 455 Dale F Gray, Assessit:e;u of Corporite Sector Value altid VIriltuercbiity: Litiiks to Exclictiii't' Rnrt, atit Inuicicl Cr-ises Nc. 456 Sal man M.A. Sal m La, d .. C,it,011,171tc,1't: I.( X atl PiIieI Pt'liC ,tee11 t Pits: toCi'c'dino. of,,, 'nil I/tVA , 1ittiik S,'tttimtr No. 457 Mary Caniniiig, 1'eter Moo:k, antid l'imothy I-Icleniiak, I . *i . 7 ILIFRO Internation.il Union of Forest Research Organiz iions-; t.. 4 LEI Lembaga Indonesia Ekolabel A. NTCC National Timber Certification Council Ntlalaysia) ^ PEFC Pan-European Forest Certification Framewvork LINDP United Nations Development Programme; \W\ HLI %W ahana Liiigkungan Hidup Indonesia s s , M * II/ a4. l _ I kr Executive Sumimarym a I s there a rule tor lorest conce!,sions in the sustainable management of public forests? Can sustainable forest management be achieved under forest concessions? ' What can be learned from the extensive experience with -- forest concessions in countries around the world, from the failures and few successes? Can forest concession pro- cedures be strengthened to achieve the sustainable forest 1 _ i and environmental management of public forests andd' thereby contribute to the survival of forest cover? ,/j - A forest concession is a contract between a forest owner and another party permitting the harvesting (forest utilization contracts) and/or managing (forest management ., - services contracts) of specified resources from a given for- . - est area. The concessions discussed in this study involve - i -- - i both types of contract, a combination that occurs in many a - countries. The study examines the forest concessions ex- - . ; -- perience on public lands with a focus on natural forests in developing countries. However, the study also draws on i concessions experience in developed countries that may be applicable to natural forests in developing countries. The experience surveyed provides the basis for pro- 7 posals to strengthen procedures for the allocation of for- . - est concessions and improve their forest and environmental - management; the study also introduces economic and pro- o- . j ; . cedural incentives for improved forest management per- . :- - formance and proposals to strengthen monitoring, - . I supervision, and compliance with contract terms. ; . - >*a- < Government commitment is essential to the success of the proposals. With tighter control, forest concessions may be able to play a role alongside other policies to - 4 w i; .B ~~s-. ss.i:- .t- Forest Concession Policies and Revenue Systems achieve sustainable forest management and privatization to be efficient or successful. On maintain forest cover. the other hand, for fast-growing fcrest planta- tions, private ownership or privatization can be perfectly appropriate. WHAT THE STUDY COVERS Issue 2. Public Benefits of Natural Forests Part One of the study reviews and evaluates country experience with forest concessions and Public benefits of natural forests include (a) non- alternative foresttenures on public lands in both timber products, (b) nonmarketed values, and tropical and temperate countries. Important per- (c) environmental benefits. Nonmarketed val- formance incentives are defined. Part One also ues are forest values that are not sold, and there- includes proposals to improve concession al- fore not priced, in any organized market. Thus, location procedures, strengthen concession they are often overlooked in evaluating the contracts, and improve both forest management benefits generated by forests. on concessions and the monitoring and super- vision of concessions. Issue 3. Local Community Forest Part Two evaluates forest revenue systems Use and Benefits and presents proposals for revised forest fees. The aim is to reflect the values of both the tim- Past forest concession agreements have ignored ber and the concessions, to make fees easier to forest uses by forest dwellers. These benefits collect, and to structure forest fees to provide should be incorporated in redesigned conces- economic incentives for concession manage- sion agreements along with opportunities for ment and performance. forest concessions run by local commnunities. Issue 4. Length of the IMPORTANT ISSUES IN FOREST CONCESSIONS Concession Agreement Many of the issues of forest concessions stem Longer term concession contracts do not, as is from the complex biological nature of the for- often thought, provide incentives for sustain- ests. Other issues are social, institutional, and able forest management through greater secu- administrative. The latter are closely tied to a rity (Boscolo and Vincent 2000; Gray 1994; fee structure that in many countries is both too Vincent 1 990;Walker and Smith 1993). Short- complex and too low to foster conservation. term renewable contracts with renewal based This study identifies eight issues common to on performance reviews provide better incen- tropical developing countries as well as tem- tives for, and guarantees of, performance. perate developed countries: Issue 5. Concession Size and Forest Fees Issue 1. Public or Private Forest Ownership and Management Forest concessions can vary enormously in size and often are granted over vast areas, beyond a For the slow-growing natural forests discussed company's needs. Such concessions encourage in this volume, private ownership of forest land wasteful use of timber and poor management or privatization of forests is not appropriate. of resources. Annual area-based fees at signifi- These forests have too many nonmarket, envi- cant levels can encourage concessionaires to ronmental, and nontimber public benefits for relinquish excess forest area. 2 Executive Sumrncry Issue 6. Bidding on Concessions and * Step 1. Define the concession area and en- rransparency in Concession Allocation sure that it is not encumbered by other land ownership or land-use restrictions. In most countries, concessions are allocated * Step 2. Begin the allocation process, prefer- administratively-a slow process that invites in- ably initiated by the government rather than efficiency and corruption. To improve the pro- by concession applicants. cess and achieve greater transparency, e Step 3. Advertise the availability of the con- competitive allocation of concessions has been cession area and invite expressions of inter- tried using auctions and sealed tenders. These est. Concession conditions, rights, and efforts have had varying success. This experience obligations should be specified in the appli- has demonstrated that procedures must be clear- cation package issued at this point. ly defined and tightly controlled I-o ensure that o Step 4. Prequalify applicants. The conditions bidding is competitive. for prequalification should be stated in the application package. Issue 7. Concession Management Incentives * Step 5. Evaluate, approve, and notify quali- and Performance Incentives fied applicants, all within a limited time specified in the application package. In most countries, concession agreements have * Step 6. Allow time for applicants to evaluate notprovided sufficient incentives forforestman- the area and the timber and to prepare pro- agement, nor included measurable perfor- posals. Under Step 6, those who are prepar- mance requirements. Interim concession ing a bid will undertake a reconnaissance licenses and performance bonds can provide inventory of the concession area, unless the incentives for compliance, as can the level and government has prepared an inventory as structure of forest fees. part of the bidding package. a Step 7. Submit proposals and bids. Issue 8. Inspecting, Monitoring, and Auditing * Step 8. Selection winning applicant and bid. Forest Management * Step 9. Award and sign the concess ion con- tract. Contract conditions should follow a In many countries, arrangements for supervising standardized form applicable to all con- and monitoring concessions are weak. Forestry cessions, with special conditions, rights, departments and ministries often are underfund- and obligations for the area in question (in ed and ill equipped, with little field capability for an appendix). inspection and monitoring. Proposals to strength- en forest revenue systems are designed to increase forest revenues and provide funds for improving STRENGTHENING THE FOREST field capacity or for contracting out the work of CONCESSION CONTRACT monitoring and supervision. To be effective, the forest concession con- tract must provide certainty of rights and ob- CONCESSION ALLOCATION STEPS ligations for the concession holder and AND PROCEDURES include strong incentives for the concession- aire's compliance. Required performance Suggested steps to strengthen the procedures steps should be defined by the government, forallocatingconcessionsareoutlinedhereand as forest owner, and spelled out in the con- detailed in chapter 4. tract as follows: 3 Forest Concession Policies and Revenue Systems * Step 1. Boundary marking. Clear and per- FOREST REVENUES AND PRICING manent definition of the concession bound- ON CONCESSIONS aries is essential to forest management. * Step 2. Concession area map. Mapping the The forest revenue system ancd the concession area is an important prerequisite structure of forest fees are key tools for a reliable forest inventory and manage- of forest policy. ment planning. (Landell-Mills and Ford 1999) * Step 3. Access control. The concession holder would be required to control access * Issue 1. Low Forest Fees and Revenues. In to prevent conversion of the forest estate into many developing countries, forest fees are marginal agricultural and grazing land. well below the value of the timber. Low con- * Step 4. Forest inventory and environmental cession fees encourage the overexpansion inventory. Both inventories would be com- of forest concessions into areas that may be pleted and approved before full-scale har- more appropriate for nontimber uses. vesting is allowed. * Issue 2. Poor Forest Revenue Collection. For- * Step 5. Forest management plan and envi- est fees, which are usually based on the vol- ronmental management plan. Both plans ume of timber cut (stumpage fees), would be required to protect timber and commonly are avoided or are not properly nontimber products and environmental ben- collected, reducing the incentive to harvest efits. Both should be verifiable on the ground. or utilize the timber efficiently, or to man- * Step 6. Road plan. The road plan should be age the forest sustainably. There is scope for designed for on-the-ground verification. the wider use of area-based forest conces- * Step 7. Forest utilization plan. A forest utili- sion fees, which are easier to administer and zation plan would be required in cases in harder to evade. which the concession involves a processing * Issue 3. Minimum Forest Fees. Minimum for- plant. est fees can ensure that forest fees cover ad- * Step 8. Social and community development ministrative costs, including those of plan. This plan should document commit- regenerating the forest and preserving the ments to the community by the concession forest, nontimber, and environmental values. owner. * Issue 5. Bidding on Concessions and Bonus * Step 9. Initial annual operating area plan. Bids. As well as generating revenues and cap- This plan should include a logging plan and turing timber values, competitive auctions a plan for marking trees for cutting. The lat- by bonus bids effectively allocate conces- ter should be handled in such a way that sions and reduce illegal practices. marking could be inspected and checked by the forest agency before logging begins. Suggested Forest Pricing Policies On-the-ground supervision and monitoring of The forest pricing policies and forest fees sug- the performance conditions listed above are es- gested in chapter 8 are intended to improve sential. If the government forest agency is not forest concession performance and its sustain- equipped for that, the work could be contract- able management by increasing the financial ed out to reputable, impartial private sector viability of concessions. The proposals in- firms using increased forest fees. clude five elements: 4 Executive Summary 1. Annual concession fees. Area-based an- recommended to improve overall efficiency of nual concession fees are recommended at rates forestry by preventing harvesting of timber at that generate a significant proportion of forest below cost or below opportunity c:ost. Mini- revenues and provide incentives for forest mum area-based forest concession fees are rec- management. ommended to reflect the environmental and 2. Initial concession fees. A rnodest initial nonmarket opportunity-cost values of alterna- concession fee is recommended to cover ad- tive forest land uses. ministrative costs and discourage frivolous 5. Fund to finance forest management, su- applications. pervision, and monitoring concessions. It is rec- 3. Bidding on concessions. Where com- ommended that a substantial proportion of the petition can be achieved, it is recommended forest revenues from concessions be allocated that concessions be allocated by bidding, pref- to a forest management fund and used to erably by sealed tender. finance the supervision and monitoring of 4. Minimum forest fees: Volume-based and logging and forest management activities area-based. Minimum volume-based fees are on concessions. 5 Intro,d iction At decade ago, less than 1 percent of natural trop- ical forests (fewer than 1 million ha) was under ;: sustainable forest management. This ratio was established in a study of tropical forest management un- MC > dertaken by Duncan Poore and others (1989), for the In- . ternational Tropical Timber Organization (ITTO). Since then, there have been substantial efforts to bring forests under sListainable management. However, these efforts have not always been successful (Hardner and Rice 1999). Questions remain. Can tropical forests be sustainably managed for a diversity of uses, including commercial ex-. ploitation, or can tropical forests be preserved only as pro-. tected areas? Is sustainable forest management achievable' through forest concessions, or should they be abandoned? -. . g This study examines these questions primarily from the standpoint of natural tropical forests on public land and ., proposes revised structures and procedures for conces- sions contracts and fees. A forest concession-defined in detail in the first sec- . a tion below-is a contract between a forest owner and an- other party permitting the harvesting and/or managing of specified resources from a given forest area. Thus, forest concessions may involve both rights and obligations. Con- cessions have been the primary form of forest tenure and, forest management in many developing countries, espe- cially among forest-rich tropical developing countries, but- also among a number of temperate developed countries. -: The experience of individual tropical countries and tem- perate developed countries with forest concessions has been extensive (box 1). In both cases, these country expe- riences have been mixed, frequently negative. From these . ' aW. Forest Concession Policies and Revenue Systems Box 1 Forest concessions around the world West and Central Africa Forest concessions of Latin America Forest concessions are tlhe domi- various types are the dominant form of forest tenure nant form of forest tenure in Bolivia, Guyana, in almost all the forest countries of West and Central Nicaragua, Suriname, and Venezuela R.B.. In Suri- Africa: Cameroon, Central African Republic, Cote name, for example, the 32 concessions cover 712,000 d'Ivoire, Democratic Republic of the Congo, Gabon ha; expired concessions 560,000 ha; Incidental Cut- Congo, Ghana, and Liberia (Grut, Gray, and Egli ting Licenses (shorter-term concessions that do not 1991). In Gabon, logging concessions cover 11.9 require a management plan) 567,000 ha; and explo- million ha (ha), 56 percent of the forest area of the ration licenses a further 1.3 million ha; for a total of country (World Resources Institute 2000a). In Cam- approximately 3.1 million ha: 22 percent of the total eroon, logging concessions cover 17.3 million ha, 76 forest area ofSuriname (Sizer and Rice 1995; Mitchell percent of the forest area, with over half of the area 1998). Forest concessions exist in other Latin Amer- in abandoned concessions (World Resources In- ican countries but are less important. stitute 2000b). North America. Canada has a variety of types of Southeast Asia Forest concessions are the domi- forest concessions. Some are area-based; others are nant form of forest tenure in Cambodia, Indonesia, volume-based, allowing a specified quota of wood to Malaysia (Peninsular Malaysia, Sabah, and Sarawak), be cut. The latter include tree farm licenses and other and Papua New Guinea. In Indonesia, the 427 forest types of concession licenses, and short- and long-term concessions active in 1998 covered 52.3 million ha timbersales-another form ofconcession license (Ha- and yielded 15.6 million cubic meters of logs, 53 per- ley and Locker 1990; Ross 1995; World Resources cent of the total official harvest of wood Institute 2000c). Types of forest tenure differ among (Essama-Nssah and Gockowski 2000). Another 34 the 10 provinces and 2 territories (Nonevent Territo- percent, 10 million cubic meters of the official har- ry is no forested), each of which has its own forest vest, came from land clearing. The actual harvest, legislation and administration, providing a diverse however, is considerably higher. Cambodia has 24 con- portfolio of forest management experiences. These cessions, covering 4.6 million ha, about 44 percent of tenures cover 220 million ha: 77 percent of the com- Cambodia's 10.5 million ha of forest (Fraser Thomas mercial forest area (World Resource Institute 2000c). Partners and Associates 2000). An additional 12 con- They represent an annual allowable cut of approxi- cessions, covering an additional 2.3 million ha, were mately 180,000 cubic meters per year, 83 percent of canceled in 1999 for nonperformance. Illegal logging which is in long-term tenures (Haley and Locker and the unreported timber harvest are substantial in 1990). both Cambodia and Indonesia. These problems will Few, if any, concession-type forest tenures remain be explored below. in the United States. experiences, good and bad, there are usefu I les- Against this, it is argued that protection sons to be learned for the redesign of forest con- will be ineffective because agricultural incur- cessions systems. sion following logging is experienced in many There have been numerous challenges to tropical countries (Angeles 1999; Farris 1999; the viability of sustainable forest management Whitmore 1999). Nevertheless, a recent study of tropical natural forests. One view argues that of 93 parks in 22 developing countries in which forests can be conserved only by setting them forests have been set aside as protected found aside in protected areas in which logging is that " . . . the majority of parks are successful strictly controlled (Bowles and others 1998). in stopping land clearing, and to a lesser degree Proponents of protected areas argue that it is effective in mitigating logging, hunting, fire, and not possible to control logging to achieve sus- grazing." (Bruner and others 2001). tainable forest management outside protected Anotherviewpoint argues that, for countries areas. with low population pressures on forest lands, 8 Introduction such as in the Amazon of Bolivia, areas can be 5. In countries with private forest lands, set aside after conventional logging and protect- private woodlands and woodlots are a fifth ed from incursion or deluging more cheaply and alternative. efficiently than under conventional forest man- The challenge is to undertake both land- agement (Rice, Gull son, and Reid 1997; Rice, use planning and its implementation and to Sugar, and Bowles 1999). However, doubts have meet those commitments in the face of coun- been raised about the success of such a policy, tervailing pressure from special interest groups. given future pressures for deluging (Pearce, Puts, For countries with significant public for- and Van clay 1999). est lands, improved forest concessions policies Finally, others have pointed out that al- can be important components of sustainable though parks and protected area; are essential forest policy. Such concessions policies would to conserve forests and biodiversity, on their involve: own they are inadequate to preserve the range * Restrictions on the areas allocated to con- of forest ecosystems, species, and plant and cessions animal communities in tropical forests (Puts and * Government initiative in selecting areas for others 2000). They note that, in addition to es- concessions tablishing protected areas, " . . . priority must * Restructured forest concessions procedures be given to ensure that the greatest possible * Settingasideprotectionareaswithinconces- amount of biodiversity is conserved outside sions for preservation and other uses protected areas by altering harvest patterns in * Measures to protect the environmnent and these landscapes of resource extraction." (Putz biodiversity within the managernent plan and others 2000). * Low-impact logging These differing perspectives suggest a * Improved on-the-ground supe-rvision and range of models for forest conservation and monitoring of concessions operations forest management. For countries with public * Provision for community-basecl forest uses forest lands, the best arrangemient to maintain * Nontimber forest products production and forests and biodiversity will likely be a combi- wildlife management nation of some or all of the following alterna- * Community management and co-manage- tives: ment of concessions 1. Protected areas large enough to pro- * New directions, such as simplifying and rais- vide habitat protection, and in a contiguous ing fees and introducing incentive systems pattern for concession holders (Hardner and Rice 2. Forest concessions with enforceable 1999, Putz and others 2000). performance-based management criteria, and This study examines the experience, role, incorporating protected area; and other use and effectiveness of forest concessions in the zones use and sustainable management of forests on 3. Forest plantations of higher-yield spe- public lands in developing countries. It also ex- cies (situated on compact land areas close to amines alternative forest tenures. The study fo- processing plants and markets) to provide for cuses on tropical natural forests but draws on domestic forest products needs and to reduce the experience of both tropical and temperate pressure on natural forests countries. Many of the issues, conclusions, and 4. Community forests and community for- recommendations also will apply to public for- est concessions managed by communities and ests in temperate countries, and to countries in indigenous groups. transition. A number of proposals based on1 9 Forest Concession Policies and Revenue Systenms these experiences will be discussed. They seek forest tenures, that is, on forest concessions, and to: (2) fees on timber. Fees on tenures, such as area * Impose restraints on granting concessions concession fees, confer the right to exploit the * Strengthen procedures for the allocation of resources of defined areas of theeforest. In the case forest concessions of the type of contracts discussed in this study, * Improve forest and environmental manage- that right would be in exchange for undertaking ment on concessions the duties of forest management. Fees on timber, * Introduce performance incentives for im- such as volume-based stumpage fees, are based proved forest management performance on the measured volume of timber cut but do not * Strengthen monitoring, supervision, and always reflect its true economic value, which is compliance. the price that would prevail in a competitive The proposals incorporate a number of per- market. formance incentives, both economic and pro- cedural, designed to encourage compliance and performance; reduce the incentives for graft, FOREST CONCESSIONS DEFINED corruption, and illegal activities; and increase transparency. However, if the proposals are to Forestconcession contracts can be of two kinds: be successful in improving forest concession forest utilization contracts, allocating harvest- operations and management, it is necessary that ing and/or use rights to public forest lands; and governments be committed to deal with graft forest management services contracts, which and corruption in the forest sector, and to in- are procurement contracts for forest manage- crease transparency of concession allocation, ment services. Forest utilization contracts operation, supervision, and monitoring. With- may give the holder rights to harvest timber out these commitments, the proposals will or other forest products or to hunt. They also fail to improve concession operations. may entitle the holder to use forest services, An importantfeature of the proposals is rais- such as watershed protection, or to profit from ingforestfees. Sustainableforestconservation and biodiversity or tourism. management depend on it. Low forest fees on Often forest concessions contracts involve timber and concessions provide the wrong incen- both types of contracts, granting concession- tives, signaling abundance rather than scarcity. aires harvesting or use rights, but also requir- Low forest fees on timber make commercial log- ing them to undertake forest management ging and processing profitable and attractive for activities, reforestation, and/or environmental entry and expansion, encouraging entry, wastage protection. Forest concessions in many coun- of valuable timber, overcutting, and depletion of tries are of this dual nature, and these are the the forest (Karsenty 2000). Low concession fees types of concessions discussed in this study. make forest concessions profitable and attractive Forest concessions contracts can be be- and encourage overexpansion of forest conces- tween a government, as owner of public for- sions, and into areas that may be more appropri- est land, or a private forest land owner on ate to nontimber uses or protection forests. the one side; and a private corporation, pri- The fee structure in many countries is com- vate individual, government agency or cor- plex and needs to be simplified. The final chap- poration, community, or cooperative on the ters of this study discuss fees in detail. In the other side. meantime, it will help to know that they break The forest concessions discussed here in- down broadly into two categories: (1) fees on volve public forest lands. In most cases, they 1 0 Initrodtuctiotn also involve contracts between the govern- Governments also may contract out the ment, as owner of public forest lands, and harvesting of other timber and nontimber for- private sector corporations. However, con- est products through sales, permits, or conces- cession contracts can sometimes be with state sions to individcuals, private sector firms, or organizations, communities, ocr aboriginal forest communities. Other forest outputs, such groups. as recreation and ecotourism, also may be con- tracted out to private sector firms or communi- ties. The design of forest concessions and other WHY FOREST CONCESSIONS? contractual arrangements illustrate the applica- tions of contract theory and principal-agent As owners and administrators ol public forest relationships (box 2). Other principal-agent lands, governments can manage' public forest examples from the natural resources field lands; harvest timber in their own logging op- include various types of mineral leases and erations; and sell logs to sawmills, pulp mills, petroleum leases. Agricultural leases and share- and other wood processing plants. Govern- cropping are classic principal-agent arrange- ments can even engage in processing forest ments (box 2). products, including both nontiinber products Besides lacking expertise in the specific and other forest outputs, such as bamboo, rat- areas mentioned above, many countries, espe- tan, gums, and resins, recreation, and ecotour- cially developing countries and countries rich ism. For example, in Indonesia, the state in tropical forests, do not have the human pow- corporation, Perum Perhutani, operates and er, capacity, budget, or field capability to man- manages forest plantations on sl:ate forest land, age their forests, control logging, protect forests growing primarily highly valuable teak on the from incursion, or manage protected areas. densely populated island of Java. Perum Per- These countries also may consider contracting hutani manages the plantations; operates log- out forest management and protection duties ging operations; produces other forest products, to private sector firms, organizations, or comn- including nontimber products; operates pro- munities by means of forest concessions. These cessing plants; and markets the products. In concessions would grant harvesting rights to several European countries, national, state, or timber but also require the concessionaire to provincial forest services engage in both the manage and protect the forest. These, too, are management of state forests and in the logging applications of principal-agent theory. Govern- and roadside selling of logs. ments may contract out the management of In most countries, however, governments forest protection to communities in exchange do not have the capacity, capital, or experience for harvesting rights to nontimber forest prod- to operate logging operations, to produce oth- ucts, hunting, or other traditional uses. Hence er forest products (rattan, resins), or to run oth- derives the dual nature of the concessions con- er forest services (recreation and ecotourism tracts mentioned above. operations). Instead, mostgovernments choose Thus governments may choose to under- to contract them out. They may contract out take both forest management anid production logging operations through sales of standing (harvesting) of forest products or other forest timber or logging concessions of various types. outputs; or they may contract out either or both Contracting out is often more efficient (Leffler activities, as shown in figure 1. Communities, and Rucker 1991). as forest owners, and private forest owners, Forest Concession Policies and Revenue Systems Box 2 Principal-agent relationships, contract theory, and rationale for forest concessions The theory of contracts and principal-agent relation- agent relationships are at the corc of forest conces- ships provide the basis for the design of forest sion policy and in the design of conccssion terms and concessiotis as proposed in this study Principal-agent conditions, or in short-term timber harvesting con- relationships and contract theory are at the heart of tracts (Leffler.and Rucker 1991). Principal-agent many economic arrangements. relationships also are involved in delegating the su- Principal-agent theory, or briefly, agency theory, pervision of concessions, monitoring performance of deals with the relationship betwveen a principal (own- forest concessions, or auditing concession operations er of a resource) and an agent (user of a resource). It (Strausz 1997). is concerned with how one individual (say, a land Agricultural leasing and sharecropping represent owner or employer) can design a compensation sys- classic and well-studied applications of principal-agen- tem (a contract) to motivate another individual (his cy theory applicable to forest concessions. The or her agent, say, a tenant or employee) to act in the substantial and diverse literature on the developed and agent's interests (Hayami and Otsuka 1993; Eatwell, developing country experience with agricultural leas- Milgate, and Newman 1987). The "principal-agent ingand sharecropping provides useful experiences for problem" arises because the interests of the principal the design of forest concession contracts and policies. and agent differ (the landlord and the tenant have Several applicable references are listed belov. different objectives), and the principal's information Mineral and Petroleum L.eases. The literature and about the agent's actions is imperfect (it is difficult applied eperience on petroleum and mineral leasing for the landlord to fully monitor the tenant's actions). also provides useful experience and examples appli- Thus, economic inccntives are important in en- cable in designing forest concession policies. couraging performance by the agent and To explore principal-agent theory and applications, harmonization of the interests of the agent and prin- contract theory, and agricultural and other Ieasing ar- cipal. Contract theory is concerned with the design rangements, readers are referred to Binswanger and of contracts and contract terms and conditions that Deiniger (1993); Dasgupta, Knight, and Love (1999); provide incentives (both positive and negative) for the Gibbons (1998); I-Iayami and Otsuka (1993); Hen- agent's actions that achieve the principal's objectives dricks, Porter, and Tan (1993); Leffler and Rucker and harmonize their interests. Therefore, principal- (1991); Mead (1994); Strausz (1997); andltlim (1992). also face the same choices (Leffler and Rucker concession experience of a number of tropical 199 ). and temperate developing and developed for- est countries. From this review, ways of mak- ing concessions more effective are identified WHAT'S AHEAD? AN OVERVIEW and recommendations are developed. A range of forest tenure alternatives are Can sustainable forest management be achieved surveyed in chapter 3, including short- and under forest concessions? In Part One, we evalu- long-term timber sales, forest concessions, ate the role and effectiveness of concessions in privatization of concessions, joint forest enter- managing forests and using forest resources. Part prises, and state forest corporations. The review One has four chapters, starting with this intro- again draws on the case study experiences of a duction and reviewing and evaluating country range of countries. experience. From these experiences, the author Chapter 4 is based on the preceding re- identifies problems and proposes changes to con- view of forest concession issues and country cession management polices and procedures. experiences. It presents a set of proposals de- Chapter 2 examines key issues and prob- signed to deal with the problems and issues in lems of forestconcessions, drawingon theforest forest concessions to make forest concession 1 2 Initrodluction Figure 1 Forest management and production options for public forests Government-owned public forests Forest management Forest production Manage Contract out Public Contract out forests forest management harvesting harvesting more sustainable. A series of steps are outlined 6, and forest revenue issues surveyed in chap- to improve the concession alloc:ation process ter 7. A full range of alternative forest fees is and strengthen concession contracts, forest man- summarized in the appendix, which is expand- agement on concessions, and the monitoring ed on the website with data drawing on the and supervision of concessions. lThese steps are experience of both tropical and temperate coun- designed to introduce performance incentives tries (http://essd.worldbank.org/rdv/RDVWeb.nsf/ in the allocation and operation of concessions. forestry/ExternalLinks). Forestfees and charges are key instruments Changes in the structure of forest fees in managingforestconcessions,with important based on these experiences are proposed ill incentive effects. Part Two reviews forest reve- chapters 8 and 9. These proposals are designed nue systems and evaluates alternative forestfees to reflect the values of both the timber and the for concessions, starting with a brief review of concessions, to make fees easier to collect, and forest pricing and forest values (chapter 5). to provide economic incentives forconcession Country experiences are reviewed in chapter management. 1 3 tE .'; - . PARTONE -li' FORESTiCONCESSI.ONS .MANAGEME:NT- Q:.PTOICNS, 61c! - j L4. , ' j! ~ ~ r ., i , . - * > r f it rp -- ! ;1 s r n~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i IL~~~~~~~~~~~~~I - - - { t' 4Is, -s.< , ;T ~~~~~~~- . ,^- * ! rt-; 1~~~~ ., ^- ~'1.¢s z , ; ' j, r ^ '! ' < , . . , /'- - e --, {'!i -. ,9 w 'ee-,-4,,- u r . il,, _ X;~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- , If~~~~~ s'..> _ .,;.,..-4,- Forest Concesoipns ;--. Management ls,s!ues. anM i-sues in the mana lement and operdtion ot fnI(re,l conce,;(-esionll restill 1:lion Ihte t I-)nip le\ na- , - tLre oI the toresis OtheMr conflcesions issues are - social, institutional. and admini.trati,e Perhaps surpris- ' ingly, nian\ ot these ILsues are commOnni t) nian\ dekel- oping (countries v% itlh tropical torets. as \ elI as to a number = V ' 4 of forested teniperate de%eloped countries. The local de- ; * tails vdrN. but the similarities proi,ide oapp(-ortuni1ies tor r countries to benefit from their shared e\perience, COMPLEX TROPICAL FORESTS, DIVERSE USES, BENEFITS, AND VALUES ....... -- . ' Most tropical natural forests are slow growing, the timber often achieving growth of no niore than 1 m3 per ha per . . year. The forests are uneven aged and contain a great va- riety of species of trees-frequently as many as 200 to 300-of widely varying ages, sizes, uses, and values. Trop- ; ical forests are renowned for their biodiversity. They con- % tain a wide variety of species of plants and animals - . (numbering in the thousands, with many species yet uni- - -_ dentified). As a result, tropical forests generate a diverse range of timber and nontimber outputs, environmental * ->t - benefits, goods, and services, making forest management '- a challenge. - In most tropical countries, forest tenure arrangements, - i both for the land and the forests, as well as the ownership Ijft ,C of the forest outputs and benefits are unclear. In part, this stems from the complexity and diversity of the outputs and the nonmarketed and collective nature of many of w YAS- Forest Concession Policies and Revenute Systems these outputs and benefits. This context adds are less complex than in tropical countries, al- to the difficulties of tropical forest management. though similar in nature. Thus, there are useful In addition, tropical countries face other lessons to be learned from the experiences with problems in achieving sustainable management forest concessions and forest management in of their valuable tropical forests. Increasing pop- temperate as well as in tropical countries. ulation pressures in many countries lead to ag- Forest agencies in temperate developed ricultural incursion into forest lands by landless countries also have faced budgetar/ pressures people seeking to feed their families. In these over the last two decades, although admittedly countries, unless tropical forests can be pro- much less severe than indevelopingcountries. tected and managed, little forest will be left to The former also have had to curtail forest meet the country's growing domestic demand management, monitoring, and inspection. for timber and nontimber forest products, to However, as a result, they have developed in- maintain water flow and other nonmarket for- novative approaches to deal with the pressures. est values, and to contribute to the country's economic development and well-being. Finally, the era of reduced government KEY CONCESSIONS ISSUES budgets has made forest managernent and pro- tection increasingly difficult. In many countries, The nature of tropical and temperate natural for- cutbacks in staff and funding have left the agen- ests and the diversity of their outputs, benefits, cies and ministries responsible without the ca- and beneficiaries lie behind many issues, but pacity to manage the forests, or to supervise particularly in respect of the first issue-public on-the-ground forest activities. Thus, just when or private ownership and management of tropical forests are most in need of manage- forests. ment and protection, governments are least able to provide it. Issue 1. Public or Private Forest Ownership and Management TEMPERATE FOREST COUNTRIES Developing countries in particular face difficul- ties in the regulation, control, and supervision Temperate forest countries face many of the of public forest lands. Supervision and moni- same forestry issues and problems as tropical toring of public forests by government forest forests, similar in kind if not in degree. Tem- services is difficult. With cutbacks in the gov- perate forests, particularly northern boreal for- ernment sector, some have argued for deregu- ests, also are slow growing (often at 1 m3 per ha lation of forestry and the transfer of tenure and per year or less). The species composition is forestry responsibilities to the private sector. far less complex than in tropical forests. Nev- However, the privatization of tropical forests ertheless, temperate forests also generate a di- or forest land is not likely to be successful for verse range of outputs, benefits, and two reasons. First, tropical natural forests have responsibilities. The range includes timber and too many nonmarket, environmental, and non- nontimber forest products, the collective ben- timber public benefits. Therefore, deregulation efits and responsibilities of watershed protec- or privatization is not an efficient solution. tion and water management, recreational Private owners would ignore these nontim- opportunities, and biodiversity. ber and environmental benefits because they Forest tenure, forest management, and ad- would not be able to capture and collect rev- ministration issues in temperate forest countries enue from them. 18 Forest Concessions Management Hsiles Privatization is appropriate only for fast- For natural tropical forests, there are op- ,rowing forest plantations that produce few non- portunities to strengthen forest concession con- timber, environmental, and biodiversity tracts and procedures, to support forest benefits. management with economic incentives, to en- Second, the slow growth rates of most trop- courage or require concessionaires to under- ical natural forests mean that the growth rates take forest management activities, and to put in volume and value of the timber are too low forest management and concession manage- to make sustainable forestry financially viable ment on a more businesslike footing. A num- for private sectorfirms. Private sectorfirms can ber of proposed improvements are discussed earn more by practicing "liquidation" forestry below. and investing the proceeds elsewhere (Pearce and others 1999). Issue 2. Nontimber and Therefore, public ownership is necessary Environmental Values for the sustainable management of natural trop- ical forests. Governments can either undertake Natural forests, both tropical and temperate pro- forest management responsibilities or contract duce a diverse set of outputs and values. Out- out forest management, either within strength- puts such as commercial timber are marketable ened forest concessions contract:s, or as sepa- and are harvested by forest companies. These rate forest management contracts, provided that values are more easily measured. forest harvesting generates sufficient revenues Other outputs-nontimber products such to fund these forest management contracts. as fuelwood, rubber, fruits, game, nuts, herbs, There are ways to maintain public control of medicines, fodder, and a great number of oth- forest concessions while contracting out to the er nontimber forest products-cornmonly are private sector, or to an independent govern- gathered by forest dwellers and people from ment organization, certain forestry activities. communities in or adjacent to the forest. These activities could include harvesting op- These nontimberforest products may be mar- erations as well as regulatory functions, or keted or kept for family use. For this reasons, services such as forest inventory, log mea- values of most nontimber forest products are suring and grading, inspection of conces- difficult to estimate. sions, forest nursery operations, tree planting, Still other outputs that provide benefits to and other forest management operations. To individuals, such as recreation, hunting, and avoid collusion and ensure independence, the tourism, are not easily marketed, and thus are activities contracted out still will need to be much more difficulttovalue. Otheroutputs gen- supervised and monitored for performance. This erate collective, public, or commuunity benefit', monitoring and supervision can be delegated some of which go beyond local effects to pro- or contracted out, using the revenues from for- vide benefits nationally or internationally. These est contracts. include watershed effects of water supply, ero- Concessions performance can be audited sion control, flood control, and water quality by independent organizations or autonomous benefits, biodiversity, climate effects, and car- inspection services. Greater use can be made bon sequestering. These outputs are even moire of performance incentives, both positive and challenging to measure and to value. negative, including such things as refundable Nontimber values can vary greatly by for- performance bonds, which are refunded at the est type and location. Unlike timber values, end of each management plan upon demon- which are realized only at harvest time, non- stration of satisfactory performance. timber values are annual and continuing. Thus, 1 9 Forest Concession Policies and Revenue Systems small continuing annual nontimber values of- production, concessions agreements have ig- ten can equal or exceed timber values. Non- nored forest uses by forest dwellers and forest timber benefits, which add to the value of the communities. As a result, concessionaires have forest, make it easier to justify forest manage- had little incentive to manage forests to benefit ment, but they also make forest management local communities or forest dwellers. In addi- complex for multiple outputs. tion, forest communities often derive little ben- Forest concession legislation and conces- efit, employment, or revenues from forest sion agreements in most countries, tropical and concessions. Suggestions for the redesign of temperate, are based on timber production, and concessions agreements, forest management re- concession agreements are operated primarily quirements and procedures to ensure commu- for timber production. Under these concession nity forest uses and to increase community agreements, concessionaires are given little or benefits from forest concessions are proposed no incentive to manage the forest for nontim- in chapter 4. There also are opportunities for ber forest products, or for the environmental community forest concessions, producing tim- values. As a result, these other forest outputs ber, nontimber forest products, and other for- and uses often are ignored by concessionaires est outputs, including, for example, ecotourism. and potential forest values lost. The challenges then are to redesign con- Issue 4. Length of Concession Agreement cessions agreements to incorporate nontimber forest products and environmental values, to In many tropical countries, the short length of require concessionaires to manage the forest concession tenure is often identified as a rea- for nontimber and environmental values, and son for the unwillingness of the concessionaires to provide incentives (both positive and nega- to manage the forest and to practice sustain- tive) for concessionaires to manage the forest able forest management (FORM Ecological Con- for these values. Suggestions for the redesign sultants and Delvingt 2000). of concessions agreements and of forest man- It is commonly argued that longer, more agement requirements and procedures, perfor- secure concession tenures would provide the mance incentives, penalties, supervision, and required incentive for sustainable forest man- inspection procedures are presented in chap- agement. Yet, long-term leases may not be the ter 4. answer for slow-growing tropical forests pro- ducing nonmarket benefits. Under long-term Issue 3. Local Community Forest Uses tenures or under privatization of the forest, con- and Benefits cessionaires may continue to liquidate, rather than manage, slow-growing tropical forests Forest communities and forest dwellers are pri- (Boscolo and Vincent 2000; Gray 1994; Pearce mary producers and users of nontimber forest and others 1999; Vincent 1 990;Walker and products, such as fuelwood, foods, medicinal Smith 1999). In an empirical testsimulatingcon- plants, bamboos, and rattans. They also are cessionaire behavior, Boscolo and Vincent primary users and beneficiaries of many envi- (2000) also demonstrate that longer-term con- ronmental services, such as wildlife, watershed cessions give loggers little incentive to adopt benefits, and biodiversity. Thus, the issues for reduced-impact logging. forest communities parallel those of nontimber Where growth rates of tropical forests, in and environmental values. volume and value, are low-below rates of re- Because most forest concessions agree- turn on other investments-concessionaires will ments in the past have focused on timber have no incentive to manage the forests, even 20 Forest Concessions Management Issues inder long-term, or secure, tenure. Given the for nonperformance. However, if long-term 'low growth rates of most tropical natural concessions are renewable based on perfor- *orests-well below private sector rates of mance, then sustainable forestry may be return-long-term tenures or privatization can- achieved under long-term concessions, pro- not provide sufficient incentive for concession- vided performance can be and is properly aires to practice sustained-yield forestry. monitored. Concessionaires will liquidate the forests and invest the proceeds elsewhere at a higher rate Issue 5. Concession Size of return. In practice, under the slow growth rates Forest concessions can vary enormously in size of tropical forests, short-term tenures may re- among countries as well as within countries; sult in better forest management performance. the difference can be anything from a few hun- Evidence from Indonesia indicates that short- dred to tens of thousands of ha (Grut, Gray, term tenures, renewable upon forest manage- and Egli 1991). In some countries, concessions ment performance have provided a much aretoosmalltosupportviablesilviculture, log- stronger incentive for forest management than ging, and transport units. More often, conces- have long-term tenures (Gray and Hadi 1989, sions are too large, often well beyond the needs 1990). of concessionaires (see box 3 on concessions Thus, a more appropriate form of tenure size and ownership). for slow-growing tropical or temperate natural Concessionaires often acquire large forest forests might be a concession contract of 15 to areas, more for future insurance purposes or 20 years, renewable at 5to 1 0-year intervals and speculation than for regular timber supplies. subject to inspection and performance evalua- Large areas of forest are locked up, and public tion of the concession. This is the type of ten- forest resources lie idle. The acquisition of large ure offered under forest management licenses concessions areas can leave concessionaires in several Canadian provinces (Ross 1995). To with excess timber. Large concessions and ex- ensure impartiality, inspections could be car- cess timber supply provide little incentive to ried out by an independent agency funded by use the timber efficiently or to practice more forest fees that reflect timber values and better intensive forest management. This excess tim- collection of fees, as proposed below. ber supply encourages wasteful logging, cream- Boscolo and Vincent (2000) also demon- ing or high-grading, that is, taking only the best strate that performance-based renewal condi- tress. tions provide a powerful incentive for Large concessions with excess timber sup- reduced-impact logging, compliance with min- ply also are especially prone to deforestation imum-diameter cutting limits, and better forest by agricultural incursion or shifting cultivators. management, even under short-term concession With excess forest area, concessionaires have agreements. little incentive to control encroachment. Long-term leases can have another disad- The acquisition of large concessions, be- vantage. Under a long-term lease, if the con- yond the company's needs is encouraged by cessionaire mismanages the forest, it can be low forest fees and, in many countries, by low difficult to cancel the concession without liti- or negligible area-based fees on concessions. gation and/or compensation. If the concession With low, negligible, or nonexistent annual is granted under a short-term or renewable con- area-based fees, there is little or no cost to ac- tract (renewable subject to performance), it will quiring and holding large concession areas, and be easier simply not to renew the concession little or no incentive to relinquish excess area. 21 Forest Concession Policies and Revenuie Systems Box 3 Forest concession size and ownership The distribution of concessionis sizc and ownership 9.87 millioni ha, 17 pcrcenit of the total concessions in most couLntries is highly skewed toward a fcw large area, a high degree of concentration (Gray and [l-adi concessions holding large areas of forest and many 1989). smaller coneCssions, and toward concentration of own- In Canada, holdings of timber rights are com- ership. plicated by the several types of forest tenure and In Cameroon, the 10 largest concessionis owners by differences in tenure among the provinces. Sev- held 50 percenit of the area, the 25 largest held 75 eral provinces have both area-based and percent of the area. The largest concessionIs holding volume-based tenures. Area-based tenures provide was 650,000 ha (WVorld Resources Institute 2000b). rights to timber over a dcfined area. Volume-based In Gabon, the 12 largest concessions owners, 5 tenures provide rights to a specified volume of tim- percentoftheowners, held halfof thecoicessioi area, ber within the public forest. Thus, the aninual equal to 21 percenit of Gabon's total forest covcr. The allowable cut is the best measure of timber hold- remaining 209 concessionis ow\ners held the rest. Th'lc ings. For example, in British Columbia, the largest largest holdingwas 699,000 ha (\Vorld Resources In- forest province, the top 10 forest companies hold stitute 2000a). 59 percent of the annual allowvable Cut, a volume of In Indonesia, of 557 concessions in 1989, cover- 41 .8 million cubic meters per year (World Resources ing 58.8 millioni ha, the top 4 concessionis ownvers held Institute 2000c). Annual area-based concession fees at a sig- Forest fees and forest revenue issues are nificant level can encourage concessionaires to discussed in greater detail in Part Two in the relinquish excess forest area for allocation to chapters on forest revenue mechanism and pric- other uses, or as new concessions. Consolida- ing policies (chapters 5-7). Forest pricing poli- tion of small concessions (of less than optimal cies to strengthen forest revenue systems, size) can be encouraged by making concessions increase fees to reflect forest values, and improve transferable. Division of concessions that are revenue collection are suggested in chapter 8. larger than the optimal range also can be en- Included amongthe proposals in PartTwo couraged. At renewal, concessions that have is the suggestion that a more significant share been operated at less than, say, 75 or 80 per- of forest revenues be levied through conces- cent of their annual allowable cut could be re- sions fees. Concessions fees are fees on forest duced in size. This reduction would free area concessions in addition to those levied on the for reallocation. timber harvested and are easier to collect. They could include any or all of the following: (1) an Issue 6. Forest Fees and Forest Revenues initial concession license fee; (2) an annual on Concessions concessions fee based on the concessions area, inventory volume, or annual allowable cut; or The forest revenue system, forest fees on tim- (3) bonus bidding to pay a premium over basic ber, and fees on concessions can have a signif- concessions fees in which concessions are al- icant effect on forest management and the located by competitive application and through performance of forest concessions. Low forest oral auction or sealed tender. fees on timber and on forest concessions are Concessions fees, properly designed, can common to developed countries (GrLit, Gray, serve a numberof forest policy objectives. First, and Egli 1991; Repetto and Gillis 1988). Few, concessions fees are much easierto collectthan if any, countries price forests properly and use volume-based stumpage fees, based on the economic incentives to encourage efficient use measured volume of timber cut. With stump- and sustainable forest management. age fees, forestry departments are dependent 22 Forest Concessions Managenmenit IsK ties on accurate and correct measurernent of the Wheni there is adequate competition, con- volume of timber cut, which is usually carried cessions should preferably be allocated through cut by the concessionaires. As a result of this bidding. Concessions sold by bidding, also can and other factors, forestry departrnents often provide an indication of what should be collect only a small fraction of the stumpage charged on concessions when competition is f ees due. Concessions fees based, for example, not possible (Gray 1983; Gray and Ha.di 1989). on the area or productivity of the concession Examples of experience with auctioningof coni- z.re a fixed annual fee, easier to collect, and cessions are presented in box 4. rnuch less subject to abuse. It is generally believed that sealed-tender Second, concessions fees can reflect the biddinggenerateshigherpricesforconcessions security value of timber supply provided by the than open-bid auctions, because the former c(oncession. This security value is ain important provide less opportunity for tacit or open col- aind real value to concessions holders: the in- lusioni among bidders (Brannmian 1996; ;urance value of a guaranteed timber sLIpply. Crampes and Estache 1997; Gray 1983; *:oncessions fees can discourage the nonpro- Johnson 1979). "Vickery" type auctions, in luctive efforts (lobbying, persuasion, influence, whvhich the concessioni is awarded to the high- ar bribery, that is, "rent seeking") invested in est bidder but at the second highest bid prices, obtaining a concession and so channel efforts also have been recommended to achieve high- into more productive activities. er bids by encouraging bidders to declare their Third, concessions fees can encourage true offering prices (Karsenty 2000). better management of concessions and more Allocation through bidding, sealed tender, intensive forest management within conces- or oral auction has advantages. It avoids the sions. They also can reduce speculative acqui- difficult administrative decisions in choosing sition of concessions. Low or zero concessions among competing applicants. It allocates con- fees provide the wrong incentive. They encour- cessions areas to those to whom the timber or age the acquisition of concessions, make the concessions are most valuable. Bidding also acquisition of large concession areas cheap, generates additional revenue for forest owiers, and thus encourage creaming or high grad- be they governments, local communities, or ing, that is, taking only the most valuable spe- private owners. cies or parts of the tree, and leaving the rest as Bidding has another advantage. The pric- waste. es bid for concessions provide a market-based indicator of whether forest fees on the timber Issue 7. Bidding on Concessions and harvested are at the right level. If forest fees are Transparency in Concession Allocation low, profits from harvesting timber will be high, concessions financially attractive, and Concessions are all too commonly allocated the premiums paid as bonus prices bid for administratively, which invites corruption, brib- new concession high. On the other hand, if ery, and kickbacks. As a result, persons with forest fees fully reflect the value of the stand- little knowledge of the forest industry but much ing timber on concessions, the bids for con- influence are sometimes awarded concessions cessions will be lower. They will reflect only that they then sell or contract out (World Re- the value of the security of the timber supply sources Institute 2000a). Forest values, which provided by the concessions. Bidding on con- should go to the government, as owner of the cessions is discussed further in Par: Two in sev- forest, are thus dissipated in inefficiencies, eral chapters on forest revenue niechanisms and bribes, and kickbacks. pricing policies. 23 Forest Concession Policies and Revenue Systems Box 4 Experience with auctions and sealed tenders A few countries in West and Central Africa, Latin if the highest bids had been accepted (vVorld Re- America, and South East Asia have experimented with sources Institute 2000d). The World Bank had bidding for concessions, introduced auctions, or are hoped that public auctions would increase govern- planning to do so (Landell-Mills and Ford 1999). ment revenue and reduce corruption Auctions and sealed tenders have been used at varn- (Essama-Nssah and Gockowski 2000). Under ous times and to varying degrees in allocating forest pressure from the Bank to increase transparency concessions in Cote d'Ivoire, the Democratic Republic and accountability, the government made changes, of the Congo, Ghana, a number of peninsular Ma- tightened procedures, and appointed an indepen- laysian states, Sabah and Sarawak, and Venezuela R.B. dent observer (Seymour and others 2000). (Gillis 1992; Grut, Gray and Egli 1991). Cameroon's auction experience provides useful les- In Congo, in the past, bidding was used to allo- sons for other counties on how and how not to cate concessions in areas opened up for exploitation design and operate concession bidding. or for concessions cancelled or returned. Bids were In the late 1990s, Brazil auctioned a first conces- for the annual allowable cut (volume maximum sion in the Amazon on a second attempt. Largely as a annuel) based on per cubic meter bonus bids (Grut, result of the newness of the process and uncertainty Gray, and Egli 1991). Cote d'Ivoire has expcriment- on the part of potential bidders, there was only one ed with bidding on concessions, and Ghana agreed bidder and the bid was low. Nevertheless Brazil gained to introduce bidding in the allocation of new logging experience in the process, and perhaps the advantag- concessions (World Bank 1988). H-londuras has used es of proceeding slowly. auctions in the sale of pile timber under short-term Peru has developed plans to auction managed for- timber sales (Ryburn 1997; Gray and Hagerby 1997). est concessions in the Biabo Permanent Forest in the Cameroon has had uneven success in auctioning Peruvian Amazon under the auspices of the World concessions, starting in 1997 (Essama-Nssah and Bank and World Wide Fund for Nature Forest Alli- Gockowski 2000). This uneveln success was the re- ance (Toledo 2000). The Biabo l'orest prcject will sult of uncertainty and confusion over the sale bring 2.18 million ha under management, including conditions and the government's commitment to the over I million ha as protected forest and 631,000 ha bidding process, and the governments failure to ful- managed under the proposed forest concession sys- ly specify the procedures and conditions and stick to tem. The project includes the design of the proposed them (Seymour and others 2000). Several of the con- bidding and auctioll system, forest management su- cessions designated for bidding were allocated pervision, inspections and monitoring of procedures through a discretionary process (de grJ a grg, mean- and capacities, management of protected areas, and ing "by mutual agreement"). Others were not community participation in forest management and allocated to the highest bidders, while others appeared monitoring. to be allocated to individuals of influence (Seymour Indoniesia announced its intention to auction 3 and others 2000). In total, 16 of the 26 concessions million ha of expired concessions (Reuters 1999). did not go to the highest bidder (Essama-Nssah and However, to achieve this goal, Indonesia also would Gockowski 2000). have to put in place procedures and conditions for The revenue generated for Cameroon from the auctions and performance honds (Seymour and others auction would have been two-and-a-half times greater 2000). As shown by the examples in box 4, auc- independent organization as auctioneer. This tion procedures need to be under tight control, auctioneer might need to be an organization of to ensure that bidding is competitive and that international standing. concessions are awarded to the highest bidder, Bidding conditions can be tailored to sup- or to the highest ranking bidder when techni- port a country's industrial strategy. For example, cal competence and other factors are consid- to prevent large companies from acquiring large ered. To ensure impartiality, the auction process areas, concessions could be auctioned in small- might be carried out or supervised by an er, but manageable, units. To encourage 24 Forest Concessions Maniagement Issues development of a more competitive and diverse of their deposits if deposits and prepayments forest industry, small companies without conces- are to provide incentives for forest management. ;ions could begiven preference in biddingorgiv- The concession renewal provisions at 5- en the opportunity to match the highest bid. to 10-year intervals, mentioned above, can pro- It is recommended that competitive allo- vide a strong performance incentive for com- cation of concessions be applied first to new pliance (Boscolo and Vincent 2000). -oncessions in areas of the country in which The level of forest fees and the way they ^ompetition can be expected. Competitive bid- are structured can have important incentive ding also could be used to reallocate conces- effects on concession performance, logging sions returned, expired, and not renewed; or methods, adoption of low-impact logging, com- cancelled for nonperformance, perhaps with pliance with diameter limits, and use of spe- existing holders being given the option of cies. (Gray 1983; Grut, Gray, and Egli 1991; matching the winning bids. Boscolo and Vincent 2000; Karsenty 2000). Forest fees and pricing issues are discussed Issue 8. Concession Management Incentives below and summarized in the appendix. and Performance Incentives Prepayment will ensure that concession- aires are up to date with payment of their forest In most countries, concession agreements do fees. Other incentives are introduced in the not provide sufficient incentives forforest man- concession proposals of chapter 4. agement, nor do they include measurable per- formance requirements. Incentives can be used Issue 9. Inspection, Monitoring, and Audit to support the regulation and management of of Forest Management concessions. These can be positive incentives- payments or reduced fees based on perfor- Inmostcountries,arrangementsforsupervision mance-or negative-penalties or loss of and monitoring of concessions are weak, often deposits for nonperformance. close to nonexistent (Grut, Gray, and Egli 1991; Granting interim concession licenses that Gray and Hagerby 1997; Gautam and others are converted to an operating license upon 2000; Essama-Nssah and Gockowski 2000; demonstrated performance provides another in- Seymour and others 2000). centive. It puts the onus on the concessionaire Forestry departments and ministries often to demonstrate forest management performance are underfunded and ill equipped to supervise rather than requires the forestry department to and monitor logging activities and forest man- be continually checking perfornance. agement on forest concessions. They are uni- Concession managementalso can include derstaffed and underequipped arid have little greater use of guaranteed performance depos- field capability for on-the-ground inspection its and refunds upon performance. Performance and monitoring (Grut, Gray, and Egli 1991; bonds can serve as a strong incentive for com- Hardner and Rice 1999). pliance with concession terms and require- Forestry agencies commonly do not have ments, for performance in concession the vehicles or fuel to enable staff to go into management, and for adoption of low-impact the field (box 5). As a result, personnel often logging (Boscolo and Vincent 2000). Perfor- are dependent on concessionaires for transpor- mance deposits can be required at various stag- tation, accommodation, and support, thus jeop- es in the process of concession application, ardizing their independence and their ability approval, and granting. However, concession- to supervise and monitor concession opera- aires would need to be confident of the return tions. In addition, forestry staff often have little 25 Forest Concession Policies and Revenue Systems To improve concession management, Box 5 Inadequate field capability logging, and forest management of conces- The number of vehicles coes iot correctv nea- sions, it is important to strengthen the field sure an organization's field capacity. Vehicles do not capability of forestry agencies. It is important ensure that iispectionis are madeorconccssion per- to provide staff with incentives to undertake formanceevaluated.Vehiclesnmayinotlbcoperational field work and training in field inspections. It or may be used for other purposes thani in field also is important to strengthen the indepen- supcrvision. However, the numbcr ofvehicles is a dence of field staff so that they are less ready measure of potential field capability. Recent data from Cameroon and Gabon illustrate the gen- eral lack of resources for field supervision and inspection of forests and forest concessions. Box 6 Forest certification In the late 1980s, as a result of the economic crisis, the Cameroon Ministry of EnvironA ment and Independenit third-partv certification is beg'inining Forests was forced to sell most of its vehicles. It to play a role in monitoring and assessing pcrfor- only recently (1998) acquired newvehicles. It now mance in forest harvesting operations and forest has a total of 5 four-wheel-drive vehicles (onlC ill management. Forest certification eimerged in the late each region), and 28 motorbikes for 793 field 1980s. Environmenital groups including Friends of agents assigned to forestry monitoring and en- thc E.arth, World Wcldlife Fund, and Greenpeace forcemilent, micost of whonm remain office bound pressured the Internatioial 'lropical TIimber Org-a- (W7sorld Resources Institute 2000b). Mlaintenance nization (VITO) to implemeilt an international of vehicles and fuel fLirther limits field operationis. system for labeling tropical timber (Kickens 1999). In Gaboni, the Ministry of Water and Forests As a result, the IlfO has developed a series of has ncarly I 00 vehicles, a substanitial increase from guidelines and criteria for sustainable management 19 in 1997, Lut two-thirds of them are in the cap- of tropical forests (VITO 1992a, 1992b, 1993). A ital. Only 34 vehicles are available for provincial numberofindepenidenit tilrd-party international aid inspectors (World Resources Institutc 2000a). national monitoringinstitutions and monitorinigsys- tems have becn established. lhiese include the Forest Stewardship Council (FSC), FSC PrincipIls and or no incentive to go the field. In some cases, Criteria; International Standards Organization daily subsistence allowances are not sufficient (ISO),ISOI40;IPan-European ForestCertification Framework (PEFC); Finland's Forcst Certificationi to cover even the cost of food and accommo- System (FFCS), Canadian Standards Assoaiaon dation; expenses may not be fully reimbursed; (CSA); Brazil'sCERIFLOR forestcertificationI pro- and repayment may be delayed or never mate- gram; Malaysia's National Timber Certification ria l ize. At the other extreme, travel allowances Council (NTrCC); Camerooni's FSC National Work- may be paid whether the person visits the field ing Group; Bolivia's FSC Working Group; and or not, again providing little incentive to go into Indonesia's Lembaga Indonesia Ekolabel (LEI) among others (Forest Stewardship Council 1999; the field. WIorld Bank 1999d). Forestry staff in many countries are under- Around 20 million ha (about 0.5 percent of trained and underpaid. Salaries commonly are the earth's forests) have been certified worldwide, so low that people must work at other jobs to with mostofitin forests already managed in tem- survive. Salaries are viewed as retainers rather perate developed countries (Florest Stewardship than as payment for performance. Under such Council 2000b; 'World Bank 1999c). Certifica- thanuastpaymen, staff are lnerable to bribery tion systems proliferatc. 1Thlrd-party monitorinig circumstances, staff are vulnerable to bribery and certification is growing rapidly and offering to approve logging plans, certify logging or for- opportunities to strcngthcn monitoring and in- est management performance, or approve log spection of forestry operations and forest volume measurements and records without managenient of concessiolis. field inspection. 26 Forest Concessions Managetment Issues dependent on the concessionaires and less vul- concessionaires and to provide perforrnance in- rerable to persuasion or bribery. centives for forest agencies, indepen-ident au- Contracting out monitoring and super- diting of concession management, logging vision to independent (public or private) or- performance, and forest management is pro- ganizations funded by improvements in forest posed. Forest certification can play a role in fees is an alternative to maintaining field staff. independent monitoring and auditing of for- Tlo strengthen performance incentives for est concessions (box 6). 27 3". Alternative Forest Te6"U':ir;e's' Experiences from Selected Co trties . , .- c F :-rest uoncesicinv ha%e been the precldomn iit Inorill ot toreAt tenUre anid ihe primilar} niechaninlm tir the allocation and usie ot torest on publ1i( lands in de\ eloping countries an:d in numerous de% eloped co u n - , tries Hu%% e\ er, iorest(:ori-essicrisha\e notbeen \ thiUt considerable problen, ijohnson and Cabarle 1993, Rice. GuLiIlisoI n, and Reid I 9c Hardner and Rice 1999'. ,onie o0 %%hich ha\e been identitied in chapter 2P .. i -, Chapter 3 re% iew s a range ., alternati\e tcore,st ten- ures on %xhich concte-,iitml niaN be based Thes are e'.dl- 4 uated in ternm cit their suit3b1lt tlor sustaindble managenont of slow -grov ing. natural tropical ti'rec-,r drav% ing on the e\perience ot hoth tropical and temiper- ate Icr-st ccuntries Forest tenure reters Itc) the rights to '' u- the timber but alsc) rad include; rights to cither forest c,ut- puts and %dlUes -- scorne loresl tenures nia% be rilore appropriate for gjt < cCiuntries lith %ell de\eloped forest access and tianip(:cr- taticon nethcxrk.s or for countries m ith a %%ell de%eloped. technicall\ trained, %-ell equipped. and capable tf)rest sern ice that has good tield cap.ibilitN Somne are mnre ap- -- 4 propriate to plantaticin forests -- Chapter 4 suggests imponlant changes to forest con- cession agreernents. concession allocation prcceclures.; and torest management requirements The authors alsci o:' suggest changes to concession mcmnitoring and superx - - -* sion procedures to irmprc%e tocest management: to Inccr- pcirate nontimber, ccmrnunit, .and en\ ircinnental % alues. -AZ to irncrease ccmnnlunt' and national benetits, dnd to raise - fcore-t re'.enue.: Forest Concession Policies and Revenue Systems SHORT-TERM TIMBER SALES Short-term timber sales, along with other forms of forest tenure, also are used in several Timber Sales of Standing Timber is a form of Canadian provinces, including Alberta, British forest tenure under which the buyer has rights Columbia, Manitoba, and Ontario. In Canada, to the trees only, not to the forest land. The 90 percent of the productive forest is on public tenure rights are for a specific volume of tim- forest land. The provinces and territories are ber, for trees of certain species or diameters, or the owners of the public forest lands and are perhaps for marked trees only. The rights to the responsible for management of these public timber are for a limited time: the length of the forests. Forest tenures and forest management timbersale. Timbersales can be one, two, three, arrangements differ among the 10 provinces or five years, occasionally longer. Timber sales and 2 territories (Haley and Luckert 1 990; Ross do not include rights to future crops of timber 1995). As well, a number of the provinces have nor to any guarantee of future timber supply. several different types of forest tenures. British Under short-term timber sales, the forest Columbia, for instance, has 10 different types agency retains responsibility for management of forest tenures, representing many of the al- of the public forest, for surveying boundaries, ternative tenures discussed here, including a inventorying, and selling blocks of timber. The couple of forms of long-term forest concessions. forest agency also is responsible for supervis- Canada and many tropical countries have ing logging, and for regeneration afterwards. similar forest circumstances and face similar This is the traditional timber sale model. forestry issues. Each has extensive forests of Short-term timber sales commonly are sold slow-growing trees (although of very different in competitive auctions by open auction, oral species), physically remote forests, and eco- bidding, or sealed tender. To achieve bid pric- nomic remoteness due to difficulty of access es that reflect the value of the timber, it is im- and high transportation costs, and environmen- portant that the forest service set appropriate tal and aboriginal land rights issues. T-hus, the "upset prices" (starting prices for the bidding), experience of Canada and the provinces in for- and encourage adequate competition among est tenures and forest pricing issues can be use- bidders (Klein 1998; Elyakime and others 1997). ful to many developing countries. Timber sales sometimes may be allocated Among developing countries, Malaysia has administratively at fixed, volume-based stump- successfully used short-term timber sales. In the age prices. However, this formula is likely to PeninsularMalaysian states, timber is common- generate less revenue, and the timber is more ly sold under competitive timber sales contracts, likely to be used inefficiently. achieving a five-to-six-times increase in stump- Short-term timbersales arewell developed age revenue. Peninsular Malaysia has a good and widely used in the United States. They are transportation network and a well-developed, used by the U.S. Forest Service on National well-staffed, well-trained, field capable forest Forests, by the U.S. Bureau of Land Manage- service. The forest industry of Peninsular ment on BLM forest lands, and by a number of Malaysia consists of a number of independent the states on state forest lands. The U.S. Forest logging companies, and a separate processing Service, Bureau of Land Management, and state industry without a captive timber supply. As a - forest services have the staff, funding, and field result, competition for logs and timber is well capability to manage public forests and super- developed (Vincent and others 1997). vise logging operations. And there is usually In Latin America, Honduras provides an- sufficient competition to ensure bidding and other example of timber sales. A system of tim- reasonable stumpage price bids. ber sales has been developed for the pine forests 30 Alternative Forest Tenures: Experiences from Selected Countries nanaged by the State Forest Development Cor- reforestation, but otherwise are similar to short- aoration (COHDEFOR) and introduced in 1995 term timber sales. A few examples are found in KGray and Hagerby 1997; Ryburn 1997). Tim- the United States and among the Canadian prov- ber sales volumes vary between 2,000 and inces. Although there are no developing coun- 8,000 cubic meters, and contracts are of two try examples, long-term timber sales contracts years duration. The forest road netvork in Hon- can be an alternative forest tenure for countries duras is well developed, better than in many with well-developed forest service institutions. developing countries. The forest administration, COHDEFOR, is staffed and field-capable. COHDEFORfirstdoesadetailed invento- SALE OF FELLED TIMBER AT ROADSIDES ry of a timber sale area, marks the trees to be OR CENTRAL LOG YARDS cut, and makes the plan of operations. A refer- ence price (appraised price) is esiablished by a In some countries, instead of selling the stand- "market index" appraisal, based on the market ing timber, the forest agency may decide to price of sawn lumber and its relationship to undertake the logging itself and sell the timber stumpage price. This market index appraised as logs, at roadsides or in central log yards. stumpage price is adjusted to the stand condi- When the forestagency sells felled timberfrom tions of the timber sale area (volume per ha, public forest lands in these locations, the agen- stand quality, terrain, log-hauling distance, and cy is responsible not only for managing the for- road construction costs. See Ryburn 1997). The est and allocating areas for logging but also for appraised price serves as the basis for the de- the logging operation. Logging operations can posit and as the starting price for bidding. The be carried out by the forestry agency itself or auction takes place in two stages. Bidding is by contractors hired by and super/ised by the first by sealed tender. At the auction, the ten- department. When the forest agency sells pub- der envelopes are opened, and the top bid lic timber at a central log yard, it also is respon- serves as the starting point for the oral auction. sible for transporting the logs to the central log West Africa and South East Asia also have yard, usually using contract truckers. made limited use of timber sales, primarily for Timber sold in these locations usually is plantation timber (Gray 1983; Grut, Gray, and sold in lots. It can be sold at set prices, by oral Egli 1991). In Gabon, per-tree timber sales con- bidding, or by sealed tender auction. tracts were provided for in the legislation, but Organizing and supervising logging oper- the system could not be implemented because ations, as well as forest management, requires the forestry department was not able to mark a very well-developed, field-capable, and well- the trees or control the cutting (Grut, Gray, and financed forestry department. If competitive Egli 1991). bidding for logs is to be achieved and compet- itive log prices realized, sale of logs at road- side or in a central log yard also requires a LONG-TERM TIMBER SALES developed forest industry composed of a num- ber of processing plants. Long-term timbersales are similartothe short- The sale of felled timber at roadside or term timber sales described above but extend central log yards is used in several European for longer terms of 10 to 20 years. They often countries (for example, Finland, Germany, and require the timber sale holder to undertake Sweden) and, to a limited extent, in a few forestry activities such as forest planning, road developing countries (for example, Tanzania). construction, forest management, and In Thailand, before logging was banned, the 31 Forest Concession Policies and Revenue Systems government-owned Forest Industries Organiza- applied to other tenures, or forest fees estab- tion sold logs by public auction (Gray 1983). lished in the license agreement and adjusted As mentioned in the Introduction, Perum by a pre-established formula. In exchange for Perhutani, an Indonesia state forest enterprise, the security of timber supply without competi- owns and manages substantial forest planta- tion, the licensee agrees to undertake forest tions, primarily of teak, on the densely popu- management and forest renewal activities, lated central islands of Java and Madura. It either with or without compensation for the manages these plantations, carries out logging costs incurred. operations, and operates sawmills and other In Canada, forest management licenses in wood processing plants. It also auctions some various forms and under different names are of its log production to supply other forest prod- the major form of forest tenure in 9 of the 10 ucts plants. The strong demand for timber on provinces (Ross 1995). They are called Tree the densely populated islands of Java and Farm Licenses in British Columbia, Forest Madura ensures Perum Perhutani high prices Management Agreements in Alberta, Forest for the logs sold. Management Licenses Agreements in Saskatchewan, Forest Management Licenses in Manitoba, Sustainable Forest Licenses in FOREST MANAGEMENT LICENSES Ontario, Contrat d'Approvisionnement et d'Amenagement Forestier (CAAF) in Quebec, Forest management licenses are similar to for- Crown Timber Licenses in New Brunswick and est concessions. Both are long-term, area-based Newfoundland, and License and Management forest tenures. However, most examples of for- Agreements in Nova Scotia (Ross 1995). The est management licenses have much stronger general form of the agreement is similar in all forest management obligations than forest con- nine provinces, but with significant differences cessions found in developing countries. Coun- in specific aspects among the provinces. tries' experiences with forest management These long-term, area-based forest tenures licenses and problems can provide ideas for share the following major characteristics: other countries in redesigning their forest con- 1. They all involve a negotiated agree- cessions. For this reason, it may be useful to ment between a provincial government and a examine forest management licenses in some large forest company. detail. 2. In most cases, agreements are negoti- Forest management licenses are the ma- ated privately by the minister, at the minister's jorforest tenure system in Canada. Forest man- discretion, and approved by cabinet. In a few agement licenses provide rights to the annual cases, potential areas have been advertised and allowable cut of a geographically defined for- offers invited (competitive bidding has not been est area (Ross 1995). These tenure rights are used). for a specified length of time, commonly 20 to 3. Almost always, the agreement is linked 25 years. They are renewable at regular inter- to the construction and operation or supply of vals, following a performance evaluation. The a majorwood processing plant (a pulp or paper licensee has rights tothevolumeof timberequal mill, large sawmill, plywood or board plant). to the annual allowable cut at specified forest 4. Most agreements contain renewal pro- fees. The standing timber remains the property visions, under which they are reviewed at reg- of the government, as owner, until approval of ular intervals and extended by anotherfull term. the annual cutting plan and logging begins. The 5. Tenure holders are granted exclusive specified forest fees can be either the forest fees rights to harvest timber on the area, within the 32 Alternative Forest Tenures: Experiences from Selected Countries I imits of the sustained yield, and subject to the uses and environmental values in fc,rest man- *estrictions agreed on, at stumpage prices es- agement planning or operations, and for ignor- :abl ished by the agreement, or at stumpage pric- ing indigenous peoples' uses of forests (World es levied on other tenures. Resources Institute 2000c). 6. Tenure holders are given extensive re- In spite, or perhaps because, of the fail- sponsibilities for reforestation and management ures and criticisms, Canada's 40 to 50 years of of the lands for timber production on a sus- experiences with forest management licenses tained yield basis. In some cases, tenure hold- can provide useful lessons for developing coun- ers are reimbursed for reforestation and forest tries. The successes, failures, and imperfections management costs; in other cases, they are ful- all have something to teach about strengthen- ly responsible for these costs (Ross 1995). ing existing forest concessions arrangements Forest management licenses in most prov- and designing forest tenure arranglements for inces are for a 20- or 25-year period. In almost sustainable forest management. all provinces, the licensee is subject to a per- formance review, and the license is renewable periodically, at 5-year intervals in most prov- VOLUME-BASED FOREST TENURES: inces, 10-year intervals in others. Review and TIMBER QUOTAS PROVIDE GUARANTEE renewal provides a continuing incentive for per- OF FUTURE TIMBER SUPPLY formance of the required forest management activities. The licensee, who values the securi- With volume-based tenures, concessionaires do ty of timber supply, is willing to undertake for- not have forest tenure rights to any specific area est management and regeneration to preserve of forest. Instead, volume-based tenures pro.- this security of supply. With satisfactory forest vide a timber quota, giving the right to cut a management performance, tenure becomes specified annual volume of timber from larger continuing tenure, almost perpetual. Almost all managed forest, or a specified proportion of the provinces have provisions to allow withdrawal annual allowable cut of the managed forest. The by the government of up to 5 percent or 10 volume-based timber quota can be in terms of percent of the area at the review for specific a total volume, of certain species (mahogany, alternative land uses, such as parks or reserves. coniferous, deciduous), or of types or qualities Forest management and reforestation ex- of timber (sawtimber, pulpwood). Thus, vol- penditures are handled differently among the ume-based timber quotas can overlap other provinces. In some provinces, companies are forest tenures, sometimes adding complexity reimbursed; in others, they are required to pay and confusion to forest tenures. for reforestation and forest management. Oth- Only a few countries have had experienc- er features of the forest management license es with volume-based forest tenures. Canada arrangements vary among the eight provinces provides a number of examples. Eight of the and provide a rich experience and an opportu- 10 provinces have had experience with volume- nity for comparison and evaluation. based tenures extending over several decades The Canadian experience with forest man- (Ross 1995). They include British Columbia's agement licenses is far from perfect. The grant- Pulpwood Agreement and Forest License, ing of licenses has been by negotiation without Alberta's Timber Quota Certificate, Saskat- an open and competitive process. Forest man- chewan's Term Cutting Agreement, Manitoba's agement licenses have been criticized, among Timber Sale Quota, Ontario's Forest Resource other things, for encouraging deforestation and License, New Brunswick's Crown Timber Sub- over cutting, for not incorporating nontimber License and Crown Timber Permit, Nova 33 Forest Concession Policies and Revenue Systems Scotia's Forest Utilization License, and New- provinces, the forest is managed by the provin- foundland's Timber Sale Agreement (Ross cial forest service. In a few provinces and on 1995). some volime-based tenures, timber quota hold- The names differ and the specific rights, ers are required to undertake forest manage- terms, and conditions vary considerably, but ment planning. Reforestation responsibilities they all involve a volume-based guarantee of also vary. In most provinces, reforestation is timber supply. Tenure lengths vary among prov- done by the provincial forest service. In other inces from 5 to 20 years (25 years for British provinces and on some volume-based tenures, Columbia's pulpwood agreements). In most timber quota holders are required to reforest. provinces, the quotas are for 10 to 20 years. In some cases, timber quota holders pay refor- Most of the volume-based agreements are re- estation fees on the timber cut (Ross 1995). newable or replaceable but with less certainty than for the area-based tenures. For some of these volume-based tenures, the volume is re- GOVERNMENT FOREST ENTERPRISES duced if the timber quota has not been fully used. The provincial governments retain con- Government forest enterprises-state-owned siderable discretion to modify the terms and enterprises that undertake forest business op- conditions at renewal. erations to manage public forests-are another Most volume-based agreements are grant- tenure arrangement for public forests. Govern- ed within managed public forests on which al- ment forest enterprises may be involved in lowable cuts have been established. However, logging operations, or in both logging and pro- some volume-based tenures are granted over- cessing. lapping rights within area-based tenures or other In the present era of privatization and tight forest tenures. British Columbia's pulpwood government budgets, state forest enterprises agreements cover smaller, pulpwood-sized tim- may not be politically attractive. Governments ber within tree farm licenses or provincial man- may be more interested in selling public enter- aged public forests (timber supply areas). In prises and assets than in investing in improv- New Brunswick, Crown Timber Sub-Licenses ing efficiency and profitability of state are granted within area-based Crown Timber enterprises. Licenses. In Alberta, Saskatchewan, and Mani- State enterprises have been widely criti- toba, when area-based tenures were granted, cized as being unprofitable, inefficient, and volume-based quotas were granted to compa- wasteful. Government enterprises commonly nies that had traditionally logged within the area have suffered from overstaffing, lack of a clear (Ross 1995). mandate and mission, shortage of capital for The forestry department designates a one- reinvestmentwith no authority or ability to raise to-three-year cutting area permit to each quota the capital themselves, and political interfer- holder. These cutting area permits are replace- ence in operational policies, all of which have able to the life of the timber quota agreement. prevented them from achieving efficiency and Timber quota agreements therefore can provide profitability. the holder with a guaranteed timber supply for In cases in which state enterprises have 10 to 20 years if all other conditions are met been given a clear, direct mandate, indepen- (Ross 1995). dence from government interference in opera- Obligations for forest managemnent and tions, the ability to raise capital retain and planning and for reforestation vary among the reinvest profits, authority to control staffing lev- various volime-based tenures. In most els and to operate independently under strong 34 Alternative Forest Tenures: Experiences fromii Selected Cotifntries inanagement, government enterprises have processing operations are comparable to those demonstrated an ability to function efficiently, of private sector forest companies. generate profits, and modernize. Perum Perhutani auctions some of its log Where state forest enterprises have a clear production to supply other forest products mandate and independence and are properly plants. It also processes timber and nonwood capitalized, they may be better equipped than forest prodLicts fromn the plantations and mar- private sector companies to manage tropical kets the goods produced. In addition, it is in- orests on a long-run sustainable basis. State volved in a variety of social forestry activities, iorest enterprises are likely to have a longer- social services, and training to improve village term time horizon than private sector compa- life in villages adjacent to the forest plantations. nies and to operate with a lower discount rate It is a profitableenterprise, resulting in partfrom in evaluating long-term investments. its high-value teak plantations and the strong They still will need to be given the right demand for timber on the densely populated performance incentives if they are to manage islands of Java and Madura. tropical forests sustainably. State forest enter- In the Peninsular Malaysian states, a nuL11- prises should still pay stumpage and other for- ber of state-owned forest enterprises operate est fees for the timber. If they pay no fees, they forest concessions along with wood process- will treat the timber as a free good and use it ing facilities. However, these state forest enter- inefficiently and wastefully. prises reportedly have not been particLilarly There are a variety of examples of state efficient compared to the private sector forest forest enterprises. Some manage public forests companies. However, the Sabah Foundation, only. Others operate forest concessions and in Sabah, Malaysia, has done well. It is a unique logging operations. Still others operate conces- and autonomous state institution that owns and sions and logging and processing lacilities such operates the largest forest concession in the as sawmills and plywood plants. state, an 850,000-ha concession with a 100- For example, in Honduras, COHDEFOR year term. is responsible for the planning and management State forest enterprises operate forest con- of the pine forests and the organization and cessions in a number of other countries. Most auction of timber sales contracts to private sec- have not been particularly efficient or profit- tor logging firms, as described above under tim- able in their operations, nor outstandinig in for- ber sales tenures (Gray and Hagerby 1997). est management practices. However, their In Indonesia, five state forest enterprises performance may be attributed to general prob- (Inhutani I, II, Ill, IV, and V) own and operate lems of interference, overstaffing, under- forest concessions in the outer islands. These capitalization, and shortage of funds for concessions are among the largest in the couni- reinvestment. Undercapitalization and shortage try. Indonesia's largest forest concession is of investmentfunds imposes an extremely short owned by Inhutani I. It also has logging opera- planning horizon on state enterprises, thus in- tions and operates processingfacilities, includ- hibiting sustainable forest management. ing sawmnills and plywood plants. Although the A number of developing countries and a performance and forest management of Indo- few developed countries also can draw on ex- nesian concessionaires generally has been poor perience with state enterprises in other natural (Gray 1989 and 1996), the conicessions oper- resource fields, such as mining, petroleum, and ated by the state forest enterprises are reputed- fisheries. State enterprises in these fields have ly among the better managed, and the been used to capture the value of public re- profitability of their forestry, logging, and sources (the economic rent) for the country, 35 Forest Concession Policies and Revenue Systems control the rate of development, and manage values can be protected by contract clauses, the resources. easements, or by separate land-use legislation. PRIVATIZATION OF THE FOREST PRIVATIZATION OF PUBLIC FORESTS BUT NOT THE LAND AND FOREST LANDS Privatization of the forest excluding the land Because forest concessions have been so dis- involves the sale of the existing forest crop and appointing in so many countries iGrut, Gray, futurecropsforaspecifiedtimeperiod,forone and Egli 1991), and with the current fashion or more additional rotations, or perhaps forev- for privatization, some countries have come to er. New Zealand adopted this policy to sell its see privatization of public forests and forest exotic plantation forests, primarily radiata pine lands as a good alternative to granting forest (Pinus radiata) (Hall 1995). The plantations concessions. The last decade has seen increased were sold in lots, by sealed tenders, and under private sector participation in the forestry sec- international bidding. The sale was for the ex- tor, in forest ownership, forest use, and forest isting crop of trees, plus the land-use rights to management (Landell-Mills and Ford 1999). grow a second forest crop on a 35-year rota- Here the authors examine the trend to private tion schedule or for other purposes. Bids were sector ownership of forests and forest lands. The for an initial payment with no additional fees restructuring of forest management and forest on timber harvested. Had it not been for the agencies through contracting out, corporatiza- legal challenge of Maori land claims, the New tion, and privatization of forest management, Zealand government might have sold the land supervision, inspection, and auditing is dis- as well. In spite of high expectations, the initial cussed in chapter 4. auction was not very successful. In the first Privatization of forest lands may beentirely round auction, held in July 1990, most sealed appropriate for forest plantations on forest land bids were rejected as too low. Only two bids, planted to fast-growing, short-rotation species covering 15 percent of the forest area adver- (Hall 1995). The financial return from fast-grow- tised, were accepted by the government. The ing plantations for pulp and paper can equal government then moved to sell the remainder the return from alternative investments, and by negotiation. forest plantations produce far fewer nonmar- Privatization of forests can be appropriate ketable forest outputs, collective public bene- for fast-growing plantation forests but not for fits, and beneficial externalities. natural tropical forests that grow slowly and Privatization of forests and forest lands is generate additional nontimber benefits. New the approach taken by the British Forestry Com- Zealand chose to privatize its plantation for- mission in selling a portion of the Commission's ests but not its natural forests (Hall 1995). Plan- forest plantations from 1981 until 1997 when tation forests involve large initial capital a temporary moratorium on privatization was investments. Security of tenure is required to introduced (Landell-Millsand Ford 1999). Italso allow recovery of the investment. Plantations is the approach taken by Chile in the sale of its produce primarily market outputs of wood or forest plantations and, more recently, of its nat- other products. Nontimber outputs and non- ural forests. market environmental values are usually much However, privatization of tropical natural less than in natural tropical forests. For planta- forests is likely to be a serious and irreversible tion forests, these nontimber and nonmarket mistake (Gray 1997a). First, as suggested above, 36 Alternative Forest Tenures: Experiences from Selected Counlitries the rate of growth in tropical forests is too slow corporations to management and operate to make sustainable management attractive to public forests are another tenure alternative private sector investors. Private sector investors for public forests. Joint ventures have been are more likely to practice liquidation forestry, used to attract the capital, corporate manage- that is, mining the forest for its timber and rein- ment skills, forest management expertise, and vesting the proceeds where they can earn a product marketing connections to develop higher return (Walker and Smith 1993). public forests. Under the joint venture ar- Private management of forests will be fi- rangements, the government commonly con- nancially profitable only if the growth rate in tributes the forest resources; the private sector value of the forest biomass (the volume of the partner the capital, management, and mar- residual stand after logging) is greater than the keting. The government hopes to capture a rate of return the concessionairecan earn else- proportion of the value of the timber (the where (Gray 1994). If the growth rate in value economic rent) as its share of the profits of the is less than the rate of return the concession- joint venture. aire can earn elsewhere, the private investor's Joint venture arrangements have some financial choice will be to liquidate the forest, advantages but also important cautions and sig- taking all salable trees and abandoning the re- nificant dangers. The advantages are the op- sidual stand to fate or nature. Growth rates of portunity to harness the strengths of each physical biomass of 1 percent to 3 percent per partner: the finance, business management, year, combined with the growth in real value forest management, and marketing skills of the per cubic meter of 1 percent to 2 percent per private sector company, and the public forest year (relative to other prices and inflation as a resource assets of the government. result of increasing scarcity of timber), would Nevertheless, joint venture arrangements yield a combined growth in value estimates of carry dangers. The government cannot be a si- from 2 percent to 5 percent pe!r year. This is lent partner. It must have the necessary finan- well below the opportunity cosi: rates of return cial and business management expertise and on alternative investments for concessionaires forestry management expertise to be an equal in most developing countries. partner, to oversee and evaluate the operations Second, as explained earlier, tropical for- of the joint venture. Without these skills, the ests provide a wide range of nonmarketed for- government could be merely signing a blank est products, collective benefits, and beneficial check. externalities: nontimber forest products, water- Transfer pricing presents a danger to gov- shed, erosion control, ecotourism and recre- ernment participation in joint ventures. ation, and biodiversity. These important Through transfer pricing, the private sector nonmarketed outputs and values benefit indi- partner can sell the joint venture rnachinery viduals, communities, the country, and the and equipment, materials and other inputs, world, but generate little or no monetary re- or various types of management or marketing turn to private owners. services at prices above market prices, thereby transferring profits to the subsidiary that pro- vides the goods or services. Similarly, by sell- JOINT VENTURES AND PARTNERSHIPS ing the logs or processed products to another WITH PRIVATE SECTOR CORPORATIONS company or a marketing subsidiary at prices below market prices, the private sector part- Joint ventures or partnerships between the gov- ner can transfer profit to the other company, ernment or a state enterprise and private sector and perhaps out of the country. I nappropriate 37 Forest Concession Policies and Revenoe Systems transfer pricing and other problems are hard to profits, it would receive only a proportion of detect without expert knowledge of the com- the value of the timber. In addition, if joint ven- pany and the industry. tures pay no forest fees, they will treat the tim- Joint venture forest enterprises should not ber as a free good and use it inefficiently and preclude the government from setting forest fees wastefully. at an appropriate level to reflect timber values. A number of developing and some devel- The government should not depend on its share oped countries have had experience with joint of the joint venture profits to capture the value ventures in the forest sector as well as in other of the timber harvested. Because the govern- natural resource sectors, particularly in mining, ment receives only a proportion of joint venture petroleum and fisheries. 38 Makingq'F1drest Concessions Sustaiinable H | andingo'er hItrest tnan3genien n re,ponsihil t,es. to private sector forest concessions companies has not worked well in the past and has not been very successful in achieving sustainable management v - of tropical forests (Grut, Gray, and Egli 1991; Gray and . Hadi 1990; Johnson and Cabarle 1993; Hardner and Rice Z~~~~~~~~~~~~~ . ' A . . i st 1 b' tai oT. ~ { "~" j ; I I J | | i B .o f <; 47 7 . !I h - ?' A,- 'SQp; : | r t C ' - > ' 1 . ~~~~~~~~~~~~~~~ r v V ,,, X f ,* t ,, j~~~~~~~~~~~~~1 ,^> 2o;t.R1 ; -;PART.TWO r s'!: ' ; 2 o FO"REST REO/EN UE AND"PRICiNGs POLICIES - - J,. ' t iL' ffi ~~~~; * ' ' ' 1 ' g 'I " ' {' '- F ¢ te ~~~~~~~ *- ;- ;0 ,+: 4 .9^ , !i' 1ll-;;l ;~~~~~~~~~~~~ rv ;1't' X , and straightforwardly, with arguments that are less clut- tered, once the structure of fees, charges, and prices is - - agreed upon. The forest pricing policies and fees suggested here represent a contribution toward improving the perfor- mance of forest concessions, the sustainable management of forests on concessions, and the financial viability of - sustainable forest management. The policies and fees can - make improvements by (1) structuring fees to provide in- centives for improved use and forest management, (2) rais- ing fees to reflect the value of the forest, (3) generating the revenue to make forest manageTment a worthwhile invest- ment for governments, and (4) providing the revenue to I ' T '. i < ; ., 7;1. ?- ; H 2 ;- * ,..-f,7;, W.q, ., Forest Concession Policies and Revenue Systems finance improved forest management. The pro- efficiency and prevent below-cost or below posals include the following six elements, opportunity cost harvesting of tropical forests. which are then discussed in detail. 5. Minimum area-based foresr concession fees. Minimum area-based forest concession 1. Annual concession fees. Annual area- fees are recommended to reflect the environ- based concession fees at rates that generate a mental and nonmarket opportunity cost values significant proportion of forest revenues and of alternative forest land uses involved in allo- provide incentives for forest management are cating tropical forest areas to timber production. recommended. Annual concession fees should 6. Fund to finance forest management, su- become a major revenue source. They can sup- pervision, and monitoring of concessions. It is plement, or partly replace, volume-based recommended that a substantial proportion of stumpage prices and export taxes, which are forest revenues from concessions be allocated to difficult to collect. To this end, the annual area a forest management fund and used to finance charges should be introduced at significant lev- the supervision and monitoring of logging and els, and present area fees should be increased forest management activities on concessions. substantially. 2. Initial concession fees. A modest, one- Discussion of these fees followvs. time, initial concession fee is recommended. It is designed to generate sufficient revenues to cover Increased use of annual area-based con- administrative costs in granting concessions and cession fees. For most countries, volume-based to discourage frivolous or speculative concession fees (stumpage fees, royalties, export taxes) ac- applications or acquisition of concessions. count for 90 percent to 95 percent or more of 3. Bidding on concessions. It is recom- forest revenues. Yet, as has been rioted, vol- mended that concessions be allocated by bid- ume-based fees are notoriously difficult to col- ding (preferably by sealed tender) based on lect and are subject to abuse. Stumpage fees bonus bids, by a carefully designed, impartial- and other fees based on log volumes require ly administered auction process, initially on a the forest department to have the field capabil- limited basis, in selected situations, and under ity to measure log volumes; or, if log measure- competitive conditions, to ensure success. Bo- ment is done by forest industry companies, to nus bids would reflect and capture the security independently check log volumes and scaling value of the secure timber supply provided by records. Many forestry departments do not have the concession. As well, bonus bids can cap- the field capability to perform these tasks. ture a share of the stumpage values of timber It is recommended that stumpage fees and not reflected in the volume-based forest fees other volume-based forest fees be supplement- on timber harvested. ed by easier-to-collect annual area-based fees 4. Minimum volume-based stumpage pric- set at sufficiently high levels to become a ma- es. Minimum volume-based stumpage prices jor forest revenue source. They should gener- are recommended. These should be high ate 50 percent or more of forest revenues and enough to reflect (a) the administrative costs in could be set on the total concession area and/ supervision, inspection, forest renewal, and or on the annual cutting area. The former is the forest management, log measurement, and col- simplest and easiest to administer. However, it lection of revenues, and (b) the environmental may penalize concessionaires responsible for and other nonmarket values-the opportunity protection and management of large areas with- cost values precluded by harvesting tropical tim- in their concession for other, nontimber, envi- ber. Minimum volume-based fees can improve ronmental uses. To overcome this inequity and 80 Suggested Forest Pricing Policies for Tropical Forests introduce incentives to manage areas for non- The level of these bonus bids will, of course, limber benefits, the area fee might be levied depend on the extent of competition. If there is on the entire concession area, with a partial or little competition, bonus bids can be expected to ull rebate of fees for areas protected and man- be minimal. Without competition, bonus bids 3ged for other nontimber uses. The rebate could cannot be expected to reflect the full value of the be made conditional on performance in man- timber and the concession. Thus, in areas or situ- aging and protecting these areas. ations in which competition for concessions is weak or nonexistent, area-based concession fees Simplification of volume-ba.;ed fees and will need to be administratively set. However, improvement in collection. Many countries they should be set based on the bonus bids in have several volume-based forest fees. For sim- more competitive areas or situations. plicity of administration and collection, it is recommended that the various volume-based Minimumr1 forest fees on concessions. Min- fees be combined in a single volume-based fee. imum annual area-based fees on concessions Other steps can be made to improve the col- and minimum volume-based stumpage prices lection of volume-based fees. However, the should be established to setfloor levels for both. details are likely to be specific to the individu- Minimum forest fees ensure that I-imber and al country, the forest situation, and institutions. concessions are not given away at very low pric- es with little or no return to the country. Mini- Initial concession fees. A modest initial mum forest fees on timber and concessions concession contract fee should be levied on con- should reflect the highest of (1) the future val- cessions. It should be high enough to cover all ue of the timber if reserved for future cutting of the administrative costs involved in granting (that is, the present discounted value of this pro-- the concession. This initial concession fee jected future value), (2) the administrative ancl should be based on the total area of the conces- forest management costs involved in the sion. Area-based initial concession fees provide concession, or (3) the value of the timber or some discouragement to concessionaires seek- concessions in other nontimber uses (environ- ing too large an area, beyond their needs. Where mental protection, environmental tourism po- a government carries out the forest inventory tential, wildlife, forest foods and game, prior to inviting tenders and bidding, the initial watershed protection). These nontimber values concession fee also should reflect and recover have been shown to be significant in forest val- the cost of the forest inventory. uation studies, often equal to, or even greater than, the timber values (Bishop 1999; Chomitz Bonus bidding on concessions. Bonus bid- and Kumari 1998). ding is recommended in the allocation of con- cessions. It is recommended that bonus bids Fund to finance forest management, su- be in the form of annual payments, and on an pervision, and monitoring of concessions. In area basis of so much per ha for the entire area most countries, forest revenue from concessions of the concession. These annual area-based and stumpage fees goes directly into govern- bonus bids would be paid in addition to the ment general revenues. Forestry departments, regular annual area charges. Such bonus bids dependent on annual appropriations, common- would capture the additional value, over and ly do not have the funds to undertake the above regular area-based fees and volume- supervision and monitoring of logging and for- based stumpage prices, of both the timber and est management on concession, or for reinvest- the concession. ment in forest management and reforestation. 81 Forest Concession Policies and Revenue Systems Unless investments are made in the super- rests with the government rather than the vision and moniitoring of forest concession op- concession operator. erations, and in forest management and Stumpage prices and area fees for timber reforestation, forests will continue to be deplet- on public lands outside concessions should be ed, deforestation will continue, forest revenues higherthan those on forestconcessions, reflect- will decline, and the country's valuable forest ing the companies' reduced responsibility for resoLirces will be lost. To ensure adequate funds forest management and protection. Higher for monitoring and supervision, forest legisla- stumpage prices and area fees outside conces- tion should guarantee that a fixed portion of sions would provide an incentive for conces- the revenues obtained by the state or region is sionaires to use the forest within their directed into a fund used to finance monitor- concession more intensively. In many coun- ing and supervision of concessions. This fund tries, once concessionaires have acquired a should then be used to monitor mianagement forest concession, the secure supply of timber of the present forests from which the revenue from the concession has allowed them to buy originates. Finance ministries are likely to re- timber from outside the concession at lower sist this proposal. However, given the long-term prices (box 14). requirements for forest management and super- Area fees and volume-based stumpage fees vision, adequate stable funding is essential to for forests outside forest concessions should be achieve sustainable forestry. high enough to fund forest management by the forestry department or agency responsible for forest management. It also is recommended that FOREST FEES ON PUBLIC FOREST LANDS a substantial proportion of forest revenue from OUTSIDE CONCESSIONS timber outside concessions be allocated to a fund and used to finance the supervision and Outside forest concessions, the responsibility monitoring of logging, forest management, and for forest management on public lands normally reforestation. Box 14 Cheap timber from outside concessions In Nicaragua, because of low forest fees outside con- tenures]. The minimum [annual] area tax on cessions, conicessioin owners have b-een abile to ventes de coupe is more thani on contcessionls, purchase thimber and logs more cheaply from indige- bLIt the former rcquires no maniagemrent plan nIus communities thani fr-om their own conicessions, and can be paid in a year [that is, paid oniv and illegal logs even more cheaply (Gray and lHgcr- oncc], whereas the latter requir-es management by 1997). As a result, the commullities have not plans, and the area tax is payable on the whole received a reasonable price for their timber or logs, concession for 30 years. As a result, the area and unconitrolled illegal' I,. becn encouraged. tax burden on wood cut fromil concessmoiis is In Cameroon, problems with lower fees out- three times that on wood cut from ventes de side the larger concessions caused forcst fees to be coupe on a volume hasis. Not surprisingly, log- restructured and raised under the 1994 forest law, gers prefer cutting in venies de couipe. with unexpected results (Seymour and others (Seymour and others 2000) 2000). Second, higher area taxes and inadequate gov- H-ligher area taxes have had two effects. First ernment control mean that illegal logging is they have made large concessions more expen- hoth easy and profitable. sive to log thani vcnies de coupe [shorter-terimi (Seymour and others 2000) 82 Suggested Forest Pricing Policies for Tropical Forests Area fees outside forest concessions are minimum wage rates in industries in which recommended. As on concessions, they should there are many sellers of labor (employees) and be set at a significant level and be a major fee few buyers (employers). on forests outside concessions, equal to or more Because the timber buyer has no forest significant than volume-based stumpage fees. management or protection responsibilities, They should be applied to the entire area. these minimum prices on private and communi- It is recommended that cutting rights on ty lands should be higher than the forest fees on Dublic forest lands outside concessions be sold forest concessions. Otherwise, timber from pri- oy competitive bid and under short-term tim- vate or community lands becomes a cheap ber sale contracts (Gray and Hagerby 1997). substitute for timber from managed lorest con- Bonus bids would be in the form of an annual cessions. It is recommended that the schedule area-based fee levied on the entire timber sale of forest fees applied to public forest lands out- area. sideforestconcessions be used as minimum pric- es fortimberfrom private and community lands. FOREST FEES ON COMMUNITY AND PRIVATE LANDS ESTABLISHING THE LEVEL OF FOREST FEES Timber on community lands and private lands Setting the appropriate level of forest fees for is the property of the owners. They are free to the timber sold or area fees on concessions is sell the timber, subject to any forest manage- an important issue. Of course, the forest indus- ment conditions prescribed by the government. try would prefer low forest fees. Governments Usually, stumpage prices on standing timber should seek to establish forest fees that reflect or felled timber are negotiated between buyer the full competitive value of the timber and and seller. However, in most countries, there forest resource. are only a few buyers and many land owners. If forest fees are too low, then timber is As a result, the market for standing timber and cheap; and cheap timber encourages poor use felled trees is not competitive. Communities of the forest and waste in timber processing. and land owners usually must take the prices The resulting extra (above normal) profits from offered. Often, low forest fees on concessions low forest fees will encourage overexpansion are used by timber buyers as the basis and jus- of the forest industry. This, together with poor tification for the low prices offered to private use of timber, will lead to rapid exploitation of landowners and communities. Therefore, rais- the forest and deforestation. ing forest fees on concessions would strength- The value of standing timber-stumpage en the position of community and private forest value-represents the economic value of the owners in negotiating stumpage prices. timber, the price that would prevail in a com- Thus, to compensate for the lack of com- petitive market (Gray 1983; Landell-Mills and petition for timber on private and community Ford 1999). lands, governments can play a. role by estab- In situations and locations that have comn- lishing timber prices as floor prices to counter- petition for timber and forest tenures, the allo- balance the monopoly power of timber buyers, cation of timber or forest tenures by oral auction support the interests of landowners and com- or sealed tender provides a direct, market-based munities, and ensure fair prices. The setting of measure of stumpage values, based on buyer's minimum prices for private anid community willingness to pay or a good measure of the sales of timber is analogous to establishing value of the timber or of tenures. Prices bid on 83 Forest Concession Policies and Revenue Systems timber and concessions in areas with competi- easy to estimate. Log prices vary considerably tion can provide a market basis for administra- with species and grade. Thus, stumpage values tively set charges in other, less competitive also will vary widely with species, grade, log- situations or regions. ging costs, transportation costs, and distance However, competitive markets for stand- from market. Stumpage value of higher priced ing timber are rare. Usually, there are only one species or grades can be several times that of or two, or at best a few buyers and many sell- lower priced species or grades. ers. The prices offered by the few buyers re- There are practical considerations in esti- flect their market power and will therefore mating stumpage values. There are inevitable understate the full value of the timber. problems of price and cost data. Log or product prices may not be accurate, or they may not be Deriving Stumpage Values competitive. Prices may reflect market power of Standing Timber of buyers or sellers. Underinvoicing or transfer pricing may be common, or other noncompet- If competitive timber sales are not feasible, itive factors may distort prices. Given the vari- stumpage values can be derived from market ability in processing efficiencies, costs, and prices of logs sold in competitive log markets. recovery rates, processing cost estimates may Stumpage values are derived by deducting log- be inaccurate. Logging cost estimates may be ging and transport costs. Costs should include uncertain because of the variability in logging depreciation on capital equipment and a nor- conditions, stand conditions, and weather. In mal profit or opportunity-cost rate of return on addition, costs may be higher than they should the capital invested. So as not to reward ineffi- be because of low forest fees that shelter ineffi- ciency, costs should be based on averages of cient logging and processing operations. costs of operations of normal efficiency. In the absence of a competitive market for Estimating Stumpage Values logs, it may be necessary to determine stump- age values from the prices of the processed Estimates of stumpage values of standing tim- products (sawnwood, veneer, plywood), less ber can be derived in several ways. The appli- the cost of processing. Deriving stumpage val- cability of each is examined in turn. ues from log prices, rather than from the prices * Stumpage values from sales of standing tim- of processed product, is considerably simpler ber. The simplest and most direct measure and therefore more reliable. Starting from pro- of stumpage values is the price paid in a cessed product prices involves additional data, competitive market to landowners, private a greater chance of unreliability from poor data, owners, or communities for standing timber. and more calculations. These prices are likely to underestimate Logging costs and hence stumpage values stumpage values. As already noted, most will vary with location, stand conditions, and countries countfew forestcompanies to buy terrain. Stumpage values of nearer, more ac- timber, often only one or two in any one cessible, forest areas and stands will be higher, area, but many sellers and private owners reflecting the lower transport costs. Stumpage and several communities. It is a buyer's mar- values of stands with high volumes per ha and ket, and owners are eager to sell. Buyers can those on dry ground and easy slopes will be offer "take it or leave it" prices. In addition, greater than for stands in adverse situations. if land ownership is unclear and title to the Although conceptually stumpage values timber uncertain, sellers will be willing to are simple, in practice, stumpage values are not sell the timber at almost any price. 84 Suggested Forest Pricing Policies for Tropical Forests *, Prices paid for felled trees and logs at road- the circumstances and provide the closest esti- side or riverbank. Landowners cr communi- mate of stumpage values. ties also may sell trees in the forest felled and cut into logs, or as logs at roadside or at Adjusting Level of Forest Fees river bank. Stumpage values can be derived from prices of felled trees by deducting fell- To ensure that forest charges remain current ing costs, or from the prices of logs deliv- in the face of inflation and changing costs, ered to roadside or riverbank by deducting regular formal review processes are required. felling and skidding costs. However, stump- In addition, the indexing of forest charges for age prices derived by deducting felling and inflation and/or forest product price changes skidding costs from these prices likely also can ensure that charges remain current. If un- would underestimate stumpage values. The dertaken at frequent intervals and based on same market imperfections apply to stump- recent price data, indexing of fees, charges, age values based on prices paid for felled and stumpage prices can adjust forest charg- trees or logs. There are usually few buyers es and compensate for cyclical as well as sec- and many sellers. Often, ownership of the ular product price movements. If the lag in timber is uncertain, and some of the timber the adjustment of charges is short, fluctua- may be cut illegally. tions in forest product prices will be com- e Prices paid for logs delivered to the mill. The pensated for by adjustment of forest charges, price paid for logs delivered to the sawmill and risk and uncertainty to the forest indus- is another starting point in estirnating stump- try reduced. age values. Log transportation costs, load- ing costs, and logging costs are deducted to arrive at the stumpage value of the standing CONCESSIONS VALUES timber in the forest. However, with few saw- AND CONCESSIONS FEES mills, forest owners or loggers will have only one or two sawmills to buy their logs. Again, Timber concessions, which represent a guar.- with so few buyers, the market for delivered anteed access to publicly owned timber, also logs will not be competitive. It will be a have value in addition to the stumpage value buyer's market, and delivered log prices will of the timber. Concessions confer rights to the likely underestimate stumpage values. annual allowable cut on the concession area. * Domestic and export prices of forest prod- Concessions values include the value of the ucts. Stumpage values can be estimated from security of timber supply provided by the con- prices of the processed forest products, cession. Concessions values will also reflect, sawnwood, or plywood. StLimpage values in part, the extent to which foresi: fees under- are derived by deducting processing costs, state the stumpage values of the tirnber. Where log transport costs, and logging costs from concessions are allocated by competitive bid- the FOB prices of the processed forest prod- ding (by sealed tender or open aluction), the ucts. Using processed pro(luct prices in- bids will provide a measure of how closely for- volves more steps and is more complicated est fees reflect stumpage values, as well as a than the methods previous discussed, but the measure of concessions values themselves. market for sawnwood is much closer to a Concessions values derived through competi- competitive market. tive auctions of concessions can then be used None of these methods is ideal. It is a to establish the level of concessions fees for matterof choosingthe method thatwill bestfit other concessions. 85 1 0 Forest Pricing Policies: .Su m. ary , _ -. . Forest rek enue s srernes are a ke,, ,-I1 tore r1:-. -.- ' ' ., ; I Landull-Nlls and Ford 1 999( I An important theme ot this ctudc has been that iorestr\ pricing policries can contribute to lhe sustainabilih ol trop- ical forest resourcet bv deterring ,)ere\ploitation, proc id- - ing econol-mic incentives to use limber more erticientl -. and generating the revenue lo miake torest management financiall\ uAistainable Sustainable management -i ropi- I. cal forests requires impro\ements in present torest man nia- - , '- agement practices and institulional changes in lorest-, administration. Econo)mic incen'i es and better designed 3 - forestre%enue s;stenmscar tacilit3te and uppc.rt mpro\ed W- r forest management and administration . -4 ' Pricing policies can ensure Fiat torest tees reflect hoth * the value of the torest resources and the opportunit', cc si -t 30 i . involved in their har-est, including market and nonmar- ket values In other %eords. concessions tees and tees on -O the timber cut should reflect th] %alue ot the concession *j . in terms of the access to timber and the securit of timber supply. Forest tees on the timber cut should reflect the - value of the timber to processing plants and in markets- - ---- s Forest fees aiso should reilect the o ppcrtunitN c osts in har- vesting the timber. -- Concessions tees that put 3 scarcit\ price on conces- -t sions area can s lo% the dcquisition ot large areas o0 tropi- It!v cal forest concessions, or ePen iesult in the return ot e\ces s -_ concessions area. These same tees can encourage better timber use and better, more inensei%e torest management on concess;ions cMinimum tee on ccince-sions and on thet timber haR ested can reilect these % alues and pro: ide ec o- - . nomic incentie es tor torest lard uses -A Forest Concession Policies and Revenue Systems If these pricing policies were adopted by Higher prices and values of tropical tim- a majority of tropical timber producing coun- ber would make improved forest management tries, timber-producing countries would not economically attractive. Tropical forest resourc- have to compete with one another for forest es then would become worth conserving and industrialization. Higher forest fees could managing as a renewable resource rather than slow the harvest, reduce the supply of tropi- being treated as a depleting resource. cal timber on the world market, and raise Finally, higherforestfees would make for- world prices of tropical timber. These results est management financially sustainable. High- would benefit tropical timber-producing erforestfees and a highercollection rate would countries through higher prices for their ex- provide funds for management, protection, and ports and better terms of trade for forest prod- regeneration of the resource. They also would ucts. In industrialized countries, higher prices finance a strengthening of forestry departments for tropical timber would, in turn, dampen and of more effective revenue collection sys- demand and reduce consumption of tropical tems. Sustainable forests would become finan- timber. For tropical timber-producing coun- cially and politically worth preserving. If tries, the higher forest fees and higher export tropical forests become valuable, and are used prices on timber products would offset the and managed well, there will be greater inter- reduced sales of tropical timber to industri- est within tropical countries in their mainte- alized countries. nance and conservation. 88 Appe.ndix Forest Revenue- Mecharnis: - 'Su'mmary)->' .' ? his appendix presents a comprehensive summa- T ry of a range of alternative forest fees. A full dis- cussion on the World Bank Forestry website pro- vides the basis for recommendations on forest revenue systems in Part Two of the main body of the study. See http://essd. worldbank.org/rdv/'RDVWeb. nsf/Forestry/ ExternalLinks. Revenue mechanisms include a variety of payments -I to the owner-in this study, the government-for timber .- , ; - or for the use of forest lands. These mechanisms have var- ious names, such as prices, fees, charges, dues, taxes, roy- alties, severance taxes, license fees, userfees, bidding and -< auction arrangements, and bonus bid payments. They can r'' be broadly divided into volume-based fees-payments levied on the measured volume of timber, timber rights, or other forest products-and area-based fees-payments levied on the area of forest tenures. Each is discussed in greater detail below. Fees, charges, dues, taxes, and royalties have slightly -. different meanings and interpretations, differing historical roots, and differing applications among jurisdictions. For example, stumpage prices on public forest timber are called forest dues in some jurisdictions, stumpage fees or charges in others, timber royalties in still others. It is easy - to become mired in semantics. No matterwhattheir name, rN ' forest revenue mechanisms levied on the timber, associ- ated with the transfer of property right to timber, or on other nontimber forest outputs are all essentially prices, prices of the timber, timber rights, or other forest out- puts sold. Fees and charges on forest land, such as area 7* fees or ground rentals, are the prices of the right by the -. Forest Concession Policies and Revenue Systems concessionaire to a secure timber supply or to government's interest in timber output, royal- other forest land uses. ties may be levied in various jurisdictions as a per-tree charge, on the volume of roundwood (logs, pulpwood, poles and other unprocessed REVENUE MECHANISMS AND FUNDING timber), on the forest inventory volurne of stand- MECHANISMS ing timber, on the output of processed prod- ucts such as lumber or plywood production, or Forest revenue mechanisms are distinguished on the volume or value of exports. from forestry funding mechanisms. Forest rev- Forest revenue mechanisms also may be enue mechanisms are designed primarily to classified based on whether the revenue mech- generate revenues. They include prices, fees, anisms are levied on anticipated values of tim- and taxes. Forestry funding mechanisms are ber, for example, the values of timber rights (ex designed to finance forestry activities, such as ante rent collection); or on timber values de- reforestation, stand tending, and the provision termined later (ex post rent collection), for ex- of nonmarketed forest outputs including recre- ample, stumpage prices. ation, wildlife, and watershed protection. The diversity among jurisdictions in the Forestry activities can be funded by (a) rev- names, intended purpose, or use to which the enues generated through forest revenue mech- revenues are put makes any classification com- anisms or from elsewhere in the government plex and comparisons between jurisdictions budget, or (b) financial incentives such as tax difficult. In addition, in any one jurisdiction, deductions or expensing of expenditures, there may be several charges with different grants, cost sharing arrangements, and subsi- names, all levied on the same base, for exam- dies designed to encourage and finance private ple, on the volume of roundwood harvested. sector activities. Revenue mechanisms contrib- This study classifies forest revenue mech- ute to the government's budget. Funding mech- anisms in terms of the economic activity and anisms often result in a reduction of revenues the base on which they are levied and reviews orare a drain on the government's budget. This them in that order. Public finance takes this study focuses on revenue mechanisms. same approach to classify and analyze various taxes and to compare taxes interjurisdictional- Types of Revenue Mechanisms ly. Revenue mechanisms for nontimber outputs are listed in section 2 below. Forest revenue mechanisms commonly are clas- sified by their name, historical roots, or intend- Revenue mechanisms for timber produc- ed purpose, or by the use to which the funds tion and forest lands. Twenty-three revenue are directed. For example fees includeadiverse mechanisms related to timber production are range of revenue mechanisms: license fees, area identified in table Al. They cover a broad spec- fees, stumpage fees, reforestation fees, and oth- trum of charges itemized in the next three sec- ers. Volume-based charges on the timber cut tions and grouped in the table under the are called stumpage prices in some jurisdic- following headings: charges fortimber harvest- tions, stumpage fees in others, royalties in oth- ed, charges for logging and forest operations, ers. Reforestation fees, intended to finance and charges for forest lands and tenures. reforestation, are levied in various countries on 1. Charges for timber harvested. Charges areas logged, volume of timber cut, the pro- levied on the timber cut represent the pric- cessed products, or exports. Reflecting the es charged for the marketed timber output 90 Appendix: Forest Revenue Mechanisms of the forest. Volume-based stumpage pric- 3. Charges for timber lands and tenures. es are the most common forest revenue Fees and charges on various forest tenures, mechanism and are equivalent to the sell- including forest concessions, can reflect the ing price of standing timber. Alternative fees security value of a guaranteed tirnber sup- and charges include per-tree charges, plyorthevalueofforestlandsinotheruses, charges based on the area log,:ged, lump- or cover the cost of fire protection and oth- sum timber sales, competitive bonus bid- er forestry services provided. ding, charges on minor forest products, Forforest concessions, reveniue mech- charges on processedproduct,;, and export anisms can include initial license fees, re- taxes oni logs and forest products. Each is newal fees, bonus bidding, annual ground described and analyzed below. rentals, allowable cut fees, and area-based 2. Charges for logging and forestry operations. and other service fees. Reveniue mecha- Charges,fees,ortaxesoncapit;lequipment, nisms on shorter-term forest tenures can labor or other forest operations inputs, cor- include initial license fees, bonus bidding, poration income taxes, logging taxes, profit annual ground rentals, and area-based and based royalties generate reveniues from the other service fees (table Al). forest sector. Government ownership of, or joint venture participation in, logging or pro- Revenue mechanisms for nontimnber for- cessing operations also can generate revenues est outputs. To indicate the potential for equal from the forest sector, but as profits rather and parallel treatment of timber and nontimber than as fees or taxes. Each of these is discussed forest outputs, a selection of potential revenue below. However, as argued below, none is a mechanisms for nontimber forest outputs is list- very effective substitute for fees on timber or ed in table A2. The nontimber revenue mecha- forest tenures. nisms again are classified, first, by the resource Table Al Revenue mechanisrns for timber production and forest lands CHARGES LEVIED ON TIMBER HARVESTED 1. Volume-based stumpage prices Description * Fee per unit of timber harvest:ed (cubic meter, cubic foot, hoppus feet, cords, metric tones) based on the measured volume of logs, pulpwood. * Represents the selling prices of the standing timber. * The most widely used revenue mechanism in developed and developing countries. * Base: measured volumes of timber cut, as logs or other primary forest products. Can be varied by species, size, grade, and location, to reflect differences in timber values. * L.evel: can be administratively set, negotiated, set by appraisal, or set by bidding. * Administration: complex, requiring strong field capacity, log measuring and billing * procedures, often subject to abuses. Analysis * Are most closely related to the values of the timber. * Can reflect differences in timber values by species, size, quality, location. * Setting the level to properly reflect timber values is difficult. In maniy countries, stunipage prices are well below timber values. (cont 'd.) 91 Forest Concession Policies and Revenue Systems Table Al Revenue mechanisms for timber production and forest lands (cont'd.) * Administration: difficult. Requires strong forest administration to set prices to reflect values. * Log measurement is subject to abuses. Requires strong field capability to measure logs. 2. Per-tree charges Description * Price per tree cut. * In some situations, can be a simple substitute for volume-based stumpage prices. Used in a few countries but not common. * Can be varied by species and location to reflect differing values of trees. * Level: can be administratively set, negotiated, or set by appraisal or bidding. * Administration: easier than volume-based stumpage prices, avoids measuring logs. Can be easily checked by counting stumps. Analysis * An alternative to stumpage prices for many countries and situations. Have the advantages of simpler ad- ministration and field inspection. * Are particularly useful for plantation forests of uniform size trees. * Encourage use of the full tree. * In marked stands, possible to charge for the timber before logging. 3. Charges based on area logged Description * Based on the area logged. * P'aid prior to cutfing, with prices based on the area approved for cutting. * Not common but are of potentially greater use in many countries. * Base: area (ha) of the annual cutting permit. * Level: administratively set, negotiated, or set by appraisal or by bidding. * Administration: simple, but requires on-the-ground supervision to ensure that logging is confined to the approved area. Analysis * Key advantage: administrative simplicity. * Useful supplement to volume-based stumpage prices or per-tree charges. * In natural forests, per-ha charges cannot properly reflect the value of the timber. * Useful for plantation forests. Per-ha charges generate revenue prior to logging but require on-the-ground supervision to ensure logging is within the designated area. 4. Lump-sum timber sales Description * Sale of all timber, or all marked timber, on a cutfing area as a block. * Used in several developed countries, on private lands, and for plantation timber. * Payment is required prior to logging or by interim payments during logging. * Level: administratively set, negotiated, or by bidding. * Administration: require field capability for presale inventory and on-the-ground supervision of logging to be sure that logging is within the area, and/or only marked trees are cut. (cont 'd.) 92 Appendix: Forest Revenue Mechanisms rable Al Revenue mechanisms for timber production and forest lands (cont'd.) /nalysis * Relquirec field capability for presale inventory and for inspection during logging. * Encourage full use of the area and marked timber. * Are appropriate for sale of marked timber in natural forests, particularly for plantation timber. * Can work well in conjunction with competitive bidding (5 below). 5. Competitive bonus bidding Description * Sale of timber by oral auction or sealed tender. * Can be used along with other revenue mechanisms to set the level of the fees or charges. * Used in a number of developed and developing countries in which competition exists, but requires com- petitive conditionis among timber buyers, which are not always available. * Level: where compettion is strong, can adequately reflect the value of the timber. * Administration: requires significant administrative capacity to designate areas for sale, carry out a detailed invenitory, organize and carry out the sale and bidding, and supervise logging. Analysis * Has many advantages, both in establishing the level of charges to reflect timber values and in allocating timber among buyers, * Provides an independent market-based measure of timber values. * To be effective, competition among buyers is required. 6. Charges on minor forest prodlucts Description * Charges on forest products (poles, posts) and on nontimber forest products (foods, fruit, nits, medicilial plants) based on the quantity of these diverse forest products. * Many jurisdictions have separate fees for each minor forest product, but others have no fees. * Charges vary for each product. Schedule is often lengthy and complex. * L.cvel: charges vary with the value of the products, but often are very low or token. Because charges fir milor forest products are difficult to collect, to discourage evasion, charges are best kept low. * Administration: because minor forest products are usually produced or gathered by individuals at scat- tered locations throughout the forest, administration and collection of fees is difficult. Given the wide range of products and an often lengthy schedule of charges, administration can be complex. Analysis * With the diversity of minor forest products and wide range in uses and values, the charges are complex; administration, supervision, and collection are difficult. * I-lowever, to indicate that forest products have value and as a basis for future control, at least token charges for all minor forest products are recommended. * A simple system is to issue permits to collect up to a certain quantity within a specified time. 7. Charges on processed forest products Description * Charges on processed forest products (lumber, veneer, plywood, pulp, paper) are used as substitutes for stumpage prices on standing timber logs, or unprocessed forest products. * 'They are widely used in developing countries and several developed countries. (cont*d.) 93 Forest Concession Policies and Revenue Systems Table Al Revenue mechanisms for timber production and forest lands (cont'd.) * Base: the volumes of processed products produced or shipped from wood processing plants. * Charges can be varied by species and grade as well as by product (lumber, plywood) * l.evel: most often administratively set as an ad valorem (percentage of value) charge, but can be set by negotiation or appraisal. * Administration: charges on processed products often are used because they are easier to collect at centrally located processing plants than charges on logs at remote locations in the forest. Analysis * Main advantage: easier to collect than stumpage prices levied on logs. * Disadvantages: discourage efficient use of timber, penalize processing plant efficiency, and reward pro- cessing plants that waste wood. * Not recommended. Alternatives are possible. 8. Export taxes on logs or processed products Description * Used (1) as an easier-to-collect substitute for volume-based stumpage prices, and/or (2) to provide an incentive for domestic processing of logs. * Used as an alternative to charges on processed products. * High rates of export taxes on logs or processed products are used to raise revenues, to discourage the exports of logs or processed products, or to encourage further processing. * Base: the volume (cubic meters), or value (FOB) of exports. * Level: almost always set administratively, usually as an ad valorem (percentage of value) rate. * Administration and chief advantage: easier to collect than either stumpage prices or charges on processed products. Analysis * Can encourage domestic processing or further processing. * However, can generate significant distortions in usinig and marketing forest products. Need to be designed with great care and attention to coverage, rates, and details. * E_xport taxes on logs can encourage domestic processing but also can encourage waste and inefficienicy in the domestic industry. However, they are better than a log export ban and can generate revenue. * Export taxes on logs, if combined with equivalent charges on log inputs to processing plants, can be substi- tutes for stumpage prices on logs. At equal rates on logs exported and used domestically, the incentive for domestic processing is neutral. * Export taxes on processed products may be easier to collect than charges on processed products (7 above). However, they discourage export of processed wood products. CHARGES FOR LOGGING AND FOREST OPERATIONS 9. Charges, fees, and taxes on capital equipment, labor, or other inputs Description * Some jurisdictions have special forestry charges, fees, or taxes on capital equipment, chain saws, labor, or other inputs in the forestry sector, in addition to economy-wide charges on labor, capital equipment. * These include sawmill licenses, special charges on logging trucks and tractors, licenses for chainsaws. * They are usually only a minor revenue source. I-lowever, revenues can help cover costs of licensing, con- trol, and inspection. (cont 'd.) 94 Appendix: Forest Revenue Mechanismis lable Al Revenue mechanisms for timber production and forest lands (cont'd.) Analysis * Used primarily as tools to control sawmills, chain saws, and logging equipment. F1or example, some coun- tries have used chainsaw licenses and fees to monitor and control the use ofchainsaws as a step in controlling their use in illegal logging. 10. Corporate income taxation Description * Most countries have a corporate income (net profits) tax on the profits of all corporations. * Base: net profits = gross revenues less manufacturing, sales, administration, and other costs. * L.evel: in most countries, statutory rates are 40 percent to 50 percent of net profits. However, effective tax rates are substantially reduced through distortions created by tax avoidance, evasion, tax holidays, invest- ment incentives, and transfer pricing of inputs and sales. * Administration: require accurate accounting by corporations and reliable auditiig. Government adminlis- tration requires the government to have the accounting and auditing capacity and staff to audit the corporations. Analysis * Should not be considered a replacement for stuLImpage prices or other forest fees. Replacemenit of these forest fees would give forest companies "free" timber and encourage overcutting and waste. * Functions best as part ofan economy-wide tax system, not as a substitute for forest charges, fees, or taxes. * Transfer pricing problems of inputs and products can transfer profits out ofthe country and ttherefore lead to substantially reduced income tax revenues. * Accounting opportunities to avoid or evade income taxes in forestry, as in other industries. I 1. Logging profits tax Description * Three Canadian provinces have used special logging profits taxes levied at 10 percent of net profits of logging operations. * These logginig profits taxes are in addition to corporate income taxes. Analysis * A logging profits tax might be considered as a replacement for stumpage prices or other forest charges. I-lowever, they can, at most, collect only a percentage of the value of the timber (10 percent under the Canadian logging profits taxes). * The logging profit tax should not be deductible from corporate income taxes (as in Canada). Thlis defeats the purpose of the tax. * Transfer pricing of inputs and outputs can inflate deductible costs, deflate sales prices of logs, and thus incorrectly reduce taxable logging profits. Tax accounting provides opportunities for tax avoidance and evasion because of the complexity of the accounting and tax calculations. 12. Economic-profit-based royalties: resource rent tax Description * Differ from the corporate income tax or logging profits tax by attempting to measure and tax the value of the natural resource itself (the forest, ore body, oil and gas pool). * Originally developed for mineral development projects. First applied to the Bougainville copper mine in Papua New Guinea. The Uranium Royalty system in the Canadian province of Saskatchewan is anotiher example. (cont'd.) 95 Forest Concession Policies and Revenue Systems Table Al Revenue mechanisms for timber production and forest lands (cont'd.) * Base: resource profits are calculated by allowing deduction of operating costs and a normal rate of retLrn on capital invested. Remaining resource profit is taxed at a high rate. * Administration: can use the existing corporate income tax system and tax auditing. i-However, because of the high tax rates, accurate and reliable accounting is required. Transfer pricing, tax accountinig, and audit- ing problems can cause distortions and loss of revenue. Analysis * Applicable only to large, integrated forest development projects. Successfully applied to mininig projects but not yet to forestry projects. * Could be a potential replacement for stumpage prices and other forest fees. * Should operate alongside corporate income taxes. Not a replacement for corporate income taxes. * Transfer pricing problems can seriously weaken their effectiveness. As in other industries, tax accounitinig and auditing difficulties can lead to tax avoidance and evasion. 13. Government ownership or participation in the forest industry Description * Government ownership or participation (joint ventures or shareholding) in the forest industr-y are somlle- times suggested as substitutes for forest charges. * Ownership or participation can take a variety of forms: government-owned and -operated concessiolns, logging operations, and processing plants; joint ventures through equity participation, production sharitng, or options on production. * Administration: government ownership by itself is not enough. Government needs to have the manage- ment and accounting abilities to monitor its operations for efficiency. * Government also needs the skills to negotiate joint ventures and to participate in, supervise, evaluate, and scrutinize the operations. Analysis * Government ownership or participation is not a substitute for an effective forest revenue systemii . It is an indirect and not very effective way to capture timber values. * Government forest firms and joint ventures should still pay forest fees; otherwise, they will be receiving "free wood," distorting their decisions and wasting resources. * Ifgovernment firms and joint ventujre forest operations are to operate efficiently, they must be allowed to operate independently free from political involvement. * Government ownership or participation can provide the knowledge and experience to supervise the private sector forest industry operations, and cost data to set forest fees. CHARGES FOR FOREST LANDS AND TENURES 14. Initial license fee on forest concessions Description * Levied by only a few countries. * In most of these countries, the fee is very low and does not cover even administrative costs. * Base: a fixed fee, or a per-ha fee. * Administration: easy, as either a fixed fee or a per-ha fee. (cont d.) 96 Appendix: Forest Revenue Mechanisms rable Al Revenue mechanisms for timber production and forest lands (cont'd.) Alnalysis * Initial license fees are recommencled to cover administrative costs of evaluating and graning cocll(essions. Fees should be high enough to cover administration costs of granting concessions. * Advantage: if set high enough, initial fees will discourage frivolous or speculative concession application and acquisition. * A per-ha fee is recommended. 15. Renewal fees on forest concessions Description * Levied by a few countries. * Base: lump-sum or per-ha fee. * Administration: easy. Analysis * A renewal fee can be used to cover administrative costs in evaluation of performance and renewal of con- cessions . * Covers costs and helps discourage speculative applications or renewals by noncommitted concession h)old- ers. 16. Competitive bonus bids on forest concessions Description * Not common for forestry concessions. Widely recommended. * Common for other natural resources (oil and gas leases and exploration permits, mineral leases and explo- ration permits). * Base: can take the form of initial or annual bonus or premium payment. Can be on a lump-sum basis, per ha, per cubic meter of annual allowable cut, or per cubic meter of actual annual cut. * Administration: government forest agency must have the capacity to establish forest concessicn area, orga- nize and supervise auction and bidding, encourage competition, and supervise forestry operations on the concession. fo avoid graft, corruption, and influence, the agency must be independent. Analysis * Can provide a measure of the value of concessions and of timber values for use in setting fees on other parameters. Recommended as forest areas become increasingly scarce worldwide. Recommended when competition for forest concessions exists or can be encouraged. 17. Annual ground rentals on foirest concessions Description * Have been used successfully in a number of developing and developed countries. However, mrinost coun- tries rates are low, and ground rentals generate little revenue. * Base: rental is usually total area of the concession; in some countries, the area of productive forest or the annual allowable cut (18 below). * Administration: administratively easy and simple, especially if based on the total area. Analysis * Opportunities for much more widespread use as key components of forest revenue systems if rates are increased to more significant levels. (cont 'd.) 97 Forest Concession Policies and Revenue Systems Table Al Revenue mechanisms for timber production and forest lands (cont'd.) * Rate increases are recommiieinded (I ) to reflect the value of the concession and the value of the security of timber supply and (2) to generate more revenue and reduce reliance on difficult-to-administer and collect stumpage prices. 18. Annual allowable cut fee on forests concessions Description * Annual fee, based on the annual allowable cut of the forest concession. Can be an alterniative to annual ground rentals (17 above). * Used in a limited number of countries, primarily developed but also a fcNv developing couLntries. * Base: calculated annual allowable cut of the concession. * Administration: can be levied only after completion of the forest inventory and calculationi of the anIual allowable cut. Analysis * An alternative to annual ground rentals that can rnore closely reflect the value of forest concessions. * Annual allowable cut fees are the only feasible concession fees for volume-based forest tenures. * However, area-based annual ground rentals are preferable for most area-based forest tenures because of their simplicity. 19. Property taxes on forest concessions Description * Annual taxes based on an assessed value of the property or concession. * Widely applied to private forest lands in developed countr-ies and to forest concessions in some developing countries, for example, Indonesia. * Base: assessed value of the property, forest, or concession. Assessed value may be based on market values, on some percentage of market values (for land and buildings), or on some formula (for forests and other less marketable assets). * Administration: requires establishing assessment procedures, which can be complex and expenisive where there are no property tax assessment procedures in place for private lands. * If property taxation and assessment of private lands is already established, it may be possible to extend the system to forest concessions on public lands, using a simple assessment formula. Analysis * Alternative to ground rentals. * May be feasible in some countries, if assessment procedures for private lands are well developed. * If property tax assessment systems for private land already exist, could provide the basis for simiple assess- ment formulae to be used on forest land. * Forests are slow growing; therefore, forestry is very capital intensive. As a result, property taxation often discriminates against forestry. TIherefore, adjustments to assessment formulae for forestry are required. 20. Area-based or other service fees on forest concessions Description * Include fees for such services as fires protection, insect and disease control, inventory, log measuremenit, tree seedlings, inspections. * Used in only a few jurisdictions. (cont *d.) 98 Appendix: Forest Revenue Mechanisms Table Al Revenue mechanisms for timber production and forest lands (cont'd.) * Base: like user fees, are based on the amount and level of the services provided. Per-ha may he the simplest way to charge. * Administration: relatively easy. If related to the amount ofthe service provided, can facilitate cost recovery and efficiency in provision of forestry services. Analysis * In most cases, set too low and do not cover costs. As a result, the services are subsidized and often used inefficiently. * Area-based or other fees for forestry services that reflect the cost of provision can help to ensure that costs are recovered, encourage efficieni: provision and use of the services, and avoid unintenided subsidies. * Should be keep simple and easy to administer and collect. ;1. Initial license fees on short-term forest tenures Description * Initial, one-time fees levied on applications for timber sales and other short-term tenures. Hlowever, few jurisdictions use them. * Base: fixed or per-ha fee. * Administration: simple, as either a fixed fee or a per-ha fee. Analysis * Modest initial fee recommended to cover the costs of processing the sale and discourage fi-ivolous applica- tions. 22. Annual rentals on short-term forest tenures Description * Annual fees (fixed or per ha) levied on timber sales contracts and other * short-term tenures. * A fewjurisdictions levy an annual rental on short-term tenures. * Base: fixed annual or per-ha annual fee. * Administration: simple. Analysis * Recommended for timber sales and othershort-term forest tenLires to cover costs ofsupervising or provid- ing forestry services to these operations. * Also can capture part of the value of the timber, reducing reliance on stumpage prices on the timber cut, which are difficult to administer and collect. 23. Area-based or other service lees on short-term forest tenures Description * Include fees for such services as fires protection, insect and disease control, inventory, log scaling, tree seedlings, and inspections. Are used in only a few jurisdictions. * Base: like user fees, based on amountand level ofservices provided. Per-ha may be simplest way to charge. * Administration: relatively easy if related to amount of services provided. Can facilitate cost recovery and efficiency in providing forestry services. (cont 'd.) 99 Forest Concession Policies and Revenue Systems Table Al Revenue mechanisms for timber production and forest lands (cont'd.) Analysis * ln most cases, set too low and do not cover costs. As a result, services are subsidized and often used inefficiently by beneficiaries. * Can reflect cost of provision to ensure that costs are recovered, encourage efficient provision and use of the services, and avoid unintended subsidies. * Should be kept simple and easy to administer and collect. Sou,lce: Author. output (economic activity) and, second, by the benefits and costs), such as watershed bene- base on which they are levied. fits; orcommon property resources and outputs, Pricing policies and revenue mechanisms such as wildlife and fisheries. are more difficult to design and to implement Because many nontimber forest outputs for nontimber forest outputs than for forest rev- involve nonmarket values, establishing prices enues. There are two reasons for this. First, for all nontimber forest outputs is not expect- nontimber outputs represent a much more di- ed. Nevertheless, it is often possible to devel- verse range of forest uses. Second, many non- op imaginative pricing policies and revenue timberoutputs involve nonmarketvalues. These mechanisms for a number of situations and to nonmarket outputs include public (or collec- use pricing policies as a tool of resource man- tive) goods and services, such as recreation and agement. Table A2 suggests potential pricing wilderness values; externalities (or spillover revenue mechanisms for nontimber outputs. Table A2 Revenue mechanisms for non-timber outputs Recreation * Annual and daily entr-anice fees for parks and recreational facilities * CampgroLind fees, picnic site fees, other facilities fees * Differential fees between facilities to encourage use of less crowded or underused facilities * Peak ancd off-peak fees to encourage off-peak usage and ration peak usage * Differential fees between provincial residents and nonresidents, on the grounds that provincial residents finanice part of the cost throughi a Limp-sum share of provincial general revenue funding * Voluntary contributions to specific uses and special funds. Hunting and fishing * I.icense fees, annual and daily * Differential license fees by region, location, or species * -rags for each animal or fish * VoIliutary contrilbtionis to specific funds to finanice managemilenit or enhancement Subsistence resource use * Prices or fees not appropriate for most subsistence resource uses for a variety of reasons Watershed management outputs * Annual water use licenses based on licensed volumes of withdrawals or in situ usage * Water power rentals for hydroelectricity Accounting prices for nonmarket resource outputs and values * Variety ofaccouniitig prices could be used, not as revenue sources but as internal prices for forest manage- menit, multiple use managemenit, land managemilent, departmental budgeting, and planninig. Source: Author. 1 00 References i - --------- Anderson, David L. 1987. "Innovation in public rent cap- .-. ture: The Saskatchewan uranium industry." 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Background note to Forest Watch Report. 107 Recent World Bank Technical Papers (continued) No. 463 Stepheni Foster, John Chilton, Marcus Moench, Franklin Cardy, and Maniuel Schiffler, Grouni nwater in Rura l Develop;l;eit: Facineg thle Challeniges of Slltyppl/ and Re souirce Slustajil;lilityl No. '65 Csaba Csaki and Zvi Lernian, eds., Structural Chanigc ii th1e Farmnini Sectors in Central aniid Easteri; Europe: Lessons for ELI Accession -Second World Bnkl/ FAO Workshop, lime 2 7-29, 7999 No. s66 Barbara Nun berg, Readyi fir Eitrope: Pit blic Admiii iiistratio i Relorm atid Eu ropan Uiil;iJII Accessio i i Ccifral t1Ii,1 EPas;te;;; Europe No. -67 Quenltin T. WVodon with conitributiolIs from Robert Avres, Matias Barenistein, Norman H-icks, Kihoon Lee, \Villi.m1 Molonev', I'i,; Poeters, Corinne Siiens, and Slhlomo Yitzhaki, Povi,rtil iii;l Policil ini lot; ,l,incrica ju11t ' tI lle l ciriluim No. :69 Lauriani Uninevelhr and Nancv Hirsclihorin, Foodi SnittM/ lssites in thie Develophti; l4orld No. '70 Alberto Valdes, ed., Agriciultutral Support Policies i4 Transitioin Econiomies No. *-71 Brian Pinito, Vladimir Drebentsov, and Alexander Morozov, Dismani;tlingx Rissia 's Non paYnicits Siystecmu: Crc;tiln g Comlitiolls fi(u GCrothi No. '.72 )it B. S. Gill, A Diapniostic Frnile7oorkfotr Rei'emict Admninistratioll No. 73 Esen Ulgenerk and Leila ZIaouLi, Front Trim sitio;; to Accessin; i: Dezueloph ig StablIe at 1d Comipetiti7i; Fia ndoICit Mar-kes ini Bitlgarin No. ' 74 loa n nis N. Kessides, ed., Hungaril: A Regitatory atid Stritet;in/l Review7 of Selected inhastruictutre Sectors No. 475 Csaba Csaki, Zvi Lermian, and Sergey Sotnikov, Fantm Sector Restrtictiuring ii Beltieaits: Prorcsˇs o;id Collstraitits No. 476 Katlher-inie Terrell, Czechi RpImblic: Lalbor Mari-ket Reptort No. !81 Csaba Csaki, John Nash, Achim Fock, and Holger Kray, Food1 an1idi Agricitltite in Bulgaria: Tli;t Cllu;lenige of Pni uu71 1l1fotr ELI A cctssit; No. -!82 P'eter Havlik, 7Trade andit Cost Coimpetitiveness in tiIu, Czech Replublic, Ht-Iigary, Polaid, a;idi Slolvem;;a No. 483 Mojmiir Mrak, Comiimunaiu;l Ii frastructcire it; Slovenia: Sitri'eiy of Iltvestm;uenit Needs ai;d Policies Ai;iied at Eu; on; ; illg Pr' ivn;ate Sector Pit rtiCillatiotll No. 484 Csaba Csaki and Laura Tuck, Rn ral Development Strategy: Eastern; Eutrope an;d Central Asi;n No. 4'88 Nina Bubinova, Governiance Imupact a;; Private Ilivestnme;i No. 489 Tim Schwvarz and David Satola, Telecomimnitlicatiomis Legislation in Tr-a;sitioinal na;d Developitig Ecollomies No. 490 Jesko Hentscihel and Radha Seshagiri, Thte Citi1 PovertY/ Assessm;enit: A Primer No. 191 Daniel Miiller-Jentsch, The Devlaoiment of Electricity/ Malrkets ii the Eit ro-Mediterranean Area No. .192 luntivate Voravate, Douglas F. 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Chaves, Susana Sanchez, Saul Schor, and Emil Tesliuc, Finaticial Markets, Credit Co ristaii;ts, auth h;;oest;iieitt ill Rtnal Romanaii No. 500 Zvi Lerman and Karen Brooks, Turkmiieistai: A;; Assesstiietit of Lettselholdi-Biised Fur;;; Rcstr;tctricriii No. 501 Aldo 13aietti, Private ifrtiastrttuctre i)i East Asia: Lessoits Learlied in; the Aftermiath; of the Crisis No. *05 Ali Hashim and Bill Allan, 7Treisitty Referen;ce Model No. 506 Omer Gokcekus, Nick Manning, Ranjana Mukherjee, and Raj Nallari, li;stitittioi;al EIviroinii;ent iitid Pul7lic Officials' Peiforiniance ill Gtnaiana No. 50)7 Raniana Mukiherjee, Oiner Gokcekus, Nick Manniniig, and Pierre Landell-Mills, Baiigladesl;: 7TI;; Expcriecic illlit Percepit ititois of ;tIthelic O)fficiails No. 5(09 World Bank, Kosovo: Ecoiomic aind Social Reformis for Pence atid Reco;iciliatio;; No. 510 Anatoly Vinokul, Joana Godinilho. Christopher Dye, Nico Nagelkerke, Tlie TB itil HII V/AIDS Epideiu;cs iu; thil R ussian; Fedtration No. 512 Gereiimia Palomba, Milan Vodopivec, Fimimi;cing, Efficioiicui, and Equuity/ ill Allbli;iai Ed utctiotl No. 513 Thomilas O'Brien, Christian Filipov, The Ci;rrenit Regitlatory Franimework Goveri;ii;g Buisi;;ess in; Eitlgaria = Uw H ftA a 15 7 9 780821 351703 zZ~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BDX~ ~ ~ ~ ~mz~