Appendix 4: Case Studies in Valuing Asian Forests

This chapter presents a series of case studies to illustrate the concepts introduced in the main text, especially Chapter 4. The emphasis is on applying valuation techniques to environmental assessment problems, but a range of alternatives is considered. These involve economic analyses of:

• the environmental impacts of single forest uses (ie. impact analysis),
• competing forest uses (ie. comparative analysis), including consideration of the environmental effects of forest conversion, and
• inventories of a range of compatible forest use values (ie. total valuation).

Case studies are organized on the basis of types of forest management activities, including protection forests, natural forest management, logging and forest conversion, and plantation forestry or afforestation. The intent is to provide a continuum of management alternatives from protecting the current values of the forest in the absence of significant extraction activity (ie. protection forests) to situations where natural forest no longer remains (ie. plantation forests/afforestation). A variety of regional locations has also been selected, with case studies hailing from India, Nepal, Sri Lanka, Thailand, Fiji, Indonesia and the Philippines.

4.1 Protection Forests

Protecting a forest by designating it as a park or wilderness area constitutes a management system with environmental benefits and costs, just as does cutting the forest. A description of environmental impact assessment applied to protecting forests was presented in Chapter 3. Here we are interested in valuing the benefits and costs of these impacts, and in most cases this will constitute a valuation of the benefits provided by the forest and the costs of setting up and maintaining the forest in this condition, as well as the opportunity costs to local communities of foregoing access to the area. Although the emphasis is on economic valuation, the role of collaboration with local communities is recognized as crucial to the success of such management systems. However, this is not covered in detail. Case studies from Thailand and Sri Lanka are presented, the first emphasizing a total valuation approach, while the second concentrates on direct use values associated with the forest and the effects of restricting access.

4.1.1 Khao Yai National Park¹

Thailand has made a significant public commitment to establishing and maintaining an extensive system of national parks. Currently about 10% of the country is included in one of the several different types of protected areas. In a recent study, the authors examined in some detail the benefits and costs associated with three different protected areas in Thailand.

¹ Reprinted from: J.A. Dixon and P.B. Sherman, “Economics of Protected Areas”, Ambio Volume XX, Number 2 (April) 1991.

Khao Yai National Park (KYNP), Thailand's first national park, is located about 160 km northeast of Bangkok. A large park (over 2000 km²), Khao Yai is a major wildlife reserve with extensive areas of relatively untouched forests. Almost all of the forests outside of the park boundaries have been either degraded or totally cleared for agriculture and settlements.

Khao Yai is also a major tourist destination and receives between 250,000 to 400,000 visitors per year. Therre is good road access from Bangkok and two overnight facility complexes located within the park boundaries. The most popular activities for visitors are recreation/picnicking and wildlife viewing.

As a major wildlife habitat and watershed, the park provides important biodiversity and ecological benefits in addition to tourism and recreation. In fact, Khao Yai contains one or more of the benefits listed in all 8 benefit categories outlined in Box 4.1.² The major costs associated with Khao Yai are direct management costs, lost income on the part of traditional resource users living around the park, and potential development benefits from alternative uses of the park's land and natural resources.

² Box 4.1 presents the same information about use and non-use values that was seen earlier in Table 4.2 but arranges this in a slightly different way.

Qualitative and quantitative estimates were made of the main benefits and costs associated with protecting Khao Yai: first, the benefits:

Tourism. Visits by Thai and foreign tourists are a major and potentially growing use of Khao Yai. As many as 400,000 visitors a year use the park, paying admission and lodging fees totalling more than 3 million baht. Tourism related expenditures are estimated to be between 100 to 200 million baht. Value: consumers' surplus (a measure of the true social value of the visit) is estimated at 10 to 25 million baht per year.

Option/existence value. Park users were surveyed to determine their maximum willingness-to-pay to ensure the continued existence of elephants in the wild. The average maximum willingness-to-pay indicated was 181 baht (approximately US$7.00). Based on a series of assumptions and statistice concnering park use, we estimated Khao Yai's value to thai residents for preserving elephants to be approximately 122 million baht. Even if one considers this figure to represent the sum value of protecting all species, the amount is clearly significant. Note that no attempt was made to separate option and existence value. Value: Option/existence value estimated at a minimum of 122 million baht.

Biodiversity/ecological processes. Although most famous for its elephants, numerous other species contribute to its biological diversity. In addition to the option/existence value of species diversity given above and its powerful pull for tourists, other aspects of biodiversity such as the potential value of future discoveries from genetic resources remain difficult to value. Value: Undetermined.

Watershed protection. Khao Yai provides important watershed benefits in terms of the quntity, quality and timing of water flows. The reservoirs located downstream depend on Khao Yai's watershed protection function. Substantial investments have been made in these reservoirs and many people depend on the water they provide. Value: Can be calculated but undetermined at present.

The costs associated with protection are both direct and indirect:

Management costs. The present annual budget for Khao Yai is about 3.4 million baht. Implementation of a proposed management plan to meet protection, interpretation and development goals will result in increased annual budgets and large capital expenditures in the next few years. With its large area and closely settled borders, greater effort is needed to support programs that help improve the standard of living of nearby residents, thereby reducing their dependence on illegal and unsustainable uses of the park. Cost: Current government management costs are 3 to 4 million baht per year but will approximately double over the next few years.

Opportunity costs. A variety of development benefits are lost because of protection. Foremost are water resource development, timber harvesting and agriculture. The potential economic benefits from agriculture appear to be relatively small due to fertility, drainage and topographical conditions, and high extraction costs for timber liit its profitability. Precise estimates of these opportunity costs require more data. Impacts on tourism, biodiversity and ecological processes, if these activities were allowed, may be large. Another major category of opportunity costs is the loss of income to local villagers due to prohibitions on the gathering and harvesting of plants and animals in the park. Note that the two categories are not additive since development of park resources would also result in a loss of opportunity to collect plants and animals. Value: A rough ‘guessitimate’ of the reduction in village-derived income from park resources is 27 million baht per year, though unregulated harvests would probably not be sustainable and would result in significant damage to highly valued species.

In sum, benefits from tourism and direct costs (management) of Khao Yai can be estimated with reasonable accuracy. In addition, the nonquantified biodiversity/ecological benefits and watershed protection benefits may be substantial and would all be enhanced even further if more effective management is undertaken. Khao Yai, therefore, is a good example of a protected area that fits the socially beneficial category described earlier. It provides recreational, wildlife habitat, and watershed benefits that are quantifiable in physical and, in some cases, economic terms. It also provides less tangible benefits in terms of preservation of forest cover and associated biological diversity. Without, government intervention, however, such a large area would not be provided privately. The benefits are too diffuse and the financial returns from preservation would be outweighed by the directly appropriable benefits from exploitation of Khao Yai's timber, land and animal resources.

4.1.2 Knuckles National Wilderness Area³

³ Based on H.M. Gunatilake, D.M.Senaratne and P. Abeygunawardena, “Role of Non-timber Forest Products in the Economy of Peripheral Communities of Knuckles National Wilderness Area of Sri Lanka: A Farming Systems Approach”, Economic Botany 47(3): 275–281, 1993.

This case study is concerned with the protection of an important forest area in the central highlands of Sri Lanka and an economic assessment of current forest uses, particularly the use of NTFPs, within its boundaries. The Knuckles range of forests is located in the Kandy and Matale districts of Sri Lanka and comprises areas both above and below an elevation of 3500 feet. Aside from being an important repository of biodiversity, including many endemic species of plants and animals, the forest provides various watershed protection and related ecological services. Management planning is underway for the new Wilderness Area and will involve prohibiting all conflicting land uses above 3500 feet and restricting these below 3500 feet. In the latter case, the main degrading land uses are shifting cultivation (mostly for vegetables and maize) and cardamum production. Over 1000 families live within the boundaries of the Wilderness Area and another 5500 live outside the area but within one mile of the boundary.

Land use in the Knuckles forest area has been dominated by four different uses. First, the area provides a wide range of nontimber forest products to the communities living in and around it. The list of known NTFPs used by the local population includes: 16 species harvested for food, two spices, eight species important as medicines, 13 species used for roping, four species used in matting, three species with agricultural uses and bamboo. Two other land uses, for cardamum production and shifting cultivation, are destructive and involve conversion of natural forest. NTFP extraction, although more benign, can result in degradation of the forest if harvest levels are excessive. The intensity of NTFP extraction was not known until the present study. A fourth use of the forest is for livestock grazing, principally buffaloes, during the six months of the year when rice is not cultivated and they are not needed for draft purposes.

The case study is concerned with assessing the overall contribution of forest uses within the protected area to local livelihoods, in terms of both cash incomes and subsistence production. Since protection would involve restricting or even eliminating some of these uses (especially the destructive ones), it is important to understand how important these activities are to aid in designing mitigating strategies. In particular, the placing of severe restrictions on cultivation (whether shifting or cardamum) within the park area might lead to increased dependence on NTFPs. Thus, it is imperative to determine the present level of exploitation of NTFPs to determine whether increased pressure might be allowed without exceeding sustainability limits.

Data gathering consisted of the surveying of three villages - a total of 20 households in each for a total of 60 - to establish not only local forest use but the entire economic activities of the households. This ‘whole farm’ or farming systems approach enables the researchers to consider forest uses within a broader context. Questions were asked about sources of income, including on-farm agriculture (ie. within the village), forest activities and off-farm payments (ie. government transfers). It is important to emphasize that income here may mean not just cash but also the implicit value of subsistence production. To differentiate the authors refer to money income (ie. cash only) and total income, the latter including both cash and the estimated value of subsistence production.

Valuation becomes important because not all the NTFPs extracted from the forest are marketed and therefore easily priced. For those NTFPs lacking local market prices, more roundabout ways to assign values must be used, as discussed in the previous chapter. The main approach is to use shadow pricing techniques. In the simpler cases, prices from nearby towns of cities were available for NTFPs extracted but not sold in local markets, with an adjustment for transport costs to these market locations. In other situations, direct substitutes for NTFPs were available, and prices for these products were used to price the NTFPs in question. Pricing grass as fodder was difficult and could only be achieved by observing the labour cost of cutting and feeding liveststock at commercial dairies, which is probably not very representative of village grazing conditions. Other items were priced by appealing to ‘willingness to pay’ or opportunity costs; however, the study gives no indication of how this was done.

Regardless of the technique, one of the aims of the study was to sum the direct use values associated with the forest, including NTFPs, cardamum production, shifting cultivation and livestock grazing uses, to arrive at a total value. Although the study makes no attempt to calculate the value of ecological services provided by the forest, the analysis constitutes a total valuation in the sense of Section 4.1.2 of the main text.

Before reviewing the results of the survey it is important to understand the limitations of the analysis. In some respects the figures obtained are not compatible with the measures discussed in the previous chapter. For example, labour for extraction or collecting has not been deducted as a cost from the gross values calculated for the NTFPs (and it is unclear whether labour costs for crop/perennial cultivation were considered as well). Thus, ‘net values’ are not true economic measures of value and instead overstate this true value. In addition, several categories of NTFPs were not fully incorporated into the estimates. Hunting of wildlife is not common at present because all guns have been confiscated, although hunting was important in the past. Commodities harvested very occasionally (ie. every 3–4 years) or collected illegally (ie. poles and rattan) were not reported, and therefore were not included. Similarly, products which contribute to agricultural productivity indirectly, such as materials for constructing traditional field plows, were not valued. Finally, medicinal plants used by local healers or ‘curers’ (as opposed to more common, household gathered products) were not taken into account because of difficulties in collecting information relating to these products.

Notwithstanding its limitations, the study demonstrates the importance of forest uses within the overall economic structure of local communities. Results for individual land uses are reported both interms of their share of money income and total income, as defined above. Cardamum and shifting cultivation within the forest, for example, together contribute 46% to total income and 54% to cash or money income, for the average household. In contrast, NTFPs account for 16% of total income but those actually marketed contribute only 5% of money income. On a per hectare basis, the forest area above 3500 feet is estimated to generate annual net benefits from NTFP extraction of US$91.80/ha (1993 dollars, excluding labour costs). Livestock values associated with forest use are relatively insignificant.

Clearly, many NTFPs are not marketed, and their usage would go unrecorded and unobserved if only cash incomes were considered. Using non-market valuation techniques and expanding the analysis to the broader concept of total income, allows the analysts to avoid this problem and capture the true importance of NTFPs in local livelihoods. NTFPs were also shown to make a proportionally greater contribution to the total incomes of lower income families, increasing the need to ensure they are properly valued. Table 4.1 provides a detailed breakdown of the NTFPs valued, their incidence and physical rates of use by households, as well as average annual values per household and an indication of the shadow pricing technique used.

Table 4.1 Value of NTFPs in Knuckles National Wilderness Area, Sri Lanka

Source: Gunatilake et al. (1993)

Notes: MP₁= price at nearest market;
FP= forest gate price;
MP₂ = price at nearest city;
WP = willingness-to-pay;
OC = opportunity cost

The relevance of the study to environmental assessment is its demonstration of the role economics can play in analysing the economic and environmental impacts of protection of forests. As implied in this case study, these effects are liable to be indirect. As access to the forest is reduced, villagers are likely to substitute activities to replace the income and subsistence production formerly obtained from the forest. It is these compensating activities which are liable to produce potentially negative environmental impacts, rather than the original designation of the forest as a protected area. Indeed, the rationale for designation of the park in the first place is to generate positive environmental benefits. Results from the study suggesting a wide range in household total incomes, so that there may be scope for expanding NTFP activities within some households. The overall level of non-destructive forest use (ie. NTFPs), while important regionally, does not appear to be excessive on a per hectare basis. However, further studies would be required to assess this more thoroughly and to determine how local villagers will respond to reduced access to the forest.

4.2 Natural Forest Management

Natural forest management can refer to many things, but here it is taken to mean use of a forest for the production of goods and services but not so as to damage the forest ecosystem. Thus, many extractive activities are compatible with natural forest management, as defined here. Where large-scale logging is proposed, followed by conversion of the forest to alternative uses (whether forestry-based or not), natural forest management no longer applies. Forest conversion and economic analysis are considered in the next chapter. Meanwhile, two case studies are presented concerning natural forest management. The first concerns the harvest and export of rattan from Indonesia, one of the most important trades in NTFPs in the world, and measures to conserve its natural occurence. Secondly, a case study of total valuation of mangrove use values in Fiji is presented. Here, it is demonstrated that despite the limitations of the valuation methodology, the results indicate high use values associated with the mangroves.

4.2.1 Rattan Harvesting (Indonesia)⁴

⁴ Based on R. Godoy, “The economics of traditional rattan cultivation”, Agroforestry Systems 12: 163–172, 1990.

Rattan (cane) is the most important non-timber forest product harvested and exported from Asia. Exports from Indonesia, the most important producer, can exceed US$100 million in a normal year. Demand abroad for rattan is strong, with international prices having increased sevenfold in real terms (that is, excluding the effects of inflation) since the 1970s. However, the burgeoning demand for rattan for furniture construction, and Indonesia's capacity to supply this market, have put heavy pressure on natural supplies. In some areas, rattan species are threatened with extinction or forests are being damaged because of the activities of cane harvesters. Sustainable use of forests containing natural rattan has come to depend on the development of alternative supplies of rattan, and a key option is the cultivation of rattan in secondary or degraded forests. Some of the agronomic aspects of rattan species, whether in natural or cultivated conditions are described in Box 4.3.

From an environmental assessment perspective, policies to support rattan cultivation have the effect of reducing pressure on natural supplies and thereby producing environmental benefits (or avoiding environmental damages). A first step in assessing the attractiveness of such a policy is to consider the financial and economic profitability of cultivating rattan, and this is the focus of this case study. Once its profitability has been determined, this could be considered within a wider policy framework. Such a framework could include the possibility of subsidies if profitability is not assured, as long as it can be demonstrated that rattan cultivation produced the environmental benefits hypothesized above.

The study examines the financial and economic returns from cultivating rattan irit (see Box 4.3) on one hectare of secondary forests and abandoned rubber plots in Kalimantan (Borneo) over a 25 year time frame. A 10% discount rate is used for the calculations. Since farmers sell both green and processed rattan, calculations are done for both cases. A number of important parameters are used in the asessment, including (all prices in 1988 terms):

• growth rates and yields: cane is assumed to grow at 4 m/yr and once mature yield 147 mt/ha;
• labour use: land preparation requires 11 person-days/ha, annual maintenance takes 5 person-day/ha/yr, and harvesting gives 50 kg of green cane per person-day;
• processing costs are 1,200,000 Rupiah (Rp)/mt of dry cane and land is valued at Rp188,000/ha;
• financial prices at the farmgate are Rp350,000/mt for green cane and Rp1,754,384/mt (20% moisture) for processed cane; and
• real growth rates (excluding inflation) in key variables over the 25 period analysed include a 2% annual increase in wages and a 0.18% annual rise in rattan prices.

Combining these parameters in a simple financial analysis model allows the analysts to determine the returns to rattan cultivation, measured either in terms of net present values (NPV) or internal rate of return (IRR), the latter referring to the percentage rate of return on the project which results in a zero NPV or BCR of 1.0 -- thus, it tells us what discount rate would result in discounted benefits being equal to discounted costs. Table 4.4 presents the results of the financial analysis, and from this information, it is clear that cultivation of rattan is an attractive investment. NPVs from growing rattan are comparable with the returns from monocropping coconuts under good management conditions and IRRs exceed the discount rate (ie. 10%) by a sizeable margin. These results hold whether green or processed rattan is considered, although returns are better for processed rattan. Interestingly, farmers often opt to sell their cane green rather than processed, despite the higher profits from the latter.

To assess whether rattan cultivation is of benefit to the nation requires shifting to an economic perspective. As discussed in Section 4.1.1 of the main text, this involves correcting for distortions in prices by constructing shadow prices where needed and expanding the analysis to include all benefits and costs, regardless of whom these may involve. As it turns out, the only price requiring adjustment is the price for rattan itself. Possible positive or negative effects of rattan cultivation on other parties or on the environment are not considered. The main source of distortion in the rattan price has been the ban on exports of green cane imposed by the Indonesian government, which had the effect of pushing up the world price for the unprocessed product. To correct for this, pre-ban world prices were projected, thus excluding the effect of the ban, and then the following adjustments were made to arrive at an economic farmgate price:

• addition of a premium to account for an overvalued exchange rate (this was done by adding on 10% to the financial price), and
• subtraction of all fees and taxes, as well as the costs of handling and fuel.

Having made the necessary adjustments, the economic returns from rattan cultivation are re-estimated and shown in Table 4.2. Economic profitability is approximately the same as financial, despite the adjustments made. Therefore, it is apparent that rattan cultivation also provides net economic benefits to the nation. In fact, sensitivity analysis demonstrates that the world price for rattan would need to fall from 35–49% before its cultivation became uneconomic. The economic impacts of growing and processing rattan are not incorporated into the economic analysis because of a lack of data. The impact is liable to be positive in the case of cultivation itself, since rattan requires a shady environment, thereby encouraging forest growth around it. In contrast, processing can have negative impacts on ambient environmental quality and farmer health, due to the burning of sulfur for fumigation.

Table 4.2 Financial versus Economic Returns from Rattan Cultivation, Indonesia

Source: Godoy (1990)

If raw or processed rattan exports are to be encouraged as a means of fostering local economic development and generating export income for the country, then rattan cultivation will an important element in such a strategy if natural forests are not to be degraded further. While financial profitability seems good at present, should it decline sufficiently or land tenure and other factors interfere to discourage cultivation, government intervention would be justified. In particular, the paying of subsidies or other incentives may be required.

4.2.2 Mangrove Valuation in Fiji⁵

⁵ Based on P.N. Lal, “Ecological Economic Analysis of Mangrove Conservation: A Case Study from Fiji”, Mangrove Ecosystems Occasional Papers Number 6, UNDP/UNESCO Regional Mangroves Project, August 20, 1990.

Mangrove ecosystems are well known for their linking of land and water systems, their high productivity and the large number of direct and indirect use values they support. As a general rule, the direct uses tend to be on-site and terrestrially based, while the indirect uses are largely off-site and coastal or marine based. Examples of the former (ie. direct use values) include timber, fuelwood, fish, drugs and supplies for textiles and leather manufacturing, while examples of the latter (ie. indirect use values) include filtering of nutrients and storm surge protection. Mangroves are amongst the most threatened ecosystems globally, because of the attractiveness of converting them to alternative uses such as prawn or fish farming. Yet when managed in their natural state, they are capable of producing significant economic benefits on a sustainable basis, usually not the case with conversion to other uses. Since so many of the benefits of natural management of mangroves are diffuse and tenure over mangrove areas is often ill-defined, conversion often appears attractive financially, when it may not be in economic terms. Where conversion is contemplated, the foregone net benefits from mangroves must be considered as an opportunity cost or impact of this management decision. This is only possible is values can be attached to mangrove uses.

This case study attempts to estimate the values associated with conservation and management of natural mangrove systems in Fiji. By correctly valuing the mangroves when managed as a natural system, the option of conserving them in this form can be properly compared to alternative land uses involving conversion. For this reason, we take the perspective of a partial valuation here, but we examine only the use values associated with the natural management regime, although not all of these can be properly quantified. All values are expressed in economic terms and where discounting is performed, a 50 year timeframe and 5% social discount rate are used. Readers interested in the fuller analysis, which includes valuation of alternative land uses and financial analyses of all options, should consult the original study.

Mangrove forests in Fiji cover 38,543 ha and are dominated by three main species and a hybrid. Further detail on the ecology of Fijian mangrove forests is provided in Box 4.4. Fiji's mangroves have been subjected to a range of pressures over the last century, beginning with reclamation for sugar cane cultivation to feed a colonial sugar industry at the turn of the century. More recently, most conversion has been for agricultural purposes, supported by the government. Despite the obvious costs of clearing the mangroves from a site, many reclaimed areas are not productive at present and lie barren. Ownership of mangroves rests with the government but traditional use rights are held by indigenous Fijians, especially regarding access to fisheries.

Of the many use values associated with Fijian mangroves, only three could be quantified; these are forestry, fisheries and filtering of nutrients. Although the study is primarily concerned with valuing potential use rates, it would be preferable to concentrate on actual or current use rates, since it is not clear that market demand would support the higher levels of harvesting activity implied by potential use rates. This represents a possible flaw in the study (see Section 4.2.5 of the main text) but for purposes here we will assume that the demand does exist. For both forestry and fisheries, commercial and subsistence harvesting occurs and separate estimates must be made in each case.

The direct uses associated with Fijian mangrove trees are complex and depend on species, as shown in Table 4.3, but the most important is fuelwood. Average annual harvests are 40,700 cu m, of which 37,900 (93%) is for subsistence use with the remainder harvested commercially. Limited by demand factors, current extraction rates are only about 1.06 cu m per ha, compared to a potential, sustainable extraction rate over a 40 year rotation of 4.3 cu m. Thus, at present at least, mangroves are not overharvested on a national basis and current harvesting is compatible with sustainable forest management.

Net economic benefits of the commercial fuelwood harvest range from F$103 to F$225 per ha, expressed in net present value terms (1986 dollars; F$1 = US$1.13), and varying according to location. Valuing the subsistence harvest requires the use of a price for a direct substitute, since fuelwood gathered for household use is not sold locally. Offcut timber from nearby sawmills serves as such a substitute and its price, adjusted for transport, was used for this purpose. The net economic benefit (NPV) of the potential subsistence harvest is F$210 per ha. Once the shares of commercial and subsistence harvesting are weighted according to an optimal management regime (which emphasizes commercial extraction), the resulting net present values for fuelwood benefits range from F$160 to F$210 per ha.

Table 4.3 Traditional Uses of Fiji's Main Mangrove Tree Species

Source: Lal (1990)

Valuing fisheries benefits is approached in a similar manner to forestry benefits, with one exception. Whereas forestry benefits involve simple measurement of the harvest of fuelwood, the relationship between mangrove area and support for fisheries is more complex, and no simple measurement is possible. Instead, assumptions are made about the impact on mangrove-dependent fisheries if the mangroves were not present. For the studies' purposes, impacts ranging from a 20% to 100% reduction in catches are analysed, assuming all mangroves were removed. Again, commercial and subsistence fisheries were separated, and net present values calculated for each type of harvest. Current annual harvest rates in areas where fisheries are judged to be fully utilized, but not overharvested, are about 331 kg per ha, with slightly more than half (184 kg) caught in the subsistence fishery.

Based on assumptions about commercial fishing industry costs, including adjustments for taxes and other price distortions, the net present value of commercial fishery catches is estimated at F$2606 per ha of mangrove. For the subsistence fishery, a shadow price was established using the price paid by commercial fishermen to purchase surplus fish from villagers. Using this price and allowing for annual household fishing costs of about F$80 per year, a net present value for the subsistence catch of F$2862 per ha of mangrove results. It should be emphasized that these figures assume complete loss of fisheries should the mangroves be entirely converted to other land uses. Since some fish may be able to use alternative habitat (ie. coral reefs), lower values may be more realistic. As a lower bound for fishery benefits, it can be assumed only 20% of the fish catch would be lost, resulting in a combined net present value of fishery benefits of F$1094 per ha of mangrove (versus F$5468 per ha above).

Finally, a replacement cost approach is used to value the nutrient filtering benefits of the mangroves. As noted in Section 4.2.5 of the main text, the replacement cost technique must be used with caution and provides an upper limit for the value of environmental services provided by forests. If the nutrient filtering function of the mangroves were replaced with a conventional secondary sewerage treatment plant, the capital cost would be F$2.5 million, compared to F$0.8 million to provide an equivalent service using 32 ha of mangroves as oxidation ponds. The difference in costs is taken as a measure of the environmental benefit provided by the mangroves. Calculated on an annual basis, the benefit is F$5820 per ha. As noted above, values calculated in this way should be seen as rough estimates only and treated with caution.

Simply adding the values estimated above to give a total value per ha may be misleading, since the study examines potential production from the mangroves and not actual use rates. Mangroves subject to an optimal fuelwood harvesting regime may not be able to provide the same level of fisheries and water treatment benefits as enjoyed at present because of tradeoffs and conflicts between direct use values. Similarly, the possible error in assuming that the full productivity of the mangroves could be harvested and marketed at current prices was already noted. Nonetheless, the Fiji mangrove case study demonstrates that such forest areas are valuable and that proposals to cut and drain them must take into account these values. If this is done, it is likely that fewer mangrove swamps would be converted to alternative land uses.

4.3 Logging and Forest Conversion

A more radical regime than managing natural forests for sustainable production of timber and NTFPs is to convert them to alternative land uses altogether. Not surprisingly, Chapter 3 indicates that the environmental impact associated with such a management situation is liable to generate a substantial number of negative environmental impacts. The case studies presented here emphasize the valuation of the impacts of such forest conversion activities, but from different approaches and for different forest systems. First, the downstream impacts of cutting timber in an important watershed in the Philippines are examined using a dose response type methodology. Second, a proposal to clear cut a mangrove forest area in Indonesia, to supply pulp for paper manufacturing, is evaluated. In this latter case, the information about linkages between the mangroves and important ecological services is limited, so that an alternative to cost-benefit analysis must be used to assess the impacts of cutting.

4.3.1 Logging Impacts on Fishing and Tourism (Philippines)⁶

⁶ Reprinted from G.Hodgson and J.A. Dixon, “Measuring Economic Losses Due to Sediment Pollution: Logging versus Tourism and Fisheries”, Tropical Coastal Area Management, April 1988, pp 5–8.

The Philippines, like many Asian and Pacific nations, is faced with pressing questions of appropriate coastal zone development. The Philippines has a rapidly growing population. Over the years, much of the land in Luzon in the north and the Visayas and Mindanao has been deforested; and some areas, notably in the Central Visayas, have serious soil erosion problems and a declining fish catch. These and other problems have stimulated immigration to Palawan Island.

The study site, Bacuit Bay, located near the northwest tip of Palawan proved to be an ideal location to examine the effects of sediment pollution on marine resources. Bacuit Bay covers about 120 km² and along with its outer shelf includes 14 islands, each surrounded by fringing reefs teeming with fish. In 1985, a logging company began operations in the watershed surrounding Bacuit Bay, causing a rapid increase in soil erosion and sediment input to the bay. The purpose of the study was to document the source of sediment as well as to follow it down the main river, into the bay and to monitor the possible deleterious effects on coral reefs and associated fisheries (see Box 4.5).

From a coastal development perspective, the Bacuit Bay case is especially interesting because, besides the obvious conflict for resources between the fisheries and logging industries, Bacuit Bay is also the site of a rapidly expanding tourist industry based on foreign scuba divers. By 1986, there were two major international scuba diving resorts within the bay. They are relatively high priced and valuable market products: clear water and beautiful coral reefs. Logging operations, thus, conflict with both the fisheries and tourism industries in El Nido via sediment pollution of the bay.

The ecological analysis (see Box 4.5) showed that logging causes accelerated erosion, mainly due to road building that leads to a high sediment output from the watershed and increased sediment deposition on the bay's coral reefs. This deposition kills the corals and is predicted to reduce fish biomass at a defined rate.

From an economic perspective, the question is: What is the net economic benefit of continued logging of the Bacuit Bay drainage basin considering predicted future losses from the fisheries and tourism sectors due to increasing sediment pollution of the bay? To provide a framework for the analysis, two reallistic development options were considered: a logging ban, and logging to continue as planned. Since the financial records of a wide variety of companies involved are not public, a standard cost-benefit analysis was not feasible. Revenue information was available, however, and therefore, gross values of revenue from each industry and present values were computed.

As in any analysis, a wide variety of assumptions were necessary. For example, to assess the impact of sedimentation on the values of fisheries production, fish catch was assumed to be proportional to fish biomass. Capital (ie. investment) outlays for foreign goods were assumed to be equivalent in each of the three industries. Given the inherent difficulties in predicting future values of fish stocks, commodity prices and tourism growth, the analysis was limited to a 10 year time horizon.

The results of the simple economic analysis are striking (Table 4.4). Under option 1, a logging ban, gross revenue is $41 million more than option 2, continued logging,. For both 10% and 15% disount rates, the present value of gross revenue given the logging ban is greater than with continued logging. Based on this analysis, the logging ban will clearly produce the greatest revenue over the 10 year time horizon. The loss of less than 5% of the total concession area used by the logging company should not be a major blow to the company.

Table 4.4 Present Values of Gross Revenues for Tourism, Fisheries and Logging under a Logging Ban (option 1) and Continued Logging (option 2) on Palawan, Philippines

Source: Hodgson and Dixon (1988)

A variety of externalities (ie. impacts of economic activities on third parties) such as income distribution, employment, infrastructure development, increased risk of flooding and loss of wildlife via habitat loss are important considerations with regard to the two development options. In each case, it appears that the fisheries and tourism industries will provide a safer, more sustainable development than if logging continues in this location.

In conclusion, the results indicate that sedimentation pollution can seriously degrade coastal marine resources in the tropics. Therefore, governments concerned with maintaining sustainable coastal marine fisheries might consider increasing the role of sedimentation pollution monitoring in their national environmental programmes. More basic research needs to be done to investigate the indirect effects of coastal sedientation pollution on commercially important tropical marine fish species such as tuna, which have traditionally been considered entirely pelagic (ie. free swimming), but which may, in fact, be dependent on the nearshore marine environment for at least part of their life cycle. From the perspective of coastal zone management and planning, the results of the study suggest that valuable information, guidance and sometimes, clear answers can be obtained from the combination of integrated ecological research and economic evaluation. It is likely that this approach will be useful in resolving a variety of coastal zone resource conflicts in other locations.

4.3.2 Pulp Production from Mangroves (Indonesia)⁷

⁷ Reprinted from E.B. Barbier, “Sustainable use of wetlands - valuing tropical wetland benefits: economic methodologies and applications”, The Geographical Journal 159 (1) 22–32, 1993; based on research by H.J. Ruitenbeek, “Mangrove Management: An Economic Analysis of Management Options with a Focus on Bintuni Bay, irian Jaya”, Report for Environmental Management Development in Indonesia Project, Halifax, Canada and Jakarta, Indonesia.

The economic analysis of the mangrove wetlands of Bintuni Bay, Irian Jaya, Indonesia illustrates the use of the total valuation approach, and in particular the importance that environmental linkages play in the economics of tropical wetland systems.

Mangroves in Indonesia are under threat from intensive use of their resources. Excessive exploitation of mangrove systems for charcoal, wood, fish ponds or similar resource uses is usually based on very narrow evaluation of only one of many possible ‘productive’ uses of these systems, often ignoring many important linkages between all the direct and indirect uses of the mangrove wetlands. In the 300,000 ha of mangrove wetlands of Bintuni Bay, pressures from a woodchip export industry pose a direct threat to the mangrove ecosystem, also endangering its ability to support commercial shrimp fisheries, commercial sago production and traditional household production from hunting, fishing, gathering and manufacturing. The mangrove system also has important indirect use value through its environmental function of controlling erosion and sedimentation, which protects agricultural production in the region. In addition, the wetlands have been identified as an ecologically important and ‘diverse’ ecosystem, which would suggest a high biodiversity value if it were kept mainly ‘intact’.

The total value of household income from marketed and non-marketed sources was estimated in the study to be around Rp9 million per year per household, of which about Rp6.5 million can be attributed to traditional uses of the mangroves for hunting, fishing, gathering and manufacturing (Rp 2000 = US$ 1). Commercial shrimp production yields approximately Rp70 billion per year, and if the by-catch fish production is ever commercially marketed, the imputed value of this catch is projected to exceed Rp30 billion per year. Sago production could reach a sustainable level by the year 2000 and earn Rp68 billion annually. In comparison, selective mangrove cutting schemes have a maximum value of about Rp 40billion per year.

In the study, values were imputed for the benefits of erosion control and biodiversity. The imputed benefit of erosion control was based on its indirect use value in support of local agricultural production. This was estimated to be around Rp1.9 million per household. Biodiversity values are expected to be ‘capturable’ through additional aid flows and other international transfers for conservation projects, which have an imputed value of Rp30,000 per ha.

The economic analysis compared different forest management options as to their effects on the total economic value of the mangrove wetlands. The forestry options ranged from complete clear cutting of the mangrove forest for woodchip production to selective cutting regimes of various intensities to a cutting ban. An important feature of the analysis was that it explicitly incorporated the linkages between mangrove conversion, offshore fishery productivity, traditional uses and the imputed benefits of erosion control and biodiversity maintenance functions. To the extent that these linkages exist, then some of these direct and indirect uses become mutually exclusive with more intensive mangrove exploitation through forestry options. The ‘optimal’ forest management option will therefore depend on the strength of the environmental linkages.

The results are summarized in Figure 4.1. The ‘very strong’ linkage scenario suggests immediate linear linkage between changes in the forest area and other productive uses. ‘Weaker’ linkage scenarios involved non-linear impacts with five or ten year delays. The analysis indicates that the clear-cut option is optimal only if no environmental linkáges exist - a highly unrealistic assumption. At the other extreme, a cutting ban is only optimal if the linkages are very strong, i.e. mangrove alteration and conversion would lead to immediate and linear impacts throughout the ecosystem. Under a scenario of linear but delayed linkages of five years, selective cutting of the mangroves has a present value of Rp70 billion greater than the clear cutting option, and only Rp3 billion greater than the cutting ban option. Even if weak interactions exist, an 80% selective cutting policy with replanting is preferable to clear cutting. Given that there is still considerable uncertainty over the dynamics of the mangrove ecosystem, and that alteration and conversion may be irreversible and exhibit high economic costs, then the analysis suggests that there is little economic advantage to cutting significant amounts (eg. more than 25%) of the mangrove area in the Bintuni Bay wetlands.

In sum, the Bintuni Bay mangrove analysis demonstrates the importance of economic valuation of environmental linkages in wetland development decisions. The failure to take into account such linkages may lead to critical errors in these decisions, leading to a narrow focus on a single major productive use. The analysis also demonstrates the importance of valuing traditional uses of tropical wetlands, their environmental functions and their potential to generate future use and non-use values.

Figure 4.1 Indonesia - Total Economic Value of a Mangrove System under Varying Environmental Linkages

Economic Value of Mangrove System, Bintuni Bay, Irian Jaya, Indonesia
(Net Present Value in Billions of 1991 Rp; 7.5% Discount Rate)
2000 Rp = US$ 1

Environmental Linkages - None to Very Strong

Total Net Benefits include economic returns from a) woodchip production from mangrove forest cutting, b) commercial shrimp and by-catch fish production, c) commercial sago production, d) traditional household production from hunting, fishing, gathering and manufacturing, e) imputed benefit of erosion control, and f) capturable biodiversity.

Source: Ruitenbeek (1992).

4.4 Plantation Forestry/Afforestation

Plantation forestry, as practised in the tropics, most often involves the rotation of fast-growing species planted in monocultures. Asia accounts for just over one-third of the total planted area of such plantations. Industrial timber and fuelwood are the principal wood products harvested, but social forestry programmes have been important as well. Chapter 3 discussed the negative environmental impacts of plantation forestry (ie. vulnerability to disease and pests, degradation of soils, impacts on crops, etc.) and outlined the standard techniques for evaluating these impacts. Economic analysis can assist with valuing the negative impacts of plantations. However, against these impacts must be weighed the additional supplies of timber and forest products from planted forests, which can help reduce the pressure on natural forests. Along with plantations, afforestation programmes represent areas of planted forest, but with a different purpose in mind. Typically, afforestation is intended to restore degraded areas of forest to provide a number of different benefits, including watershed protection, sustained supplies of fuelwood and other forest products. Valuing all the different outputs and comparing these to the costs involved, is needed to demonstrate the true worth of undertaking such programmes.

The case studies considered here is concerned with valuing the multiple benefits of afforestation programmes in degraded, hilly areas of Nepal.

4.4.1 Afforestation in Degraded Areas (Nepal)⁸

⁸ Reprinted from J.A. Dixon, R.A. Carpenter, L.A. Fallon, P.B. Sherman and S. Manipomoke, Economic Analysis of the Environmental Impacts of Development Projects, Earthscan and the Asian Development Bank, London and Manila, 1988.

This case study, based on an Asian Development Bank project appraisal report and on reports of a similar project by Fleming (1983), is a description of the benefit valuation for a benefit-cost analysis of a management programme for two watersheds in Nepal. It is an example of the use of change-in-productivity techniques in which actual market prices are used as a measure for valuing the benefits of environmental improvements. In this example, physical changes in production brought about by the project are valued using market or, where appropriate, shadow prices for inputs and for outputs. The productivity effects of both introducing the project and of not doing so (with- and without-project analysis) are evaluated.

The forests of Nepal are continually being degraded by overcutting and overgrazing; the results are inadequate and polluted water supplies, shortages of fuelwood and leaf fodder, and increasing soil erosion. The major causes of the overexploitation of the forests around kathmandu and Pokhara are the need of the rural population for greater income and the shortage of fuelwood in the urban settlements. Most of the forests in the middle hills, where 52 percent of the population live, have been converted into shrubland (see Box 4.7 for a description of existing forest types). Trees are being cut down or lopped heavily and the forest floor is overgrazed. The shrubland is being exploited for fodder and stripped of fuelwood. As a result, the water-retaining capacity of natural vegetation in the hill forests has been reduced and runoff has increased in both quantity and speed. Each year an estimated 240 million cubic meters (m³) of eroded soil is transported downstream by the country's major rivers and their tributaries, causing major damage.

The project is intended to reduce soil erosion, to increase the productivity of the different land uses within the watershed and to provide a sustainable flow of resources which would include fuelwood and fodder. Benefit-cost analysis, based on estimates of the economic values of the products from differing uses of land, can be used to assess the project. The benefits of the programme may be considered to be equal to the land values (the economic value of the products) achieved with the project, minus the land values without the project. These benefits and costs can then be used to calculate the economic internal rate of return (IRR) in the usual manner. The main problem is in valuing the differing outputs from the various uses of land, a problem considered in the following paragraphs for without project conditions.

Grazing Land. Grazing animals produce milk and fertilizer. Given the physical values for production of plant and animal products per ha and assuming a fodder consumption rate of 14,000 kg per animal per year, the annual value of fertilizer production is calculated to be Rs126 per animal per year or Rs11/ha/year. This figure is found by determining the value of the fertilizer produced per animal and multiplying this amount by the carrying capacity of one ha of land. In the case of grazing land, the carrying capacity is 0.0857 based on grass production on grazing land, 1200 kg, divided by the annual feed requirement per animal, 14,000 kg. Similarly, the annual value of milk production per ha of grazing land can be calculated to be Rs108/ha/year. The total annual productive value of grazing land would, therefore, be the total of the values of milk and fertilizer production or Rs119/ha/yr.

Since market prices are used to establish fertilizer and milk values per ha of grazing land, it is important to confirm that these prices reflect the true opportunity cost or marginal willingness to pay. Any input-price subsidies should be added to the price and if milk prices are controlled by the government, alternative prices which more accurately reflect marginal willingness to pay should be obtained.

Pasture. Since fodder production from pasture is estimated to be five times that of grazing land, the annual value from pasture would be Rs595/ha/year.

Unmanaged Scrubland. From the production data for scrubland (degraded forest land) it was calculated that the annual value of fertilizer produced from scrubland grass was Rs5/ha/year and that the annual value of the milk was Rs45/ha/year. Assuming that the average grazing animal consumes about 7100 kg of tree foliage per year, the value of the fertilizer so produced on scrubland was calculated at Rs12/ha/yr and the milk production at Rs126/ha/year. Taking production from both grass and tree foliage together, each hectare of of unmanaged scrubland could, therefore, produce Rs17 worth of fertilizer and Rs171 worth of milk each year.

The value of fuelwood, as estimated by the three approaches described in Box 4.8, is as follows:

The most conservative estimate (the lowest) was chosen for the analysis. Therefore, the annual fuelwood value per ha of unmanaged scrubland would be Rs65/ha/year (based on production of 1 m³/ha/yr).

The total annual value of scrubland was estimated to be the value of the milk, fertilizer and fuelwood, or a total of Rs253/ha/yr.

Unmanaged Forest. This land is open to restricted grazing and harvesting of fuelwood and fodder. The annual value of the fertilizer was estimated to be Rs25/ha/year and the annual value of milk Rs252/ha/yr. Using the indirect substitute method, the annual value of fuelwood was estimated to be Rs143/ha/year. The total annual value of unmanaged forest would therefore be Rs420/ha/year.

The per ha values for grazing, pasture, unmanaged scrub and unmanaged forest land range from Rs119 to 595/ha/year assuming no improvements in management were made under a project. Per ha land values for improved or with project conditions vary from year to year, according to scheduled harvesting on plantations, managed scrubland and managed forest. These values are calculated in the same way as the without project values but are not described here. Total land values under each management alternative (both unmanaged and managed) can be calculated by multiplying the number of hectares of each type of land by their unit values.

The contribution of the project to the control of soil erosion, landslides and flooding is not accurately quantifiable and is therefore not included in this analysis. The incremental benefits of the management programme are assumed to be the difference between the values of products from the unmanaged land (that is, without the proposed scheme) and the values of products if the management scheme is adopted. In each case, the value of agricultural production is assumed to be constant. The incremental benefits of the project, minus its costs, result in a stream of net benefits which yield an economic IRR of 8.5 percent.

This case illustrates the use of valuation techniques to place monetary values on a change in pasture and scrubland/fores productivity brought about by a project. A with and without project framework was used to determine the scale of productivity changes. Both direct and indirect methods were used to estimate prices for the fertilizer, milk and fuelwood produced.

4.5 Conclusions from the Case Studies

The case studies presented include a wide range of policy problems and geographic settings within Asia, although their coverage cannot be claimed as exhaustive in any way. Table 4.6 summarizes information about the cases analysed. Several observations emerge from reviewing these studies. For instance, the importance of integrating ecological and economic approaches is critical, especially when the valuation of ecological functions is the objective. This requires more than complex mathematical techniques, but extends to continual collaboration between economists and ecologists. The studies also demonstrate that the economic analysis of environmental impacts should not be conceived of as an end in itself, but needs to be directed towards some particular problem. These problems may range from simply incorporating the non-market values of natural forests into project appraisals, to assessing the economic values of environmental benefits or damages when choosing among competing forest land uses.

A variety of valuation techniques are also used in the case studies, although some clear patterns emerge. Forest valuation studies elsewhere in the world concerned with recreational use most often use the contingent valuation method (CVM) to obtain a measure for its value. No such studies were uncovered for Asian forests, although forest recreation and tourism are undoubtedly important in the region. Many tropical forest studies, however, are more concerned with production values or direct harvested uses associated with forests and the predominant valuation technique for assessing environmental impacts is liable to be valuing changes in productivity. Often this entails the use of shadow prices where market prices do not exist or are distorted. The indirect uses or ecological services provided by Asian forests are important as well, and more complex valuation techniques, as used in the valuation of sedimentation damages in the Philippines, will often be required. Unfortunately, such techniques require extensive data and are expensive to implement, and for these reasons there are still relatively few instances where indirect use values have been successfully quantified for Asian forests.

Table 4.6 Summary Information for Asian Forest Valuation Case Studies