28. Incremental cost of complying with criteria and indicators for achieving sustainable forest management - Mohd Shahwahid H.O., Awang Noor A.G.*, Ahmad Fauzi P., Abdul Rahim N., Salleh M., Muhammad Farid, A.R., Mohammad Azmi M.I.** and Amir S.*

* Universiti Putra Malaysia, Serdang, Selangor, Malaysia, Tel: ++(60 3) 8948 6101

** Forest Research Institute Malaysia, Kepong, Kuala Lumpur, Malaysia, Tel: ++(60 3) 6275 2564, Fax: ++(60 3) 6276 5687, E-mail: [email protected]

*** Kumpulan Pengurusan Kayu Kayan, Terengganu, Malaysia

INTRODUCTION

Prompted by proponents of sustainable forest management (SFM), governments in the developing world and countries involved in the timber products trade, as producers and consumers, have subscribed to SFM to provide the greatest good for the greatest number of people in the long run. In order to implement SFM, the Forestry Department Peninsular Malaysia has produced the Malaysian Criteria and Indicators (MC&I) system that clarifies major activities that require compliance. The National Committee on Sustainable Forest Management has formulated 88 activities to operationalize the criteria and indicators. The MC&I complement ITTO criteria for achieving SFM.

Skepticism surrounds the capability of tropical countries in meeting the criteria and indicators. Perhaps the most critical question is whether the additional cost of compliance can be met. However, reliable information on costs is not available. Such information is necessary to guide long-term planning and to provide motivation to implement SFM. In addition, this information will assist various parties in identifying financial mechanisms and appropriate technologies for bilateral or multilateral cooperation and assistance.

The Malaysian Government is committed to attaining ITTO’s Target 2000 Objective, which aims to ensure that all timber produced comes from sustainably managed forest. Hence, knowledge of incremental costs of compliance provides important indicators of the magnitude of financial resources required.

BACKGROUND

The idea of complying with criteria and indicators for achieving SFM is very broad. At the ground level, compliance is often translated into harvesting systems such as improved logging (IL) and reduced impact logging (RIL). The inherent principle is to adopt selective timber harvesting with minimal damage to residual stands and reduced environmental impacts. This can raise timber yields for subsequent harvesting cycles. In terms of biophysical impacts this is sensible. Whether it is financially viable remains unclear. Experiences in various parts of the world seem to provide conflicting evidence in support of RIL in comparison with the “cut and get out” conventional logging (CL) practices.

Two studies appear to favour RIL on both environmental and financial grounds. A study in Indonesia showed that following clear guidelines provided by the FAO Model Code of Forest Harvesting Practice could translate into substantially lower environmental impacts for forest harvesting (Elias, 1998). In comparison with CL, forest stand damage was reduced by about 50 percent. Heavy damage to the residual stand was reduced from 29 to 12 percent. The area opened up by felling and skidding decreased from 11.1 to 7.7 percent and 8.7 to 5.2 percent, respectively. Average skidding distance declined from 350.6 to 335.2 m/ha. The net results in system productivity were affected only slightly. The productivity of felling trees with buttresses even increased from 17.6 m³/h to 18.3 m³/h. Skidding roundtrips declined by about five minutes from 38 to 33 minutes. Based on time studies, a comparison of production costs for felling, skidding, bucking, loading and unloading by CL and RIL showed that the total costs of RIL increased by only 1.3 percent compared with conventional methods (Rp 28 573/m³ or 4.0 percent to Rp 522 884/ha).^[45] However, these costs excluded expenses for preparing topographic maps and timber harvesting planning costs, not to mention the opportunity costs of reduced timber production from protected buffer zones.

A study in Brazil’s eastern Amazon provides further insights into the ecological and economic effects of RIL (Holmes et al., 1999). The ground area disturbed by heavy machinery during RIL was nearly 40 percent less compared to CL. Favourable comparisons also emerged with regard to soil disturbance on skid trails and tree damage. In terms of costs, RIL planning costs nearly doubled CL ‘up-front’ costs, but the efficiency gains were considerable. Skidding and log deck productivity increased dramatically and led to reduced costs of nearly 40 percent. Better recovery of the merchantable timber volume at the typical RIL site reduced the average variable costs associated with wood waste by almost 80 percent and stumpage costs by 16 percent. Overall, the average total cost of a typical RIL system was 12 percent less than the average cost of a typical CL system, and net revenue was 19 percent higher. This indicates that from a financial perspective RIL in the eastern Amazon is superior to CL, primarily due to higher skidding productivity and lower timber waste.

Both studies indicated that the cost of RIL is either lower or, at most, slightly higher than CL. With such favourable experimental results, one would expect to see greater implementation of RIL in new concession areas. However, several constraints decrease the likelihood of widespread adoption. Many of the financial benefits of RIL are due to reduced waste. Unfortunately, these costs are often not recognized, as many CL operators do not apply rigorous cost accounting. Wood waste simply does not appear in the books. Up-front costs on the other hand do, which explains why the perception of higher costs associated with RIL persists. Other constraints to adoption include the lack of trained staff, the lack of enforcement of environmental legislation and financial disincentives to change behaviour. In the short run, CL continues to provide greater financial returns because forestry codes and regulations designed to assure forest sustainability are circumvented.

The results of the above studies favouring RIL over the status quo, in terms of costs, may be misleading in that they were experimental. Under the watchful eye of researchers, contractors comply, especially in small-scale experiments. This problem is particularly apparent in time studies. Therefore, costing ought to be done at the compartment level. Furthermore, to determine the full cost of RIL requires that all relevant costs from planning to staff training be considered. Costing should not be restricted to direct costs only, which are known to comprise only a small proportion of the total cost of harvesting and forest management.

The proponents of RIL have been challenged on profitability and environmental grounds (Pearce et al., 1999). The “sustainable forest management effect” will inevitably increase the cost of timber harvesting and management (Leslie, 1999). While sustainable systems appear capable of earning reasonable returns, they do not compete financially with unsustainable systems. The evidence on discount rates reinforces the critics’ arguments. Discount rates in poor countries are very high, indeed, so high that few investments in forestry would seem to be justified financially. High discount rates simply reinforce the preference for CL based on rapid liquidation of the timber and other resources without regard for future harvests or other impacts. Factors that might mitigate this inequality include improving concessionaires’ property rights, better enforcement of regulations, higher timber prices, and valuing of non-commercial species. None appears to give sustainable timber management any edge over conventional systems. All have some role to play, but none is in itself sufficient.

Frequently, non-market values have been used to defend SFM, particularly when these values are higher under RIL than CL. Earlier studies emphasized the importance of holistic forest management for both timber and non-timber products and services (Panayotou and Aston, 1992; Roslan et al., 1994). Research on “biodiversity impact profiles” is not sophisticated enough to reach firm conclusions. For carbon storage, the picture seems to favour SFM fairly clearly. But SFM also loses some environmental benefits relative to the pre-intervention period. For the argument to have any substance, these non-timber values have to be sufficiently important to make up for reduced profits. While there is only a limited number of studies in Malaysia to guide in this respect, those that exist seem fairly uniform in finding that the non-market benefits of sustainable systems are significant. All tend to acknowledge that non-timber values more than offset lower timber volumes. The role of carbon is highlighted because a survey of non-market values suggests that carbon values dominate the non-market values overall (Kumari, 1995; Woon and Mohd Parid, 1999).

Pearce et al. (1999) concur that the prospects for SFM are low in the early stages of development, and increase over time as societies attach higher values to the forest and its services. Extended to include carbon and biodiversity values, it can be argued that the potential for SFM is far greater, even in the early stages of development, than might otherwise be thought.

JUSTIFICATION OF THE STUDY

One major stumbling block for introducing environmentally sound land management practices is the widespread perception that they are more expensive when compared with conventional methods. This explains why, in many locations, forestry sector stakeholders remain cautious about complying with criteria and indicators and adopting RIL. The search for relevant economic data has started and efforts have intensified to satisfy the growing demand for better information.

The need for this study on the costs of complying with the MC&I is evident given the substantial discrepancies in the available information. For example, ITTO (1995) suggested that SFM would cost producer members annually between US$ 3 500 and US$ 4 100 million while producer countries’ cost estimates exceeded US$ 7 000 million. This discrepancy is possibly due to the highly aggregated average figures used, which do not reflect the inherent variations in the various producer countries.

ANALYTICAL STUDY FRAMEWORK

The analysis is based on cost comparisons with and without compliance to MC&I activities. The cost incurred when not complying with these activities comes basically from using the conventional practice (CP). The list of pre-felling and felling activities conducted with and without compliance with MC&I activities is provided in Table 1. The conceptual framework for obtaining the incremental or additional cost of conducting each pre-felling and felling activity when implementing the SFM is given in Figure 1. Each harvesting activity occurs at different time periods. The costs of the pre-felling activities were compounded to the year harvesting was conducted (1999) as the reference base period to obtain the present value cost.

Table 1. Flow of harvesting activities in the implementation of sustainable forest management

Table 1. Continued

Figure 1. Analytical framework of cost analysis for harvesting operations

METHODOLOGY

In Malaysia, crawler tractors are used normally for extracting logs in the hill forest. Excavators have been introduced recently not only to extract timber but also for road construction. Excavators reduce the damage to the residual stand and minimize road width. Chainsaw operators cut trees standing along the road, and lop off the crown ahead of the excavator, which is then used to arrange the cut trees along the road. This operation reduces the usual damages caused by the crawler tractor that indiscriminately pushes over trees causing excessive soil exposure. The crawler tractor levels and shapes the road, digs ditches beside the road and skids the cut trees to the log landing. However, introducing the excavator and tree felling along the road before the crawler tractor does its job, requires additional machinery rental, compensation for fellers and extra time in comparison with the conventional road construction system by crawler tractor only.

In this study, both CP and MC&I compliant (MC) options practised selective felling of trees tagged according to the prescribed cutting limits. Hence, they should have produced approximately similar harvested volumes. Felling involves the use of chainsaws to cut trees in the predetermined direction and cross-cutting. Later the trunk is bucked into appropriate lengths at the log yard. Felling and bucking involves several teams per compartment. A team may consist of two chainsaw operators; each one taking turns at operating the chainsaw and the other clearing and guiding felling directions.

Directional felling is standard but enforcement tends to be difficult. Theoretically, felling should be directed towards the skid trail with the tree crown ending up on the opposite side of the skid trail and the upper part ready to be hooked on to the crawler tractor. Borhan and Guglhor (1998) reported that 30 percent of the trees were felled completely away from the intended directions within a range of 25 to 90°, sometimes 180°. The reasons included feller’s deliberate disregard for the proper direction, preference to fell according to the natural lean, lack of skill and concern for safety. Instruction was given for adherence to directional felling in the MC option but to no avail.

Skidding involves the moving of logs from the stump along skid trails to the feeder roads and log landing normally by crawler tractors fitted with a winch. The tractor operator is assisted by a helper who wraps and hooks the cable around the end of the log. The crawler tractor, which is equipped with steel tracks and a bulldozer blade, can be used on very steep slopes. A problem is that operators tend to scrape the soil and to push down trees with the blade. This leads to severe soil disturbance and excessive damage to residual trees and regeneration.

Using front-end loaders or grapplers, logs from the log landing are loaded onto the deck of a modified 10-wheeled truck or san tai wong for hauling to the main log landing. The san tai wong is agile and strong with a total weight capacity, at full load, of up to 40 tonnes. The cost of short hauling depends on the weight of logs and distance.

Timber harvesting was conducted using two systems; the MC&I compliance (MC) practice in a 43-ha research plot, while CP was conducted in the rest of the compartment (364 ha). Table 2 summarizes the characteristics of the study sites. Total timber production from the MC and CP plots was 991 m³ and 12 086 m³ respectively. Theoretically both plots are bounded by the Selective Management System (SMS). Hence, buffer areas around rivers and steep slopes were marked and protected from harvesting. The timber volumes not harvested in both plots were 203 m³ and 393 m³ respectively.

Table 2. Summary of study sites

n.a. - not available

RESULTS

Elements and incremental proportion of harvesting cost

Table 3 provides the present value per hectare of harvesting costs for the MC and CP options. The overall present value per hectare costs for harvesting were RM 6 426/ha^[46] under MC and RM 3 949/ha under CP. Information of interest in this table is the distribution of the costs among the pre-felling, felling, additional training activities and foregone timber revenues.

Table 3. Average present value cost of harvesting activities (Malaysian ringgit)

Additional training was required to comply with the MC&I activities. This took up a small proportion of the total cost. The pre-felling activities comprised an environmental impact assessment (EIA), pre-felling inventory of commercial timber trees, compartment boundary demarcation, proposed road alignment and tree marking and mapping. The cost of pre-felling activities was higher under the MC option. With the exception of the EIA and tree marking and mapping, the differences between the two options were minor. EIA and tree mapping are new requirements in the MC&I. There is a recommendation now that the EIA be conducted for the entire annual coupe rather than for each compartment, which would reduce costs. Tree mapping is necessary to facilitate felling and prescribing skid trail alignment on the map to prevent excessive and unplanned skid trail construction.

A team of contract workers supervised by Forestry Department field staff usually conducts tree tagging. The contractor normally charges a rate of RM 1.80/tree tagged. Under the MC&I, tree mapping is required.

Harvesting activities include road construction, felling and bucking, skidding, log loading, short distance haulage, supervision and monitoring, administration and taxation. On aggregate, these activities dominated the total harvesting cost under both options taking up 90.51 percent under MC and 95.81 percent under CP. Payments for premiums and royalty charges, skidding and administration that included profits for the contractor were the major cost elements. The cost of road construction was low under CP (3.30 percent) but high under MC (16.91 percent). This requires additional costs for renting hydraulic excavators and longer work time to abide with the more rigid road specification according to the MC&I. The use of excavators rather than bulldozers in the road formation cut is to reduce unnecessary road corridors and to prevent excessive blading. In the MC plot, the lengths of the feeder road and skid trails were within the 40m/ha and 300m/ha limits set by the MC&I.

The above components are direct financial costs. The licensee, contractors and harvesting crews incurred opportunity costs due to higher timber volumes not harvested in buffer areas. The average production cost rose by 32.1 percent to RM 8 491/ha when the foregone timber revenues from buffer areas were included in the MC option. The mean production costs only increased by 5.47 percent to RM 4 168/ha with the inclusion of these foregone revenues in the CP option. The opportunity cost is computed as potential gross revenue net of the direct cost of extraction. Fixed indirect costs such as forest premium for the logging rights and road construction cost, were not included as they are considered sunk costs. These foregone revenues consist of foregone timber revenue incurred by the concessionaire and loss of royalty charges not collected by the Government. The protected buffers took up about 28 percent of the licensed area. Ironically, payments of forest premium for the logging rights cover the whole licensed area including the buffers. Hence, the concessionaire has an interest to recover a portion of the sunk cost incurred, by extracting timber from the buffer areas. Each harvesting crew will be paid on a piecemeal basis by the contractor depending on the quantity and quality of timber extracted. Likewise, the contractor will also be paid on a piecemeal basis by the concessionaire.

Table 4 shows the harvesting cost on a per cubic meter basis. Observed trends were similar to those on a per hectare basis. This information is useful as the timber harvesting industry is more familiar with measuring financial viability in volume units. The costs of harvesting were RM 199/m³ and RM 117/m³ under MC and CP options, respectively.

Table 4. Average total cost of harvesting activities per m³ timber production

Note: Average production rose by 32.1 percent to RM 262/m³ when the foregone revenue from buffer areas was included in the MC option. While the average production cost only increased by 5.5 percent to RM 123/m³ when the foregone revenue from buffer areas was included in the CP option.

The costs per hectare of harvesting were consistently higher under MC than under the CP option mainly due to higher labour inputs and expenditures on improved activities. However, for activities such as pre-felling inventory, the differences in the average costs were due mainly to the effect of averaging by a smaller net production area. The incremental proportions of the cost among the various activities were more variable. In aggregate, compliance with the MC&I led to an overall increase of RM 2 477/ha or 62.7 percent and RM 81/m³ or 69.1 percent (Table 5). The higher percentage increase in cubic meters is due to the lower timber yield under MC that raised the average cost relative to the CP.

Among the various activities, the increase was 263 percent or RM 414.31/ha in pre-felling activities; 734 percent or RM 956/ha in road construction; 37 percent or RM 688/ha in felling activities; RM 9.5/ha in additional training; and 855 percent or RM 1 849/ha in the opportunity cost of foregone timber revenue. The activities with the most significant incremental costs were road construction, tree marking and mapping, skidding, and the opportunity cost of buffer areas.

Table 5. Average incremental cost of compliance with MC&I activities

Note: The incremental average total cost rose by 74.76 percent to RM 4 323.15/ha when the incremental foregone revenue from buffer areas of RM 1 849.34/ha was taken into account. While the incremental average per m³ total cost increased by 70.46 percent to RM 138.91/m³ when the incremental foregone revenue of RM 57.42/m³ from buffer areas was included.

In some activities, the incremental cost is only due to a greater need for supervision and monitoring under the MC&I. This occurred particularly in proposed road alignment and road construction.

Cost sharing of incremental costs of MC&I compliance

Table 6 shows the incidence of the cost borne by the concessionaire, the contractors appointed by the concessionaire and the Forestry Department. The incidence of incremental costs is related to the logging business practice (many activities have been contracted out to the Forestry Department and licensee conducting supervising and monitoring activities).

For some activities, only the concessionaire was incurring the incremental cost. This occurred in management plan preparation and in taxation. In others, only the concessionaire and the Forestry Department were incurring extra costs such as in additional training. In pre-felling and felling activities, all three stakeholders had to incur an incremental cost.

Overall under both options, the Forestry Department was not burdened with a substantial share of the total incremental harvesting costs (11.87 percent). As expected the concessionaire and the contractors were affected by higher costs (23.46 percent and 64.67 percent). With the exception of tree mapping, the operational costs of the pre-felling activities were borne by the contractors for salaries and wages, and material inputs. The Forestry Department’s supervisory and monitoring costs seemed to be higher for tree marking and mapping operations and road design. The concessionaire’s cost was mainly for salary and wages for supervision and monitoring. The contractors and concessionaire incurred substantial expenditures for felling activities. The concessionaire’s contributions were mainly payments of premium and royalty charges.

POLICY IMPLICATIONS

The results indicate that complying with the MC&I for SFM implies additional costs for licensees, harvesting contractors and the Government. This paper has computed the incidence of this burden among these stakeholders. Consideration of compensation may have to be addressed explicitly to encourage compliance if SFM is to be achieved. Instruments for financing compensations have to be determined.

In Malaysia, harvesting compartments are allocated to a licensee who then appoints contractors to extract the timber. MC&I compliance requires the contractors to undertake additional activities, which if not compensated, reduce revenues and thus the incentive to comply. It is in the interest of the licensee to compensate the contractors, otherwise no timber will be extracted. The licensee has little choice but to absorb the additional cost, as compliance is a prerequisite for renewal of annual harvesting rights. The Forestry Department too has to conduct additional activities and reinforce its monitoring capabilities. Hence, the burden of the incremental cost is mainly borne by the licensee and the Forestry Department.

Table 6. Incidence of per hectare incremental harvesting costs for each activity among stakeholders when complying with MC&I

An incentive package is required to encourage implementation of the MC&I. A transfer of funds to cover the incremental cost could fully compensate for lost benefits. In forestry, a user fee is an instrument used to correct resource underpricing that has in the past led to excessive exploitation and loss of government revenue. In the case of capturing a higher economic rent from timber extraction, setting stumpage fees by auction has been popular in many countries including Honduras and Malaysia.

Domestically, funding could be worked out through an adjustment of the Government revenue system from forestry. Government revenue comes in the form of lump sum premium payments, part of which are determined through auctioning stumpage fees, for timber extraction rights and volume-based royalty charges as tax revenues. Now that extraction costs have risen, a reduction in this stumpage fee could address the burden faced by the licensee. This can release some funds from the licensee for transfer to the contractors.

Another source is through a reallocation of state government’s annual budgets among agencies. The Forestry Department would require a larger budget to implement and enforce the MC&I. The country would stand to benefit from the reduction of off-site environmental impacts. This could relieve certain agencies of damage relief activities. A reduction of sedimentation and improvement of the water quality of rivers could alleviate the need for flood control activities such as dredging. An investigation of the off-site costs of clearing forested watersheds in the highlands indicated a substantial annual budget allocated for dredging to avoid a decline in hydroelectric power generation. Furthermore, a shift in timber harvesting from CL to RIL is expected to lead to a reduction in water treatment costs.

At the international level, markets have to be created for timber produced from sustainably managed forests. Unless there is a green price premium, compliance would reduce the profit margin of licensees and government revenues. Premium prices can only be obtained when there is good demand for this timber. To this end, ITTO has a role to play to promote such markets among its member nations.

The Global Environmental Facility could also provide funds for securing global environmental benefits such as carbon sequestration and biodiversity conservation. For example, implementing a set of RIL guidelines to reduce damage to soil and vegetation in Sabah, Malaysia has led to potential carbon savings of 90-94 tonnes/ha or 328-343 tonnes of carbon dioxide per hectare over 40 years (Pinard et al., 1995). Global benefits are shared by all nations, both developed and developing. Embedded is the perception that developing nations would be willing to intervene or take different actions such as complying with the MC&I if the international community would be willing to bear the incremental cost. In the context of SFM, the global benefits would be maintaining or enhancing capabilities to sequester carbon and to conserve biodiversity.

RECOMMENDATIONS

The above analysis is one step in evaluating compliance with the MC&I. The next step is to assess the benefits of compliance. Although results suggest additional expenditures being incurred by the stakeholders, there are cost savings to society due to a reduction in off-site environmental impacts. There are expected to be on-site productivity gains as well as from both timber and non-timber forests products that can be reaped during subsequent cutting cycles. Global society too is expected to gain from the higher potential for carbon sequestration and biodiversity conservation.

Compliance with the MC&I would require fulfilment of various encompassing factors. Dykstra and Heinrich (1996) suggested four components of a good harvesting operation:

• Comprehensive plan.

• Effective implementation and control.

• Methodical post-harvest assessment and feedback to the planning and harvesting team.

• Development of a competent and motivated workforce.

If these factors are not incorporated, full compliance with the MC&I will be suspect.

Incentives would have to be provided to encourage compliance by the affected parties. The full payment of premiums over the whole compartment may act as a disincentive to compliance. Nevertheless, there is an interesting twist to this circumstance. There is already an in-built mechanism to implement an economic instrument to encourage compliance with the MC&I. The premium being paid over areas not loggable in the compartment, can be treated as a form of performance bond that is returnable upon full compliance with the harvesting specifications. The closing report, together with an additional checklist of prescribed activities following the MC&I, could play an important role in deciding whether the bond is refundable.

ACKNOWLEDGEMENTS

We are grateful to the many organizations and personnel involved who made the field experiment and data collection possible. They include the Terengganu State and Dungun District Forestry Department, KPKKT, support from Forest Research Institute Malaysia’s staff and last but not least, funding from ITTO.

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