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IV. The cases for and against national forest funds: tracing the main arguments

National forest funds have long been a subject of debate amongst economists, policy makers and foresters. The purpose of this section is briefly to sketch the outlines of this debate as a prelude to a discussion of various possible roles that national funds might play in future efforts to improve the financing of sustainable forestry (Part V).


A. Common Arguments in Favour of Forest Funds.

1. Funds can help meet forestry’s special needs for long-term investment

A starting point for many arguments in favour of forest funds is that investment in sustainable forestry is essentially a long-term proposition. As early as 1960 the FAO Regional Conference for Europe determined that "the formation of such a fund may be necessary since afforestation can only be a long-term investment, requiring continuity of plan..." (Fontaine, 1961). As a more contemporary statement of the rationale behind national forest funds puts it: "The essential logic behind Forestry Funds is to provide a secure, sufficient and long-term source of finance...In a sector where the main product is by its very nature a long-term investment, short planning horizons can undermine the [forestry] authority’s ability to implement its mandate." (Landell-Mills, 1999)

Sustainable resource use requires actions today that will not limit the use of the resource in the future. However, market forces most strongly represent people and demands of the present. A fund can, in this sense, serve as a surrogate economic voice for expected demands of future generations. For example, a particular forest may need years or decades to respond to new demands for forest products. This delay can lead to oscillations in the market as supply lags well behind changing demands for forest goods. Steady investment can reduce these oscillations. In many countries, the forest sector also needs long-term investments in roads, equipment, training, and other sorts of physical and human infrastructure. When public and private investment capital is limited in a country, a dedicated fund, fed by both earmarked forest revenues and outside income, may be a practical way to meet this need. Even some developed countries have seen forest funds as a useful tool for these purposes.

2. Funds can shield the forestry sector against the fluctuations and unpredictability of national budgets

The problem, say forest fund advocates, is that national budgetary processes are both by design and in practice poorly equipped to accommodate the long-term investment needs of forestry. Forest cycles are longer than political cycles. Budgets are typically annual or biennial efforts. Parliamentary majorities may last for five or ten years. Forest plans must cover decades. To supply goods from the forest over the long run requires a steady source of funding that does not have to justify and re-justify itself in the near term and that is protected from fickle political winds. Even stable democracies like Canada, France, Norway, and the United States have seen the benefit of insulating parts of forest funding from political whim through permanent funds (see Appendix A).

Ideally, budgeting allocates money to programmes of merit; but whatever the theory, in practice, the budgetary process in many developing countries is a highly dysfunctional, and cannot be relied upon to allocate funds to forestry that are commensurate with its needs and that reflect its importance to the country. Forests are typically undervalued economically and have weak political constituencies — forested areas tend to have fewer people, lower per capita incomes, and lower education levels compared to the cities and agricultural areas. Governments may view forested regions almost as colonies, to be exploited for their resources without suitable investments. Funds, proponents argue, can help counter this treatment.

3. Funds can help stimulate more effective management by government forest agencies

Forest funds, it is argued, can also help reduce a perverse incentive inherent in annual government budgeting. In most countries, if a bureaucrat is thrifty and efficient, the bureaucrat is punished by having to return unspent money to the general treasury and having his next annual budget reduced. With a fund, the efficient administrator is rewarded because unspent money remains in the fund for future use.

Funds can also help side-step rigid bureaucratic rules. In a rule-bound government, creating an autonomous fund can avoid entrenched government structures and increase flexibility in forest management.

4. Funds may allow for greater oversight of forest spending

By isolating forest funding from other funds, setting up record keeping requirements, and requiring independent audits, a fund can make forest bureaucracies more accountable. In a government susceptible to corruption, an autonomous or semi-autonomous fund may make donors more comfortable with contributing capital. Legally earmarked and separately-managed funds provide some comfort that donor money will not be "siphoned off" into the general treasury and used for non-forestry purposes (Landell-Mills, 1999). Likewise, where fund management is structured to include a wide-range of stakeholders, rather than being supervised entirely by government foresters, donors may have some assurance that targeted grants or loans are not "siphoned off" for general support of the forestry administration. Given that the current study is based on fund legislation as written, not as implemented, it is difficult to declare that any particular fund has outstanding oversight in practice. However, several funds have good oversight methods on paper which, while not a sufficient condition is likely to be a necessary one. These are discussed below, in Part V.


B. Common Arguments Against Forest Funds.

1. Funds may trap capital in the forest sector

Some developing countries suffer from too much capital tied up in natural resources, not too little. Arguably, they would benefit from harvesting trees and investing the resulting income more for industrial development than for reforestation. Yet dedicated funds prevent them from making this kind of choice. As one analysis puts it:

Pressure to disburse [earmarked] funds to the appointed purpose may result in their being invested in projects of low economic and social value; and there usually is no obvious linkage between the level of funds collected (which is most often based on a proportion of full log value, and which can therefore vary significantly with market shifts) and the investments that might be justified in plantations and other designated purposes, given existing technical capacity and demand factors. (Douglas and McGrath, 1996)

This argument has particular resonance for countries with large areas of forest, such as Indonesia. It has emerged in a broader form in the debates over joint implementation of the Kyoto Protocol under the United Nations Framework Convention on Climate Change. In this case, some developed nations have proposed investing in forestry in developing nations as a means of offsetting greenhouse gas emissions. The developing nations would rather see the offsets come from investments increasing the efficiency of the developing nations’ industrial sectors.

2. Funds may prevent ideal allocation of government budgets

Budgeting is a process of allocating scarce government resources. In this process, many deserving programs compete against each other. The ideal way to allocate government funds is to consider each program according to its relative merits and budget accordingly. No single program, such as forestry, should be isolated from this process. As a general principle "the criteria by which resources are allocated to forestry should be the same as for all other sectors and should aim to maximise the achievement of the government’s overall fiscal objectives." (Douglas and McGrath, 1996)

As noted, linking sectoral spending to sectoral income is problematic. No one would expect a nation’s police to earn its own budget. Why should a forest department be different? Government agencies should not be expected to turn a profit. Government monies should be given to agencies on the basis of need and utility, not on the basis of income. Some combine this argument with an economic one and go one step further. If forestry can survive on its own income, why should it be a government-run enterprise at all?

It may also be argued that the vaunted "steadiness" of a fund against the vagaries of the budgetary process is itself illusory. As one study of Côte d’Ivoire and Cameroon suggests, a fund that relies on forest income may be exposing itself to fluctuations that are even more violent and unpredictable than those occasioned by annual budget making. When international markets change, or regulatory measures are put in place such as bans on log exporting, a fund’s income base may collapse (Gabus, 2000).

3. Funds may transmit misleading economic signals to bureaucrats

If a fund draws on income from the sale of wood, it gives the bureaucracy an incentive to promote such sales. Without a similar incentive to produce other valuable goods from the forest, such as flood control, clean water, biodiversity, carbon sequestration, or aesthetics, the fund will steer the forest manager towards a less-than-ideal management program.

Environmental economists have made this argument in the United States, where a portion of the Forest Service’s budget comes from income from timber sales off the national forests. (Thoreau Institute, 2000). They argue that this fund makes managers too eager to offer timber concessions.

Funds may promote government inefficiency. If an agency does not have to compete annually with other agencies for funds, it loses an incentive to spend every bit of its budget wisely. If it knows it can expect a base amount of money from a special fund, it has no incentive to trim its budget below that base amount.

Alternatively, there may be a tendency in some cases for Governments to conclude that because the forestry sector now has a special fund, it is justified in reducing budgetary support to the sector, potentially leaving the total level of financial support more or less unchanged.

4. Funds may invite corruption

In a government with low pay for government workers, poor accounting practices, or a culture that tolerates corruption, any concentration of money becomes a target for illegal diversion. Keeping money outside the normal oversight inherent in the government budgeting process may increase the opportunities for corruption.

Funds may also put financial issues in the hands of people ill-trained to handle them. An understaffed forest department may lack experts in budgeting and finance to administer the fund. Even if a fund has an advisory board of stakeholders, these people may lack the skills to oversee a large financial operation. These kinds of skills more likely can be found in the finance or planning ministry.

Concerns such as these, coupled with disdain for earmarked funds as a deviation from the principles of unitary budgeting, as described above, has led to attacks on the autonomy of several funds. Indonesia (Gautam,, 2000) and Cameroon (Gabus, 2000) have both in recent years seen increasing responsibility for fund management vested in their finance ministries, with a concomitant reduction of the power of forestry officials to make spending decisions. The Indonesian Reforestation Fund, before the present government, was also widely seen as channelling too little of its money into forests and too much into other areas, and has been subjected to international auditing and restructuring as part of Indonesia’s agreement with the International Monetary Fund in 1998.


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