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V. Envisioning future roles for national forest funds

Defining appropriate future roles for national forest funds requires understanding the arguments above, both for and against. In our opinion, the "point-counterpoint" reported in Part IV is inconclusive, not because none of the arguments are persuasive on their own terms, but because (as noted several times already) too little is known about the actual functioning of national funds — of different types and in different circumstances — to draw definitive conclusions. It is important to bear in mind that whether a particular argument is compelling will depend on the variety of fund at issue, and on the context of the particular country, including the state of its forests, economy and institutions. Like trees, a fund that does well in one country may do poorly if planted out of provenance.

Nevertheless, despite the current state of knowledge, the arguments above can provide important guidance for those engaged in the design of national forest funds, as well as for those preoccupied with the question of what role they can or should play in future efforts to promote sustainable forest management. The arguments for forest funds have value as signposts to opportunities, just as the arguments against funds can serve as warnings of pitfalls.

But bearing in mind these opportunities and pitfalls, what can be said about the future relevance of national forest funds to the international discourse on financing sustainable forestry?

In our opinion, that relevance will depend in large part on the extent to which funds can, in their design and operation, both respond to and contribute to innovative strategies that are currently at the forefront of thinking regarding forest financing, management and governance.

In this Part, we examine the potential role of forest funds in four strategic areas:

decentralisation and devolution of forest management;

encouraging private sector initiatives;

improving accountability and transparency; and

promoting the production of environmental goods and services (or "internalising the externalities" of forest management).


A. Decentralisation and devolution

Decentralisation and devolution of forest management are on the agenda — at least on paper — of many if not most developing countries in the world. The term refers to a host of measures designed to promote greater local participation in forest management and decision-making. These may include:

vesting greater responsibility and power in local government units for carrying out public sector forestry activities,

empowering local community-based groups, households and individuals to control and benefit from the management of local forests, through the recognition and confirmation of land rights or through co-management agreements, and

encouraging the involvement of local people and interest groups in the formation of national policy.

Most national forest funds have traditionally been highly centralised in terms of administration and orientation. In the coming years, there is likely to be increasing pressure on forest funds both to reflect better the underlying principles of the decentralisation and devolution agenda in their structure and governance, and to promote more effectively that agenda through their funding activities.

This can happen, and in some cases is happening, in a number of ways. Some countries are using funds to promote local management with either of two approaches. One is through a single national fund that channels assistance to sub-national and municipal governments or to community groups. That assistance may be general financial aid, technical expertise, materials, or financial support for specific projects. For example, the language creating the Lesotho Forestry Fund allows it to be used for both general assistance to community forests and direct payments to community representatives.

The other way is through multiple local funds. For example, the law of Gambia establishes a local fund for each Community Forest Management Agreement that the government approves. The local fund receives income from activities on the community forest. The local forest committee appoints three community members to administer the fund, which the community can use for both forestry activities and general economic development. Cyprus law creates a similar set of local funds.

One can envision any number of additional strategic roles that forest funds could play in support of local forest management. In theory, for example, funds could have a role in improving the enabling environment for local forest management, by supporting efforts to clarify and confirm land tenure rights, by facilitating the negotiation of co-management agreements, and by providing support for dispute resolution mechanisms. They could focus generally on enhancing local technical capacities.

Funds can also empower existing private owners of forest land through various forms of assistance. This sort of support is discussed in more detail in section B, below.

With respect to national policy formulation, local groups may not be effectively involved for lack of opportunity or lack of knowledge. While funds do not offer a full solution to either problem, they can help. Funds can provide opportunity directly, by creating roles in national fund management for local interests. Some national funds have taken steps in this direction through creation of advisory boards filled with stakeholders. This can be a small step or a large step depending on the power of the board. Where the board meets infrequently and its role is purely to give advice, the amount of power that local groups gain is small. Where the board meets frequently and its consent is required for spending, the power gained is greater. Forest Renewal BC (Canada) offers an example worthy of scrutiny, with both a board of directors and several advisory committees representing the interests of a broad array of stakeholders, including local interests.

Funds can also provide opportunity indirectly by facilitating local involvement under general forestry or environmental planning laws. For example, a fund could help defray the cost of local participation in environmental impact assessment. Or, a fund could supply grants to local communities that wish to formally organise so that they can be eligible to participate in a community forestry program. The provisions in Tanzania’s draft forest law creating a Tanzanian National Forest Fund would allow spending on these sorts of activities.

Funds can also educate local groups in ways that help them participate in national policymaking. This appears to be an uncommon goal of fund legislation, but an example exists in the law creating the Forest and Forest Resource Development Fund of Laos. The legislation expressly allows the fund to be used for training on forest policy, laws and regulations.


B. Encouraging private sector initiatives

A number of existing forest funds have been shaped to encourage private forestry, and one would expect this trend to accelerate in the future given the increasing centrality of private investment in national and international strategies to improve forest financing. Governments may seek to assist forest owners economically, to encourage forest owners to adopt sustainable practices, or to do both.

Some funds support industrial forestry. For example, the purposes of Costa Rica’s Forest Fund include modernising forest industries and markets. In Canada, Forest Renewal BC spends some of its income promoting development of value-added industries in the forest sector. Some funds focus on landowners. FONAFIFO in Costa Rica benefits mostly owners with small to medium-sized holdings. Norway’s fund serves private landowners exclusively.

The challenge in designing support to private landowners is to address points that actually make a difference in the way private owners will behave. Again, understanding the context of the country is essential to create a useful fund. What factors are controlling landowners’ behaviour? Some funds target lack of technical knowledge. Some target lack of capital, particularly for long-term investments like reforestation. Some target risk.

Funds can also tap economies of scale. Funds can supply goods or services in bulk to small landowners that they otherwise would find difficult or expensive to acquire. For example, a fund could serve as a marketing tool, promoting demand for products from small ownerships. Or, a fund could supply small landowners with equipment or technical expertise they could not acquire alone.

The Oregon (USA) Forest Resource Trust offers an example of using a fund as an innovative co-operative marketing mechanism (Cathcart, 2000). The fund acquires ownership of the carbon sequestration potential of the forests it assists. The fund can market this potential much more effectively than individual owners can. First, the fund can pool the potential from several ownerships to offer buyers large single transactions. Second, acting as broker for multiple ownerships, the fund can hold some sequestration potential in reserve. This reserve allows the fund to cover the risk that fire, insects, disease, or other disaster will halt sequestration on any particular ownership, making the sequestration potential it offers more attractive to buyers than sequestration potential of an individual stand.

Funds that spend part of their money on promoting markets generally, as Costa Rica’s Forest Fund can, similarly provide services that individuals working alone could not afford.


C. Increasing accountability and transparency

Corruption and other forms of illegality in the forest sector are matters of growing concern. Much of the work of promoting forest development depends of the rule of law. That is true whether the concern is assuring sustainable use of government forests or protecting the property interests of private forest owners.

As noted above in the discussion of arguments for and against funds, funds do not inherently work against illegality. In fact concentrations of capital in funds can offer new opportunities for illegal diversion of forest money. However, policymakers can structure funds to make spending more transparent and diversion of funds more difficult. In doing so, they will at the same time be promoting the overall goal of greater accountability and transparency within the forestry sector as a whole.

Three general ways of increasing accountability and transparency are (1) involving stakeholders outside the government in fund administration, (2) requiring annual plans from fund managers before funds can be spent, and (3) requiring regular independent audits of the fund.

One method of stakeholder involvement was discussed above: stakeholder membership on boards and committees. Besides involving stakeholders in decision making, it should give the stakeholders access to internal information about the fund that is necessary to make wise decisions. This access to information is usually implicit. However, it can be explicit, and it can involve more than just stakeholders with formal roles in fund management. For example, the legislation creating the Forest Resources Improvement Association of Alberta (Canada) makes its records subject to the provincial Freedom of Information Act.

Some countries with common law legal systems structure their funds as trusts. This implies that the ownership of the fund is split between the legal owner (the trustee) and the people due to benefit from the fund (the beneficiaries). The beneficiaries of any trust may ask a court to order independent review of trust administration. They may ask a court to enforce the terms of the trust, to stop illegal uses of the trust, and to stop trustee actions that fail to protect the beneficiary’s interests in the trust.

An annual spending plan, with outside approval, is a common requirement of forest fund legislation. In Gambia, the Director of Forests must submit for approval to the Secretary of State responsible for Finance annual estimates of fund income and expenditure. The Guatemala Special Forest Fund must have an annual plan approved by the board of directors of the national forest institute. The accounting officer of South Africa’s National Forest Recreation and Access Trust must submit an annual budget to the appropriate minister for approval. The trustees of the proposed Tanzanian Forest Fund must prepare and follow annual estimates of income and expenditure. Uruguay’s Forest Fund must be used according to an approved annual plan.

Auditing is also a fairly common fund requirement. Funds that are simply independent accounts within a government agency may rely on general provisions governing review of government activities. However, funds with annual plan requirements often have linked auditing requirements. Gambia, for example, requires annual audits of its national fund by the Auditor General. Funds that are set up as independent or quasi-independent entities are almost certain to have separate accounting provisions written into their enabling legislation. Gambia requires the Director of Forests to annually audit local community forest funds, and allows the Auditor General to also audit them.

To facilitate audits, the law may require fund administrators to keep records and make annual reports. South Africa requires its Trust’s accounting officer to keep records of assets, liabilities, and financial transactions and prepare annual financial statements. Tanzania’s legislation requires its fund’s trustees to publish an annual report including a set of audited accounts.

What constitutes a good auditing program depends greatly on local context. A nation with an effective independent auditing system may need no additional auditing provisions for its fund. A nation with no effective auditing may gain little from simply writing normal auditing requirements into legislation.


D. Promoting the production of environmental goods and services (‘internalising externalities’)

Some of the most promising uses of funds involve promoting environmental goods and services that are poorly served by existing markets. These are not yet common uses of forest funds, but given the increasing prominence of "internalising externalities" arguments in the search for innovative forest financing mechanisms (Richards, 1999), it is likely that forest funds will increasingly move in this direction as well (as indeed many of their cousins, environmental funds, have already done.)

Forests produce public goods that bring the owners little economic benefit. These may include scenic value, watershed enhancement, protection of biodiversity, and carbon (greenhouse gas) sequestration.

The lack of economic incentive is a market failure, and the economic boost from a fund is a logical remedy. Sometimes a fund can act as a means to capture the value of the public goods and to return some of this value to the forest owner. Sometimes a fund can provide a mechanism for turning public goods into marketable goods. And sometimes it can encourage co-ordination of management to achieve higher production of these public goods.

A forerunner of the use of funds to capture the value of environmental services was the use of funds as mitigation. The fund would take a tax on some environmentally damaging activity as income and put it to use on an environmentally beneficial activity, such as forest management. The damage caused by the bad activity and the benefit caused by the good activity might be otherwise unrelated. For example, the United States has long diverted a portion of royalties from offshore oil and gas leases into a fund for purchase of public lands. This fund requires legislative approval for expenditures, and for many years has spent much less than it has acquired. A new law will send a large part of the fund to sub-national and municipal governments for land acquisition. Environmental funds provide additional examples. The Colombia National Royalties Fund, for instance, channels royalties from non-renewable resources into environmental projects. It is not unusual to find mechanisms that recapture scenic value of parks and protected natural areas by allowing the managing agency to collect and keep entrance fees from tourists.

As described earlier, Costa Rica is aiming to recapture the value of environmental services and return it to forest owners through FONAFIFO. On paper, the law recognises a broad range of environmental services for which forest owners ought to be rewarded. The only tax that the law directly ties to payments for environmental services is one on fossil fuels. However, Costa Rica is also marketing carbon sequestration from its forests and channelling the resulting income back to forests through FONAFIFO. Also, the country is negotiating with private hydropower companies to pay FONAFIFO for watershed-related environmental services. (de Camino et al., 2000). One criticism of the program has been that its payments are not necessarily in proportion to the environmental services that projects provide. It has favoured reforestation and afforestation and perhaps slighted ongoing forest management (Heindrichs, 1997). However, the programme holds promise.

Funds can also help turn environmental services into marketable commodities. The Oregon (USA) Forest Resource Trust offers an example. The trust by law acquires a property interest in the carbon sequestration potential of the forest lands it assists. The trust markets the potential and uses the resulting income to assist other landowners.

Where the ownership of forest land is split among many owners, management for environmental values often becomes complex. Funds can become tools to encourage co-ordinated management.

At its simplest, this means creating incentives for behaviours that create environmental benefit, with no need for varying the management scheme to fit individual circumstances. For example, the Maryland (USA) Chesapeake Bay Trust aims to improve water quality by assisting landowners that want to reforest areas near surface water.

A more sophisticated fund could come up with individual management prescriptions for individual stands to achieve environmental goals. For example, a fund could co-ordinate management on adjacent stands to create suitable habitat for endangered species where no single stand alone was large enough to provide such habitat.

Though no such fund may now exist, the key tool for such co-ordination does exist. Some existing funds require private forests to have approved management plans before they receive assistance. It is a logical step for fund managers to consider how plans for different ownerships interact and to motivate adjoining ownerships to work in concert to achieve greater environmental benefits.


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