Implications of the economic rent analysis for the level and structure of forest charges

The previous section has presented an estimate of the economic rent from roundwood production in Suriname and shown how this varies by roundwood species (i.e. Grade A or Grade B), roundwood market (i.e. domestic or export), transport distance and harvesting intensity. This section will show how forest charges might be set to capture most of this rent and promote efficiency within the sector. It starts by discussing some general principles underlying the design of a forest revenue system. Included in this section is an overall proposal for a forest charging structure that should promote efficiency in the sector and encourage the sorts of changes in forest management that the forestry administration (i.e. SBB and LBB) wishes to pursue. This is followed by a series of concrete recommendations for forest charges for each of the various types of forest used for wood production in Suriname. It finishes by estimating the total amount of government revenue that might be collected from these charges.

Forest charges - some general principles

Any system of forest charges that falls short of competitive bidding for individual parcels of timber is likely to be a second-best solution, in as much as it will not be able to fully reflect the variability of the forest resource in terms of its economic rent. Furthermore, the system of forest charges that is finally chosen is likely to reflect a number of other considerations in addition to the economics of wood production. However, there are some broad principles that can be followed when designing a system of forest charges. For example, Gray (1983), lists the following five main principles that should be considered when designing a system of forest charges:

Forestry policy. Forest charges should reflect the overall objectives of forestry policy, i.e. they should encourage forest concessionaires to carry-out activities that meet the objectives of forestry policy and discourage activities that work against the policy.

Administrative efficiency. The charging system should aim to minimise the costs of implementation (to both the government and forest concessionaires) and reduce the scope for evasion.

Government revenues. The charging system should aim to capture a significant proportion of the economic rent, unless there is a specific objective to allow forest concessionaires to obtain cheap wood for some reason (e.g. in order to promote a domestic forest processing industry).

Economic efficiency. Forest charges should promote efficiency in the use of the forest resource and in the use of all other resources involved in the forestry sector.

Equity. The charging system should take into account the impact of charges on different groups within the sector.

These principles are all relevant to the design of an appropriate system of forest charges in Suriname. The importance of setting appropriate forest charges to maximise government revenues and promote economic efficiency has already been discussed in Section 2.5 The importance of setting the correct level of forest charges. Therefore, this section will discuss some of the main issues concerning the relationship between forest charges and forestry policy, administrative efficiency and equity.

Using the forest charging system to promote forestry policy

Apart from the broad objectives of increasing government revenues from the collection of forest charges and promoting efficiency within the sector, the one major forestry policy objective that has become important in Suriname in recent years is the desire to improve the standard of forest management within the sector. In other words, the current forestry policy aims to move roundwood production from the current system of more or less unregulated and unplanned harvesting towards a system of carefully controlled harvesting in accordance with a long-term management plan, with appropriate safeguards to maintain the productivity of the permanent production forest estate and protect the social and environmental benefits that Surinam's forests produce.

The implementation of this policy is very much focused on persuading forest concessionaires to move towards a system of planned production from the largely unplanned harvesting activities that are currently taking place. To use the terminology adopted by SBB, forest concessions that have moved towards a system of planned production will become known as intensively managed forest concessions, while the remaining forest concessions will be temporarily re-issued as extensively managed forest concessions. Log tagging will be required in both types of forest concessions (for monitoring roundwood production), but forest inventories, long-term plans and annual harvesting plans and control over the areas and trees that can be cut within concessions, will only be required for intensively managed forest concessions. It is anticipated that extensively managed forest concessions will represent a transitional arrangement that will allow current forest concessionaires to continue operations until sufficient technical and human resource capacity develops to implement improved forest management across the whole of the production forest estate in Suriname.

The establishment of SBB and improved forest legislation will provide an institutional capacity to implement these changes. However, this policy aim could also be promoted through the forest charging system. Therefore, it is suggested that forest charges should generally be set at a slightly lower level for intensively managed forest concessions in order to encourage forest concessionaires to make the change towards a system of planned and controlled production. Furthermore, this reduction should go slightly beyond the amount that would be required to cover the increased cost of operations in intensively managed forest concessions to give a real incentive to switch to this system.

Administrative efficiency

There are three main costs of administering any forest charging system:

the cost of calculating the charges that are due;

the cost of collecting these amounts; and

the cost of policing the system (i.e. detecting and pursuing any individuals that have not paid the charges).

Given the relatively low number of companies and individuals that are likely to have to pay forest charges in Suriname, the cost of collecting the charges should be relatively small. The cost of policing the system will depend upon the extent to which policing requires activities in the field or can be concentrated on transport routes; and the cost of calculating the charges that should be paid will depend upon how complicated the charging system is.

There are three broad types of charges commonly used to collect forest revenues and the main advantages and disadvantages of each of these are described in Table 4, along with an indication of their likely administrative costs.

Table 4 The administrative cost, advantages and disadvantages of the most common types of forest charges

Type of charge	Administrative cost	Advantages	Disadvantages
Area-based charges
Charge on the total area of the forest concession (annual charge and/or lump sum charge at the start of the conce-ssion agreement)	+	Easy to police and generally very low cost. Encourages the complete utilisation of standing commercial timber. Discourages forest concess-ionaires from applying for unnecessarily large areas to stop others gaining access to the forest resource.	Difficult to adjust for different levels of commercial stocking and changes in market conditions. Can encourage overharvesting without careful monitoring of forest oper-ations.
Charge on the area cut (annual charge)	+ +	Generally low cost and encourages the complete utilisation of standing comm-ercial timber. More flexible than a charge on the total concession area.	Difficult to adjust for different levels of commercial stocking. Can encourage overharvesting without careful monitoring of forest operations.
Volume-based charges
Charge on the standing volume of commercial timber	+ + + + +	Encourages the complete utilisation of standing comm-ercial timber and takes into account variations in stocking.	Very high cost. Requires a stocking survey and detailed monitoring or checking of the stocking survey. Not res-ponsive to changes in market conditions.
Charge on the standing volume of timber that is cut	+ + + +	Discourages waste during harvesting and is more responsive to changes in market conditions.	High cost and requires monitoring of felled areas. Doesn’t discourage "high grading" (the deliberate selection of only the most valuable trees).
Charge on the volume of timber that is transported	+ + +	Moderate cost because monitoring activities can be concentrated at a small number of points along transport routes.	Doesn’t discourage "high grading" or waste during harvesting operations.
Flat rate charges
Flat based charge for a permit to produce timber or NWFPs	+ +	Generally, low cost and relatively simple to police.	Difficult to adjust for different levels of production. Doesn’t discourage "high grading" or waste during harvesting operations.
Flat based charge for a permit to own a piece of equipment	+ +	Generally, low cost and relatively simple to police.	Difficult to adjust for different levels of production and doesn’t distinguish between commercial producers and producers for own-use. Doesn’t discourage "high grading" or waste during harvesting operations.

Note: this is a limited selection of the most common types of forest charges used in various countries around the world. For a more comprehensive review of all the possibilities, see Gray (1983).

Area-based charges are generally cheap to calculate and administer, require little policing and encourage the efficient use of the resource. Their main disadvantages are that it is difficult to incorporate differences in productivity between different forest areas (e.g. different levels of commercial stocking) in such charges and they can encourage overharvesting of the resource. They can, however, be used to introduce differences in forest levies to take into account differences in accessibility and, consequently, transport costs.

Volume-based charges take into account the variability in productivity between different areas and can accommodate the differences in commercial value between different species. Whether they encourage greater efficiency or not, depends upon the point at which the charges are applied. If the total amount of charges due is based on the total standing volume of commercial timber, this encourages the maximum utilisation of the resource. If they are applied to the cut volume, the volume that is transported from the forest, the volume that is finally used in the mill, or the volume of products that are eventually produced, they may do less to promote efficiency. On the other hand, as the basis for calculating charges moves away from the forest to the mill, the cost of monitoring compliance, calculating the charges and policing the whole system becomes gradually less, because the monitoring agency can concentrate its activities on a few points rather than having to visit a large number of widely dispersed forest sites.

The third type of charges described in Table 4 are flat-rate charges for use permits. These can be issued in the form of permits to carry-out a particular activity, or as permits to own a piece of equipment (e.g. a chainsaw). They have the advantage of being generally very simple to administer and reasonably inexpensive to police. Their main disadvantage is that it is difficult to reflect variability in the level of output in such charges. They may however, be an appropriate and cost-effective way of collecting charges for minor forest products, where a relatively large number of people produce small volumes of timber for their own-use and sale.

It is common for several of these different types of charges to be used at the same time. Many countries, for example, combine an area-based or flat-fee charge at the start of a forest concession agreement, with an annual area-based charge and a volume-based charge (calculated from various different measures of production). The forest charging system in Suriname currently includes a relatively small annual area charge based on the total area of a forest concession plus a volume-based charge (estimated from the number of logs produced in a forest concession), but doesn't include a charge at the start of a concession agreement.

It is suggested that a combination of area-based, volume-based and flat-rate charges should be used in Suriname, with a general increase in the weight given to area charges within the overall the charging structure. This should reduce the scope for evasion of the charges and promote efficiency in the use of the resource.

Equity

The only other major consideration in the design of any forest charging system is the impact of the charges system on different groups within the forestry sector. A number of different stakeholders currently harvest or trade in roundwood in Suriname, including: forest concessionaires (with and without their own processing facilities); independent loggers and timber traders; and local communities. Some of these stakeholders only produce or trade in roundwood in the domestic market, others concentrate on the export market and some are active in both markets. Within the existing forest charging system, there are currently several differences in the way that charges are applied to these different groups, which have equity implications. These include the following:

The export levy. The largest difference in the way charges are applied to different stakeholders is the export levy. This, plus the differential foreign exchange rate, ensures that roundwood exporters have to pay considerably more (to the government) for the roundwood that they export, than domestic processors have to pay for the roundwood that they use. This, in effect, gives domestic processors a subsidy, in the form of wood that is priced at less than its export value. Some of the value of this subsidy may be passed on to domestic consumers in the form of wood product prices that are cheaper than they would otherwise be. This is, overall, somewhat detrimental to encouraging the development of an efficient forest processing sector, but is common in many developing countries with large or potentially large forest sectors.

The area-based charge. The current area-based charge within the existing forest charging system is only applied to forest concessions. Roundwood producers that operate in community forests (HKVs or Houtkapvergunning) and areas that have been awarded Incidental Cutting Licences (ICLs) do not have to pay this charge (although operators in ICLs do have to pay a higher volume-based charge). This gives producers operating in HKVs a slight advantage over other roundwood producers.

The volume-based charge. Roundwood producers operating in areas under ICLs have to pay twice the volume-based charge set for elsewhere. This puts these producers at a considerable disadvantage compared with producers operating in other areas.

Policies that attempt to favour one or more particular constituencies within the sector often lead to several problems. The two main problems that often occur are that:

the policies often do not benefit the groups that they were originally intended to benefit; and

the distortions in prices that arise from such policies often lead to inefficiency rather than to benefits for the groups that are being supported.

As a general rule therefore, a policy of equal charging for all producers is often the best policy to follow, with other measures to support particular groups (if that is an aim of the forestry policy). It is assumed here that the government would wish to continue the current policy that gives some protection to the domestic processing industry, but it is recommended that some changes should be made to the charging system and the overall way in which forest concessions are awarded and managed, in order to encourage efficiency in the domestic wood processing sector.

An overall proposal for the structure of forest charges in Suriname

The exact structure of forest charges that is eventually chosen for Suriname should be based upon the trade-off between the effectiveness of the charges (in terms of promoting efficiency and raising government revenues) against the administrative cost of implementing the system. This will depend upon the type of forest being harvested, the type of product being produced and the type of producer. It should also take into account the considerations of equity and the overall aims of forestry policy as described above. Bearing this in mind, the overall structure proposed in Table 5 has been developed. This reflects the current forestry policy in the following ways:

By increasing the proportion of the total charge that is collected from the area-based charge, it should encourage more efficient use of the resource and reduce administration costs.

The average charge (per m³) for roundwood produced in intensively managed forest concessions should be lower than the charge for roundwood produced in extensively managed forest concessions, in order to encourage producers to move to a system of properly planned and improved forest management and to compensate them for the increased (production) costs of doing so.

The average charge (per m³) for roundwood produced outside forest concessions should be higher than the charge for roundwood produced in forest concessions, in order to discourage long-term commercial timber production in HKVs and ICLs and to reflect the fact that forest management is not required in other areas (e.g. areas being cleared for conversion to agriculture).

The volume-based charges should be levied on the volume cut in intensively managed forest concessions, in order to encourage the reduction of harvesting waste. The volume-based charges on production from other areas should be levied on the volume transported, so that monitoring can be concentrated on transport routes (and administration costs can, consequently, be reduced).

The area-based charge in intensively managed forest concessions should be differentiated by distance, to reflect the higher cost of producing roundwood in areas that are further from the market.

The volume-based charges levied on processed products (e.g. hewn squares and minor forest products such as chainsaw sawnwood) should be higher than the volume-based charges levied on roundwood to reflect the amount of roundwood that is used in manufacturing these products.

More detailed justification for each of the individual components of the proposed forest charging system is given in Table 5.

Table 5 An overall proposal for the structure of forest charges to be applied in Suriname

Type of charge	Amount	Justification
Production of major forest products (i.e. roundwood and hewn squares)
In extensively managed forest concessions
An area-based charge (in Sf) applied to the total area of the forest concession. PLUS	An amount that, in total, equals roughly half of the average economic rent from roundwood production.	By collecting half of the economic rent from production as an area-based charge, this should reduce the scope for evasion of levies and encourage the efficient use of the resource. To avoid the possibility of forest concess-ionaires deliberately asking for small concessions then over-cutting them, it is essential that a maximum annual allowable cut (AAC) should be set for each forest concession.
a volume-based charge (in Sf), based on the volume transported from the forest.	An amount that equals roughly half of the average economic rent (per m³) from roundwood production. The volume-based charge should be differentiated by species group and the volume-based charge should be doubled for hewn squares. A proportion of the revenues from this charge should go to SBB to cover their costs of policing the system.	The charge should be based on the volume transported so that SBB can concentrate their monitoring activities in the field on the intensively managed forest concessions. The charge should be differentiated by species to reflect the different prices paid for different species and should be doubled for hewn squares on the assumption that 1.5 m³ of roundwood is required to produce 1 m³ of hewn squares.

Table 5 An overall proposal for the structure of forest charges to be applied in Suriname (continued)

Type of charge	Amount	Justification
Production of major forest products (i.e. roundwood and hewn squares)
In intensively managed forest concessions
A one-off flat-rate charge (in Sf) for approval of the Outline Management Plan Or A one-off area-based charge (in Sf) for approval of the Outline Management Plan PLUS	An amount to cover the average cost of Outline Management Plan approval by SBB. An allowance to cover this amount should be subtracted from the other charges for this type of forest concession. All of the revenues from this charge should go to SBB to cover their costs.	This charge should cover the cost of Outline Management Plan approval by SBB. It should be collected at the start of the exploration inventory (as is currently the case with the prospecting fee it would replace). It could either be levied as a flat-rate charge, as a flat-rate charge in different size bands, or as an area-based charge.
An area-based charge (in Sf) applied to the total area of the forest concession. PLUS	An amount that, in total, equals roughly half of the average economic rent from roundwood production, less: an amount to cover the costs of Outline Management Plan and Annual Harvesting Plan production; an amount to reflect the sum already collected in the flat-rate charge suggested above; and a small amount to give an incentive to switch from an extensively managed forest concession to an intensively managed forest concession. The amount charged should be differentiated by distance from the market. A proportion of the total revenues from this charge should go to SBB to cover the cost of Annual Harvesting Plan approval.	By collecting half of the economic rent from production as an area-based charge, this should reduce the scope for evasion of levies and encourage the efficient use of the resource. To avoid the possibility of forest concess-ionaires deliberately asking for small concessions then over-cutting them, it is essential that a maximum annual allowable cut (AAC) should be set for each forest concession. The differentiation by distance from the market is justified on the basis that transport costs are higher for roundwood produced in remote areas.
a volume-based charge (in Sf), based on the volume cut in the forest.	An amount that equals roughly half of the average economic rent (per m³) from roundwood production. The volume-based charge should be differentiated by species group and the should be doubled for hewn squares. A proportion of the total revenues from this charge should go to SBB to cover the cost of policing the system.	The charge should be based on the volume cut to discourage waste in harvesting activities. The charge should be differentiated by species to reflect the different prices paid for different species and should be doubled for hewn squares on the basis that 1.5 m³ of roundwood is required to produce 1 m³ of hewn squares.

Table 5 An overall proposal for the structure of forest charges to be applied in Suriname (continued)

Type of charge	Amount	Justification
Production of major forest products (i.e. roundwood and hewn squares)
Outside forest concessions (i.e. HKVs; ICLs; and areas licensed for forest clearance)
A volume-based charge (in Sf), based on the volume transported from the forest.	An amount equal to the economic rent (per m³) from roundwood production, plus a surcharge. The volume-based charge should be differentiated by species group and the should be increased by 50% for hewn squares. A proportion of the total revenues from this charge should go to SBB to cover the costs of policing the system.	The charge should be based on the volume transported so that SBB can concentrate their monitoring activities in the field on the intensively managed forest concessions. The surcharge should reflect the current levels of harvesting waste in typical forest operations and should include an amount to discourage production from these areas or reflect the fact that no management is required in some areas (e.g. areas where forest is being converted to agricultural land). The charge should be differentiated by species to reflect the different prices paid for different species and should be increased by 50% for hewn squares on the basis that 1.5 m³ of roundwood is required to produce 1 m³ of hewn squares.
Production of minor forest products (i.e. chainsaw sawnwood, charcoal, shingles)
A volume-based charge (in Sf), based on the volume (of each product) transported from the forest or a flat-rate charge for a permit or licence to engage in this activity (e.g. charcoal production). This charge could be differentiated into low, medium and high production levels if necessary.	An amount equal to the economic rent (per m³) from roundwood production, multi-plied by a conversion factor that reflects the amount of roundwood used in manu-facturing these products. A proportion of the total revenues from this charge should go to SBB to cover the costs of policing the system.	The volume-based charge would have the benefit of more accurately reflecting production levels, but would be very difficult to police, considering that there are a large number of producers in this informal sector, many of whom are producing small amounts of these products (which are easily hidden). An annual flat-rate charge would be a more cost-effective mechanism, perhaps with some differentiation between production levels.

Table 5 An overall proposal for the structure of forest charges to be applied in Suriname (continued)

Type of charge	Amount	Justification
Export of major forest products (i.e. roundwood and hewn squares)
A volume-based charge (in US$), based on the volume exported.	An amount equal to the economic rent (per m³) obtained from producing export quality roundwood, less the average amount already collected by the charges on production (above). The volume-based charge should be differentiated by species group and the should be increased by 50% for hewn squares. A proportion of the total revenues from this charge should go to SBB to cover the costs of policing the system.	The charge should be based on the volume exported because this is relatively easy to measure and control. The charge should be differentiated by species to reflect the different prices paid for different species and should be increased by 50% for hewn squares on the basis that 1.5 m³ of roundwood is required to produce 1 m³ of hewn squares.
Export of letterhout (snakewood)
A volume-based or weight-based charge (in US$), based on the volume or weight being exported.	An amount equal to the economic rent (per m³) from the export of this product. A proportion of the total revenues from this charge should go to SBB to cover the costs of policing the system.	The charge should be based on the volume or weight that is exported because this is relatively easy to measure and control. The charge should continue to be set at a very high level to reflect the very high value of this product.

The charges described above will comprise two parts: the charges that will be paid in return for the use of the resource (i.e. the levy, royalty or retribution) and the charges that will be paid to cover the cost of administering the forest charging system (i.e. the service fee). In addition to these charges, there are also currently the following miscellaneous forest charges in Suriname: two inspection fees (one for inspection in Paramaribo and one for inspection outside Paramaribo) and a bridge fee (for the Saron and Carolina bridges).

The inspection fee (for roundwood, hewn squares and minor forest products) should no longer be necessary because the service fees paid to SBB will cover the cost of inspecting and measuring production for the purpose of calculating forest charges. However, exports of other wood products also have to be measured and graded for the purposes of calculating their minimum trade value and the minimum amount of foreign exchange that should be submitted to the Central Bank for conversion into Suriname Guilders at the official exchange rate. The forestry administration (i.e. SBB) will be expected to continue to carry-out this service and should, therefore, charge for this service in the same way as it will for all its other monitoring activities.

With respect to the bridge fee, this is currently set at a level that is so low (Sf 25/m³) that it probably does not even cover the cost of collection, let alone cover the cost of maintaining these bridges. The forestry administration should either set this fee at a more realistic level or not bother with this charge in the future. To simplify the forest charging system, it is recommended that this fee should be discontinued.