Policy implications and recommendations
The above analysis has presented a range of estimates of economic rent from roundwood production in Suriname. It has shown that forest charges could be increased to levels significantly above current levels of forest charges and generate sufficient revenues to both increase Government revenues from the forestry sector and finance SBB. It has also shown that there are many opportunities for increasing efficiency and, consequently, economic rent in the sector. Increased efficiency in roundwood production could result in a total reduction in production costs of around Sf 15,000/m3 and increased efficiency in the forest processing sector and better marketing of forest products could result in even greater increases in economic rent. However, in order to stimulate some of these improvements, it will be necessary for the Government to create a policy environment that encourages the development of the sector.
In summary, the current state of the forestry sector in Suriname can be described as one of low productivity and high production costs, but with tremendous potential for improvement. Certainly, the increases in forest levies and other fees proposed earlier will provide some impetus to make some of the changes discussed above. However, improvements in the policy environment affecting the forest sector are likely to be crucial for the development of the sector. The rest of this section will describe some of the current barriers to increased efficiency in the forestry sector in Suriname, before explaining how some of these may be removed by changes to Government forestry policies and other Government policies.
Barriers to increasing the efficiency of forest operations
There are a number of natural, economic and policy-induced barriers to increasing the efficiency of the forestry sector in Suriname. These are briefly described below.
Low levels of forest charges
The problem of low forest charges has already been raised several times in this document so they will not be repeated here. To summarise very briefly, underpricing of the resource encourages waste and reduces the return on any effort or investment to improve efficiency.
Productivity and quality of the forest
The scope for increasing the efficiency of forest operations in Suriname is undoubtedly limited by the productivity and quality of the forest in the country. The estimated yield of the forest is at the low end of the range of yields typically found in tropical forests. Furthermore, the species diversity and the fact that such a large number of potentially commercial species are not very well known in international forest products markets increases the challenges faced by forest managers trying to increase harvesting intensities.
Infrastructure and access to resources
The problem of low productivity is further compounded by the relatively inaccessibility of much of Surinam's natural forest combined with the lack of natural and man-made infrastructure (i.e. rivers and roads) that could be used to transport roundwood to market. It seems likely that, with the exception of a few highly valued species, forest harvesting beyond a distance of about 150 km away from the coast will result in very low levels of economic rent and could not be economically justified except at very low levels of forest charges. In such cases, social and environmental factors should come into play and it seems likely that these forests may be more highly valued for their non-market benefits than for the timber that they can produce. Of course, since many of these benefits are global in nature, the challenge for the Government here is to try to develop mechanisms whereby the global community might pay for these services. Recent examples of developments in international funding mechanisms, such as those supported by Conservation International, would seem to be very positive steps in this direction.
Size and structure of the industry
Because of past policies, the forest harvesting and processing industry in Suriname has been allowed to develop into a very small-scale and fragmented structure. With the exception of the few large firms operating in the sector, most firms are characterised by low levels of capital utilisation and efficiency, leading to high costs and low levels of profitability. Furthermore, the overall size of the industry has increased to a level that is unsustainable. Considerable economies of scale could be achieved in forest harvesting and processing, particularly in more remote areas of forest, if the scale of operations was increased.
Risk and uncertainty
Another factor that discourages improvement in the sector is the current level of uncertainty surrounding the awarding of forest concessions and the uncertainty surrounding existing stop-gap measures that have been introduced to allow forest operators to stay in business. This uncertainty makes it difficult for forest operators to plant their investments and activities and reinforces the attitude that forest operators should continue to cut forests quickly and without any regard for long-term sustainability before they lose their cutting rights. This further diminishes their ability and incentive to improve efficiency and manage their forests in a more responsible way.
The problem with the overall size of the forestry sector in Suriname is not so much that it has grown beyond the capacity of the forest to support it (indeed the abundance of forest could probably support the scale of industry that has developed), rather the industry has expanded beyond the capacity of markets to absorb all of its output. The domestic market for forest products in Suriname is extremely limited by the low level of population and generally low levels of income in the country. The Caribbean region generally has the capacity to absorb a large volume of forest products exports, but current economic policies in Suriname have all but destroyed any export potential from the country. The only export market that has developed is the export of roundwood to Asia, which may not offer the best opportunities for forest products producers in Suriname given the country's location. This problem depresses local forest product prices and further restricts the opportunities to increase economic rent and forest charges.
Lack of investment
The last problem limiting the development of the forestry sector in Suriname is the lack of investment in both plant and machinery and human resources in the country.
Many people interviewed during data collection for this study stated that it was nearly impossible to obtain capital for investment in the forestry sector at the moment. Local banks prefer to lend to traders (who benefit from the current exchange rate policy) as this offers a high-rate of return over a short period of time and at low risk. Foreign bank loans are also unattractive because of the exchange rate policy and it is currently difficult to attract foreign investors for a number of reasons.
Two of the reasons behind this reluctance to invest may be due to uncertainty over long-term rights to forest resources (already discussed above) and a current lack of protection for foreign investors (discussed below). These and more general issues concerning the general environment for investment in Suriname need to be addressed if the efficiency of the sector is to be improved.
Foreign investment in the forestry sector in Suriname could bring significant long-term benefits. Such investment should be more than just an infusion of capital, but should also include the transfer of marketing and technological skills and should provide producers in Suriname with access to foreign markets. Surinam's current experience with foreign investors in the forestry sector has been somewhat mixed and some would say that it has not brought many of the benefits identified above. However, with careful monitoring and control, foreign investment can be a positive force in the development of the sector.
Implications and recommendations for forestry policy
The implications of this analysis and recommendations for improvements in current forestry policies in Suriname fall into two broad areas: recommendations for improvements to the forest charging system and recommendations for improvements in the way that forest concessions are awarded and administered.
Recommendations for improvements to the forest charging system
Recommendations for improvements to the forest charging system in Suriname are as follows:
Recommendation 1: Forest charges in Suriname should be raised to levels at least equal to those indicated earlier in this report, if not higher. They should be revised each year to take into account changes in market conditions and production costs determined from simple surveys of key economic variables (see Whiteman (1999b) for a further discussion of how this might be done). Priority: HIGH.
Recommendation 2: The structure of forest charges in Suriname should make greater use of area-based charges to increase the incentive to make maximum use of forest resources during harvesting operations. Combined with this, there must be a clearly agreed and enforced annual allowable cut for areas where area-based forest charges are used. Priority: HIGH.
Recommendation 3: Consideration should be given to introducing more competitive means of setting charges. Such mechanisms would reduce the need for calculation of charges each year and are likely to result in the Government capturing a greater share of the economic rent from production and trade each year. A starting point might be to award permits to export roundwood based on competitive tenders for fixed export quotas. Priority: MEDIUM.
Recommendation 4: Consideration should also be given to varying forest charges to reflect the different levels of costs and revenues obtained from different forest operations. The analysis presented earlier has suggested that, at least, charges should be varied by distance from the coast. Anther modification that might be considered is to increase the number of different species groups used for the setting of forest charges to reflect their different market prices and encourage the use of and development of markets for less well know species. Priority: MEDIUM.
These recommendations, if implemented, should increase Government revenues, provide sufficient revenues to fund the SBB, increase the harvesting intensity in Surinam's forests and, consequently, lead to lower production costs and greater efficiency in roundwood production and processing. A further benefit of encouraging forest concessionaires to take a grater volume of commercial species during harvesting operations, is that it will increase the productivity of the forest per hectare and reduce the incentive to come back for commercial species left behind, before the forest has had time to recuperate.
Recommendations for improvements to the forest concession policies
Many of the current problems with the forestry sector in Suriname at the moment have arisen out of the way that forest concessions have been awarded in the past. With the establishment of SBB and strengthening of forest concession legislation, it should be possible to address many of these problems over the next few years. Recommendations in this respect are made below.
Recommendation 5: To increase long-term security and reduce uncertainty in the sector, the current prevalence of short-term cutting permits such as ICLs and unregulated harvesting in HKVs should be reversed and this production should be replaced by production from properly managed long-term forest concessions. It is important that these new forest concessions should be awarded quickly and in a structured way so that a certain amount of consolidation can take place in the sector in the near future. Priority: HIGH.
Recommendation 6: New forest concessions should be awarded at an appropriate scale so that economies of scale can be achieved. It is suggested that a minimum area of at least 15,000 ha should be awarded in most cases and that concessions should be awarded to individuals that demonstrate that they have sufficient capital, skills and expertise to give a reasonably high probability that they can manage them responsibly (i.e., they should be awarded on the strength of their applications as proposed in Mitchell, 1998b). Priority: HIGH.
Recommendation 7: Furthermore, new forest concessions should be awarded first in areas that are close to the coast rather than in the interior of the country. Indeed, it the Government should not award any forest concessions in the remoter parts of the interior of the country that are likely to be unprofitable. Priority: HIGH.
Recommendation 8: Forest concessions should be more closely monitored to examine their performance in some of the areas discussed in Section 5, to see whether changes in policy are having the desired effect on efficiency and profitability. If necessary, it may also be appropriate to support improvements in management planning through training and information (see below). Priority: MEDIUM.
These measures should reduce risk and uncertainty, encourage a restructuring of the forestry sector into units of a more economically efficient size and encourage investment in the sector.
Other improvements to forestry administration
One final recommendation that can be made is that the Government, through the newly established SBB, should also take on a more proactive role in the development of the sector, rather than just simply focussing on monitoring and control.
Recommendation 9: The Government should support the development of a more competitive forest economy, through the improved provision of data and information about the sector and training in management and technical forestry skills. This should be developed in partnership with the private-sector and should address some of the current problems of inefficiency, such as those identified in Section 5. Priority: MEDIUM.
Implications and recommendations for general Government policies
The above recommendations all concern actions which are within the control of the Forest Service and SBB. However, it must be recognised that, as in any country, forestry policy is implemented against a background of broader economic policies that can have a significant impact on the development of the sector. In the case of Suriname, there are a number of economic policies that act against the development of the sector. Altering forestry policy may go some way towards improving the situation in the forestry sector, but the effectiveness of any such changes will be extremely limited by the presence of these broader economic policies. The following two main areas were identified as particularly harmful for the development of the forestry sector in Suriname, during discussions with the forest industry: the overall investment climate in the country; and current trade and exchange rate policies.
Improvements to the investment climate in Suriname
As noted above, a lack of investment was identified as a major factor that restricts the development of the forestry sector in the country. The presence of the dual exchange-rate mechanism distorts capital markets and makes it very difficult for firms in the forestry sector to borrow money from domestic capital markets and overseas. The need for an investment law to protect foreign investors was also mentioned several times as a requirement to attract high-quality foreign investment.
Another suggestion made during discussions was that companies might try to set-up joint ventures with groups of foreign companies so that they (i.e. the foreign companies) can spread their risk. These and other options for stimulating investment in the sector should be given high priority for consideration by the government.
Recommendation 10: The Government should strive to improve the investment climate in Suriname by introducing measures that reduce distortions in the capital market, increase investor's security and make foreign investment in the country more attractive. In particular, efforts should be made to finalise and pass into law the draft law on foreign investment. The government should also more actively promote joint ventures between foreign companies or groups of foreign companies interested in investing in the forestry sector in Suriname. Priority: MEDIUM.
Improvements to current trade and exchange rate policies in Suriname
Current trading policy and, in particular, the operation of the dual exchange rate mechanism, was the issue that raised the most concern in discussions with representatives of the forestry sector in Suriname. As shown in earlier parts of this report, there is generally a sufficient level of excess profit in the roundwood exporting sector to cope with the difference between the market and official exchange rates.
However, the same is definitely not true of the sawmilling sector. Taking 40% off the top of any revenues generated from sawnwood exports completely removes the price differential between export and domestic sawnwood prices. Indeed, it probably goes further than this and reduces the revenues gained from exporting sawnwood to a level below what would be obtained in domestic markets.
Given the problem of the extremely limited domestic market for forest products, if an aim of forestry policy is to encourage domestic roundwood processing, the development of an export market will be crucial to this policy. This will not occur as long as the current dual exchange rate policy remains in place.
Recommendation 11: The Government should remove the dual exchange rate policy currently operating in Suriname as soon as possible. This will reduce distortions in the capital markets, stimulate investment in the forestry sector and assist with the development of forest product exports. Upon removal, the Government should also revise its system of forest charges to replace the revenues that it currently earns from the operation of the policy by higher export charges. Priority: HIGH.
Although these recommendations fall largely outside the control of the Forest Service and SBB, it is suggested that these messages should be passed-on to the respective government agencies as examples of where current economic polices are severely restricting the development of the forestry sector and, quite possibly, other secretors of the economy.