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Timber harvesting with tractors is the standard extraction method in the Mixed Hill Dipterocarp Forests of Sarawak, Malaysia. Conventional Logging (CL) systems cause substantial disturbance and damage to forest stands and the environment. This is why over the last few years, Codes of Practice on Reduced-Impact Logging (RIL) have been developed and implemented in many trial areas of tropical natural forests.

The Cost-Benefit-Analysis (CBA) reported here compares the project worth of two timber harvesting systems: (1) Conventional Logging (CL) and (2) Reduced-Impact Logging (RIL). Two time frames are included in the analysis: (1) One-year calculation periodthe financial costs and revenues of CL and RIL are calculated for the year of harvest in a primary forest; (2) 40-year calculation periodthe financial and economic project value is analysed until year 40 after logging, which includes timber production from a second harvesting operation.

Data on cost, productivity, and damage to the residual stand as well as data on soil compaction were obtained from RIL and CL trial blocks in the FOMISS-Samling Pilot Area (FSPA). In addition, timber wastes due to poor utilisation and lost logs are estimated based on data collected in the FSPA. Figures on forest growth are predicted with the Dipterocarp Forest Growth Simulation Model (DIPSIM).

The discount rate used in the analysis was set at 10%. For the calculation of shadow prices, a standard conversion factor of 1.2 on traded financial prices was applied.

The financial analysis was carried out for two hypothetical blocks with a net production area (NPA) of 100 ha each. The net operable area (NOA) amounts to 90 ha under CL and 70 ha under RIL. As a consequence of soil compaction due to skidtrail and log landing construction the NOA for the second harvesting operation under CL is reduced by 13 ha, resulting in a NOA of 77 ha. Under RIL the NOA is reduced by 3 ha, resulting in a NOA of 67 ha.

The results of the damage assessment demonstrated that the percentage of severely damaged trees was reduced from 54% under CL to 28% under RIL. This damage reduction leads to an increased quality of the future harvestable stand. Considering this point, a Quality Factor (QF) was introduced. Under CL a QF of 50% was defined; hence 50% of the volume increment consists of defective or damaged trees. A QF of 65% was set for the RIL management option.

Timber wasted as a result of poor felling and trimming techniques was taken into account by defining an Utilisation Factor (UF). Under RIL a UF of 80% was calculated and for the CL a UF of 75% was estimated. Under CL the volume of timber wasted due to logs left on the log landing or due to second trimmings amounts to 20% of the total extracted volume, whereas in a planned harvesting operation the log wastage approaches 0%.

The overall harvesting volume of the first harvest under CL averaged 44.5 m/ha and in the RIL blocks the harvesting volume averaged 27.8 m/ha.

The potential harvesting volume in the second harvesting operation 40 years after the initial harvest would be 23 m/ha in CL and 83 m/ha in RIL. However, the maximum harvesting intensity under RIL was set at 40 m/ha/y.

The financial analysis considers all costs associated with harvesting operations, including the cost of training, planning, skidtrail preparation, tree felling, log extraction and post-harvesting operations. The analysis also considers royalty payments and revenues from timber sales. Total harvesting costs under CL and RIL amounted to RM 28/m and to RM 43/m respectively (RM = Malaysian Ringgit). The average royalty costs, weighted according to the species harvested, were RM 37/m. For the calculation of timber revenues an export quota of 40% was considered. Under the RIL system a 10% certification premium was added to the prices. In order to calculate the profit from timber harvesting, the forest operation costs, which do not include costs for harvesting operations and royalties, were subtracted from the log price.

The economic analysis takes into account the costs of the harvesting operation and the benefits from timber sales, carbon stocks, Non-Timber Forest Products (NTFP), soil values, recreational values, and biodiversity values.

The economic value of timber revenues averaged RM 351/m for CL and RM 387/m for RIL (including a 10% certification premium). A total NTFP value of RM 6,798 per block (100 ha) and year was calculated for CL and a value of RM 9,764 for RIL. The annuity per block with regard to soil erosion benefits was estimated to be RM 1,442 (year 1-10) and RM 9,034 (> year 10) under CL and RM 4,526 (year 1-5) and RM 10,126 (> year 5) under RIL. In addition the following annual recreational benefits per block were obtained: RM 189.5 for CL and RM 1,895 for RIL. The annual economic value of biodiversity per block amounts to RM 625 for CL and to RM 898 for RIL.

The profit was estimated at RM 29 and RM 45 per m under the CL system and the RIL system respectively. However, considering the extracted volume, 4,005 m/100 ha NPA under CL vs. 1,942 m/100 ha NPA under RIL, the CL system is more profitable. The total profit per 100 ha NPA amounts to RM 117,566 under CL and to RM 88,318 under the RIL system.

The high extraction volume in the first harvesting operation under CL strongly influences the results of the CBA with regard to the 40-year calculation period. The results show that both harvesting systems are economically viable at the applied discount rate of 10%. Disregarding the negative environmental and social costs connected with CL, this system is more profitable than the RIL system. This is also due to the effect of discounting over a 40 year period which reduces the higher commercial RIL volume and revenues of the second cut to a minimal amount. Considering the above, it becomes apparent why the Net Present Value of the CL system is financially more profitable than the RIL system (NPV: CL = 118,700; RIL = 91,409).

In contrast, the economic analysis demonstrated that from the society's point of view the RIL system is more preferable than the CL (NPV: CL = 910,014, RIL = 990,462).

However, from the concessionaire's point of view the CL system is more profitable. But, it should be emphasised that the application of RIL techniques in the FSPA is still in its infant stage. In other words, there are ample opportunities for further improvements in cost cutting, increasing harvesting intensity and sales revenues, as well as skills and efficiency improvement of the forest workers and machineries.

The sensitivity analysis demonstrated that a slight reduction of harvesting costs by 10% and a simultaneous 20% increase in the logging volume of the first harvest is already sufficient to make the RIL system more profitable than the CL system.

Incentive mechanisms to promote the application of RIL techniques include different approaches: (1) adapted payment systems; (2) property rights; (3) regulation of royalties; (4) domestic fiscal marked-based instruments; and (5) market instruments based on public good benefits.

The proposed payment system for timber harvesting crews is composed of three elements: (1) a fixed monthly salary; (2) a piece-rate bonus; and (3) a quality-dependent reward. Each element accounts for one-third of the potential monthly maximum income.

The extension of the licence period is a basic prerequisite, but additional regulations and incentives are required to achieve the implementation of RIL techniques.

The wastage of timber resources is a consequence of the present royalty assessment procedures. In order to secure an optimum recovery of felled timber the royalty rate should be determined as close as practically possible to the felling site in the forest. This would minimise log wastage due to poor felling techniques, high-grading of logs, and rejection of average-quality timber. The volume measured immediately after tree felling should be used as a reference for determining the royalty to be paid by the timber company.

Performance bonds are another possibility to support the implementation of RIL techniques. The main argument for such measures lies in the incentive they would provide to shift from short-term exploitation to sustainable forest management.

The most important market-based instruments based on public good benefits are timber certification and carbon offset trading. Both can help compensate the timber company for revenues foregone due to environmental and/or social restrictions imposed by RIL.

In order to improve the profitability of the RIL system it is recommended to increase the harvesting intensity of the initial harvest by about 20%. Damage assessments should be carried out to control the effects of higher extraction intensities.

The establishment of a new SFM Coupe in the FSPA should provide an opportunity for monitoring harvesting costs and productivity under RIL (SFM) conditions. In order to obtain realistic figures it is recommended to carry out time studies that verify the RIL costs applied in this study. This analysis should be carried out jointly by the Forestry Department Sarawak and the timber company.

At present, CL and RIL still apply the same payment system: machine operators, hookmen and tree fellers are paid on a piece rate basis (per hoppus ton, equivalent to 1.8 m). It is strongly recommended that the piece-work compensation system for forest workers be modified. Instead, a remuneration system is required that takes into account the quality of work and rewards forest workers for best professional harvesting practices. A payment system has been developed that combines three elements: (1) a fixed monthly salary, (2) a piece-rate bonus and (3) a quality-dependent reward. Such a system would increase awareness and foster improvement of the skills of forest workers, as well as contributing to the achievement of the objectives of sustainable forest management.

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