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7. Incentive systems to promote the application of
Reduced-impact logging techniques

The main objective of this chapter is to discuss the potential of Innovative Financing and Financial Incentive Mechanisms (IFIMs) to promote the application of RIL techniques. Richards (1999, p. 1) defines IFIM as "... (innovative) financial incentive mechanisms which result in new or increased finance and/or modify the flow of private costs and benefits in a way that stimulates sustainable forestry".

IFIMs can be classified into four main approaches:

IFIMs cover a wide range of approaches. Some deal with sources of finance, some are related to market transactions in which externalities are internalised, and others are concerned with non-financial mechanisms, but with a strong impact on investment incentives (Richards, 1999). These approaches will not be discussed in detail. Instead, several IFIMs are highlighted that could potentially serve as core mechanisms to support the introduction of RIL techniques.

In contrast to IFIMs, which are based on national or international schemes, are "internal" incentive systems of government bodies or timber concessionaires. At the timber company level, one key point in the context of RIL is emphasised by numerous authors (e.g., Sist, 2000): the payment system for forest workers.

7.1 Payment systems

The implementation of RIL techniques requires skilled, well-trained, and responsible harvesting teams. A modified payment system is desirable to provide adequate incentives for crews to apply RIL techniques consistently. The simple piece-work rate under CL, which is based on the extracted commercial volume, provides little incentive to increase quality (Sist, 2000). Instead, a remuneration system is needed that takes into account the quality of work and rewards forest workers who apply the best professional harvesting practices. Experience during RIL trials in the Model Forest Management Area (MFMA) suggests that a purely time-based wage does not provide an adequate incentive for workers to maintain high levels of productivity.

Considering these aspects a payment system is proposed that comprises 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 income. Furthermore, in situations where elements (2) and (3) are satisfactorily achieved the total monthly compensation will be higher than the average monthly compensation under CL. The payment system here can serve as an example for practical application in the FSPA (Figure 10). The proposed system is derived from the following:

Compliance classes a&b: Good to full compliance RM 800
Compliance class c: Satisfactory compliance RM 400
Compliance class d: Poor compliance RM 200
Compliance class e: Non-compliance RM 0

The large jump between compliance class c and a+b should serve as an additional incentive to fulfil the qualitative demands of RIL techniques. It should be noted that the RIL compliance assessment must be carried out in each individual block (or compartment) and that the results are used to evaluate the quality performance of the entire harvesting crew.

Conventional Logging


Reduced-Impact Logging (Proposed)

Class a&b RM 800

Quality-dependent compensation based on compliance classes

Piecework-dependent compensation

Average per month

RM 2000

Class c RM 400

Class d RM 200

Class e RM 0

RM 1.25/m3

Maximum per month

RM 800

Piecework-dependent compensation

RM 800

Base monthly salary

Figure 10. A proposed compensation system for harvesting crews under reduced-impact logging. The current worker-compensation system under conventional logging is shown at left for comparison.


7.2 Security of tenure

The development of long-term, legally binding forest management concession agreements has been stressed in several publications as among the most important requirements for the promotion of sustainable forest management (e.g., Graaf, 2000). Increased security of tenure for timber companies will facilitate contractual arrangements with outsiders and lower the discount rates at the private-sector level (Richards & Moura Costa, 1999).

But, the conversion from short-term harvest licences to longer term agreements, in order to empower concessionaires to harvest the same stand again in the future, will not inherently prevent land users from acting in ways that impose social costs on others. Hence, the extension of the licence period is a basic prerequisite, but additional regulations and incentives are required to achieve the implementation of RIL techniques.

7.3 Regulation of royalties

During this study it was demonstrated that about 20% of the extracted volume is wasted as a result of repeated trimmings as well as logs that are rejected and left behind in the forest. This figure is similar to results reported in other studies. For example, a study carried out in Kalimantan indicates that about 23% of the total felled timber volume is "wasted at the roadside" (Sist & Bertault, 1998).

This wastage of timber resources is a consequence of the present royalty assessment procedures. This state levy on harvested timber is collected far from the felling site. Timber that does not arrive at the royalty assessment point is not accounted and can thus be wasted by the companies without penalty. Logs are trimmed excessively and often only the best log grades will reach the assessment point, with timber of lower quality and value being left to rot in the forest.

In order to secure the maximum recovery of felled timber, royalties should be assessed as close as practically possible to the felling site in the forest. Ideally, the taxation could be based on the gross standing volume (clear bole volume of standing trees). This would encourage concession holders to minimise log wastage due to poor felling techniques and high-grading of logs. A difficulty with royalty assessment based on standing volume, however, is that the determination of standing volume is frequently biased with respect to measurement of the clear bole length. A reasonable alternative would be to use the volume measured immediately after tree felling as the basis for determining the royalty to be paid.

7.4 Domestic fiscal market-based instruments

The idea of market-based instruments (MBIs) is to internalise social costs and benefits into private returns. This should cause a change in the entrepreneur's economic behaviour (Richards & Moura Costa, 1999).

Performance bonds represent a type of MBI that would support the implementation of RIL techniques. These are based on the "polluter pays principle" (PPP). At the beginning of the concession the entrepreneur deposits a refundable bond into an account of the State Government. If harvesting operations are executed in accordance with RIL standards, the value of the bond is gradually returned to the concessionaire. Any fines for poor compliance with RIL standards are deducted from the bond.

The main argument for the performance bond approach lies in its ability to provide an incentive for shifting from short-term exploitation to sustainable forest management. Performance bonds can also compensate, at least in part, for the discounting problem in forestry. Normally, the NPV from logging a primary forest is much higher than the NPV from a second cut 40 years later. By ensuring that the concessionaire receives income gradually and towards the end of the rotation period, returns from logging new areas are also subject to the bond, roughly in line with the NPV of a second harvest (Richards, 1999).

7.5 Market instruments based on public good benefits

The most important market instruments based on public good benefits are timber certification and carbon offset trading.

The main objective of certification is to establish an environmentally discriminating market for the purpose of encouraging concessionaires to move from timber mining to sustainable forest management in order to be able to sell their produce globally and without restrictions on market entry. Recent experience has shown that few consumers are willing to pay a "green premium". The main incentives for becoming certified, however, are not to obtain a market premium but rather to protect market share and to maintain access to environmentally sensitive, high-priced consumer markets. Certified producers can receive higher average sales revenues from these timber markets, which are located mainly in Europe and the USA at present, due to the higher overall price level.

Carbon trading has a high potential for promoting the adoption of RIL techniques (or sustainable forest management in general) by compensating producers for improved practices that will sustain high levels of carbon in the forest. Compensation is achieved through international transfer payments which are internalised by timber concessionaires and other forest owners or managers. The key economic advantage of trading certified carbon credits in the forestry context lies in the fact that a continuous flow of revenue is generated from the first year onwards. Currently, the cost of topical forestry carbon offsets ranges from US$2 to US$10 per ton of carbon and averages about US$8 (Stuart & Moura Costa, 1998). As demonstrated by the sensitivity analysis for carbon trading as described in Section 5.4 for carbon trading, a minimum of RM 30/ha/y is required to make RIL more profitable than CL. This corresponds well with the carbon value figures indicated above.


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