3.1 Chile
3.2 India
3.3 Indonesia
3.1.1 Financial incentive programmes
3.1.2 Assessment of effectiveness
In 1973, the Chilean government initiated a structural adjustment program that reduced the role of government and provided leeway for the private sector to operate. Privatization was a key element of the reforms, which created a dynamic, export-led, market-based economy. Venezian and Muchnik (1997) stated its main elements included:
i) return of land and industries seized by the previous government to their original owners;ii) privatization of public enterprises, banks, state-held lands, and the national pension fund;
iii) elimination of non-tariff barriers to trade and a reduction of import duties from an average rate of 105 percent in 1973 to 10 percent in 1979;
iv) a reduction in public spending and tax reform (resulting in a balanced budget in 1977);
v) elimination of interest rate and credit allocation controls;
vi) introduction of a crawling peg and then a fixed exchange rate to help stabilize domestic prices.
As part of this reform package, a timber plantation subsidy program was initiated in 1974 to encourage private sector reforestation. Some of the tax exemptions established in 1931 were maintained and direct payments of 75 percent of the costs of reforestation were given (Clapp 1996). Further payments were available for additional silvicultural activities. There were exemptions on property and inheritance taxes on reforested land and a special Central Bank line of credit for reforestation (FAO 2000a). Between 1975 and 1979 the government sold its own plantations, along with land, nurseries and machinery.
The incentive program accelerated private sector planting. The average annual reforestation level was 11 373 ha between 1940 through 1974 (Clapp 1995), and there were about 300,000 ha of state plantations in 1974. In 1990 the plantation area was 1.45 million ha, mostly established by the private sector (Pandey and Ball 1998). Plantation establishment rates averaged almost 80 000 ha annually from 1974 to 1990 and the proportion of state reforestation fell from a high of 91 percent in 1973 to almost zero in 1979 (Clapp 1995).
The planting subsidy was removed in 1994. Since then, plantation area has continued to increase but at a slower pace. By year 2000 the plantation area was expected to be almost 2 million ha, of which 80 percent would be Pinus radiata (Williams, 1998).
Despite the massive rise in plantation area, many observers have questioned the importance of the incentives. Beattie (1995) argues that the incentives were a minor factor contributing to forest industry growth, once a critical initial mass of plantations was established. Wunder (1994) claims that subsidies were secondary with more important factors being a comparative advantage in the production of timber in plantations and a favourable general economic environment.
By 1994, there was evidence that the subsidies had served their purpose and were no longer necessary. Many Chilean forest companies were foregoing the incentives to avoid government requirements, including long-term allocation of land to forestry and restrictions on the management and harvesting of the plantations. There was also widespread criticism that they favoured large landowners and companies (Keipi 1997) and that plantations were being created by conversion of natural forests causing an ecological problem (Dasgupta et al. 1998).
Further, while many plantations were established on degraded lands, some have been established on prime agricultural land because of their inherent profitability. Haltia and Keipi (1997) calculated that Eucalyptus globulus and Pinus radiata plantations are both more profitable in Chile than the next best land use, cattle ranching, at all interest rates between 2 and 20 percent. In contrast, in Brazil, cattle ranching was more attractive than establishing Pinus taeda at discount rates of 12 percent and higher but was less attractive at interest rates of 8 percent or less. Eucalyptus grandis plantations were more profitable in Brazil at all interest rates.
Conversely, Clapp (1995) felt that the reforestation incentive was “stunningly successful”, creating one of the world’s most competitive forest industries. While subsidy payments are estimated to have totalled approximately US$50 million, Clapp concludes that the Chilean government achieved its purpose but may have paid more than necessary. The planting program resulted in higher land prices and there is less reasonably priced land available for plantation establishment than in Brazil or Argentina (Williams 1998). If imitation is an endorsement, then further evidence of the value placed on successful outcomes is provided by Colombia and Ecuador, which have adopted the Chilean model for their own incentive programs.
3.2.1 Financial incentive programmes
3.2.2 Assessment of effectiveness
Indian government has promulgated forest policy since the Arthasashtra Indica was issued in the third century B.C. The most recent National Forest Policy (NFP), passed in 1988, sets the highest priority on environmental protection (FAO 2000b). The formal recognition of communities as partners in forest management led in 1990 to Joint Forest Management (JFM) legislation.
The Federal Government has primary responsibility for forest management and most forests are under its control with the work overseen by state forestry departments. An increasing proportion of area is under site-specific village forest management plans developed through JFM, which by January 2000 covered more than 10 million hectares of degraded forests (India MoEF 2000).
The NFP remained consistent with its predecessor Act by maintaining a target of putting one-third of the national land area under forest. The country is far from meeting this target as only 19.5 percent (64 million ha) has tree cover (Ahmed 1997). Furthermore, 35 percent of the forest is badly degraded and the general trend is downwards, due to population and grazing pressures.
To achieve the NFP target roughly 33 million ha needs to be afforested and 31 million ha of degraded and open forest need restocking, presuming no further deforestation. During the late 1990’s, already low afforestation levels declined further, mainly due to funding reductions. In 1996-97, only 1.3 million ha were afforested, which was below the average of 1.5 million ha in previous three years (Ahmed 1997). Of this, roughly 70 percent of plantation establishment was carried out by the State.
As the new Forest Policy was under achieving the Government of India developed a National Forest Action Programme (NFAP). The NFAP outlines a 20-year forest management strategy, including a major afforestation programme and continued regeneration of degraded natural forests through JFM. An annual afforestation rate of 3 million ha is required for twenty years to meet the target (FAO 2000b).
The key incentive in the JFM programme is the sharing of benefits between the MoEF and participating communities. The majority of new planting is on public lands under the “20 Points Programme for Afforestation”, which provides free seedlings for planting on private lands (FAO 2000a). In addition, direct government planting continues.
Other programmes that provide incentives include a 1989-90 federal “Integrated Afforestation & Eco-Development Projects” scheme that funds local reforestation projects, especially on ecologically fragile watersheds in mountainous areas. To address problems related to seed sourcing and quality, a “Seed Development Scheme” was initiated in which the federal government funds development of facilities for seed collection, testing, certification, storage and distribution.
To date, afforestation programmes have been undermined by widespread use of inappropriate and low quality seed that have led to plantation failures and poor growth. In the long run this discourages forest establishment. The Seed Development Scheme is intended to correct these problems. Where improved seed has been used eucalyptus yields increased from 7 to 20 m3ha-1year-1.
India is caught in a dilemma over timber pricing - higher prices make plantation establishment more attractive, which India desires, but create an incentive to harvest natural forests, which India wishes to discourage. Until 1988 the Indian government supplied timber to the forest industry at artificially low prices, which supported an overcapitalized wood products industry. This policy, coupled with high tariffs on imported logs, also contributed to a low level of wood supply, with the result that the forest products sector faces raw material shortages and operates well below its rated capacity (Ahmed 1997). A number of recent policy changes include major reductions of import duties on wood products, particularly logs (FAO 2000b), a total ban on export of timber from India, a ban on harvesting in natural forests, and reductions in tariffs for forest products to make wood products more affordable.
The ban on timber exports and the lower tariffs on incoming timber will support industry but the other measures will provide more competition and may lead to a reduction in overall industrial capacity.
The impacts of land reform policies on plantation investment are also mixed. Some states prohibit any individual or company from owning more than 20 ha, so that forest products companies are contracting with small farmers, through buy-back arrangements, to meet their requirements for timber (FAO 1997). This provides a financial incentive for farm forestry.
There are even broader issues. High population levels and poverty are the two main causes of destructive pressure on forests. Meeting the needs of the rural poor and tribal people has high priority. The effectiveness of forest establishment incentives will depend on such pressures and the government’s assessment of priorities.
3.3.1 Financial incentive programmes
3.3.2 Assessment of effectiveness
All natural forests are owned and administered by the State, which may temporarily assign property rights (e.g. as a timber concession) or irrevocably transfer land to private parties (Hammond 1997). Forestry policies are linked to national development objectives defined under 25-year National Development Plans. Indonesia is now in its second development plan, running from 1994 to 2019 (FAO 2000c). These plans are subdivided into five-year economic plans (Repelitas). From Repelita I through IV (1969-1989), the long-term national goals were to increase forestry development and establish large-scale forest-based industries.
Aggressive exploitation is being replaced with emphasis on environmental protection and sustainable management. Repelita V (1989-1994) limited log extraction, froze the issuance of new mill licences, increased reforestation taxes (charged on harvests of timber from the natural forest) by 150 percent, added an export tax on sawn timber (which has forced inefficient mills to close), encouraged public participation and improved training and monitoring. Repelita VI (1995-1999) has more strongly emphasized sustainable forest management.
The Industrial Timber Estate (Hutan Tanaman Industri - HTI) development programme was initiated in 1983 to establish industrial timber plantations. These were intended to supply wood for the burgeoning forest products sector and to reduce pressure on natural forests (Potter and Lee 1998). HTI agreement holders are granted 35-year concessions, which may be extended by another 35 years.
A critical aspect of forest planning is the categorization of the forest estate, which is the basis for designating areas for natural forest concessions (Hak Pengusahaan Hutan - HPH), timber plantation concessions, and tree crop plantations (e.g. oil palm). “Unproductive” natural forestlands are designated as sites for the development of timber plantations under HTIs. “Unproductive” land is forest with a low available commercial species volume (Hammond 1997).
The government has offered companies willing to establish HTIs interest-free loans drawn from a reforestation fund supplied by a reforestation tax levied on HPH concessionaires (Potter and Lee 1998). These loans cover 32.5 percent of establishment costs and must be repaid in seven years. The government has also supported companies borrowing establishment capital and has allowed some to further lower establishment costs by co-operating with a state forestry company. Other incentives include low land taxes and, critically, the right to cut and sell any remnant vegetation on concessions (Potter and Lee 1998).
In 1992, to accelerate the establishment of plantations and at the same time provide employment for transmigrants, HTI-Trans was developed (Indonesian Ministry of Forests 1998; Potter and Lee 1998). Under this program, the Government will provide 40 percent of the investment in a joint venture arrangement with private companies.
The government’s objective was to establish 1.8 million ha of forest plantations under HTI by 1995, 2.3 million ha by 2000 and 10.5 million ha by 2030 (Sunderlin and Resosudarmo 1996). Indonesia’s Ministry of Forests (1997) reported that HTI programmes are targeted to have achieved about 6.4 million ha by the year 2000 however estimates of the area allocated to the HTI program have tended to be over-optimistic, as described below.
Indonesia has an emerging pulp and paper industry based partly on plantations. However, it is unclear how much the HTI program and associated incentives contributed to these achievements. Actual HTI planting rates are considerably less than expected. As of December 1995, only 520 000 ha of HTI timber plantations had been established (Sunderlin and Resosudarmo 1996). Between 1990 and July 1997, actual planting was only 23.1 percent of the planned level (Potter and Lee, 1998). These authors report that 320 000 ha were planted in 1996/97 and an additional 311,000 ha was planned for 1998/99. This may bring the total HTI area to 1.15 million ha by the year 2000, which is about half the target.
Kartodihardjo and Supriono (2000) report that there are 22 companies managing 1.2 million ha of HTI that have not taken advantage of the subsidy from the reforestation fund. The director of one company stated that receiving subsidies from the reforestation fund requires inclusion of state-owned companies in corporate management, which raises management and other costs. Thus, at this time, the timber plantation subsidy has no real benefit for some companies because the transaction costs are excessive.
Some companies have abused the HTI program. They have harvested the remaining natural forest on their concessions but had no intention of establishing plantations. Indeed they may apply for and receive funds for reforestation which, it is asserted, they divert to higher-yielding investments (Potter and Lee 1998; Kartodihardjo and Supriono 2000). This behaviour has contributed to the gap between planned and actual HTI area (Potter and Lee 1998; Kartodihardjo and Supriono 2000).
On some HTI areas, which are supposedly deforested, there may be a substantial amount of natural forest remaining. One analysis found 22 percent of the total area managed as HTI, was actually productive natural forest, prior to their establishment (Kartodihardjo and Supriono 2000). Thus, the HTI program can contribute to loss of the natural forest, which is precisely the opposite of what was intended (Sunderlin and Resosudarmo 1996; Hammond 1997; Potter and Lee 1998). A further consequence of the gap between planned and actual HTI planting is that industrial users are being forced to draw on the natural forest for wood fibre that was supposed to have been produced by plantations (Kartodihardjo and Supriono 2000; World Bank 2000).
A more basic reason why the HTI programme has missed its establishment targets is that even the subsidized returns from fast-growing plantations are relatively unattractive. Even with fast growing species, HTIs do not produce a return for 5 - 8 years (Potter and Lee 1998). In contrast, oil palm plantations are much more profitable and are also heavily subsidized. Between 1986 and 1997, 1.65 million ha of oil palm was planted. Since the economic crisis of 1997 increased the incentive to earn foreign exchange, oil palm development has accelerated. Thus, timber plantations cannot compete with other investments and are undermined by the government’s oil palm subsidies.
Higher log prices would increase the financial attractiveness of timber plantations (Sunderlin and Resosudarmo 1996). Several factors dampen domestic log prices. One of these is the log export ban, recently reintroduced to help reduce illegal logging (FAO 2000c). Pervasive illegal logging is, itself, a second factor that suppresses prices. The World Bank (2000) reports that currently almost all domestic log consumption is met from illegal logging, with official concessions accounting only for processed exports. Timber supply is also inflated by other factors that increase harvesting pressure on the natural forest such as encroachments by plantations into several conservation and protection areas.
Poorly defined tenure is another factor that is beginning to reduce the attractiveness of timber plantation establishment. New plantations are being established in areas where local residents often have small plots and obtain products from the forest. Some new HTIs have met resistance from local people who are being displaced (Hammond 1997; Kartodihardjo and Supriono 2000). Potter and Lee (1998) reported that the failure of another HTI company to keep a promise to build villagers a road, the commencement of work without consultation, intimidation by soldiers, and the felling of trees and high quality forest generated resentment. Eventually the villagers burnt down the company’s base camp and plantation. In response to these reactions, community forest schemes are being developed by HTIs as a compromise.
Due to macroeconomic events, foreign exchange earnings from processed timber exports, especially plywood, have to be maintained. To do this, the government feels compelled to emphasize plantation establishment to make up for shortfalls in wood supply due to degradation of the natural forest. The government has also counted on plantations to provide employment (Kartodihardjo and Supriono 2000).
