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The previous report by Rizer (1988) referred to a number of subsidies and tax incentives that were then in place to encourage investment in the forestry sector and recommended that these should be examined to see if they were in the best interests of the Fijian economy. Discussions with the Fiji Islands Revenue and Customs Authority revealed that all of the schemes referred to earlier had been closed and they suggested that the forestry sector is now generally taxed in the same way as other sectors in the economy.

However, there remain a number of incentives to encourage foreign and domestic investment (and some quite significant incentives specifically for the forestry sector). These fall into the following three categories: general tax incentives; industry specific tax incentives; and subsidies to the forestry sector. In addition, there is some evidence that the administration of foreign trade might be providing another implicit incentive to the domestic forest processing industry (see below).

6.1 General tax incentives

The Fiji Government introduced a new Investment Incentives Package in January 2001. The main thrust of this new package is to make incentives transparent, easily available, automatic and non-discretionary. It encompasses eight principles aimed at stimulating economic growth through increased investments (FTIB, 2003). The Investment Incentives Package includes the following:

As these incentives are available to all sectors of the economy, there is no specific advantage to companies and individuals working in the forestry sector and they do not distort the overall pattern of activities in the economy.

One or two of the companies interviewed mentioned that the administration of the Duty Suspension Scheme was so complicated that it was difficult to take advantage of this incentive (e.g. to import cloth, fixtures and fittings to manufacture value-added wood products for re-export). This is likely to be only a minor problem affecting a few companies in the sector, but it could be investigated further if the Government wishes to strengthen the promotion of an export-orientated wood processing sector.

6.2 Industry specific tax incentives

Companies in the forestry sector (along with some others) are also eligible for the following two specific incentives:

Considering the likely levels of profit and capital expenditure in the forestry sector in Fiji, the investment allowance described above could be quite significant and result in reductions in the Corporate Taxes paid by sawmills.

For example, the calculations for an “average” sawmill (described in Section 5.4 above) suggest that such a sawmill should pay Corporate Tax of around FJD 130,000 per year (on average). However, the sawmill would also be spending an average of around FJD 150,000 per year on equipment that is eligible for the investment allowance tax exemption. By offsetting 40 percent of the cost of this investment - FJD 60,000 - against their Corporate Taxes (which is quite feasible), their Corporate Tax bill could be reduced by 15 percent (i.e. an allowance of FJD 60,000 would result in a reduction of Corporate tax of FJD 19,200 (FJD 60,000.x 32 percent), which is equal to about 15 percent of their original tax bill). Smaller and less profitable sawmills could probably also claim a similar amount in investment allowances, resulting in a greater reduction in their Corporate Tax bill. This could partly explain the relatively low levels of Corporate Tax payment admitted by some sawmillers that were interviewed.

6.3 Subsidies to the forestry sector

There are no specific subsidies for forest management and forest operations in Fiji (e.g. to support tree planting, harvesting and processing). However, certain companies and individuals operating in the forestry sector are eligible to apply for subsidised loans from the Seed Capital Revolving Fund (SCARF).

6.3.1 Seed Capital Revolving Fund

As part of the affirmative action for indigenous Fijians and Rotumans, the Fijian Government has provided FJD 4.5 million for the SCARF program to assist the tourism, fisheries and forestry industries. The fund began in 2002 and is administered by the Fiji Development Bank (Fiji Development Bank, 2005).

Loans under this scheme cover investments in logging, sawmilling, further processing of wood products and the acquisition of working capital (for operation or establishment of eligible enterprises and limited to 30 percent of the total loan amount). Eligible investments include the purchase of fixed assets such as: land; buildings; machinery; and equipment, for existing or established business.

Eligibility criteria for loans are as follows:

The maximum loan amount is 65 percent of the total project cost and is not to exceed FJD 162,500, while the equity contribution of the borrower must be at least 35 percent of the total project cost (with the possibility of 25 percent provided by the Government and the balance provided by the applicant in cash or kind) and should not be more than FJD 87,500 per applicant. The (nominal) interest rate for the loan is eight percent per year, with repayment periods depending on the type of asset purchased.

The provision of subsidised loans from SCARF is not likely to have much of an impact in the processing sector, except for very small-scale operators. For example, the “average” sawmill described and analysed in Section 5.4 above would involve an investment of around FJD 2 million, so the maximum total project cost that can be submitted for SCARF funding (FJD 250,000) would only cover about 12.5 percent of the total investment. With the modest difference between commercial interest rates (around 15 percent in nominal terms) and the SCARF interest rate of eight percent, the subsidised loan available from SCARF would have only a marginal impact on productions costs and the sawmill owner’s rate of return.

Where SCARF could have a major impact is on companies and individuals engaged in logging operations. The delivered roundwood production cost for a “typical” forest operation (described in Section 5.3 above) assumed that an operator would not be able to obtain a commercial loan for such activities (which is often the case) and would have to finance the operation entirely from their own funds. It also assumed that they would require a 20 percent (real) ROC on their investment, so any loan at a real interest rate of less than 20 percent would reduce their total delivered roundwood production cost or could enable them to earn a higher ROC on their equity investment in the operation. Furthermore, the total investment required for such an operation would only be around FJD 215,000, so the entire project could be submitted for SCARF funding.

To examine the impact of SCARF funding on forest operations, the calculations described in Section 5.3.1 above were repeated assuming that 65 percent of the capital investment would be funded at the subsidised (nominal) interest rate of eight percent (equal to a five percent real rate of interest - i.e. after adjusting for inflation at three percent per annum) and with the repayment periods allowed under the SCARF scheme. The results of this recalculation are shown in Table 19 below.

Table 19 Estimated cost of harvesting, extraction, loading and transport for a “typical” forest operation in Fiji with a subsidised loan from the SCARF

Type of cost

Cost by activity (in FJD per cubic metre)



with dozer


with skidder





& reloading




































Total (excluding profit)










Return on capital










Total (including ROC)










Comparing this with the original calculations (shown in Table 13 on page 44), this shows that that the total delivered roundwood cost with a (subsidised) SCARF loan would be about FJD 3.28/m3 (or 5.3 percent) lower than without the loan. The total cost (excluding the allowance for profit) would increase because of the additional cost of interest repayments, but the additional amount required to provide a 20 percent ROC would be reduced by much more than this increase (because of the much lower level of equity invested in the project by the operator). Alternatively, if the roundwood was sold at the same price as the delivered roundwood cost from operators not eligible for a SCARF loan (the original FJD 62.24/m3), the operator’s ROC would be raised from 20 percent to 29 percent.

The above analysis shows that the subsidised loans available from SCARF would have only a very marginal impact on the total delivered roundwood production cost and, thus, the potential for SCARF to distort the market for roundwood is quite limited. As this is likely to have little or no impact on average roundwood prices in the market as a whole, it provides a major inducement to investment by indigenous Fijians (by significantly raising their ROC) without introducing a major distortion into the market.

6.4 Other incentives to the domestic forest processing industry

One final incentive to the domestic forest processing industry concerns the way that foreign trade (specifically imports of wood products) is administered in Fiji.

Table 34 and Table 35 (on pages 90 and 91) show that, in recent years, there have been almost no imports of sawnwood into Fiji and very few imports of wood based panels. Strictly speaking, companies and individuals are free to import wood products into Fiji, subject to the payment of (quite modest) import duties. However, several people interviewed suggested that non-tariff barriers (e.g. requirements for phytosanitary certificates, etc.) were used to restrict the importation of wood products into the country.

A number of sawmillers commented that it would be much more profitable for them to sell imported sawnwood than to manufacture (and then sell) the same product locally. This is also confirmed by the domestic price statistics for sawnwood, where price levels in Fiji are somewhat higher than international market prices. Thus, it seems likely that the domestic sawmilling industry is protected from international competition, allowing it to charge relatively high prices for their products. Although this is not an explicit tax incentive or subsidy, such import protection is a significant incentive to the domestic industry.

There are two main economic problems with import protection. The first is that protection acts as a disincentive to increasing efficiency in domestic harvesting and processing operations, because the costs of any inefficiency can simply be passed onto consumers. The second is the effect of protection on the distribution of income in the economy, as the process of passing on costs to consumers protects the income levels of operators while increasing the costs of consumption to consumers.

Despite these two problems (economic efficiency and equity), the negative economic effects of import protection in Fiji may not be that great. In the first case, there appears to be significant competition for raw materials, which suggests that processors will be pressured into increasing efficiency due to limitations on the supply-side (i.e. availability of raw materials) even though they do not face the forces of international competition. In terms of equity, the effect of import protection may actually be beneficial, as many purchasers of wood in the country are relatively wealthy (e.g. hotel operators - often supported by foreign investors) and part of the benefits from the high domestic prices for wood products in the country are passed onto the poorer landowners in the form of official and unofficial forest charges. Thus, from a broad perspective, while these problems are worth noting, they may not be that great.

6.5 Overall assessment

The costs and benefits of the above incentives are as follows:

6.5.1 Costs to the Government (fiscal costs)

Investment allowance: The reduction in Corporate Tax estimated above (FJD 19,200) was based on an “average” sawmill, producing 5,000 m3 of sawnwood per year. This implies an average Corporate Tax loss of FJD 3,840 per one-thousand cubic metres of production. At an average level of production of about 80,000 m3 per year in recent years, this suggests that the total cost of this allowance (in terms of avoided Corporate Taxes) could be in the order of FJD 300,000 per year.

SCARF funding: The “cost” of SCARF funding is the difference between the interest that the Government would obtain if they lent this money at a commercial rate of interest (15 percent) and the interest that they will earn at the subsidised rate of interest (eight percent). For every FJD one-million lent, this amounts to FJD 70,000 per year. The total subsidy to the forestry sector will depend upon how much of the FJD 4.5 million assigned to tourism, fisheries and forestry is used for forestry projects. Assuming that forestry projects account for about one-third of the SCARF funding, the total subsidy for forestry would amount to about FJD 100,000 per year.

6.5.2 Economic costs

Non-tariff barriers: The “cost” of the restricted level of forest product imports into Fiji depends on how much of the domestic production would be substituted by imports (if importing were easier) and the prices of those products (compared to the price of domestically produced wood products). Furthermore, the latter depends on how much product substitution would take place, as substituting domestic sawn hardwood with imported sawn softwood would result in significant savings to consumers (e.g. the regional trade price for sawn hardwood is quite similar to the domestic market price in Fiji, but regional trade price for sawn softwood is about FJD 100/m3 lower). It is impossible to know how much would be substituted if importing wood products were to be made easier, but the benefits to consumers (in the form of lower wood product prices) could amount to about FJD 500,000 for every 5,000 m3 of sawn softwood imports that might occur.

Other market distortions: As noted above, apart from the trade issue, the market distortions (in prices and investment) from the subsidies and incentives on offer in Fiji are quite modest and probably do not have a major impact on the overall economic efficiency of the sector.

6.5.3 Benefits

The main benefit of the incentives available to the forestry sector in Fiji is that these incentives probably help to create income and employment, contribute to poverty alleviation and play a small part in redistributing income towards the poor (i.e. native landowners) in the country.

A comprehensive cost-benefit analysis of these incentives would require considerable work to examine the number of jobs (and other benefits) created by these incentives and to compare these against the impact of government incentives for other parts of the economy. This would require a significant effort and is beyond the scope of this report. However, it appears that the costs of these incentives (to the government) are quite modest and probably worthwhile. The economic distortions are also quite small - with the exception of the implicit restrictions on trade - and the latter possibly have quite a significant impact on income distribution (by passing on some of the benefits of higher wood product process to landowners). Thus, in their totality, it seems likely that these incentives are worthwhile and justified.

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