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8.1 Forest charges - some general principles

Most forest revenue systems have strengths and weaknesses. However, there are some broad principles that can be followed when analysing the forest revenue system in a country. For example, Gray (1983) lists the following five main principles that should be considered when designing a system of forest charges:

To a large extent, satisfying the last four principles outlined above would also meet the objectives of forestry policy in Fiji, which stresses the need for efficiency and the maximisation of benefits for landowners from the utilisation of their forest resources. Therefore, the appraisal below will focus on how well the current forest revenue system performs against these four principles. As the forest revenue system is closely related to the current licensing procedures, it will also comment on this as well where appropriate.

8.2 Appraisal of the current forest revenue system in Fiji

8.2.1 Administrative efficiency

There are three main costs of administering any forest revenue system:

In addition to this, in the case of Fiji, there is also the cost of distributing to landowners the revenues collected by the Government on their behalf.

The Forestry Department calculates the official forest charges that should be paid and polices production, while the NLTB collects the charges and disburses revenue to landowners. The Forestry Department collects a Scaling Fee of FJD 3.50/m3 for this from producers (plus a negligible Map Fee) and the NLTB collects a similar amount, partly from producers and partly by retaining a 10 percent share of all of the official charges collected by them. The above fees amount to about 10 percent of the total charges paid (including unofficial charges).

The Forestry Department believe that their fees are sufficient to cover their costs, but the NLTB expressed some reservations about this. Comparing these fees with other countries, this is a remarkably low administrative cost. If this is a reflection of the efficiency of these two institutions, it is a remarkable achievement. However, it could reflect the fact that the true costs of administration are uncertain. In particular, for the Forestry Department, the amounts collected and retained by them seem very low considering the amount of work that must be involved in monitoring forest operations. For example, the revenue collected from fees covers only five percent of the expenditure of the department. This raises the question: is it true that production monitoring only accounts for five percent of the activities of the Forestry Department?

Another aspect of the administrative efficiency of the system concerns the procedures in place for recording production and calculating charges. In the field, roundwood leaving the forest is usually checked by the Forestry Department in the presence of representatives of producers and landowners. This approach, involving all three major stakeholders, is commendable and should reduce the scope for collusion, corruption and theft. Indeed, the Forestry Department’s statistics for fines and penalties show that very little illegal production is recorded. In local offices, the Forestry Department has a computer system that records production and calculates the charges that should be paid. This was demonstrated during the field-visits. This also appears to be working well and is comparable with product recording systems in many developed countries. The quality of production statistics in Fiji is excellent and this system could have other long-term benefits should producers decide to try to obtain certification for their products.

One final consideration should be the costs of administration borne by the private-sector. In general, it appears that the requirements for monitoring and paperwork are not particularly onerous and are certainly not any worse than the requirements in many other countries. However, there is one potential problem and that concerns the nature of the licences issued by the Government. At the moment, the main licence establishing a harvesting area is issued in the name of landowners. A number of forest operators complained that they sometimes entered into agreements with landowners, paid for licences and started to pay some of the unofficial fees, only to have the landowners try to renege on the agreement at a later date. This usually occurs when a competitor comes along and offers the landowners a better deal. This is a very real cost to producers.

Many producers also have a separate legal contract with landowners to reinforce their agreements, but this is quite weak in comparison to the powers available to the Forestry Department and NLTB. In particular, the latter can revoke or refuse to reissue licences to landowners. Markets work most efficiently when they are governed by a secure legal framework and binding contracts and the cost of such problems might be reduced if the licences could be improved in this respect.

8.2.2 Total forest revenue collection

The above analysis has indicated that the current levels of official and unofficial charges collected from producers in Fiji accounts for about 95 percent of the economic rent from production. Given the level of precision in these calculations, it is probably reasonable to say that landowners are earning the maximum possible benefit from the use of their forest resources and there is little scope to increase charges.

This conclusion is not only confirmed by the calculations set-out above, but by other indications such as the fact that the availability of indigenous roundwood is probably declining, or at least becoming more difficult to access. Further evidence of increasing competition to access a diminishing resource is provided by the development of unofficial payments, which was recently initiated by producers as they competed to acquire harvesting rights. With so much competition for the resource and the widespread use of short-term licences, it is very unlikely that producers could earn any “excess profit” for very long.

Apart from the above, there is the issue of how much of the charges should be paid through the official system of Royalties and Premiums and how much should be paid through unofficial channels. The determining factor should be the equitability or “fairness” of the two alternative systems, although a mixed approach does have other advantages as well (see below). It should also be noted that landowners have become used to the unofficial system of payments and seem to prefer it to the official system. The Government could simply try to redirect all of the unofficial charges through the official system by increasing Royalties by the amounts that are currently paid as unofficial charges. However, it seems likely that this would be unpopular with both landowners and producers. It could also lead to a situation where landowners continue to try to extract additional payments from producers. If such a situation occurred, it could reduce the availability of the resource even further and drive some producers out of business. This would not be in the interests of landowners, as it could lead to less production and a lower total amount of revenues collected for landowners overall (i.e. it is possible for forest charges to be set too high!).

One final point to consider is that the unofficial payments are not currently recorded anywhere. The Forestry Department and NLTB are both charged with the responsibility of making sure that landowners receive the maximum benefit from the use of their forest resources. They can not measure their performance in this respect as long as a major component of the charges collected are not recorded anywhere.

8.2.3 Economic efficiency

The above analysis of economic rent demonstrated how production costs can vary depending on a number of factors such as: location; terrain; forest stocking; technical, managerial and marketing skills; and scale of operations. Some of these factors are within the control of producers (e.g. managerial skills) and the forest revenue system should not allow poorly managed operations to survive at the expense of the better operators. However, some of the variation is due to factors beyond their control and they should not be penalised for this.

The problem with all analyses of economic rent is that they are often based on averages, which are then translated into recommendations about levels of charges that reflect these averages. There is no such thing as an average forest operation or average sawmill! Therefore, one of two outcomes usually occurs. In some cases, forest charges are set too low, so that no producer is penalised (but many benefit a lot from under-priced wood). Alternatively, the charges are set at a level close to the average level of economic rent, so that some unfortunate producers are penalised, while the lucky ones do rather well out of the arrangement. Either way, administratively fixed forest charges are never detailed enough to reflect the circumstances faced by each individual operator in the industry (whether within or beyond their control). Market forces can do a much better job of this, if competition for the resource can be guaranteed.

In terms of economic efficiency, the system that has developed in Fiji has several advantages in this respect. The official system of Royalties sets a baseline for the value of roundwood that landowners should expect to obtain. It also sends them market signals about the relative value of different species. On top of this, they are free to negotiate additional payments that, in effect, determine the market price of the standing roundwood. Unlike in many counties where the Government retains all forest revenue, Fiji’s landowners seem able to negotiate very attractive prices, probably due the high level of competition for the resource.

Although there seems to be a lot of competition for the resource, one aspect that might be considered is the availability of market information. Landowners are at a disadvantage in this respect, as producers know a lot more about the forestry business than they do. Improved information should improve the functioning of the market and lead to greater economic efficiency. As noted in the analysis above, this might extend to a revaluation of the relative levels of the Royalties.

Another consideration concerns the awarding of licences. The FSA submission suggested that licences should only be awarded to processors. Such a move would be anti-competitive and should be resisted. Many countries have a vibrant and dynamic independent logging sector and if an independent logger can produce roundwood more efficiently than a sawmiller can, they should be allowed to do so. Indeed, it is in the sawmiller’s interest to buy their roundwood from the cheapest source available, even if that means buying it from someone else rather than producing it themselves. In addition, processing is beyond the capacity of most landowners, but some of them may be able to start businesses as independent loggers. Therefore, restrictions on the awarding of licences should be avoided as it might exclude landowners from the industry.

However, this argument applies in both directions. Competition requires a “level playing field” and the Forestry Department should ensure that independent loggers are competent and able to follow the same requirements for good harvesting practice that sawmillers have to comply with.19

A final consideration concerns the scale and duration of licences. Forest areas owned by different landowning communities are generally small and highly fragmented. Annual-licences are good for encouraging competition, but they discourage investment in the processing industry, which tends to be of a long-term nature and requires security of supply. The forest processing industry in Fiji could probably be more efficient with higher levels of capacity utilisation (and, maybe, some new investment in improved technology), but this is unlikely to occur under current circumstances. The combination of these factors tends to push up costs, lower profitability and reduce the amounts that processors can afford to pay landowners as forest charges.

It is not suggested here that the Government should try to encourage the industry to restructure into just a few small large mills. Indeed, the medium-sized sawmills in the sector appear to be quite well managed and have proved resilient to fluctuations in market conditions in the past. Furthermore, a small number of very large mills would probably reduce competition for the resource (leading to a completely new set of problems). Rather, it is suggested here that the Forestry Department might examine how they can encourage improved performance in the processing sector through the types of licences available to producers and by increasing the scale and security of wood supply.

Many countries struggle with the sorts of problems described above. They try to solve them by measures such as: organising landowners into co-operatives; offering landowners shares in processing operations; or guaranteeing a certain amount of supply from state owned forests. Crucial to the success of such initiatives is a meaningful dialogue between stakeholders about the strategic direction for the future of the sector. The forestry sector in Fiji has considerable potential and the Forestry Department may wish to consider this further.

8.2.4 Equity

An assessment of the level of equity or “fairness” inherent in the forest revenue system is a matter of whether some individuals are given an unreasonable advantage over others. Measures to improve the functioning of the market and competition for the resource (as described above) should ensure that producers and landowners are each given their fair share of the benefits from production. Furthermore, competition should ensure that all producers are treated equally. The question that remains is whether the landowners’ benefits are distributed fairly amongst themselves.

Currently, the distribution of forest charges through official channels is arranged by NLTB according to a formula. This was not reviewed and it would, anyway, be beyond the scope of this exercise to comment on this. The procedures for distributing the unofficial charges is not clear, although almost everyone interviewed said that they felt that the unofficial system was working better than the official system, giving landowners more control over the benefits that they receive from the forest and usually more rapid payments.

Ultimately, the decision about how much of the forest charges should go through official channels and how much should go through unofficial channels is a political decision. An impartial economic appraisal of the situation could conclude that, if landowners are capable of looking after their own interests, then there is no need for the NLTB to collect forest charges at all. However, the current system whereby NLTB are involved has two advantages:

NLTB have the responsibility to achieve the two objectives above on behalf of landowners. They could possibly achieve the latter without being involved in charge collection and disbursement, but it is unlikely that they could achieve the former. Furthermore, evidence from other countries that have given landowners more control over forest charges has shown that that they sometimes lose out in the long run. Therefore, this would support the argument that NLTB should continue to be involved in the administration of the forest revenue system.

As noted above, the economic arguments for increasing the share of payments that go through the official system are quite weak. If the issue is simply a problem that NLTB find it difficult to cover their administrative costs from their share of royalties, they should increase the share that they retain rather than increase the level of Royalties.

8.3 Recommendations for changes to the forest revenue system

Based on the above discussion and conclusions, the following recommendations are presented for further consideration by the Forestry Department:

Recommendation 1: Administrative costs. The Forestry Department should review their expenditure on forest monitoring, control and charge collection to assess whether their fees cover their costs. If not, they should consider increasing their fees. There is very little room for an increase in charges, but a modest increase in the Scaling Fee would probably do no harm. NLTB may wish to consider this issue as well.

Recommendation 2: Licences and security of wood supply. In consultation with interested stakeholders, the Forestry Department and NLTB should examine whether the problem of landowners and/or producers reneging on production agreements is a major problem and what, if anything, they should do about it. The aim should be to use licences to reinforce the agreement to supply roundwood in a harvesting area, to minimise the likelihood of broken contracts and the consequential costs to both landowners and producers.

Recommendation 3: Total charge collection. The Forestry Department should record the total amount of revenue collected from unofficial charges and publish this information along with the statistics on official revenue collection. The level of unofficial payments (lump-sums and per cubic metre) should be recorded in licence agreements.

Recommendation 4: Analyse the relative values of different species. The Forestry Department should collect some better information about product prices (in domestic and export markets) and the mixture of products typically produced from each species (by grade and market destination). This should be analysed to identify the relative levels of economic rent from different species and revise the composition of the species classes.

Recommendation 5: Revision of the Royalties. Royalties should not be increased by very much (if at all). For example, Royalties in the top two species classes could be increased in line with inflation and Royalties in the lower two species classes could be kept the same or even reduced. The relative levels of the different species classes (and movement of individual species between the classes) should be determined from the outcome of Recommendation 3,

Recommendation 6: Average levels of unofficial charges. The Forestry Department should publish annually the average level of unofficial charges paid by producers (per cubic metre) by species class and zone.

Recommendation 7: Awarding licenses. Licences should continue to be awarded in an open and transparent manner without fear or favour, subject to the condition that all producers have to meet the same minimum standards of competence and comply with all forest regulations.

Recommendation 8: Long-term strategy. The Forestry Department should consult with all interested stakeholders about the feasibility of developing a long-term strategy for the sector. In particular, this should focus on improving the security of wood supply from the highly fragmented forest ownership, while maintaining the overall objective that landowners should continue to receive the maximum possible benefit from the use of their forest resources.

Recommendation 9: Revenue collection and disbursement. NLTB should continue to play a role in revenue collection and disbursement in order to provide a safety-net for landowners.

19 This requirement for a “level playing field” should also apply to other areas of public policy. For example, during discussions with one sawmiller, it was claimed that a native landowner had won a public procurement contract that was tilted in their favour, but did not have the capacity to produce the volume required. The sawmiller (who did not win the contract) was supplying the native landowner at the slightly lower price he had bid, while the landowner was then selling this on to meet the contract at a higher price. It is questionable whether this arrangement satisfies the intention behind the policy to support business development by native landowners, but it serves as an example of how such policies have to be implemented with great care.

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