3.1 Introduction
3.2 Industrial plantations
3.3 Pricing & allocation of timber concessions
After World War II, many Southeast Asian countries encouraged increased exploitation of their natural forests as a source of foreign exchange to finance National development. Market demand has progressively expanded. Yet the evidence from countless independent studies suggests governments have consistently been unable to collect the full economic value from forest exploitation. Logs have been generally under-priced13 while processed exports may have earned far greater foreign exchange employment and value added than log exports (but many experts doubt this is so).
13 And many commentators believe they still are in Sarawak and Indonesia, for example.
The allocation and pricing of timber rights is more commonly recognised as a major issue by outside commentators than those directly involved (in Government Forest Services). Some economists (e.g. Gillis; Repetto) have argued that developing country governments have consistently failed to collect anything like the full potential value of the timber (or bamboo or rattan) being sold to industry, especially for exports.14
14 However, logging concessionaires may pay close to the full economic rent - one-third to the government and two-thirds to those who collect it. Stumpages might not be set artificially low out of ignorance of the true value of logs - the lower the stumpage, the higher the quasi-rent or surplus value that can be extracted from the concessionaire, given the market value of the logs. If the private profitability of logging was not so great, then the possibility of recognising the public benefits of conservation may be higher.
This raises the issue: should governments seek to collect the full economic rent from harvesting forests? In many countries (including Canada and New Zealand) a deliberate trade-off was made -foregoing potential stumpage revenue, to attract and foster new private industries. It does work but it is almost certainly not economically efficient or cost effective! New Zealand has now abandoned this practice. In other circumstances, governments deliberately forego potential revenue to achieve greater control over environmental impacts of logging (coupe design, road standards, species, girth limits, etc.).
As explained in Section 1.4, we will now examine aspects of industrial forestry and forest industries around the region, particularly which actors are responsible for what activities, and whether government policies have set out a clear framework to provide the appropriate incentives/disincentives and regulatory mechanisms to achieve efficient and equitable results.
As noted in section 2.1 above, plantations may be for site rehabilitation or local fuelwood supplies, but the major interest still is in industrial plantations, especially using tropical acacias and eucalypts for pulpwood (Southern China, Thailand, Viet Nam, Malaysia, Indonesia and India).15 Malaysia's Compensatory Plantation project began in 1982 with the aim of establishing 188,200 ha by 1995, of utility-grade species to meet domestic timber needs. The main species are Acacia mangium, Eucalyptus camaldulensis, gmelina and pine.
15 The plantations of mahogany (Swetenia macrophyla) in Fiji for high-value sawlogs and veneer logs, are a notable exception.
Where governments concede that current rates of logging natural forests are unsustainable, the rate of logging is gradually slowing while more and more emphasis is placed on fast-growing exotic plantations. For example Sabah now has over 50,000 ha, but the target area of plantation is:
* Sabah Forest Development Authority - 100,000 ha by 1998;
Sabah Softwoods Sdn Bhd 61,000 by 1990; and
Sabah Forest Industries Sdn Bhd - 60,000 ha.
This would produce at least 6 million cubic metres of logs per year, enough to satisfy all existing industries. No further new industries are planned, but the intention is to upgrade existing mills to produce higher value-added products. It is inevitable that the mix of products and exports will change from indigenous species to plantation timbers.
Sri Lanka's Forest Policy recognises that:
"Plantation forests require careful siting and careful selection of species. Guidelines stating the reasons for plantation establishment should be prepared taking into account present socio-economic conditions and priorities for timber production in non-critical areas".
Conservationists correctly point out that even if the plantations produce as much timber as native forests (or more) they are still not a substitute for the natural ecosystem, for wildlife, and traditional uses by indigenous people, such as foods and medicines. Economists point out that countries are unlikely to receive the high prices currently paid for high-quality natural timbers like Dipterocarps, when they sell their "common" plantation timbers.
Private sector involvement in plantations has generally been small (notwithstanding some examples from large Indian corporations and proposals in Northeast Thailand). Oliva (1988) commented on the general failure of attempts to get ASEAN-region licensees or concessionaires to effectively establish plantations - despite the threats and inducements, it is generally still not in their interests. Many countries are now actively interested in attracting private sector afforestation (as governments attempt to reduce their recurrent expenditures and wonder why "tree-farming" should be a governmental activity anyway).
A 1987 seminar in Sabah16 listed the following as required incentives:
Secure tenure, fiscal and tax incentives, and extended-term, low-interest credit;Provision of adequate infrastructure (ports and roads);
Strong R&D expenditure (for technical success) and Human Resources Development (for efficient management); and
Stability of Forest policies over the long term to foster confidence.
16 "The Future Role of Forest Plantations in the National Economy and Incentives Required to Encourage Forest Plantations" Koto Kinabalu December 1987, supported by the World Bank.
Alternative routes now being explored include contract reforestation, joint ventures and production-sharing in Philippines and leasehold reforestation in Philippines, Nepal, China and India for example. Even where plantation establishment by the private sector is sought, there are legal-institutional impediments like the restriction in India (under land reforms regulations) on any individual or company owning more than approx 20 ha. Although companies cannot buy and afforest land, they are contracting with small farmers, through buy-back arrangements, to ensure their future requirements of raw materials (while simultaneously providing a real financial incentive for tree-farming. Similarly, in China, some of the former forest cooperatives are being converted to equity/shareholder companies, which are then free to employ professional managers or advisors, and to sell their products at free-market prices to industries or the government.17 It had become very obvious in China as elsewhere, that paying people just to plant trees, without giving them a financial stake in the final produce, was often a waste of money. The model for commercial farm forestry and co-operative plantation establishment now evolving in China, is quite radical but potentially a very interesting precedent. In principle, it is similar to the sale of the rights to manage and harvest the plantations established by the NZ Forest Service
17 See "Chinese Farmers versus the Forestry Stocksharing System - a study of Forestry Policy of China" by Li Lukang, presented to this consultation.
This is another area where policy formulation needs to consider very carefully, "Who are the actors involved? What are the options available? How will various actors respond to each type of policy instrument, or particular rates of tax, etc?"
In assigning rights to the private sector to harvest from government or communal forests, many options exist, with regard to:
scale of operations: for example, in Indonesia, the average size of concessions is 104,000 ha,18 presenting difficulties in supervision by both the Ministry and the concessionaires. The issuance of 500 concessions in Thailand by 1968, covering 50% of the country, opened up vast new areas for encroachment and official agricultural development.duration of licence: short-term licences do not encourage long-term stewardship of forests, but even 25-year licences are less than many cutting cycles, destroying any motivation to nurture regrowth. "Cleaning operations" every 5-10 years can be observed. Even with very long term licences, concessionaires may behave as if their tenure is insecure, because of uncertainty about political changes.
harvesting methods to be used: The reports from Thailand, Philippines and Indonesia refer to deficiencies in the various Selection Systems as practiced. Low volumes/ha from selection logging necessitate greater areas logged for a given output, at higher extraction costs. Damage to residuals is often unacceptable. Rather than trying to prescribe and regulate logging methods, a system can be devised whereby operators' commercial self-interest coincides with sustainable forest management.
quantity, grades and sizes to be removed: Again, almost all countries report concerns about "high-grading", or failure to take less-commercially-desirable species, and/or illicit removal of under-sized logs. The calculation and enforcement of meaningful Allowable Annual Cut is notoriously difficult. Again, fiscal incentives may be more effective than regulation.
prices, fees and charges: There are countless instances of stumpages, fees and charges being extremely low. As noted above, it was often to attract new investment; to capture other social benefits like infrastructure and employment. For example, the Bangladesh Forest Industries Development Corp made only notional payments for areas, logs and bamboo for many years. The Hindustan Paper Corp in Kerala paid Rupee 11 ($0.5) per ton of eucalypt pulpwood compared to production costs of R 500. When stumpages were increased to realistic levels, industry contracted leaving excess capacity and demands for more plantations and more logging of natural forests. Subsidising log input prices seems a very inefficient way of creating additional employment,19 and discourages intensive recovery in mills. The very low Concession Licence Fee (less than $2/ha) and Land & Improvement Tax ($0.5/ha of unlogged concession) in Indonesia encourages large concession areas.
whether reforestation and silvicultural treatment (culling) is required: Clearly the more the logger is required to pay (for reforestation, roads or infrastructure), the less is available as log purchase price, ceteris paribus. The question is whether the logging concessionaire is the best one to undertake these activities? (incentives, efficiency?) If so, should it be by explicit payment rather than by lowering the official sale price of logs, which will distort subsequent decisions.
whether performance bonds are imposed: Performance bonds designed to induce reforestation, have had mixed results in Indonesia. Most companies still find it cheaper to forfeit the reforestation deposit than to replant, considering relative costs, inflation, and administrative costs. The incentive effect clearly depends on the level of the bond, relative to other costs.
transferability/sale of licences/rights: In many countries, the logging rights are not transferable, reducing the incentive to manage the forests to maintain a high residual value. Transferability may impose penalties for not looking after the forest and provide financial rewards (as higher transfer prices) for those who have not high-graded, have protected advanced growth, and installed good infrastructure. Systems like "Evergreen Licences" as in British Columbia (Canada) with claw-back provisions may also be applicable in Asia.
whether export is permitted or some specified processing is required: As one form of indirect subsidy to local industry, countries have operated a two-price scheme, where logs for approved local processing are considerably cheaper than export logs. Accelerated industrialisation has been accomplished in Indonesia & Malaysia, through a whole suite of policy measures linked to trade and tariff policies, tax incentives, log export restrictions, "cheap logs", worker training programs etc. (delos Angeles & Idris, 1990) This is now also becoming a high priority for India, China and Viet Nam. Analysis of the methods and performance of accelerated industrialisation in Indonesia and Malaysia, compared with the relative lack of success of PNG and the Philippines, would be instructive - to address the whole rationale and the empirical performance of the suite of policies. Most independent studies suggest the short-run economic cost to Indonesia has been extremely high. Setting log prices correctly may be one necessary condition, but it is certainly much more complex.
18 The largest owners are now believed to control between 2 and 5 million ha. (Tempo 1991)19 Manasan (1989) observed that in SE Asia forest industries, only Philippines offered a direct financial incentive to employment, via tax rebates, but that this was ineffective because of other tax concessions.
All these conditions can interact, and trade-offs are possible - changing any one will probably affect potential economic rents and thus bid-prices. In choosing policy measures, we could constantly ask ourselves "What incentive effect is this condition likely to have on a typical private operator, and how will that affect long-term sustainability of forestry, in an environmentally friendly but net-benefit-maximising way?"
While most logging and processing industries throughout the region are in the Private Sector, most countries still have at least one government corporation, e.g. Thailand's FIO, BFIDC in Bangladesh, Nepal Timber Corporation, Perum Perhutanian, Sabah Forest Industries, etc. Why? Do they perform a useful function? are they profitable? are they more environmentally aware and cautious than private industries? or are they just anachronisms from the 1950s experiments with socialism or state capitalism? Very few of these corporations earn profits to pay dividends to the state, particularly if adjustment is made for the heavily subsidised raw materials they get from state forests. Even Myanmar denationalised its forest industries in 1989, except for the teak which remains a state monopoly under Myanmar Timber Enterprises.
Logging Bans and Log Export Bans
The performance of logging industries has come under intense criticism, to the extent of the well known logging ban in Thailand since 1988 and in the Philippines since 1991. We should not only consider whether such measures are warranted or not, and what the implications are, but also ask ourselves why politicians felt required to take such drastic action, particularly if it as against the advice of their own professional staff.20 If logging bans apply to all trees, this could immediately kill any private interest in plantations or farm forestry. In the Philippines, where local communities are supposed to manage secondary natural forests under long-term sustainable, low-impact regimes, how can they do this if they are not allowed to cut and sell the timber?
20 The very influential Australian Conservation Foundation is also committed to seeing a total ban on logging in ALL Australian natural forests, as soon as possible. The logic may be hard to follow but the emotive appeal is strong.
Log export bans are not intended as a conservation measure, but as part of a package to encourage accelerated domestic processing, with employment generation and value-added, and hopefully higher net foreign exchange earnings. As noted above, these have a wide and diverse history (e.g. in British Columbia Canada since 1903) but almost invariably have been scorned by economists for the serious distortions in resource allocation that they create. Even Malaysia's successful and widely-acclaimed policies for accelerated industrialisation and "down-stream, value-added processing" have recently been assessed by a World Bank team as economically inefficient and too ambitious.
