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4 Political, legal and institutional aspects

4.1 Legal Framework

There is a Central America Agreement for Management and Conservation of Natural Ecosystems and Development of Forest Plantations[1]. For our purposes, the convention has two relevant elements:

1. Article 2, states "to promote national and regional mechanisms to avoid changes in the use of areas with forest coverage located in forest lands and to recover deforested areas".

2. Article 3d indicates: "to guide national and regional reforestation programs to recover degraded lands preferably apt for forestry and that are currently under agricultural use.....”

On the other hand, one of the objectives of the Central American Alliance for Sustainable Development is "to promote reforestation and the productive forest activity in Central America” (CCAD 1994).

These documents show the growing political importance of timber production through forest plantations. It is obvious that, at regional level, the States are interested in promoting reforestation as an important environmental measure.

4.2 Forest plantations promotion policies

Forest plantation policies of Central American countries have very particular characteristics. An important element is a reforestation incentive system. Because most teak plantations are located in Costa Rica, Panama and El Salvador, reference is made of the legal framework of each of these countries.

4.2.1 Costa Rica

The first Forestry Law (No. 4465) of Costa Rica was promulgated on November, 1969. The present Forestry Law is No. 7575, approved in 1996. Together with its Rules and Regulations[2], constitutes the Costa Rican forest legal framework.

Costa Rica has a 29-year experience of regulating plantation and conservation activities. However, it is only in the last 10 - 12 years when private sector plantation activities attained relevance. Also, the private sector increased its participation in the decision-making process of sector.

New legislation defines the State intervention in forest plantations. Article 28 indicates that "forest plantations, included the agroforestry systems and individually planted trees and their products, will not require harvesting, transportation, industrialization or export permit...". Article 56 states that "logs and rough sawnwood from forests or plantation, will not be transported, if it does not have the respective documentation". A transportation certificate is required as a form of control in highways.

The law establishes a new incentive system for forest plantations known as Payment for Environmental Services (PES), a payment or compensation for carbon sequestering, soil, water and bio-diversity protection and scenic beauty provided to society. Some of these services benefit not only the Costa Rican population, but also the global community, as is the case of carbon sequestering.

PES is a program under the responsibility of the National Fund for Forest Financing (FONAFIFO)[3], organization created to finance forest activities by granting credits or PES. Article 69 indicates that, from the total amount collected yearly by the selective consumption tax on fuels and other hydrocarbons, a third will be allocated to the PES Program (approx. US$31 million/year).

Government dispositions detailed PES conditions. The yearly amount to be paid is updated annually, for forest plantations US$600/ha for the first five years. The landowner endorses to the government the annual amount of carbon sequestered by the plantation, signing a contract for a maximum of 15-years.

Article 29 of the Forestry Law lists the incentives that the landowner can have access to:

Different articles permits that:

FONAFIFO has incorporated new elements to facilitated landowner access to these credits. Payment schedule and interest rates area designed for long-term investments. They cover not only the establishment of the plantation, but also its management. Because FONAFIFO has limited financial resources, at present the maximum area to be financed is 100 ha/year/loan. Also is possible to use the plantation (trees) as collateral to guarantees the credits. The country’s commercial banking system has no similar credit plan.

Landowners and industrial managers interested in the forestry sector development have organized the Costa Rican Forestry Chamber (CCF), a union created in 1993 that represents the interests of the Costa Rican private forestry sector.

4.2.2 Panama

Panama has a detailed legal framework that regulates reforestation activities: Forestry Law No. 1 (approved in 1994). Law No. 24, approved in 1992, deals with reforestation, and was amended in June 1993, adding specific Reforestation Incentives. It establish a 30 year period during which, all forms of private reforestation will receive priority and support. This Law indicated the country’s political will to increase reforestation,

The most relevant economic aspect is in article 5, which states that “100% of the Forestry Investments made by legal or natural persons is considered deductible expenses of Income Tax,” This incentive applies to all incomes, excepted those from forestry activities. Furthermore, machinery, equipment and inputs imported for reforestation activities are exempt of taxes and fees (Panama 1992).

The institution responsible for the implementation of the forestry policies is the National Institute of Renewable Natural Resources (INRENARE) that depends of the Planning and Economic Policy Ministry. The Finance and Treasury Ministry is responsible of registering and controlling the taxes invested in the reforestation activity.

There is a National Panamanian Association of Forest Farmers. Its members own almost 70% of the teak plantations in the country.


Up to 1997, Panama had registered a total planted area of 26,724 hectares, using mainly Pinus caribaea, Tectona grandis, Bombacopsis quinatum, Acacia mangiun and African mahogany. The teak area was 12,936 ha, or 48.4% of the total reforested area.

Furthermore, they have a financing policy, promoted by the National Bank, that offers credits at 7.5% interest rate for a 10-year term. In addition, the Agricultural Development Bank has a credit line for timber production projects of medium-size growers, and for sawmills.

Teak plantations were established considering a 20 years rotation. Subsequent studies of INRENARE and CATIE proposed a 25 year rotation as a minimum. ANARAP and forestry technicians, estimate average increases of 1.3 cm/year in diameter, 2 m/year in height and 12 m3/ha/year. The total volume at 25 years is estimated as 300 m3/ha (thinning and final cut) and the commercial volume as 250 m3/ha

Overall, teakwood has good acceptance on the national market. Ever since woodworkers have learned how to work it, its acceptance has been on the rise and is considered comparable to mahogany and cedar. Teakwood commercialized locally comes from isolated trees or second thinning of small areas. In the last two years a teakwood market for mature trees has opened. Timber purchased from farmers is sold to Japanese and Chinese businessmen for export. As the amount of mature teak is very limited, this is a temporary business.

Teak plantation investment projects had a B/C relationship =1.38, and a NPV=US$19,380/ha, with production costs close to US$14,000/ha for a 25 years rotation, at an average price of US$600/m3 for wood.

Source: Morán (1998)

4.2.3 El Salvador

El Salvador Forestry Law, approved in 1973, gives general guidelines for the reforestation process.

A Project to reform the actual Forestry Law is under consideration. Article 34, of this proposal specified that forest plantations in private properties will not require authorization for its establishment, maintenance, and thinning or final cut.

Reforestation is based on technical and financial criteria. For credits approval, banks request the technical opinion of the Forestry Service. The banks have funds for forest credits.

The institutions related with the Forestry Policy are:

From 1992 to 1995, an important source of capital was the social investment fund.

One of the limitations to promote reforestation in the country, is the lack of enough trained professionals. Universities do not have a degree in Forestry Engineer and there is no association of forestry professionals. Since the banks do not require that the person who implements the project has a forestry degree or background, professionals of any field can prepare and managed forestry projects,

There is a Forest Farmers Association and the Association of Seed Producers that gathers seeds and produce trees in commercial nurseries.


Between 1950s and 1976, 230 hectares of teak were planted and from 1980 to 1986 about 1,200 ha were planted by the MAG-ISTA. Until 1996, the total area registered was 2,488 ha, distributed in 138 owners.

In rural area teak has great demand as round logs for housing. Farmers are using the sprouts for small diameter products. Depending on the site, landowners plant up to 2,500 trees/ha. First thinning is scheduled between 4 and 8 years, between 11 and 13 years the second, and between 16 and 18 years the third. An important aspect is that most plantations lack management. Some are being "ransacked" and are gradually degrading.

Estimated rotation age is 25 years yielding commercial volume of 214 m3/ha of logs (up to 8 cm diameter top end) corresponding to a MAI of 8.56 m3/ha/year.

The financing plans of the forest promotion programs are applied to all forest species, including teak. Some characteristics of these programs are: have no financing limit, the term is from 2 to 25 years, the interest rate is 6%/year, with a 10 years grace period. All cases require mortgage guarantee.

Teak markets are analyzed based on three products:

  • Roundwood: used in generally for housing or rural constructions, pitchforks, beams, round plank and rods. Competition comes from eucalyptus, mangrove or other construction materials. Roundwood is also used for the construction of ranchos de plaza (recreation sites). The price is good, but the market is limited.
  • Timber: the sawmill industry demands larger diameters. The main buyer is a company that manufactures export furniture. Prices depends on log diameter, they pay per cubic foot, without considering the form of the log.
  • Roundwood for export: in eventual cases there is an export market. Recently, some logs were sent to Australia and India.

Wood prices vary accord to log diameter and length.

It is not sure that the expansion of planted areas will be with teak. Being one of the most criticized species, for being foreign, and for assuming it erodes steep slopes. In spite of all, teak is currently the most planted specie in El Salvador.

Sites with long drought periods produce wood with a very attractive appearance, what is a plus.

Source: Zambrana (1998)

[1] Ratified by Costa Rica in 1996
[2] La Gaceta No. 16, January 23rd, 1997
[3] Article 69: Support to Compensation Programs. Forestry Law No. 7575

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