The data described above and shown in Table 1-3 and Appendix 1-3 was used in the SMAT forest investment models to calculate economic rent.

Economic rent is defined as :

Product value
Less production cost
Less capital cost
Less normal profit

Normal profit was defined as a 15% real return on capital investment, and real rates of return of 10% and 20% were also used in the analysis to test the sensitivity of the results to changes in this variable.

If current levies do not collect all of the economic rent from the forest industry, the portion of economic rent which is not collected goes to the industry as increased profit. This profit is called excess profit, ie. it is the amount of profit in excess of that which would keep companies investing in the forest industry. The level of excess profit in the industry is therefore, the amount by which forest levies could be increased without driving companies out of business.

Economic rent was calculated for the following five components of the Indonesian forest sector:

1. plymills;
   

2. sawmills (with moulding production);
   

3. HPHs in Sumatera and Sulawesi;
   

4. HPHs in Kalimantan and Maluku; and
   

5. HPHs in Irian Jaya and NTB.

These results were then used to show :

1. how much economic rent is currently obtained by the MoF with existing levies ;

2. the relationship between economic rent and product prices;

3. the maximum levy which could be set to obtain all the economic rent at current product prices;

and the results of this analysis are presented in the next page.