Forests Sourcebook - HCV Resource Network

NOTE 5.4
Strengthening Fiscal Systems
in the Forestry Sector
Fiscal instruments encompass a wide range of mechanisms
by which money flows between public and
private sector institutions involved in the forestry
sector. Flows from the private sector to the public sector
(forest charges) can be broadly categorized as taxes, royalties,
fees, and fines. Financial flows in the other direction
(incentives) include tax incentives, grants, subsidies, and
subsidized loans. Other fiscal instruments include temporary
measures (such as performance bonds) and direct
intervention by the state (for example, joint ventures, public
shareholding, state marketing boards, and price restrictions).
All of these instruments have different strengths and
weaknesses (see box 5.14) and deciding on the right mix of
instruments depends on the objectives that the forestry policy
maker wishes to achieve.
The main objectives of fiscal instruments in the forestry
sector are the same as in other parts of government. The
two most important are to raise money for the state and to
cover the costs of forest administration. In addition, a distinction
should be made between raising revenue from the
use of the forest resource (royalties) and general revenue
collection (taxes).
Fiscal instruments (charges and incentives) can also be
used as tools for policy implementation, either to promote
Box 5.14
Common Problems with Fiscal Systems in the Forestry Sector
Fiscal systems in the forestry sector generally suffer
from three similar problems:
Inadequate rent capture. Charges for the harvesting
of publicly owned forest resources often do not capture
the full commercial value of the harvested products.
Charges are often set administratively and are not
updated frequently, so they rarely reflect true market
values. The main consequence is that these artificially
low prices distort markets, discourage efficient use of
the resource, and result in lost revenues to the state.
Inadequate charges may also encourage corruption, if
government officials can capture some of the uncollected
rent for themselves during the process of monitoring,
controlling, and approving forestry activities.
Complexity. Fiscal systems in the forestry sector are
often complicated, as a result of administrative
processes (setting and collecting forest charges, for
instance) that attempt to replicate market forces by the
use of detailed schedules of charges according to product
type, tree species, forest location, and total area of
production. The main consequence is that such systems
are often expensive to administer and administration
costs can account for a high proportion of total
revenue collected. Complexity may also present more
opportunities for corruption.
Perverse or unintended effects. Fiscal systems also
often have unintended effects, particularly with
respect to environmental and social aspects of forest
management. Incorrect pricing often leads to poor
harvesting practices (for example, selective harvesting
rather than harvesting of all commercial trees, thus
leaving large amounts of roundwood as waste in the
forest). Fiscal systems are also sometimes inequitable,
especially where harvesting activities impose costs on
people living in and around forests but provide them
few benefits.
Source: Whiteman 2006.
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