Forests Sourcebook - HCV Resource Network

Box 5.16
Solutions to Problems with Fiscal Systems in the Forestry Sector
A brief, simple summary of some remedies to the
problems raised in box 5.14 include the following:
Market mechanisms. Greater use of market mechanisms
(competitive tendering and bidding) can reduce
some of the problems of complexity and inadequate
rent capture in fiscal systems by using the market to
establish the true value of the resource.
Improved data and information. Increasing the reliability
of and access to information about the forest
resource and markets supports the greater use of market
mechanisms. Public reporting of production, revenue
collection, and the results of monitoring and control
activities can also reduce the scope for corruption.
Greater consultation. Providing opportunities for all
stakeholders to comment on fiscal policies should lead
to better outcomes. Public input can include discussion
of both technical and policy-related issues and should
examine who gains and who loses from existing and
proposed arrangements. Reforms of fiscal systems in
the forestry sector are frequently opposed by vested
interests and their influence may be reduced with
greater consultation and open discussion and debate
about who will lose and who will benefit from reform.
Decentralization. Forestry activities are often criticized
for imposing costs on local people without providing
them any benefits. If carefully designed—taking
into account the capacity of local institutions—fiscal
systems can share the benefits of forestry with local
people, compensating them for any costs they may
incur and encouraging them to participate in the management
and protection of forests (see note 5.1, Decentralized
Forest Management).
Source: Whiteman 2006.
In theory, the royalty payment for roundwood harvested
from the forest should equal the price that would be paid for
standing trees (stumpage value) if they were sold in a competitive
market. This price can be calculated as the value of
the roundwood at the port or processing plant (determined
by species, quality, product prices, and the efficiency of processing
plants), less the costs of harvesting, extraction, and
transport (determined by the efficiency of the producer and
location-specific factors, such as terrain, forest stocking, and
transport distance).
Royalty payments can be established through competitive
means, such as competitive bidding in auctions or tenders,
or they can be set by the forestry administration. In the
latter case, consultation, negotiation, or calculation of the
stumpage value (as described above), can be used to set the
payment.
Because of the effort involved, infrequent revaluation of
royalties is a major problem in many countries, although
some countries regularly alter royalties according to predetermined
formulae (for example, taking into account price
indexes for the main operational costs and forest product
prices). Another difficulty with setting royalties administratively
is obtaining reliable information about costs and
prices for the calculation of stumpage values. In addition,
information about forest stocking is sometimes needed to
calculate appropriate royalties (especially where royalties
will be collected using area-based charges).
Traditionally, competitive mechanisms have mostly been
used to establish royalties for relatively small, short-term
sales of standing trees (especially from forest plantations).
Royalties on production from longer, large-scale forest concessions
have more commonly been established using
administrative means. However, it is possible to combine
both methods for forest concessions by, for example, setting
volume- and area-based charges according to a predetermined
formula and using a bidding process to set a license
charge (World Bank 2003).
Fiscal incentives. Fiscal incentives are a subset of a broad
range of measures that encourage others to act (FAO 2004).
Incentives are most commonly used to promote activities
that result in net nonmarket benefits (that is, production of
goods and services, usually social and environmental, that
have no value in the marketplace and are not, therefore, a
source of revenue for the forest owner). In many countries,
incentives are used to promote tree planting and afforestation
in general, with a broad assumption that these actions
will usually lead to net nonmarket benefits. However, with
the development of payments for environmental services
(PES) and funding mechanisms to support international
conventions, incentives are gradually becoming more accurately
targeted toward specific activities that result in specific
nonmarket benefits (for further details, see note 2.3, Innovative
Marketing Arrangements for Environmental Services).
182 CHAPTER 5: IMPROVING FOREST GOVERNANCE