III. A closer look at the range of forest funds

As noted above, national forest funds may vary significantly with respect to a number of key variables. The following discussion explores these distinctions in more detail, focusing specifically on the issues of:

This discussion draws primarily from a review of forest fund provisions in legislation from over forty countries, and where available, relevant secondary material. Appendix A lists and individually describes these funds.

A national forest fund may be nothing more than an accounting convention or it may be a complex legal entity subject to special rules that make it independent of the usual channels of government decision-making. In between these two extremes are many variations.

Many funds exist only as separate accounts in the budget of a government ministry or agency. Specific income streams flow into such an account, and laws limit the ways that the government may spend the account. The fund has no independent legal powers or standing and no special institutional structure behind it. The many "special accounts" of land management agencies in the United States are examples. Nearly a third of the United States Forest Service’s budget flows through special accounts and trust funds (Gorte & Corn 1997). The Solomon Islands Forest Trust is a "Special Fund" under the national constitution, but otherwise does not appear to be a distinct agency. Similarly, the Indonesian Reforestation Fund as described in its organic legislation was designed simply as an account under the joint administration of the Forestry and Finance ministries.

In most cases, any unspent money in such an account just sits as a paper entry in the treasury’s books. In some cases, the treasury pays the fund interest on unspent money, as if the treasury were a bank holding a deposit for a customer. Norway’s Forest Trust Fund, for example, uses income on the Trust to fund its administration, while the principal goes directly for the benefit of the forests that contributed to the Trust.

In their simplest form, the law gives a particular ministry the authority to spend the fund. Usually this is the ministry most directly concerned with forests, but occasionally the law gives the Finance Ministry control, as with Cuba’s National Fund for Forest Development (FONADEF) and Bulgaria’s Concessions Cost Recovery Fund.

In a variation on this simple form, the law may create a special agency within a ministry whose sole task is to administer the fund. Bolivia’s FONOBOSQUE appears to be set up this way, as a public entity under the Ministry of Sustainable Development and Environment.

The law may also create a board of stakeholders to advise the agency that administers the fund. The Gambia, for example, allows the establishment of a National Forestry Fund committee, with representatives of national and local government, forest communities, non-governmental organisations, and other stakeholders. The committee meets once a year to review planned spending.

In another variation, the law may split authority over the fund among more than one agency. The most common split of authority reflects divisions between financial and technical expertise. In Indonesia, the law appears to give joint control over fund use to the ministries of Forestry and Finance, and spending plans also require presidential approval. A more common arrangement is to give the lead in fund administration to the ministry most concerned with forests but to require approval from the finance ministry, perhaps as part of the approval of the ministry’s overall budget. Gambia, for example, requires the Director of Forestry to annually submit estimates of fund income and expenditures to the Secretary of State responsible for Finance. In some countries, the law creating the fund does not mention a requirement for outside approval of spending, but the general budgetary laws of the country may require such approval in any case.

Some laws give the forest fund an independent or quasi-independent legal personality. Again, there are many variations on this theme.

Independence may be little more than a legal convenience. For example, the law may simply allow the fund to enter into contracts, make loans to forest projects, accept gifts, or place money in a private bank account.

Taking a step further, the law may organise the fund as a government-owned corporation. The government appoints the managers of the fund and supplies it with a stream of income, but the fund otherwise operates independently of the government. If the laws of the nation allow, the corporation might take a pre-existing charitable form, such as a trust or a foundation. The South African National Forest Recreation and Access Trust is one example. Because it has a single trustee — the Minister — it remains under control of the government. However, the trust form implies a certain flexibility and independence from bureaucratic requirements. In the United States, the state of Oregon’s Forest Resource Trust offers another example of the trust format. The Tanzania Forest Fund is essentially organised as a trust. The trustees, appointed by the Minister, have the independence to deposit trust funds in a private bank account and prescribe procedures for making grants from the fund. The law reserves to the Minister the power to direct the trustees to act if the trustees are not acting "in a proper and reputable manner."

Going one more step, the fund may be organised as an independent corporation. The law will specify how the managers of the corporate body are chosen, often with stakeholders assured a role in management. The British Columbia (Canada) quasi-public corporation Forest Renewal BC is an example. Its directors are appointed by the province’s Lieutenant Governor, its income is from royalties from Crown forests, and some of its actions require the approval of the provincial government, but otherwise it functions as an independent corporation. The America the Beautiful Act of 1990 in the United States allowed the president to designate a wholly private foundation to accept up to $25 million from general government revenues to support tree planting and maintenance in communities and urban areas. The law imposed conditions on the gift regarding how it could be spent, the conduct of foundation officers, and transparency and auditing of foundation accounts. However, it did not give the government any control over selection of the foundation’s directors or managers.

Funds can be structured in such a way that they shift control of money from the central, federal bureaucracy to local branches of the same bureaucracy, to local government or to community-based organisations.

For example, a fund may reserve a fraction of income from local or regional forestry operations for the use of the local or regional office of the national forest bureaucracy. The Knutson-Vandenberg Fund of the United States keeps a portion of the income from timber sales on the national forests at the disposal of the management unit (the particular national forest) that generated the income. Malaysia’s National Forestry Act creates a Forest Development Fund in each of the states to which the Act applies. Each Fund gets part of its income from forest activities in the state.

Some approaches involve the transfer of a portion of the national fund to sub-national or municipal governments. The Costa Rican Forest Fund, for example, is structured to shift some of the money it receives from a tax on wood to municipal governments and regional environmental councils.

Finally, local funds are a common feature of legislation designed to encourage community-based forest management. Examples would include user group funds in Nepal’s community forestry programme, or similar funds in India’s Joint Forest Management programmes, into which participating local committees are required to place some or all of their share of revenues they are entitled to keep. Cyprus’ forest law sets up a Communal Forest Fund for each communal forest, while Gambia’s sets up local funds controlled by local forest committees.

Funds almost always have some dedicated source of income or, more rarely, an endowment. In their income structure, most funds fall into one of two broad classes.

The first class of funds can accept money from multiple, diverse sources. The majority of national funds reviewed for this paper fall into this category. An example is Costa Rica’s Forest Fund, which may receive money from a tax on wood, donations, issuance of forest bonds, fines and seizures, sales from forest nurseries, sales of forest seeds, charges for forest and protected area use, and other forest-related income. These multiple-source funds also tend to have multiple purposes.

The second class of funds take in money from a single source or small set of related sources. Usually, these funds spend the money on a use closely tied to the source of income. Local community forestry funds are good examples. The local funds in Gambia, for example, may take in money from activities related to the community forest or community-controlled state forest, including projects financed by the fund and donations specifically for advancement of the fund’s work. The fund administrators must spend this money on the community forest or on general community development.

Under Indonesia’s presidential decree of July 1990, the country collects an assessment on wood processed for timber or chips. This money is deposited into the Reforestation Fund, and is used for reforestation, development of plantations, and land rehabilitation.

Norway offers an example of an even narrower source of funding. It collects money as an assessment on forest products produced from a particular piece of land. The fund must spend that money on forestry projects benefiting that same land, or on projects benefiting another piece of land with the same owner.

Rarely, the law creates a fund to take money from a single source indirectly tied to forests and spend the money broadly on forest projects. One example is Costa Rica’s fee charged to fossil fuel users to compensate forest owners for the environmental services that forests provide. The United States has a fund that takes income from a tariff on plywood and lumber and devotes it to reforestation. Though not strictly a forest fund, Colombia has a fund fed from royalties on mining and petroleum extraction that supports local environmental projects, including reforestation.

Within these two basic funding patterns, laws may grant funds income from any of several sources. The discussion below outlines some of the more common sources.

2. General Revenues

Laws creating funds will often reserve the option of placing money from the general treasury into the fund. This is rarely the primary source of money for a fund, particularly in developing countries. However, in some countries the law requires that all income to the country go into the general treasury. In that case, as a formality, all income for the fund may flow through the general treasury.

Though most forest funds are designed to channel an ongoing stream of income into forestry projects, funds can also be designed as endowments, foundations, trusts, or revolving funds. These take an initial sum and invest it either outside the forestry sector, spending the income on forestry projects, or inside the forestry sector, as direct support of forestry projects. Such a fund might begin with an initial lump sum from the general treasury, though other funding mechanisms are also possible. An example of an endowed revolving fund is the Oregon Forest Resource Trust. This makes investments in private reforestation efforts. In return, the private owner must pay back the investment or grant the Trust a share in income from forest produce of the reforested lands. The Trust may not force the owner to harvest timber. However, the Trust does have the right to sell the carbon sequestration potential of the forest.

The "basic" model of a forest fund, of course, involves a re-investment of some portion of forest revenue into public forest management. One category of such revenue is the income from sales of forest products or admission fees to public forest lands. For example, Albania’s fund receives 70 percent of the state forests’ income from the sale of wood, grazing fees, sale of medicinal plants, and fees for hunting and other activities. Bulgaria’s Concessions Cost Recovery Fund receives 15 percent of revenues from concessions, among other income. (See also sub-sections 4 and 5, below).

Less frequently, the income for the fund may come from the sale or transfer of government forest land. For example, the law can require that income from the transfer of "surplus" lands better suited to non-forest uses be reserved in a fund for the purchase of lands more suitable for forest management. In the United States, the Forest Service sometimes exchanges lands with state and local governments. If the land offered in exchange is not of sufficient value, the state or local government may be required to make a payment into a special Forest Service fund reserved for future land purchases.

The government may also grow tree seedlings or collect forest seeds and sell them to private landowners. The income from such sales may go into a general forest fund or into a special fund to support those nursery activities. In Costa Rica, for example, the income goes into the Forest Fund.

4. Forest-Related Taxes

Some funds receive income from forest-related taxes. These may include taxes on forest land, severance or yield taxes on forest harvest, or taxes on the sale or processing of forest products. The Indonesian Reforestation Fund legislation stipulates that the fund is to receives its income solely from a tax on production of lumber and chips. The Costa Rican Forest Fund enjoys income from a tax on wood, among other sources.

Sometimes the tax is more in the nature of a fee for service and the fund is a mechanism for assuring that the fee is spent for the promised service. For example, the government might levy a small property tax on forest land whose receipts go into a fund for combating fires, insects, or diseases, supporting forest research, or doing other tasks that benefit a broad class of forest owners. From an economic viewpoint, such a fund tends to internalise the external benefits of these activities.

The Norwegian Forest Fund returns service to the landowner in direct proportion to the income for the Fund produced by harvests on the owner’s land. In fact, each parcel of land producing forest products has a legal claim on the Fund.

Many laws creating general forest funds provide that amounts collected during forest-related law enforcement go into the forest fund. If the fund goes to further the work of the enforcing agency, this creates an institutional incentive for stronger enforcement.

Fines and penalties are the obvious source of such income, but there are others. The law can allow the government to seize and eventually sell illegally harvested forest products, with income from sales going into the fund. The law may also allow the government to seize forest products if the ownership is uncertain, as when logs lack registered brands or hammer marks. If the government cannot determine ownership, it may sell the forest products, and the law may direct that the proceeds go into a forest fund.

Some nations assess damages for injuries to forests. Uruguay law requires persons who damage the public forests in violation of protective laws to pay the state damages. These payments go into the Forest Fund. Similarly, the Dominican Republic includes in its fund damages resulting from violations of forest laws.

Donations and grants are commonly listed as potential sources of fund income. Channelling donations and grants through a fund may help assure the donor that the recipient will spend the money for the intended forest use. A fund may provide better accounting and oversight procedures than the general treasury would allow. Also, when the donation stands apart from general government funds, it may be easier to determine administrative costs and overhead and so to judge the effectiveness of the grant. The vast majority of funds reviewed in this study accept donations or grants.

Some funds are set up either as a pool of capital designed to support private forest management or as a mechanism for assuring that private participants in management of public or community lands share in the market benefits. In either case, the fund will typically earn income specifically from projects it supports.

The Oregon Forest Resource Trust, described above because its initial capital came from general revenue, also serves as an example of a fund dependent on money from projects. Some beneficiaries treat the Trust as a lender. The return to the Trust will be the interest and eventually the principal of the loan. Some beneficiaries allow the Trust to become something like a limited partner in the forest as a business. The beneficiaries agree to give the Trust a share of any income that the forest produces. Beneficiaries also give the trust a narrow but discrete ownership interest in the forest: the Trust assumes the right to sell any carbon sink credits generated by the project.

In the case of a fund supporting community involvement in forestry, the fund may get a set fraction of all income generated by the land that the community helps manage. The fund would use this income to support the community’s management efforts. A related sort of fund, beyond the scope of this study, would channel some or all of this money to the community without requiring that it be spent on land management.

The law may allow a fund to raise money by selling bonds to the public. Costa Rica offers an example. Typically, a fund would have to redeem these bonds with interest, usually using income from other fund sources. The law might also guarantee payment of the bonds through the general treasury if the fund fails to meet its obligations.

The Uruguay Forest Fund may accept the proceeds of lawful loans and financial instruments.

In some cases, forest funds get support from activities that are not tied to sale of forest commodities, but that try to capture some ec onomic values of forests not captured through the private market. For example, a country might divert income from tourist entry fees or hunting permits. Costa Rican law allows the country to recoup the value of the environmental services that forests provide from those that take advantage of the services. The Dominican Republic’s forest code also calls for its Forest Trust Fund to receive income as compensation for environmental services. Croatia’s fund law calls for a small general income tax to recoup the value of general forest benefits.

In a similar vein, a country may tax a polluting industry and divert the proceeds into a forest or similar fund as a general sort of mitigation. For example, in the United States royalties from the leasing of offshore oil rights go into a fund for purchase of public lands.

The above discussion has touched on some possible uses of funds. Below is a more complete discussion of fund use.

A common use of forest funds is to support activities of the government related to forests. The plainest of fund laws may not specify the uses of the fund any more precisely than that. For example, a single clause in the Mozambique Forest and Wildlife Act creates a forest and wildlife development fund without specifying its uses. In these cases, a subsequent decree, regulation, action of the parliament, or decision of the appropriate minister will ultimately determine the uses of the fund.

Most laws are more specific as to uses. The law may allow the government to use the fund in the administration of the forest bureaucracy. Costa Rican law sets aside fifteen percent of income from the tax on wood going into the Forest Fund for the general use of the State Forest Administration and smaller percentages for specific uses within the Administration. Bulgaria’s Concessions Cost Recovery Fund is intended to cover the costs of granting and administering concessions. Norway allows interest on the fund to go towards internal fund administration.

Public land management is another common use of funds. The law may target funds to specific aspects of management. For example, a fund might reserve a portion of the income from government concessions for reforestation or other management activities that do not immediately generate income. The Lithuanian Forest Fund exists basically to fund public forest management. The law allows the government to use the fund for a variety of activities, from reforestation to road building and preparation of timber sales.

Public land purchase is another possible use. The fund is used to buy lands on the market or through eminent domain. Some of the United States funds noted above are limited to land purchases.

Funds may support government activities in aid of forest-based industries. Zambia has a forest development fund that promotes the wood processing industry. A fund can be used to promote markets for local forest products. That might include advertising, market research, or export assistance. The Costa Rican forest law recognises modernisation of forest industries and markets as a purpose of the Forest Fund.

Funds may also support forest research and public education efforts, including forest extension programs. The Forest Fund of Laos is noteworthy in this regard, as the law expressly allows it to be spent to educate the public about forest laws and policies as well as about technical matters. The Tanzania Forest Trust may be used to support general public education, forest research, and also public participation in forest policy debates and environmental impact assessment. The Senegal fund may be used for public education about protection and conservation of forests.

Governments can use funds to provide general services of benefit to private forest landowners. One of the most common uses of funds is to give general support for afforestation and reforestation, though it is often not clear from fund legislation whether the fund is to be used for government planting programs or for directly supporting private planting (see below). Vanuatu’s fund is used for plantations and other afforestation and reforestation works. The Solomon Islands Forest Trust supports tree planting and reforestation. Mauritania’s fund can spend on reforestation and regeneration. Government services to landowners may also include fire, insect and disease suppression. The Senegal fund authorises spending on fire fighting, for example. For the convenience of landowners, governments may run forest nurseries or collect and distribute tree seeds. Costa Rica again is an example.

National funds may also serve as conduits to distribute funds to sub-national governments. These would then be able to use the money for those forest-related activities allowed under the law establishing the fund. The Rural Fire Disaster Fund in the United States supplies state and local governments with emergency funds for forest fire fighting when their own funds are exhausted. In Costa Rica, ten percent of the income that the Forest Fund receives from the tax on wood is earmarked to support forest protection programs in municipalities.

Many funds directly pay for private land management. As mentioned above, some funds finance private reforestation or afforestation efforts. Funds may also pay for management planning. Where capital is limited among the target landowners, the fund may help pay for plan implementation. In the United States, the Maryland Woodland Incentive Program is an example of a reforestation fund. The Norway Forest Fund also goes for the benefit of management activities on private lands. Costa Rica’s National Fund for Forest Finance (FONAFIFO) provides assistance to small and medium-sized landowners. Devoted to improvement of both forests and pasturelands, Tunisia’s fund appears to focus on collective and private lands outside of the state forest domain.

Less common are funds that make direct payments to landowners for non-commodity uses. Costa Rica, for example, pays landowners for non-commodity benefits from money raised through its environmental services taxes. These payments at present are tied to reforestation efforts. The Chesapeake Bay Trust (Maryland USA) makes payments to landowners for reforestation designed to improve water quality.

Besides payment to individual landowners, funds may assist other private bodies. Funds may go to promote forest-based manufacturing by providing capital for modernisation, marketing, or other private business activities.

In areas with social or communal forest landholdings, national funds may make direct payments to forest communities. The Lesotho Forest Fund can make payments to community forest holders. The Senegal fund can provide subsidies to collectives and local organisations. Zambia has a Joint Forest Management Fund supporting local level activities. These kinds of funds may pay only for forest management or they may represent rewards for good past management by the community, which the community can spend as it sees fit.

Funds can also go to non-governmental organisations (NGOs) that support sustainable forest management. These typically would be earmarked for the benefit of particular projects with which the NGO is involved.

Some fund legislation includes provisions to promote the integrity of the fund. Note that funds may also be subject to general government or corporate transparency, record-keeping, reporting, or auditing requirements. Here we take note only of special integrity provisions written as part of the legislation creating or governing the fund.

One institutional structure that promotes integrity is an independent advisory board that reviews fund plans and spending. Gambia’s National Forestry Fund Committee, mentioned above, is an example. In the Solomon Islands, the Minister must consult with the national Forestry Board before approving spending from the Forest Trust.

Another is a requirement that fund administrators keep records and prepare an annual accounting of the fund’s actions. For the Lesotho Forest Fund, for example, the Principal Secretary of the Ministry of Agriculture must keep accounts tracking the Fund’s operations and submit an annual report to the country’s Accountant General. In Burkina Faso, the fund must be administered according to the rules of public accountancy , and the fund accountant must submit an annual report to the chamber of accounts in the Supreme Court.

Some laws require annual audits for funds. Again, Gambia requires the Director of Forests to arrange annual audits of local community forest funds. Lesotho requires an annual audit of the national fund by the Auditor-General.

Promoting transparency and integrity of fund use is of obvious interest to outside donors. Because of this, the topic of fund integrity is discussed in greater depth in Part V below.