Forestland resource ownership and valuation

The issues covered in this section deal essentially with ownership of forestland and the determination of its value. Issues related to "economic rents" inherent in forestlands are reviewed, as are issues related to their realisation and distribution. Immediately below (Table 3.1.1) are presented harvest statistics for Latvia.

Valuation should be of no less concern to state owners or forestland resources than it is to private owners. Neither is interested in foregoing any of its potential revenue. Each is interested in maintaining its various benefits at their highest level – including that of timer sales.

Issues relating to timber tenures are often amongst the more contentious of those which state forest authorities must deal with. Other ownership issues include the exclusivity of user access, the enforceability of the owner/ user’s claim, as well as its divisibility and transferability. Aspects of these issues are familiar to Latvia – having been taken into consideration in the post-independence redistribution of land.

The state’s sovereign right permits it to retain exclusive title to all potential benefits of state forest land resources – though legitimate access is allocated to other users through a variety of short-term and long-term mechanism.

In Latvia’s case, the state also reserves the right to prescribe post-harvest reforestation on private forestlands. This means that, in respect of forestlands, the state assume both - a public sector "governance" role, and a private sector "entrepreneur’s" role. It is the potential conflict surrounding these divergent interests that constitutes one of the major issues for the ROL/FAO project.

A high level and public debate in Latvia currently suggest that there exist a potential perception of conflict between the state in its role as a forest landowner and in its role as an enforcer of forest practices and legislation. Suggestions also include consideration of assigning these responsibilities to separate state structures.

In well developed mature forestry constituencies a combined ownership / enforcer role may be far less problematic – if at all. This is less the case where there exists a legacy of a command economy, and an historically lower level of responsible, accountable, and transparent governance and management. Latvia’s situation precludes the continued assumption of the dual management-enforcer role in the short term at least – though, in the long term other options exist.

The level of funding on non-wage expenditures on state owned/managed forests is far below what is required for their efficient management and exploitation. Table 3.1.2 gives funding levels for state forest authorities for this decade.

It is widely accepted that current state budget allotments to the Forest Service and Forest Department have been inadequate for a number of years. Ultimately, inadequate funding compromises efforts to maximise the productivity of forestlands. The state responds to criticism on this point by reference to the inadequacy of its revenues from forestry activities. Private forest interests, thereupon, point out that the state is indifferent to industry’s declared inability to fund similar activities – at the state’s insistence that this is part of tenure arrangements.

Independent of its ownership, forestland should be viewed as a capital asset – yielding many benefits quantifiable in many ways. As stated earlier, it is the extent to which these benefits are tangible and quantifiable that often determines whether or not they are ultimately considered in forestland valuation calculations. Timber values are easy to quantify. However, many benefits deriving from forestland are not easy to even identify, let alone quantify - for example, that of soil and water conservation. At least one glaring consequence of the above is the absence in most nation’s System of National Accounts of figures to account for the depreciation (and appreciation) of forestland.

For a number of reasons the natural capital that is the forestland base of Latvia is not maximising its yield. Operation and budgetary issues feature prominently in the cause. However, issues related to crop establishment, thinning and rotation age at harvesting also warrant review. Decisions on these crop management parameters must be based upon their impact upon harvest yields and values – a strategy that is still to be more effectively integrated into forest management in Latvia.

The actual practice of forest management in Latvia can be improved by adopting more appropriate practices – especially in key areas such as:

stand growth and yield modelling

timber allocation and stumpage determination mechanisms

harvest development planning

forest and forestry information management systems.

A clearer understanding of the relationship between stand characteristics and end product quality and value must guide forest management and harvesting development decisions. There is limited scope for reliance on intuition and local traditions in attempting to optimise the magnitude and distribution of benefits from Latvia’s forestlands. Historical forest management practices must be replaced with approaches better matched to a market economy. Latvia will otherwise be less than optimally placed to successfully compete in these markets.

Perhaps the most striking and unsupportable artefact of the former command economy is the insistence upon incorporating stumpage rates directly into higher level governance instruments.

The lengthy process of legislative change invariably eliminates any ability to adjust stumpage rates in a timely manner in response to changing market circumstances. The consequences of this include:

in cases where end product selling prices fall

i) above normal state revenues at the cost of producers / sellers

ii) below "normal" profits for producers / sellers

in cases where end product selling prices increase

below normal state revenues in favour of producers / sellers

above "normal" profits for producers/sellers

Furthermore, in Latvia stumpage rates are currently established largely independent of any link to rational pricing principles or market concepts. From an economic perspective, this practice can not be rationally justified.

Ordinarily, the ministry responsible for forests, as managers of the state’s (public’s) forests, authorises the sale of forest stands to timber developers, (operators, loggers, contractors, etc.) - for a fee. The fee is frequently related to – and often exactly equal to – an "economic surplus" or "residual value" accruing to the conversion process (tree to log). This is generally determined by the following formula:

Fees for the use or harvest of any forest product - wood or non-wood - can be calculated on similar principles.

Stumpage collections usually become part of general revenues and are managed for the state by their financial ministries. They are generally not "earmarked" for specific forestry purposes, but disbursed through normal state budget processes.

Social, political and economic priorities will determine the ultimate redistribution of any government revenue collections. State budgets will ordinarily determine the amount that eventually returns to the Ministry of Forests. This funding is then available to manage the state’s forests.

Redistribution of revenues collected from an "economic surplus" (stumpage or other user fees) can take many forms. Fundamentally, an efficient and equitable approach to collecting and redistributing forestry fees recognises that many stakeholders may have legitimate claims to a share of the benefits of the republic’s forest resources – and should therefore be funded out of collected surpluses.

Unless a rational approach is used that provides "normal" returns to legitimate claimants (state, owners, labour, etc.) markets will become distorted, efficiency will be compromised, and economic rent distributions will remain inequitable.

Workers should receive fair wages. Licensees should receive a fair ("normal") profit on their invested capital - usually measured as the profit realised by "an operator of average efficiency". A fair profit or "normal profit" recognises the operator’s realistic costs and an amount that essentially represents the payment to his own entrepreneurial inputs for assuming the risks involved. Operators that are more efficient will realise slightly better returns - less efficient operators have lower profits and in some cases may succumb to business failure.