SOME GUIDING PRINCIPLES UNDERLYING THE DESIGN OF ANY FOREST REVENUE SYSTEM

As already noted in Section 1, wherever it is not possible to use competitive processes to establish forest charges, it is necessary for the forest administration to calculate and set charges. Thus, from a purely economic point of view, the charging system should attempt to replicate the prices that would be paid if forest products were sold competitively. However, the forest revenue system used in a country is also often designed to meet a number of other objectives. In general, forest revenue systems are usually designed to meet the following four different types of objectives:

Economic objectives. Forest charges should promote efficiency in the use of the forest resource and in the use of all other resources involved in the forestry sector. The system of charges should not introduce distortions into the economy that reduce economic efficiency overall or are counter to any other economic objectives of government policy. The charging system should also aim to minimise the costs of implementation (to both the government and the private-sector).

Forestry policy objectives. Forest charges should reflect the overall objectives of forestry policy, i.e. they should encourage forest concessionaires to carry-out activities that meet the objectives of forestry policy and discourage activities that work against the policy. In the case of Zambia, the forest revenue system should also accommodate the new policy of sharing revenues with local communities.

Institutional objectives. The forest revenue system should be designed so that the forestry administration has the capacity to implement revenue collection and monitoring activities and, in this particular case, it should provide sufficient revenues to support a self-financing forestry administration.

Political objectives. Forest charges are often seen as a form of taxation and should therefore, as with any tax system, have the broad support of the people and be viewed as fair. Thus, the charging system should take into account the impact of charges on different groups within the sector and should reduce the scope for evasion and corruption. It should also be implemented in a way that is open and transparent and is easily understood by all stakeholders.

In many countries in the world where forest charges are set administratively, the forest revenue system in place usually fails to meet one or more of these objectives. In some cases, it fails in all four areas. Often, the forest revenue system in a country looks excellent in terms of meeting economic and forestry policy objectives, but implementation is very weak. Recent debate has generally come to the conclusion that this often occurs where is implementation is difficult for institutional or political reasons.

It is likely that the revised system of forest charges that is finally chosen in Zambia will have to meet all four of the above objectives to some extent. Therefore, the remainder of this section will briefly describe why it is so important that these objectives are met and examine how the forest revenue system can assist in this process.

The two main economic objectives that a forest revenue system should meet are economic efficiency and administrative efficiency. To a certain extent, these objectives also overlap with some of the other objectives that the system should meet.

Economic efficiency

One of the most important concerns about forest charging policies is that, if the policies are not well designed, they can encourage low levels of efficiency in roundwood and forest product production. This leads to waste and the misallocation of resources (in terms of not only forest resources, but also labour and capital). Deficient charging policies can also lead to incorrect land-use decisions, which can subsequently have negative social and environmental consequences as well.

Examples of some of the detrimental effects of poorly designed forest charging schemes, include:

low charges reduce the incentive for forest concessionaires to reduce production costs to a minimum;

charges on only the volume removed from the forest discourage concessionaires from maximising production from each area of forest; and

low charges also reduce the incentive to improve the marketing of roundwood.

Not only are these effects wasteful, but they encourage the development of a processing sector that is too large (i.e. if roundwood is cheap – more companies want to use it). This discourages efficiency in roundwood utilisation in the processing sector and reduces the incentive to improve the marketing of forest products. It can also distort capital investment towards a poorly performing forest processing sector, when some of this capital would be more profitably employed in other sectors of the economy.

In terms of land-use policies, if forest charges are too low (or are unevenly distributed), the forest resource appears to be of little value. This reduces the incentive to manage forests for production and gives a greater incentive to either set them aside for conservation purposes or to convert them to other land-uses. Thus, where forests are undervalued, too much forest will be converted to other land-uses (such as agriculture).

These issues are critical because they have the potential to distort the economy and trap economic development into the pursuit of low-value activities supported by the wasteful use (and eventual depletion) of the forest resource. At first glance, low revenue collection (due to low levels of charges and low levels of collection) would seem to be a major issue for charcoal production in Zambia. Industrial wood production (i.e. for sawnwood and panels) appears to be relatively less important here than in some other countries, although the above problems probably also apply to this part of the sector as well.

Administrative efficiency

There are three main costs of administering any forest charging system:

the cost of calculating the charges that are due;

the cost of collecting these amounts; and

the cost of policing the system (i.e. detecting and pursuing any individuals that have not paid the charges).

Generally, the cost of administering a forest charging system increases with the complexity of the system. If additional complexity does not bring in higher levels of revenue, then the overall administrative efficiency of the system goes down.

However, there is a major trade-off between administrative efficiency and the pursuit of other objectives within the system. It is quite common for forest revenue systems to be complex not because the complexity is expected to increase revenues, but rather because the complexity is designed to meet the objectives of forestry policy. The most common example of this trade-off occurs in the choice of where to assess forest charges. Assessing charges in the forest is generally much more expensive than assessing them on roads or at the mill. However, assessing charges at the roadside or in the mill does not encourage the monitoring agents to get into the forest to see what is going on.

Given the relatively small size of the industrial wood production sector in Zambia, the administrative cost of assessing charges from this sector should be relatively small. However, this will depend upon the extent to which policing requires activities in the field or can be concentrated on transport routes. The presence of a large number of small charcoal producers would suggest that a relatively simple and low-cost method of assessing and collecting charges should be identified. Certainly, the involvement of local communities could also help considerably here.

Economic efficiency is mostly encouraged by setting the right overall level of charges, although the structure of the charging system is also important. However, in terms of encouraging forest concessionaires to follow forestry policy, it is usually the structure of the forest charges within the revenue system that is more important.

The relationship between forest charges and maximum sustainable yield

In terms of the production of forest products, the main aim of forestry policy is to ensure that the value of production of all products is maximised while, at the same time, the forest is regenerated adequately so that another harvest of products can be obtained at a later date (maximum sustainable yield). This is promoted through a combination of forest management regulations, the terms and conditions attached to forest concession or harvesting licences and the forest revenue system. In combination, these three factors largely determine the way that forest management and harvesting is planned and implemented by the private-sector.

In order to maximise sustained yield, forest management and harvesting is usually structured on two levels. Firstly, at the broad level, the area of forest that should be cut in any given year has to be identified and organised. This is usually done by first identifying and excluding any areas that should not be harvested within the forest concession (e.g. for watershed or biodiversity protection), then by arranging the forest concession area into annual cutting areas or harvesting coupes. Following harvesting in one coupe, the coupe is closed to allow the forest to regenerate. The period required for regeneration will vary from species to species, but is usually determined by the overall growth rates of the majority of the commercial species.

At the more detailed level, once the appropriate area and location of felling coupes has been determined, forest management should then aim to maximise the production from each felling coupe, while leaving the forest in a condition in which it can recover. This aim is mostly enforced through harvesting regulations, but it can also be encouraged (or, more importantly, it is sometimes discouraged) by the structure of charges in the forest revenue system.

Harvesting regulations usually specify a minimum cutting diameter, so that some smaller trees will be left behind to grow into the next crop. They may specify tree species that should not be cut and the type of harvesting operations that will be allowed in the forest. They sometimes also specify particular procedures or types of equipment that should be used for harvesting.

The revenue system has a more indirect effect on whether production from felling coupes is maximised or not. For example, volume-based charges on their own do not encourage maximum production. Rather, they encourage the forest concessionaire to select only the most valuable trees. This process (called "high grading") can lead to gradual degradation of the forest over time. Area-based charges encourage the use of all commercial trees within a felling coupe, but they are difficult to implement because of the variability in commercial tree stocking within the forest. Thus, area-based charges are usually combined with volume-based charges that can account for some of this variability.

Another problem arises with the calculation of volume. Ideally, volume-based charges should be assessed on the standing volume of commercial trees that are present in the felling coupe. However, this requires detailed forest inventory information and such a system is very expensive and difficult to monitor. Thus, volume-based charges are usually assessed on the volume actually cut or removed from the forest (and, it is hoped, if there is also an area-based charge, it will encourage the maximisation of production).

With volume-based charges, it is also possible to account for the different value of different species, by setting a higher charge for more valuable species. Area-based charges on the other hand, can account for differences in the profitability of forest harvesting operations due to distance from markets.

There is currently no area-based charge in the forest revenue system in Zambia. Discussions with forest concessionaires and MENR staff suggested that a certain amount of high grading may be taking place in the forest, so this is something that should be considered in the appraisal of the forest revenue system.

Revenue sharing

An important recent initiative in Zambia is the proposal in the 1999 Forest Act to introduce revenue sharing with local communities into the forest revenue system. This should have major benefits in terms of encouraging local communities to protect and invest in the forest resources surrounding them. It should also have an impact on the distribution of income within the population, but much will depend upon the arrangements that are eventually chosen in terms of the amount of revenues that will be shared and the processes that will be used to implement this policy.

Very careful attention will have to be given to the effects of revenue sharing on income distribution, to make sure that the policy has the desired effect. It must be remembered that every additional Kwacha that is raised and either given to the government or shared with the community, will be a Kwacha that somebody somewhere else will have to pay, either in terms of lower income or profits (producers and traders) or higher forest product prices (consumers). Thus, increased revenue collection, even with revenue sharing, may not necessarily lead to desirable changes from the socio-economic viewpoint.

For example, Figure 1 shows three possible outcomes of the policy. In the first, government revenues are increased and are shared with communities and the cost is borne by traders. In the second, government revenue increases and traders’ income falls. Some revenue is shared with communities, but producers are paid less for their product, so the overall benefit to communities does not rise. The last scenario presents a worst case scenario. Government revenues increase, benefits to communities do not change and traders use the policy as an excuse to raise retail charcoal prices. Therefore, traders also benefit at the expense of urban consumers.

The eventual outcome of who wins and who loses from increased revenue collection and revenue sharing will depend upon how this policy is implemented and the relative bargaining strengths and weaknesses of individual stakeholders.

The main institutional objective of any forest revenue system is to provide the Government with revenues, which it can then spend on its policies and programmes. However, it is also important for the system to be within the capacity of the institution collecting the charges.

Revenue-collection and self-financing

In theory, from the point of view public sector financial management, there is no good reason why the collection of government revenues and government expenditure should be linked within one sector or Ministry. Revenue collection should be based on the value of the resource being taxed (or ability to pay, in the case of general taxation), while government expenditure should be determined by the net benefit from public investment projects (or need in the case of welfare payments).

Indeed, harvesting of public forest resources (a commercial activity) should cover the cost of monitoring and control and leave a significant amount of money left over for the government to use to promote its other policies and programmes. These could be in the forestry sector, or they could be in another sector. How they are spent across sectors should be determined by the democratic political process. The forestry sector could be a net contributor to government finances or a net beneficiary, depending on the commercial value of the resource and the value of non-commercial benefits requiring investment in public policies and programmes.

However, in reality, this process appears to have failed in many countries. Often, forestry administrations are not effective at securing general government funds to cover the cost of implementing forestry policies (even where they have high benefit to cost ratios). In some cases, they do not even obtain enough funds to effectively monitor and control commercial exploitation. In other words, a lack of public financing may actually results in governments losing significant revenues. These general failures in public finances have led to the recent trend towards the establishment of self-financing and autonomous forestry administrations in a number of countries.

Given the intention to create a self-financing forestry administration (the Zambia Forestry Commission or ZAFCOM), it will be necessary to ensure that the level of revenues collected (net of any revenue given back to communities) is sufficient to cover the costs of this institution. At the very least they should cover monitoring and control costs and, in the longer term, they should cover the cost of other public-sector forestry activities such as extension and conservation.

Capacity to understand and implement rules and regulations

The second institutional objective for any forest revenue system is that it can be implemented by the forestry administration. Funding is, of course, a major factor influencing implementation. However, it is also important for the forestry administration to be able to understand the system, enforce it fairly and defend it when criticised by other stakeholders. To some extent, the ability to implement revenue collection is determined by the quality of the laws, rules and regulations supporting these activities.

The last set of objectives for a forestry revenue system concerns the political acceptance of the system. Forest revenue systems often fail this test (and are, consequently, poorly implemented) when the system is not transparent or appears to favour one group over another.

Good governance

Good governance covers a number of issues such as: arriving at policy objectives through the democratic proce ss; openness or transparency; and accountability of the forestry administration. Specifically, in terms of the forest revenue system, good governance includes the following:

the forest revenue system should, as already discussed, support other objectives of government policy wherever it has an effect on them;

stakeholders should be consulted and informed about forest charges and should be convinced that they are reasonable and fair;

the system should not be ambiguous and the forestry administration should have the capacity to implement the system, so that all stakeholders are treated the same according to the law;

information should regularly be made available about the performance of the forest revenue system and the forestry administration; and

the forestry administration should be held accountable for any failures in implementing the system (and, of course, should be rewarded when it is implemented well).

The forestry administration in Zambia would appear to be facing challenges in some of these areas, due to a lack of capacity.

Equity

The other major consideration in the design of any forest charging system is the impact of the system on different groups within the forestry sector. A number of different stakeholders currently harvest or trade in forest products in Zambia, including: large and small-scale forest concessionaires; individual commercial producers of charcoal and NWFPs; timber traders; and local communities. Some of these stakeholders only produce or trade in the domestic market, others are active in both the domestic and export markets and some just use forests for the collection of products for their own use.

These stakeholders all face different levels of costs and benefits for their use of the forest resource. Charging policies can be used to try to favour one group over another. However, such policies often lead to other problems, such as:

the policies often do not benefit the groups that they were originally intended to benefit; and

distortions in prices that arise from such policies may lead to inefficiency rather than to benefits for the groups that are supposed to be supported.

As a rule therefore, a policy of equal charging for all producers is often the best policy to follow. Other explicit measures can be used to support particular groups. The one exception to this might be an exemption from charges for production for personal use. As already noted, the proposals for benefit sharing will result in a change in the share of costs and benefits between stakeholders and this is a probably a better way of trying to redistribute costs and benefits rather than a differential charging policy.