What this chapter covers:
Forestry contractual arrangements are highly flexible. They can be designed and written to convey a diverse array of property and use rights, as well as obligations. The contract terms provide the opportunity to both design property rights and to circumscribe or constrain the rights granted. The types of property rights and contract constraints on rights are the subject of the current chapter.
Forest utilization contracts can provide a range of rights to timber, non-timber forest products, harvesting or use rights (for hunting, collecting, etc.) or use rights to other forest uses (water rights, ecotourism leases, etc.). Procurement contracts include obligations by the contractor to provide goods and services for public forests, for services such as forest inventory, road construction or maintenance, forest protection, log measurement, forest monitoring, forest auditing, etc. Both types of contract may be combined in a single contract that includes both rights and obligations. Forest management concessions, for example, combine forest utilization and goods and services procurement contracts. They provide rights to timber, but require the concessionaire to undertake a variety of forest management activities.
This chapter first reviews key characteristics and dimensions of property and use rights. The chapter then surveys some major types of contract.
Property refers not to objects, but to the rights the owner of these rights has in relation to the rights of others. Property is established in a society and is often expressed in laws or customs that define the conditions under which the owner has these rights. Property therefore represents a bundle of rights. The bundle may be big or small, and may contain a variety of different rights. Forest contracts convey property rights to forest outputs or forest uses. Contracts may be written to provide a wide range and variety of rights, and may be very flexible in terms of the bundle of rights included.
The nature and extent of property rights establishes the power over a resource that the owner of the rights (a company, individual, community, or government) may exercise, but also limits or constrains these rights. A clear understanding of this concept and recognition of the limits to property rights is important for three reasons. First, even the government does not have absolute unconstrained property rights over a resource. The government’s rights and powers are limited by the constitution, by statutes, by civil and common law, and by customary laws of the country. If the government is not clear in its understanding of the extent of its own property rights it can end up granting property rights to others over which it does not have the authority. The second reason is that, in deciding what to contract and in designing contracts, a clear understanding of the dimensions of property rights is important to the successful design and implementation of forest contracts. Third, a lack of understanding of property rights can be an important source of conflict between the government and contractors and between contractors and third parties.
There are several essential dimensions to property rights: exclusiveness - the scope and breadth of the holder’s interests or obligations; duration - how long the holder’s interests or obligations will last; comprehensiveness - the nature and breadth of the benefits or obligations to which the holder is entitled; rights to economic benefits and obligations - the extent to which the economic benefits or obligations are circumscribed or restricted (by laws and regulations); and transferability - the owner’s freedom to transfer those rights or obligations to others. These dimensions of property rights are described below. They are important to the successful design and implementation of forest contracts.
Exclusiveness refers to the extent to which the holder of the property may claim and secure sole use rights to the property, to the exclusion of others. The feasibility and power to exclude others (“third parties”) is a key dimension of property rights. It has important economic implications. Exclusiveness allows the holder of the resource rights to control access and therefore to charge for use of the resource, and to sell or market the products or services. Exclusiveness therefore allows market valuation and pricing of resources. Most forms of property rights in timber - timber leases, timber concessions and licences - convey exclusive rights to the timber to a single person or company. The holders of these rights do not have to be concerned about other users competing for the same resources, or interfering with their operations. However, these exclusive rights to the timber do not usually extend to other forest products or other forest land uses, such as rights to non-timber forest products, hunting or gathering rights, rights to the land itself, or rights of access for these other uses.
The degree of exclusiveness can vary across a spectrum. At one extreme, traditional freehold tenure usually provides the owner with a strong legal right to protect his or her interests against any intrusion by others. At the other extreme, with open access resources everyone has a right to use the resource, and no one has any right to exclude anyone else. Open access fisheries, open grazing lands, and woodlands open to fuelwood gathering are examples of open access resources.
Common property ownership refers to situations in which two or more people hold rights to the same resources. Often in common property ownership, the property rights are owned by the community, which collectively manages the resource, and allocates harvesting rights among its members. In many countries, aboriginal lands and resources are held by tribal groups under traditional and customary forms of ownership in which rights are shared by members of those groups under community established rules and traditions. In other cases, each common-property user is entitled to take a specific quantity or a share of the resource. Examples include certain types of water rights, grazing rights, and fishing rights that entitle their holders to specific quantities of the resource which is used in common with others. Timber harvesting rights can sometimes take this form, where several users are authorized to harvest volume quotas of timber in a public forest, or a share of the annual allowable cut, without exclusive rights to any defined tract.
Exclusiveness of rights is an important factor to consider in the design of contracts. The exclusiveness of users’ rights can have a profound influence on the way contract owners use and manage resources. If users compete for the same resources, each is likely to exploit it inefficiently. In their effort to protect their own share or to increase their share at the expense of others, they will tend to exploit the resources too rapidly. No one will have an incentive to conserve reserves for the future, or to invest in future growth and yields, because they cannot expect to capture the benefits of their efforts. Such distortions in resource use are conspicuous in many open access fisheries and grazing lands, and in many open access forest resources around the world exploited for fuelwood and charcoal production. However, contract conditions can often be written to create exclusive rights that will encourage efficient use of the resource and its sustainable management.
The duration of the rights, the length of time over which the rights extend, also has an important impact on the resource users’ behaviour. Private freehold ownership of land conveys rights in perpetuity. Leases and licences normally have a shorter, finite term. The duration of property rights is important because it determines the extent to which the holder will take account of the future impact of his/her actions. If the rights over a forest extend for a long period, the holder will consider the relative economic advantage of harvesting now or in the future, as well as investment in silviculture and forest management that yields benefits over many years. But if their rights will expire after a brief period, they will disregard future benefits that they may not capture.
For plantation forestry, because forest growth and silviculture yield returns over a longer time, the duration of rights over forest land is especially important. Unless their rights extend over the full period needed to grow forest crops, those who harvest timber will lack adequate incentives for planting, reforestation and forest enhancement.
However, long-term tenure does not guarantee sustainable forestry. For uneven aged natural forests and tropical natural forests, long-tenure may not be sufficient to ensure sustainable forestry. Instead long-term secure tenure may encourage rapid depletion of the forest (Gray, 1997). Because such forests grow slowly, private investors will be more inclined to mine the forest and reinvest the profits elsewhere at higher returns. For tropical natural forests and other slow-growing forests managed under uneven-aged silviculture, shorter term tenures, renewable upon demonstration of sustainable forestry practices, may provide better incentives for forest management (Gray, 1997; Boscolo and Vincent, 1998).
Comprehensiveness covers the extent that property rights give to the holders rights to the full range of benefits from the forest. For example, when someone holds a tract of forest land under private freehold ownership, they will usually have rights to the full range of values generated by the use of the land for timber, agriculture, recreation, water, minerals, and so on. If their rights are in the form of a licence to cut timber, however, they are usually restricted to the benefits of timber harvesting alone. Each form of conveying property rights (contract) provides a particular degree of comprehensiveness, somewhere on the spectrum ranging from all the attributes of the forest to only specific and narrowly defined rights.
The extent of property rights has important implications for the way contract holders will utilize and manage a forest. When contract holders have full and comprehensive rights to the forest, they will manage it to generate the most financial values to themselves, balancing returns from one forest output against another, balancing returns from timber against the other marketable outputs such as fuelwood and other non-timber forest outputs, water rights, etc., which they can sell. They will still ignore public, collective and non-market forest outputs, which do not yield financial returns to them, even though these outputs may be highly valuable to society.
Conflicting interests can easily arise if the system of contractual arrangements allocates duplicate or overlapping rights to the same resources. When all these rights are held by one party, conflicts will not arise. The holder can choose the most financially advantageous balance of uses. When rights to different forest resources and forest uses are held by different parties, conflicting users can be reconciled if the values are marketable and can be traded freely. For example, if the holder of water rights is threatened by the interests of the holder of timber rights, and the threatened water value exceeds the benefits of logging, the holder of the water rights could buy out the timber rights, to the advantage of both and to society as a whole. As a result, the forest will be put to its highest value use. However, where some forest values are not priced, cannot be traded, or are not well defined, beneficial transfers will not be possible. In that case, conflicts will remain and governmental intervention and regulation will be required to resolve the conflicts.
Jurisdictional problems between governments can sometimes also cause problems. For example, if provincial, state or local governments have authority over timber, and the federal government has authority over fish or wildlife habitat, serious conflicts can arise, compounding the confusion over resource rights.
The extent to which the holder of forest rights is able to realize the economic benefits of these rights is another important dimension of property rights. Forest rights are often constrained by forest regulations, or other government regulations, which will influence how the forest is harvested, utilized or managed. Regulations that affect the benefits from forest contracts include restrictions on the rate at which timber may be harvested, utilization rules that require the recovery of uneconomic logs, measures to protect environmental values, log export bans, domestic processing requirements, etc.
The transferability of property and use rights refers to the ability to transfer, sell or assign the rights to someone else. Transfers of forest contracts and use rights are often restricted. For example, the terms of temporary licences and forest concessions often restrict the licensees or concessionaires from transferring their rights to someone else, or require them to obtain government consent. Governments may use these controls to prevent undue concentration of holdings, or to prevent local or foreign monopolization of resource rights.
If forest rights are totally non-transferable, they will have no market value. Only the holders of the rights may benefit from them, and then only by using the rights themselves. Therefore, restrictions on the transfer of resource rights may impede the efficient use of resources. Those who can use the resources more efficiently or in more valuable uses will not be able to acquire the rights from less efficient users.
Divisibility of resource rights is a related efficiency issue. To take advantage of economies of scale, changing economic circumstances and opportunities, resource users must be able to adjust the size of their holdings of resource rights. Governments often prohibit the subdivision of resource rights such as forest leases and licences. They may require maximum and minimum size leases or licences. Although there are many sound forest management or administrative reasons for this, these restrictions can nevertheless inhibit the efficient division or amalgamation of forest contracts.
A final and important characteristic of property rights is the quality of title and security of the rights, and the ability of the holders of the rights to ensure their rights are respected and protected from encroachment by others. The security of property rights is important because it affects behaviour. Insecurity of rights discourages sustainable management and conservation of forest and long-term investments.
The security of property depends on the legal form of the property rights, and on the government’s institutional and legal framework. Different forms of property rights provide holders with various levels of security of those rights. Freehold property owners usually have a strong legal basis for security and the means of deterring others from interfering with their rights. Those holding rights in the form of forest licences and leases issued by governments often have lesser protection. They have security of their rights with respect to the government that issued the licence or lease, but not with respect to third parties.
Another source of interference could be the government itself in legislating changes to conditions, expropriation, changing regulations, introducing or changing taxes or tax rates. Some countries protect property rights and governments provide compensation for encroachment, but many countries provide no protection.
The six characteristics of property rights have important implications for the way that resources are treated by those who hold the rights. Exclusiveness, duration and rights to the economic benefits obviously strongly influence the holder’s incentives to conserve and manage the resources over time, and to invest in their continuing production and enhancement. Comprehensiveness influences the users’ taking into account the impact of their actions on other resource values, and to search for the most valuable combination of uses. Transferability enables resources to be reallocated to those uses and users that can make the best use of them. Holders of property rights are influenced by the quality and security of their rights, which depend on the above characteristics, as well as the legal form that the rights take.
Because these dimensions of users’ property rights affect the way that forest resources are used, they also affect the value of those forest resources. Two factors affect the value of property rights to forest resources. One is the inherent physical and economic properties of the resources or goods over which the property rights extend. The other is the extent to which the property rights enable the holder to realize these values. Property rights to valuable resources will be worth little if the rights themselves are highly restricted or truncated. If the rights extend for only a short period, if the holder is restricted from selling the rights, or if the holder’s rights allow others to share in the resource, the value of the property rights will be correspondingly lower.
Users of forest resources often hold only usufructuary rights, rights to use resources belonging to someone else, usually the state. Examples of usufructuary rights include forest concessions, leases, licences and permits issued to private users for the use of public forests. These rights normally have limited duration, are limited in rights to a specific resource or use, and are transferable only under certain conditions. These licences and permits usually do not provide exclusive use rights to other resources such as non-timber forest products, water, etc. Often they are short-term, grazing leases, hunting and fishing rights, with terms as short as one season. Many are non-transferable, and most require payments to the government.
These six characteristics of property rights (exclusivity, duration, comprehensiveness, transferability, rights to economic benefits, and quality and security of title) are not the only characteristics of property rights. They represent six important aspects of property rights to consider in the design of forest contracts. These characteristics of property rights may be combined and packaged in resource utilization contracts to yield a diverse range of contract forms. However, a few standard contract forms have developed. These are described in the next section, along with some general comments on the various forms of goods and services contract.
The two major types of contractual arrangements used by governments in the management and administration of public forest lands – resource utilization contracts and procurement contracts for goods and services – serve very different purposes. The main focus in this chapter is on property rights and how they are embodied in resource utilization contracts. Procurement contracts for goods and services, which also play an important role in how governments execute their responsibilities and manage forests, are discussed briefly. They are covered in more detail in subsequent chapters.
The major forms of resource utilization contract and their characteristics are summarized in Table 6.1 in terms of the six dimensions of property rights discussed above. They are listed in declining order of their completeness of the property rights. The first one, freehold property rights, is included for comparison.
Contractual arrangements may be designed to fit a variety of conditions. The other three types of resource utilization contract in Table 6.1 represent the main basic types of contract. They illustrate the range of contracts that are possible. Many variations of each type of contract are possible by variation of the contract clauses included, and by variations in the wording and conditions included in those clauses. Because of this diversity in potential contract conditions, the commonly used names of these contracts in Table 6.1 are not always used consistently. The distinctions between contract types are often blurred as a result of variations in contract conditions, exclusivity, duration, etc. For example, the term “concession” is used for a variety of forms of contract, and even used sometimes to describe an outright grant of land. However, as used here, and most commonly, “concession” refers to contracts granting usufructuary rights on public lands (where public land is synonymous with government, state, or Crown land).
Traditionally leases or leasehold contracts convey to the lessee many of the rights of the freehold owner, the distinction being that they are conveyed for only a fixed term. However, leases today commonly incorporate a variety of restrictions, rights and obligations on the part of the contractor; unlike weaker forms of usufructuary rights, leases always provide for exclusive possession. Forest contracts referred to as “forest concessions” are typically in the form of leases (some are closer to licences). Various forms of forest lease and concession are widely used by governments in a number of countries around the world to grant rights over public forests. Usually they carry longer terms of ten to 20 years, or more, and are sometimes renewable.
Leases can be an appropriate type of contractual arrangement for the allocation of large forested areas where long-term tenure is required to attract large-scale potential forest developments, for example when large capital investments are required to develop the resources, or desired by the government to generate local employment. Investors may be unwilling to undertake large-scale investments in manufacturing facilities without long-term security of raw material supply. Long terms and large areas may also be required to generate interest on the part of the private sector if the resources involve large investments for development or access.
It is important to note that, as with all contracts, lease-holders must obey all laws, forest and other regulations that apply to the development project, the environment and forest resources involved. This also means government, or its designee (such as a third party forest monitoring and inspection or enforcement contractor), is responsible for supervising and enforcing the contract and applicable laws. This is perhaps obvious, but it is important to bear in mind, particularly when writing lease agreements where compatibility with existing laws and regulations must be ensured.
Types of contract termed licences cover a wide range of shorter-term forest rights. Technically, a licence gives the licensee permission to do something that would otherwise constitute trespass, such as cross or occupy someone else’s land. If the licence conveys a right to take products from the area, such as timber, fuelwood, non-timber forest products, game or minerals, it should more properly be called a profit a prendre (or “profit”). Licences that convey only a right of access to pass over the land are properly termed easements.
Table 6.1: Major types of resource utilization contract
Type of contractual arrangement |
Exclusivity |
Duration |
Compre-hensiveness |
Transferability |
Right to economic benefits |
Quality of title | |
Freehold or fee simple |
Completely exclusive |
Completely unlimited |
Traditionally complete, but truncated by legislation |
Complete |
Complete, except for taxes, and regulatory controls |
High | |
Lease or concession |
Exclusive |
Limited term (usually long-term) |
Varies |
Some-times restricted |
Subject to charges, taxes and regulatory controls |
Usually high but varies | |
Licence or “profit a prendre” |
Varies: usually exclusive |
Limited term |
Restricted to specified purpose |
Varies: often restricted |
Limited by restrictions on activities, charges and regulatory controls |
Low | |
Permit |
Varies: often not exclusive |
Limited term (usually short) |
Restricted to specified purpose |
Usually restricted |
Limited |
Low | |
Licences convey rights only to the specific products or activities set out in the licence. Usually, licence holders do not have legal authority to enforce their rights against anyone other than the grantor of the licence. Licences can provide exclusive rights, or sometimes common-property rights.
Licences are widely used by governments to grant resource utilization rights to public forest resources, not only for timber but also for non-timber forest products, such as rattan and bamboo, resins and gums, fruits and nuts, water rights, wildlife, fisheries and a wide variety of other resources and activities. Licences are highly flexible and may be used to accommodate a wide range of users, from individual fuelwood or charcoal producers and gatherers of non-timber forest products to large forest enterprises requiring access to substantial and long-term supplies of timber. Licences may have short or long terms. Fuelwood, charcoal, hunting and gathering licences normally are for one year, whereas forest management agreements and long-term timber sales may have terms of ten years or more. Licences may apply essentially to any size of forest. The issues surrounding both the term of the contract and the area of forest to which the licence applies are the same as those discussed in connection with forest leases. Licences designed to promote resource development and/or requiring substantial capital investment with steady and high demands for raw material will usually require longer terms and apply to larger areas.
The institutional requirements for governments are greater when licences, as opposed to leases, are employed. Because licences commonly involve smaller areas, more users and more diverse forest uses, there will be more and different contracts to design, negotiate and administer, with more specialized provisions in the contracts. As a result, the administrative workload will be greater.
Contracts termed permits apply to a wide range of narrowly specified rights to forest resources. They are usually of short-term duration. These are usually simple documents giving permission to the holder for specified resources, such as special species of timber, fuelwood, specific non-timber forest products such as rattan, fruits and nuts, etc.; or for specific activities, such as hunting or charcoal production. There is no formal distinction between a licence and a permit, but permits are usually for shorter periods, involve less formal administrative procedures, and are often non-exclusive.
Permits may be used as the means of selling a specific quantity of resources within a short time-frame; for example, a permit to cut and remove certain species of timber or timber products from, say, 100 ha of forest within the next year, or a permit to cut a given number of house poles.
Permits in respect of small areas might be chosen over licences when governments wish to stimulate small-scale economic activity. An example is where governments are attempting to facilitate the development of a new resource, such as under-utilized species or some non-timber forest products.
This form of contract is the most specialized. In many cases, governments must take an active role in all aspects of contract design, negotiation, supervision, and enforcement. Because permits normally have short terms and apply to small areas, governments must expect to spend considerably more time and effort in writing and supervising resource utilization permits, even though the contract documents may be simpler.
It is not uncommon for governments to employ both licences and permits for the same forests in a hierarchy of administrative control. For instance, a company may hold a licence with a term of 25 years to manage a specific area of timberlands, but still be required to apply for permits for activities such as road building or timber harvesting on individual areas. Moreover, permits may be required from different government agencies, again even though a licence is held which applies to the lands in question. An example of this is where a timber company must apply for a licence for pesticide application from the Ministry of Environment under the longer-term forest management agreement granted by the Ministry of Forests.
There are several concerns which governments may have in designing contractual arrangements, terms and conditions for utilization of public forests.
Common concerns for many countries include the following:
The second major class of contract employed by governments is that used for the procurement of goods and services for forest management. Governments are finding it increasingly advantageous to contract with the private sector for the delivery of a wide range of forestry services in connection with the management and administration of public forest lands. Some examples of services procured through contracts include: management of protected areas, mapping of forest lands, forest inventories, operation of forest nurseries and seedling production, direct purchase of seedlings, tree planting, fire fighting, check-scaling of logs, forest monitoring, enforcement of resource utilization contracts, road building and maintenance. Typically these types of contract are narrow in scope, that is, they relate to the delivery or production of a very specific service or product. They are often of shorter duration (less than one year), or of longer term if investment, start-up costs and experience are required.
Variation in the forms of contractual arrangements used for procurement of goods and/or services centre around contract conditions, performance incentives, monitoring and enforcement of the contract, pricing and payment scheduling. Contract conditions, pricing methods and payment conditions within contracts affect the distribution of risk between the signing parties, and have a dramatic effect on the ultimate cost of goods and services to government, as well as the government’s ability to attract potential suppliers. Pricing and payment issues are discussed in Chapter 8.
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