Why plantations? The traditional reason for plantation establishment is to provide fibre and other products and in site rehabilitation. Plantations have been used to support forest industry expansion and this objective has often been twinned with the intention of reducing harvesting pressure on native forests (Working Paper FP/7).
More recently, plantations are being viewed as precursors to establishing natural forests on degraded areas and as sinks for carbon dioxide. Such significant ecological are rarely considered by investors since they are difficult to quantify and compare with monetary values (Kengen 1997). Also, a private investor is unlikely to capture the social and ecological benefits from plantations.
Thus, a prime justification for offering incentives is to raise the private return to encourage a more socially desirable level of plantation investment. Incentives are appropriate when the private net returns are lower but the returns, including externalities, are greater than the returns from alternative land uses. In this situation, incentives could be effective by creating a more socially desirable land-use pattern. Incentives may not be needed if the private returns from forestry exceed those from other land uses or if the addition of incentives will still not provide an attractive private return. In selecting an appropriate level of assistance, rates of return not only have to be compared with those from alternate land uses but also with investments in other sectors.
Incentives may also be used to help investors overcome barriers such as the high capital cost of establishment and the relatively long waiting period for a return. Sometimes, investors, including local farmers, have a cultural bias against investing in plantations or they do not appreciate the advantages (Keipi 1997; Kengen 1997). Incentives may draw their attention to this sector.
In addition to these economic arguments, there may be strategic reasons. Countries such as Indonesia and Chile have used incentive programs to jump-start the initial development of national forest industries, in part, to generate foreign exchange. Incentives may attract investment away from other countries, states/provinces or regions. However, the validity of this rationale depends on the competitive advantage of the forest sector with respect to forest production in other countries and relative to activities in other domestic sectors (Keipi 1997). There is also the risk of competitors retaliating by offering their own subsidies.
Incentives can be used to encourage economic development and generate employment in specific, less developed regions. If a large processing plant can be attracted to an area, it may act as a catalyst for infrastructure development as well as providing employment and attendant benefits. Incentives may also be a tool to diversify the economy in regions or to provide impetus to shift resources away from a sector with limited economic potential (often agriculture).
Sometimes forest incentives are self-financing in the sense that a substantial income may be generated over time and, if taxed, the government may at least partly recover its contribution. Chile’s plantation subsidies are reported to have profited the state (Beattie 1995; Keipi 1997).
Macroeconomic and structural factors can have profound impacts on the attractiveness of plantation investments and the effectiveness of subsidies (Kaimowitz et al. 1998). For example, many African countries cited a shortage of capital as a major impediment to plantation investments (Blanchez and Dube 1997; Chipeta 1997). The risk that government policies or taxation levels may change during the life of the plantation is also high in some countries and can inhibit plantation investment. Sometimes land-use policies and tenure rights are often weak and poorly designed. Other constraints include a lack of economic planning and project development expertise, unsupportive government policies, institutional limitations, inadequate infrastructure, the small size of domestic markets and currency devaluation (Blanchez and Dube 1997).
Recent economic policy favours the direct elimination of distortions existing elsewhere in the economy rather than using subsidies as offsetting measures. Stewart and Gibson (1995) recommend:
i) the removal of forest products export bans and tariff and non-tariff barriers to international trade of all products;They argue that once these reforms are in place direct incentives for forestry are unnecessary.ii) the elimination of export subsidies;
iii) the removal of all forest product consumption taxes other than the general sales tax.
