Conclusions, policy implications and recommendations

Main findings

Interest in planting forest species has experienced wide swings over the last 15 years. The peak in planting activities during 1996 and 1997, when about 6 000 and 3 000 ha respectively were planted was followed by a steep decline. Since 1999, the private sector has planted less than 500 ha each year, although there is still a significant interest in tree planting. The major constraint to plantation development is a lack of appropriate incentives and shortage of suitable land.

Although the area planted by commercial investors is significantly larger than the area planted by small-scale investors, the latter play an important role too. An important driving force for many farmers is that they are faced by labour shortages and would like to switch to less labour-intensive tree plantations. The implication is that if the individual planters have a better understanding of forest plantation establishment and management, more may prefer to plant forest trees for future benefits. Encouraging individual planters to plant forest trees is easier as they have land available. The role of RISDA is important in encouraging individual planters to plant forest tree species.

Both the private companies and individual planters are constrained by a number of problems, including appropriate species selection, difficulty in obtaining quality seedlings, lack of knowledge on planting and labour shortage.

Individual planters generally lack the knowledge of potential markets and end-uses for timber trees. This implies that more information on potential markets, end-uses and prices of timber needs to be disseminated. The information on financial returns is particularly relevant as income generation is the most important reason for planting trees.

As stressed in Income Tax Order 2002 for approved agricultural projects (Order 5, First Schedule), and again in this report, for any forest plantation activity to be eligible for ITA, an area of at least 50 ha is required. This means that currently incentives favour large-scale plantations. The period covered by the order depends on the type of species planted. For species such as sentang and teak, the period is 25 years, whereas for species such merawan (Hopea spp.) and kembang semangkok (Scapium spp.), the period is 50 years. A minimum size of 50 ha mentioned in Order 5, First Schedule of the Income Tax Order does not stress that the planted forest area must be contiguous. In other words, as long as investors have an area of at least 50 ha, they are eligible to apply for ITA.

Major policy implications and recommendations

The main policy implications related to forest plantation development are in the areas of land, incentives, marketing and technology transfer.

Land

A basic question related to plantation establishment of any plantations is land availability. According to a baseline study conducted by FRIM and Jabatan Perhutanan Semenanjung Malaysia (JPSM) in 1996, there are more than 2.8 million ha of land suitable for conversion to forest plantations in Malaysia, although the area in Peninsular Malaysia itself is below 400 000 ha (Table 39).

Table 39. Land suitable for forest plantations in Malaysia in 1996 (ha)

State	Total area
Johore	51 766
Kedah	3 659
Kelantan	91 280
N.Sembilan	2 893
Pahang	94 213
Perak	52 210
Sabah	919 075
Sarawak	1 526 077
Selangor	7 902
Terengganu	68 108
Total	2 817 183

Source: FRIM & JPSM 1996.

Of the 2.8 million ha, more than 1.5 million ha are located in Sarawak, more than 900 000 ha in Sabah and some 94 000 and 91 000 in Pahang and Kelantan, respectively (FRIM and JPSM 1996). Although in terms of area the figures are encouraging, in terms of status the situation is discouraging. For example, in Sabah, 334 163 ha are alienated or privately owned land, whereas the remaining 574 912 ha are state land. While it is possible to develop land that is owned by the state, planting on privately owned land is a major problem. The existing customary rights of the local people supersede the importance of land development. In addition, due to the rapid economic development some of the areas reported in 1996 are not available anymore.

Nonetheless, the lack of suitable land should not be treated as a barrier to plantation development. One way of solving the land issue is to find solutions for using alienated land, which is sometimes left unattended. Another option is to establish joint ventures in other countries. Malaysian planters have been successful in establishing agricultural projects such as rubber and oil palm. At this point, Malaysian investors should become better acquainted with opportunities and incentives for plantation development overseas.

Incentives

The existing incentives offered by the government are still not attractive enough to encourage potential planters to invest in forest plantations. Matters that need serious consideration by the government include incentives for the planting, management and harvesting stages.

Group relief for CTP expenditure

There have been a number of proposals from both the public and private sectors requesting the government to provide group relief incentives for companies involved in CTP (KTS Resources 2000; Abdul Razak 1997). This is similar to those given under Schedule 4C (Income Tax Act, 1967), that is, deduction for approved food production projects. Under this schedule, a company resident in Malaysia (referred to as a “surrendering company”) may surrender its adjusted loss, in full or in part, for a given year of assessment of an approved project to one or more related companies resident in Malaysia, in the basis year for that year of assessment (referred to as a “claimant company”).

Under Schedule 4C, a surrendering company is related to a claimant company if at the end of the basis period for a year of assessment at least:

Seventy percent of the issued share capital of the surrendering company is directly owned by the claimant company;

Seventy percent of the issued share capital of the claimant company is directly owned by the surrendering company; or

Seventy percent each of the issued share capital of the surrendering company and claimant company is owned directly by another company.

The other items that are proposed are as follows:

The amount of adjusted loss surrendered shall be allowed as a deduction against the aggregate income of the claimant company pursuant to section 44(1);

A surrendering company shall be allowed to transfer its CTP expenditure, in full or in part, to another related company resident in Malaysia;

The claim for the deduction shall have the consent of the surrendering company on the quantum of CTP expenditure surrendered;

The quantum of CTP expenditure to be surrendered in each fiscal year should be based on the area planted and maintained for that year;

It is also proposed that a ceiling amount of group relief claim be fixed for each plantation company and this can be formulated by using the company’s forest planting area as the basis for calculation; and

The Group Relief shall not be mutually exclusive from PS or ITA (under Schedule 4C, group relief is not allowed if the surrendering company is given PS or ITA).

Expand the list of qualifying capital expenditures

The following activities should be included as qualifying expenditures in both the ITA and Schedule 4A:

Costs of preparing the Forest Management Plan and the Annual Operating Plans;

Cost of environmental impact assessment;

Costs and fees related to timber certification (MTCC, FSC and others);

Costs of surveying (e.g. boundary and compartment demarcation and maintenance);

Costs of enrichment planting, silviculture, pest and disease control, and fire management;

Capitalization of interest expenses incurred in immature areas up to the maturity date;

The special agricultural allowance for CTP shall be calculated based on qualifying expenditure incurred and to be deducted fully against aggregate income from all sources;

The special agricultural allowance for CTP shall be given on qualifying expenditure incurred during a period of up to 15 years from the date of first qualifying expenditure being incurred;

The special agricultural allowance for CTP claimed against aggregate income shall be credited to an exempt income account for the franking of tax exempt dividends to shareholders;

Companies enjoying CTP PS or CTP ITA shall not be precluded from claiming special agricultural allowance on qualifying expenditure on the CTP (under current law, Schedule 4A, PS and ITA are mutually exclusive).

Investors in CTPs will invariably face serious cash flow problems until the final harvest (often up to 15 years or more). The current incentives do not address adequately the cash flow problem. The government should consider providing more effective incentives to increase the pace of plantation development to ensure that there is an adequate supply of logs to feed the existing and future timber processing mills.

The tax incentives that would increase private sector involvement in CTP are as follows:

a. During planting and management

CTP ITA – qualifying capital expenditure be extended to 15 years (instead of the current five-year period) and this can be carried forward to be used during the harvesting period; and

An alternative for the company to choose between group relief or Schedule 4A.

b. During harvesting

CTP PS for 10 years, commencing from production date; and

Marketing of plantation-grown timber

The practice that is currently being used by RISDA, especially for selling latex and rubberwood logs, could be adopted. Such an approach is practical when dealing with smallholders who have problems selling their own timber. If such an approach were applied, relevant government agencies could act as one-stop agencies dealing with the buying and selling of timber from forest plantations.

Technology transfer

Technology transfer should be provided through extension services. Services should be rendered to clients from the planting to the harvesting stages continuously. To help planters successfully solve problems should be the objective of all interested parties.

Research institutions should ensure that all new research findings related to forest plantation development reach clients in a timely manner. Such an effort would keep clients abreast of the most current issues related to forest plantation development.