At a time of many pressing and competing demands for financial resources, the forest sector needs an unchallengeable basis for analysis if forestry investment is effectively to compete with other alternatives. When this study was launched the perception was that proper valuation is an important element in making the case for forestry or for recognizing when alternative land uses are better options. The prospectus of the André Mayer Research Fellowship which funded this study called for research: to document and analyse experiences and results of currently available methods for valuation of forests and trees during investments preparation; to indicate shortcomings of current methodologies in the full valuation of forest products and services; to highlight those which hold most promise for practical application and general adoption; and for the best methods, to suggest how to apply them so as to present the economic contribution of forests and trees at the same level of analytical reliability as that of other land-using options.
The study was to consider (a) land development programmes involving conversion of forests to other land uses and (b) forestry projects proper. Of particular interest was the recommendation of valuation approaches for a range of situations taking account the need for replicability, cost effectiveness and applicability under conditions of poor data availability and where economies are not fully monetized, as in many developing countries. Guidelines included: (a) that methods should be applicable in the context of making funding decisions for specific programmes or projects and capable of integration into the main standard analyses in preparation of investment programmes; and (b) that methods should, within limits imposed by need for scientific rigour, be simple, replicable and have limited dependence on the attitude of the analyst. The report was to be of immediate practical value to investment programme preparation experts in member countries and international lending and technical assistance agencies ranging from development banks to institutions such as the Food and Agriculture Organization of the United Nations (FAO).
A period of nearly a year was spent on an extensive but also in-depth study of information. A programme of attachments was undertaken to the United Nations Environment Programme (UNEP) in Nairobi, Kenya; the Centre for Social and Economic Research on the Global Environment (CSERGE) and International Institute for Environment and Development (IIED), both in London, England; and the World Bank (International Bank for Reconstruction and Development, IBRD), Interamerican Development Bank (IDB), World Resources Institute (WRI) and Resources for the Future, all in Washington, D.C.
It has become apparent that the product envisaged by the André Mayer prospectus is premature relative to the state of the art in forest valuation. The review of literature has shown that, although in recent years numerous forest valuation studies have been carried out in both developed and devolving countries, many have been carried out in isolation from forest policy, management and investment. The following attributes may be noted:
- most studies have been academic;
- those done by funding institutions, e.g. World Bank, have been costly and time-consuming projects;
- there is no evidence of the results influencing decisions. There is some indication that valuation is often undertaken to support decisions already taken, e.g. to establish a conservation area;
- methodologies do not appear to be an issue: they have been applied in the context of both developed and developing countries. The same method can give as divergent a set of results as different methods. All of them lack maturity to such a degree that it is recommended that more than one method be applied to a given situation (see annex 3);
- there is severe site specificity: a "prescription" type of guide for investment preparation, as envisaged by the André Mayer research fellowship, would be difficult to provide at this stage, especially for use internationally;
- production function information is critically short for any one situation, let alone for the diversity of circumstances faced by international development agencies in preparing projects.
In view of the above, the outcome of the André Mayer fellowship has had to be adjusted. It provides not an instruction manual but, rather, a set of principles and a framework for procedures that should be taken into account in any specific context with which the analyst is faced. Indeed, given the variation of circumstance and perceptions, "blueprint" or "cookbook" approaches would be inappropriate.
Unlike other material already available, this work does not present valuation in isolation. Instead, it promotes awareness of the context in which such work is undertaken. Failure to appreciate this carries danger of misuse or even abuse of valuation. For this reason, investment preparation professionals who may be tempted to focus only on the practical elements in Part II of this publication are encouraged to read the first part also.
A review of the literature suggests that the exhaustion of forest resources has been a major concern throughout history although usually restricted to a local context or national boundaries. However, with the emergence of the environmentalist movement in recent decades, this concern has been extended beyond national boundaries to international level, particularly with regard to tropical forests. Although a renewable resource, forests can be exhausted if they are not properly managed. Such considerations resulted in forest-related matters received major attention at the 1992 United Nations Conference on Environment and Development (UNCED), commonly referred to as the Rio Summit.
This importance placed on forest resources was reflected in the Forest Principles and in Chapter 11 (Combating Deforestation) of Agenda 21. Chapter 11 listed a series of programme areas aimed at sustainable management including efficient utilization of forests. Measures to ensure the full valuation of the goods and services provided by forests, forest lands and woodlands therefore became essential. It was assumed that inadequate value credited to forests is one of the major causes in the failure of sustainable forest management. Among other things, deforestation and transfer of forests to other land uses were thought to result from inadequate recognition and underestimation of the values of the many goods and services provided by forests at local, national, regional and global levels.
Evidence suggests that many forest valuation studies have been carried out in isolation from forest policy and management. One of the greatest challenges is how to integrate these studies into forest management or forest investment decisions and forestry policy development. Decision-makers are unlikely to seriously take into account values estimated without showing how they can be captured. This is particularly true in developing countries which, in their day-to-day struggle to satisfy the most basic needs of their populations (notably food), cannot take a long-term view.
Valuation per se therefore is not a panacea to solve all forest-related problems. Indeed, estimated monetary values, even if high, cannot assure either that forests will be conserved or that forest management will be preferred to alternative land uses. Valuation can be a useful tool, but it is necessary to integrate it into forestry development policy and forest management decisions. It should be remembered that: (i) there are many issues that cannot be addressed through monetary values; (ii) decision-makers often do not require fine-tuned figures, but just orders of magnitude or even no quantitative information at all; (iii) often a decision-maker may need qualitative information only, such as an accurate assessment of the expected outcome, the issues involved and the segments of the population that would be most affected as a consequence of the management decision taken for a particular forest.
This publication aims to provide the decision-maker on investment projects and those involved in forestry investment project preparation with a pragmatic view of forestry valuation. It builds upon preceding FAO Forestry Papers 17 (Gregersen and Contreras, 1979: "Economic analysis of forestry projects" and its supplements "1. Case studies" and "2. Readings"), 106 (Gregersen and Contreras, 1992: "Economic assessment of forestry project impacts")1 and 114 (Gregersen et al., 1993: "Assessing forestry project impacts: Issues and strategies"). These papers give well developed and well discussed approaches, methodologies and techniques to deal with forestry and related investment projects, as does FAO Conservation Guide 16 (Gregersen et al., 1987: "Guidelines for economic appraisal of watershed management projects"). In FAO Forestry Paper 127 (Gregersen et al., 1995: "Valuing forests: Context, issues and guidelines"), the reader was provided with issues, guidelines and context in which a forestry valuation should take place; its recommendations are essential reading for those who need to decide whether to carry out valuation and how to select the main line of approach.
This publication has been prepared primarily to serve two audiences: (a) decision-makers on investment projects, who need exposure to the purpose, limits and context of valuation, and (b) those who prepare forestry investment projects and who want a full briefing on contextual aspects and what it is possible and not possible to do with valuation in their forestry work.
The first audience (decision-makers in government planning agencies, international technical assistance agencies and multilateral development institutions) is offered summary information in the following section and in "Part I: The context in which valuation decisions are taken". Considerable attention is given in this early part of the publication to the function of full valuation, what purposes it can serve in decision-making and its limits, and the context in which it is carried out. The summary information in the early sections can be read independently of Part II which gives technical details on valuation procedures.
The second audience (those who prepare forestry investment projects) are the "practitioners" who need to have key elements of valuation to apply in their work: this is expected to be the main group of users. Material for this group is more detailed and is in "Part II: The valuation process", supported by annexes, many illustrating procedures and outcomes from recent valuation exercises. Users in this category are assumed to have experience in project feasibility analysis and investment preparation in general. They are expected to already know how to use shadow pricing techniques. This publication offers them in one place a convenient reference on how to value a broad range of forest benefits. To do so, there is an extensive bibliography as well as some cross-referencing to other works which practitioners should consult for details on specific techniques.
For about the past fifty years it has been repeatedly stated that forests can supply a large range of goods and services of great importance to humankind. However, this realization per se does not seem to be able to assure their conservation. On the contrary, figures suggest that the process of deforestation, particularly in tropical areas, is faster than before. Forest degradation is not so well documented, but it can be inferred that it is increasing similarly.
From the 1980s environmental concerns allied to new models, such as sustainable development, caused the increasing rates of deforestation in tropical regions to become a major issue at international level. Various initiatives have ensued. The first one was the launching, in 1985, of the Tropical Forest Action Plan (TFAP) that had as its major aim to save the tropical forests.
However, the apex of this great international interest in forests can be traced to UNCED in 1992 during which special attention was given to forest-related matters. The concepts developed at the Rio Summit were embodied in the Forest Principles and in Chapter 11 (Combating Deforestation) of Agenda 21. Forest resources also received attention in other documents issued during this summit, such as the Convention on Biological Diversity. Since the Rio Summit many intergovernmental initiatives have been taken, such as the Canadian/Malaysian initiative, the Montreal and Helsinki processes, the Centre for International Forestry Research (CIFOR)/Indonesia dialogue and the United Nations Commission on Sustainable Development (UNCSD) - Intergovernmental Panel for Forests among others2.
This suggests that forest resources have never before received such attention. All of these measures have as their major aim to protect the world’s forest resources, particularly the tropical ones, from further depletion or, at least, to slow down the rate of depletion. Unfortunately, however, evidence suggests that deforestation and forest degradation continue at high rates. As pointed out in Agenda 21, "the vast potential of forests and forest lands as a major resource for development has not yet been fully realized". Thus, the need to demonstrate the importance of forest resources remains as strong as ever. Promoting efficient utilization and assessment to recover the full valuation of the goods and services provided by forests, forest lands and woodlands, therefore, has become one of the programme areas according to section C in chapter 11 of Agenda 21.
Inadequate recognition and underestimation of the values of the many goods and services provided by forests at local, regional, national and global level has been assumed to be one of the major causes of failure of sustainable forest management, perhaps even contributing to deforestation, forest degradation and transfer of forests to other land uses. Some authors, such as Richards (1994), argue that the major single cause of deforestation is because forest resources are underpriced and therefore undervalued by society. However, as discussed later (e.g. the Grimes et al. (1994) study on Ecuadorian forests), evidence suggests that valuation per se does not seem to be able to halt conversion of forest land to other uses. The need to properly value the goods and services of forests, forest lands and woodlands has long been recognized. The need to value forests can be traced to papers written by German foresters in the last century, e.g. Martin Faustmann (1849) and Max R. Pressler (1860)3. One of the earliest references recommending the need for valuing the broad range of forest goods and services occurred at the 5th World Forestry Congress (WFC) held in the United States in 1960.
Proper valuation of forest goods and services is dependent on reliable information on the forest resource, information both quantitative and qualitative including physical as well as socio-economic elements. In this sense, forest resource assessment and, more generally, environmental and social impact assessments are closely related to the valuation of forests even if they are distinct in nature.
The knowledge and understanding of how tropical forests function is still severely limited. There remains considerable uncertainty over the dynamics of the forest ecosystem, particularly as far as tropical forests are concerned. The interactive processes in tropical forests are complex and inadequately understood. Where an alteration or conversion may be irreversible is still uncertain. And knowledge on the relationship between economics and environment is even poorer. Economics has one logic while the environment has another: the challenge is to find the way to make these logics compatible. This lack of information on such basic interaction parameters and values makes it difficult to select the dominant use or combination of uses that could yield the maximum social value for a particular tract of forest. Parallel to this ecological context, there is the "real world" context in which there are forces that influence the fate of forests and pressures for land use changes.
Valuation should be a neutral analytical tool, not an advocacy instrument. However, this does not always happen. Proper valuation of forest resources can provide useful information to all those associated with choices among management options and alternative uses of the forests and lands to meet the needs of the group involved. It can contribute to showing that the sustainable use of the forest has a positive economic value, and that this economic value can be even higher than the value of alternative resource uses which threaten it. However, valuation is unable to be informative about the motivations of people in their use of the forests. Valuation is just a tool that can increase the knowledge of the range of monetary values associated with forests. It is expected that a proper valuation should be able to change government perceptions on forest resources and, consequently, to influence decisions enabling a more judicious use of forest resources; otherwise forest valuation may be a wasted effort.
Despite the importance of forest valuation in the decision-making process, it is not per se a solution to all forest-related problems and, consequently, the salvation of the world’s forest resources. The valuation process does not ensure that sustainable forest management will be preferred to alternative land uses. Ultimately, valuation is a tool that is expected to provide elements for the decision-making process in the selection of orientations for forest management or in the allocation of land under forests in situations of competition with alternative use options. It can be useful in the sense that it can provide values within an order of magnitude that can help the decision-maker to formulate investment decisions and choose between alternative conservation strategies.
The above points should be understood not as criticism of forest valuation but as the need to recognize its practical limitations. It is important to stress once more that forest valuation is just a tool that, taking int o account the context, can contribute to providing a basis for decision. However, as well as economic considerations, there are social and political factors that play an extremely important role in the use of forest resources. Thus, there are several factors that determine a forest’s value. Further research is necessary:
(i) to reach better estimates of all goods and services provided by a forest,
(ii) to reinstate appreciation of forests, particularly the tropical ones, as a valuable economic, ecological and social asset, and
(iii) to provide estimated values even though they may not all be captured.
Following this introduction, which ends with a summary of the suggested steps in forest valuation that are detailed later, the monograph consists of two parts. Part I deals with the context of valuation. The first chapter covers how to define and clarify the decision for which valuation is intended to provide a basis. It is followed by a chapter on clarifying the purpose of the valuation and its context and outputs.
Part II deals with the valuation process itself and is divided into three chapters. Questions of data inadequacy or difficulties of measurement are important in valuation: chapter 3 focuses on this aspect. Chapter 4 deals with choosing and applying valuation methods and techniques to meet information needs.
It should be stressed that valuation methodologies are generic in nature: there are no methods applicable to only one type of project. To carry out valuation for any one project type generally requires the use of several valuation methods which, being tools, are also usable on other types of project as well as being usable for policy-oriented valuation.
Chapter 5 is on uncertainties and how to deal with them. This is a key issue: full forest value comprises many benefits and values, most of which are not measured or measurable; they may be intangible, or not recorded or documented through market or other formal mechanisms; they may accrue to a diffuse global community, or can be reaped only in the distant future. In many instances, their magnitude can be influenced by many factors within and outside the forestry sector and therefore their likely impact is a matter of probability. Thus there are no certainties in valuation: probability assessments are a necessary element of all valuation studies and chapter 5 offers ways to deal with this important aspect. The closing chapter (chapter 6) draws conclusions from what has been discussed and highlights some issues addressed; it also identifies opportunities for further work.
F. Summary guidelines for forest valuation
What follows is an attempt to provide a guide for practitioners facing the task of developing economic values as part of investment project preparation and/or policy decisions. It is important to stress that the suggested steps constitute guidelines, not "rules" to be followed regardless of context. As emphasized throughout, there is no single rule to be followed. Ultimately, economic values are only one input, often a small one, into decisions concerning forest use. Further, there are many different ways in which to go about deriving and using such values. Within this context, the suggested steps for forest valuation are provided, in the form of a diagram (figure 1) and as a discussion of each step.
Step 1: The first step must be a clear definition of the decision to be made.
What answer is required for decision-making? What sort of problem is the analyst confronting? Can valuation of only those aspects amenable to presentation in monetary terms suffice or should there also be supplementary qualitative assessment (such as aesthetic, spiritual or existence values or ethical considerations)? Winpenny (1992) found little scope for applying economic values to these important but non-quantifiable benefits. It is necessary to clearly define what goods and services are going to be valued and in which context spatially and in terms of time scale. The valuation should be site- and time-specific.
Step 2: The second step is to clarify the purpose of the valuation, its context and outputs.
What are the objectives to be reached with the study and in what circumstances does the decision have to be made? According to Patton (1986), it is very important to identify who needs what information, under what conditions and for what purposes. Why is valuation important to deal with the problem? What information is required by the decision-maker? It may be qualitative rather than quantitative, or orders of magnitude instead of fine-tuned figures.
Since a given policy can affect the distribution of benefits and costs, the analyst should ask who will bear the costs and who will get the benefits. In some cases, the major beneficiaries are at global level whereas the costs are borne mainly by the local population (or the reverse). The analyst is dealing with groups of divergent capacity to express themselves or even to understand the issue. Judgement becomes the most critical faculty of the analyst, who must make allowances when local groups have difficulty in formulating their concerns and their particular sets of values. A clear understanding of the context is essential in order to select the correct perspective from which to value forests. Having defined the purpose and context, it becomes possible to say what outputs should be aimed for in the valuation exercise.
Step 3: The third step is to clearly identify the input and output needs and to determine information needs and the constraints to meeting those needs.
Data generation is usually costly and time-consuming. As Gregersen et al. (1995) pointed out, it is worth the time and effort to value things only if the values are going to be used effectively to accomplish something, for example, to influence a decision. There is no virtue in collecting more information than the minimum required to make reasonable decisions; the ability to determine just what this level is comes with experience. With regard to data accuracy, it is worthwhile to note that Chambers (1981)4 suggests that there exists an "optimal ignorance" and "appropriate imprecision", these concepts being a recognition that, although imprecision is not a virtue, saving time and money is. It is likely that the decision-maker often needs orders of magnitude rather than fine-tuned numbers (see Kumari, 1995b). Thus, fine-tuned figures are not necessarily the best answer.
For example, knowledge is limited on the physical and biological behaviour or capacity of forests to produce the goods and services that give them value. Many interactions and coefficients of productivity as well as the response of forests to husbandry interventions are not yet fully understood, particularly for harvesting of non-wood forest products (NWFPs), biological diversity etc. Similarly, scientific knowledge about production and its cycles or seasonality, about markets for many forest products and services (especially NWFPs) is not well documented, with many results often incomplete or based on dubious estimates about these uncertain and complex issues.
Step 4: The fourth step deals with choosing and applying valuation method(s) and technique(s) to meet the information needs according to the problem under consideration.
The analyst’s choice of appropriate valuation techniques for a given forestry project calls for judgement and therefore improves with experience. Forestry valuation is not like a construction project, with engineering blueprints which precisely predetermine what should be done. The most appropriate techniques to apply will depend on the context. There has been great emphasis on estimating the total economic value (TEV). Its estimation is not itself a valuation method. Conceptually, it is an aggregate of (i) total use value (TUV) and (ii) total non-use value (TNV). There is a contradiction in the term TEV, in that not all values of goods and services supplied by a forest can be reduced to economic or monetary terms. However, its calculation continues to be appealing.
In all cases, the analyst must assess how much it will cost, and how long it will take to collect, process, analyse and present results relative to the time, funds and human resources available. If an attribute considered vital for a decision cannot be accommodated in the valuation because of cost, skills required or other reasons, the analyst should ask if the valuation should be attempted at all.
Step 5: The fifth step is to deal with value uncertainties, the existence of which is often recognized but generally ignored in analysis.
Uncertainty is an inherent part of forestry. This can be attributed to many factors, such as long production periods (from 10 to 100 or more years), during which the goals and objectives of producers change as well as the desires and wants of consumers. Other factors contributing to value uncertainties include basic economic data, physical inputs, costs, physical production response, market structure and prices, technological change and the dynamic of the forest ecosystem, particularly the tropical one (Lundgren and Thompson, 1972). A change of the political party in power may alter goals and value systems of governments, altering social programmes and priorities, and thus affect forest management (Lundgren, 1976).
The analyst needs to clearly identify the problem and the uncertainties allied to it. There is neither an empirical model nor a theoretical one of how the analyst should do this. So, no matter how permanent a particular valuation may appear, it is invariably not the last one. Thus, one strategy of dealing with an uncertain future is to allow room to reconsider and revise the valuation as new information becomes available.
