PART I: THE CONTEXT IN WHICH VALUATION DECISIONS ARE TAKEN

Chapter 1: DEFINING AND CLARIFYING THE DECISION⁵

It has been assumed that the incomplete valuation of forests currently practised⁶ has reinforced perceptions that forests have little worth other than for their timber and that this has made governments assign low priority to the forestry sector and thereby contributed to deforestation. Those who hold this opinion expect forest valuation to provide information that can help governments (a) recognize that forests are worth enough to deserve a better share of scarce capital resources among competing land-use activities, and (b) choose and implement investments which appropriately balance natural-resource conservation with development. Munasinghe (1993c) points out that valuation results can also be used in determining or influencing pricing, land use and incentive policies.

In considering the question of defining or clarifying the decision that will require valuation, it is useful to consider the function of valuation which is discussed below. Forest valuation is a tool that can provide decision-makers with useful information for deciding among alternatives or upon preferred combinations of possible interventions.

There is a widespread perception that forests are threatened⁷. In developing countries deforestation and forest degradation have reached levels which society considers unacceptable; in developed countries pollution, the cutting of residual primary forests and human pressure for recreation are putting strains on forests. As a result there is great public interest in forestry and the desire to see greater levels of investments into the sector in order to ensure sustainability. However, forests are complex ecosystems that are not fully understood and, as such, they cannot be fully represented in terms of total area alone. Forests in different locations support different volumes of biomass, different plant and animal species and provide different ecological and social functions. For example, to the people who live in or near forests, they mean a source of different materials, including food, as well as cultural identity. For others, they mean a source of timber and other products. For still others, they have value in terms of recreation, biological conservation and so on (World Bank, 1995). Thus, proper valuation should be intended to provide a rational basis for directing funding into objectives to which society attaches importance.

There have been calls for full valuation as a way to demonstrate the importance of forests and so arrest their displacement by other land uses. Advocates of full valuation argue that forests are undervalued and that consequently people do not realize their importance and, therefore, are unconcerned if there is deforestation, forest degradation or unsustainable use. Guided by this perception, many valuation studies have been carried out to influence policy; others have been done in isolation for research purposes. The closest to valuation in investment preparation has usually been at the pre-investment sectoral review stage. However, valuation principles and methodologies remain the same and the purpose of this work is to show how to apply these general approaches in an investment context.

In investment preparation, the function of valuation is to provide a basis for decision or choice among options or to find what combinations of various types of activities give the best benefits. Properly done, valuation can provide useful information to all who are associated with decisions and choices among investment or management options and alternative uses of forests or of the land. It can show whether or not sustainable management and use of the forest has an economic value higher than the value of alternative resource uses which compete with it. Correctly executed, valuation can help to ensure that forestry is not considered in isolation from other sectors; this is especially important when sustainable forest management efforts take place in environments of increasing competition for scarce resources, such as growing needs for agricultural land and for funding. Decision-making by governments, private enterprises, local communities, farmers and conservationist groups on management and utilization of the forest resource is therefore influenced by the value that each of these groups attaches to the forest resource as well as to the relative costs and benefits of alternatives to forests⁸.

In the context of valuation for land use decisions, IIED (1994) has stated that, in practice, there is no alternative to presenting the policy-maker with a range of models and indicators. This means offering an array of options from among which the final choice can be made. Thus, valuation can be an important tool for policy analysis: for example the valuation of a native forest can assist in understanding the importance of forest vis-a-vis its conversion to other land uses, e.g. land use policy (forestry versus agriculture).

Some benefits of the forest, carbon sequestration among them, can be (or can be perceived to be) more important at global than at national or local levels. Valuation can contribute to setting levels of possible compensation to a country or to a local community that is obliged to conserve forests beyond its own needs or to refrain from using its forests’ full production potential. In the case of tropical developing countries, there are often calls for greater conservation of forests for carbon storage or for biological diversity. Such calls, if not backed by funding, imply that the developing country should carry the management costs. Yet the people who derive the satisfaction from that resource conservation may live in developed countries; they do not share the burden and they carry the costs only (and then indirectly) if and when species become extinct or ecosystems disappear. CSERGE (1993) has observed that, under such conditions, where costs fall mainly to the poor and benefits are reaped largely by (possibly wealthy) outsiders, valuation could provide a rational basis for estimating the level of adequate international transfer payments to compensate countries that are conserving forests beyond their own needs for the sake of global gain. Indeed, the concept of a developing country agreeing to the preservation of natural tropical forest without any financial returns to pay for their management is not a very practical one, particularly when large proportions of their populations often rely on the land to supply both food and fuel.

Valuation should always be approached as a tool to answer questions; it should be done not for mere curiosity but to provide those who have to make decisions with the relevant information. Therefore, knowledge of the factors that decision-makers are likely to take into account is necessary before designing the valuation. Investment is one area where prior valuation studies are useful. Investment preparation tends to come after policy decisions on the orientation of the project intervention (sometimes based on formal valuation) have already been taken. In such cases, investment preparation work focuses not so much on valuing the contribution of forests but on comparing the likely outputs with and without the project. However, situations exist where projects are on such a major scale that full valuation of various options is required as an immediate precursor to investment project preparation. It is for such situations that these guidelines are prepared.

Value is the worth of a product or service to an individual or a like-minded group in a given context (Brown, 1984). Economic values are anthropocentric by nature, i.e. they are human-oriented and human-assigned. There are, however, non-anthropocentric values, for example, intrinsic values; these essentially deal with the inherent right of life forms to exist, independent of whether they are of use to humans.

Values are of importance not just in the field of economics but also in philosophy in the treatment of ethics. Classifications of value are varied and complex: for the purpose of this work, valuation is understood in its economic sense, i.e. monetary values⁹.

The reference to "in a given context" in the above definition of value is of fundamental importance. Even in the "same" situation, people with different values are likely to behave differently. They perceive the situation and organize its constituent elements in different ways. As Jamieson (1987) indicated, even people with identical values do not necessarily behave identically: their values are put into operation under different sets of constraints. In other words, there is not a single value but a wide variety of values for a given resource and the people concerned hold these values for a variety of reasons (McCollum et al., 1992). Hence the results of a valuation should be attributed back only to the group that was studied.

There are many circumstances when the values of forests are not captured and remain only "potential" or "latent". There are other circumstances when values are captured through sale in the market and many other situations when the value is captured by people through direct use (e.g. by subsistence consumption). When value is captured through trade, it is not necessarily equal to that captured through direct use. Kanel (1990), for example, observed that certain non-wood forest products are essential for household food security during drought periods when other foods are scarce. He felt that under such conditions, the value-in-use, i.e. the true benefits brought to resource users, is much greater than the value-in-exchange, i.e. market value¹⁰.

Economic value associated with forests can be classified in four categories: (A) direct use values (including consumptive and non-consumptive use values); (B) indirect use values; (C) option values; and (D) existence and bequest values. Box 1 gives a breakdown of values developed by Gregersen et al. (1995) (after adaptation to include elements from Pearce and Moran, 1994). It should be noted that a forest can have any or all of the values in Box 1 or only some of them. Very often, an analyst has to deal with a combination of values the relative importance of which is different for each forest or project.

Full forest valuation is not a panacea for problems of forestry development, including deforestation and forest degradation. In the end, there is a political nature to the decisions made and full valuation provides only some of the information. It is far too simplistic to assume that forest resources have been depleted because of lack of valuation and that they will be conserved or that forest management will be preferred to alternative land uses when valuation takes place. Deforestation is a multisectoral issue and not only a forest sector problem (Ciesla, 1995). Monetary valuation is an attempt to integrate environmental effects into the decision-making process: it is only one form of valuation, has its own limitations and will not always be the most relevant method. There are many socio-economic and political forces that underlie the processes of deforestation, forest degradation and conversion of forest lands to other uses, not all of which can be addressed through valuation (Commonwealth of Australia, 1995). These forces interact and there is a diversity of needs and concerns which suggests that there is no universally "right" or "wrong" policy path (World Bank, 1995). Valuation is not an end in itself but a tool that can help lead to sound decisions.

Box 1 - Classification of forest values

I. USE VALUES

A. Direct use values (associated with the following benefits)

A.1.1 commercial/industrial market goods (fuelwood, timber, pulpwood, poles, fruits, animals, fodder, medicines, commercial non-wood products (e.g. rattan) etc.)

A.1.2 indigenous non-market goods and services (fuelwood, non-commercial non-wood products, animals, skins, poles, fruits, nuts, medicinal plants etc.), food security.

A.2 Non-consumptive uses

A.2.1 recreation (jungle cruises, wildlife photography, trekking, etc.)

A.2.2 science/education (forest studies of various kinds).

B. Indirect use values (associated with the following benefits)

II. NON-USE VALUES

C. Option values

C.1 People may value the option to use a forest in the future. Although such values are difficult to measure in economic terms, they should be recognized in value in the contributions of forests to human welfare. This concern can contribute to conservation and preservation of forests.

D. Existence and bequest values

D.1 People may value a forest or resource complex purely for its existence and without any intention to directly use the resource in the future. This includes intrinsic value.

Source: Adapted from Gregersen et al. (1995).

Measuring or estimating values is not the same as capturing them or making them reality and integrating them into forest development policy and management. Values such as those for carbon sequestration may accrue to the global community but no one group can see them reflected in financial flows. For those who live near or in forests, a claim that enormous values are being generated by their forests while they themselves are gaining no cash, employment or other "real" benefits may not be easy to appreciate. Similarly, countries that set aside large areas of forest for environmental benefits (which valuation may show to be quite high) may have difficulty defending their conservation decisions when they have to invest cash in return for the non-cash benefits.

Values will be high enough to stimulate better management of forest resources only if they are perceived to be capable of being realized or capable of being captured, otherwise no attention will be paid to valuation results even if they indicate great value for forests. Thus, for example, Grimes et al. (1994) in their study on the economic value of non-wood forest products in Ecuador calculated a present value of US$2,830 per hectare in upland plots and US$1,257 in alluvial plots for collection of NWFPs. These values were significantly higher than the returns from alternative land uses in this area and yet people persisted in preferring the alternative uses. Clearly, local people preferred actual returns from their other land uses to calculated high "potential" values for NWFPs.