PART II: THE VALUATION PROCESS

Chapter 3: IDENTIFYING AND DETERMINING INPUT AND OUTPUT INFORMATION NEEDS AND CONSTRAINTS TO MEETING THOSE NEEDS

Much has been written about economic, social and environmental losses caused by deforestation and forest degradation. Population growth has been frequently pointed out as a major cause. However, although this may be true of some regions, there has been also some exaggeration. Indeed, deforestation and forest degradation are the result not of a single cause but of a complex relationship of different factors. So, the first step is to identify and quantify real impacts and their causes. This is a critical and difficult step. For example, estimates of some outputs, such as fuelwood, timber or fodder, can be dealt with in a straightforward fashion, whereas environmental outputs are not so easy to deal with. Environmental outputs can usually be dealt with only in a qualitative sense, e.g. aesthetic benefits (Gregersen and Contreras, 1992). It is also important to bear in mind that some forestry projects are designed to produce multiple outputs (e.g. sawnwood and plywood) or joint products and services (e.g. timber, wildlife habitat and watershed or soil protection).

The inputs of a project can be direct or indirect. Indirect inputs are those which already exist in the project site, e.g. infrastructure such as roads or community facilities. Direct inputs are paid for by the project. If raw material, such as wood, is produced as part of the project, then the component input requirements are listed rather than the raw material such as roundwood. According to Gregersen and Contreras (1992), the direct inputs can be categorized as shown in table 5.

Table 5. Categories of direct inputs.

Source: Adapted from Gregersen and Contreras (1992): table 4.1, p. 47.

A forestry investment project can provide direct or indirect outputs which are specific to both the site and the situation. This is in accordance with one of the arguments of this report on the importance of the context in the design, analysis and results of a forestry valuation study. The classification as direct or indirect output follows. As can be seen, most of the outputs might or might not be traded in any given situation²³.

Outputs that are consumed:

- timber products (commercial/non-commercial)

- fuelwood and other biomass fuels

- fruits, nuts, leaves, etc.

- laboratory animals, genetic materials, skins, etc.

Outputs that are not consumed, but often are paid for in financial terms:

- scenery/recreation use (jungle cruises, trekking, wildlife photography, etc.)

- soil protection/watershed protection (downstream land/water users paying upstream populations for services to protect soil)

- existence values (people valuing a forest just because it is there).

- socio-cultural services, i.e. living environment, for indigenous peoples

- protection of biodiversity (which may eventually lead to marketed outputs)

- gas exchange and carbon storage.

Gregersen and Contreras (1992) suggest that, as a general rule:

(i) using the various technical studies available for the project, identify direct inputs and outputs. To the extent that separable project components have been identified, divide up the direct inputs and outputs by components. These can be listed in separate physical flow tables for components and added together at a later, summary stage in the analysis;

(ii) identify the indirect effects due to the project. List these by separable components, if possible, as indirect positive effects if they add to the aggregate quantity/quality of goods and services available for consumption, or as indirect negative effects if they involve reduction in the quantity/quality of goods and services available.

Both direct and indirect effects should be distinguished on the basis of how the resulting information will be used in succeeding stages in the analysis. They should be divided into categories that make sense from the point of view of valuation and in terms of the types of sensitivity tests that will be included in the analysis. Many of the indirect effects cannot be assigned meaningful values in monetary terms. However, they should still be identified in quantitative physical terms, if possible, and otherwise at least specified in descriptive terms. Regardless of whether or not they have an identifiable monetary value, they may be important in the broader decision-making context. It is not just monetary values that are important to a decision-maker: on the contrary, there are many other considerations that may be much more important. The analyst should also be aware that, generally, an indirect positive effect can have an associated indirect negative effect (cost), e.g. pollution or negative environmental effects.

Technical experts can help the analyst identify the likely magnitudes of the effects (both positive and negative). These can be listed in a separate table or tables. In those instances where it is not possible to estimate magnitudes (quantities involved), the analyst should still develop a statement describing the nature of the effect expected in terms as specific as possible. Note that in any change there will be always someone who gains and someone else who loses. Most of time they are very different people. Evidence suggests that the establishment of a park or reserve generally imposes losses on local people who depend on the forest resource whereas its benefits go to outsiders. This is a very important aspect to be taken into account.

The "with and without" concept should be used to develop technical relationships to relate system inputs²⁴ and outputs with and without the project. It is important to stress that with and without a proposed change is different from "before and after" the change (Gregersen et al., 1995). This rule is not specific to a particular type of investment project.

The existing situation or "without project" condition over time must first be defined and quantified using the available information, such as inventory, monitoring and survey data. Often, this information is neither easily available nor sufficient to characterize all the important relationships. Thus, experience and expertise of professionals are needed to compensate for the absence of data and to focus energies on those relationships having the greatest impacts.

The next step is to define the "with project" conditions; for example the effectiveness of different rehabilitation and management practices should be quantified. As in the "without project" situation, the analyst may be faced with lack of data. Again, input and output values should be estimated and, to do so, professionals with experience and expertise are required. It should be stressed that output will vary according to the combination of inputs (i.e. technical relationships) and that the great challenge is to develop these biophysical relationships.

Not all benefits attributed to a forestry project have a close relationship to market products, e.g. high environmental quality can contribute to better health of people. In such cases values can be estimated by proxy using one of the methods discussed in more detail in the next chapter. However, there are some benefits that cannot be quantified, such as those involving ethical issues of human life. In such cases information should be descriptive. These aspects will influence the kind of information required and will vary not just as a function of the project type but also as a function of the context in which the project has been proposed. The main sources of information are statistical records, surveys, inventories and so on. The analyst can also rely on information provided by professionals with experience and expertise on the investment project type or on the area where the project is located or, preferably, on both.

Valuation should be case specific: each case has its own specificities and data requirements. There is no model nor a list of what information is needed. The information demanded will be a function of the objective of the valuation, the context in which the valuation is being carried out²⁵, availability, time and cost to collect²⁶ and technique/method used. One of the greatest challenges is not just to produce the information, but how to get it used. The expertise and experience of the analyst will be of extreme importance in this definition of what information is needed. It is also important to bear in mind that one type of project can have more than one function, e.g. a project can have as its major aim watershed management, but at same time contribute to biological conservation (protected area). For each of the four major categories of investment project discussed, the types of information needed are outlined. It does not constitute an exhaustive and conclusive list of the information required because each case has its own particularities which should be taken into account. However, as an example, the watershed is discussed in detail.

In such cases it is advisable first of all to define clearly both the forest scenario and the non-forest scenario, i.e. what will be the use to which the land will be put after conversion from forest. Then identify the inputs and outputs for both. The issue of who benefits and who loses is particularly important in this case because often very different people and economic sectors of society are involved. Frequently the decision to convert forest land to agricultural land, including pasture, is based on a political decision rather than an economic one. One of the best examples was the process of colonization in the Amazon region²⁷. Among other factors, pressure for increasing food production and even questions of national security can have much more influence than economic factors in the final decision on converting forest land to other uses.

Arguments in favour of afforestation or reforestation projects have often been in response to specific aims such as to offset deforestation, meet industrial needs or supply fuelwood. However, this sort of project can also contribute to watershed protection. In recent decades a major emphasis has been put on projects in which social aspects are the major goal, such as community forestry projects. In such cases the focus should be much more on the role of these plantations in satisfying people’s needs rather than on trees per se as has traditionally been done in large-scale industrial forest plantations.

The traditional inputs linked to land, labour and capital should be identified and quantified. Given the emphasis on social forestry projects, the analyst should be aware of the land tenure where the project is going to be established. The property ownership mode can be individual, family, village, government or even free access. These forms can occur in isolation as well as coexist. Each project will have different combinations of these inputs and for each one there will be a different output. Each afforestation or reforestation project is to some extent distinct and site specific. Therefore, although some principles may be common and known, their application to particular situations requires interpretation of local needs and adaptation to fit those needs.

Given the emphasis on environmental matters, the establishment of protected areas has become a major concern. As in the previous project types, the major inputs usually will be land, labour and capital. However, in these projects the analyst should be very careful since evidence suggests that the establishment of protected areas may be much more important to outsiders than to local people. The establishment of protected areas to promote biological conservation seems to have imposed heavy opportunity costs on local people. It is also important to bear in mind that, for example, establishment of protected areas may conflict with the aim of becoming self-sufficient in wood products.

Deforestation is one of the causes usually blamed for upland degradation and for downstream impacts, such as flooding and reservoir sedimentation: although this is true in part, there has been also some exaggeration (see box 3). So, the first step is to identify and quantify real impacts and their causes. Any project involves a set of new or altered activities directed at reaching its objective. In the case of watershed management projects these activities primarily involve upland use and management. The inputs are largely those derived from additional use of factors of production (land, labour and capital) over and above the level of use in the "without project" condition. These inputs are "costs" and occur on site whereas outputs are divided between upland on-site and downstream off-site effects and are "benefits". A list of examples of inputs needed for a watershed project is presented in table 6. Once the inputs have been listed, they should be quantified in terms of costs; a physical flow table by each category and for the years of the project should be developed since the inputs are not going to be used at the same time.

Table 6. Examples of inputs needed for watershed projects.

Source: Adapted from Gregersen et al. (1987): table 3.1, p. 22.

Once the inputs are listed the next step is to identify the outputs produced. Technical studies are needed to derive relationships that link outputs for a given watershed condition "without project" and outputs associated &qu ot;with project". All outputs should be considered. Using the "with and without" concept, technical relationships can be developed as presented in table 7. It should be stressed that it is the incremental relationships between the independent and dependent variables that is important.

However, people do not put value on soil losses avoided, but rather on what those avoided losses mean in terms of, for example, food losses avoided. Thus, the input-output relationship is only complete when it has reached the relationship between inputs and the goods and services that are consumed or used by people and therefore take on value to society.

Table 7. Examples of technical relationships needed to perform economic analysis of watershed management projects under "with and without" project conditions.

Source: Gregersen et al. (1987): table 3.2, p. 23.

Notes: ^a Technical relationships for determining land use impacts on landslides and flood frequency and associated damages require involved and complex analyses. According to Gregersen et al. (1987), methods of performing hazard analysis for such events are presented by Petak and Atkisson (1982).

Proper valuation of forest goods and services depends on reliable information, both quantitative and qualitative, and including physical as well as socio-economic elements. However, information on biophysical relationships between inputs and outputs is often inadequate. A shortage of basic and reliable scientific information on many aspects of forest production other than timber is among the most fundamental barriers to reliable forest valuation at present. The absence of solid information and knowledge may explain the heavy reliance on "guesstimates". It may also explain the temptation facing analysts to adopt assumptions for a given valuation that may tend to favour the outcomes they want to see.

On the physical side, sound information on the nature of the forest and ecosystem interactions as determined by forest resource assessments is a prerequisite for valuation of forests. This information should go beyond timber to encompass non-wood products and the potential to provide services. It should cover both "stock" and "flow" elements; for example, it is necessary to know not only total quantities of wood and non-wood products but also productivity under various management regimes. Furthermore, it is necessary to know how the system interacts internally: how does harvest of timber affect non-wood resource productivity? how does either of them affect water and soil protection potentials? what cyclic (including seasonal) patterns exist in productivity? Specific areas of information weakness include:

- There is still considerable uncertainty over the dynamics of the forest ecosystem, processes which (particularly in tropical forests) are complex and inadequately understood. Even knowledge on what may be irreversible after forest alteration and conversion is still inadequate, as is that on the relationship between economics and environment;

- According to Andersson and Bojö (1990), "our knowledge of environmental processes, such as land degradation, is rather limited, especially regarding long-run effects". This can lead to wrong assumptions which, in turn, can drastically affect valuation results. Box 3 gives an example of the implications of poor knowledge on the perception of value in a watershed forestry project.

Box 3. When does sedimentation control start?

Control of sedimentation has been a major consideration and source of value for forests in watershed management projects. In the absence of unassailable scientific evidence, it is assumed in some valuation studies that sedimentation will be reduced as early as the first year after watershed forestry interventions. This boosts early returns and therefore the net present value (NPV) is increased, sometimes sharply. In real life, however, many soil stabilization benefits take place only after many years and could be spread over decades, thus reducing NPV to very small or even negligible levels.

See: Chomitz and Kumari (1996).

One result of lack of reliable knowledge is that analysts have on occasion succumbed to the temptation of attaching high weights (and consequently high values) to forest functions or goods for which there is no reliable or agreed scientific information on the biophysical relationships between inputs and outputs. Take non-wood forest products as an example:

There is frequent attribution of high values to hitherto little-commercialized tropical NWFPs for which there is no information on yields, productivity, markets, seasonality and management regimes.

Data are also insufficient on potential yield of NWFPs. These products usually occur at extremely low densities and produce low yield per unit area. Information is lacking or is weak on the reliability of crop yields, periodicity or seasonality: this clearly makes marketing problematic. Box 4 gives an example of unpredictable NWFP yields.

Box 4. - Unpredictability of forest yields: a factor in valuation²⁹

An example of lack of predictability in data on non-wood forest products (NWFPs) is the production of the illipe nut that produces an oil similar to cocoa butter: the illipe fruit is produced by about 20 different species of Shorea trees. According to Peters (1994), in 1987, over 13,000 tonnes valued at over US$5 million were exported from West Kalimantan (Indonesia) alone. In the following year less than 50 tonnes were collected. In carrying out valuation, it is important to bear in mind this lack of predictability of production. In the absence of solid records or basic knowledge, a cautious approach should be used to avoid overestimation of value of NWFPs.

Within the same country, the cultural milieux varies in every region and even locality: consequently, the peoples’ perceptions and uses of the forest are also different. Padoch (1987), referring to Peruvian conditions, points out that there is no "typical village" or "typical marketing pattern". A study by Lescuyer (1996) of two neighbouring villages with different commercial outlets showed that the institution of monetary value for each product gathered led to change in the modes of use of the resource. This once more suggests that forest valuation should be type- and site-specific and any generalized approach would have only limited validity (Leslie, 1987).

The following chapter deals with choosing and applying valuation measures and techniques in order to value inputs and outputs. It is assumed that the inputs and outputs have been explicitly identified and quantified as discussed in this chapter.