International Forestry Review - CFA

International Forestry Review Vol. 12 (2), 2010

The

Contents PAPERS Forest taxation regime for tropical forests: lessons from central Africa A. KARSENTY

International Forestry Review

COMMENTS 121

165

The 2008-2009 timber sector crisis in Africa and some lessons for the forest taxation regime A. KARSENTY, N. BAYOL, P. CERUTTI, D. EZZINE DE BLAS and E. FORNI

172

Forestry taxation in Africa: the cases of Liberia and Gabon R. KRELOVE and O. MELHADO

139

Bidding system for allocating forest concessions M. GRUT

177

Legitimacy of public domain forest taxation, and combatting corruption in forestry J. PALMER and J. BULKAN

150

Taxation of tropical forests: Search for generalizations after half a century of trying I. RUZICKA

181

THE INTERNATIONAL FORESTRY REVIEW

The challenges of redistributing forest-related 130 monetary benefits to local governments: a decade of logging area fees in Cameroon P.O. CERUTTI, G. LESCUYER, S. ASSEMBE-MVONDO and L. TACCONI

A reform of fiscal policies in forested African countries H. BOURGUIGNON

Vol. 12 (2), 2010

Special Issue: Forest taxation and tropical forest management

ISSN 1465 5489 PUBLISHED BY THE COMMONWEALTH FORESTRY ASSOCIATION www.cfa-international.org SPECIAL ISSUE EDITORS: A. KARSENTY and A.J. POTTINGER

The International Forestry Review Editor

Alan Pottinger The Crib, Dinchope, Craven Arms, Shropshire SY7 9JJ, England Email: [email protected]

Chairman of the Editorial Advisory Board

Jim Ball 11 Mansion House Mews, Corsham, Wilts SN13 9BB, England Email: [email protected]

Editorial Advisory Board

Jim Ball Independent, Italy/UK

Peter Kanowski Australian National University, Canberra, Australia

Timothy Boyle Independent, Canada

Jean-Paul Lanly Conseil Général du Génie Rural, des Eaux et des Forêts, Paris, France

Susan Braatz FAO, Rome, Italy Eberhard Bruenig University of Hamburg, Germany Neil Byron Australian Productivity Commission, Melbourne, Australia Jim Carle FAO, Rome, Italy Ebby Chagala Kenya Forestry Research Institute (KEFRI), Nairobi, Kenya Mafa Chipeta FAO, Rome, Italy Jonathan Cornelius James Cook University, Australia John Innes University of British Columbia, Canada

Bill Mason Forest Research, Edinburgh, UK Cesar Sabogal Centre for International Forestry Research (CIFOR), Brazil Naresh Saxena Independent, New Delhi, India Jeff Sayer Science Adviser: International Union for Conservation of Nature (IUCN) Lee Su See Forest Research Institute Malaysia, Malaysia Josef Turok International Plant Genetic Resources Institute (IPGRI), Rome, Italy Peter Wood Independent, Oxford, UK

Contact Editor, International Forestry Review, The Crib, Dinchope, Craven Arms, Shropshire SY7 9JJ, UK Telephone: +44 (0)1588 672868, Fax; +44 (0)870 01 16645 Email: [email protected], Web: www.cfa-international.org Cover photo: The entrance of the wood mill owned by Gabonaise Industrielle du Bois, Gabon (Photo: A. Karsenty)

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International Forestry Review Vol.12(2), 2010

i

Contents COMMENTS

PAPERS Forest taxation regime for tropical forests: lessons from central Africa A. KARSENTY

121

A reform of fiscal policies in forested African countries H. BOURGUIGNON

165

The challenges of redistributing forest-related monetary benefits to local governments: a decade of logging area fees in Cameroon P.O. CERUTTI, G. LESCUYER, S. ASSEMBE-MVONDO and L. TACCONI

130

The 2008-2009 timber sector crisis in Africa and some lessons for the forest taxation regime A. KARSENTY, N. BAYOL, P. CERUTTI, D. EZZINE DE BLAS and E. FORNI

172

139

Bidding system for allocating forest concessions M. GRUT

177

Forestry taxation in Africa: the cases of Liberia and Gabon R. KRELOVE and O. MELHADO

181

Legitimacy of public domain forest taxation, and combatting corruption in forestry J. PALMER and J. BULKAN

150

Taxation of tropical forests: Search for generalizations after half a century of trying I. RUZICKA

SPECIAL ISSUE EDITORS: A. KARSENTY and A.J. POTTINGER

ii

International Forestry Review Vol.12(2), 2010

International Forestry Review Vol.12(2), 2010

121

PAPERS Forest taxation regime for tropical forests: lessons from Central Africa A. Karsenty Département “Environnements et Sociétés”, UPR 36, TA C-36/D, Campus de Baillarguet, 34398 Montpellier Cedex 5, France

Email: [email protected]

SUMMARY Intense debates have taken place on the role of forest taxation in forest management and its potential as a component of public policies. Some reforms, such as the introduction of auctions for allocating concessions in Cameroon, have been controversial and their effects are being assessed in different ways by analysts. Empirical analysis and data suggest that two different aspects have often been confused but should be considered separately: the level of taxes and the structure of the taxation system. The heterogeneity of companies has often been overlooked in economic models. The specific context in which the fiscal reform is planned is critical and a combination of instruments – fiscal and non fiscal, economic and regulatory – should be designed and implemented together to create systemic effects. This is rarely possible through a single reform. The potential of fiscal instruments in fostering SFM should not be over-emphasized, but certain possibilities do exist if taxation is not used alone but as an auxiliary in a coherent set of actions and public policies.

Keywords: forest taxation, forest concessions, sustainable forest management, central Africa

Quel régime de fiscalité forestière pour les forêts tropicales ? Enseignements d’Afrique centrale A. Karsenty Des débats intenses ont été conduits sur le rôle de la fiscalité dans la gestion forestière et sur son utilisation possible en tant qu’instrument de politique publique. Certaines réformes, comme l’introduction d’un système d’enchères pour l’attribution des concessions au Cameroun, ont été controversées, et leurs effets ont été perçus de manière différente par les observateurs. L’analyse et les données empiriques suggèrent que deux aspects différents ont souvent été confondus, alors qu’ils devraient être considérés séparément : le niveau des taxes et la structure de la fiscalité. L’hétérogénéité des compagnies a souvent été ignorée dans les modèles économiques. Le contexte spécifique dans lequel la réforme fiscale est préparée constitue un facteur déterminant, et un ensemble d’instruments, fiscaux et non fiscaux, économiques et réglementaires doit être préparé et mis en œuvre simultanément, pour produire des effets de système. Mais cela est rarement possible par le truchement d’une réforme unique. Le potentiel des instruments fiscaux pour promouvoir une bonne gestion forestière ne doit pas être surestimé. Cependant, de réelles possibilités existent si la fiscalité est comprise comme un auxiliaire bien conçu au sein d’un ensemble d’actions et de politiques publiques.

Régimen fiscal de los bosques tropicales: lecciones del contexto centroafricano A. KARSENTY Ha habido debates intensos sobre el papel que deben desempeñar las cargas fiscales en el sector de la gestión forestal y su potencial como componente de las políticas públicas. Algunas reformas, como la introducción de un sistema de pujas para el reparto de concesiones en Camerún, han sido polémicas, y los analistas están evaluando diferentes aspectos de sus efectos. El análisis empírico y los datos sugieren que hay dos aspectos diferentes que a menudo han sido confundidos pero que deberían considerarse de forma separada: el nivel de los impuestos y la estructura del régimen fiscal. En muchas ocasiones se ha pasado por alto además la heterogeneidad de las empresas en los modelos económicos. El contexto específico dentro del cual se planifica la reforma fiscal tiene una importancia fundamental, y una combinación de instrumentos – fiscales y no fiscales, económicos y reguladores – debe ser diseñada e implementada de forma conjunta para así poner en práctica efectos sistémicos. Pocas veces resulta posible lograr esto a través de una sola reforma. No se debe subestimar el potencial de los instrumentos fiscales para promover la gestión forestal sostenible, pero existen ciertas posibilidades con tal de que las cargas fiscales no se utilicen de forma aislada, sino como instrumento auxiliar dentro de un programa coherente de acciones y políticas públicas.

122

A. Karsenty

INTRODUCTION One of the main objectives of a tax system is to collect revenue for the State and local governments. The tax system should also foster resource valuation by limiting wastes and adding value to the products. It is a tool that the government can use to adjust access costs to forest resources. The level of taxes should remain compatible with profitability of enterprises but should also be used to induce the operators to either improve their performance in sustaining the value of the resources, or withdraw from the forest sector if they cannot cope with new requirements. “Capturing the forest economic rent” Specific taxation regimes generally apply to natural resources. It is commonly acknowledged that exploitation of natural resources such as ore, fish or timber is likely to generate an economic rent. The economic rent is the difference between the return derived from a factor of production and the remuneration needed to keep this factor in its same use.1 In other words, economic rent is equivalent to excess profits, beyond the “normal” profit. Why are natural resources believed to generate rents? There are two basic assumptions, both derived from the Classical economic theory: - Natural resources, priced as commodities on global markets, are a “gift of nature”, i.e., no investment costs have been devoted to produce them, even if extracting them has a cost; - Since the market price is given by the extraction cost of the marginal unit of resource, there is a range of differential rents enjoyed by the resource owner, depending on various factors (e.g., location and quality). Such a hypothesis can be debated and somehow alleviated, but it is the common background on which the existence of the natural resources economic rent is based. As the official owner of forests in most tropical countries, the government should try to capture the forest economic rent (FER) through various fiscal schemes. It must be pointed out that the FER is, potentially high, especially high when primary forest is logged, since this type of forest yields the benefit of centuries of biomass accumulation which will not be reconstituted under the common 25-40 years felling cycle enforced in managed forests in tropical countries. In theory, the Government could capture the full FER using an appropriate corporate tax on revenues. However, there is asymmetrical information between the governments and the companies regarding the genuine costs borne and profits enjoyed. In addition, thanks to “fiscal optimization”, companies are able to lower their declared benefits and corporate taxes can be drastically reduced. For this reason, governments have put the emphasis on specific taxes and rely only marginally on corporate taxes.

Knowing the magnitude of the FER is particularly challenging. In theory, it is easy since timber is supposed to be a commodity, with prices based on the international market, logging costs that can be determined throughout the territory, and “mobilisation costs” that vary according to transport distance. In practice, however, it is not so simple. Timber is not a “perfect commodity”: international databases are rare and incomplete2 since there are dozens of species, different qualities, products (logs, sawnwood, veneer, plywood, moulding, etc.) and sizes. The different segments of timber markets are not large enough to harmonize prices and there are no forward markets for timber. Market niches are frequent, and for the same product, prices may vary from one contract to another, depending on the antecedent and quality of trade ties established between both parties (regular supply, quality maintained over time, etc.). In addition, in many tropical countries (namely the Congo Basin and Southeast Asia), companies are vertically integrated and process logs into a range of products, some of them being no longer “commodities” but manufactured items. Thus, the magnitude of the FER can also be very sensitive to the efficiency of the timber process in the different industries, an efficiency not only reducible to the apparent wood volume recovery rate (for instance furniture-making might face a low wood volume recovery rate compared to plywood but its production often generates much greater added value, due to potential prices enjoyed by high quality furniture). As a result, assessing precisely the FER magnitude is often a difficult exercise to set the “optimal tax level” which could capture the full economic rent for the government without hampering the forest industry. Tax levels are generally set by trial and error, and governments sometimes face “black boxes”. And since relative prices are subject to permanent change, the amount of FER captured by a given tax level is subject also to change: when timber prices rise, proportionately less economic rent is captured; but if energy prices rise more than timber ones, a rigid tax rate can lead to a situation of excess taxation, with remaining profits falling below “normal” levels. Cameroon was faced with such a situation in early 2006, before the escalation of timber prices beginning mid-year. Facts are dynamic in this respect; moreover, since industrial processes also need to be taken into account, the companies have their own capacities to respond to change in fiscal pressure and relative prices, through better management and technical or commercial innovation. In other words, companies have (differential) capacities to re-create economic rents, especially when they operate on the international market and they have a production diversification potential. Such empirical evidence suggests that, beyond the primary function of “collecting the rent”, the overall tax level may have a dynamic impact on companies’ strategy and behaviour. We shall come back later to this point. A recurrent debate has opposed economists regarding the 2

1

 his reflects Alfred Marshall’s notion of rent as synonymous with T “producer’s surplus”.

 he only free information source is the ITTO’s Market Information T Service, which gives a twice-monthly list price of selected products, significant but far from being comprehensive.

Forest taxation regime for tropical forests

impact of the level of taxation on loggers’ behaviour vis-à-vis forest management quality. First, there is economic evidence: the more profitable logging becomes, the larger the national area of forest attractive for loggers is likely to be (less selfprotected areas). Some arguments emphasize the perverse incentives generated by excess profits allowed by low tax levels: loggers will disregard any type of improvement such as reduced impact logging (RIL) or careful layout of skidding trails, which reduces ecological damage and is likely to save some money in the long term, but which implies significant management change at the company level. The same outcome is expected in the processing industry: why waste time and energy in investing in diversification and optimal use of byproducts if the activity is profitable enough when “doing business as usual”? In short, “rentiers” are not innovative, and if sustainable forest management (SFM) has to do with innovation, then rents must be seized. The other side argues that a non-profitable timber company will not have the capacity to invest in a highstandard management plan, training workers to achieve RIL, afford modern processing facilities and prospect new markets for lesser-used species (LUS). As an example of the ambivalence of insufficient profitability, it is clear in West and Central Africa that many European companies during the period of low timber prices in the 1980s abandoned improved forest management practices (such as planning road and skid trail networks) that they had used in the past. Apparently similar causes (excess profits on one hand, falling profits on the other) do not always produce the anticipated effects.3 We might provisionally close this debate on the influence of rent-sharing in forest management by citing this pragmatic opinion: “It is an empirical question, however, whether the national economy and poorer local populations gain more from private harvests, private rent capture, and re-investments, than they would from the Forestry Ministry’s resource management and rent capture. How much would private interest reinvest locally, how much would private operators transfer to secure accounts overseas? Alternatively, how much resource rent would the Forestry Ministry dissipate in hidden personal transfers, excess employment, poor financial management, and insufficient environmental awareness? (…)” (Hyde & Sedjo 1992). Redistribution in favor of the state and at the expense of the operator (high tax rates) will thus have no predictable influence on the practices of operators as a whole (everything will depend on the context and the many parameters that may be completely specific to the operator). This heterogeneity of the companies is a key issue, and is often not well perceived by reformers (who consider “the industry” without distinction). Providing it does not exceed a threshold above which the activity is unprofitable for all, a significant fiscal pressure acts as a selection factor amongst the companies, driving the less efficient out of business (provided laws are enforced 3

 ince the mid-1990s, in the light of a more favourable economic S situation, various logging companies in Central Africa have taken on forestry experts to improve their planning.

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and control is effective). In a context of rising standard levels for achieving SFM, a tougher tax policy accelerates the concentration of the industry, leaving only those able to cope with demanding SFM standards (e.g., FSC certification) and who can afford to pay high taxes (since they have certain capacities to re-create economic rents). This sounds good for sustainability, but it can also be viewed as a threat by local entrepreneurs and national politicians wary of foreign capital domination in the forest sector. Why tax structure matters It has been suggested that since forest taxes are not levied on damages but on production (or the surface bearing the production), it is not possible to use them as “eco taxes” (Leruth et al, 2001). But, to varying degrees, any fee or tax has its own set of incentives, and can be used to collect economic rent and/or be an element of a field control system. The other, and often ignored, dimension of forest taxation is its structure along the commodity chain. This is where levers for amending company practices can be found. For a given level of fiscal pressure, taxes can be collected at different stages, applying in particular to: - the surface area conceded (area fee or royalties); - the Annual Allowable Cut area, generally equal to 1/30th of the full concession area; - the stumpage volume, as it is derived from inventories and valued according to the commercial value of the stand; - the felled volume, with differences among species according to their contrasted commercial value; - the (valued) volume of logs entering into the mill; - the (valued) volume of processed products; and, - the forest products exported (logs, sawnwood, veneers, plywood) valued at their FOB prices. Some of these taxes can also be modulated according to the location of the concession in order to offset differences in transport costs. Forest taxation is never limited to a single tax, and its structure may be somewhat complicated. In the early 1990s, some economists advocated a dramatic simplification of the forest taxation structure in Africa, suggesting only an area fee (the easiest to monitor), preferably set through competitive bidding (Grut et al. 1991). But this idea proved to be unpractical: with a single area tax calculated upfront, forest taxation would be reduced to a fixed cost whereas the cash flows of companies vary with price changes, weather conditions, security, possible conflicts with local populations, etc. Too many fixed costs would be incompatible with the economically hazardous nature of tropical forestry. The private sector tends to prefer taxes proportional to their economic activities, namely felling taxes and export duties. However, some empirical evidence shows that moving taxation upstream can have a positive impact regarding waste reduction and sustainability. It is, for instance, more advisable to set the taxes on (valued) volume entering the mill than to tax exported processed products: taxing the raw

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material rather than the output gives the timber processor an incentive to invest in increasing the rate of wood recovery. Such a change has been observed in Cameroon since 2001. But whilst this principle is relevant to this context, the control of timber entering the numerous mills spread across vast territories proved to be more difficult than expected (even though controlling the logs entering the mills ought to be part of the plans to fight illegal logging). For other taxes, it is necessary to describe some features of the “logging sustainability issue” in high forests of the Congo Basin. Logging practised in remote forests (high transport taxes) is very selective, with, on average, one to two trees felled by hectare (but many more destroyed to get access to and extract them from the plots). Such ‘creaming” of forest stands is not a direct factor of deforestation, but it can lead to biological erosion as it generally targets a handful of species. One side of the “sustainability issue” can be characterized as follows: overexploitation of some commercial high value species, and disregard for several abundant LUSs that could at least partially substitute the volume of principal species harvested (the logging of which is encouraged by high standard management plans). In this respect, area fees and felling taxes can be utilized as levers to modify, to some extent, loggers’ choices. Increasing the tax rate on higher value species (in addition to setting silvicultural regulations in the forest management plans such as raising minimum felling diameters) and lowering tax rates on some abundant LUSs may result in a more balanced mix of harvested species. Regarding the area fee, it is difficult to predict what impact a higher tax level would have (for an equal overall fiscal pressure). The first idea is that higher area fees provide incentives to logging intensification (i.e., more trees harvested per surface unit on average), as in agriculture. Such intensification, provided it is done within the framework of well-designed forest management plans that include RIL can even increase forest regeneration in many semi-deciduous forests, with commercial light-demanding species (Fredericksen & Putz 2003). But it cannot be practized in every forest, by any company, and disregarding market conditions. If intensification is neither desirable nor even possible, a higher area fee simply means fixed costs replacing variable ones (e.g. export taxes), and constitutes a higher risk for the industry. At the same time, higher area fees send a signal of greater resource scarcity to the players. The announcement of an increase in area fees, from almost nil to US$ 1.00 in 2002 in DRC, contributes to the return to the State domain of 25 million ha of low production concessions which until then had been retained by individuals for speculation purposes. Contrary to conventional wisdom, high area fees do not penalise large concessions but rather “under-exploited” ones, since what matters is the fiscal burden per cubic meter of yield, not the average tax per hectare. This scarcity signal embodied in a higher area fee spreads its effects all along the commodity chain: with raw materials getting more costly (adaptations such as intensification take time, and their effect may be limited), the industrial

operator is more likely to increase wood recovery rate and/ or the added value of its production (by valuing by-products, for instance). On the other hand, such a multiplier effect associated with upstream taxation can also have undesirable and indirect impacts on local wood consumption patterns. In a country like Cameroon, since the tax burden has moved (and increased) from downstream (there is no more export tax on processed products but logs are taxed at the mill gate) to upstream (with higher area fees when set through loyal competitive bidding), the sawnwood sold on domestic markets bears the same production cost (including taxes) as the exported one. Consequently, impoverished African consumers cannot afford to pay the price for this industrial production and is more likely to turn to the informal sector. Last, but not least: in practice, the restructuring of forest tax patterns is rarely “neutral” in terms of fiscal burden: and since governments keep looking for increased fiscal revenue, restructuring and raising fiscal pressure are often associated – and often confused by observers. As we have seen, companies do not have the same capacity to re-create rents, and for many of them higher area taxes mean a narrower “profitability perimeter”. This profitability perimeter (or the area inside the economic rent frontier) has often been assimilated to a surface of profitable forest. But in highly diversified natural tropical forests, the profitability perimeter also needs to be considered according to the range of harvestable species: higher fixed costs (i.e., area tax) mean fewer harvested species (only the most valuable can absorb the higher costs). This means more “creaming” – except if corrective measures are adopted in the meantime, such as reducing felling taxes on abundant LUSs, as was suggested in 2006 by an economic study (Karsenty et al. 2006) and is currently considered by the Cameroonian government. Bidding and risk: is there a “winning curse”? As we mentioned above, there is asymmetrical information between the regulatory authority (the government and its experts) and companies regarding the magnitude of FER which the latter benefit from. The difficulty is compounded by the heterogeneity of the companies,4 the differences in richness and remoteness of forest stands. Setting a “right level” for an area fee is the more difficult as such a tax both has the potential to send important signals of resource scarcity and is a potential risk to the industry as a fixed cost. In recent years, the majority of conflicts with the private forest industry were related to the level of area tax (in Gabon, Congo, DRC, Cameroon…). These reasons explain the present shift away from the setting by the Administration of the area tax level setting towards a competitive bidding system. Among the advantages of this latter approach, one expects a simplification of tax recovery (less control), greater transparency (fewer arbitrary allocations), a reduction of differential economic 4

Since each company has its own “industrial equation” which makes different the effective commercial value of the same forest depending on who manages it

Forest taxation regime for tropical forests

rents linked with location (bids would be higher in low-cost transportation areas compared to remote or land-locked areas, all things being equal), an incentive to reduce wastes (in logging and processing) and a disincentive to speculation (adjustment between logging capacities and size of the requested area). Concession allocation through bidding has been encouraged by the World Bank in reform packages, and such a procedure is in force in Cameron since 1997.5 The current allocation system is based on an examination of a technical offer (with an eliminatory threshold) with a weight of 30% in the final computation, and a proposal for setting the per hectare annual area fee, with a weight of 70%. There has been a floor price equivalent to € 1.5 per hectare since 2000. Normally, bidders commit themselves to pay the area fee they proposed for the entire contract duration (15 years, renewable), which made this case almost unique worldwide (contracts are generally shorter). Normally, area fees should be updated on a regular basis to reflect domestic inflation, but this has not yet been the case. The bidding system has been fought against by prominent operators including the best known ones. “Insiders” were very reluctant to give up their long-time established network of patronage and face competition. Not surprisingly, “outsiders” have another view. A new generation of companies, generally more efficient, have seized this opportunity to enter the Cameroonian forest sector. Obviously, once they become insiders, they will be prompt to coalesce with the other players to claim for tax cuts. Some lessons can be drawn from the Cameroonian experience: 1. The area fees proposed by private operators in a market-based environment – € 4-6 per hectare a year in average, and up to € 13 for “good” forests – are far higher than area fees initially calculated by the government under the administrative system. This result was unexpected for most observers and reveals not only the value of Cameroon’s forests on international markets, but also, to some extent, the windfall earnings that neighbouring countries were and are still experiencing; 2. One objection to the reform was that, without a comprehensive inventory of the whole forest, commercial concession values would remain largely unknown and the auction would be impracticable. In fact, though the lack of a comprehensive inventory is a handicap, companies are relatively well informed of the composition of the forest auctioned, often previously exploited at low intensity. Nevertheless, the setting of the floor price was a tricky matter during the reform process. After being set at approximately € 2.5 per hectare, it has been lowered 5

 he first round was most disappointing for the World Bank since T robust rules were not implemented at this time. New allocation rounds resumed in 2000, with better designed allocation rules and the appointment of an Independent Observer.

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at approximately € 1.5 to take into account “the less favoured concessions” with lower potential commercial value. In fact, the floor price matters only in few situations, perhaps in less than 10% of the cases. When competition is real, the proposed price is significantly above the floor price (from € 4 to 6, in average, and sometimes higher). However, it sometimes happens that there is only one bidder in the allocation process for a particular concession and that his bid is only slightly above the floor price. This is often due to the fact that he has been informed – against existing regulations – that he is alone in the race. Sometimes, there is no proposition at all, which may indicate the floor price is too high. The auction system has been effective in capturing most of the economic forest rent and both government and local council revenues (entitled to 50 % of the annual royalty) have increased. The structure of forest taxes has changed with most of them concentrated upstream; this is consistent with the decline of roundwood exports due to the progressive implementation of a partial log export ban since 1999. A 2006 economic study (Karsenty et al. 2006) found many indications that some recently allocated concessions (particularly in 2005) were marred by new irregularities, as demonstrated by the strong correlation between the abnormally low level of financial bids and the many cases where only one bidder was selected at the stage of bid evaluations (all other candidates were eliminated for “insufficient” technical scores). Such a situation simply confirms the fact that any mechanism for the award of an economic asset can end up being diverted. Another lesson is the fact that the “technical” component of the bidding system gives way to manipulations fuelled by corruption, and public opinion (including the civil society and some analysts) is still reluctant to accept the idea that the financial offer is the only component that cannot easily be manipulated. The increase in the costs of access to the forests sparked a range of responses. Some companies attempted to enlarge the range of species harvested, provided they could find new markets for them. The most efficient wood processors have been able to diversify their finished or half-finished products. Recovery rates have globally increased, as several operators have moved toward valorisation and marketing of by-products (including moulding, flooring, etc.). Other wood processors have decided to increase the share of out-sourced raw material, and with the weakness of control by the Forest Service (including widespread corruption), contractors are often national entrepreneurs who access the forest through different ways, often illegally, and with no forest management activities at all. The traditional contrast between regulation and

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economic instruments does not make sense here. As we pointed out, two types of response exist: one (type 1) is potentially favourable to SFM and is based on forest productivity increase (compared to the high-grading initial situation), waste reduction, increase of efficiency in wood processing, and attempt at market innovations. The other response (type 2) threatens SFM. It includes outsourcing, fiscal evasion and illegal logging. In fact, depending on the pressure they feel from the regulating authority, most companies tend to mix “type 1” and “type 2” strategies in varying proportions.6 An appropriate policy, backed by a strong political will, has to enforce strict regulations in the field to block the “type 2 response”, and apply economic instruments such as a bidding procedure and an incentive-oriented taxation regime. However, the competitive auction system has some inherent risks, which are exacerbated by the excess of installed capacity and the lack of information during the launching phase. The heterogeneity of forests, in terms of occurrence and distribution of commercial species, of timber quality and of proportion of unproductive areas, is not always taken into consideration in forest inventories (both reconnaissance and large scale) and an information asymmetry is always present in a context of limited public information. The companies’ adaptation capacity to diverse characteristics of the resource depends on a number of factors, including capital availability, access to markets and the efficiency of the processing capacity. These features are not always under the control of firms that often have limited access to information, limited capacity of anticipation and can make wrong assessments, all limiting factors that can cause risks of overbidding.7 Some operators argue that given the fluctuations of the international wood market and the unstable institutional and legislative conditions of the country, it is impossible for them to correctly reveal their willingness to pay based on expectations on future economic rent. Furthermore, having to pay a fixed annual area fee – as it is the case in Cameroon – when a large part of the cash flow is determined by international volatile prices exposes the concession holder to high risks when the market is down. Based on the above considerations, competitive auctions should not be implemented alone. Targeted fiscal measures aimed at reducing the risks incurred on versatile international markets should be introduced. The following set of measures is to be considered: -

Financial means should be given to the Forest Service (or to private firms acting on its behalf) to undertake survey inventories aiming at providing accurate public information of the commercial potential of the resource to be auctioned. In addition, sufficient

 ven though a handful of companies are clearly committed toward E SFM and globally comply with the new regulation system. 7 Vincent et al. (2003) speak of a “winning curse”. 6

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time has to be given to allow potential bidders to make their own surveys. The area fee should be linked to the international price of tropical wood through the creation of a basket of forest products (logs, sawn wood, ply and sliced veneer, plywood) from different species on which a wood price index updated yearly would be based.8 Export, felling and sawmill entry tax on secondary species could be significantly reduced in order to promote diversification of these species to counterbalance potential high-grading due to higher fixed costs deriving from SFM implementation. And if the forest management plan reduces the potential yield (through increase of the minimum exploitability diameter on main species) after the auction (unexpected reduction), a corresponding reduction in the area fee can easily be calculated. A reduced area tax could be granted to firms that go beyond legal requirements and get independent certification of their forest concession. The government will have to decide what certification system it will endorse and what the duration of the tax rebates for certified firms will be. It is clear that this measure would strongly increase certification which in turn will result in an acceleration of forest management plan implementation, a pre-condition for certification. Management plans under preparation will define productive and non-productive areas within the concession. If the allocation is not made though bidding, it would be advisable to have the area fee paid only on the productive areas once the management plan is ready and approved (it would also provide an incentive to achieve readily the forest management plan). Transferability of concessions (already in force in Cameroon) at auctioned prices should be facilitated with minimum interference of the administration. In case of evident overbidding (payment default), the operator must return the concession without delay and the possible non compliance with forestry rules must be sanctioned adequately.

This set of measures can be considered as a useful way of “fine-tuning” the fiscal regulatory framework following the consolidation of the competitive allocation process. They are inspired by the need for risk reduction, performance recognition (certification), diversification, levelling of the playing field conditions and fair treatment of law-abiding 8

Such a mechanism has been mentioned as a possible means of reducing risk associated with the volatility of international timber prices in Karsenty (2002), and was also put forward by Vincent et al. (2005). Given that operators might be reluctant to disclose their prices to competitors, it is important to work with a price index. This type of information provided by ITTO twice a month for a dozen of African species (logs and sawnwood) could be used as a starting point.

Forest taxation regime for tropical forests

operators. If implemented, they would reduce fiscal revenue in the short-term. At the same time, they should spur a sounder and more vigorous growth of the sector which in turn would benefit the whole economy and counterbalance the initial reduction in revenues. BOX 1 Providing fiscal incentives for certified concessions: a realistic “performance bond” scheme The increase in cases of tax evasion, or attempts to do so, is also an expected – and obvious – outcome of a higher fiscal burden unless controls become more rigorous. The area tax is less favourable for tax evasion, but “non complying” loggers look for other ways of escaping payments on logs harvested in or outside the concession (felling taxes) or without declaring (and paying taxes on) logs entering the mills. To counter such a tendency, financial rewards could be given to concessionaires who comply with the law and commit themselves to independent auditing based on performance, e.g. forest management certification. One could consider that a concessionaire who invests in independent auditing certification places himself under scrutiny and invests in its “reputation”. Certification is both a difficult and long process and easy to lose quickly. Compliance with law is the first requirement for internationally recognized certification schemes and works as an ally for the forest service with respect to law enforcement. Thus, tax cuts for certified concessions would be a wise policy, and would return fractions of the captured economic rents to operators complying with the law, allowing them to offset the cost of their organizational investments and diversify their harvests, in line with management plan prescriptions. To convince governments to give up such tangible fiscal revenues, the international community could propose to compensate governments for the foregone revenues derived from the amount of area certified. This seems a realistic way to take up the idea embodied in the so-called “performance bond” scheme suggested by several authors (Blakeney 1993, Leruth et al. 2001) but whose implementation seems most difficult as long as it is does not take into account the dynamics of independent certification schemes.

overcapacity). A free regime of log exports (or with moderate taxation) hinders the development of local companies required for the countries’ economic take off, and does not guarantee improved management of forest resources. A “limited protection” through a pre-determined flow of exported logs appears to be the best compromise. Controlling the flow according to the efficiency of local enterprises may prove effective in monitoring the forest sector. Governments can regulate the flow of logs exported through export taxes and/or quotas aiming at supplying minimum raw material to national industries at a price adapted to local processing capacities. A national quota of log exports can be set yearly and distributed between different exporters according to objective and transparent criteria. If and when the national administration capacity allows, these quotas have to be auctioned for the sake of both economic efficiency and transparency of allocation procedures. This would result in the implementation of a national market of log export rights, which can be regulated by the Government who decides the quantity of rights which can be auctioned annually. BOX 2 The opportunity cost of the log export ban Log export bans for the most valuable species have an economic cost, as specific qualities of logs – most often the highest quality– are processed rather than exported. The economic cost is generated by low processing efficiency which causes a given log to lose economic value in the processing compared to selling it as logs on the international market (to be processed in more efficient sawmills abroad). Not all timber processing entails a loss of added value, as there are efficient plants with good wood processing rates able to fetch high prices for their products. However, there is still a portion of the industrial sector which is not very efficient. According to customs statistics, the average declared FOB price of sapelli sawnwood exported from Cameroon was CFAF 274,250 per m3 in 2003 (equivalent to € 418 per m3, but listed at € 487 per m3 by ITTO-Market News Service in 2003). The FOB price for Congo Basin sapelli logs was listed as € 206 per m3 for “B” quality by ITTOMNS in 2003. The recovery rate in simple sawmills (i.e. without drying facilities or industrial carpentry for byproducts re-utilization) is 32% on average (Fochivé 2005). Sapelli logs which have been processed in these mills could have been exported for a minimum of € 200 (above the € 175 FOB price given by ITTO for “B/C” quality). The average round wood equivalent value of sapelli exported as sawn wood is € 134 per m3 using customs value and € 156 per m3 using ITTO value. Thus, the likely opportunity cost is € 66 per m3 in the first case and € 44 per m3 in the second case.9 If these same logs were sold in the international market as B/C quality, they would still be earning higher profit than they would as sawn wood. The reasoning does

Export duties, log export bans and the case for auctioning log export rights Export levies are the easiest to collect (“no payment, no sale”) and here, in principle, opportunities for fraud are the fewest. For these reasons, it would seem advisable to have them play a significant role in any taxation system. The main problem is to determine the appropriate level of tax: if it is too high, it will discourage exporters, while if it is too low, the government will lose revenues. Bans on log exports (or excessive taxation of exports) are economically unsound (because of the opportunity cost of processing locally under lower technical conditions, or because of limited intelligence of the needs and market conditions) and dangerous from the perspective of resource management (because they rapidly induce processing

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9

Net benefits (sales minus costs) rather than gross value of sales would be a more appropriate indicator of opportunity cost of the log ban. However, if the net benefits were used, results would likely provide a similar indication.

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not change if applied to a more efficient segment of the industry with higher processing efficiency.10 What varies is income distribution. With a higher volume of exported logs, a greater part of the forest rent goes to the public treasury, as taxation is heavier on logs as compared to processed products. Under a log export ban and given a low processing efficiency, the share of the economic rent going to the industry could probably be greater as compared to a free trade situation. A more comprehensive analysis on added-value generated by the processing industry would need to be carried out in order to make a reliable assessment.11

Conclusion: the value of forest taxation as an auxiliary tool for sustainable forest management should not overestimated nor overlooked The structure of the tax system should be simple enough to reduce the numbers of opportunities of tax evasion, disputes or abuse of power, and at the same time to limit administrative costs. Tax systems should, at the very least, include area fees, stumpage fees (or felling taxes) and export taxes. The administrative costs/tax revenues ratio cannot be used as the only criterion to evaluate the taxation system of a country. Taxes collected in the field, referred to as stumpage fees or felling taxes, contribute to the forest administration outreach in logging areas and thus help control illegal logging by either entitled companies or illegal loggers in production areas. Collecting this kind of taxes helps structure the administration and therefore contributes to delivering public goods (logging control), justifying the use of several criteria to evaluate the taxation system. Taxes can also be used as incentives, i.e. by encouraging economic agents to implement practices contributing to the sustainability of forest ecosystems, thus performing beyond the minimal requirements of regulation. Because of this double function played by the tax system, only a part of the forest tax can be considered exclusively as an incentive. The other component (rent collection) may also entail incitation aspects (particularly when its structure is appropriate) but is not conceived to fill this objective. For these reasons, the potential of the fiscal instrument for fostering SFM should not be over-emphasized. But, as we have tried to suggest here, there is a real potential for the fiscal instrument in this respect, provided it is not used

I t should be kept in mind that a recovery rate of 45 – 50 % in sawn wood can be reached by adding by-product output to the standard product (which has a higher price as compared to byproducts). Also, some companies obtain high recovery rates on the main products by selecting only the highest quality logs for processing. In this case, processing efficiency would be higher, but so would be the opportunity cost associated with logs which are not exported. 11 This analysis should assess the positive impacts on added value of establishing a log export ban which includes wage distribution and industrial capital remuneration against a reduction in transportation activity due to lower volumes. 10

alone but as a component of a consistent set of actions and public policies. REFERENCES BARBONE, L. and ZALDUENDO, J. 2000. Forest Taxes, Government Revenues and the Sustainable Exploitation of Tropical Forests. Africa Region Working Paper Series, n°5, World Bank, Washington D.C. BLAKENEY, J. 1993. Performance Deposit: An Incentive for Sustainable Forest Management, in D’Silva E., Appanah S. Forestry Management for Sustainable Development, EDI Policy Seminar Report n°32, World Bank, Washington D.C. BOSCOLO, M. and VINCENT, J. R. 2000. Promoting Better Logging Practices in Tropical Forests: A Simulation Analysis of Alternative Regulations, Land Economics 76 (1): 1-14. BROWN, D.W. 1999. Addicted to Rent: Corporate and Spatial Distribution of Forest Resources in Indonesia – Implications for Forest Sustainability and Government Policy. DFID/ITFMP Mimeo. D’SILVA, E. and APPANAH, S. 1993. Forestry Management for Sustainable Development, EDI Policy Seminar Report n°32, World Bank, Washington D.C. FREDERICKSEN, T.S. and PUTZ, F.E. 2003. Silvicultural intensification for tropical forest conservation. Biodiversity and Conservation 12: 1445-1453. GILLIS, M., 1988. West Africa: Resource Management Policies and the Tropical Forest. Repetto R., Gillis M. (Eds), Public policies and the misuse of forest resources, W.R.I. - C.U.P. GILLIS, M., 1992. Forest Concession Management and Revenue Policies, In: SHARMA N. P. (ed.) Managing the World’s Forests, Kendall/Hunt, Dubuque, Iowa, USA. GRUT, M., GRAY, J.A. and EGLI, N. 1991. Forest pricing and concession policies: managing the high forests of West and Central Africa, World Bank Technical Paper 143, Africa Technical department. HYDE, W.F, AMACHER, G.S. and MAGRATH W. 1996. Deforestation and Forest Land Use: Theory, Evidence, and Policy Implications. The World Bank Research Observer 11(2): 223-248 HYDE, W.F. 1998. Deforestation and Forest Land Use: A Reply. The World Bank Research Observer 13(1): 141145 HYDE, W.F., NEWMAN, D.H. and SEDJO R.A. 1991. Forest Economics and Policy Analysis. An overview. World Bank Discussion Papers. No 134. HYDE, W.F. and SEDJO R.A. 1992. Managing Tropical Forests: Reflections on the Rent Distribution Discussion. Land Economics 68 (3) : 343-350 KARSENTY, A., 2000. Economic Instruments for Tropical Forests - The Congo Basin case IIED/CIFOR/CIRAD. London. KARSENTY, A., 2002. Le rôle controversé de la fiscalité forestière pour la gestion des forêts tropicales, Cahiers

Forest taxation regime for tropical forests

d’Économie et de Sociologie Rurale 64: 5-36 KARSENTY, A., RODA, J.M., MILOL, A., FOCHIVÉ, E. and KUETCHE M. 2006. Second audit économique et financier du secteur forestier au Cameroun, Gouvernement du Cameroun (Ministère de l’Économie et des Finances), 222 p. LERUTH, L., PARIS, R. and RUZICKA R., 2001. The Complier Pays Principle: The Limits of Fiscal Approaches Towards Sustainable Forest Management. IMF Staff Papers 48 (2). PEARCE, D., PUTZ F. and VANCLAY J., 1999. A sustainable forest future? CSERGE Working Paper GEC - 99/15. London. PEARCE, D., PUTZ, F., and VANCLAY, J. 2003. Sustainable forestry in the tropics: panacea or folly? Forest Ecology and Management 172: 229-247. http:// dx.doi.org/10.1016/S0378-1127(01)00798-8 REPETTO R., 1988. Overview. Repetto R., Gillis M. (Eds), Public Policies and the Misuse of Forest Resources, W.R.I. – C.U.P. VINCENT, J. R., 1990. Rent Capture and the Feasibility of Tropical Forest Management. Land Economics 6(2): 212-223 VINCENT, J. R. and GILLIS, M., 1998. Deforestation and Forest Land Use: A Comment. The World Bank Research Observer 13 (1) VINCENT, J. R., GIBSON C and BOSCOLO M., 2003. The Politics and Economics of Forest Reforms in Cameroon, The World Bank Institute: Washington, D.C. (unpublished) WORLD BANK, 1991. The Economics of Sustainable Forest Management: a Malaysian Case Study, (unpublished).

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International Forestry Review Vol.12(2), 2010

The challenges of redistributing forest-related monetary benefits to local governments: a decade of logging area fees in Cameroon P.O. CERUTTI1, 2, G. LESCUYER1, 3, S. ASSEMBE-MVONDO1, and L. TACCONI2 Center for International Forestry Research (CIFOR), Central Africa Regional Office, Yaoundé, Cameroon Crawford School of Economics and Government, The Australian National University (ANU), Canberra, Australia 3 Centre de Coopération Internationale en Recherche Agronomique pour le Développement (CIRAD), TA 10/D, 34398 Montpellier cedex 5, France 1 2

Email: [email protected]

SUMMARY The Cameroonian regulatory framework on forest, wildlife and fisheries requires logging companies to pay an Area Fee (AF), half of which must be redistributed to rural councils (40%) and villages (10%) neighbouring the logging concessions. The AF had the main objectives to provide a consistent contribution to the State budget and to improve rural livelihoods through an equitable and effective redistribution of forest-related benefits. After a decade of implementation, and about €85 million redistributed to about 50 councils, the literature unanimously evaluates the livelihood impacts of the distribution of the AF to communities as weak. Less comprehensive assessments have been carried out on the impacts of distribution of the AF to local governments. This paper discusses the potential of the AF as a tool for local development through local councils, with particular attention to the economic, equity and governance issues. One of the most significant findings is that mayors, although elected and unanimously blamed for embezzlements and mismanagement of the AF, are often only scapegoats in a complex political system that does not allow the rural population to directly sanction the misuse of the AF via the current electoral system.

Keywords: Area Fee, Cameroon, rural councils, rural development, regulatory framework

Défis de la redistribution des bénéfices monétaires tirés de l'exploitation forestière aux conseils municipaux: une décennie de versement de la redevance forestière annuelle au Cameroun P.O. Cerutti, G. Lescuyer, S. Assembe-MVondo et L. Tacconi Le cadre réglementaire camerounais sur les forêts, faune et la pêche requie que les compagnies forestières paient une redevance forestière annuelle (RFA), dont 40% doit être redistribuée aux communes, et 10% aux villages riverains des concessions. La RFA avait pour objectifs principaux de fournir une contribution régulière au budget de l’Etat, et d’améliorer le niveau de vie rural grâce à une redistribution efficace et équitable des bénéfices financiers liés à la forêt. Après une décennie de mise en pratique, et environ 85 millions d’euros redistribués à environ 50 communes, les rapports évaluent d’une façon unanime que les impacts socio-économiques de la distribution de la RFA aux communautés ont été faibles. Des études moins poussées ont été lancées sur les impacts de la distribution de la RFA sur les communes rurales. Cet article examine le potentiel de la RFA en tant qu' outil du développement local au travers des conseils municipaux, avec une attention particulière donnée aux questions d'efficacité économique, d'équité et de gouvernance. L’un des résultats les plus importants est que certains maires, bien que blamés à l’unanimité pour fraude et mauvaise gestion de la RFA, ne sont souvent que des boucs émissaires dans un système politique complexe qui ne permet pas à la population rurale de sanctionner directement la mauvaise utilisation de la RFA.

Desafíos de la redistribución de beneficios financieros forestales a las administraciones locales: una década de cargas fiscales para el uso de áreas de producción maderera en Camerún P.O. CERUTTI, G. LESCUYER, S. ASSEMBE-MVONDO y L. TACCONI El marco regulador camerunés sobre los bosques, la fauna y la pesca requiere que las empresas de tala de árboles paguen un impuesto local (Area Fee, o AF), la mitad del cual debe ser redistribuido a los municipios rurales (un 40%) y los pueblos (un 10%) vecinos de las concesiones de tala. El AF tenía como objetivos principales hacer una contribución constante al presupuesto estatal y mejorar los medios de vida de las comunidades locales a través de una redistribución equitativa y eficaz de beneficios de carácter forestal. Una década después de la implementación de la política, y con una suma aproximada de 85 millones de euros ya redistribuida entre unos 50 municipios, el veredicto unánime de los analistas es que el impacto sobre el terreno de la distribución del AF entre las comunidades locales ha sido más bien débil. Se han llevado a cabo también evaluaciones menos exhaustivas sobre el impacto de la distribución del AF en la administración local. Este estudio examina el potencial del AF como instrumento para facilitar el desarrollo local a través de los municipios, y se enfoca en particular sobre temas económicos, administrativo

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y de equidad. Entre las conclusiones más significativas se encuentra el hecho de que a menudo los alcaldes, aunque sean elegidos y culpados de forma unánime de malversación de fondos y mala administración del AF, no son más que chivos expiatorios en un sistema político complejo que no permite a la población rural imponer sanciones directas por la malversación del AF a través del sistema electoral actual.

INTRODUCTION In Cameroon, forest logging concessions, composed of one or more Forest Management Units (FMU), and Sale of Standing Volume (SSV) provide the bulk of the annual timber production – about 91% in 2007 (MINFOF 2008). Both logging titles were introduced by the forest law of 1994. The most important difference between the two titles is that, contrary to FMUs, SSVs are short-term logging titles (maximum 3 years) and do not require the preparation and implementation of a forest management plan. The forest law introduced an auction system for the attribution of FMUs and SSVs (Republic of Cameroon 1994, 1995). The bid s of logging companies are ranked against a set of technical and financial criteria – including a per hectare payment for the complete forest surface – and the winning bid is then multiplied by the surface of the logging title auctioned. The resulting amount, which must be paid annually by the logging company, constitutes the Area Fee (AF). Although the AF already existed in the previous forestry code, one major innovation of the 1994 forest law and its implementing decrees is the distribution of the AF between the State treasury, which keeps 50% of the total, and the rural councils and the villages where logging titles are located, which respectively receive 40% and 10% of the total amount. In line with the forest policy developed by the Ministry of Forests and Wildlife (hereafter the ministry) in the first half of the 1990s, two general objectives were assigned to the AF. First, it is designed to maintain the substantial contribution that forestry taxes make to the State budget and, second, to improve rural livelihoods through a decentralised, direct and equitable redistribution of forest revenues. After more than a decade of implementation, the AF has provided a significant contribution to the State’s budget (e.g. MINEFI 2006). We also know that the direct impact on community livelihoods has been modest (Nzoyem et al. 2003, Bigombe Logo 2004, Ndjanyou and Majerowicz 2004b, Oyono 2004, 2006, Morrison et al. 2009, Oyono et al. 2009). Much less is known on the use and impact of the 40% of the AF accruing to rural councils, mainly for two reasons. First, contrary to the 10% share, no specific regulation for the use of the 40% share has been issued: the AF is considered a municipal revenue and is combined with other revenues to finance councils. Hence, the use made of this particular revenue is not easily traceable. Second, surveying and assessing how public revenues are managed at the council level is often not an easy task, as the issue is charged with political sensitivity. This article focuses therefore on the use of the councils’ 40% share of the AF because, if managed appropriately, these revenues could contribute to local development and the

fight against rural poverty. The paper uses quantitative data kindly provided by the Ministries of Forests and Wildlife, Finance, and Territorial Administration and quantitative and qualitative data collected in 2008 and 2009 in eight councils selected among those receiving high levels of AF over the past decade. Interviews were carried out with concerned mayors, other members of the municipal councils, and grassroots organisations. The case of Cameroon, and notably the redistribution of tax revenues from natural resources has general relevance. Several other countries in the Congo Basin adopted similar legal frameworks, and can thus learn lessons from the Cameroonian case. Moreover, there is an international debate on potential future redistribution schemes in the framework of REDD strategies. Their design may be improved, if some of the governance constraints discussed in this paper were tackled beforehand. The first section focuses on a brief history of the AF in the Cameroonian context and discusses its contribution to the State budget over the past decade. The second section deals with the distribution of the AF at the council level by considering the present scheme at work as well as potential scenarios to achieve a more equitable redistribution among councils. Finally, the effectiveness of the use of the AF at the council level and its influence on local governance are analysed for the eight sampled councils. The last section concludes. The AF contribution to the State budget During the 1990s, the new forest law and especially its provisions on the auction system to be used for the allocation of FMUs and SSVs were not effectively implemented. Only few FMUs were attributed, and the auctions were marred by irregularities and discretionary attributions which granted logging titles neither to the more competent companies nor to the highest bidders (Global Forest Watch 2000, Cerutti and Tacconi 2008). As a result, auctions were halted from 1997 to 2000, and the log-export tax and surtaxes, which were volume-based taxes, constituted the main sources of forestry revenues. They contributed an annual average of about €31 million over the period 1994-1999. In 1999, the ministry implemented a partial log-export ban which decreased log-export taxes by about 82% from 1999 to 2000, and stabilised at an annual average of about €6 million over the period 2000-2008. The introduction of the ban, a long-term planned provision of the 1994 law, was a negative development from the Treasury’s viewpoint because it was starting the implementation of the third Structural Adjustment Plan (SAP), and although a sawmillentry tax was introduced in 2000, its implementation proved difficult (MINEFI 2006), while the AF had not yet started

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delivering the expected increase in revenues. In 2000, the ministry started auctioning FMUs and SSVs again, and the amounts collected through the AF increased. Over the period 2000-2008, it provided an annual average of about €20 million to Treasury’s coffers; less than log-export taxes in the 1990s, especially if inflation is factored in, but broadly fulfilling its role of contributing to the Treasury’s much needed revenues. Other taxes introduced by the fiscal and custom reforms of 1994 and 2002, and notably those related to the industrialisation boosted by the log-export ban, such as the VAT, helped filling the gap, though they are not generally considered forestry taxes per se. Two parts make up the AF’s bidding price for FMUs and SSVs; a minimum price set by the ministry and the companies’ bid on a per hectare basis. The minimum bidding price is set at €3.8/ha for SSVs, and €1.5/ha for FMUs. SSVs have higher minimum prices because they are short-term titles and do not require the preparation of a management plan. The law provides for the ministry to periodically adjust the rates, especially in response to inflation or to particular economic conditions, but they have never been changed. The total AF due annually by each company is thus the bidding price times the entire surface (in hectares) of the allocated FMU or SSV. Historically, SSVs obtain higher bidding prices than FMUs, the average price paid for 169 SSVs attributed between 2000 and 2008 is about €21.3/ha, while the average price of the 93 FMUs currently attributed is about €3.8/ha. At least a couple of reasons could explain the difference. First, FMUs are attributed for a period of 15 years renewable once and can have surfaces of up to 200,000 ha, while SSVs have a maximum surface of 2,500 ha and must be harvested within three years (Republic of Cameroon 1994, 1995). Second, FMUs require companies to make further investments to guarantee that their harvesting operations are sustainable (e.g. prepare a management plan with annual logging surfaces or engage in forest certification schemes). In 2008, the AF collected totalled about €19.5 million for an area of about six million ha, including FMUs and SSVs. This makes the AF the most important forestry tax, followed by Stumpage Fees (SF) (Figure 1). By the end of 2006, all available FMUs had been

attributed at least once (MINFOF 2008) and, according to their bidding prices and surfaces, the annual AF collected should be about €22.8 million. However, that amount has never been reached because each year some companies default and some abandon their FMUs. In the short-term, it is likely that the general income accruing from the AF paid by FMUs will decrease because several FMUs were attributed to the highest bidders that were not necessarily those ready to engage in long-term sustainable forest management (SFM). In those cases, the winner exploits the FMU for a few years paying a relative large annual amount of AF, then abandons the concession. As a result, the expected AF will need to be reconsidered in light of the number of FMUs which are abandoned after few years. For instance, the average price paid for six FMUs, which were abandoned in 2007 and later re-attributed, decreased from about €9.6/ha to about €2.9/ ha, resulting in a decrease in the projected AF of about €2.7 million per year. In 2008 and 2009, about eight more FMUs were abandoned, and their AF will likely decrease when the ministry reallocates them. Over the longer term, variations of revenues from the AF may depend on the ministry’s policy for SSVs. For more than a decade after the adoption of the 1994 forest law, the policy was to grant SSVs until all FMUs had been auctioned in order to maintain a fairly regular timber production and tax income over the years (through the AF) while progressively moving the production away from titles that did not have sustainable forest management requirements (MINEF 1999, 2004). Starting in 2004, the ministry was planning to completely wind down timber production from SSVs by 2007 (MINEF 2004). However, although SSVs decreased from about 130 in 1997/1998 to about 15-20 in 2007/2008 (MINEF 1999, MINFOF 2008), the policy was never fully implemented, and by 2009 it had actually been reversed, with the ministry granting about 40 SSVs. Future ministerial decisions notwithstanding, it can be stated that the AF has become the main forestry tax providing a major contribution to the State budget, thus accomplishing one of its main objectives. Whether the other main objective – contributing to rural livelihoods and to the enhancement of equity in the redistribution of forest-related benefits – has been achieved is discussed in the following sections.

FIGURE 1 Area and stumpage fees collected (2000-2008)

Equity in redistributing the AF Since the AF inception, its redistribution among all councils over the national territory has been on the agenda of the national policy discourse as an issue of equity. Such a concern is a long standing issue between the central administration and decentralised councils and villages, especially those that do not border FMUs and SSVs but are nonetheless located in forested areas, such as councils bordering protected areas and which do not receive the AF. Also, several disputes occurred between councils that obtain only very limited amounts of AF (or that have hundreds of villages) and councils that (because of their territorial extension and their location in remote regions) receive large amounts of AF to be redistributed among a small number of villages.

Challenges of redistributing monetary benefits to local governments

The AF collection from logging companies and redistribution to concerned councils and villages has undergone several changes during the past decade. For a few years after the 1994 law, the AF was redistributed in cash to rural communities, with no clear rules established for its use. Then, the government approved a decree in 1998 mandating that 10% of the total AF revenue should be allocated to village development (MINEFI and MINAT 1998). In 2000, the increased allocation of FMUs and SSVs by the ministry received so much political attention that the following year’s fiscal law included provisions for an equalisation fund to redistribute of the AF across a larger number of councils, including non-forested ones. However, there was no political consensus built around the fund after the adoption of the fiscal law and the fund was never established. Between 1998 and April 2007, logging companies paid the AF to the Ministry of Finance with quarterly cheques, separated for the 10% and the 40% amounts, which were then transferred to the concerned councils and villages. Since April 2007, logging companies deposit the AF payments directly into two dedicated bank accounts held by the councils, one for the council part (40%) and another for the village part (10%). A notification of the transfer is also delivered to the Ministry of Finance, which has lost its role of collector while maintaining that of controller. Two issues are often raised in terms of equity. One issue is largely technical and concerns the transparency of the procedure adopted to calculate the AF. The other issue is more political and focuses on the redistribution of the AF over the entire national territory. Transparency The AF is based on the surface of FMUs and SSVs pertaining to a given council (Republic of Cameroon 1994, 1995) and requires concerned ministries to establish a common set of baseline data. The Ministry of Territorial Administration and Decentralisation establishes the official boundaries of the councils. The Ministry of Forests locates the boundaries and establishes the surfaces of logging titles. The Ministry of Finance controls that each council gets the AF due by logging companies. In theory, different responsibilities should produce a transparent set of data with annual expected amounts by each council. In practice, the ministries do not consult each other and data from one ministry are not updated with those from another ministry. This makes it difficult for mayors, council members and the local population to know whether they are receiving the due amounts of AF, and evidences abounds of councils that did not receive what was expected (e.g. Nzoyem et al. 2003, Ndjanyou and Majerowicz 2004a, Morrison et al. 2009, Oyono et al. 2009). For a couple of years (until 2005), the cheques paid by logging companies were given to mayors during public meetings held in Yaoundé, with extensive press and media coverage. The meetings were initially requested, and later acknowledged, by donors as a sign of transparent management, because everyone could check the amounts

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expected by each council in the country. Since 2005, the amounts due and actually disbursed per council and per logging title have not been released, even though several more FMUs and SSVs have been attributed, some have been abandoned, and some have seen their initial surface changed. The lack of clarity about data and responsibilities among several ministries fifteen years after the adoption of the law can be ascribed more to a political choice than to technical deficiencies. Lack of transparency leaves the door open for alleged mismanagements and for conflicts at the local level between council members and the local population over the distribution of the AF. It is extremely complicated for mayors and villagers in rural Cameroon to get access to baseline data (surfaces and bidding prices), monitor the taxes paid by logging companies, and assess the share that should be paid to them every year. Before the current direct bank transfer system, that is before 2007, the literature reports many cases in which the due AF amounts had never been budgeted by councils, or where there existed discrepancies between the amounts paid by companies to the Ministry of Finance and the amounts eventually received by some rural councils (e.g. Nzoyem et al. 2003, Ndjanyou and Majerowicz 2004b, Morrison et al. 2009, Oyono et al. 2009). Lack of transparency also affects the relationships between mayors, the members of the elected council committee voting the annual budget, and the local population. It often happens that mayors and local elites are suspected of using only part of the AF for the council’s development activities, while reportedly keeping a substantial part for personal or political purposes. This type of conflict could be avoided with a common and widely disseminated set of baseline data. Instead, they often require the political intervention of one ministry or another to be settled by fiat. Equity over the national territory Over the past decade, the equity of the redistribution of the AF over a larger number of councils than those receiving it has been a recurrent theme in the Cameroonian political arena. As noted above, an equalisation fund was proposed but never implemented. Finally, at the end of 2009, the law on decentralisation established that half of the 40% received by each council must be recentralised into an equalisation fund and redistributed to all councils over the national territory (Republic of Cameroon 2009). The fund has also been introduced in the 2010 fiscal law (Republic of Cameroon 2010), but before the practical modalities of redistribution are clarified, including which councils would be eligible, and the fund becomes fully functional, an implementing decree is needed. Technical solutions may be easy to devise, but what will be needed for the new fund to be implemented is political consensus over its supposed benefits. The reasons raised in favour of the fund are that the number of villages bordering the FMUs and the total population concerned are not taken into consideration by the existing redistributive procedure. If a council has a large territory and a small number of villages on which FMUs and SSVs are allocated, as it often

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is the case in the East Region of Cameroon which produces the largest amount of timber, it receives larger amounts of AF than a council with a smaller territory or a larger number of villages, as in the South Region. This may seem logical, as the council that produces more gets more, but it is not perceived as such by the majority of Cameroonian councils, especially those currently excluded by the redistributive system. Several reasons may explain the current positions. Half the AF collected over the period 2000-2008 (about €85 million) has been redistributed to about 90 different councils, with a maximum of 63 rural councils in 2006. However, since all available FMUs have been allocated, and with the expected reduction in the number of SSVs, an average of about 51 councils will be concerned by the redistribution process on a regular basis. The 2007 AF data (Table 1) show that: a) the population concerned by the AF redistribution in the 51 councils amounts to 6.2% of Cameroonians; b) the councils concerned cover about 35% of the national land area; and c) there are large differences in the amounts received by the 51 councils, not only in absolute terms but also in the annual amounts received per person.

losses in terms of the potential AF that the forest could have generated if it were auctioned for logging. Both the latter group of councils and those without forests perceive the redistributive process as inequitable. Both groups complain that Cameroonian forests belong to all Cameroonians and everyone should benefit from them. Politically, socially and financially these issues merit attention because people perceiving the forest law as unjust may tend to solve the injustice through illegal behaviour if a concerted solution is not found. For instance, the rural population living around protected areas might increase illegal logging and poaching to compensate for their perceived losses of AF. The sense of inequity is certainly not the primary cause of illegal logging, which remains primarily driven by its economic viability and lack of sanctions, but it is nonetheless one of the contributing factors. If the political pressure exerted by unsatisfied councils and the population might justify the adoption of a different redistributive system, other reasons explain resistance to change. Some may likely be political in nature. Both the East and the South Regions, for instance, which are the ruling party historical strongholds, have about 15% of their

TABLE 1 AF redistributed per classes of value in 2007 A. Redistributed AF/ yr > € 450,000 300,000 < € < 450,000 150,000 < € < 300,000 75,000 < € < 150,000 < € 75,000 Total

B. No of councils 5 7 12 6 21 51

On average, the population of the 51 councils received about €20 per person per year. The average income per capita in Cameroon in 2007 was about €733, but average rural income levels are usually much lower, less than €100. Therefore, the largest amounts redistributed per person per year, that is €49.9 and €23.5 (column D, Table 1), are not a trivial contribution to income in rural areas. The lowest amounts of redistribution per capita, however, which are more common in the majority of councils and include the majority of the population, are less significant. Concerns about the overall equity of the redistributive system are likely to be raised in such councils. Issues about equitable redistribution have also been raised in relation to the lack of redistribution to all Cameroonian councils (about 370) and to the councils bordering protection forests. Protected areas in forested landscapes cover about 3.9 million ha, with a total of 93 councils concerned out of about 170 councils located in forested areas. Of the 93 councils with protected areas, 37 (which account for about 70% of the surface of protected areas) already receive the AF from existing FMUs, but the remaining 56 councils do not. The latter councils perceive protected areas as monetary

C. Population as percentage of total population 0.6 0.8 1.8 0.6 2.5 6.2

D. €/ person/ yr (average per class) 49.9 23.5 11.5 11.7 2.9 19.9

surfaces covered by protected areas (gazetted or planned) and 32% covered by FMUs, while the ratios are inverted for the South-West and Littoral Regions, which have about 25% of their surface covered by protected areas and only 10% and 6% respectively covered by FMUs. Financially, that means that the former two regions receive an AF of about €9.8 million, while the latter regions get €0.5 million. Thus, an equalisation fund which considers redistributing the AF would transfer funds from the ruling party’s historical strongholds to the regions where the opposition has more power, and as such it is against the interest of the ruling party. Effectiveness of the AF The AF has become a major source of revenue for many rural councils. The dominance of the AF in the councils’ budgets is obviously more pronounced for councils that have not developed alternative economic activities other than those related to timber exploitation. In a sample of eight councils located in the East Region of Cameroon, the 2008 AF ranged between 52% and 95% of total annual revenue (Table 2). The AF constitutes a very significant means for

Challenges of redistributing monetary benefits to local governments

TABLE 2 AF share of annual council budget

Council

Total of council revenue (in K€)

AF (in K€)

1 2 3 4 5 6 7 8

1,250 663 839 698 482 353 2,202 278

1,183 545 629 479 333 214 1,221 147

Share of AF in the council budget (%) 95 82 75 69 69 61 55 52

many councils to promote socio-economic development, although the effectiveness of its use has been questioned (e.g. Bigombe Logo 2004, Oyono 2004, 2006, Lescuyer et al. 2008, Morrison et al. 2009). As discussed below, our findings in sampled councils corroborate past doubts about the effective use of the AF. It is difficult to estimate how the AF amount is used at the council level for two main reasons. First, a council’s elected members are usually very reluctant to provide the council’s accounts, even if they are public documents. Second, even when accounts are made available, part of the funds is budgeted for intangible expenditures that cannot be easily assessed. In the eight sampled councils, only four categories represent material investments (Table 3): purchase of land plots (budget code 2.10), other tangible assets (2.20), layout and construction building (2.21), and equipment and movables (2.22). On average, these budget lines account for about 41% of total expenditure. Three budget categories cover the kind of expenditure previously covered by the State, that is subsides and transfers granted for school and social infrastructures which are not always traceable (budget codes 6.50 and 6.60), as well as other tangible assets (2.20) used for the construction of national or regional roads. Since other tangible assets (2.20) have already been accounted for, the two remaining expenditure amounts to about 6% of total expenses. Materials and supplies (6.10) and staff costs (6.20), although often clearly over-budgeted, or difficult to locate or justify, cover about 23% of expenditure, thus raising tangible expenditure to about 70% of total expenditure. Several other budget categories cover a large spectrum of intangible expenditure which is hardly traceable and seems to depend on the discretionary power of the mayors. This is the case, for instance, of transport (budget code 6.11) and other services (6.12) used by many people for disparate reasons, and other expenses (6.70) that is used for many and often unclear reasons. These various costs amount to about 22% of the total council budget, while the remaining 8% is mostly covered by the repayment of councils’ debts. Thus, a significant part of the AF is used for expenses, both tangible

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TABLE 3 Councils’ expenditure (percentage of total expenditure, sample of 8 councils) Budget code 6.10 6.11 6.12 6.20 6.30 6.40 6.50 6.60 6.70       1.50 1.60 & 1.70 2.10 2.20 2.21 2.22 2.50 2.60  

Recurrent expenses Materials and supplies used Transport used Other services used Staff costs Taxes and duties Financial cost Subsidies granted Transfers granted Other expenses Total   Equipment and investment expenses Repayment of long- and medium-term debts Repayment of other LMT debts Purchase of land plots Other tangible assets Layout and construction of building Equipment and movables Other long- and medium-term loans Holdings and appropriations Total

Average 8 councils (%) 11.1 2.1 6.6 12.1 0.5 0.5 3.7 1.8 13.2 51.7

3.8 3.6 1.5 23.0 4.7 11.2 0.2 0.3 48.3

and intangible, which are often not traceable. Overall, after more than a decade of AF redistribution, several problems remain in the basic management of the councils’ budgets, with direct impacts on the effectiveness of expenditures. Often, there are compelling reasons for the persisting problems. Since the AF started pouring into the councils’ coffers, several expenses that were previously covered by the budgets of concerned ministries, such as health, education, and infrastructures, had to be covered by the councils’ budget because of faltering State’s investment (Oyono et al. 2009). Also, the lack of the appropriate technical skills needed by the councils’ personnel to manage a budget, which increased in some cases by two orders of magnitude with the arrival of the AF, negatively affects the AF effectiveness. In other cases, mayors and council committees bear part of the responsibility for the lack of effectiveness. For instance, only very rarely investments are made into growth stimulating activities, such as micro-credit and financial grants. Interviewed mayors maintain that the law is not clear whether these activities can be funded from the AF, but rural councils often also lack the long-term vision needed

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for those investments to be made, especially because not necessarily compatible with the five year mandate of the mayors and the committees. Strategic development plans are still missing in about 70% of councils in Cameroon, and councils have a dependency towards external sources of revenue, which may weaken the councils’ capacity to diversify the means of development over the longer term. In 2009, for instance, the government halved the AF level to smooth the negative impacts the financial crisis was having on the timber industry. This resulted in a significant decrease of the revenues of many councils, with negative impacts on basic public services such as education and health, which were almost entirely funded through the AF. The lack of effective and independent control of the AF use, as well as the adoption of sanctions for mismanagement, also remain unresolved issues affecting the management of the AF. The tools to discover bad financial management practices and to impose effective sanctions are not lacking, but the political will to enforce them is missing. The Ministry of Finance, for instance, is supposed to organise regular audits of the management of the AF at the council level. However, these controls are rare and when sanctions are imposed they often remain unenforced. Often, administrative controls are not well designed, as the controller is also the one with some management responsibilities in the use of public funds. For instance, it is true that councils receive the AF and elected mayors must manage it, but mayors rarely authorise a large expenditure or sign a cheque without the tacit approval (or, sometimes, counter-signature) of a higher appointed official, be it the Divisional Officer or the Governor. But since part of the councils’ expenditures are often used to pay such officers (in the form of daily allowances for various expenses they incur), they are then hardly in a position to exert an independent and objective control over the way public expenditures are made. Controls are also difficult within the councils’ committees, which are composed of a dozen elected members who commit themselves to jointly manage the council under the leadership of the mayor. All the elected members are, in theory, accountable to the council’s inhabitants. In practice, however, since most of the members are elected on the mayor’s list, once elected they are not well positioned to question a mayor’s decision about how to spend public revenues, especially because all their personal expenditures (tangible and intangible) are often covered by the council’s budget and must be authorised by the mayor. This theoretical accountability to the people but practical dependence on the mayor often explains why there is little room left to properly discuss, modify and control the management of the budget during council meetings, as reported by several interviewees. Every five years of course the mayor is ultimately accountable to the people who elected him, and the use of the AF can become an issue very high on the electoral campaign, as it happened during the most recent elections in 2007. In principle, the mayor can be sanctioned for the management of the AF when election time comes. In practice though, since eligible candidates are selected at the

central level by the party, the AF can also become a means to negotiate one’s way to the candidature and to power, thus disconnecting the mayor from the people, as indicated by the results of interviews held with local grassroots organisations and NGOs in the five councils receiving more than €450,000 per year (Table 1). All mayors of sampled councils had been in office during the 2002-2007 mandate. In one council, peoples’ perception about the use of the AF was very negative, as the mayor used the AF for private interest. In this case, the mayor was not selected to run for office in 2007 by the central committee of the party, but interviewees said they would have not voted for him in any case. In two councils, the perception was one of fair use of the AF, and although it is reportedly believed that both mayors had used part of the money for private purposes, they were re-elected in 2007. In the remaining two councils, the perception of the mayors’ use of the AF was again very negative, but both mayors were re-elected. In one case, the mayor was the only candidate appointed by the dominant party, and in the other case, people believe the mayor was able to use the AF as a tool to negotiate his candidature at the party level and election at the council level. Conclusion Over the period 2000-2008, the AF accounted for an average of about €20 millions entering the State’s coffers annually. A comparison with forestry taxes paid in the 1990s, mostly based on the volume of exported logs, shows that AF provides substantial public revenues. However, the AF’s impact on the equitable redistribution of forest-related benefits and its effectiveness on rural poverty is still modest. First, the transparency of the distribution process of the AF is still limited. The ministries of forests, finance, and territorial administration have not yet been able to produce a homogeneous, public, and widely disseminated set of basic data in terms of the councils’ surfaces and the annual amounts due to each council by each logging title. On the other hand, only a minority of rural councils and villages received the approximately €10 million of AF redistributed annually over the past decade, with wide differences among them. As a consequence, issues about the AF’s redistributive equity have often been high on the political agenda, with two proposals for an equalisation fund presented in 2001 and in 2009 still not yet implemented. Greater transparency of basic data may improve the effectiveness of the AF by fostering the development of longer term strategies in concerned councils and villages, while a negotiated political consensus on the equity of the redistributive mechanism may improve peoples’ perceptions about the AF. Both improved transparency and a consensus on the redistribution mechanism will fall short, however, of their potential impacts on rural livelihoods if not coupled with the enforcement of sanctions for the embezzlement or mismanagement of the AF. An assessment of the budgets

Challenges of redistributing monetary benefits to local governments

of eight councils receiving large amounts of AF shows that hardly traceable intangible expenses, which seem to depend on the discretionary power of the mayors, account on average for about 22% of annual expenditure. Moreover, expenses for tangible assets are often very difficult to justify or trace. Several tools for the adoption of sanctions already exist. But there needs to be a clarification of roles and responsibilities in the control chain to guarantee that effective and objective sanctions are issued and implemented. Mayors are often blamed when mismanagement occurs or the expected impacts on rural poverty do not eventuate. Indeed, they are assigned by the current legal framework the most prominent role in the management of the AF and should be held accountable for their decisions, but a deeper analysis of the redistributive and sanctioning mechanisms shows that they are often only political scapegoats. For instance, in 2009 the central administration unilaterally decided to halve the AF paid by logging companies as a way to soften the impact of the global financial crisis on companies, and the new equalisation fund proposes to further halve the AF currently received in absolute terms by councils. Both measures will greatly impact the councils’ budgets, but they have been taken without consultation with concerned mayors. Mayors will still be held accountable, however, for the impact of the AF on their citizens’ livelihoods. As the democratically elected representatives of the people, mayors are expected to be sanctioned by them for mismanagement of the AF when election time comes. In some cases, that may happen. But an analysis of the 2007 elections in the five councils that received the largest amounts of AF in the last decade shows that, out of the three mayors that were perceived by the local population as having badly managed the AF, and even used it for personal purposes, only one was not re-elected. In the other two cases, although the grassroots organisations and NGOs interviewed for this study expressed very negative assessments of the use of the AF over the 2002-2007 mandate, the same mayors were reelected in 2007 because selected as running candidates by the ruling party. Lastly, it must be noted that, even when the mayors’ management of the AF is assessed as fair by the people and conflicts do not arise, investments into growth generating activities are only rarely undertaken. Investments in public infrastructure are certainly needed and often justified, especially in area such as health, education, and roadconstruction where the role of the central administration falters. But such investments promote the idea of the AF as a substitutive revenue for rural councils, which certainly risks making the AF falling short of its original targets. ACKNOWLEDGEMENTS The authors wish to acknowledge the useful suggestions provided by two anonymous reviewers

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REFERENCES BIGOMBE LOGO, P. 2004. Le retournement de l’etat forestier: l’endroit et l’envers des processus de gestion forestière au Cameroun. Yaoundé, Cameroon, Presses de l’UCAC. CERUTTI, P. O. and TACCONI, L. 2008. “Forests, Illegality, and Livelihoods: The Case of Cameroon.” Society & Natural Resources 21 (9): 845 - 853. Global Forest Watch. 2000. An overview of logging in Cameroon. Washington, D.C., World Resources Institute (WRI). LESCUYER, G., Ngoumou Mbarga, H. and Bigombe Logo, P. 2008. “Use and misuse of forest income by rural communities in Cameroon.” Forests, Trees and Livelihoods 18: 291-304. MINEF. 1999. Planification de l’attribution des titres d’exploitation forestière. Yaoundé, Cameroun, Ministère de l’Environnement et des Forêts (MINEF). MINEF. 2004. Planification de l’attribution des titres d’exploitation forestiere. Yaoundé, Cameroun, Ministère de l’Environnement et des Forêts (MINEF). MINEFI. 2006. Audit économique et financier du secteur forestier au Cameroun - Draft n°1 - Août 2006. Yaoundé, Cameroun, Ministère de l’Économie et des Finances (MINEFI). MINEFI and MINAT. 1998. Arrêté conjoint n° 00122/ MINEFI/MINAT du 29 avril 1998, fixant les modalités d’emploi des revenus provenant de l’exploitation forestière et destinés aux communautés villageoises riveraines. Ministère de l’Economie et des Finances (MINEFI) and Ministère de l’Administration Territoriale (MINAT). MINFOF. 2008. “La production forestière en chiffres.” Lettre Vert, Décembre 2008 - Mai 2009. 20: 24-42. Yaoundé, Cameroun. MORRISON, K., CERUTTI, P.O. OYONO, P. R. and STEIL, M.. 2009. Broken Promises: Forest Revenue-Sharing in Cameroon. Washington, D.C., World Resources Institute (WRI). NDJANYOU, L. and MAJEROWICZ, C. H. 2004a. Actualisation de l’audit de la fiscalité décentralisée du secteur forestier camerounais. Boulogne, France, I&D, Institutions et Développement. NDJANYOU, L. and MAJEROWICZ, C. H. 2004b. Actualisation de l’étude sur la fiscalité décentralisée du secteur forestier camerounais. Boulogne, France, Institutions & Développement. NZOYEM, N., SAMBO, M. and MAJEROWICZ, C. H. 2003. Audit de la fiscalité décentralisée du secteur forestier camerounais. Boulogne, France, Institutions & Développement. OYONO, P. R. 2004. “One step forward, two steps back? Paradoxes of natural resource management decentralisation in Cameroon.” Journal of Modern African Studies 42 (1). OYONO, P. R. 2006. “Acteurs locaux, représentation et politics des éco-pouvoirs dans le Cameroun rural

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post-1994.” Canadian Journal of Development Studies XXVII (2). OYONO, P. R., CERUTTI, P. O. and MORRISON, K. 2009. Forest taxation in post-1994 Cameroon: Distributional mechanisms and emerging links with poverty alleviation and equity. Bogor, Indonesia and Washington, D.C., Center for International Forestry Research (CIFOR) and World Resources Institute (WRI). Republic of Cameroon. 1994. Loi No 94/01 du 20 janvier 1994 portant régime des forêts, de la faune et de la pêche, Republic of Cameroon. Republic of Cameroon. 1995. Décret No 95-53-PM du 23 août 1995 fixant les modalités d’application du régime des forêts, Republic of Cameroon. Republic of Cameroon. 2009. Loi No. 2009/019 du 15 décembre 2009 portant fiscalité locale. Republic of Cameroon. 2010. Code Général des Impots. Ministère des Finances - Direction Generale des Impots.

International Forestry Review Vol.12(2), 2010

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Forestry taxation in Africa: the cases of Liberia and Gabon R. KRELOVE and O. MELHADO International Monetary Fund1, 700 19th Street NW Washington D.C. USA 20431

Email: [email protected] and [email protected]

SUMMARY The paper focuses on mobilizing resources through forestry activity in Liberia and Gabon. It advocates the management of forests in a sustainable manner while obtaining a fair share of rents arising from their exploitation. The paper describes the performance of a generalized area tax through a bidding process for allocating concessions in Liberia and presents the status of forestry taxation in Gabon. Both countries through reform have greatly simplified the fiscal terms for the industry, and further improvements are feasible. A deepening of the reform should consider phasing out export taxation and the consolidation of an area tax and auctions for allocating concessions.

Keywords: forestry taxation, area tax, concession auctions, Liberia, Gabon

Fiscalité forestière en Afrique: les cas du Liberia et du Gabon R. Krelove et O. Melhado L’article se penche sur la mobilisation des ressources fiscales à travers l’activité forestière au Liberia et au Gabon. Il se situe du point de vue de la gestion durable des forêts tout en visant une distribution équitable des revenus issus de leur exploitation. L’article envisage les effets d’une redevance unique, basée sur la superficie et fixée par le biais d’un processus d’enchères dans l’allocation des concessions au Libéria et, il décrit, par ailleurs, les caractéristiques de la situation actuelle de la fiscalité forestière au Gabon. Les deux pays ont énormément simplifié les règles fiscales de l’industrie par des réformes et d’autres améliorations restent à faire. Un approfondissement de la réforme devrait considérer une diminution de la taxe à l’exportation, le renforcement de la redevance de superficie et l’utilisation d’enchères pour l’allocation des concessions.

Cargas fiscales en el sector forestal en Liberia y Gabón R. KRELOVE y O. MELHADO Este estudio se centra en la movilización de recursos a través de la actividad forestal en Liberia y Gabón. Se apuesta por seguir una política de gestión forestal sostenible y al mismo tiempo obtener los beneficios apropiados de la renta que proporciona su explotación. El estudio describe el rendimiento de un impuesto local generalizado derivado de un proceso de pujas para el reparto de concesiones en Liberia y presenta el estado del régimen fiscal forestal en Gabón. Ambos países han llevado a cabo un proceso de reforma para simplificar las condiciones fiscales en la industria, y la realización de cambios ulteriores parece factible. Una profundización de la reforma debería considerar la eliminación gradual de los impuestos sobre la exportación y la consolidación de un impuesto local y un sistema de pujas para el reparto de concesiones.

INTRODUCTION This paper presents the situation of forestry taxation and forestry reform in Liberia and Gabon. The paper focuses on mobilizing resources through forestry activities. It investigates the scope to adopt a generalized area tax through a bidding process for allocating concessions with the bidding parameter being the amount of tax to be paid. The rationale is that the area tax strengthens sustainable management by confining logging to areas that can be efficiently exploited. The selection of two cases allows comparing a bidding process in place such as Liberia with Gabon that still has not 1

fully implemented allocating permits through bidding. From regional experience, foresters do not favor competitive bidding because they see the lack of information and inadequate infrastructure as impediments to an appropriate bidding process. More than a year is needed to make an inventory of the area and it is costly. In several cases companies have found that the forest density in the concessions assigned was below the expected profitability threshold. It has traditionally been difficult to arrive at reliable estimates of the potential rent capture from sustainable forestry in developing countries, reflecting mainly incomplete

The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.

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and imperfect data availability. However, there is a sense among experts that historically the share of rent accruing to African governments from forestry has been very low. For example, it was recently estimated that in aggregate about 95 percent of value added in forestry in Africa during the 1990s accrued to forestry companies (with the remainder split among employees and government) (Whiteman and Lebedys 2006). By comparison, the estimated government take in some recent petroleum concessions around the world is above 80 percent of expected economic rent, with some contracts yielding over 90 percent (Cramton (2007). This suggests that to date governments have been more successful in designing revenue capture mechanisms for other resources. While revenue has been increasing with reforms to the fiscal regimes in a number of African countries, for example by the introduction of concession auctions, there remains scope for further rent capture. Several possibilities are discussed here: designing the auction to encourage greater competition (the AngloDutch two phase auction) and bidding over a variable that is responsive to realized changes in forest rent (using the stumpage percentage rather than the area fee as the auction variable). Another possibility, to be used as either a complement or substitute for these measures, is a tax on positive cash flows. The practical problems in administering such a tax are similar for forestry and for agricultural concessions. It requires essentially the same data as is needed for the effective administration of the corporate income tax. The method calls for adding back depreciation allowances and interest expense, while deducting in full fixed investments as they are incurred. Losses incurred in the development stage of a project must be carried forward, ideally with interest, to be used to shelter income from tax when the project becomes profitable. Thus an account must be maintained until the tax is first paid (if at all), but the same is true for depreciation accounts and losses under the income tax. Because this additional tax on forestry is related to the project’s rate of return, and takes account of the time value of money, it will not be paid by ex post marginal concessions. Like the stumpage fee, the tax distributes risk between the company and the government by being responsive to the realization of the forest economic rents, unlike the area fee that, under bidding would be determined by expectations for rent, rather than its realization. By absorbing more of the risk, the government could realize a higher expected share of the rent.

FORESTRY REFORM TAXATION IN AFRICA: THE CURRENT SITUATION With overwhelming evidence of the increasing risks of climate change, preserving tropical forests is of paramount importance. In this regard, countries with abundance of forests are generating positive externalities.2 The key 1

1

2

The maximum benefit is obtained if resources are kept intact;

challenge for African countries in this domain is to manage their forests in a sustainable manner while obtaining a fair share of rents arising from their exploitation. The general objectives of forestry sector reform in Africa are to make the management of forest resources sustainable;3 to improve the business and investment climate; to introduce a tax system that is simple, transparent, and equitable; and to ensure an equitable sharing of forestry rents among the private sector, the central government, and local communities. Forestry taxation should ensure that forest rents are shared fairly among stakeholders. It should also make investment attractive by ensuring equal opportunities and fair competition among private operators. Appropriate taxes combined with auctions can shape incentives toward higher forest yield by increasing harvesting per hectare and reducing timber waste. With sustainable management in most African countries, which is still far from being applied, the forestry sector could be an element to promote development on a sustainable basis. Given increasing demand from international markets for both logs and processed products from the region, evolution of the sector should be guided with a view to protect the resource and it should focus on the following issues: • Source of fiscal revenues. Currently, forestry produces only a relatively minor proportion of tax revenues. This may be because tax systems are poorly designed, compliance is minimal, or governance is weak—likely for all these reasons. With better designed systems, strengthened tax administration, and improved governance, revenues from the forest sector could be raised substantially. • Export earnings. In some African countries, notably those in the Congo basin, forestry is becoming a key export, for instance is currently the first export in the Central African Republic and the second in oil and mining exporters such as Congo, Gabon, and Cameroon. • Labor markets. Though statistics are not easily available it appears that a considerable proportion of the labor force in the Congo basin countries is already employed in the labor-intensive forestry sector, and another large proportion depends on forests for subsistence. With proper incentives, forests could become an important employer not only in logging and processing but also in forest management and tourism. • Domestic activity. There is potential for a processing industry generating additional value added. With this in mind, some regional governments are limiting the however, for doing so, those countries must be compensated for both foregone tax revenues and economic activity. Unless a mechanism to compensate these countries is in place, where beneficiaries of the externalities transfer equivalent resources, owners of forestry resources would continue exploiting their resources. The topic of compensation is not developed in this paper. 3 Taking into account the need to protect resources for the long term and thus contribute to address the global problem of climate change.

Forestry taxation in Africa

export of logs and taxing those exported at higher rates, in an attempt to encourage further domestic processing. The private sector can bolster activity in the sector through job creation, remitting revenue to governments at all levels, and directly contributing to rural development in remote areas. However, the current institutional and regulatory situation places obstacles in the way of these private sector contributions. Foreign investment is critical for sustainable development in Africa. In the last few years foreign companies have been investing not only in forest exploitation but also increasingly in processing. However, investment in Africa does not compare favorably with investment in Eastern Europe, Asia, and Latin America, for a number of reasons: (1) long distance to points of shipment and a lack of public roads; (2) high transport and harbor costs and a long delivery time for imported spare parts; (3) high costs of workforce training; (4)  the need for costly private power generation in many locations; (5) banking sector reluctance to provide long-term finance for forest industry investments; (6) an investment climate that does not promote the stability of long-term investments; (7) governments that do not respect their commitments; and (8) in some cases a lack of a level playing field between formal companies and their informal competitors, who may have lower levels of both tax compliance and compliance with the principles of sustainable forest management.4 THE REGIONAL SITUATION Forests, which cover a substantial part of the region, are vital to the economy of the Congo basin countries, through commercial exploitation, subsistence, and tourism. While the Democratic Republic of Congo (DRC) contains the largest area of unspoiled forests, Gabon and Congo, where population density is low, have the largest number of hectares of forest per capita. A number of countries in the region are important producers and exporters of roundwood and forestry products. The largest are Gabon and Cameroon; CAR, Congo, DRC, Equatorial Guinea, and Ghana are also important producers. Liberia is well endowed with valuable forest resources. Liberia’s forests are equivalent to about 45 percent of the remaining Upper Guinea Forest, which spans ten West African countries from Guinea to Cameroon. These forests contain a number of species that are in high demand on world markets. Consequently, Liberia has the potential to again become an important actor in the tropical timber market. Despite its importance in the economic activity, tax revenues from forestry are low. Forest taxes in the region yield over US$150 million of government revenues annually. The main taxes are: (1) area taxes, with rates varying from 4

 hese concerns were expressed by industry representatives at a T meeting in Washington with the World Bank and the International Monetary Fund on January 15, 2004.

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CFAF 250 per hectare (ha) in the Democratic Republic of Congo (DRC) to CFAF 4,100/ha in Cameroon; (2) stumpage taxes from about 1.25 percent in the DRC to 4.5 percent in the Central African Republic (CAR); and (3) export tax on logs from 2 percent in the Republic of Congo (Congo) to 17 and 17.5 percent in Cameroon and Gabon. The DRC taxes exports of transformed products at 8 percent and the CAR at 4.5 percent. All the countries have taken actions to promote domestic processing. In Congo, the DRC, and the CAR laws specify that 60 percent of logs ought to be transformed domestically. Cameroon has a total ban on unprocessed exports of some varieties. Gabon’s forestry code states that 75 percent of logs must be processed domestically by 2012. All of these countries levy a land rental and felling tax or stumpage fee, although in some cases the charges are specific rather than ad-valorem. Implementing ad-valorem rates in Liberia is being supported by the establishment of a chain of custody system, designed to track tree cutting, transportation and prices, thus supporting the main tax administration operations for these taxes. In all countries there is a strong case for strategic reforms over time, such as (1) shifting the burden of taxation away from dependence on export taxes; (2) reducing the number of taxable species; and (3) moving from stumpage and export taxes to taxation based on area or on profits. THE SITUATION OF LIBERIA Because of weak global demand in key markets and political instability, Liberia’s timber sector stagnated after a fast expansion throughout the 1960s. The sector recovered somewhat through to the late 1980s, but the subsequent outbreak of civil strife lead to a cessation of the sector’s formal activities. Immediately before the imposition of a ban on timber exports in 2003, annual exports amounted to about US$150 million according to official sources.5 The ban was lifted in 2006 and production and exports were expected to resume by 2008. Production of forest products continued during the civil war, despite a UN ban on imports of Liberian origin. Exports officially recorded by the Forestry Development Authority (FDA) in those years indicate massive under-reporting. Under the transitional government following the civil war, 72 companies claimed the right to log, but all were found to be in violation of business law or their operating obligations. All forestry concessions were canceled in 2006. The UN embargo has since been lifted, and resumption of largescale forestry operations is intended. With the assistance of the Liberia Forest Initiative (LFI), a coalition of donor governments, lending agencies, NGOs and civil society groups,6 the legislation and organizational and administrative Exports registered by importing countries amounted to US$183 million in 2002. 6 Members of the LFI, in addition to the World Bank, include the U.S. State Department, the EU, the U.S. Forest Service, FAO, IUCN, the Environmental Law Institute, Conservation International, CIFOR, IATA, CGIAR, and Fauna and Flora International, as well 5

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structures (including the FDA) have been modernized and a new fiscal regime has been put in place. All concessions must now be awarded on the basis of competitive bidding; the first concessions were auctioned in April 2008. The new regime also provides for preferential access for rural populations, revenue sharing between the center and regional and local governments, and fiscal incentives for further processing of timber. Agricultural concessions have so far occupied degraded land (forest cover previously removed), but there is possible interaction of forestry and agriculture income streams if concessions include the right to remove remaining trees. Forestry Contracts Recent reforms in the sector have been extensive. The Forest Development Authority (FDA), the main agency for controlling and regulating the sector, has been completely restructured. A reformed forestry law, the National Forestry Reform Law (NFRL) was passed in 2006. Under this law and the recently approved National Forest Management strategy, the FDA must manage the forest on scientific principles, and in consultation with local communities, for the benefit of communities, conservation and commercial forestry (the so called “three Cs”). Large logging companies are required to achieve international standards ensuring their operations are sustainable. In the new regime, there are two distinct types of forestry concessions, meant to achieve different objectives: Forest Management Contracts (FMC) are long-term contracts for large areas; and Timber Sale Contracts (TSC) are shortterm contracts for smaller areas that will likely be cleared for plantations or farming. All contracts are awarded by competitive bidding. The Public Procurement and Concession Act (PPCA) of 2005 specifies a process that is transparent and seen to be fair. Successful concession bidders will post a performance bond, reach a social agreement with affected communities in the vicinity of the concession, and share rent with the government through an area tax, stumpage fees, and export taxes. The area fee is determined by the bidding, and the stumpage fee and export tax vary by species. In addition, to encourage further processing of timber, the export tax on wood products is set at half the level of taxes on exports of roundwood. This structure of taxes is similar to that prevailing in most of the timber producing countries in the region. Administration of these taxes will be supported by a chain-of-custody system through which all timber must be tracked and which requires accurate records from maps of harvest-trees to transport waybills to export permits. The system is run independently by SGS Group, a private Swiss inspection company. By July 2008, six TSCs had been auctioned and awarded. Three FMCs have been auctioned so far. Other auctions were to take place later in 2008. as Liberian government agencies and civil society organizations.

Contracts and Concessions Review In 2006, the Public Procurement and Concessions Commission (PPCC) with support from international partners (UN, World Bank, EC, USAID) undertook a review of contracts and concessions signed under the NTGL (October 14, 2003 to January 16, 2006).7 This review process was necessitated by the exceptional circumstances surrounding the long-term civil conflict and the breakdown of the rule of law. It was a one-time effort and not meant to establish a precedent or legal justification for reviewing, modifying or canceling contracts by successive Liberian governments. The objective of the review was to determine whether the contracts and concessions were undertaken openly, transparently, and according to international standards. As a result of the review, two rubber concessions were recommended for renegotiation, and one oil palm concession for cancellation. Fiscal Terms for Commercial Forestry Sustainable harvesting of Liberia’s forests resumed following the lifting of the United Nations trading ban in 2006. In anticipation, the authorities have put in place a new system of laws, regulations and forest fiscal regime to govern sustainable management and utilization of the forest, to capture an appropriate share of the forest economic rent for the budget, and to use forest development as a driver of economic revitalization, especially in rural areas. The National Forestry Reform Law of 2006 (NFRL) provides for stumpage fees, land rental fees, and forest product fees (interpreted as fees associated with the production, registration, transport, transfer of ownership, use or export). The fees are to be set by the Forestry Development Agency (FDA) and revised periodically. FDA regulation 07-107 has set the main fees as follows: • Stumpage: levied on the fob price of logs, at three ad valorem rates, 10 percent; 5 percent and 2½ percent of the fob price of the log, depending on the category of species.8 • Basic area fee: US$2.50/ha per year for Forest Management Contracts (FMCs - larger, longterm concessions), and US$1.25/ha per year for Timber Sale Contracts (TSCs— smaller, short-term concessions). • Export taxes: for logs, levied on the fob price of logs at three ad valorem rates (as with the stumpage fee), 10 percent; 5 percent and 2½ percent. Exports of processed wood products are taxed at half the rate of those for log exports. There are in addition a number of minor charges for particular services, and charges on imports and exports (e.g., Government of Liberia, “Report on Contracts and Concessions Review Process,” Liberia’s Partners’ Forum, February 13–14, 2007. 8 On private land where the trees have been artificially regenerated, the stumpage fees are reduced by half. 7

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inspection fees, PSI fees, and port charges) that apply to forestry, and more generally to all transactions. Finally, in addition to taxes and fees, concession holders are required to deliver services to local communities.9 Tax rates in Liberia are broadly comparable to those in other countries in the region, although the export taxes on logs, at rates up to 10 percent, are somewhat lower than those of other producers (for example, the tax is 17 percent of the fob price in Gabon, and 17.5 percent plus a speciesspecific surtax in Cameroon). Like all other countries in the region, Liberia levies a lower tax on export of processed wood products, although the gap (50 percent) between the tax on roundwood and processed exports is smaller in Liberia than in other countries (for example, in Cameroon, the tax on processed products is 2½ percent of the fob value, about a tenth of the tax rate on roundwood; and in Gabon the tax on processed exports is zero).10 When considering appropriate tax rates and revenue potential of these taxes, it is important to understand that the revenue yield of any instrument will depend on the other instruments and total revenue will be determined by the complete fiscal regime. In particular, when as in Liberia concessions are allocated by competitive auction, one would expect a negative relationship between bid amounts and tax levels—for example; a higher stumpage charge would lead to lower winning bids. For this reason it is appropriate to view these taxes as serving the role of establishing a floor for the public share of forest economic rents, from which auction bidders compete by offering (positive) premiums over this floor (operating in this way similarly to a reserve price). Consequently, as experience and data are gained on auction outcomes, the taxes could be adjusted periodically to exploit this floor strategically to improve auction outcomes. The base for the stumpage fees and export taxes is the fob invoice price. Establishing the market prices of logs and wood products is often more difficult than for other natural resources such as oil and minerals. Timber is not a homogeneous commodity, and international price databases are imperfect, since there are dozens of species, wide quality variations, many products (logs, sawnwood, veer, plywood, molding, etc.) and sizes. Often different segments of timber markets are not large enough to harmonize prices, and there are, in general, no organized spot or forward markets. Market niches are frequent in the industry, and for the same product, price may vary from contract to contract, depending on the quality of trade ties established among transactors and other idiosyncratic factors. In addition, in many tropical countries, companies are vertically integrated, further reducing the volume of arm’s length transactions. There is one independent source of data on prices: the International Tropical Timber Organization (ITTO) provides a twice-per-month list of prices of selected products. But the list is far from being comprehensive. In addition, the data  any developing countries require concession holders to provide M services to local communities. See Karsenty (2007). 10 Comparisons of this form must be treated with care however, as quantitative export controls, including outright bans of log exports, may be in place. 9

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is based on surveys of firms in the industry, which are in effect asked to provide proprietary data, so there may be systematic biases in the data. Under regulations, the FDA is required, along with the chain of custody firm, SGS, to maintain a database of prices, based on public and other sources, which fob invoice prices will be tested against. It is uncertain how discrepancies (which experience in the region suggests will arise often) will be resolved, if an agreement between the FDA and the taxpayer on the transaction price is not forthcoming. This uncertainty is a potential deterrent to investors. A mechanism to settle these disagreements will need to be developed. The taxes considered here have different characteristics for ease of administration, and for producer decisions and behavior. Each has advantages and disadvantages, making a balanced approach, using a variety of instruments, appropriate. One traditional advantage of export taxes on timber and processed products is that they are relatively easy to levy and collect. Differentially high export taxes on logs (and quantitative export controls) have also been used to encourage greater domestic processing of timber before export. It is argued below that export tax is a weak and often inefficient means to encourage investment in domestic processing. In addition, with an effective chain-of-custody system in place, administering stumpage fees on logs should be no more difficult than administering export taxes, thus largely negating the first argument. Finally, export taxes distort consumption, encouraging domestic use of logs and log products rather than production for export. For all of these reasons, it would be beneficial to eliminate the export taxes. In the absence of logging no export taxes were in fact being paid. Thus, to maintain the degree of expected rent capture from the taxes, the stumpage fees should be increased to incorporate the previous levels of export tax. It has to be emphasized that implementation may prove difficult and could pose significant revenue risk due to weak tax administration. The institutional constraints could mean that the recommended reform might take several years to implement. There are few grounds for not making this change quickly. For the TSC contracts already signed, it is likely that their plans are to export most of their log production; if so, a doubling of the stumpage fee would not represent a material change in the fiscal environment they face. On the other hand, it would be important for FMCs—no contracts for which have yet been signed—to have certainty about the taxes they face, in particular before irreversible decisions are made on investments in further processing. This argues for making the change quickly. It would be appropriate to make the change revenue neutral, raising the stumpage rate to raise approximately the same amount of extra revenue as lost on the export tax, based on an estimate of the likely share of processed wood exports on average across all concessions. The law is not fully clear on the treatment of natural trees that may be harvested on agricultural concessions or other land. There is no particular reason to treat these differently from other natural forest, so stumpage (and export tax where applicable) should be charged. On the other hand,

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there has been discussion of whether the harvest of rubber trees should be liable to forest taxes. We take the view that production of timber resulting from planting for agricultural purposes should not become liable to forestry taxes, where exploitation is undertaken by the agricultural concessionaire. Experience with the Auction Mechanism The Public Procurement and Concessions Act (PPCA) of 2005 requires that contracts for significant forest resource licenses be tendered to the public. Auctions of concessions began in early 2008. As of June 2008, 3 FMCs and 6 TSCs have been tendered by the FDA, and the TSCs have been awarded.11 Four further FMC auctions are currently being prepared. The auction process appears to have been credible; reserve bids were used for all contracts, which were necessary in two TSC bids, which required a second round. However, errors in the quoted timber volumes appeared in the TSC bid documents and in the FMC documents. Despite these errors, none of the 13 companies that bid asked for clarification. Notable characteristics of the outcomes include the following: 1-Some bidders appeared to lack understanding about how to determine an appropriate bid, suggesting that there is a learning curve for these auctions. For the TSCs, besides the fact of the errors in the bid document, there appears to be little correlation between the available timber and the bids submitted. This suggests that the companies have failed to develop a valid business plan and undermines confidence that winning bidders will be able to meet the land rental commitment over the concession period.12 Since the process was new, it should be expected that there would be a period of learning for both the FDA and the bidding companies. 2-Winning bids for TSCs ranged from US$1.91 per hectare per year, to US$20. Bids for FMCs ranged from US$3 per hectare per year to US$26. Bids in this range suggest that the authorities can expect a significant increase in revenue from I n order to promote Liberian business, areas less than 100 000 ha are reserved for majority-owned Liberian companies only (NFRL, sections 5.3g and 5.4g). There are no restrictions on company ownership for larger FMCs. However, for these contracts, bids may be adjusted using a margin of preference for domestic bidders, although the PPCA requires bidders to be informed of the criteria in the bid documents (PPCA Section 58(3)(f)(i). Companies that wish to bid must prequalify (FDA regulation 103–07; Schedule 1), to verify inter alia that they are: a registered corporation; in good standing in tax payments; and not bankrupt. In addition, all bidders must post a bidder’s bond equal to 1/6th of the legislated annual area fee (exclusive of the bid premium). Subsequently, the high bidder must post an annual performance bond worth a minimum of US$25 000 to US$250 000 (depending on the contract area), or half of the expected government revenue for the first year, up to a maximum of US$1 million (FDA regulation 10407, sections 43 and 61). 12 The FDA has attempted to work with several of the winning bidders to develop realistic business plans. 11

forest taxes and fees. Other countries that have introduced concession auctions over area fees have experienced such an increase. In Cameroon, area fees rose from about €0.50/ha per year before the introduction, to the area of €5 on average (and up to €13 in some cases). Ghana, which also auctions concessions with bids over area fees, also experienced an increase in revenue.13 14 Although in a number of auctions the bids appeared unrealistically high, the Cameroon experience suggests that some caution is warranted. In Cameroon the average winning bid on smaller short-term concessions (similar to TSCs in Liberia) over the period 2000–2007 was €21.3 per hectare (about US$34 at the mid-2008 exchange rate), and for larger, longer-term concessions (similar to FMCs), the average winning bid over 1997–2007 was €3.8 (about US$6) per hectare. 3-Bids could have been too high because companies had not prepared realistic business plans. Another potential problem associated with unrealistic bids may arise from the level of the bid bond. In Liberia, the bid bond was set at US$50 000 for the large FMC, and about US$25 000 for the two smaller FMCs. If the bond is low, then default costs are low, and consequently bidders are effectively bidding for options on concessions, rather than the concessions themselves.15 As experience is gained, the regulations on the amount of the bid bond may need to be revised. The key to good auction outcomes is to ensure a high degree of competition; that means in particular discouraging collusive, entry-deterring and predatory behavior. If completion problems persist, a simple-to-understand two stage auction, called an “Anglo-Dutch” auction, has been shown to often yield good results in natural resource and other bidding situations. This design exploits the fact that, while ascending and sealed-bid auctions are each vulnerable to collusion and entry-deterring behavior, the combination is much less vulnerable. The Anglo-Dutch auction contains a sealed auction stage, similar to the current auction design for TSCs and FMCs. However, that stage is preceded by an ascending price auction. In an Anglo-Dutch auction, the auctioneer begins by running an ascending auction in which the price is raised continuously until all but two bidders have dropped out. The two remaining bidders are then each required to make a final  he approach of allocating concessions according to competitive T bidding over area fee apparently emerged in the region under the influence of World Bank work on this topic (Grut et al. (1991)). 14 As in Cameroon, auctions in Ghana have a similar structure to those in Liberia. There is prequalification and an independently determined reserve price; a bidder bond requirement; and conclusion of a social agreement with local communities. The general impression is that the auction mechanism is a more fair and transparent way to allocate concessions than the alternatives, and that the conduct of actual bidding has been fair. 15 Furthermore, if under-financed firms can avoid commitments through bankruptcy, then an auction process actually gives them an advantage over better-financed competitors. This is one reason that financial bona fides need to be verified in the prequalification phase. 13

Forestry taxation in Africa

sealed-bid offer that is not lower than the current bid price, and the winner pays the winning bid. In the Liberian auctions, as in the auctions in Cameroon and Ghana, bidders submit a proposed area fee payment. The winning bidder will also pay a fixed stumpage fee, and, in the current regime, an export tax, both at a rate known in advance of bidding. One motivation for the stumpage charge is that actual tax payments will more closely reflect ex post realized profit. This reduces the risk of the forester. In normal circumstances, a stumpage fee, which is in the nature of a sales tax on a commodity, would be distortionary, in that it affects production decisions by reducing the marginal benefit of production. However, this argument carries less force in the case of timber, where production is often determined more by administrative means, through a forest management plan. Thus the stumpage shares risk differently between the government and the forester in a way that may benefit the forester, while having only minimal impact on the cut. Moreover, with a stumpage fee, in contrast to the area rent, the government’s share increases with the profitability of the concession. This advantage of the stumpage charge could be exploited by using the stumpage charge rate as the bidding variable. (In practice, the whole species scale, but the relative levels could be fixed so that only one bid is made.) In this regime, bidders would compete on their willingness to share revenue with the government (subject to a minimum stumpage charge, and perhaps also to a given annual land rent payment). Experience with oil concession auctions has shown that bidding over production shares, rather than rentals which do not vary with production, typically increases government revenue, by reducing bidders’ risk.16 It is worthwhile to consider these and other options for auction design, with the goal of optimizing the public share of revenue from the forest resource. The key to any successful procedure is a high level of bidder participation. Taking into account bidders’ needs is thus critical in getting participation; for this reason, reform should proceed inter alia through a process of consultation with prospective bidders. Strategy for Encouraging Further Processing The new forestry legislation, the NFRL specifies that fees be set to encourage further processing of timber while maintaining a fair rate of fees. This goal has been implemented by placing an export tax on roundwood, as indicated previously, with tax at half rates for processed product exports. In addition, the contract will require the concessionaire to make agreed investments in further processing, according to a specified timetable. At the contract bidding stage, it is intended that a second envelope will be submitted as part of the bid that will outline the bidder’s commitments to invest in further processing. These plans will be taken into 16

 ee Cramton (2007). As discussed there, variations on this S principle can be envisaged. For example, the bidding could be on sharing revenue in excess of an amount to allow foresters to recover development expenses.

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consideration by the FDA in selecting the winning bid. The NFRL provides for application of general tax legislation. The LRC has few specific provisions for forestry. With regard to general provisions, it is possible under the LRC to grant special incentives to forestry projects, under 204(e). With 204(e) amended as proposed, forestry will not qualify for incentives, although investments in wood processing will continue to qualify. It is extremely difficult to achieve an effectively targeted incentive through export taxes. There are at least two aspects to this. First, a lower export tax rate for processed wood, as currently in place in Liberia, encourages low-value added processing, but actually discourages high value-added production. In fact, the extra value added in processing needed to qualify for the lower tax rate could even be less than the tax reduction obtained, so that processors gain less than the government loses, representing a net loss to the economy.17 It is difficult to calibrate export taxes to provide an effective incentive across processing representing different degrees of value-added. Second, and more important, experience in other countries, including in the region, is that differential export taxes or log export quotas or outright export bans could have the counterproductive effect of threatening sustainable forest management. In a number of countries that used export taxes or quantity restrictions on logs to encourage investment in processing—Cameroon, Ghana, and Indonesia are examples—a domestic processing capacity developed that outstripped the ability of domestic forests to supply timber on a sustainable basis. This overcapacity, combined with weak enforcement and poor governance, promoted illegal logging, corruption, and over harvesting of forests.18 The revenue cost of processing commitments placed in forestry contracts is nontransparent, so that their effectiveness is difficult to determine. A company considering entering a bid on a concession, will take account of the cost of all commitments, including social expenditures and required  or example, consider a log export with value US$100 fob. With F a 10 percent export tax, the after tax revenue is US$90. Now suppose that at a small cost, US$4, the producer can undertake an operation that would convert the log into a processed wood product, which would halve the export tax rate. Assume, in the extreme case that this processing does not add positive value at world prices—that is the fob price of the processed product is also US$100. Then on export the producer would pay US$5 in tax, and have US$95 after tax. Since costs are higher by US$4, the net gain is US$1. However, the Treasury has lost US$5 in tax revenue, so the net gain to the economy from this processing is negative US$4. Karsenty (2008) argues that the economics of many primary processing activities—especially sawmilling—is of this form, especially since in simple mills, about two-thirds of the timber volume is lost in the sawmilling process, and because world prices for sawnwood tend to be low relative to the world price of the roundwood. 18 See World Bank (2003). More recently, Gabon introduced new fiscal and other incentives for further processing. This led to overinvestment in the sector, reflected in a considerable amount of non-performing loans of the banking system arising from wood processing (see Melhado (2007)). 17

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investments for further processing, in determining its monetary bid. Where the bidder would be required, if it wins the contract, to undertake investments that in its view do not pass a market test, or if it must undertake the investment on a timetable different from what it considers appropriate, the bidder would likely reduce its monetary bid for the concession to compensate. Thus, the processing commitments work as an incentive by, in effect, subsidizing the log inputs, just as with direct incentives like a differential log export tax. Moreover, since the amount the company would otherwise have bid is not observable, it is not possible for the authorities to directly determine the cost of the incentive to the treasury. It would be better to direct any investment incentive for processing at the investment itself, rather than through subsidizing the log inputs. Both an export tax and a processing commitment under the concession contract in effect subsidize log inputs. Furthermore, there is no compelling reason to favor investments in log processing over investments in other sectors of the economy. For this reason, an appropriate approach would be to subsume fiscal incentives to processing in the general incentives to invest under the LRC, placing these investments on the same footing as other manufacturing investments. At the same time, investments in wood processing would be encouraged by improving the infrastructure of logging, and strengthening the management of logging operations, grading and pricing logs appropriately, and managing efficient transportation of the output. In this regard, encouraging training in grading, sizing, pricing of logs and in other processing skills, as well as identifying opportunities for cost cutting along the forestry value chain. Revenue Sharing and Social Agreements Two aspects in particular of the fiscal terms for forestry concessions are of importance to local communities: revenue-sharing and social agreements. Revenue-sharing All forest resources in Liberia, regardless of land ownership, are held in trust by the Republic, represented by the FDA, for the benefit of the people, except those located in communal forests or which have been developed on private or deeded land through artificial regeneration. (NFRL, Section 2.1). Land rental paid on forest concessions accrues to the national government but is earmarked for apportioning among counties (30 percent), affected communities (30 percent) and the national government (40 percent) (NFRL, Section 14.2 and FDA regulation 106–07). These arrangements may be subject to review in the context of a proposed Land Commission that will inter alia make recommendations on the decentralization of public functions. There are a number of potential risks arising with the arrangements: (1) There is ambiguity whether the area fee bid premium arising from the concession auctions will be included in the total to be distributed, as the bid premium is not listed as a land rental fee (FDA regulation 107-07) and

is described therein as separate and additional. The NFRL Section 14.2 is also unclear, but appears to lean toward inclusion. The issue is important because the bid premium is likely to significantly exceed the basic land rental alone; (2) that bid premium are payable recurrently every year raised the possibility of default by concession holders, exposing communities and counties to potential revenue risk; (3) distribution mechanisms for community sharing of land rentals are being hurriedly put in place in time to provide visible benefits when logging commences, but experience in other countries with similar arrangement is that the flow of funds from the central government to communities can be slow; and (4) the arrangement will need to be renegotiated if the fiscal terms in forest concessions are reformed. The danger here is that the mechanism could lose credibility if timely and effective implementation is not ensured. Part of the problem arises from the decision to earmark a share of a particular flow of revenue collection. The program would be more effective and potentially more responsive to community and county needs if flows depended mainly on community needs and were financed out of general revenue. Social agreements Traditionally, timber concession holders have negotiated and financed a compensatory package for local communities affected by their operations, usually by providing infrastructure or amenities or specific inducements to traditional leaders; this has been considered a vital element in establishing acceptance of logging operations among local communities. The idea of a formal social agreement has been introduced and incorporated into Liberian law through NFRL Section 5 and FDA regulation 105-07. Guidance on their implementation is provided in the Social Agreements Handbook (2008).19 A minimum financial benefit for communities under a social contract is defined in FDA regulation 105-07 as US$1 per cubic meter of logs harvested annually by the concession holder. However, in the Social Agreement Handbook, the FDA has capped this amount at US$1 and US$1 ½ per cubic meter for TSCs and FMCs, respectively. The regulation requires that the payments be made on a quarterly basis into an escrow account, to be accessed by community Forestry Development Committees. Since logging contracts have only just been signed for the initial batch of TSCs, there are not yet any social agreements in existence. Conclusions Forestry reform has greatly simplified the fiscal terms for the industry, and further improvements are feasible. The legislation and regulations now provide for stumpage fees (varying with species quality), and for export taxes. The bidding variable in auctions is the area rental. There is 19

 he idea of a formal social agreement appears to have been borrowed T from Ghana, which introduced similar social responsibility agreements under its Timber Resources Management Act (1997).

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limited experience with auctions so far, but there may be scope to consider improved auction design and a change of bid variable—the stumpage fee instead of the area rental—in order to capture more of the rent while, at the same time, improving the risk profile for investors. Clear rules are needed for treatment of natural forest on agricultural concessions, and of planted timber (e.g., rubber wood). Forestry payments are to be included in the Liberia Extractive Industries Transparency Initiative (LEITI). Port fees raise special concerns for forestry exports. The export tax incentive for further processing of timber carries risks, and may not be cost effective. Export tax is halved for processed timber, but the tax is levied on the value of the wood product, not the log. This discriminates against high-value processing, while at the same time posing risks for sustainable forest management if overcapacity develops in low-value processing. It would be worthwhile to consolidate the export tax into the stumpage fee, and rely on general manufacturing and processing incentives to provide attractive fiscal terms for processing. A reform agenda for the forestry sector in Liberia should take into account the following measures: • Remove the export tax, and make up the revenue through increase in the stumpage tax rates. • Forest taxes should be charged on harvested natural trees on agricultural concessions, but not on harvest of trees planted for agricultural purposes (for example, rubber wood) by the concessionaire. • Consider revising the auction format to require participants to submit bids on the stumpage fee percentage they are prepared to pay, to share risk better and increase revenue. • To improve the level of competition in the auction process and enhance rent capture, consider changes in the auction design in light of experience and best practices in forestry and other natural resources, including moving to a two-stage Anglo-Dutch auction. • Consider introducing into concession agreements a forestry economic rent tax, at a modest rate, to capture a larger share of the rents from the most profitable projects. • A strategy for the promotion of value added wood product investments could be focused on using the general fiscal incentives of the LRC, and not direct or indirect subsidization of the log input, or through other measures targeted specifically at log processing. Export taxes should not be used for this purpose.

use of the forests: (1) in 2001 a new Forestry Code was approved. The objectives of the Code are to place forests under sustainable management plans; 20 establish a taxation system that will stimulate sustainable management of the forests, and consolidate a local processing industry; (2) in 2002 Gabon created a system of 13 national parks. The parks occupy 3 million hectares—about 10.6 percent of the country’s area; and (3) in 2004 Gabon approved a letter of development of the forestry sector. The letter, prepared in consultation with the World Bank, lays out an agenda for reform and specifies measures to remove obstacles to achieving sustainable management.

THE SITUATION OF GABON

20

After several years of almost unregulated exploitation of its forest, Gabon in 2001 initiated comprehensive reforms directed toward sustainable management of its forestry resources. Three important measures were implemented that defined the institutional and legal frameworks and the vision of reform aimed at ensuring the protection and sustainable

Forestry Taxation Though the objectives of the reform have been formulated and Gabon has made substantial progress in only few years, substantial challenges need to be addressed to move the reforms forward. Tax revenue from forests in recent years has represented less than 1 percent of GDP and only about 7 percent of total tax revenues.21 Until recently, the taxation system was cumbersome: at least 20 different taxes and fees burdened sector activities, particularly exports. Moreover, a timber marketing board (SNBG) had a monopoly on the exportation of Okoumé and Ozigo logs, and charged a fee on these exports to finance its operations. After lengthy negotiations between the government and forestry companies, in 2004 a reform reduced the taxes to three: • An area tax based on the size of the concession. Previously tax rates differed by zone: Zone A: FCFA 20 per hectare; Zone B: FCFA 12; Zone C: FCFA 8; and Zone D: FCFA 4. The new tax is based only on the size of the concession; the rate is FCFA 600 per hectare. This tax exempts the special and family permits. A temporary provision allows concessions under sustainable management plans to reduce the tax obligation by 50 percent. • A stumpage tax based on the value of the log. The rate varies from 2.6 percent to 7.7 according to where the tree is located to reflect costs associated with difficulties in exploitation. The incentive is to reduce waste and to facilitate valuation of the real cost of the activity. The tax exempts special permits and the family exploitation, and differentiates between logs for exports (the tax base is calculated after subtracting 15 percent of the price of the log) and for domestic processing (the tax base is calculated after subtracting 60 percent of the price of the log).  management plan is a planning program for an area, usually with A a horizon of at least 20 years. It sets a pace of felling to keep the resource sustainable and incorporates an inventory of the stock, a zoning map defining principal roads and areas for annual felling, the duration of the rotation, and a list of the exploitation units. 21 Forestry tax arrears during 2004-07 are about CFAF 10.7 billion for the area tax and 7.4 billion for the stumpage tax. The government is taking measures to accelerate the rate of recovery of tax arrears, among them introducing retention rates.

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An export tax of 17 percent on logs: the rate was lowered from the 2002 level of 20 percent. Processed exports are exempted.

The yield of Gabon’s forestry taxes has been lower than in other countries in the region. In Cameroon, for example, which produces only about 65 percent as much forestry products as Gabon, forestry taxes in 2003 brought about CFAF 40 billion, compared with CFAF 33 billion for Gabon. Before further reforms in the tax structure are undertaken, going to other rounds of tax design, it would appear to be important to consolidate revenues by strengthening control mechanisms and collecting tax arrears. It is not feasible in the short run to substitute the stumpage and area taxes for the export tax. A gradual phasing out of the export tax on logs has been recommended because the tax distorts incentives, penalizing exports in favor of domestic processing. However, the stumpage tax revenue is still far off its original target of about CFAF 7 to 8 billion annually, and even farther from full replacement of the export tax, which has an expected yield of about CFAF 25 billion annually over 2003-06. Exemptions from the stumpage tax also introduce distortions and lowers collections, making it difficult to phase out the export tax. For instance, even if the same base is applied to both taxes, the revenues would differ, because: (1) the rate of the export tax is 17 percent and the rate of the stumpage tax varies from 3 percent to 9; (2) the stumpage tax does not apply to family permits and special permits while the export tax does; and (3) the export tax is applied to the full value of the log, while the stumpage tax exempts 15 percent of the full value if the log is exported, and 60 percent if it is processed domestically. Sustainable management and concessions The new Forestry Code differentiates forests by rural and permanent domain. The rural domain comprises community and other forests for use by municipalities. Community forests can be commercially exploited. Though the law establishes simplified mandatory management plans for them, in practice it has not been enforced, and a preferential treatment has been granted, exempting certain permit holders from paying stumpage and other taxes. The permanent domain of the state comprises all the areas that are subject to mandatory management plans. Though the forestry code established the end of 2005 as a deadline for adopting management plans, as of May 2010 less than 50 percent of the permanent domain is under forestry management plans.22 The areas subject to management plan are protected areas including recreational areas,23 where no exploitation is allowed, and the productive areas where most of the logging takes place. There are three types of productive areas:  nly the big companies, which are mainly foreign–owned, O have adopted management plans. These include, Compagnie Equatoriale de Gabon (CEB) Thanry, SBL, Rougier Gabon, Leroy Gabon, and SHM 23 It includes the system of 13 national parks. 22

• Big forestry concessions under sustainable management (Concession forestière sous aménagament durable, CFAD). The size of concessions range from 50 000 to 200 000 hectares; no owner may hold more than 600 000 hectares. These concessions are also associated with processing units. The concession may be granted to foreign investors as long as they submit an acceptable management plan. • Medium-size concessions or associated forestry permits (Permis forestier associé, PFA), which are granted exclusively to nationals. A PFA must be associated to a CFAD; the maximum area of 15 000 ha can be extended to 50 000 ha if a management plan is submitted. • Good faith permits (gré a gré), which are granted only to nationals and are managed by the government. The area is measured in feet rather than hectares. Owners of these permits must sell their production domestically to a processing industry. The main problem has been the appropriate allocation of the permits. When the letter of development policy was being prepared the World Bank advocated (1) a moratorium in the allocation of the gré a gré permits until a transparent mechanism is in place (the moratorium was decreed on October 9, 2004); (2) making public information about the holders of the permits (since February 2005 they have been listed on the web page of the Ministry of Economy and Finance); (3) a system of auctions to allocate concessions. The timber marketing board The government decided in December 2004 to eliminate the monopoly of the timber marketing board (SNBG)24 in commercializing Okoumé and Ozigo. The decree established a period of transition in which the SNBG would downsize its operations and transform itself into an institution undertaking surveillance and control of the forestry sector. Because the decision abolished fees on exports amounting to about 10 percent of the sale prices, forestry activity would be expected to increase. Companies are not compelled to export anymore through the SNBG. In the initial period after the reform, however, the SNBG did not downsize its operations and became an active actor in the domestic trading and exporting of timber, which was contrary to the spirit of the law. The bias toward domestic processing The Forestry Code states that the government aims to have 75 percent of total production processed domestically by 2012. This is not a new idea: over the years Gabon has planned to build a domestic processing industry. However, when the Forestry Code was approved, the government not only restated that intention, it also offered fiscal incentives 24

 he government had 51 percent participation and the rest was T owned by several producers.

Forestry taxation in Africa

for processing. Those incentives include exemption from the stumpage tax of 60 percent of the price of the log, full exemption of the export tax, devolution of the value-added tax paid on inputs for processed exports, and a requirement that certain permits for forestry production be associated with domestic processing units. The new requirements have indeed increased domestic processing, but have also generated at least three costs: (1) a revenue loss for the government; (2) a bias against the export of logs; and (3) efficiency losses in the economy because some new enterprises could not be competitive.25 CONCLUSIONS A reform agenda in the forestry sector should be based on the following pillars: • Improve Protection and sustainable exploitation of forests. To accomplish that it will be necessary, first, to consolidate the system of national parks and other protected areas and, second, to enforce the adoption of sustainable management plans in areas under exploitation. • Strengthen the structure of taxation. The reforms initiated in some countries should be further advanced in order to remove distortions and increase tax revenues. The first stage should concentrate on the recovery of area and stumpage tax arrears and enforcement of payment of the stumpage tax particularly from logs used in domestic processing, but the second stage should be directed to phasing out the export tax and strengthening other sources of revenue. The stumpage tax should also be strengthened by eliminating exemptions for exports and domestic processing; unifying the rate at a higher level, eliminating exemptions for permits in the rural domain; and making tax administration more efficient. Other sources of revenues include area taxes or the possibility of profit taxes. • Permits in the sector should be allocated by auction. As proved in some countries of the region, competitive bidding is the easiest way method to determine the proper rents. A system based on auctions would make information about the process public and guarantee that new permit holders adopt management plans. • The government should avoid picking winners and losers in the forestry sector. Distortions as incentives to domestic processing should be avoided. The sector should compete the way other sectors in the economy do. The sector should be built up in terms of the general objective of diversifying the economy. Measures to benefit the sector are those that reduce transaction costs such as the elimination 25

 s a side indicator that there were competitiveness problems A in the processing industry is that at the end of 2004 most of the nonperforming loans of commercial banks were originated in credits to wood transformation industries.

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of the transport syndicate monopoly or elimination of surcharges like fee customs charges for accounting services. Fiscal incentives should be assessed in terms of their incentive to attract investment throughout the economy, such as accelerated depreciation under the corporate income tax. REFERENCES CRAMTON, P., 2007, “How Best to Auction Oil Rights,” in Escaping the Resource Curse, ed. by M. Humphreys, J. Sachs and J. Stiglitz (Columbia University Press). GRUT, M., N. EGLI, and GRAY, J. 1991, “Forest Pricing and Concession Policies: Managing the High Forests of West and Central Africa,” Technical Paper 143 (Washington: World Bank). KARSENTY, A., 2007, “Overview of Industrial Forest Concessions and Concession-Based Industry in Central and West Africa and Considerations of Alternatives,” CIRAD, April. KARSENTY, A. 2008, “Forest Taxation Regime for West and Central African Moist Forests,” CIRAD. MELHADO, O., 2007, Optimal Taxation in the Forestry Sector in the Congo Basin: The Case of Gabon, IMF Working Paper 07/253 (Washington: International Monetary Fund). SCHWIDROWSKI, A., and THOMAS, S. 2005, Forestry Taxation in Africa: The Case of Liberia, IMF Working Paper 05/156 (Washington: International Monetary Fund). WHITEMAN, A., and LEBEDYS, A. 2006, “The Contribution of the Forestry Sector to African Economies,” International Forestry Review, 8 (1), pp. 31–43. World Bank, 2003, Reforming Forest Fiscal Systems to Promote Poverty Reduction and Sustainable Forest Management, proceedings of a conference, Washington, October 19–21.

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International Forestry Review Vol.12(2), 2010

Legitimacy of public domain forest taxation, and combatting corruption in forestry J. PALMER1 and J. BULKAN2 1 2

Senior Associate at the Forest Management Trust, Gainesville, Florida, USA Mellon Foundation post-doctoral fellow in international environmental human rights at Colby College, Maine, USA

Email: [email protected] and [email protected]

SUMMARY Taxation systems for publicly-owned forests should be founded on a government’s constitutional right of radical tenure, simultaneously recognising the rights of forest-dependent stakeholders to share benefits and responsibilities. Complex taxes may be historically explicable but are open to corrupt diversions. A systems approach may be essential for benefit sharing to really reach geographically or institutionally remote beneficiaries. The purpose of each tax should be justified and communicated to tax payers, including through participatory development of tax laws. Transparency in justification and implementation of forest taxes helps to diminish corruption through replacement of administrative discretion by rule-based decision making. Strategists should be more aware of the links between criminality in various sectors.

Keywords: taxation, corruption, forest-dependent stakeholders, systems approach, criminality

Légitimité de la fiscalité des forêts domaniales et lutte contre la corruption en foresterie J. PaLmer et J. Bulkan Les systèmes de fiscalité des forêts domaniales doivent être fondés sur un droit constitutionnel indiscutable de propriété éminente de l’État, qui reconnaîtrait simultanément les droits des populations locales et des autres parties prenantes dépendantes des ressources de la forêt, à partager les bénéfices et les responsabilités. Des systèmes complexes de taxation peuvent trouver leur explication dans l’histoire mais sont porteurs de risques de détournement et de corruption. Une approche de la fiscalité en termes de système est essentielle pour que le partage des bénéfices atteigne réellement les bénéficiaires éloignés géographiquement et institutionnellement. Le but de chaque taxe devrait être justifié et communiqué aux contribuables, et l’évolution du système fiscal devrait être discuté de manière participative. La transparence quant à la justification et dans la mise en œuvre de la fiscalité forestière aide à réduire la corruption, en remplaçant la discrétion administrative par une prise de décision basée sur une explicitation des règles et des objectifs. Les décideurs et les analystes devraient être plus conscients des liens entre les diverses formes de criminalité dans plusieurs secteurs.

Validez del régimen fiscal de dominio público en el sector forestal y la lucha contra la corrupción J. PALMER y J. BULKAN El régimen fiscal de los bosques de propiedad pública debería ser basado en el derecho constitucional de tenencia radical de un gobierno, además de reconocer los derechos de compartir beneficios y responsabilidades de los grupos interesados que dependen económicamente del bosque. Los regímenes fiscales complejos pueden ser explicables desde una perspectiva histórica, pero el sistema tiene tendencia a la corrupción y la malversación de fondos. Puede ser necesario un enfoque sistémico para lograr un reparto de beneficios que llegue de forma eficaz a los beneficiarios que vivan en zonas apartados o que no tengan acceso a las instituciones normales. El objetivo de cada impuesto debe ser justificado y comunicado a los contribuyentes, y este proceso debería incluir el desarrollo participativo del régimen fiscal. La transparencia en la justificación e implementación de los impuestos forestales ayuda a reducir la corrupción a través de la sustitución de la impenetrabilidad administrativa por un proceso de toma de decisiones basado en reglamentos. Los estrategas deberían estar conscientes de los vínculos entre grupos criminales en varios sectores de la sociedad.

Legitimacy of public domain forest taxation

INTRODUCTION This paper has three main sections: • The claim by governments to administer publiclyowned forest assets. • The right to impose taxes for access to those forest resources. • The problems of forest taxation in situations where corruption is prevalent. National governments tend to view as self-evident their right to tax the use of publicly-owned assets. However, in many countries there have been continuously-occupied settlements and usage by local people long pre-dating the formal nation-state. It is not surprising that central government claims to sole administrative and decisionmaking rights over public assets such as natural forests are often disputed by local people and other stakeholders. It is usually not disputed that the government has some rights. The question is – what are these rights and how should they interact with local well-established and long-practised and continuously evolving rights held by communities and individuals? We suggest that the failure to clarify the moral and legal origins of government rights, and then to communicate effectively and efficiently a rationalised argument to other stakeholders, are among the reasons for the frequent arguments over forest access rights and, partly as a consequence, over forest taxes. Taxation requires an authority acknowledged to have the right to levy taxes and an ability to collect those taxes. In other words, some form of government with at least some legitimacy in the eyes of those who are taxed. Within this simple bilateral arrangement – government imposes and collects tax, citizens and enterprises pay tax in exchange for some benefit – there are a variety of modalities. In a working democracy, tax laws are developed in a participatory and consultative manner with the affected stakeholders, draft laws are debated and enacted by a representative parliamentary process, formal assent is given by the head of State, and the law is openly and fully published and made accessible to those who should pay the tax. The law is then implemented and enforced by one or more designated government agencies. Affected stakeholders comply with the law or are subject to sanctions as prescribed in the law. It is human nature that affected citizens and enterprises will seek to minimise their tax burden and to postpone payment until the deadline. This is legal. What is not legal is to evade legally imposed taxes or to fail to pay within the deadline. Conformity to prescriptions in the law represents acknowledgement that the tax law is just and reasonable, and that the benefits from payment of tax are commensurate with the tax levied and collected. This paper does not deal with theories of forest taxation (see Karsenty in this issue, Gray 1997). Some of the actual obstacles to developing and implementing a just, equitable and efficient forest tax system are discussed, and the particular problems occurring in situations of forest corruption.

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This paper does not deal with the arguments over the percentage ratios between forest taxes and forest values (Gray 1983, 2002, Repetto and Gillis 1988). We do not debate the relative merits of area-based and volume-based taxes (Gray 2002, Karsenty 2000). The context of this paper is closed-canopy naturallyregenerated tropical rainforest in the permanent forest estate and managed or harvested under private-sector long-term logging concessions with at least a nominal regime for sustainable forest management. This paper does not deal with dry woodlands or heavily degraded forests, nor shortterm salvage or other temporary forest harvesting permits. Here we condense arguments for government’s claims to administer the public forest domain, in Africa and elsewhere. CLAIMS TO RESOURCES

AUTHORITY

OVER

NATURAL

Why should a government make claims to control large areas of forest? What is the source of a government’s authority over land and natural resources? In almost all countries today, governments have only limited and clearly defined jurisdiction over forests on privately-owned land. The nature of that private tenure is prescribed in statutory law passed by the national legislative process. The same limited government jurisdiction applies also to forests on land where the community tenure is legally recognised. The questions arise mainly over forests on lands which are neither privately nor communally owned. Firstly there should be clarity over government’s right of control over resources anywhere within the national border. How has such right of control evolved? One might suppose that it follows from the nature of sovereignty. Settled communities use those natural resources which are in closest proximity, simply to reduce travel time. There is a positive return on investment of human labour or ingenuity or cash to protect and develop and enhance those resources. It then pays to defend those improved resources from harvesting by other people who have not made such investments. Therefore boundaries need to be defined and communicated and defended; and hence the development of a nation State with mapped and acknowledged boundaries. Records of such concepts and usages go back to the earliest historical records in Sumerian times. Human history is in some sense a record of the violations of such boundaries by near or far neighbours. A key date for formal international recognition of boundaries is 1648, the Treaty of Westphalia which brought to an end the fearfully destructive Thirty Years War in Europe. “The result of years of negotiations, the treaty is a detailed and highly pragmatic settlement of the myriad local and regional squabbles that became conflated into what was allegedly a religious war” (Williams 2007). Although this treaty does not explicitly mention “sovereignty”, what is called Westphalian government emerged from that time when countries formally agreed to respect the boundaries of nation states and the right of sovereign governments to decide how those states should

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be managed (Scott 1998). Within those national boundaries, the State has an obligation to defend resources against outsiders and in some sense it has underlying administrative responsibilities for those resources on behalf of the citizens, that is, it has “radical title”, in the sense of “at root”. In popular language, “the buck stops here”, that is, the State has ultimate responsibility and powers to give effect to that responsibility. Notions of representative government with full adult male suffrage emerged just prior to the Treaty of Westphalia, in 1647 during the Putney Debates on a political constitution for England near the end of the English civil war (Thompson 1963). So the exercise of national sovereignty is through the representative government or through the Head of State, depending on the national constitution. Although often broken in practice, ideals of national sovereignty and representative elected government prevailed for some two centuries. Poor crop harvests during the 19th century, and a long agricultural depression followed by an industrial depression, raised the social tensions in Europe. Rising demographic pressures were relieved by emigration to the Neo-Europes in the temperate regions of other continents (Crosby 1986), facilitated by bigger, faster and more reliable ocean transport and the expansion of railways. The same technologies enabled Europeans to exploit the natural riches of other continents inland from the coastal areas. Tropical diseases and the failures of familiar European crops discouraged large-scale emigrations into tropical Africa and Asia but the economic invasions intensified. During the 30 years between 1885 and 1914, almost the whole of Africa was divided colonially between seven European states. Arendt (1951) pointed out that the expansion of European government to overseas territories contradicted the notion of the unity of the nation-state which provided citizenship to its population. This expansion by European colonial regimes involved armed conquest, or cession by treaty, or a claim that the territory was “terra nullius”, that is, without human occupation or without a recognisable government (Reynolds 1996). The Spanish and Portuguese overseas empires, developed after the wars with the Moors in the Iberian peninsula, involved armed conquest with religious overtones. By the time of the Scramble for Africa at the end of the 19th century (Pakenham 1991), such overt militarism was generally unfashionable. The European powers sought to justify their economic colonialism by reference to the many previous but inequitable treaties concluded with coastal traditional authorities of sometimes doubtful legitimacy and provenance. These treaties had been concluded (for the west African coastline) mainly during the three hundred years of the transatlantic slave trade (Law 1995). Expansion inland from the coastal protectorates was justified in those times partly as counters to raiding parties from inland authorities and as protection of trade routes. Control of larger and larger swathes of African territory during the period of European inter-state rivalry was thought to be diplomatically important for protection of long range trade routes to India, China and Latin America, and in particular

for the security of depots for the coal which fuelled the transoceanic steamships at that time. Expansion by covert or overt force was almost entirely contrary to the Westphalian notion of secure and permanent national boundaries espoused by the colonising countries in their European homelands (Pakenham 1991). The degradation of international law to justify this blatant grabbing of natural resources and territories was most evident in Australia (Reynolds 1996) where the coaling station argument could not apply. The degradation was supported by the development of crudely racist philosophies which attacked the humanity of non-Europeans and fostered paternalist-imperialist views. Although overt racism receded after World War I, by that time the current boundaries of African countries had been substantially fixed and mapped. The nascent African Union, during the struggles for independence from colonial rule, recognised how detrimental could be further inter-State rivalry to adjust boundaries to more logical topographic features or ethnic limits. Hence the importance of the interventions of the Economic Community Of West Africa States (ECOWAS) in helping to suppress inter-country conflict as well as civil wars in West Africa, and of the United Nations Organization Mission in the Democratic Republic of Congo (MONUC) where illegally harvested timber, gemstones and other industrial minerals have been important sources of funds for sustaining conflict (Global Witness 2004, Smillie 2005). Consequently, at independence, the new States inherited mostly artificial boundaries of the prior colonial States, plus forms of government which were usually not congruent with pre-colonial traditional authorities. Particularly in remoter areas where the colonial regimes had scarcely penetrated, the post-independence governments thus clashed with the traditional forms of government which survived (and also evolved during) the colonial period. In some countries, such as Ghana, traditional authorities and centralised State governments operate in parallel, with neither side conforming exactly to their prescribed mandates (Cooper 2005, Tropenbos 2003) with regard to benefits of sharing natural resources. In other countries there are more or less continual struggles between ethnic groups and clans for control of access to natural resources, with little or no regard for democratically-expressed preferences. Countries are well known where control of (through the licensing of access to) natural resources is largely in the hands of the Presidential family and cronies (Bryant and Bailey 1997, Richards 2001, Ross 2001). Although such control reeks of corruption and inequity, it is observable that some of these dynasties have stabilised potentially volatile countries where ex-colonial boundaries enclose hundreds of ethnic groups and languages. The constitutional legitimacy of centralised and provincial regimes, and the limits on that legitimacy, have rarely been considered explicitly in forest concession and taxation projects. While NGOs have often documented abuses by central governments of their mandates over publicasset natural resources, such concern should extend also to scrutiny of the performance of the traditional authorities.

Legitimacy of public domain forest taxation

GOVERNMENT RESOURCES

AUTHORITY

OVER

FOREST

In most Latin American countries, European contact greatly reduced indigenous populations through exposure to human diseases to which they had no acquired resistance. In Africa and Asia, no such major reductions took place so there was no basis for claiming that the land was unoccupied. Why, then, did the four main European colonial powers (France, Germany, Portugal and UK) seek to extend overt government control over forests which were already under some form of local tenure and use? There seem to be two main reasons. Colonial administration of course had to be paid for, and the “mother country” Treasuries (Ministries of Finance) continually urged the colonies to generate revenue to cover the cost of such administration. Taxing the production of natural resources, whether non-renewable from mineral mines or renewable from forests and fisheries, was politically less likely to cause rebellions than increasing property and farm land taxes. Imposition of colonial rule and the suppression of local warfare between indigenous States made farming less hazardous and reduced the killing of young men. Rural populations increased greatly into hitherto unsettled borderlands between previous indigenous principalities. Notably in the South Asian sub-continent, the farming families moved up into the hills to cut and burn new farms, away from the crowded and heavily taxed lowlands. The land clearing was associated by colonial administrators with an increase in soil erosion, downstream sedimentation, loss of navigability in the lower reaches of rivers, excessive monsoonal flooding and of course the wastage of commercially valuable timber. Colonial administrators generally attributed a causal relationship to the environmental problems with the changes in land use (Baden-Powell 1892, but compare with the more experienced Cleghorn 1861). Consequently colonial rule became associated with the reservation to State authority of forests previously under nominal local control, with restrictions on tree felling, dry season grazing, the harvesting of non-wood forest products and the practice of seasonal grass burning. According to the colonial government records, such reservation was part of the improvement of governance (Troup 1939, Dawkins and Philip 1998). It was also part of the strategy for securing firewood supplies as fuel for the rapidly expanding steampowered railway network in South Asia. In the subaltern literature (Arnold and Guha 1995, Gadgil and Guha 1999) the reservation, with or without a formal settlement process (Government of India 1894) was a thoughtless or callous disruption of traditional practices which were important or vital for local livelihoods and not ecologically damaging in the long term. The forest reservation process developed by the Dutch in Java and by the British in Burma and India was translated to the African colonies before the end of the 19th century, with local adaptations. In Nigeria there were forest reserves under central government authority and Native Authority

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reserves under local government control. Forest reservation in Ghana was initially justified by the belief that a protective belt of forest was vital for stabilising the micro-climate of the cacao production zone (the most economically important product of the country) against desiccation by the seasonal harmattan winds. Also in Ghana it was agreed that the forests would continue to be under control by the traditional chiefs and councils for the benefit of the local communities, but logging concessions over the forest reserves could be issued to the private sector by central government with revenue shared with the traditional rulers. LOW OFFICIAL VALUES

VALUATIONS,

HIGH

MARKET

Europeans traded cheap and low quality manufactured goods for African gold and other minerals, ivory, timber, wildlife and slaves, for over four centuries. This long tradition of deliberate under-valuation of natural resources has continued into the post-independence period. Numerous consultancy reports advocate valuation and taxation to match better both cost of management of renewable natural resources and international trade prices. However, developing countries (by no means restricted to Africa) generally continue to tax products from natural forests under government control in an arbitrary manner, with a multitude of taxes and fees and penalties. Royalties on forest products The widespread charging of royalty, as a percentage of a real or nominal sale value, would be familiar to the Ancient Greeks. It ought to reflect the State’s appropriate share of the net profit from the harvesting of a resource which, being provided by Nature, has cost the State nothing to produce. In the absence of reliable and consistent information about costs of harvesting and forest management, that share was taken as half the difference between the sale price of logs, at mill gate or ship side, and a State-estimated average harvesting cost (Macgregor 1963). The share may be as much as 90 per cent (Gray 1983, Gray and Hadi 1990) where the State has a cost-tracking system. This simple approach recognised the decline in value per cubic metre from logs taken from ancient pristine forest (‘old growth forest’) to logs from second and subsequent cuts. These later logs were not going to have the huge size or perfect timber quality of the pristine forest logs of the commercially preferred timbers. In value terms, they were more like the logs of less-preferred timbers from the primary forest: smaller in size, more defective, less easy to process, with less desirable technical properties. This rudimentary but easily understood system was applied in several colonial countries. It enabled the State to capture easily a share of Nature’s Bounty, which is the intrinsic value of the huge and perfect logs which could not be re-grown to such a size in a human lifetime and so represent in effect a resource which should be treated like a

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mineral to be mined, a one-time opportunity. Accordingly, this should be taxed as a wasting asset but we are not aware of any national forest service which explicitly does so. Of course the simple royalty split-share system is susceptible to bias. Operators can exaggerate the cost of harvest; they may declare logs from an easily-harvested area as having been derived from a more distant and more difficult logging area. Operators may under-declare sale values. Given political will, these falsifications are not difficult to counter. Even simple cost surveys will provide an adequate estimate of actual harvesting costs, and there is enough accessible literature to provide comparative data for different logging conditions and terrain (Gray and Hadi 1990). Likewise, surveys of domestic markets and checks on trade data give reasonable estimates of sale prices. For example, the Guyana Forestry Commission (GFC 2005) estimated direct costs for log harvesting in Guyana by tractor and skidder as USD 55/m3, in a country where the overhead or urban mark-up is estimated by the government investment support agency as 30-35 per cent but “on the street” is more like 45 per cent and may be 100 per cent for domestic sales. Some of that high percentage may be an attempt to cover for inefficient use of installed machinery when the supply chain is weak, unreliable and intermittent. The GFC estimate matches two logging costs, stump to mill gate or ship side, of USD 80/m3, from Asian loggers working for export to processing mills in China, including direct and indirect costs (Bulkan and Palmer 2008a). Data on sales may be reported by national forest services or Customs agencies, and are likely to be FOB values as declared by the shippers. Ocean freight and insurance rates can be obtained from a variety of sources. CIF prices for the same or technically equivalent timbers can be found in the fortnightly Tropical Timber Market reports from the market information system operated by the International Tropical Timber Organization (ITTO). A comparison of prices on shipment (FOB) and prices on landing (CIF) gives an estimate of the under-valuation on shipment. It is notable that even during the recent global economic depression the CIF prices for good quality timbers imported into China declined only slightly, while ocean freight costs (Baltic Supramax Index, also reproduced by ITTO each fortnight) tumbled during 2008. However, with tractor and skidder logging costs closely related to the cost of fuel (perhaps 30 per cent of direct costs), the saving in freight has been offset partly by the much higher cost of fuel. But that higher cost in turn may be mitigated by tax concessions granted under foreign direct investment (FDI) arrangements, such as dutyfree import of fuel. Governments thus have easy access to simple data from which to set royalty rates. With few exceptions, tropical countries have preferred to set nationally uniform rates for categories of timber qualities (royalty classes), rather than vary according to actual costs of production. These rates tend to be geared to percentages of FOB declared prices (as in Sarawak, Malaysia, where there are adjustments based on changes in the log export prices) or the royalty rates remain arbitrary figures whose origins and rationales have been lost

over the years. Different countries have thus been more or less capable of extracting government revenue from Nature’s Bounty. Royalty rates for meranti timbers (Shorea spp.) in Sarawak are 6-20 times greater than for technically equivalent flooring and furniture timbers in Guyana, although logging costs reported by a Malaysian-owned company operating in both countries are nearly identical, cross-checked against a Chinese-owned logger in Guyana (Palmer and Bulkan 2007). Capturing forest revenue Besides a lack of political will, national forest services and tax authorities may also fail to capture potential revenue for government when – a. Tax rates and penalties are not indexed to changes in the cost of living or other measures of inflation (Grut, Gray and Egli 1991); b. Tax rates and penalties are not indexed to changes in currency exchange rates for incomes which are received in overseas currency; c. Tax rates and penalties are denominated in hard currency but can be paid in soft currency, with the difference in rates reducing the taxes actually paid to very low levels; d. Tax rates are not linked to export values or to downstream value additions (there may be both theoretical and institutional barriers against such links); e. Authorities are slow to issue tax and penalty invoices, weak in collecting payments, and impose no surcharges on delayed and partial payments. f. Authorities do not implement the penalties prescribed in law and in forest harvesting licences when the operator is in default. In addition to these failures, simply not keeping up with market changes, or not having a system to keep up with market changes, can lose much government revenue and allow the forest operators to generate super-profits (Palmer 2009). These profits can be used to sustain State or regulatory capture1, which generate yet more private profits when those operators are partly or wholly exempted illegally from compliance with forest management obligations or taxes (Harwell 2009, Mackenzie 2006, 2009, Ross 2001). Export levy It may be administratively or politically easier to maintain levels of revenue by taxing exports than taxing production, although most countries do both. Where it is national policy to build up industrial capacity and to add value to forest products, it makes no sense to allow prime quality 1

 tate or regulatory capture occurs when a state regulatory agency S created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating (definition from Wikipedia).

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timbers to be exported as unprocessed logs, for addition of value in other countries Countries vary in the vigour with which they promote in-country processing. Some are happy to have policies on paper to show to donor agencies but in parallel allow FDI arrangements to be so inexplicit about industrial investment that log export actually continues unabated. Numerous developing countries have rusting piles of second-hand worn-out milling equipment which were imported with high CIF declared values but which were never intended to function, being merely a nominal compliance with vaguely worded obligations and as a cover for continued and expanded log exports. Again referring to Guyana, the Malaysian transnational logger which operates the country’s sole plywood mill receives by far the largest FDI tax concessions in the forest sector, is notorious for evading forest regulations and licence conditions (ASI 2007, Bulkan 2009), and has progressively reduced plywood production to less than one fifth of installed capacity in both 2008 and 2009 while expanding log exports. Under such conditions, it makes good sense to have a variable rate export levy on logs, to capture as revenue the difference between export value of logs and domestic value of in-country processing (Gray 1983, 2002, Palmer 1996). The variable rate adjusts to changing market values, and maintains the worth of the State’s share of Nature’s Bounty. An export levy is fiscally ineffectual when it is set at such a low rate that it allows generation of super-profits and where there is no effective monitoring of export volumes and declared values. It is also ineffective if FDI arrangements exempt operators wholly or partially from such payments, or where regulatory capture causes the same exemptions (Bulkan 2010). Taxing Nature’s Bounty in the second cut The first harvest of huge and perfect logs from pristine tropical rainforest obviously can generate the largest revenue from the simple royalty outlined above. If the forest is sustained for second and subsequent harvests, using the same concession system for harvesting and relying on natural growth and regeneration for a continuously productive forest, then the State may continue to claim a revenue share of the benefits at the second and later harvests, under the same philosophy. PAYING FOR FOREST MANAGEMENT Sustaining the forest in the face of other demands on the land resources will involve management costs. The management activities may be carried out by the State or may be devolved by contract to the private sector operator; or to the local communities. However assigned, the revenue from the first harvest from pristine forest (and we are here thinking of closed-canopy tropical rainforest) should include a component to sustain the productivity of the permanent forest estate areas of such forest. So the taxes should at least

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cover that cost. Some of the management costs may be the same in type as at, and previous to, the first commercial harvest – delineation, boundary monumentation and protection against encroachment, controls on fire and grazing, and harvests of products other than commercial timber. Other costs, such as silviculture to protect, sustain or enhance the stock and growth rates of the preferred timbers or other goods or environmental services, are unlikely to feature before the first harvest but may do so subsequently. Area based costs may be covered by a concession rental or area based annual fee if the management activities and silviculture are not treated as obligations for the concession holder among the performance conditions for the licence. Operating a concession system for private sector harvesting of public forest assets of course has costs for government, no matter how devolved the responsibilities may be. Particularly in countries which have experienced phases of semi-socialist government and attempts at government control of the factors of production, there may be a persistent residue of State controls over private enterprise, involving complex systems of licences to exist and to operate. When these national economies have declined, these licensing systems have become important sources of revenue for individual offices. The more complex the systems, the more liable they are intrinsically to be associated with corrupt practices. MANY AND COMPLEX TAXES Notwithstanding repeated recommendations for simplified business licences and government administrative charges, including under the IMF-supervised structural adjustment regimes which often succeed the socialist-type economies, State agencies have been reluctant to surrender these incomes, or to make them transparent to clients (World Bank 2008 for Cameroon). Higher levels of government have also been known to dip into and divert these user fees. A notorious case is the diversion of the reforestation tax (the equivalent of royalty in Indonesia) to co-fund the development of a national aircraft industry (Ascher 1998). A concession system may be associated with any or all of the following charges (this is not an inclusive list) a. Application fee, including a charge for a set of forms to be completed by the applicant. b. Mapping fee for confirmation of the concession boundary, or a fee for access to maps and remotely sensed images. c. Fee to pay for financial due diligence checks to be carried out by a government agency or specialist accounting or credit rating agency. d. Auction fee for competitive bidding, and the posting of a premium by each bidder. There should always be a reserve or floor price set in advance of the auction, to prevent collusion between bidders. This reserve price should be known only to the independent auctioneer, and may be set by the auctioneer, also to

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prevent collusive corruption between forest service and selected bidders. Fee for issue of the concession licence, maps and other documentation. Security bond for compliance with laws, regulations, the terms of the concession licence and for payment of taxes and other charges. Performance bond or advance minimum royalty payment to stimulate early and continued production from the concession. Advance payment of concession rental / area-based fee, for the whole area or with reductions for forest quality variation or operability. Advance payment of other taxes based on output prescribed for the concession or estimated in the bid offer. A variety of monitoring, inspection and verification fees, which may include subsidies for the participating government staff or contracted observers. A system of penalties for infractions, some subject to administrative discretion and out-of-court settlement (‘compounding’, Gordon 1955), some fixed in law, some requiring prosecution in court. A social services contract, legally separate from but associated with the logging concession licence, requiring the concession holder to provide assistance for local social development and/or to substitute for a government presence in remote areas. These contracts (‘cahiers des charges’ in francophone Africa) may involve cash payments to designated offices or supply of in-kind services (Karsenty 2000).

Why have such complicated systems? Why not make one charge to applicants and one charge to successful bidders? The reasons for maintaining complex systems include – 1. Inertia: governments tend to expand to deliver services but more rarely rationalise and compact their delivery systems. 2. Response to cost-recovery requirements under IMFsupervised structural adjustment programmes: this does not imply that the IMF prescribed the complexity, but that is how a government has interpreted the IMF suggestions. 3. Employment: every formalisation of a new charge offers an opportunity to employ another administrator, which may be good for the prestige of the agency or the family or the political party. 4. Failure to link the cost of administration to the benefits of the tax: if it costs more to collect and manage the tax than the amount of that tax which is actually collected, why have that tax? 5. Tax as a service charge is not actually linked to the delivery of that service. For example, if the area management fee is not applied to the actual management of the area but is instead used as just another stream of revenue – a common situation in developing countries (Gray 1997). 6. Spreading the wealth: unless controlled, every new

tax may provide an opportunity to divert some of the income into private or political pockets. 7. Retention of administrative discretion: a system is open to corruption if it allows the tax administrator to decide through personal judgement if the tax should be imposed, varied or waived is open to corruption. A system which requires transparent rule-based decision making, with an associated formal appeals process, is an aid to good governance. 8. Baffling the auditors: the more complex the systems, the greater the discouragement to a thorough auditing of the accounts and the more the facilitation of State or regulatory capture. It is not at all unusual to find technically efficient and technically inefficient systems side by side. For example, the international auditors SGS run an efficient timber tracking operation in the huge port of Douala in Cameroon, alongside a government port entry control to the log yard which is wide open to corrupt misuse (personal observation, 2008). In addition to these forest-related taxes, an operator is also likely to be paying charges to incorporate or license the business, which itself may be a complex process and a significant obstacle in some countries; see the evaluations in the World Economic Forum’s annual global competitiveness report (http://www.weforum.org/en/initiatives/gcp/ Global%20Competitiveness%20Report/index.htm). Audits to verify the legal origin of forest products may demand evidence of that legal incorporation and compliance with legal requirements for operating a business in the forest sector; see for example the scheme operated by the SmartWood program of the Rainforest Alliance (http://www. rainforest-aliance.org/forestry.cfm?id=legal_verification). MANAGEMENT OF PAID-UP FOREST TAXES The plethora of such taxes and charges, the decline in the tradition of publication of annual or periodic reports from government agencies (Palmer 2010), and the decline in publication of audited accounts from tax-collecting government agencies, may provide a business climate in which State or regulatory capture can flourish. This climate can also make it difficult for a national Treasury or Ministry of Finance to know what amounts of forest revenue it should be receiving from a forest taxation agency such as a national forest service. Attempts to detach taxation authority from a national forest service, or to merge forest tax systems with general government tax management, may be technically complex and strongly resisted by elements within a forest service (Morrison et al. 2009, World Bank 2008 for Cameroon). This resistance may be in part an expression of lack of confidence in securing a reasonable operating budget from the national budget office, because of inefficiencies and politicking in national budget processes in which the forest service fears it will be out-manoeuvred in the annual competition for limited government funds. The forest service may feel that

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it is efficient in collecting the prescribed taxes, transparent in reporting their collection, and proper in transferring the net surplus to central government funds. But it is not rewarded by receiving an operating budget which permits it to carry out its legal mandate. This is not at all a recent complaint, nor is it peculiar to forest services in Africa. The preindependence Forest Department in Malaya frequently and vociferously complained how unfair was the government budget process. Resistance to the merger of tax systems may also be an attempt to conceal mal-feasance in the management of the collected forest taxes, as shown by the assets and conspicuous consumption – large cars, big bank balances, expensive houses, fancy clothes and lavish parties – displayed by lowsalaried forest staff. The problems of weak systems may date back many years. Reformist regimes may be discouraged from taking action to recover missing taxes because so many enterprises and government staff have been involved in so many different kinds of illegalities that any single prosecution would have large implications for justice and equity before the law. So the usual practice is to do nothing about known historical mal-feasance. The problem is compounded when court prosecutors are poorly trained, not independent and are under political direction. Or the prosecutions may be legally correct but the judiciary is under political control. During the 1990s, district forest officers in Ghana complained that they spend most of their time in court but never won a case. They lacked the legal training to develop a prosecution case, they were not empowered to contract trained lawyers to act for them, and they were out-manoeuvred by well-funded defence lawyers or politically directed or corrupt magistrates and judges. Such problems are common in extractive industries such as mineral mining and petroleum production; they are not peculiar to forestry and fisheries. Inter-government attempts to improve transparency in management of forest taxes include the Extractive Industries Transparency Initiative (Warner 2008) and the NGO-promoted campaign Publishwhat-you-pay (http://www.publishwhatyoupay.org/ ). This campaign encourages the private sector to publish details of what it pays to each government agency, and for government agencies to respond by publishing evidence that such payments have been duly received, validly receipted, and channelled into the legally prescribed funds; usually the central government Consolidated Fund. REVENUE SHARING WITH OTHER STAKEHOLDERS Authority over State forests by a national forest service was treated as self-evident (Troup 1939). The widespread failure of effective management by national forest services, not a problem only of developing countries and due to many and complex reasons, has led from the 1960s towards a greater appreciation of the multiplicity of stakeholders who have legitimate interests in those forests (Blaikie et al. 2007, Westoby 1979). This appreciation includes a recognition

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that some stakeholders have a legitimate right to share in the benefits from public forest assets: they are not the property of national forest services, as some Ministers of Forests like to claim, but assets to be administered for maximum net social benefit. In particular, local communities living in, or dependent for their livelihoods on, these public forests may have been associated with these forests long before the advent of a national forest service. Whether actively or passively they were responsible for those forests before the existence or active roles of the national forest service, and may have had significant influence over the structure and composition of those forests (Posey (1985) in Brazil, Rackham (1986) in UK). In many countries where the national forest service has only a weak or intermittent presence in the field, or is regarded as predatory, the local communities may be the principal guardians for the continued existence of the forest against competing interests for other uses of that land. This is not to impute some inherently conservationist beliefs or activities to the communities, although that may be true. Recognition of the protective roles of local communities, and the right to be rewarded as such, in some cases has gained increasing legislative support; see Aggarwal et al. (2009) for India, Opoku (2006) for Ghana. Whether this is a pragmatic recognition, or a deeper appreciation of an inherent right stemming from some form of ancestral title to the land, varies between countries. In general, central governments have been willing to admit conditional privileges to forest resources by local communities, but not going so far as to recognise pre-colonial native title (Reynolds 1996). The complexities of even partial recognition are exemplified in Ghana, where forest reservation in some areas was not completed for over seven decades because of unresolved traditional disputes over boundaries between adjacent communities. A full recognition of native title, assuming that a national constitution makes provision for such recognition, could involve disentangling years of concessional leases and common law freeholds which have been superimposed through colonial radical title on top of the native titles. This would be a legal and administrative nightmare because there is no underlying theory for compensation for such overlays. Whatever the juridical basis, there is globally increasing appreciation that communities in and dependent on a publicly-owned forest which is licensed to a logging concession should participate in some form of sharing of the benefits of that logging. In Cameroon this stems from the 1994 reform of the forest law. The Ministry of Finance has a system for distributing 50 per cent of the area-based (RFA) tax to central government, 40 per cent to local government (rural councils) and 10 per cent to villages adjacent to the concession (Morrison et al. 2009). Unfortunately, the benefit sharing scheme in Cameroon exemplifies the problems which arise when a systems approach is not taken, or is not implemented, with regard to the setting, collection, distribution and application of forestderived taxes (Morrison et al. 2009). In other words, bits of the system work but others do not, and as a consequence there is only limited evidence that the calculated funds

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actually are delivered to local communities and applied for the legally permitted developmental purposes (see also Springate-Baginski and Blaikie (2007) for India). The basis for sharing of forest-derived revenues among stakeholders could be related to the relative efforts made by stakeholder categories in generating those revenues, or in relations to social perceptions of humanitarian needs. When forest user groups in Nepal have been allowed to decide the basis for sharing, there has been a tendency to discriminate positively in favour of the poorer and most needful members of the group (Gauli and Hauser 2009). This is strong support for applying the principle of subsidiarity, by which decisions are made at the lowest effective level and in response to the rules and perceptions which operate at that level. Parliamentary oversight over government budgets and accounts should operate at the highest level, at least in a threebranch Jeffersonian style of government with independence between each of those branches. Correspondingly, there needs to be an oversight system operating at each level where decisions on benefit-sharing are made, to ensure probity and equity and to prevent capture by local elites. More generally, conservation contracts and joint forest management arrangements have involved quite arbitrary percentages allocated to different beneficiaries, as decided by government agencies. There is clearly room for improvement, in part through greater transparency of costs and benefits associated with each kind of responsibility for shared forest management. WINDFALL TAXES ON SUPER PROFITS During 2008-2010 there has been global debate about the morality of allowing the generation of super profits by enterprises which have studied carefully the government regulatory systems and have developed ways of legally avoiding controls, or which have benefitted from market fluctuations in the value of their products. Such debates have been concentrated on the financial and petroleum sectors, but arise also in some countries where particular forest enterprises may also benefit in similar ways. The successful enterprises may have super profits because they have unfair or unreasonable FDI tax advantages over other operators, they may be more technically efficient and have lower unit costs, they may have secured naturally richer forests, they may add more value to the products, or they may have more agile marketing arrangements. Mandated government agencies can “level the playing field” by making regulations more equitable, or applying existing regulations more equitably, and by closing loopholes in regulations. The variable rate export levy mentioned above, if set as a percentage or set of percentages of export value, automatically provides capture of some windfall profits if export values and volumes are properly declared. It would be contrary to the OECD guidelines for multinational enterprises (OECD 2000) for governments to simply seize super profits from efficient enterprises, or to impose arbitrary additional taxes. FDI arrangements usually

contain stability clauses, which allow FDI-benefitting enterprises to sue governments in such cases, although such clauses do not appear to have been invoked in the timber industry. Where the FDI arrangements contain only vague assurances by the investor, host governments may have crippled their own capacity to regulate those operators or to change the forest tax system and its application to those operators. ILLEGALITIES IN THE FOREST SECTOR The opportunities for illegal logging and trade in illegally harvested forest products are clearly greater when the forest tax system for public forest assets is both complex and not subject to independent audit and democratic oversight. Illegal operations include – a. Acquisition of a logging or milling concession by illegal practices; b. Location of a logging concession on land which is not zoned for such operations, including within or overlapping with protected areas; c. Sub-contracting concessions from national rentiers (this may be legal in some countries, but it seems illogical to have an open tendering and premium system in parallel with private trading of concessions); d. Timber harvesting outside legal concession and coupe boundaries, including premature return to already harvested blocks which should be in undisturbed regrowth and regeneration phases; e. Harvesting under-sized trees of preferred species, below the legal felling girth limit; f. Harvesting officially protected ecological “keystone” species; g. Under-declaration of felled/extracted timber volumes, by mis-measurement or falsification of timber name or royalty category; h. Under-declaration of exported timber volumes and grades and FOB shipping values; i. Evasion of social and environmental obligations which are prescribed in concession legislation and specific licence conditions; j. Delayed or under-payment of forest and export charges and penalties. This also is not an inclusive list of common illegalities. Even in countries where significant improvements in forest concession procedures and taxation systems have been carried out, the political domination of important aspects of concession allocations and operations may result in manifestly inequitable commercial situations for forest enterprises. The discrepancies between annual allowable cuts and actual harvested volumes, and in mirror statistics between exporter countries and importer countries, show what huge timber volumes and values are available from illegal operations to fuel corruption. (Harwell 2009 for Indonesia, Mackenzie 2006, 2009 for Mozambique, Stark and Cheung

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2006 for Papua New Guinea). Forest corruption National forest services may be small in staff numbers compared with their legal mandates in relation to areas of forest or values of forest products. When also forest management procedures (including concession allocations and tax systems) are subject to political influences, surely the first consideration for improvements should be the feasibility of making functional those improvements as intended? There is no point in advocating the transparent sealed-bid auctioning of forest concessions if some enterprises are allowed to by-pass the auction. There is no point in revising forest taxes if some enterprises are allowed to negotiate personally with the authorised Minister or head of the national forest services for reductions or delays in payment. There is little point in having a general code of conduct for loggers if only some logging enterprises are required to cut boundaries and prepare inventories and management plans, or if the loggers can evade restrictions on logging on steep slopes or in riparian zones or conservation areas. In tropical forest logging areas, the local people may find to their dismay that the forest which they had considered to be their own resource since time immemorial has been given by a government agency or political body for logging by non-local people. When the forest dwellers try to claim their rightful share of benefits from the logging, they cannot find out who is legally responsible for the calculation and distribution of those benefits. Complex and urban-based arrangements may – • obscure the rights and responsibilities of the legal holders of logging licences; • conceal the links between those holders and the field contractors and felling crews; • tie the licence holders to a multiplicity of intermediaries, business associates and local government agencies. This morass of formal and informal connections is often a consequence of the interaction between what statute law requires and what local custom expects and demands. In many places, and not only in developing countries, longestablished local custom involves the presentation of a gift as a stimulant to the delivery of services (Osborn 1857). When those services substitute for tax-funded government obligations (the social contract between government and governed), the social gift-giving custom may persist. When functionally linked to the provision of these services, this custom may become distorting corruption (Ribot 2002, Robbins 2000). With few exceptions the design of systems for licensing the harvest or management of publicly owned forest assets, and for associated taxation, does not take into account the fact of corruption as the dominant mode of business (Robbins 2000). For many years the multilateral and bilateral development banks and donor agencies refused to

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admit openly the prevalence and normality of corruption. This refusal led to programmes and projects which repeatedly failed to deliver their objectives. Even now there is a tendency to view corruption as an aberration of government and business instead of the social norm in many societies (Campos and Pradhan 2007, Rose-Ackerman 2006, Rosenbaum 2005). Public forest assets become almost open-access resources when government claims to control legal rights but fails to administer efficiently (in cost), effectively (in techniques) and equitably (in relation to legitimate stakeholders). If government has unenforceable rules, if detection of illegal harvest is a low risk, if prosecutions are rare or badly prepared, and if penalties for infraction are derisory, then whoever can harvest forest will do so (Marshall and Jenkins 1994). When harvests are illegal or only semi-legal, there is every incentive to cut as quickly as possible without regard to the future forest crop potential, because there is limited likelihood of a second harvest by the same tree cutter. It becomes in every tree cutter’s interest to act out the “tragedy of the commons” (Hardin 1968). This pattern of illegal and unsustainable logging (and fishing and grazing, in similar social situations) is seen in many countries where government claims (of the Westphalian type) and government abilities do not match. In those places the perception of society is that government and its agents are just the worst of many robbers. It is difficult for “parachuted” consultants or non-national research workers to learn how forest corruption actually operates. In some countries, the entire forest service is involved in some level of corruption, because corruption is the normal way of business, not an aberration. A problem analysis by outsiders is likely to be either superficial or limited unless the interconnections between sectors is recognised. Corrupt loggers are quite likely to be involved in other criminal activities, such as trafficking of drugs and gemstones, gun running, money laundering and people smuggling (Global Witness 2004). But this does not mean necessarily that all the forest staff agree with the corruption; some may be willing to change, provided that they are not victimised or disadvantaged. What they need is some evidence that change is technically possible and worthwhile and sustainable. They may know how corruption operates in their own unit or zone of influence, they may hear about grand larceny style of corruption at the apex of government, but they do not see how their own limited knowledge can be harnessed for positive changes throughout the sector and beyond. A reformist government might consider an amnesty to start a “clean government” campaign and to encourage people who may feel that they are locked into rings of corruption (Bulkan and Palmer 2008b). Five essential precursors to the rule of forest law By ‘rule of law’ we mean the actual application of the rule of law, not just the preparation of laws on paper which are then not applied or only selectively applied. There are many different ways of replacing kleptocratic government with

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the rule of law (Transparency International 2002). A lesson which is quite clear is that (a) replacement is not a simple or single process, (b) a transformation requires cross-sectoral sustained and harmonised effort, and (c) it is do-able. So, if do-able, why doesn’t transformation to the rule of law happen more frequently and permanently ? One reason obviously is that there are huge personal and corporate profits which can be garnered through illegal logging/fisheries/ grazing on public lands, just as there has been for centuries through maritime piracy, with which forest piracy has much in common. Beneficiaries will fight to retain illegal profits as hard as reformers fight to gain control of public assets. Organised crime attracts good brains as much as does good governance, and usually pays better and quicker; this is obvious from the commercial success of drug trafficking. A single recipe for transformation will not succeed when organised forest crime is often linked to other forms of organised crime; see above. Some features seem to be essential precursors to successful transformation from illegal operations to lawful business. We suggest that they also condition the kind of forest taxation appropriate to west and central Africa until such time as the rule of law is generally established, socially accepted and pragmatically functioning. 1. rights of government to assert public ownership of natural resource assets are rationalised and communicated; this may be through a constitutional reform process. 2. obligations of government to administer public assets are communicated to stakeholders for intergenerational non-declining benefits (economic, environmental and social benefits) from a sustained supply of forest products and services. As a vision, it may be preferable to refer to ‘conserved’ or ‘enhanced’ supply of goods and services, but that may seem too unattainable to be pragmatically useful. 3. valuation of public assets is carried out. How much are they worth? To whom? Under what circumstances? How often is the valuation revised and publicised? 4. rights of government to shares in the realisation of these values are related to (a) Nature’s Bounty and (b) the need for finance to maintain these assets and defend their integrity. 5. the rights and responsibilities of other stakeholders in these public assets and the appreciation of their values are established, recognised, operationalised and publicised. Communication of forest worth A major first step is to inform the voting public or opinion formers about: a. how much the forest is worth b. how much of that worth is marketable c. how much of that marketable worth is realised in different markets, and d. who is benefiting how from that realisation of values.

The assembly of this information requires detective work which would be most efficient through investigative journalism. However, some countries have no tradition of investigative journalism, and in others such a profession is physically hazardous. Countries experiencing forest corruption are likely to have also police corruption, so detective work by police forces is unlikely to be successful. Nevertheless, off-duty journalists and police may be helpful to local NGOs. The best informants (often surprisingly willing to talk if they can be assured of confidentiality) are those engaged in and benefiting from corruption but who perceive that they are not gaining an adequate share of the booty. Such informants may include government forest staff and logging enterprises, exporters and truckers, Customs officers and timber graders, tugboat skippers and company registrars (Bulkan 2009). We do not imply that participation in corruption is always voluntary and desired. Participation may be implicitly a condition of employment (Robbins 2000). There must be some way of communicating the developing findings to show how value accrues along the market chain – how the law intends that it accrues and how it actually accrues. Editors of independent newspapers may be willing to publish such findings progressively, if they can be convinced of the overall value of the exercise, and even in the absence of a local tradition of investigative journalism (Bulkan 2007). Forest corruption does not usually involve sophisticated accounting malpractices, so the unfolding story is easy to express in journalistic terms. In our experience, pointing out how value should accrue according to the law and how it actually accrues can be easily expressed in terms which the voting public can understand. A widespread sense of outrage at such robbery should be helpful in securing support for reforms. Transparency in procedures The first of these reforms is to make official procedures more transparent, by ensuring that all parties to a procedure have equal and free access to all information which is not commercial-in-confidence. This should be driven by parliamentary oversight of the Executive branch of government and enforced through the judiciary. However, the Jeffersonian separation of powers between these three branches of government is not recognised or practised in many countries. It is therefore up to the stakeholder participants themselves to insist on access to information. That may be implicit in a National Constitution but civil society needs to make the claim for information. Where corruption is the norm, it may be helpful to interview a majority of the participants in each procedure and collate their views about who gains what from the way in which procedures actually operate. It is common to find that people who usually pay bribes feel that everyone else is benefiting more than they are and that the practice generates unfair and insecure results. Suggesting transformations such that there is greater equity can lead participants to understand

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that most people gain more from greater transparency and less corruption (Bulkan and Palmer 2008). Keep national forest services away from forest taxation National forest services in developing countries usually argue that they need the right to impose and collect forest taxes because they cannot rely on Treasuries and Ministries of Finance to allocate them sufficient operational budgets for carrying out their legal mandates. However, even in relatively non-corrupt periods and places, it is evident that the spending departments and agencies of government have much greater influence than income-generating departments. Leaving the invoicing and collection of a miscellany of forest charges to a national forest service diverts that agency from its primary role and may cause that revenue role to become dominant. It can and frequently does also open doors to corruption, as forest service control posts operate in relatively remote and unsupervised locations. There are few good arguments against contracting out this work to commercial debt collectors, for both charges and penalties. The technically successful experiment in Ecuador for contracting such administration outside the national forest service (Navarro, Del Gatto and Schroeder 2006) should be replicable elsewhere. The national forest service / provincial forest services can then focus on rationalising the charges for access to public domain natural and plantation forests, including 1. division of Nature’s Bounty from natural forests between revenue for central and local governments and/or local communities and the risk-taking entrepreneur. 2. actual costs of location-specific in-forest management. 3. actual costs of operating a concession or contracted harvesting system, perhaps including some provision for sustainable forest management. 4. acting as a normative agency for policy, strategy and legislation/regulation. It is understandable if forest services feel more comfortable in operating their own forest taxation systems, devised by them and run by them, rather than have to compete with other government departments and agencies for operational and developmental budgets. Forest Trusts for self-contained Forest Department budgets existed in British Guiana (now Guyana) and in British Honduras (now Belize) in the 1920s (Troup 1939). These Trusts were abolished during the contraction of national government budgets during the global economic depression of the late 1920s and 1930s. Much more frequently, national forest services are allowed to retain some sources of forest revenue and to apply that income to the expenses of forest management. It could be argued that this independence has simply allowed weak and irrational and corruption-prone systems to be perpetuated. Of course Ministries of Finance will ignore national forest services if those services do not produce competitive strategies and work plans or rational budgets. Why should forest services deserve special budgetary treatment?

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The general principle should be that there is no point in a democracy of having a sophisticated and fine-tunable forest taxation system if that system can be abused to give illegal benefits to some politicians, government staff or entrepreneurs. It would be better to get local agreement on what is locally workable and locally perceived to be equitable for all relevant stakeholders than to have a system which looks good on paper but simply exacerbates corruption in practice. It might seem that we are implying that national forest services include staff who are unprincipled and untrustworthy scoundrels. That is certainly true in some countries. More frequently, national forest services are operating in business and government environments where corrupt practices are the age-old social norms or are survival tactics when economies have collapsed. While some countries climbing out of economic depression and failed State government have been able with strong moral leadership to shed corruption as a norm, other countries may boast of progress at international meetings but continue to suffer from kleptocracies. Strategists for rationalising forest taxation thus need to be aware of the social norms and contexts. REFERENCES AGGARWAL, A.; DAS, S.; PAUL, V. 2009. Is India ready to implement REDD Plus? A preliminary assessment. The Energy and Resources Institute, New Delhi, India. 15 pp. ARENDT, H. 1951. The origins of totalitarianism. Schocken Publishing Inc., New York, NY, USA. ARNOLD, D. and GUHA, R. 1995. Nature, culture, imperialism: essays on the environmental history of South Asia. Oxford University Press, New Delhi, India. 376 pp. ASCHER, W. 1998. From oil to timber: the political economy of off-budget development financing in Indonesia. Indonesia 65: 37-61. ASI-Accreditation Services International GmbH. 2007. Public Summary. Forest management audit to Barama Company Ltd. (BCL), Guyana (SGS-FM/COC-2493). Date of audit: 20 to 25 November 2006. FSC Annual Surveillance of SGS for 2006. Forest Stewardship Council, Bonn, Germany. 34 pp. BADEN-POWELL, B.H. 1892. Memorandum in forest settlements in India. Government Press, Calcutta, India. BLAIKIE, P., SPRINGATE-BAGINSKI, O., BANERJEE, A., BHATTA, B. SAIGAL, S. and SARIN, M. 2007. Actors and their narratives in participatory forest management. In: SPRINGATE-BAGINSKI, O. and BLAIKIE, P. (eds.) Forests, people and power: the political ecology of reform in South Asia. Earthscan Publications Ltd., London, UK. 92-115. BRACK, D. 2007. Illegal logging. Briefing Paper number EEDP/LOG BP 07/01. Energy, Environment and Development Programme, Chatham House (Royal Institute for International Affairs), London, UK. 6 pp.

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BRYANT, R.L., and BAILEY, S. 1997. Third World political ecology. Routledge, London, UK. 237 pp. BULKAN, J. 2006. Plunder without profit: illegality and forest corruption in Guyana. Report presented at Guyana Citizens Initiative meeting, 2 November 2006. Georgetown, Guyana. 127 pp. BULKAN, J. 2007. Guyana and the Wider World. Ten-part Sunday Feature on the forest sector, Stabroek News, Sundays, 28 January - 1April 2007. Stabroek News, Georgetown, Guyana. BULKAN, J. 2009. Slippages between forestry concession policies and practices in Guyana. PhD thesis. Yale University, School of Forestry and Environmental Studies, New Haven, CT, USA. BULKAN, J. 2010. It is more reasonable to suppose that there has been gross under-reporting of log exports than that these have declined. Stabroek News letter, Friday 15 January 2010. Stabroek News, Georgetown, Guyana. http://www.stabroeknews.com/2010/letters/01/15/it-ismore-reasonable-to-suppose-that-there-has-been-grossunder-reporting-of-log-exports-than-that-these-havedeclined/ BULKAN, J. and PALMER, J.R. 2008a. Illegal logging by Asian-owned enterprises in Guyana, South America. Briefing paper for Forest Trends’ 2nd Potomac Forum meeting on illegal logging and associated trade, Washington D.C., 14 February 2008. Forest Management Trust, Gainesville, Florida, U S A . h t t p : / / w w w. i l l eg a l - l o g g i n g . i n f o / u p l o a d s / FLEGTWDCillegalloggingAsianGuyana14Feb2008.doc BULKAN, J. and PALMER, J.R. 2008b. Breaking the rings of forest corruption: steps towards better forest governance. Forests, Trees & Livelihoods 18: 103-131. http://www. illegal-logging.info/uploads/BulkanPalmer2008.pdf and http://www.foreststreesandlivelihoods.co.uk. CAMPOS, J.E. and PRADHAN, S. (eds.). 2007. The many faces of corruption: tracking vulnerabilities at the sector level. The World Bank, Washington, DC, USA. 447 pp. CLEGHORN, H. 1861. Forests and gardens of South India. W H Allen, London, UK. COOPER, F. 2005. Colonialism in question: theory, knowledge, history. University of California Press, Berkeley, CA, USA. CROSBY, A.W. 1986. Ecological imperialism: the biological expansion of Europe, 900-1900. Cambridge University Press, Cambridge, UK. 368 pp. DAWKINS, H. C. and PHILIP, M.S. 1998. Tropical moist forest silviculture and management: a history of success and failure. CAB International, Wallingford, UK. 359 pp. GADGIL, M. and GUHA, R. 1994. This fissured land: an ecological history of India. Oxford University Press, New Delhi, India. 274 pp. GADGIL, M. and GUHA, R. 1999. The use and abuse of nature: incorporating “This fissured land: an ecological history of India” and “Ecology and equity: use and abuse of nature in contemporary India”. Oxford University Press, New Delhi, India. 274 + 213 pp. GAULI, K. and HAUSER, M. 2009. Pro-poor commercial

management of non-timber forest products in Nepal’s community forest user groups: factors for success. Mountain Research and Development 29(4): 298-307. GLOBAL WITNESS. 2004. Dangerous liaisons: the continued relationship between Liberia’s natural resources industries, arms trafficking and regional insecurity. Briefing document to the UN Security Council. Global Witness, London, UK. 25 pp. GLOBAL WITNESS. 2005. Making it work: why the Kimberley Process must do more to stop conflict diamonds. Global Witness, London, UK. 48 pp. GORDON, W.H. 1955. The law of forestry. Clarendon Press, Oxford, UK. 574 pp. Forest Policy. GOVERNMENT OF INDIA. 1894. Circular No. 22 F., dated 19th October 1894. Appendix 17 [Article 84(iii) of Code, 6th Edition]. Appendices to Forest Department Code. pp. 155-162. Government of India, New Delhi, India. GRAY, J.A. 1983. Forest revenue systems in developing countries: their role in income generation and forest management strategies. FAO Forestry Paper 43. Forestry Department, Food and Agriculture Organization of the United Nations, Rome, Italy. GRAY, J.A. 1997. Underpricing and overexploitation of tropical forests; forest pricing in the management, conservation and preservation of tropical forests. Journal of Sustainable Forestry 4 (1/2): 75-97. GRAY, J.A. 2001. Forest concessions: experience and lessons from countries around the world. The World Bank, Washington, DC, USA. 19 pp. GRAY, J.A. 2002. Forest concession policies and revenue systems. Country experience and policy changes for sustainable tropical forestry. World Bank Technical Paper – forest series number WTP 522. The World Bank, Washington, DC, USA. 107 pp. GRAY, J.A.; HADI, S. 1990. Fiscal policies and pricing in Indonesian forestry. Field document number VI-3, GOI/ FAO Forestry Studies UTF/INS/065/INS. Directorate General of Forest Utilization, Ministry of Forestry, Jakarta, Indonesia. GRUT, M.; GRAY, J.A.; EGLI, N. 1991. Forest pricing and concession policies: managing the high forests of West and Central Africa. World Bank Technical Paper number 143. World Bank, Washington, DC, USA. GUHA, R. 1989. The unquiet woods: ecological change and peasant resistance in the Himalaya. Oxford University Press, New Delhi, India. 214 pp. GUYANA FORESTRY COMMISSION. 2005. Analysis of Guyana’s forest sector revenue system (2005). Recommendation for the charge of stumpage value. Guyana Forestry Commission, Georgetown, Guyana. 81 pp. HARDIN, G. 1968. The tragedy of the commons. Science 162: 1243-1248. HARWELL, E. 2009. “Wild money”: the human rights consequences of illegal logging and corruption in Indonesia’s forestry sector. Human Rights Watch, New York, NY, USA. 75 pp. KARSENTY, A. 2000. Economic instruments for tropical

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forests: the Congo Basin case. Instruments for sustainable private sector forestry. International Institute for Environment and Development, London, UK, with the Center for International Forestry Research (Bogor, Indonesia) and the Centre de cooperation internationale pour le développement (Montpellier, France). 98 pp. LAW, R. (ed). 1995. From slave trade to ‘legitimate’ commerce: the commercial transition in nineteenthcentury West Africa. African Studies. Cambridge University Press, Cambridge, UK. MACGREGOR, J.M. 1963. Lecture notes on forest economics. Commonwealth Forestry Institute, Oxford, UK. MACKENZIE, C.A. 2006. Chinese Takeaway! Forest Governance in Zambezia, Mozambique. Forum das Organizacoes Nao Governamentais da Zambezia, Zambezia, Mozambique. 99 pp. MACKENZIE, C.A. 2009. Tristezas tropicais: mais histórias tristes da floresta da Zambézia. Fórum das Organizações Não Governamentais da Zambézia (FONGZA), Maputo, Mozambique.  MARSHALL, N.T. and JENKINS, M. 1994. Hard times for hardwood: indigenous timber and the timber trade in Kenya. TRAFFIC Network Report. TRAFFIC East/ Southern Africa Regional Office. TRAFFIC International, Cambridge, UK. 53 pp. MORRISON, K., CERUTTI, P.O.,OYONO, P.R. and STEIL, M. 2009. Broken promises: forest revenue-sharing in Cameroon. WRI Forest Note. World Resources Institute, Washington, DC, USA. 16 pp. NAVARRO, G., DEL GATTO, F. and SCHROEDER, M. 2006. The Ecuadorian outsourced national forest control system. VERIFOR Country Case Study number 3. Forests, Environment and Climate Change Programme, Overseas Development Institute , London, UK. 26 pp. OECD. 2000. Guidelines for multinational enterprises. Revised edition. Organisation for Economic Cooperation and Development, Paris, France. 67 pp. OPOKU, K. 2006. Forest governance in Ghana, an NGO perspective. Recommendations for a Voluntary Partnership Agreement with the EU. A report for FERN. Forest Watch Ghana, Kumasi, Ghana. 31 pp. OSBORN, S. 1857/1987. The blockade of Kedah in 1838: a midshipman’s exploits in Malayan waters. Oxford in Asia hardback reprints. Oxford University Press, Singapore. 360 pp. PAKENHAM, T. 1991. The scramble for Africa. Weidenfeld and Nicholson, London, UK. PALMER, J.R. 2010. ‘We don’t do annual reports now’. Documenting trends in reporting on the state of forest management in public forest assets. How REDD might make a positive difference. Paper for session on forestry institutions and the future. 18th Commonwealth Forestry Conference, Edinburgh, UK, 28 June – 02 July 2010. PALMER, J.R. 2009. Fast fortunes and tiny taxes for tropical timber exported as logs to China and India. Paper for session 6219 Globalization, conflicts and African natural resources. 2009 annual meeting of

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the Association of American Geographers, Las Vegas, Nevada, March 27, 2009. PALMER, J.R. 1996. Report on forest revenue systems. Guyana Forestry Commission Support Project, Georgetown, Guyana. 96 pp. PALMER, J.R.  and BULKAN, J. 2007. New colonial masters, Malaysian loggers in South America: how under-valuation of forest resources exposes Guyana to unscrupulous exploitation. CFA News number 38, September 2007. (Commonwealth Forestry Association). 1-2, 11-13 pp. POSEY, D.A. 1985. Indigenous management of tropical forest ecosystems: the case of the Kayapo Indians of the Brazilian Amazon. Agroforestry Systems 3:139-158. RACKHAM, O. 1986. History of the countryside. Dent, London, UK. REPETTO, R.; GILLIS, M. (eds.). 1988. Public policies and the misuse of forest resources. Cambridge University Press, Cambridge, UK. 432 pp. REYNOLDS, H. 1996. Aboriginal sovereignty: reflections on race, state and nation. Allen & Unwin, St Leonards, NSW, Australia. RIBOT, J. 2002. Democratic decentralization of natural resources. World Resources Institute, Washington, DC, USA. RICHARDS, P. 2001. Are ‘forest’ wars in Africa resource conflicts? The case of Sierra Leone. In: PELUSO, N.L. and WATTS, M. (eds.) Violent Environments, Cornell University Press, Ithaca, NY, USA. 65-82. ROBBINS, P. 2000. The rotten institution: corruption in natural resource management. Political Geography 19: 423-443. ROSE-ACKERMAN, S. 2006. Introduction and overview. In: ROSE-ACKERMAN, S. (ed.) International handbook on the economics of corruption. Edward Elgar, Cheltenham, U.K. xiv-xxxviii. ROSENBAUM, K.L. 2005. Tools for civil society action to reduce forest corruption. Drawing lessons from Transparency International. The World Bank, Washington, DC, USA. 34 pp. ROSS, M. L. 2001. Timber booms and institutional breakdown in Southeast Asia. Cambridge University Press, Cambridge, UK. 237 pp. SCOTT, J.C. 1998. Seeing like a State: how certain schemes to improve the human condition have failed. Yale University Press, New Haven, CT, USA. SMILLIE, I. 2005. The Kimberley process certification scheme for rough diamonds. VERIFOR comparative case study 1. Forests, Environment and Climate Change Programme, Overseas Development Institute, London, UK. 12 pp. SPRINGATE-BAGINSKI, O. and BLAIKIE, P. (eds). 2007. Forests, people and power: the political ecology of reform in South Asia. Earthscan Publications Ltd., London, UK. 394 pp. STARK, T. and CHEUNG, S.P. 2006. Sharing the blame: global consumption and China’s role in ancient forest destruction. Greenpeace International. 72 pp.

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International Forestry Review Vol.12(2), 2010

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COMMENTS A reform of fiscal policies in forested African countries H. Bourguignon President of the Interafrican Forest Industries Association, Paris.

Email: [email protected]

SUMMARY This article makes a case for reforming the fiscal policies in forested African countries. These fiscal policies have been designed to bring revenues to the states which they have performed satisfactorily but they were less successful in bringing local development. They should be modified to take into account past years experience and new trends, particularly Flegt and certification. They should encourage local investments and high value processing and incite international companies to develop local and regional markets in order to connect them to international markets. They should avoid leaving national producers to the informal sector. They should also help developing sustainable forestry certification in the region as it is an important leverage in the promotion of local development. This article examines the current tax systems and proposes a few solutions

Keywords: Fiscal policy, local development, international markets, local markets, certification

A reform of forest fiscal policies in forested African countries H. Bourguignon Cet article souligne l’importance de réformes des politiques fiscales dans les pays africains boisés. Ces politiques ont été conçues pour fournir des revenus aux états, ce qu’elles sont parvenues à accomplir, alors qu’elles ont eu un succès bien mitigé au niveau du développement au niveau local. Elles devraient être modifiées pour prendre en compte les expéreicnes accumulées ainsi que les tendances récentes, la certification et Flegt en particulier. Elles devraient encourager les investissements locaux et l’industrie à valeur forte, et inciter les compagnies internationales à développer les marchés locaux et régionaux afin de les rattacher aux marchés internationaux. Elles devraient éviter de laisser les producteurs nationaux relégués au secteur informel. Elles devraient également aider à développer une certification forestière durable dans la région, cette certification ayant une influence importante dans la promotion du développement local. Cet article examine les systèmes de taxation actuels et offre quelques solutions.

Reforma de política fiscal en países africanos con bosques forestales H. Bourguignon Este artículo expone los argumentos a favor de la reforma de las políticas fiscales en países africanos con bosques de extensión importante. Estas políticas fiscales fueron diseñadas para aportar ingresos al estado, y en su mayor parte han logrado este objetivo, pero han tenido menos éxito en lo que se refiere al fomento del desarrollo de la comunidad local. Las políticas deben ser modificadas ahora para tener en cuenta la experiencia de los últimos años y los nuevos modelos comerciales, sobre todo el FLEGT (aplicación de las leyes, gobernanza y comercio forestal) y la certificación. La nueva política debe estimular el procesamiento de alto valor agregado y la inversión a nivel local, y debería instigar a las empresas multinacionales a desarrollar mercados locales y regionales con el objeto de conectarlos con los mercados internacionales, evitando así el aislamiento de los productores nacionales en el sector informal. El modelo debe además facilitar el desarrollo de la certificación forestal sostenible en la región, ya que tiene una influencia significativa en el fomento del desarrollo local. Este artículo examina los sistemas fiscales actuales y propone algunas soluciones a los problemas mencionados.

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INTRODUCTION

place so that they meet these new priorities in the light of recent developments.

According to IFIA1, forestry fiscal policy should pursue five objectives: - Contribute to economic and social development of forested countries - Promote sustainable management of concessions allocated to production - Promote local industrial added value and job creation. - Contribute to the financing of the national budget and public investment - Maintain companies’ profitability so that they are able to develop and contribute to the above-mentioned points. One should add a priority which is rarely evoked, namely the outbreak of national entrepreneurs that could develop the local and regional market and rival even their foreign competitors. That is not to say that a fiscal policy alone could contribute to promoting young and gifted entrepreneurs, but at least that it should not prevent it. This point shall be addressed later. Now, it can be observed that fiscal policies have been mostly effective at bringing revenues to the state budget. Reforms of fiscal policies in the mid 90s, starting with Cameroon, were initiated by the World Bank at a time when the Bretton Woods Institutions were putting in place credit lines as a matter of urgency to enable the country to recover from a financial crisis. As has often been underlined by environmental economists, it is rather paradoxical maintaining constant tax revenues for the state and, at the same time, building up a targeted and gradual system aimed at modifying behaviour. If one adds the other priorities listed by IFIA, it makes the task even harder. One can notice how difficult it is for African timber production to climb the value chain. Investment is not being encouraged (often imposed by law) and as a consequence, added value in production remains low. An efficient fiscal policy to encourage foreign investment is needed. The international market and local or regional markets are not connected together and the exteriority of African economies does not enable international techniques, know-how and products to spread and cross-fertilise the national production system. The current crisis has shown how groups dedicated entirely to export markets are fragile, yet national companies seem to have disappeared from the scene. However, in spite of certain externalities in the fiscal system, impressive improvements in sustainable management of forests and the development of certification were achieved. What should companies focus on? Revenues for the state or for local development? I propose to examine all these new elements that should prompt the revising and reforming of the fiscal policies in 1

I FIA (Interafrican Forest Industries Association) is an association that brings together and represents the interests of the various timber associations in the Congo Basin and West Africa.

TIMBER COMPANIES’ CRITICISM Fiscal policies in forested Africa have been strongly criticised by timber companies. They insist particularly on their agonising struggle to pay heavy taxes to the state and, at the same time contribute to local social development, the cost of which can hardly be known and planned in advance. The private sector has not been heard so far. Why is it appropriate to re-open the debate now? African countries could benefit in the near future from new margins of manoeuvre that could serve the reforming of fiscal policies. - Most African countries endowed with a forest cover are either committed in a Voluntary Partnership Agreement2 with the EU or have shown an interest in improving their forestry governance and respect of legality by committing to signing such an agreement in the near future. Additional fiscal revenues for the budget would be found if illegal logging were efficiently combated. - The current crisis deprives governments of tax revenues. However the long term trend remains that raw material prices will again reach high levels in the near future and those countries that benefit from that exports should see their revenues increase. - If the industry manages to increase its exports of high added value certified products, it will also generate more fiscal revenues. One of the conditions put forward by Bretton Woods Institutions in relation to the reforming of the fiscal system is that the profitability of the timber sector should be more transparent. Suspicions relating to transfer pricing have to be eliminated. Mentalities and behaviour are changing. NGOs have certainly been helpful, but this condition should be rather more easily fulfilled. GIVING PRIORITY TO INVESTMENT A reform of fiscal policy has to aim to facilitate the integration of Africa into global trade. Tropical woods are competing with many other materials: temperate woods, concrete, aluminium and PVC. Plantation is a serious 2

FLEGT (Forest Law Enforcement on Governance and Trade) is an initiative put forward by the EU. It consists of signing an agreement with producer countries whereby the signatory commits to enforcing forestry law on its territory. The producer country issues a FLEGT licence to exporters to the EU. Local markets are often included in the agreements. The mechanism will be completed by a law forbidding the import of illegal timber to Europe, stating that importers must be duly diligent in ensuring the legal origin of the material imported

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competitor to natural forests with much lower costs. It is important to improve the competitive edge of African timber products, particularly in relation to new emerging industrial countries including, of course, China. One can find in the Congo plywood made from Congolese okoumé but imported from China! The European market is the largest consumer market in the world with 236 million cubic metres, 60 million of which are imported; it is a demanding market but it also offers opportunities for African woods. - It requires legal and sustainable material. This is an area where progress in less than 5 years was the most considerable. In August 2009, 4.5 million hectares are FSC-certified. Around 1.5 million cubic metres of certified African timber can be offered to the European market. Practices are improving and are coming nearer to best standards. The “FSC certification has certainly a great future in the Congo Basin”3, much more so than in South-East Asia and Brazil. It is important to point out that now that the Malaysian certification scheme MTCS has been recognised by PEFC, Malaysian exporters can also supply the European market with PEFC-certified wood and will be a serious competitor to certified African timber. - It also requires more added value products at competitive prices, just-in-time deliveries, customised items, etc. It is important to make a distinction between the B to C (Business to Consumer) market and the B to B (Business to Business) market. In the B to C market, commodity products like garden furniture are supplied to end consumers through specialised retailers. In this segment, price levels are key. It also requires great quantities of these articles from the producers, who must ensure long production runs on products which can only be produced if species can be found in sufficient quantities. In the B to B market, African producers are required to supply components ready for customisation, to be assembled in Europe. Europe is no longer willing to produce labour intensive articles and is clearly focusing on downstream investment on equipment to adapt to local taste (varnishing for example). Components are produced in Africa and the ‘final touch’, the adaptation to the changing mood of the European customer, added as near as possible to the local market. The heavy industries tend to move upstream, closer to the production sites. African countries could be in a good position to receive these investments if they were more attractive, but such markets require an excellent service, just-in-time logistics for components to be assembled to the customer’s taste near the place of consumption. The current policy of banning the export of logs has resulted in an increase in rudimentary second-hand sawmills. It is counter3

 his statement was made in March 2009 by Roberto Waack, T President of the FSC

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productive and does not address the issue. - Quality marking (CE marking = a requirement of the European Union): African producers have to prove and ensure constant technical characteristics of the timber products, such as mechanical resistance, etc. The nature of tropical wood is changing. Whereas it was a natural material it is now a semi-industrial component to be later assembled with other (perhaps non-wood) components into a final product. This tropical piece is part of a chain from the tree through to the final product and technical characteristics have to be guaranteed throughout. It has often been said that the chain of custody is the new paradigm of globalisation. A permanent link exists between the timber product used in Europe and the tropical forest of origin. The tangibility of such a linkage would appear in the event of a lawsuit in disputes in the building sector, for example. In order to maintain their position as suppliers of timber products to the European market, huge investment has to be made by African producers. Today, processing companies are still rather rudimentary, sawmills are not always equipped with kiln dryers, moulders, etc. Yields are still low. Huge investment is required to increase yields, efficiency in processing and quality control in order to produce engineered products, finger jointing, laminated products and more sophisticated products. This could be summarised as producing ‘more for less’. Reducing energy costs is also a necessity as fuel is an important element of the structure of the production cost. Despite waste, little cogeneration equipment can be found in Africa. Marketing investment is also important to promote lesser-known species, but promoting them is not enough. Clients have to be assured of their consistent technical performance. Financing is also required for more inventories: goods-in-process, stock levels before the rainy season, etc. Finally, human resources training is most important: more technical expertise is required but also customer-oriented skills tuned in to markets and customer trends. Increasing the attractiveness of Africa for investors requires more than changes in the fiscal policy applicable to forestry. A new fiscal policy should re-examine whether the impact of all custom duties on the import of equipment and at-source tax reduction are really positive or not, comparing the revenues generated with the losses of competitiveness and the resulting losses of taxes. Taxes on equipment imported (cogeneration, finger jointing, kiln drier equipment, etc.) should be cancelled. Africa has to improve its business climate. Governments firmly believe that investment policies can be imposed. Top-down regulations imposing local processing have been imposed in most countries. It has not succeeded in increasing local added value. This clearly shows the difficulties faced by African governments in implementing economic policies. The following two paragraphs suggest that changes in the behaviour of economic authorities could be achieved through the promotion of national entrepreneurs and the development of local and regional markets. A cultural change has to be achieved.

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ENABLING NATIONALS TO CREATE AND MANAGE SUCCESSFUL ENTERPRISES Today, the forestry sector is dominated by foreign, nonAfrican companies including European, Lebanese, Malaysian and now Chinese companies. National companies (originating from Africa) have gradually lost ground. They cannot finance sawmills and different equipment to deal with the laws imposing local processing. Most of the time they lack the minimum working capital required to regularly pay their workers and fuel costs and can only partially exploit the annual allowance cut. They cannot pay on regular basis the forestry taxes and face the constant threat of their concession being withdrawn. When the forestry regulation allows for it, they will work using short-term permits, often circumventing the law. The requirements of FLEGT (2) in the different countries having signed a Voluntary Partnership Agreement are high and if nothing changes, they will be totally excluded from international trade and also from local and regional business, which is tragic. Despite the fact that these countries are endowed with rich forest, very few nationals from these countries will ever manage a company of their own capable of rivalling foreign companies. We may deplore this situation, but it is probably very difficult to remedy. More participation of national companies to the forestry sector would encourage administrations’ involvement. The current fiscal policy, although not the only cause, has certainly not helped them insofar as it aimed to give revenues to the state and developing a national industry has never been contemplated. Even though they are excluded from concessions, they should still be given the opportunity to develop their activities on small titles, with forestry regulations and fiscal provisions adapted to their situation. They should be encouraged to supply the local and regional market with legal and sustainable material and also given the opportunity to process timber and manufacture wooden finished products. They need direct support such as training, management capacities, loans and above all a business-oriented elite, cherished by the government. They are caught in a vicious circle. Ghana is the only country that has succeeded in creating an elite of national entrepreneurs. INCREASING INTEREST IN LOCAL AND REGIONAL MARKETS Today African timber producers export between 80% and 90% of their production. Several factors can explain this situation. Margins are much higher on the export market. The devaluation of the CFA Franc has increased the gap further, but structural reasons have also played their part. Local markets (such as Gabon and the Congo) are often small, the middle class is very narrow and lacks cash. Recovery of arrears is reported to be difficult. However, the recent crisis has shown that companies that had developed their sales on the local or regional markets have proven to be more resistant, partially offsetting the collapse of their

distant markets with sales in their backyard. The division between international and local/regional markets does not contribute to the upgrading of products offered to these markets. Production of wooden articles, doors, window frame, furniture, etc. is left to national craftsmen and SMEs which cover more common needs with products at a low price adapted to the low-end segment, but these national players cannot climb the value chain. They offer low-range products with rather poor finishing, often made with non dried material. When medium and top-of-the-range products are required, they are imported most of the time from Europe and now increasingly from Asia. Because of this division, more sophisticated techniques are not diffused and skilled technicians cannot dispense their know-how on a fluid labour market or start their own business thanks to the experience they have gained in international companies. This is one more reason why national administrations have little consideration for their economies. International companies are reported to work for the benefit of remote markets, unknown to the administration, and thus are believed to have a limited impact on the national economy. There are also other arguments in favour of developing and upgrading local markets. Today, processing industries of international companies have low yields. The ratio between the production of sawn timber and logs does not exceed 35%, mainly because plants are often second-hand and unsophisticated, and also because requirements of export markets are high. Developing the not-so-demanding local markets could improve yields. International companies would be less exposed to criticism arising from their contribution to CO2 emissions through transport. FLEGT is introducing a new element into the picture which imposes the establishment of a connection between concessions and local timber processors. National craftsmen and SMEs producing furnitures for the local market get their material from waste from concessions and also often from the informal/ illegal sector. Once countries are in a position to issue a FLEGT license, then the question of where they get legal wood from will arise. Regional markets are also interesting outlets. According to some sources Cameroon could export informally up to 1 million m3 of white sawn wood to West and North African countries. Forested countries entering into FLEGT partnership agreements, under their current provisions, will probably not be able to supply these markets in the mid-term future. All these issues raise the question of adequate fiscal policy and a level playing field. Fiscal provision should be made in order to encourage operators to sell their production on the local market so that it can benefit from legal and sustainable material. Local development Local development is probably the most important sector to promote. FSC certification has developed very rapidly in the last 3 years. In the Congo, Cameroon and Gabon, the 4.5 million hectares of FSC-certified forests represent 12% of

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all areas allocated to production in these countries. Among the criteria to be met so that a company can be certified, several deal with the development of local populations. This introduces a new element into the picture. For example, timber companies have a direct interest in seeing the taxes they pay being effectively transferred to the local populations. A few years ago, they would have paid their taxes without bothering about the final destination. It is particularly striking in Cameroon, where 40% of the area tax is supposed to be transferred to town councils and 10% to communities. These amounts may be considerable; for example, the small city of Mindourou near the Dja reserve, receives almost €1 million every year by only one company. In this region, other timber companies of a similar size also pour large amounts of money every year into surrounding towns and villages. However, the infrastructure remains non-existent. As a result, timber companies have to pay twice if they want to have local populations benefit from some social infrastructures. In other countries where the forestry code states that concessions should negotiate a ‘cahier des charges’4 with populations, a lack of public social investment and infrastructure increases the cost to be borne. Indeed, local projects financed by timber companies have a direct impact on poverty reduction. Preference should be given to the local populations and not to the financing of the state. Certification offers guarantees as to the effective contribution of concessions: homogeneity in treatment through similar criteria, transparency, control by external audit, recognition of customary rights, recognition of indigenous populations, recommendation to share economic benefits, etc. In the case of Cameroon, a fiscal reform should review this provision, allocating part of the area tax to the population because the funds are diverted.

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Heavy fiscal pressure Before the crisis, forestry taxes amounted in all to around €125 million per year in the Congo Basin - €40 million for Cameroon, €50 million for Gabon, €20 million for the Congo, €10 million for Central Africa and around €5 million for DRC – and €25 million for West Africa - €15 million in the Côte d’Ivoire and €10 million in Ghana (Karsenty, 2007). Even though this contribution to the state budget cannot stand the comparison with oil revenues, it is nevertheless very significant. In the example of Cameroon presented hereafter, forestry tax on sapelli logs is about €26.25/cubic metre, or €78.75/ cubic metre on sawn timber, that is 15.75% of the FOB selling price, which is rather high. In Cameroon, concessions are awarded through bidding, unlike the other Congo Basin countries. However, in those countries, the fiscal pressure is similar, although the most significant part of taxes is collected downstream, on the volume harvested, not on the area. We can find also the same priority for national budget funding over local development. In DRC, the complexity of the system is appalling. There are more than 100 different taxes, each corresponding to the financing of a particular administration, but with no service in return. There again, the share of the area tax that should be transferred to the regions and the local villages is insignificant. In Brazil, according to a new law voted in 2007, concessions can be created on the public domain in order to stop wild settlings (‘invasoes’) and deforestation. Concessions are awarded through bidding. Bids are assessed according to various criteria where certification and creation of infrastructures and welfare in favour of local populations have more weight than the financial proposal itself. Fiscal pressure does

BOX 1 Fiscal pressure - - - -

Attribution fee: fee levied prior to the concession being awarded. Area tax : tax proportional to the area of the concession Tax based on production, proportional to the volume harvested Tax on reforestation: not applicable everywhere and may come in different forms, namely either a contribution to a state fund or by plantation or other work carried out directly by the company. - Tax on processing; tax on logs entering sawmills. - Tax on exports: to be paid either on logs or processed products and collected by the Customs Administration when invoicing. This may concern local market or export sales. - Other elements of direct taxation • Duties on imported equipment and goods • VAT (including on customs duties) • Corporate tax (often a fixed percentage of the turnover is due, irrespective of the level of profit made) • Taxes on services, tax on oil products such as fuel which represent one of the major production costs of the companies • Various systems for deducting tax at source (expatriate wages, dividends etc.) also exist. The picture would not be complete were we not to mention the different special taxations and contributions, be they voluntary or otherwise. Some are stipulated in the laws and levied at the regional level. Others are levied by controllers like SGS. Some are not stipulated in the law at all.

4

I t refers to a document of specifications validated by the forestry administration by which concessionaires negotiate with local communities social infrastructures and various benefits in return for letting them harvest the forest

not exceed 20 USD for logs, yet state infrastructures are more abundant in Brazil: dispensaries (‘puntos de saude’), schools, etc. In Africa, taxes are very heavy with no public infrastructure in return.

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Box 2 The case of Cameroon Let us take the example of a company that operates a concession of around 100,000ha, the most significant species being sapelli. Let us assume that the area tax is 4,000 CFA F/hectare and production is 12m3 per hectare. The concession will be taxed on 100,000 hectares even though unproductive parts and areas dedicated to conservation and protection may account for 10% of the total. This concession exploits 1/30th per year, that is 3,000 hectares after deduction of non-productive areas. Its production will be 36,000 cubic metres per year. It will pay CFA F 4,000 x 100,000 hectares = CFA F 400 million, that is around €600,000, or €17 per cubic metre. The tax on volume harvested amounts to CFA F 3,110 for sapelli, which is €4.75 per cubic metre. The ‘taxe d’entrée usine’ (tax based on processed volume) as it is calculated by the administration represents CFA F 3,000 , that is €4.5 per cubic metre. In all, this concession in Cameroon will pay €26.25 per cubic metre, that is €78.75 for 1 cubic metre of sawn wood (considering a yield of 33%). Let us suppose that the selling price is €500/m3 (before the crisis), fiscal pressure represents 15.75%. Let us say that fiscal pressure represents between 12% and 17% depending on the species. The one supporting most taxes are those whose selling price is the lower, often the secondary species. Only taxes on forestry are considered here. If non-forestry taxes were added (IMF, taxes on fuel, etc.) the fiscal pressure would reach between 20% and 25% of the turnover.

What reforms? A very important point to consider is the stage at which the tax is being levied: if area taxes are high, the company will be encouraged to harvest as many species as possible and will tend to export them in order to get a better price. The high level of fixed costs will discourage local entrepreneurs. If revenues to the state are mostly generated by taxes on volumes exported, the concessionaire will tend to have greater consideration for the local market. - Lower taxes upstream The case of Cameroon is symbolic. A bidding system has been set up in this country for the allocation of concessions. The price offered for the bid is the amount paid in area tax every year (‘Redevance Forestière Annuelle’). This system has made concessionaires unhappy since its introduction. Flaws of the system may be summarised as follows: companies have insufficient information to bid, auctions may be manipulated, bids are not linked to international prices, no renegotiation is possible, non-productive areas are taxed, the findings of the forest management plan are not taken into consideration and the populations’ share is not transferred. Even if such dysfunctions were addressed, three other major disadvantages would continue to have very harmful consequences in the long run: - High bids and hence high area tax make illegal operations particularly profitable. In Cameroon, the level of illegal activity is high and FLEGT will be difficult to implement. - High bids deter companies from selling on the national (the most significant in size in the region) or regional markets and discourage local entrepreneurs. - During hard business times, companies are made vulnerable by high fixed costs. In Liberia, authorities and multilaterals are trying to launch the timber sector after the lifting of a five-year ban imposed by the United Nations. The same system is being implemented as that in Cameroon: an auction system where

the amount bid is the area tax. Very little consideration is given to certification and social development, revenues for the state being the primary consideration. The first auction was held in 2008 and 3 companies, all foreign, were granted a concession. The bids ranged from 10 USD to 15 USD per hectare. Exploitation has not yet started and the winners are complaining about the amount bid, now that they are aware of the needs and demands of the populations and the numerous illegal pit sawyers in the forest granted. The high cost of the area tax will also make it difficult to eradicate illegal logging and will not encourage timber companies to develop the local and regional markets (particularly as a competitor of Côte d’Ivoire and Ghana where forests are shrinking). One should point out that smaller concessions of under 5,000 ha are reserved for national timber companies and, areas between 5,000 and 49,999 ha for communities. Small Forest Management Contracts for 50,000 ha to 99,999 ha require a 51% stake from Liberian investors. Only the future will tell if national entrepreneurs will emerge. - Higher taxes downstream For all these reasons, downstream taxes should take preference over upstream taxes since they are variable and can be more selective. Promotion of secondary species can be encouraged, although in the recent past, the Chinese market’s appetite for tropical logs provided much more than fiscal incentives. They don’t encourage illegal logging. Taxes on export ensure revenues for the state and do not hinder the development of the local and regional markets provided that exports are fostered at a preferential rate. CONCLUSION This paper makes a case for reforming the fiscal policies in forested African countries. Encouraging investment, however, depends on many other factors. Fiscal policy is one aspect. The existence of capital markets and the possibility of borrowing money from the bank are also decisive. Forestry taxes are just one part of the overall fiscal pressure. Whatever

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the objectives pursued by a reform, reaching them largely depends on good governance. Too many good intentions have been diverted from their original goals. Promoting the outbreak of local entrepreneurs and developing local and regional markets might contribute to changing the economic culture of the authorities. FLEGT and the implementation of the Voluntary Partnership Agreement could be both a chance for, and a pre-condition to, a reform. The development of certification is also an opportunity because it offers a credible framework audited by third parties through which poverty reduction could be addressed provided that governments understand that companies cannot do both, namely generate high revenues for the state and contribute to local development. REFERENCES KARSENTY A. (2007) Overview of Industrial Forest Concessions and Concession-based Industry in Central and West Africa and Consideration of Alternatives, CIRAD for Rights and Resources Initiative, Washington DC.

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International Forestry Review Vol.12(2), 2010

The 2008-2009 timber sector crisis in Africa and some lessons for the forest taxation regime A. KARSENTY1, N. BAYOL2, P. CERUTTI3, D. EZZINE DE BLAS1, and E. FORNI1 CIRAD (Centre de Coopération Internationale en Recherche Agronomique pour le Développement), Research Unit « Forests ecosystems goods and services », Montpellier, France and Libreville, Gabon 2 FRM (Forest Resources Management), Montpellier, France 3 CIFOR (Center for International Forestry Research), Yaoundé, Cameroon 1

Email: [email protected] [The authors are participants in the OFAC (Observatoire des Forêts d’Afrique Centrale) activity through the FORAF project, funded by the EU].

SUMMARY The 2008-2009 economic crisis has hit severely the African timber sector, with a brutal collapse of the foreign demand. Overall, the impact has been of around the loss of one-third of export and production. Companies have been unable to pay the fixed costs represented by the area tax, and this last has been suspended in several countries, notably in Cameroon. The brutality of the crisis has highlighted the absence of automatic correctors embodied in the fiscal system itself. A first, even though insufficient, answer could be to index the area fee to a nation-representative bundle of timber species FOB values. The absence of organisations such as the World Bank in the dialogue between the governments and the private sector is striking, given their past involvement in the forests fiscal reforms in central Africa. The current focus given on REDD, seen by many as an instrument for entering in a post-logging time could explain this passivity. Large FSC-certified companies announced their intention to sell out their concessions in Congo and Gabon. This could prefigure a new picture with various types of small logging enterprises filling the vacuum left by formal industry and some FSC-certified concessionaires replaced by large but less environmentally responsible companies.

Keywords: forest taxation, concessions, economic crisis, REDD, tropical timber market

La crise du secteur forestier en Afrique en 2008-2009 et ses enseignements possibles pour le régime de fiscalité forestière A. Karsenty, N. Bayol, P. Cerutti, D.Ezzine de Blas, et E. Forni La crise économique de 2008-2009 a eu un impact sévère sur les filières de bois d’œuvre africaines, qui ont dû faire face à une chute brutale de la demande étrangère. Globalement, on peut en estimer l’impact à une perte d’environ un tiers de l’exportation et de la production. Les entreprises n’ont plus été en mesure de payer les charges fixes que représentent les redevances indexées sur la superficie, et ces dernières ont été suspendues dans plusieurs pays, comme le Cameroun. La brutalité de la crise a souligné l’absence de correcteurs automatiques au sein des systèmes de fiscalité forestière. Une première réponse, bien qu’insuffisante, serait d’indexer la redevance de superficie sur un « panier » de prix FOB des essences représentatives de la production et des exportations de chaque pays. L’absence d’institutions telles que la Banque Mondiale, dans le dialogue entre les gouvernements et le secteur privé sur les mesures à prendre a été saisissante, étant donné leur implication passée dans les réformes fiscales forestières en Afrique centrale. Le fait que, dans le monde forestier, l’accent soit mis actuellement sur la REDD, qui est perçue par beaucoup comme l’instrument d’une entrée dans une ère post-exploitation, pourrait expliquer cette passivité. De grandes compagnies certifiées FSC ont annoncé leur intention de vendre leurs concessions au Gabon et au Congo. Ceci pourrait préfigurer un nouveau paysage, avec le développement de différentes formes de petites entreprises venant remplir le vide laissé par l’industrie formelle, ainsi que le remplacement de concessionnaires certifiés FSC par de grandes compagnies moins responsables du point de vue environnemental.

La crisis del sector maderero africano de 2008-2009: lecciones en cuanto al régimen fiscal forestal A. KARSENTY, N. BAYOL , P. CERUTTI , D. EZZINE DE BLAS y E. FORNI La crisis económica de los años 2008-2009 ha afectado gravemente al sector maderero africano, ya que la demanda exterior ha caído de forma contundente. El impacto global ha significado la pérdida de la tercera parte de las exportaciones y de la producción. Las empresas no han podido pagar los costes fijos que representa el impuesto local (area fee, o AF), y este ha sido suspendido en varios países, en particular

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Camerún. El carácter crudo de la crisis ha puesto en relieve la ausencia de correctores automáticos incorporados en el régimen fiscal mismo. La indexación del AF a los valores FOB de un grupo representativo de especies madereras del país podría constituir una primera solución, aunque sea insuficiente en sí. La ausencia de organizaciones como el Banco Mundial en el diálogo entre los gobiernos y el sector privado resulta sorprendente, dado su participación en la reforma fiscal del sector forestal centroafricano en el pasado. El hecho de que el centro de la atención actual es la REDD (Reducción de Emisiones de la Deforestación y Degradación), vista por muchos como un instrumento para introducirse en una fase post-tala, puede ser una explicación de esta pasividad. Algunas grandes empresas certificadas por el FSC han anunciado su intención de vender sus concesiones en Congo y Gabón, y este acto podría ser el precursor de un nuevo panorama en el cual varios tipos de empresa maderera pequeña rellenan el vacío dejado por la industria formal, y algunos concesionarios se ven sustituidos por compañías grandes pero menos responsables desde el punto de vista ambiental.

AN UNPRECEDENTED CRISIS? From the second half of 2008, the African timber market, like those of other tropical timber-exporting countries, began experiencing a crisis of exceptional magnitude. Market players were hoping against hope until after the summer break, but from the last quarter of 2008 they realised the full extent of the crisis and stopped buying goods. The market all but vanished. First, prices were very difficult to ascertain, then plunged sharply, dropping between 15% and 30% over a few weeks. Sapele (Entandrophragma cylindricum) lumber price lost between 25% and 30% in a couple of weeks. The collapse of the housing market in Southern Europe and the United Kingdom and the marked drop in construction startups in France sent a red signal to timber buyers who stopped placing orders. The priority of buyers has been to de-stock, and such a situation lasted until the spring of 2009, when some European buyers gradually resumed their purchase of African timber. Chinese consumption, which had seemed capable of propping up the market until mid-2008, gave way as well until April-May 2009 when the flow of orders from Asian buyers (including India) stabilized, although at an insufficient level to pull the sector out of its crisis. This downturn was caused by the slowdown of growth in China and the drop in Chinese re-exports of timber processed from raw timber and imported sawn timber. The crisis did not affect all types of wood and all markets in the same way. The price of timber intended for hydraulic use in the Netherlands has been more resilient and species such as ayous (Triplochyton scleroxylon) and okoumé (Aucoumea klaineana) are less affected than red timber species such as sapele (Entandrophragma cylindricum) and sipo (Entandrophragma utile). Some species sought by Asian markets, such as padouk (Pterocarpus soyauxii) and belli (Paraberlinia bifoliolota), have also shown good resistance. For countries such as Congo-Brazzaville or the Central African Republic which rely mostly on exports of few species of red wood, and which support high transportation costs, the situation has become critical. The exports of wood products fell dramatically. In Cameroon, the difference in volume between the first quarter 2009 and the first quarter 2008 was -42%. In CAR between 2008 and 2009, the log production volume decreased by 40% and the sawntimber by 17%. According to observers, this figure of -30 to -40% of exported volume reflects roughly the situation in Central African countries which still export most of their timber to Europe, the exceptions being Gabon

– which exports roughly 50% of its timber (roundwood equivalent) to Europe plus the USA – and Equatorial Guinea, which exports most of its log production toward China. The impact is also important for the Central African governments, with a significant decrease in the forest tax revenues, by 48% for instance in CAR from 2008 to 2009. Although most large industrial companies work primarily for export markets, some companies also have some market share in the domestic market, the latter acting as a buffer in this period of brutal contraction of foreign demand. One company in Congo has partially succeded in reorienting its sales toward the urban market of Brazzaville and has thus been able to soften the impact on the crisis on its cash flow. Another one in DRC has compensated foregone markets in Europe by increasing sales in Angola. In both case, the development of a local market only slightly cushioned the impact of the crisis. Some companies in DRC (such as SOFORMA or SEDAF) traditionally earmark one part of their production for the local market, which enabled them to maintain a substantial volume of activity. Other companies tried, but without really succeeding, to develop new products resulting from further transformation timber processing. According to some major operators, FSC certified products have better resisted the crisis but the price premium on some products of around 15% has disappeared. IMPACT ON EMPLOYMENT As a consequence of this brutal contraction of orders, logging companies have reduced their activities and, for some of them, closed down some of their logging sites and mills. In Cameroon, around 3,500 workers have been laid off, both temporary and full-time, about one third of the total employees of the formal sector. In CAR, out of 6 companies, 428 were fired and an additional 1,335 were laid off, with almost no salary. In DRC, the largest companies decided to focus only on few logging sites, the most profitable, and closing down the others. There is no information on the number of job losses in the sub-region of Central Africa; in addition to the announcements by large companies, jobs have been lost in subcontracting activities (small and medium African enterprises supplying the timber industry) and those lost in road transportation, a sector highly sensitive to the activity level in the timber sector. One can estimate roughly the total job losses due to the crisis in the timber sector around 25,000 - 30,000 at least for Central African

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countries. One of the main questions is to know how many of these are lost only on a temporary basis and how many are lost permanently. In Cameroon, recovery seems faster compare to Congo, and many workers are now reemployed in the factories. There is little news about the situation in West Africa. In Côte d’Ivoire, a country which exports 60% of its timber to Europe and 20% to the USA, the Ministry announced in April 2009 that 6,000 workers had been fired and an additional 6,000 were temporarily laid off, out of an estimated 15,600 workers in the formal sector. Some companies operating in several countries decided to concentrate their operations in one country and to temporarily close their other sites. Rougier decided at the end of 2008 to stop one site in Congo (Mokabi) and another one in southern Gabon, but kept the Cameroonian mills opened. Vicwood-Thanry did the same, closing temporarily its CAR and Congo sites and concentrating on Cameroon. Compared to CAR and Congo, Cameroon enjoys a more diversified range of commercial species, especially species such as azobé (Lophira alata) and Okan (Cylicodiscus gabonensis) which have less suffered compared to sapele. Another reason given by the representatives of those industries in early 2009 was the relative cost of inactivity in the different countries: due to the legislation, the cost of the temporary lay-off of workers is higher in Cameroon than in CAR or Congo. And the last reason was the proportion of fixed costs embodied into the tax regime: since the area fee is set through a bidding process in Cameroon, this represents around 50% of the forest taxes to be paid per cubic meter of timber exploited and exported. The area fee should be paid whatever the activity level and is thus a hard burden for the company when markets slow down. In this respect, the current meltdown, the first of its type since the reshaping of the forests tax systems in Central Africa which have increased notably the weight of the area fee at the expense on “activity-based taxes” (felling and export taxes) could be considered has the first significant trial for the new forest tax regime. These issues are discussed in greater detail in the following sections. GOVERNMENT MEASURES This crisis hit one the few sectors that provided industrial jobs in West and Central Africa, and especially in remote rural areas, such as Northern Congo. As the mining sector has been experiencing a similar downturn, with tens of thousands of jobs lost in the Katanga province of DRC, governments were urged to do something to sustain the forest industry and limit the destruction of jobs at a large scale. Since those governments are unable to inject cash directly in the industry, one of the few possibilities to support the companies was to lower or suspend taxes, on one hand, and adopt measures likely to limit export losses, such as being more flexible for log exports, on the other. By the end of 2008, the industry prepared memoranda recalling both the usual requests regarding alleviation of

tax burdens, but also other ones regarding area fees. The ministries in charge of finances were reluctant to allow for tax cuts in an already tense situation in terms of fiscal revenues after the cut on food imports tariffs decided on some months ago, in response to troubles in Cameroon subsequent to food price escalation. But it turned out rapidly that many companies unable to sell timber would simply be unable to pay the taxes too. Such a situation became clear in Cameroon when companies were requested in March 2009 to pay the first quarter of the annual area fee: they simply decided not to pay. The ministries in charge of forests have been pushing for temporary alleviation of the fiscal burden on companies, and this time they have been allied with the private sector representatives and proved to be somehow successful in their lobby, at least in some countries such as Cameroon. • In February 2009, the Government of Congo (Brazzaville) passed a package of measures. Among others, the government has allowed the companies to pay a reduced rate of VAT for the gasoil imported from Cameroon by the companies operating in the North of the country. Another decision is the relaxation of the 15% quota of log exports which is imposed to every company: the new quota is 30%. (It should be noticed however that the 15% cap has never been reached at national level, and especially in the southern part of the country, and more than 50% of logs harvested in Congo are still exported). Other measures are related to payment facilities for taxes arrears and the decision to apply a rate of zero for sales of timber on the Congolese market. In DRC, the government has reduced the area tax from US$ 0.5 to 0.4 per hectare. • In Gabon, the government lowered by 30 % the FOB price against which felling and export taxes are paid and take technical measures to shorten notably the refund of VAT to the exporting companies. • In CAR, the government was considering lowering the export and felling taxes and have allowed for delays in the payment of the area tax. • It is in Cameroon that measures have been most significant. In this country, the critical point was the annual area fee, which is set in average at € 4 to 4.5 per hectare. In June 2009, the government accepted to modify the area fee at least for 2009. In this country, the area fee revenues are shared between the Public Treasury (50%), the local councils on which the exploitation is taking place (40%) and the local communities surrounding the concessions (10%). The government decided to cut by half the Public Treasury’s share, by 40% that of the local councils and 10% that of local communities. Later in 2009, the Government also enacted a redistribution fund, further reducing the percent of area fee reaching local councils to 20%. It should also be mentioned, however, that the Government auctioned about 60 sales of standing volumes in 2009, trying to increase the amount of area fee collected. Some additional

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measures such as allowing more log exports have been taken, even on so-called “traditional species” such as sapele which are normally prohibited for being exported as logs. Such an exception regime has been closed in 2010, with the return to a better market situation. FIRST LESSONS FROM A SEVERE CRISIS Taxation The brutality of the crisis has highlighted the absence of automatic correctors embodied in the fiscal system itself. The fiscal FOB values (mercuriales) are supposed to be correlated to the international market trends. In fact, due to the weakness of the national administration and the absence of comprehensive international databases, the mercuriales

Gabon, the crisis and the log export ban The crisis hit the Gabonese’s timber sector as well as in other countries. By the end of 2008, the country was expecting in 2009 a drop of log exports of 200,000 m3 compare to 2008 (which was already down from 2007). But the decision announced by the new government (Ali Bongo was elected after a contested ballot) in October 2008 to phase out all the log exports in 2010, has changed significantly the exporters’ behaviour. As far as it became clear through the end of the year that the government will effectively enforce the log export ban in 2010, it triggered an unprecedented rush to export the logs stored, whatever the price. As a result, December hit records of exports, with 360,000 m3 tentatively exported (the previous record for a single month was 250-280,000 m3) to be carried by 27 vessels. The SEPBG (the private company granted with logs carrying monopoly) loaded until December 31, then all log exports were been stopped. According to news gathered early in 2010, up to 150,000 m3 planned for being exported had been blocked in the port and some vessels returned back without their expected cargo.

are often disconnected from market prices changes and are mere administrative prices. When a crisis occurs, governments are slow to react, or they decide sudden cuts in the mercuriales which are not informed by objective and precise data. In recent years, the international community budgeted millions of euros on FLEG (Forest Law Enforcement and Governance) processes in Africa, in a bid to prevent the export of illegal timber. Most of that money will go for improving or establishing national traceability systems, as well as to monitor and verify the latter. Very few resources, however, have been allocated for countries to acquire precise and updated information on FOB prices of timber, which could as well improve transparency and the overall functioning of the sector. As could be foreseen, the area fee, especially when it is

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high (because it was set up through competitive bidding), became an unbearable fixed charge when demand abruptly contracted and prices decreased. Since some countries beyond Cameroon (Gabon, DRC, and Congo) have decided or are considering introducing competitive bidding processes to set the area fee, it is necessary to fine-tune the way this royalty is administered. A first answer could be to index the area fee to a nation-representative bundle of timber species FOB values – which supposes precise and real-time information on FOB prices, as underlined above. Even without getting such comprehensive information, it would be easy for administrations to use the bi-monthly Market Information Service note of the ITTO which provides a price list of most popular commercial species used in West and Central Africa. Yet admittedly, with a crisis of high magnitude, such as the current one characterised by the abrupt disappearance of orders for timber, such “automatic stabilisers” would probably be not sufficient and exceptional political decisions would still be necessary. This supposes a better culture of dialogue between the government and the private sector, which could be facilitated by the institution of a kind of ombudsman. The reactions of the governments have been nationalbased, delayed and probably insufficient to attenuate the negative effects of the crisis on the employment. The COMIFAC (Forestry Commission for Central Africa) did call a regional Ministerial meeting at the onset of the crisis to discuss its effects, but it does not yet have the power to cover a relevant role in promoting and harmonising a regional concerted effort to tackle the crisis. Yet COMIFAC has included among its major objectives a sub-regional “plan of convergence for forestry taxation” and several studies for implementing it have been funded by international partners. This weak regionally-concerted reaction confirms the fact that, in spite of the existence of several institutions which have the mandate to promote regional economic integration (such as UDEAC) and the presence of dedicated sectoral structures including COMIFAC, forest taxation, along with other fiscal issues, firmly remains in the hands of national governments, and will likely remain so for many years to come. Seeing a “post-logging” time? Also, international donors, notably the World Bank and other multi- and bi-lateral cooperation structures, have not been involved in negotiations between governments and national representations of the private sector. This is perhaps witness to the fact that donors have shifted away from “old topics” such as forest sector development and taxation to more appealing “new instruments” such as REDD (Reducing Emissions from Deforestation and forest Degradation) and Payments for Ecosystem Services, which are sometimes associated with “post-logging” times. Several NGOs have also seen this crisis as an opportunity for the end of the forest concession model. The director of one Cameroonian NGO, for instance, declared that “Considering how the sector is managed, the end of the activity is unavoidable sooner or later. The sooner will

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be the better as the forest is not depleted yet”1. However, recent data (beginning of 2010 which overlaps in several forested areas with the dry season, when forestry activities are more active) seem to indicate that, despite its gravity, the crisis did not spell the end of the tropical timber industry: although negatively affected, the international market has not disappeared, especially in non-Western countries, and recovery seems to be on its way. On the one hand, it will likely be a smaller industrial sector, with fewer formal players employing fewer workers, and with more informal business supplying domestic and regional markets. On the other hand, there will likely be an erosion of the position of Western companies in favour of Asian ones: for instance, in Gabon, Leroy-Gabon (once French, then Portuguese) has been taken over by Chinese interests during the first quarter of 2009. At the exception of those having invested in certification and added-value production for high-demanding foreign markets, several companies are desperately looking for selling their business to new investors and some others, such as ITBL in Congo, have already abandoned their concessions. The most striking case is the one of the CIB (Congolaise Industrielle du Bois) in Northern Congo. This large FSC-certified company (concession encompassing more than one million hectares) is well known for its social achievements.Iinitially French, than German (from 1968) and taken over by the Danish DLH in 2006, CIB is to be sold, after having fired 650 out of 1600 employees (and 50% of the foreign staff). DLH has faced large financial losses and wants to refocus its activity on trading. The other timber company controlled by DLH in the sub-region, GIB-CIB and CFA (Compagnie Forestière des Abeilles) in Gabon, are also for sale. Given the current difficult financial condition of other large Western companies, one can guess that the buyer is likely to be an actor from an emerging country.The duality of the sector, thus, will likely be accentuated, with a growing divide between companies with certified concessions or on the way to reach certification, and another group not interested in the improvements in forest management brought about by forest certification and oriented toward less-demanding markets (notably Asia). As a consequence, smaller structures engaged in forestry operations – such as “community forests”, whether genuinely community-driven or not – if decisively heading towards improved forest management and certification, will have more chances to get a larger share of the timber sector, especially by covering the vacuum left by formal companies which did not survive the crisis or that were unable to cope with new market requirements (certification, added-value productions). However, conditions enabling a real development of sustainable timber production by the local communities in most African countries remain to be achieved. The crisis underlined the significant risk for forest sector .« Vu comment le secteur est géré, l’arrêt de l’activité est inéluctable à terme. Autant que cela se produise aujourd’hui, que la forêt n’est pas épuisée », Samuel Nguiffo quoted in Jeune Afrique « Panique dans la filière bois » (by P. Sandouly and A. Labey, 20/04/2009, retrieved May 23, 2009 on www.jeuneafrique.com

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companies to rely on a reduced number of species, of markets, of products for their activity. Some tried, but probably too late and in difficult market conditions to diversify their activity and innovate. This emerging new course, still at preliminary stage, could (if confirmed), enhance the potential resistance of companies to new crises. Good or bad news? It is not clear whether all of this is good news for African forests. From crisis can emerge innovation and new paradigms, but it is hard to see how progress can emerge from impoverished, if not distressed economies. West and Central Africa have few formal industries able to provide stable salaries and careers to workers, and to generate fiscal revenues in countries with only a handful of tax payers, whether citizens or companies. It is hoped that a reversal to such a situation will happen soon, to increase the chances of sustainable development in the region. Will the REDD mechanism, if implemented, change inherently this picture? Whatever the response, the timber sector here is likely to stay for some time to come and will remain for the foreseeable future a driving economic force impacting the fate of forests. Reinforcing and improving its regulation is still a critical task and there is a bundle of legal and economic instruments that can help for orienting the industry toward the sustainability. Bypassing this task would be a risky bet.

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Bidding system for allocating forest concessions in Africa MIKAEL GRUT Forest economics consultant

Email: [email protected]

SUMMARY Concession allocation by competitive bidding is always fiercely resisted by the local forest industrialists, and sometimes even by members of the forest service. One will be told that “It can’t be done”, “It is too complicated”, “It is too expensive” or some such thing. Of course people who benefit from arbitrary allocation will oppose a more objective, transparent and equitable mechanism. It is nonsense to say that it cannot be done, but it will only be done where there are considerable incentives, for example in the form of major grants or loans on favourable terms.The competitive bidding system proposed in this article can considerably increase the revenue of the forest owners, correcting the perennial problem of under-valuation, which not only reduces the revenues of the forest owners but also encourages over-cutting. Bidding can also reduce corruption, although it can of course also be – and often is – undermined by corruption.

Keywords: auction, bidding, concession, logging, tender.

Système d’enchères pour attribuer les concessions forestières M. Grut L’attribution des concessions par un mécanisme d’enchères reste fortement combattue par l’industrie forestière tropicale et parfois même par des membres de l’administration forestière. Les arguments entendus sont: “Ça ne peut pas se faire”, “C’est trop compliqué”, “Trop onéreux” ou des remarques de ce genre. Bien entendu, les parties bénéficiant d’attributions discrétionnaires s’opposeront à un mécanisme plus objectif, transparent, et équitable. Mais dire qu’il ne peut être mis en place n’a guère de sens. Le système concurrentiel d’enchères proposé dans cet article est à même de permettre une croissance considérable du revenu des propriétaires forestiers, en corrigeant le problème récurrent de la sous-évaluation de la ressource, qui ne réduit pas seulement les revenus des propriétaires forestiers, mais encourage également la surexploitation. Les enchères peuvent aussi réduire la corruption, bien qu’elles puissent néanmoins, bien sûr, être également sapées par la corruption – elles le sont d’ailleurs souvent.

Sistema de pujas en el reparto de concesiones forestales en Africa M. GRUT Los industriales forestales locales siempre resisten de forma acérrima el reparto de concesiones por un sistema competitivo de pujas, y a veces lo hacen también los empleados del servicio forestal estatal. Se escuchan frases como “No se lo puede hacer”, “Es demasiado complicado”, “Es demasiado caro”, o algo parecido. Está claro que los grupos interesados que sacan provecho de un sistema de reparto arbitrario se opondrán a un mecanismo más objetivo, transparente y equitativo. Resulta absurdo afirmar que no se puede llevar a cabo este tipo de cambio. El sistema competitivo de pujas propuesto en este artículo es capaz de aumentar de forma sensible los ingresos de los propietarios forestales y de corregir el problema eterno de la subvaloración, que no solamente reduce los ingresos de los propietarios forestales sino que también fomenta la tala excesiva. Resulta posible además que un sistema de pujas reduzca la corrupción, aunque obviamente puede ser, y de hecho muchas veces es, minado por la corrupción.

INTRODUCTION

WHY CONCESSIONS?

This article is mainly concerned with the maximisation of revenues and other benefits for the forest owners, who in Africa are generally the government or the local communities. However, at the same time it proposes business-friendly policies because most jobs are created by the private sector, and job creation is what development should be about.

A “concession” or “lease” is usually a permit to log an area for a certain number of years, but it could be for logging + management, for collecting non-timber forest products, for managing it for biodiversity conservation or for carbon sequestration, and so on. In this article it will be assumed that the production objective is logging or logging + management.

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Why use the concession system? Why does the forest owner, e.g. the state, not do the logging itself? This is mainly because, in the developing countries, almost by definition, the state does not always have the means to do this costefficiently and method-effectively. But even where it does have such means, e.g. in the developed countries, the trend today is that operations which can be done by the private sector are contracted out to it. WHAT IS “CONCESSION ALLOCATION BY BIDDING”? “Concession allocation by bidding” means, in a nutshell, that a concession should be allocated to the firm or other entity which pays the highest price for it, although there can be some deviations from this, as will be shown below. The bidding could take the form of tendering (“sealedbid auctions”) or oral auctions (“open-bid auctions”). The former tend to yield higher concession prices – see Gray, 1983, page 199. A floor or reserve price should be set, below which the government does not consider it worthwhile to go through with the sale. The floor price should at least cover the forest service’s administrative expenses in connection with the concession, plus possible environmental costs resulting from the logging, plus a margin for risk. In the invitation to bid for a concession, the applicants can be asked how much they are willing to pay per cubic metre of wood cut, or annually per hectare of forest, or for the concession as a whole. The last option is the most elegant. The concession fee could take the form of a one-time upfront payment, but it is better to have an annual payment: it is less onerous, and it is easier for the concessionaire to extricate himself in case of problems. The floor price should be held sealed by an independent auction or tender administrator until after the public opening of the contending bids. The floor price and all the bids should be published after the event in the report on each auction by the administrator. A secret floor price is a deterrent against pre-bidding collusion. There should be an application fee to cover the sales costs, including all background checks on the competitors and due diligence scrutiny and evaluation of financial and technical bids. FACTORS INFLUENCING THE BID PRICE The following factors must be known by the prospective bidders before they can calculate the annual concession rent which they can afford to pay. Less uncertainty can be expected to result in more bidders and a higher price. Possible future changes in the concession rent Usually – and especially when the concession period is long – there is a formula according to which the annual concession rent can be changed, depending on the FOB price of the main types of logs to be produced, and on domestic inflation. Such a formula must be known by the bidders.

Forest charges other than the concession rent More complexity leads to more corruption, but besides paying the annual concession rent, the concessionaire will usually have to pay stumpage rates. In the case of a weak forest service one could have only area fees (Grut et al.), then of course combined with a management plan to prevent over-felling and to steer the felling away from the over-used species towards the under-used ones. Besides – normally – the stumpage rates, there may be an area fee, but the main purpose of such a fee is to prevent speculative acquisition of vast areas which are then not used, and that is not likely to happen when annual concession rent has to be paid – the concession rent divided by the productive or total area can be thought of as an area fee, and the bigger the area of the concession, the bigger will usually be the rent paid for it. Then there may be log export duties, which can be justified for a while to protect infant industries. There may even be a log export ban, which may be good for industrialists but bad for forest owners. The bidder will need to know all that. If stumpage rates, area fees, and other possible charges are set too high, there will be no bids. If they are set too low, they won’t even cover the forest service’s costs. If they are to apply to an entire country, they should be set for the least profitable sites, and the consumer surplus on all the better sites would then be captured by the concession rent. As these charges are likely to be increased during the concession period, the formula according to which they will be increased must also be made known to the bidders. A predictable, transparent and stable concession allocation system will bring more bidders and higher prices. Inventory Besides the forest charges, the prospective concessionaires need to know about the quantity and quality of harvestable wood in the forest, and the logging conditions. If the forest service carries out the inventory, the industrialists will not have confidence in it, because the service is an interested party. For each concessionaire to carry out his own inventory would be very wasteful. Ideally, therefore, an inventory should be carried out by a third party, for example a forestry consulting firm. In Cameroon an “Independent Observer” has been set up to check on various government functions, and British aid and the EU have suggested that it should also check the forest logging (Karsenty 2006B, p.18). Such a body could possibly commission an independent forestry consulting firm to do the inventory and perhaps also to supervise that the management plans and the forest law are adhered to. Even if there is a pre-bidding timber inventory, prospective bidders should have ample time to visit the concession area before the bidding takes place. Management plan The prospective concessionaires can be asked to submit, together with their bids, the management plan according to

Bidding system for allocating forest concessions

which they propose to manage the forest and carry out the harvesting operations during their lease period. However, that would “muddy the water” for the persons who have to decide which bid to accept: the highest bid may be associated with the worst management plan, and vice versa. It is better if the forest service prepares the plan, or contracts a consulting firm to do it according to the forest service’s instructions. The management plan must of course respect the law of the land with regard to minimum fellable diameter, and minimum cutting cycle (normally between 20 and 40 years) if selection felling is the ecologically optimal harvesting regime. The concession areas should be inspected at least once a year to ensure that the prescriptions of the management plans are adhered to, but the forest services in Africa often do not have enough vehicles and field allowances to make that possible. The forest service can then contract out the inspection to a forestry consulting firm; or to one of the international auditing firms which would then take on professional foresters to strengthen its expertise in that area; or to one of the international inspection firms. To have an international firm inspecting the concessions might seem somewhat neo-colonialist, or at least as an abdication of responsibilities on the part of the government, but there are precedents. In Guinea-Conakry in the early 1990s a French civil engineering firm had obtained a contract to build a highway, a British firm had obtained a contract to supervise them – and it worked very well. Some years ago the government of Congo-Kinshasa recruited a private consulting firm to supervise another firm which was establishing an 8,000-ha fuelwood plantation near the capital. The government of Indonesia contracted one of the big international inspection firms to run its customs service, and that resulted in increased government revenue from that service, even after the firm had been paid.

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bidding system too can be undermined by corruption, e.g. if it is subject to political interference, or if a prospective bidder obtains information on the offers of competitors. PROBLEMS ASSOCIATED WITH CONCESSION ALLOCATION ON THE BASIS OF BIDDING, AND SUGGESTED COUNTER-MEASURES No method of concession allocation is problem-free. Below are the main problems of basing the allocation on bidding, and suggestions about how they could be overcome. Lack of competition In areas where there is no competition, bidding is meaningless. However, if a free-market price has been established for similar concessions in other parts of the country, that price could provide guidance for the price which should be charged in the area where there is no competition. Sometimes competition can be encouraged by increasing the size of the concession area so as to bring in international bidders – big concessions should be advertised internationally. At other times it may be better to reduce the size of the concession to make it more possible for smaller local firms to take part in the bidding. Increasing or decreasing the concession period may also encourage more competition. Long-term concessions will encourage long-term forest management, but they will need performance reviews from time to time to ensure that the contract is being respected. Lack of competition can be caused not only by the fact that there may be only one bidder in an area, but also by collusion between bidders. The risk of collusion can be reduced by having strict laws against it, as in most developed countries, and by bringing in as many bidders as possible, preferably from different continents.

Penalties The technical competence of bidders should also count Before a meaningful bidding can take place, the prospective concessionaires must also know what the penalties will be for the various possible infringements of the contract – presumably fines for minor infringements, and cancellation of the contract in the case of major infringements. ADVANTAGES OF BIDDING CONCESSION ALLOCATION

AS

BASIS

OF

Forest concessions are often handed out in an arbitrary way, which invites corruption in the form of nepotism, cronyism, political favouritism, or bribing. It also leads to under-pricing of the concessions. On the other hand, when competitive bidding works well it maximises the revenue of the forest owner, capturing the entire producer surplus, leaving no financial room for bribes. It puts the concession into the hands of the most efficient firm. The bid price is a clear and unambiguous criterion for concession allocation, much less open to abuse than other more woolly criteria. However, the

What if the logging firm submitting the highest bid is the one that is likely to damage the forest most? To some extent the management plan and the inspections will deal with this. Also, when enough firms indicate an initial interest in bidding for a concession, it may be possible to leave some of them out, and for a ‘short list’ to be prepared of the most competent firms which are then invited to submit bids (prequalification). That is for example prescribed in the new Liberian forest law (Woods et al.). In Cameroon bidding for concessions entails a technical offer and a financial offer, the latter carrying more weight – 70% (Karsenty 2006B). This is a good system, but the evaluation of the technical offer is a sensitive matter and should ideally be done by a third party. Smaller local firms cannot always compete with big international firms One could give local firms a financial advantage in the bidding process. E.g., when inviting tenders for the

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construction of buildings or roads in developing countries, the World Bank has sometimes reduced the local bids by 15% before comparing them with the international bids. When inviting tenders for concession rent, the reverse could be done: the local bids could be increased by some known percentage before they are compared with the others.

concessions in the natural forest by competitive bidding, from 1996 (Karsenty 2007). As a result, the charges payable to the government per cubic metre of sawlogs increased from EUR 10 in 1992 to EUR 67 in 2004 (Karsenty 2006A). In Liberia, a country turning over a new leaf and trying to stamp out corruption, competitive bidding is emphasised in the new forest law. See Woods et al..

Firms which have invested in local processing industry should be rewarded ACKNOWLEDGEMENTS Say that a local firm has had a certain logging concession for a very long time and has shown enough faith in the local economy to invest in a sawmill or plywood plant. If such a firm were to lose its concession to a higher bidder, the result on its profitability could be disastrous. Here again, one could give such a firm an advantage in the bidding process, or rather a double advantage: one for being local and another for the investment in the processing industry. The establishment of a processing industry could even be made a condition of the concession contract. The risk of accidental over-bidding This is rare in forestry, where the normal problem is the opposite, namely under-pricing. However, errors can happen, and a concessionaire may have been over-optimistic when estimating the price that could be paid for a concession, which is consequently threatening to bankrupt him. The risk of over-bidding is a general business risk, not confined to concession-allocation. However, to be business-friendly one could allow firms which have got into this kind of trouble to relinquish the concession, provided they pay the cost to the government of re-launching the bidding process, plus a small penalty. THE EXTENT TO WHICH BIDDING IS ACTUALLY USED FOR CONCESSION ALLOCATION Bidding was used in colonial times for selling lots of timber and short-term contracts, especially in plantations and relatively homogeneous natural forests, e.g. those of Gabon, where the Forest Act still recommends bidding (Code forestier, Articles 111 and 113); however, it is not practised there. Congo-Kinshasa also recommends bidding (Karsenty 2006B) but doesn’t practise it. In Ghana the first pilot bidding was tried in November 2003 for the sale of plantation timber. The bids averaged US$ 140 per m3 (EUR 114 or GBP 97 according to the June 2010 exchange rates), compared to US$ 20 in previous sales. I.e., the bid price was seven times the earlier administratively determined price – a dramatic example of how bidding can increase the revenue of the forest owner. Since 2004 concessions in the natural forest have been sold by bidding, but there has been much political interference, and as a result of the system is not functioning well. Cameroon adopted an innovative forest law in 1994, and was the first country in West and Central Africa to allocate

I am indebted to the forestry consultants John Palmer, Gene Birikorang, Eberhard Brünig and Peter Wood who generously shared with me their vast knowledge of this subject; and to John Palmer also for reading through the manuscript and making many useful suggestions. REFERENCES ANONYMOUS 2001. Code forestier, Loi 16/01. Signed by the Government of Gabon on 31.12.01. GRAY, J. A. 1983. Forest revenue systems in developing countries; their role in income generation and forest management strategies. FAO Forestry Paper No. 43, Rome. GRUT, MIKAEL, GRAY, JOHN A., and EGLI, NICOLAS 1991. Forest pricing and concession policies. Managing the high forests of west and central Africa. World Bank Technical Paper No. 143. KARSENTY, A. 2006A. Adjudications des concessions, rente économique et risque financier: le débat sur la fiscalité au Cameroun et en Afrique centrale. Bois et Forêts des Tropiques No. 287 (1). KARSENTY, A.. 2006B. L’impacte des réformes dans le secteur forestier en Afrique centrale. Published in “Exploitation et Gestion Durable des Forêts en Afrique Centrale”. Paris. KARSENTY, A.. 2007. Overview of industrial forest concessions and concession-based industry in central and west Africa. CIRAD, Montpellier. PALMER, J. and MARSHALL, M. 1996. Guyana Forestry Commission support project funded by the U.K. Overseas Development Administration. Report on forest revenue systems. Tropical Forestry Services Ltd WOODS, J., BLUNDELL, A.G. and SIMPSON, R. 2008. Investment in the Liberian forest sector. A road map to legal forest operations in Liberia. Published by Forest Trends, sponsored by the UK Foreign and Commonwealth Office. See chapter on Competitive Bidding.

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Taxation of tropical forests: search for generalizations after half a century of trying 1 I. RUZICKA Consulting economist, 74 350 Vovray-en-Bornes, France

Email: [email protected]

SUMMARY In tropical forest management with a stated goal of sustainable production, increasing or refining forest taxation may serve the fiscal objectives of the owner but is unlikely to encourage maintenance of the underlying asset. There is no happy confluence of fiscal, economic and environmental virtues in a single tax instrument. Taxation cannot be an elegant substitute for traditional regulation, itself an imperfect instrument. In any event, policy instruments need to match the management regime socially most appropriate for a given type of forest land. Improved taxation may very well have a role to play in some management regimes but not in those that aim at sustaining the supply of tropical forest services. Different classes of incentives and disincentives are needed there. Early experience with non-tax market mechanisms that facilitate oversight by state while rewarding responsible management by lessees (e.g. performance guarantee bond) ought to be evaluated and obstacles to such instruments’ introduction studied. Better understanding of logging’s environmental repercussions is much welcome and needs to be further encouraged. Conventional taxation recommendations are in conflict with recent calls for an environmental subsidy via payment for avoided deforestation.

Key words: forest depletion, forest taxation, rent, performance guarantee bond, avoided deforestation

Fiscalité forestière : à la recherche d'enseignements après un demi-siècle de tentatives I. RUZICKA En matière de gestion forestière tournée vers un objectif de production durable de bois d’œuvre, l’accroissement ou la sophistication de la fiscalité forestière peut servir les intérêts du propriétaire mais a peu de chance d’encourager la maintenance de la ressource qui en est le support. Les incitations fiscales, économiques et environnementales ne convergent généralement pas dans un même instrument fiscal. La taxation ne peut être un substitut élégant à la réglementation traditionnelle, laquelle est elle-même un instrument bien imparfait. Dans tous les cas, les instruments des politiques publiques doivent être en adéquation avec le régime de gestion socialement le plus approprié à chaque type de forêt. Une fiscalité améliorée peut très bien avoir un rôle à jouer dans certains systèmes de gestion, mais pas dans ceux visant la fourniture à long terme de services forestiers tropicaux. Différents mécanismes d’incitation et de pénalité sont, dans ce cas, nécessaires. Des expériences recourant à des mécanismes non-fiscaux de marché et facilitant la surveillance de l’Etat tout en récompensant une gestion responsable par les concessionnaires ou les preneurs à bail (comme, par exemple, des primes indexées sur la performance) devraient être évaluées, et les obstacles à l’introduction de tels instruments étudiés. Une meilleure compréhension des répercussions environnementales de l’exploitation serait bienvenue et doit être encouragée. Les recommandations conventionnelles concernant la fiscalité forestière entrent en conflit avec les propositions récentes de subventions sous la forme des paiements pour « déforestation évitée »

Un sistema tributario para los bosques tropicales: medio siglo en busca de generalizaciones I. RUZICKA En el contexto de la gestión forestal tropical que tenga un objetivo explícito de mantener una producción sostenible, el aumento de los impuestos o el perfeccionamiento del régimen fiscal pueda servir para los intereses financieros del proprietario, pero resulta improbable que fomente el mantenimiento de los recursos en cuestión. No existe un solo instrumento fiscal capaz de satisfacer las necesidades financieras, económicas y ambientales, y un régimen fiscal no puede sustituir de forma elegante los reglamentos tradicionales, que son por sí un instrumento imperfecto. En cualquier caso y en cualquier tipo de tierra forestal, los instrumentos políticos deben además ajustarse al sistema de gestión que sea más apropiado del punto de vista social. Puede ser cierto que una mejora del sistema tributario pueda desempeñar un papel importante en algunos sistemas de gestión, pero no en aquellos que tengan como objetivo mantener la provisión de servicios forestales sostenibles en zonas tropicales. Habría que seguir de cerca las primeras experiencias de los mecanismos de mercado no basados en cargas fiscales, los cuales facilitan la supervisión estatal pero que también premian la gestión responsable por parte de los arrendatarios (por ejemplo, a través de garantías de fiel cumplimiento), y hace falta también examinar los obstáculos que impidan la introducción de estos

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T  he article is adapted from a presentation to a DFID seminar on forest taxation in Africa, London, 4-5 June 2008.

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instrumentos. Resulta necesario desarrollar nuestra comprensión de las repercusiones ambientales de la industria maderera, y habría que fomentar otros estudios al respecto. Las recomendaciones a favor de un régimen fiscal convencional están en conflicto con los llamados recientes a un subsidio ambiental basado en el pago de créditos por la deforestación evitada.

INTRODUCTION It would have seemed unlikely three or four decades ago at the peak of log exports and rapid opening up and conversion of the remaining accessible areas of tropical forest that the subject of how best to organize tropical forest management would still be with us. Native tropical forests are clearly sturdier than believed at the time, especially if “helped” by civil unrest and underdevelopment of road infrastructure. Be that as it may there is little doubt that they have been under pressure. The continuing deforestation and forest degradation raises the inevitable question of how positive the contribution of policies and prescriptive forest management practices has actually been and why it is that in some instances, civil unrest has been a better friend of forests than their conscious management. Much has been written in the last half a century on the subject (see Karsenty 2008, for a recent review). The underlying situation in the majority of tropical forest countries continues to be one where the State owns forest land but entrusts its management to the private sector under a variety of leaseholding instruments and state supervision.1 The theoretical virtues of this management model are agreed to have been marred in practice by poorly designed terms of access to the resource and various forms of abuse (disrespect of harvesting regulations, lack of transparency in lease allocation, underinvoicing, etc.). Improved pricing of access to the resource, i.e. forest taxation, has long been considered one of important ways of encouraging forests’ sustainable management besides contributing revenue to the Governments of forest-rich but often otherwise poor countries. The purpose of this contribution is to re-kindle the argument developed in the 1990s (Paris and Ruzicka 1991, Paris et al. 1994, Leruth et al. 2001) that questions the efficacy of the fiscal road to sustainability and considers attention to the fiscal aspects of leaseholder regimes misplaced. I argue that the fiscal route to optimality is further undermined by recent shift of emphasis in tropical forest management towards its environmental benefits. The discussion is then 1

 irect management of the forest domain by the State is limited to D a small number of specialized situations (e.g. teak plantations in Java, state forest enterprises in southern China etc.). Ownership or management of the forest by local communities (e.g. in Melanesia in the former case or under a variety of forest stewardship schemes in the latter) is still relatively insignificant in global terms though becoming more common and featuring a number of innovations not discussed here. The reader is referred to the Rights and Resources Initiative (www.rightsandresources.org) for an extensive coverage of the topic. Private ownership of tropical forest, like direct management by the State, is limited to special situations and in most cases involves tropical forest plantations, i.e. an ecosystem different from the one of interest to us here.

used to put forward a general approach towards selecting the best management regime for different classes of tropical forests. HOW IT BEGAN In any historical analysis of tropical forest exploitation2 the developments of the global economy between the late 1950s and 1970s and the “plywood revolution” that turned a resource of marginal importance until then (with a few exceptions such as Burmese teak) into something far more valuable, especially if available in large and predictable volumes, would occupy a prominent place. Coming soon after de-colonization and against an undercurrent of economic nationalism, the new and striking profitability of tropical logging easily led to an overriding focus on that profitability rather than on sustainability. Outside the relatively narrow circle of forest scientists and botanists, selective logging (structured around “annual allowable cut” or AAC) was the pat answer to any concern about sustainability.3. To this day, it is the profitability of logging that drives the debate and it is also via the profitability of logging that the subject of sustainability is often being addressed. The “rent appropriation” wave of 1980s made such an impact because it promised to cure unsustainable practices –rapidly becoming apparent by then- by reducing logging profits. A market solution of a sort to the problem of forest loss seemed to be borne. And it is the relationship between profits and sustainability that continues to challenge us under the dominant mode of tropical forest management. Of profits and rents One of the consequences of the obvious profitability of export-oriented logging of the 1960s and 1970s (a sort of “easy money” associated with crony-ism characteristic of the sector) was to encourage a careless use of the concept of rent that came to be synonymous with any above-normal profit in an extractive activity, the fundamental difference for the remaining stock of the resource over time between extracting logs, on the one hand, and extracting a nonrenewable resource, on the other, ignored. Taxing rents, by definition, has no effect on the supply of the resource being targeted, merely on the profitability of the extraction For a much more complete account, be it with a different emphasis, the reader is referred to, e.g., Dawkins and Philip 1998 3 In colonial forest management, AAC-based system often ensured sustainable management and was therefore embraced by postindependence forest administrations. In retrospect, the sustainability –where achieved-- was less the result of the application of selective logging than application of command and control alongside it, a forte of colonial administrations. 2

Taxation of tropical forests

activity. Superficially, that is what was happening in the tropics: higher forest taxes (e.g. timber royalties) did not change the way leaseholders operate, merely transferred some of logging profits from leaseholders to the State owner. An idea of leaseholder logging operations prevailed in which (to simplify) AAC regulations ensured forests’ regeneration and extraction cost was the only cost the leaseholder bore. The difference between logs’ market price and the extraction cost was deemed to be rent and taxing it away not only had no impact on the way the logger behaved but in most cases actually improved the forests’ sustainability prospects because it eliminated rent-seeking, the “easy profits” associated with favouritism-ripe allocation of additional forest land for management besides leading to reduced logging intensity and reduced environmental damage4. Selective logging rules seemingly having ensured forest regeneration the objective of policy was to apply the highest level of tax that did not drive the leaseholder away. A superficial similarity between mining and tropical logging (“gift-of-the-nature”, cronyism in both) together with economic virtues of taxing rents rather than ordinary profits carried the day no matter how misdefined the rent was. A more careful analysis of how most logging managers operate under typical concession contracts suggests that taxes profoundly affect the supply of the forest resource over the longer run (i.e. the one that gives meaning to the term sustainability). This is because under non-transferrable forest leases and despite sustainability safeguards the leaseholder can offset some of the higher taxes by reducing his production cost in ways that are difficult if not impossible to contractually block. Careless logging, reluctant rather than willing maintenance and protection of the leased resource are examples of such cost-minimizing adaptations that paradoxically lead the forest manager to deplete more and protect less, i.e. the opposite of the hoped-for impact of higher taxation5. “Rent appropriation” has correctly been argued to deter demand for forest custody and help slow down the opening of forest for exploitation but has not delivered its other virtues. The relationship linking higher taxes to lower environmental damage of forest operations has proven to be weak despite superficial similarity to industrial externalities where negative impacts tend to be strongly correlated with the rate of output. In tropical forest management, by contrast, environmental impacts depend mainly on topographical and locational factors, and the degree of vested interest the forest manager has in protecting and building up the value of the underlying asset. Key to the revisionist view advocated here is the notion that a concern with short-term profitability of logging operations will not cure the long-term problem of asset depletion. Many leaseholders have grown rich because under the structure of incentives present in existing leases they have not paid the full –i.e. sustainability-ensuring f numerous policy statements broadly supporting this view, O Repetto 1988 probably remains the most influential. 5 The growing interest in reduced impact logging attests to the significance of this element. See for instance Sist.et al. 2003. 4

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cost of concession management6. Heavier taxation may reduce the level of leaseholders’ profits and increase shortterm revenue of the state owner but will tend to leave the owner holding a degraded forest asset at the end of the lease period. The owner will simply trade tax income for a forest decline. Whether distributional and ethical benefits of a revenue transfer from the leaseholder to the State justifies this economic inefficiency is debatable. The objection that leaseholders cannot do as they please as forest taxation comes on top of a variety of sustainability safeguards (selective logging and others) is answered by decades-long experience: safeguard provisions have proven insufficient to maintain let alone improve the productivity of the forest. Under most arrangements in practice, the leaseholder has every reason to do the minimum to satisfy the letter of the safeguards rather than seek to build up the value of the concession that he might do if, for instance, a possibility existed to sell the value of any improvements back to the owner or to subsequent tenant. And the minimum has proven insufficient in any case, mainly because the safeguards tend to target mainly (and can barely control) the composition of harvest but do not target (and cannot easily control) the production methods and their impact on immature stock. Only a manager having a vested interest in maximizing long-term value of the asset will exert an optimum amount of care. The disadvantages of the taxation approach emerge with even a greater force once –as is increasingly the case throughout the tropics--the forest areas leased are not the rich uniform stands of yesteryear but leaseholds that combine well-stocked areas with sub-areas of second-growth forest in varying conditions, and with areas deforested. Short-term profits realizable from the first category then coexist with no income (and substantial cost) incurred by a responsible leaseholder for managing the two other categories. Taxing the logs produced in the first sub-area then means that less or no money is left to manage the second two sub-areas (the management of which is far from free –only the uninformed believe that natural forest is so called because the nature takes care of everything). “Full rent appropriation” is then seen even more clearly to contribute to the degradation of the area leased. Any temptation to lease out only well-stocked areas merely becomes a precursor to their conversion to a degraded secondary forest (or worse) and a future in which the state owner ends up holding an impoverished asset with no prospect of income and no cronies lining up to offer their services. What chances management?

of

responsible

production-forest

It is not easy to be optimistic about the prospects of 6

How much of the maintenance cost is paid by the leaseholder becomes clear only towards the end of his period of custody. If the manager is still making a lot of money at the end of their custody and the forest is at least in as good a position as it was at the outset of their leases he should be given a medal and invited to continue his socially responsible management.

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I. Ruzicka

maximizing the long-term value of the forest asset especially if the forest is to retain most of its defining biological characteristics (rather than be converted to forest plantations). Experience has shown that where the forest is managed for timber by the state owner himself, the theoretical advantages of the long-term management perspective are quickly outweighed by management inefficiency characteristic of a bureaucracy7. The other extreme, i.e. outright privatization of tropical forests is not advisable for several different reasons unless the social value of forest land in question is higher in non-forestry uses (including plantations) in which case our concern as land owners should to select the most efficient among forest liquidation contractors. This leaves us with the concession model and the conundrum posed by the unjustified faith in virtuous taxation. A non-taxation approach to dealing with the problem–a returnable and competitively-determined performance guarantee bond (Paris and Ruzicka 1991, Paris et al. 1994, Leruth et al. 2001) has not been truly tested. It requires certain institutional preconditions such as the industry’s faith in the stability of contractual arrangements, and the development of the local financial sector (e.g. ability to collaterize concession obligations) that may or may not exist in particular countries and jurisdictions. The long history of collecting forest taxes, the strong appeal to the state owner of any arrangement that promises to generate revenue (and generate it fast) and the intellectual blessing given to it (wrongly) by some smart people all conspire against the prospect of discarding the orthodoxy. Environmental considerations If, as appears increasingly likely, long-term management of tropical forests for timber is all too often unprofitable once the cost of ensuring sustainability is taken into account, the only thing that can “save” the forest in a policy sense are positive environmental externalities. Managing the forest in ways that generate environmental services such as maintenance of hydrological regimes, protection of biodiversity or carbon sequestration can indeed result in significant benefits and recent years have seen an explosion of interest in understanding this dimension, and piloting and documenting the experience. This has been accompanied by calls for different forms of financial support for sustainable forest use practices, most notably REDD-type mechanisms (see Karsenty. 2008). It is essential to note that these amount to calls for a subsidy to keep the forest in good shape to continue to deliver the positive externalities and as such they are in direct conflict with the taxation orthodoxy recommendations (“tax more or tax differently, but tax!”). If existing forests can support high taxes without any long-term damage (assumption made by high taxation advocates) then the case for subsidizing forest management under “avoided deforestation” largely vanishes.

7

 similar inefficiency worries us a little less –but worries us still-A where the forest is a protected area.

A general approach The references to different ways of managing tropical forest (by the state owner, by the communities, by private owners) and the increasing importance of environmental values of the forest (for erosion control, carbon sequestration etc.) suggest a need for a more systematic approach to selecting the appropriate management regime for tropical forests. That decision is almost certainly more important in its consequences for economic optimality than any across-the-board refinement of taxation regime (misguided as that tends to be, as argued here) The previous discussion suggested that the selection of economically appropriate regime for a given area of forest will be affected by the market prices of forest products and a variety of production costs associated with each management regime. Sustainable management requires consideration of four main categories of costs, i.e. logging cost, depletion cost, management-for-sustainability (or maintenance) cost and environmental cost. Economic optimality requires that, at the margin, P = MLC+MDC+MMC+MEC where P is the market price of logs (with due allowance for species and grade differences). MLC is the marginal logging cost, MDC is marginal depletion cost, MMC is the marginal maintenance cost and MEC is the marginal environmental cost of a particular management regime. Whether a given area of forest ought to be converted to alternative (non-forest) uses, managed for timber only, for environmental services only or for a combination of timber and “environment” will depend on the configuration of these parameters. If keeping land under forest is considered to have a high opportunity cost, for instance, (i.e. outright forest liquidation actually adds value to land and forest cover in the area in question has no environmental value) a conversion or mining mode of forest management would be economically the most efficient. In other cases, different management modes may be required. The choices are summarized in Table 1. CONCLUSIONS AND RECOMMENDATIONS Under concession management with a stated goal of sustainable production, increasing or refining forest taxation may serve the fiscal objectives of the owner but is unlikely to encourage sustainability and economic optimality. There is no happy confluence of fiscal, economic and environmental virtues in a single tax instrument. Taxation cannot be an elegant substitute for traditional regulation, itself an imperfect instrument. The understanding of the relationship between the profitability of logging and sustainability needs to be revised. Socially optimal management of tropical production forest is unlikely to be achieved by further refining the structure of forest taxation but by looking to different classes of incentives and disincentives. Early experience with non-tax market mechanisms that facilitate oversight by state while rewarding responsible management by lessees (e.g. performance guarantee bond) ought to evaluated and institutional and other obstacles to such instruments’ introduction assessed

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TABLE 1 Choice of optimum management regimes for native tropical forest Management mode

Configuration of decision parameters

Objective of policy maximization

Case 1: Maximize economic efficiency

Policy recommendation

Deforestation and other effects

Encourage entry into the industry and a rapid explotation. Give as many concessions as possible

Rapid depletion; logging a competitive industry. No supernormal profits exist except if P>local cost of production at all levels of output

Mining mode [If forest is valuable for timber only, and if timber is not worth renewing]

Case 2: Maximize fiscal efficiency

Restrict the number of concessions in order to generate supernormal profits that can be taxed away.

Case 3: Maximize political efficiency

Grant concessions to political loyalists

P-MLCMMCMEC

Maximize joint value of timber and environmental services

Introduce forest guarantee bond

Maximize the value of timber output under zoning restrictions

Divide the forest estate into timber production area (if P-MEC-MMCMDC>MEC) and place the rest (where …MDC

Sustainable timber extraction mode [If forest is valuable for timber only and timber is worth renewing]

Mixed mode [If forests are valuable both for timber and environmental services and timber extraction is compatible with the delivery of the environmental services]

Private forestry-cum zoning mode [If forests are valuable both for timber and environmental services but the latter two are incompatible]

as above

Conservation (“national parks”) mode [If forests are valuable for environmental services only]

P-MLC-MDCMMC