PROJECT: DEVELOPMENT OF THE FOREST SECTOR FINANCNG MECHANISM

CLIENT: EUROPEAN UNION

SUMMARY

In January 2013, the Government of Malawi, through the Department of Forestry, commissioned a study to identify and develop long term mechanisms for increasing revenue and investment in the forestry sector for the development of a stronger coherence between financial resources and sustainable forest management (SFM).Financial and technical support was provided by the European Union (EU), through the Improved Forest Management for Sustainable Livelihoods Programme(IFMSLP), which is currently implemented by the Department of Forestry (FD).The key deliverables were a Mission Report and a National Forest Sector Financing Strategy(both incorporated in this document), including a plan for implementation of the recommendations. The study was conducted in a participatory way, which involved consultation of stakeholders in the forestry sector and beyond. A national workshop was held on 25th March to present findings to stakeholders.

The findings show that the main challenges in financing sustainable forest management (SFM) and sector development in general in Malawi are:

  • There is a widening financing gap because increasing financing needs combined with declining public sector funding and declining revenue collection.
  • In Malawi, as elsewhere, the financing gaps should be increasingly financed through private sector investments. However, at present there’s insufficient private sector financing/investment into the sector development and financial services are not well geared towards financing sustainable forest management (SFM).
  • Payments for ecosystem services are not yet broadly applied and related international financing opportunities are not optimally utilized.
  • There is not enough information on public and private sector investment flows. Further, donors are increasingly channeling funding through NGOs and integrated land-use management or environmental projects/programs where forestry is only one element. As a result coordination of forestry financing flows is becoming increasingly difficult.

Main opportunitieshave been identified as follows:

  • Making better use of forestry’s contribution to the national economy (GDP) and well-being of people locally and nationally. Linked to that there’s a potential to improve accountability and visibility of the forest sector to stimulate incremental funding.
  • There is huge potential in increasing forest revenue collection through improved pricing, coverage/scope of revenue collection, and reducing leakage.
  • There are untapped opportunities in accessing existing financing mechanisms and also attracting moredonor funding related to forestry as part of other support to improve natural resource management, climate change management (both adaptation and mitigation) and rural livelihoods.
  • REDD+ financing and payments for other environmental services (PES) related especially to watershed management provide potential for financing SFM.

In order to address these challenges and make use of the new opportunities an integrated approach to financing the forest sector is needed. Theobjectiveof the National Forest Sector Financing Strategy (NFSFS) is to create the mechanisms and conditions for expanding and diversifying the financial basis of SFM, making the existing financing system more efficient and inclusive, and complementing it with new innovative opportunities, and helping the funding match better with national priorities. The NFSFS is to bring all the various financing challenges and opportunities, including all key sources of financing, financiers/investors and their role in financing implementation of SFM, under an integrated framework of sustainable development, poverty alleviation and economic growth. The (updated) NFP is to provide the overall guidance with SFM at the core of the framework.

Enabling environment is at the core of stimulating private sector investment in SFM at all levels and sub-sectors. The following actionsneed to be undertaken to create a more enabling environment for sustainable forest sector financing and investments:

  • Improve forest governance, including law enforcement.
  • Strengthen and clarify land tenure and local people’s rights.
  • Implement the NFP recommendation regarding the role of FD in productive activities and especially in plantation forestry.
  • Re-mobilize plantation privatization efforts following best practices.
  • Continue expanding co-management models and related benefit sharing arrangements.

Improving Forest Produce Pricing and Revenue Collection

Main strategic and operational recommendations:

  • Adopt a market-based stumpage/royalty system to be adjusted regularly depending on the market and foreign exchange changes.
  • Introduce a charcoal licensing and fee system.
  • Introduce a competitive, transparent and accountable concession system.
  • Incentivize and “outsource” at least part of the revenue collection.
  • Allocate adequate resources for revenue collection.

Enhancing the Role of PES in Financing SFM

The key strategic recommendations are:

  • Allocate strong cross-sectoral political support at highest levels and adequate national resources for REDD, while also piloting PES for watershed services in critical areas.
  • Improve the visibility and understanding concerning forest sector’s national contribution, including value of ecosystem services and non-market forest production.
  • Strengthen and clarify the policy and legal framework for PES, incl. clarification of land tenure and local people’s rights.
  • Develop a clear institutional framework that facilitates inter-sectoral cooperation, leadership and stakeholder participation.
  • Improve the information basis including MRV systems and capacity.
  • FD must become more active in communication, and even pro-active especially in the Malawi climate change agenda.

Enhancing the Role of Private Sector in Financing SFM

The main strategic recommendations are:

  • Create an enabling environment for private sector participation in smallholder and plantation forestry, farm forestry and sustainable forest industries development through establishing a supportive incentive framework, and strengthening land availability and security of forest tenure and concession arrangements.
  • Promote private farm and community-based tree growing and innovative models of financing small scale private tree growing based on public private partnership models.
  • Create stronger links with tobacco, tea and bioenergy industry and identify ways of facilitating their investments, and scaling up outgrower schemes.
  • Establish more pro-active dialogue with the financial sector players, and educate them.

Improving the Operations of the Forest Development and Management Fund (FDMF)

Strategic recommendations:

  • Focus fund investments on catalytic action that can contribute to transforming the sector.
  • Focus fund investments into action that can increase revenue generation to the Fund and the Government. Broadening the revenue collection base will be the key to securing adequate funds for the FDMF.
  • Focus fund investments into piloting innovative financing mechanisms including PES and into action that can leverage responsible private sector investment, improve access to domestic financing sources, and attract additional donor funding.

Key operational recommendations:

  • Improve and clarify governance arrangements especially concerning the fund allocation.
  • Develop a fund management policy and related “regulations” (this process has already been initiated), and a strategic plan with clear objectives and planned results/outcomes.
  • Strengthen the profile of reporting and communication.
  • Develop a planning and monitoring and evaluation (M&E) system with measurable performance indicators, andfinancial management, and M&E manuals and protocols.
  • Strengthen the planning and financial management capacity incl. financial control system and adopt regular auditing practice and develop an auditing plan.

Executing the NFSFS: Short, Medium and Long-term Action

The ongoing forest policy review, future review and update of the NFP, and assessment of the functional roles of the FD,can provide the needed “big picture” and a process to which the implementation of the NFSFS and its proposed action could be linked to. The NFP Coordination Unit and Forum could provide guidance in the priorities for NFP implementation and financing.An Action Plan that is based on three categories of priorities (short-term: less than 2 years; medium term-: 3-5 years, and long-term: 5-10 years) has been developed for the execution of the NFSFS.

Organisational Arrangements, Monitoring and Evaluation and Communication

A forum/Working group dealing with forest sector financing should be established and linked to the multi-sectoral NFP Forum and NFP coordination unit.The NFSFS should be seen as a “financial arm” of the NFP and integrated into the NFP planning, monitoring and evaluation system. Special attention must be paid to improving communication, and reaching effectively outside the forest sector, and targeting specifically high level decision-makers but also the general public.

Whatever source of forest finance is concerned, the efficient and effective use of funds has to be demonstrated using appropriate performance indicators; this is crucial for the Ministry Economic Planning and Development, Treasury and central government decision-makers concerned with the monitoring of MGDS implementation, as well as to donors.