DRAFT
DRAFT FOR DISCUSSION
TOTAL ECONOMIC VALUATION
OF GEORGIAN FORESTS
UNDER THE CURRENT
RESOURCE MANAGEMENT REGIME
Tijen Arin Jacek Siry
August 2000
TABLE OF CONTENTS
List of Tablesp.iii
Abbreviationsp.iv
Acknowledgmentsp.v
Executive Summaryp.vi
Introductionp.1
Methodologyp.2
Definition of Total Economic Value (TEV)p.2
Linkages and Tradeoffs between Market and Non-market Forest Uses and Valuesp.3
Basic Principles of Economic Valuationp.5
Valuation Methodologiesp.8
Discountingp.11
Estimated Values of Forest Benefits p.14
Direct Use Valuesp.14
Timber p.14
Food Products p.21
Mushrooms p.22
Nutsp.24
Berries and Wild Fruitsp.25
Medicinal Plantsp.26
Seedsp.27
Foragep.28
Hunting and Fishingp.29
Tourism and Recreationp.37
Indirect Use Valuesp.39
Watershed Protectionp.39
Micro-Climate Regulationp.41
Climate Controlp.41
Option Valuep.41
Non-Use Valuesp.41
Existencep.41
Bequestp.43
Total Economic Value of Forestsp.44
Conclusionsp.45
Referencesp.46
Annex 1: Georgia Timber Exports Assessment Based on Turkey Import Datap.47
Annex 2: Survey Information on Hunting And Fishing Activities In Georgiap.59
Annex 3: National Parks Tourism Potential and Revenue Generation
- Georgia Protected Areas Development Projectp. 65
Annex 4: Draft Terms of Reference for a Detailed TEV Study of Georgian Forestsp.77
LIST OF TABLES
Table 1: Forest TEV Components p. 2
Table 2. Beech Sawtimber Stumpage Value Derivation ($/m3)p.14
Table 3. Timber Value Under Current Forest Managementp.16
Table 4: Annual yield of edible mushrooms in Georgia by forest type (tons) p.22
Table 5: Sample frequencies of household mushroom collection and purposesp.22
Table 6: Estimated annual average mushroom collection by district (for own consumption and sale)p.23
Table 7: Annual stock, harvest and collectors’ producer surplus on nut species in Georgia.p.24
Table 8: Berry collection frequencies in different regions of Georgia.p.25
Table 9: Sample frequencies of medicinal plant collection and purposes p.26
Table 10: Amounts of medicinal plants harvested (green mass) and their market prices in Georgiap.27
Table 11: Derivation of the current forage value of forests.p.28
Table 12: Population and density of game animals according to the 1987-88 inventoryp.31
Table 13: Average population and harvest of game populations from 1967-71.p.31
Table 14: Summation of annual net hunting and fishing benefits (Lari)p.33
Table 15: Potential annual revenues under sustainable hunting area managementp.34
Table 16: Investment and recurrent costs of hunting areas by various plot sizes.p.36
Table 17: Estimated NPV of hunting and fishing benefits under the Alternative scenario (US$) p.36
Table 18: Derivation of net recreational and touristic benefits due to forests in national parksp.38
Table 19: Forest area by slope gradientp.39
Table 20: Forest growth valuep.40
Table 21: Indicative crop budget of one irrigated Hap.40
Table 22: Estimation of economic benefits due to afforestation and forest restoration on 8,700hap.41
Table 23: Annual non-use value by city and in totalp.42
Table 24: Values of current forest uses and servicesp.44
Box 1. Methods of valuing forestsp.13
ABBREVIATIONS and ACRONYMS
AVAnnual Value (perpetual)
AEVAnnual Equivalent Value
BVBequest Value
c.i.f.Cost + Insurance + Freight
CSConsumer Surplus
CVMContingent Valuation Method
DUVDirect Use Value
EVExistence Value
f.o.bFree on Board
FVFuture Value
IUVIndirect Use Value
NBNet Benefit
NPVNet Present Value
NUVNon-Use Value
O&M Operations and Maintenance
OVOption Value
PVPresent Value
PVBPresent Value of Benefits
PVCPresent Value of Costs
SFDState Forestry Department of Georgia
TEVTotal Economic Value
TCMTravel Cost Method
UVUse Value
WTAWillingness to Accept
WTPWillingness to Pay
AKNOWLEDGEMENTS
We are grateful to the Turkish General Directorate of Forestry and the Georgian State Forestry Department for sharing information and helping in the efficient organization of our study trip to Turkey and Georgia in May 2000. We would also like to thank wood importers and processors in Trabzon, Bursa and Istanbul for their willingness to share information about their businesses and the sector, in general. We would also like to thank the Georgia Forest Development Project Preparation Unit for their efficiency in meeting our seemingly endless requests for information.
Special thanks go to the reviewers of the paper, Marjory-Anne Broamhead, Karin Shepardson, James Douglas and Bill Magrath for their insightful comments. Finally, “thank you” to Andrey Kushlin, the Task Team Leader of the Georgia Forest Development Project who provided detailed comments on the various stages of the paper and support along the away.
EXECUTIVE SUMMARY
The Challenge. Georgia’s forests are a major national asset. They occupy 40% of the country’s territory and constitute a crucial element of Georgian natural environment, rural livelihood, cultural tradition, and national economy. They are also of critical international importance as a habitat to unique biological and landscape diversity, and as a factor of regional climatic and water regime. However, over the last decade, Georgia’s forests has been put under a serious threat of losing most of these values. The economic hardships led to increased pressures on forests for fuelwood, grazing areas and hunting. The budgetary crisis resulted in a lengthy neglect of forest management issues by the state. This approach is already causing serious problems with increases in uncontrolled and illegal logging. If continued, it can quickly lead to a discontinuation of effective enforcement of forest regulations and a virtual collapse of forest management. Unmeasured, but potentially significant losses come from environmental and social damage caused by uncontrolled logging. The valuable resource, while continuing to be wasted, does not contribute to the country’s economic, financial and social recovery. At the same time, by simply reducing uncontrolled and illegal logging, adjusting forest resource use fees and gradually increasing controlled timber harvest in an environmentally sustainable manner, the Government of Georgia can increase its revenues from forests to at least about US$10.2 million per year (which alone is more than the State Budget allocations for health in 1999). Serious and thoroughly weighted policy decisions have to be taken by the Government of Georgia regarding the forest sector in order to stop and reverse this dangerous trend.
The Study. The present study – undertaken by the World Bank in May-July 2000 as part of its efforts to assist the Georgian authorities with preparation of the proposed Forests Development Project – develops the skeleton of a full-fledged total economic valuation (TEV) study (see Box 1 for a definition) to be undertaken by Georgian authorities in the next five months, with further World Bank assistance. The results of he present study indicate general trends and provide an order of magnitude of values associated with the various uses and services of Georgian forests. Outputs from the TEV analysis of the forest policy and management changes considered for inclusion in the proposed Forests Development Project will help ensure that both positive and negative effects of the policy options on all forest uses and benefits are accounted for, rather than narrowly focusing on timber value.
The current scenario, under which the study estimated the total value of Georgian forests, is largely characterized by the lack of resources for and virtual stoppage of appropriate forest management, growth of uncontrolled and increasingly unsustainable harvesting of timber resources in a number of areas, uncontrolled hunting and grazing in forest lands across the country, which undermines the watershed protection, biodiversity and wildlife habitat functions of the forests and threatens forest landscapes treasured by the Georgian society. The current use of non-timber forest resources is assumed to be largely sustainable. The absence of proper forest management and enforcement will prevent the realization of higher economic value (including higher revenues to the Government) that the forests may provide, notably from timber, hunting and recreation. The values are estimated using best available data on the most current harvest volumes and prices.
Table 1: Monetary values of forests (US$ million)
Forest Benefit / Annual Net ValueDirect Use
Timber / 12.00
Mushrooms / 1.50
Nuts / 0.58
Berries and wild fruits / 1.95
Medicinal plants / 0.08
Seeds / 0.44
Forage / 3.75
Hunting and fishing / 2.10
Tourism and recreation / 2.25
Indirect Use Values / No data
Option Value / No data
Non-Use Values / No data
Total / 24.75
The study also estimates potential additional values and/or government revenues associated with the implementation by the Government of Georgia of a number of serious, medium-term changes in forest policy and management provided these changes are thoroughly weighted and feasible from institutional, fiscal and political perspectives. It would include a significant reduction of uncontrolled timber harvesting and a gradual and moderate increase in controlled timber harvesting to an annual volume of 1 million m3 under proper silvicultural techniques and forest management plans (including environmental protection and road development measures); the development of seven national parks (currently under development with international donor cooperation); the development of game reserves; and plans to limit grazing in forest lands.
Illustration of Estimated Forest Values
Timber. Current Harvest Values. The estimation of the current timber value is based on an annual harvest of 208 thousand m3 sawtimber (including 100 thousand m3 beech) and a total of 1 million m3 fuelwood. Since only 312 thousand m3 fuelwood is harvested officially, nearly 700 thousand m3 would come from illegal cuts. Beech sawtimber stumpage value is derived at $60/m3 by subtracting logging and shipping costs from the beech sawtimber export price of $120/m3. Sawtimber of other species is considerably cheaper and its stumpage value is estimated at $25/m3. The stumpage value of fuelwood is estimated at $5/m3. The stumpage value associated with the current total annual timber harvest is thus estimated at $13.7 million and stumpage value of the legal harvest only is estimated at $10.3 million. Subtracting the current annual management expenditures from the stumpage value of the total harvest yields an annual net value of $ 12.0 million. Under the current license fee structure, the official timber harvest will generate about $1.7 million in government revenues. Low forest resource use fees and substantial illegal fuelwood harvest are major shortcomings of the current forest policy.
The current system conditions forest resource use fees on the distance to road. The fees are low compared to timber value and generate lower than potential government revenues. The fees should be set to levels that on one hand generate enough government revenues to support adequate forest management and protection and allow the forest industry to invest and develop on the other. If, for example, the government increased the fees to 50% of the estimated stumpage values, it would generate about $5 million annually. Instead, the government plans to increase forest resource use fees by 5% annually. Since annual inflation averaged about 10% during past three years, timber in real terms will become cheaper. Increased government revenues should be used to better fund forest management and protection operations. For this to be feasible, the government must not only increase timber revenues but also commit itself to better forest management funding and set up an effective revenue transfer mechanism. This approach to the forest resource use fee regulation would also provide the forest industry with $5 million in profits and risk premiums that should support its development and modernization.
Illegal fuelwood harvests result in the continued forest degradation and pose sustainability threats in some areas, especially in former agricultural (kolkhoz) forests close to villages. Not only they do not generate government revenues, but also result in substantial environmental costs. This problem arises from desperate shortages of alternative energy sources and the lack of an effective control system. Fundamental solutions to this problem lie in proper development of community-managed forests, whereby rural communities are given both the incentives and responsibility for sustaining the forests they depend on. This approach has worked well in other countries (like Turkey, India, etc.), but would take time and effort to be fully implemented in Georgia. It would also need to be supplemented by better utilization of fuelwood sources from commercial forest operations and effective enforcement of forest protection laws. Forest operations may help to increase the amount of available fuelwood by better utilizing logging residues such as branches, tops, and stumps, small and dead tress, and wood from species of lesser industrial value. A recent report prepared for TACIS on fuelwood consumption in Georgia indicates that this is a viable option.
Potential Harvest Values. The State Forestry Department plans to increase timber harvest levels to about 1 million m3 by 2005. This harvest will be composed of 420 thousand m3 sawtimber and 580 thousand m3 fuelwood. Increased fuelwood production, better utilization of fuelwood from forest operations, and more effective control will help to alleviate problems associated with illegal fuelwood cuts, but likely will not be sufficient to entirely eliminate them. In order to increase harvest levels, major investments in road construction are required. The State Forestry Department estimates these needs at $5 million annually for the next five years that will have to be incurred by either the government or the forest industry.
Applying today’s forest resource use fees, this harvest would generate about $3.3 million in government revenues while the potential stumpage value of the increased legal harvest is estimated at $20.4 million. If forest resource use fees can be increased to about 50% of the estimated stumpage values, the government would receive about $10.2 million per year in revenues that would help to fund the required forest management, protection and road construction and still leave a significant surplus for other government programs. The forest industry will capture in profits and risk premia another $10.2 million that should help in its modernization efforts.
Policy Concerns. It must be recognized that increased harvest levels will have an impact on other forest products and values, especially soil and watershed protection. These impacts need to be carefully evaluated in management plans to ensure that forest resources are used optimally. There are a number of concerns related to increased timber harvest, which reflect investment needs, market developments, and forest protection requirements. They include (1) timber harvest level determination, (2) road construction investment, and (3) timber pricing, processing, and trade polices.
While increased timber harvest levels are still well below forest growth estimated at 4 million m3 annually, this does not mean than any increased harvest will be an optimal or sustainable one. In determining where and how much to harvest, first it should be recognized that on some environmentally sensitive sites such as steep slopes, ravines, and gorges, timber harvest would be not only unprofitable under any conditions but also would likely have substantial negative impacts on soils and water conditions. On other sites essential for biodiversity, wildlife habitat, tourism and recreation, environmental costs may well exceed timber harvest benefits. Therefore, it must be determined how forestland should be allocated to productive and environmental uses applying both economic and environmental criteria.
The ability to harvest more timber hinges on more and better forest roads, which will allow operating during the whole year using modern logging equipment. Their construction must be economically justified and environmentally responsible, providing effective soil erosion and water pollution control features. Such roads will help to schedule harvest according to market demand and preserve timber quality by using better logging technologies, such as cable systems, and by removing harvested timber promptly from the forest. New roads will make sanitary and conservation operations easier to carry out and may increase some non-timber values such as hunting.
To obtain high prices and realize the full wood value potential, timber must be processed using modern technologies that allow producing high quality products, commanding superior prices on domestic and international markets. These technologies include wood drying facilities and machinery that are largely absent in Georgia. Foreign investment can help in establishing modern wood processing in the country. The government, instead of promoting investment into wood processing, subsidizes inefficient domestic wood processing industry by setting low forest resource use fees, allocating harvest licenses to domestic wood processors, and restricting log exports, but has failed to generate desirable changes so far. Rather, the government should encourage foreign investment that can provide much needed capital and know-how. Domestic industry should ensure the highest quality processing and should remain competitive by the virtue of close resource location, cheap labor, and low taxes.
In times during which modern processing capacity is being established in the country, effective trade polices may help to obtain high timber prices and increase government revenues. A comparison of Georgian and Turkish trade data indicates that the government does not have effective control over timber exports and large amounts of logs are smuggled from the country. The major reason for illegal exports is a substantial price difference between Georgia and other countries, which is currently estimated at $100/m3 for beech logs. Restrictive trade policies force this outcome by separating domestic and international markets and maintaining artificially low domestic prices. Free trade polices would help to bring domestic prices closer to international prices and therefore reduce or even eliminate incentives for smuggling. Such approach appears much more effective when compared to calls for even more stringent controls that have failed to fulfill their role so far.
Non-Wood Forest Products. The Georgian society derives significant benefit by collecting forest food products, notably mushrooms, nuts, and berries and wild fruits, and medicinal plants for own consumption and trade. The annual net value was estimated at US$1.5 million for mushrooms, US$0.58 million for nuts, US$2 million for fruits and berries, and US$0.08 million for medicinal plants. Georgia is also a significant producer of high quality fir (Abies Normaniana) seedsthat are exported to Western Europe for growing Christmas trees. The annual net value of seed harvest is estimated at US$0.44 million. The Forest Department believes that the current harvest levels are sustainable. It is estimated that annually three million tons of forage is derived from forests through animal grazing, yielding an estimated annual net value of US$3.75 million. It is widely believed that the current level of grazing in forest areas is damaging to forests, contributes to soil degradation and erosion, and threatens biodiversity. Assuming a decrease of 25% in the grazing level, the annual net value derived from this activity would drop to US$2.8 million. The decrease in forage value would be compensated by the added value of decreased erosion. The issue of identifying substitute sources of fodder will have to be addressed by the Government.