Summary and conclusions

13. What does it take? Incentives and their impact on plantation development - Thomas Enters, Chris L. Brown and Patrick B. Durst^[144]

The purpose of this concluding chapter is to provide a synthesis of the nine country case studies, identify common threads and differences and present guiding principles for encouraging private sector investments in forest plantation development.

In general, the long-term nature of tree growing makes investments in tree plantations distinct from many alternative investment options. The synthesis therefore starts with a brief illustration of the characteristics in forest plantation investments.

Of all the incentives that have been provided not one emerged as “perverse”. Incentives are neither good nor bad. Viewed as policy instruments it depends very much on when they are used during the development of a country’s plantation estate. We will therefore look closely at the stages that the countries have reached, the continuum from initiation to maturation.

Direct and indirect incentives can be presented in a hierarchical order of sophistication. The order starts with the relatively simple provision of free seedlings, which is still a common incentive. It continues through such incentives as tax relief for individual entrepreneurs or adjustments of interest rates, which favours all investors. It reaches its highest level when policy instruments are applied, which create a favourable and attractive investment climate through the reduction of risks and the removal of structural impediments. We will move up the hierarchy and discuss aspects surrounding the provision of incentives and their impacts to complete the synthesis.

A significant, but not surprising, conclusion is that there is no single path to success. If this were the case, a blueprint for providing incentives could be prepared. Instead we outline some guiding principles that, if followed, will contribute to achieving a viable plantation sector. The principles are presented at the end of the chapter in the form of “do’s and don’ts” for plantation policies.

CHARACTERISTICS OF FOREST PLANTATION INVESTMENTS

There are several characteristics of plantation investments that strongly influence investors’ decision-making relative to alternative investment options. The most obvious is the long-term nature of growing trees, with a very high proportion of expenditures early on, and most of the revenues coming only at the end of a rotation. In short-rotation plantation forestry, rotations can be as short as five years. Typically, however, maturity is not reached before years ten to 20, depending on the production objectives. In temperate regions rotations are even much longer. This long gestation period adds greatly to the uncertainty and risk of plantation investments. The lack of regular cash flow often leads to liquidity problems and there are usually considerable difficulties in withdrawing from the investment before the trees have reached maturity. In addition, there are inevitable uncertainties about future prices of products and inputs - especially regarding the prices and marketability of the final plantation harvest.

Because of progressive income tax systems (under which tax rates escalate with increased income) and the large but periodic returns from a single plantation, individual investors can be hit with the highest marginal taxation rate in the year of harvest unless tax relief is provided. However, if continuous replanting takes place after clear-felling, then a less fluctuating revenue stream can be expected in the long run. The minimum commercially viable investment in a plantation is also likely to be large, relative to an investment in agriculture on the same land.

These uncertainties and characteristics give ample cause for investors to shy away from the plantation sector despite apparent advantages of investing in plantations (for example, expected increases in demand for wood products, diversification of investment portfolios, assuring long-term supplies for downstream industries, potential profits in the long run). Thus, there remain regular calls for assistance in the form of incentives.

A BRIEF HISTORY OF PLANTATIONS IN THE STUDIED COUNTRIES

The impact of incentives on plantation development differs from country to country, even where situations seem similar. The studied countries in which plantation development is often considered to be successful (for example, Australia, New Zealand, the United States of America) are all economically developed countries where the overall importance of agricultural production in the economy has declined relative to the other sectors, agricultural intensities and productivity are high, population pressures are low and most people reside in urban areas (Tables 1 and 2).

The decline in the importance of agricultural production in Australia, New Zealand and the United States has made (especially marginal) agricultural areas more readily available for growing trees, although in recent years tree growers have lamented the shortage of suitable land at affordable prices. In the other six countries, with perhaps the exception of Malaysia, land availability - especially access to suitable land with a clear title - remains a severe constraint. Even in Peninsular Malaysia, potential investors perceive land shortages as a constraint to tree growing (Krishnapillay and Ong 2003).

Table 1: Basic country data (2002)

Note: Data derived from http://www.worldbank.org/data/countrydata/countrydata.html

Common to all countries, natural forests have been, and in some countries (for example, Indonesia and Malaysia) still are, viewed as a considerable land reserve for agriculture and industrial development. In most countries, forest conversion rates were high as populations expanded and as long as agriculture was a considerable contributor to national development. At the same time, natural forests were viewed, overtly or intuitively, as standing capital to be liquidated to fuel economic development. As long as natural forests were extensive, there was no apparent reason to plant trees. In fact, forests were - and in some countries still are - viewed as barriers to development without due recognition of their environmental and other values.

Table 2: Forest resources

Source: FAO (2001)
¹ as of 2003 (NFI 2004)
² as of 2001 SFI (undated)
³ as of 1 April 2003 (MAF 2004).

Over recent decades, this view has slowly changed and the widening gap between demand and domestic supply (the fear of a timber famine) stimulated significant activities in the plantation sector in Australia, New Zealand and the United States of America as early as the 1920s. Notwithstanding the land shortage, in many countries, the plantation area has grown considerably. Does this mean that the conditions for plantation development have become more encouraging and/or that governments have selected the right incentives to turn an inherently risky investment into a lucrative venture? Before attempting to answer this question we turn briefly to forestry development and the historical planting trends in the case study countries.

Australia

Forests in Australia cover 155 million ha, with most classified as open savannah woodlands. Plantations make up slightly more than one percent of the forest area but contribute 60 percent of annual timber production. State forestry agencies initiated efforts to establish plantations in the late 1800s. Until the 1950s, the private sector played only a minor role in the plantation sector. By the early 1970s, around 500 000 ha of plantations (predominantly softwoods) had been established. Steady progress until 1990 saw the Australian plantation estate increase to more than one million ha. Since 1995, a rapid acceleration in private planting (predominantly hardwoods) has seen the Australian plantation estate increase to about 1.67 million ha (NFI 2004). Large areas of plantations were transferred from the public to the private sector in the late 1990s, through privatization/corporatization of state (public) plantations. Today, about 57 percent of the plantations are in private hands. In 1997, the industry and government developed a partnership, called Plantations for Australia: The 2020 Vision, to develop plantations and processing industries. The partnership aims to extend the plantation estate to three million ha by 2020. However, since 2000 annual planting rates have decreased from about 137 500 to 42 300 ha in 2003, mainly due to a shortage of suitable land at affordable prices and uncertainty over tax provisions, which was only resolved in April 2002 (NFI 2004). Hence it is questionable whether the target set by The 2020 Vision can be reached.

China

Forests in China cover 163.5 million ha, with plantation forests totaling 46.7 million ha, or 29 percent of the total forest area. For much of the twentieth century, the forest area of China was in decline, reaching a low point measured by the second forest inventory (1977-1981) of 115.3 million ha (12 percent national forest cover). Much deforestation was a direct result of overharvesting and insufficient investment in forest regeneration. This negative trend was reversed with the initiation of the Three-Norths Shelterbelt Development Programme in 1978. By 1999, more then 25 million ha had been planted under the programme. In the late 1980s, China started a number of large-scale afforestation and reforestation projects, which accelerated planting rates even further. Extensive tree planting has been coupled with logging bans in natural forests, which highlights the urgency of a shift to plantations. Moreover, the government is seeking to raise the forest cover to 19.4 percent (by 2010) and 26 percent (by 2050). Recent statistics suggest that plantation establishment has picked up the pace. The establishment rate for 2002 is reported to have exceeded seven million ha. Forest lands in China are owned by either the state (42 percent) or by forest collectives (58 percent), with most collective forests managed by rural households under contractual arrangements. Collectives, including the private sector, dominate ownership of forest plantations, while state forests primarily comprise natural forests.

India

In India, forests cover 67.5 million ha or 22 percent of the total land area. Forest plantations total 32.6 million ha, constituting more than 50 percent of the total forest area. India’s forests are under tremendous pressure due to the country’s large population. Approximately 3.4 million ha of forest were cleared between 1951 and 1972, mainly for agricultural purposes. The planting rates between 1956 and 1979 ranged from 62 000 to 244 000 ha (Pandey 2000). Until the mid-1970s, forest plantations played only a minor role, extending over approximately three million ha. This changed in 1976, when a National Commission on Agriculture report identified the potential of plantations to meet the shortfalls in industrial wood and fuelwood production. The following 15 years were marked by numerous social forestry projects, which led to an annual expansion of the plantation estate by about 1.7 million ha. Donor support for most forestry projects ended in the early 1990s. This triggered a shift from social forestry to Joint Forest Management (JFM) - by 2003 more than 84 000 JFM groups were managing over 17 million ha of forest land (Bahuguna 2004) - and enabled the private sector to claim a greater stake in forest plantation development. Annual planting rates have slightly dropped to about 1.5 million ha. Of the total forest plantation area of 32.6 million ha more than ten million were planted by farmers and public and private institutions with seedlings distributed by forestry agencies (Pandey 2000).

Indonesia

Indonesia has undergone significant deforestation, with around 60 million ha of forests cleared since 1950. Officially, the country’s forest area stands at around 105 million ha (FAO 2001), although numerous sources put it at around or below 100 million ha in 1997 (FWI/GFM 2002). As the current rate of deforestation is officially acknowledged to be around two million ha per annum, actual forest cover has probably fallen below 90 million ha. Indonesia has almost ten million ha of forest plantations, including approximately 3.5 million ha planted with rubber (Hevea brasiliensis). Until about 1990, the involvement of the corporate sector in plantation development was negligible. Smallholders on the other hand had always played an important part in the plantation sector and had established 4.6 million ha as early as 1969 (Booth 1988; cited in FWI/GFM 2002). Officially, between 1990 and 1997, when Indonesia was affected by the Asian financial crisis, about 1.6 million ha were planted, although doubts about the accuracy of this figure remain. The crisis, subsequent political changes, poor law enforcement and land-use conflicts continue to keep investors away from Indonesia’s forestry sector. From 230 000 ha in 1997, the planting rate dropped to 78 000 ha in 2000.

New Zealand

New Zealand’s forests cover more than 7.9 million ha, of which about 1.8 million ha are plantations. Large-scale plantation establishment began in the early twentieth century, with a significant acceleration during the Great Depression of the 1930s. By 1936, almost 300 000 ha of plantations had been established. The government initiated a second wave of tree planting in the early 1960s, driven by Forest Service planting and incentives to the private sector. By the mid-1980s, the national plantation estate covered more than one million ha. Large-scale deregulation of the New Zealand economy included the privatization of many state-owned assets including the vast majority of the plantation forests. Since the mid-1990s, a third wave of private sector planting has markedly expanded the plantation forest area in New Zealand. New plantings peaked in 1995, when close to 100 000 ha were established. At 14 900 ha in 2003, new planting is well below the average afforestation rate of the last 30 years (MAF 2004).

The Philippines

In the Philippines, forests cover 5.8 million ha or 19 percent of the total land area. Forest cover has declined substantially since the mid-1930s, when the natural forest area was estimated at 17 million ha, and deforestation remains a problem. Through the 1950s until the late 1970s, forestry was a mainstay of the Philippine economy. Forest plantation establishment in the Philippines largely dates from the Presidential Letter of Instruction No. 145 in 1973, which issued a directive to promote the establishment of plantations and tree farms. Between 1980 and 1985, plantation development was accelerated through the Industrial Tree Plantation (ITP) Programme that attempted to directly involve timber license agreement holders in tree growing. However, the bulk of the plantations was established by the government. Of the 750 000 ha, most were planted in the late 1980s and early 1990s, with very little expansion since the Asian financial crisis started in 1997.

Sabah (Malaysia)

Forests in Sabah (Malaysia) cover 4.56 million ha, or almost 61.8 percent of the total land area of the state. Almost two-thirds of the plantations in Sabah have been planted since 1990. In 2001, plantations extended across 146 311 ha. Acacia mangium is the most common plantation species, comprising more than half of all forest plantations. Forest plantation development started in 1973. In contrast to Peninsular Malaysia, tree planting was initiated through state corporations and later was followed by private and public companies. During the 1990s, annual planting rates averaged about 10 000 ha. Despite the government’s efforts to encourage forest plantation development, tax incentives alone did not sufficiently stimulate investments in tree growing. This is clearly reflected by the fact that the current establishment ratio of oil-palm to forest plantations is about 6:1. Between 1995 and 2000, the area under oil-palm has increased twice as fast as forest plantations. Between 2000 and 2001, forest plantations even declined by approximately 8 000 ha. There are several reasons for the lack of interest in forest plantations including limited land availability, high land rents and premiums (a one-time payment) for forest plantations compared to other land uses, competition with agricultural plantations (mainly oil-palm), and the much higher financial returns that can be gained by investing in oil-palm plantations.

Thailand

Forest cover in Thailand totals 14.8 million ha, with a plantation estate comprising 4.9 million ha, or 33 percent of the total forest area. Thailand’s plantation estate is dominated by rubber plantations, which constitute 43 percent of the total plantation area. In 1961, the country was estimated to have forest cover amounting to 27.4 million ha. During the next 30 years, forest cover declined by approximately 45 percent, prompting the government to impose a total ban on harvesting in natural forests in 1989, in the aftermath of a major flashflood in Thailand’s south. Plantation development over the same period was modest. Between 1961 and 1991, the Royal Forest Department, the main engine of plantation development (with the exception of rubber plantations), established 540 000 ha of forest plantations. The turning point in Thailand’s forestry sector was the imposition of the logging ban. In late 1992, the Royal Forest Department was formally directed to shift its focus from forest exploitation to forest conservation. The Re-afforestation Act of 1992 was specifically designed to encourage the private sector to develop forest plantations. For the next five years, the government initiated numerous projects (for example, the Private Reforestation Extension Project, Fast-growing Trees Reforestation Project, the Reforestation and Extension Project in the Northeast of Thailand) that triggered a surge in plantation development. There is a severe lack of accurate data on area covered by plantations. It appears that between 1986 and 1997 the area planted with eucalyptus increased from 53 500 to 438 500 ha. However, as in Indonesia, the expansion in Thailand was short-lived owing to the Asian financial crisis. Only rubber plantations continued to attract interest.

The United States

The United States of America has approximately 226 million ha of forests extending over almost 25 percent of the country. Two-fifths of the country’s forests and other wooded lands are owned by the State (much of this in the west and mountainous regions, and Alaska) and other public institutions; most of the remainder is owned by private individuals and forest companies. Forest plantations cover 16.2 million ha, and constitute approximately seven percent of all forests. Tree planting was of little significance before the Second World War. Between 1945 and 1976, it was fuelled by high timber prices, technological advances and favourable tax policies. Private owners planted 11.7 million ha during the period. Private tree-planting areas increased ninetyfold from an annual area of 6 408 ha in 1946 to 579 000 ha in 1976, representing an annual increase of 16 percent. From 1977 to 1999, there was a phase of steady growth. The area planted reached a record level of 1.3 million ha in 1988, when tree-planting under the Conservation Reserve Program was at its peak. Private tree planting still expanded but at a much lower annual rate of 2.4 percent. In 1999, the private tree planting area was about one million ha. The rate of tree planting by the forest industry declined during the second half of the 1990s owing to the sluggish prices of forest products, restructuring of the forest industry, the sale of timberlands to other corporations and the forest industry firms’ new emphasis on productivity rather than size of timberland ownership.

SIMILARITIES AND DIFFERENCES IN PLANTATION HISTORIES

While there are some clear differences with regard to forest plantation development in the nine countries, there are also some similarities.

Although in some countries data are of variable quality, which complicates an assessment of developments in the forest plantation sector, two general conclusions can be drawn. First, there has been a pronounced shift from public to private sector involvement, which includes large-scale corporate investors, forest industries, farmers and local communities. In Sabah and the United States, the bulk of the plantations was always in private or semi-private hands. In several countries, the government had initiated tree growing on its own or with the assistance of donor-funded projects. Although in most countries there had always been attempts to bring in the private sector, greater involvement of private growers started only during the 1980s and in some countries (for example, Thailand, Indonesia) only in the 1990s.^[145] Shifts were most dramatic in New Zealand where the government sold off most of its plantations during the 1990s. Of the 1.827 million ha estate, today the State holds only a meager 87 000 ha (MAF 2004).

Second, most of the plantings started during the 1980s, peaked during the mid- to late 1990s and have since then slowed down, with the exception of China. There are numerous reasons for this quite uniform development. Australia, New Zealand and the United States of America have reached the maturation or consolidation stage, although each country intends to continue expanding its plantations. However, land-use competition and lower than expected forest product prices since the price spike of the early 1990s, have dampened investor interest to some extent. Also, the number of plantations that are reaching the end of their first rotation is increasing steadily. For example, in parts of Australia, plantations are into their third rotation (Roberts 2002) and the area harvested is increasing rapidly, so that some new investment funds are being directed to re-establishing sites after harvesting, rather than planting of new sites (NPI 2004). In other words, reforestation is replacing afforestation, a clear indication of having reached maturity.

China and India find themselves in the early acceleration stage. The economies in both countries have been growing steadily during the past ten years. This development freed financial resources for the expansion of plantations. The transfer of responsibilities to communities (India) and households (China) also assisted state efforts in tree growing. Due to land shortages in India (mainly artificially generated due to land ceiling laws) progress in plantation development has somewhat slowed but maturation is not yet in sight. The private sector shows great interest in covering larger areas with trees and many companies collaborate closely with farmers in wood production (Lal 2004).

Indonesia, the Philippines and Thailand are still at the initial stage of plantation development. This is not to say that tree growing in these three countries does not have a history. It is rather that the involvement of the private sector is in its infancy. There are two main reasons. First, for decades the three countries viewed their natural forests as an inexhaustible resource. To some extent, this continues to remain the case in Indonesia. With regard to the forests being considered an inexhaustible resource, the imposition of logging bans in Thailand and the Philippines indicates that forest departments have had a change of mind. Both countries were unprepared for the impacts of the bans on wood supplies. Although substantial efforts were undertaken to involve the private sector in tree planting and, sometimes, generous direct incentives were offered, progress almost came to a complete halt when the Asian financial crisis hit in 1997. Although developments in Indonesia are not a mirror image of what happened in Thailand and the Philippines, private sector development never really got off the ground. Annual planting rates between 1993 and 1998 averaged 250 000 ha in Indonesia, but they were reduced to negligible levels in the late 1990s. The former approach to large-scale plantations led to land-use conflicts and a new beginning will have to be made. Also, as Potter and Lee (1998, cited in Williams 2001) observed, even the subsidized returns from the fast-growing plantations, the industrial timber plantations, or hutan tanaman industri (HTI), were rather unattractive. Oil-palm on the other hand was, and still is, a more lucrative crop.

Sabah is a special case. State corporations and companies played a major role in tree growing right from the start in 1973. Planting rates were steady, although the recognition that considerably higher returns could be achieved on alternative investments (such as oil-palm), led to a decline in interest. Plantation development never accelerated sufficiently to reach the maturation stage and currently the area covered is barely stable or perhaps even in decline.

USE OF INCENTIVES IN ASIA AND THE PACIFIC

A variety of incentives have been used throughout the Asia-Pacific region. Comparisons among the studied countries are necessarily broad, since even schemes that are generically similar differ in detail. As a very simple example, there is little potential for analysing the “price sensitivity” of plantation growers to various cash grant schemes, since circumstances in different countries (and over time in the same country) vary markedly. Similarly evident is the incompatibility of various tax concessions offered in countries. However, a broad evolutionary hierarchy can be perceived in the types of incentives offered at different stages of plantation development (Figure 1).

Figure 1: Incentives and plantation development over time

In most countries covered by the study, forest plantation development on a significant scale was initiated by the State, which supports the argument that an initial critical mass is necessary to ensure private-sector involvement in plantation development. Once the involvement of the private sector is sought more directly, the use of incentives appears to progress gradually from provision of free inputs, to grants and loans, to tax concessions, to joint venture arrangements and finally to a focus on creating an enabling environment and removing structural impediments (Table 3).

Table 3: Plantation development and incentives (reported examples)

Early government efforts to engage the private sector in tree planting have tended to focus on the provision of physical incentives. In the United States of America and New Zealand, one of the earliest incentives was land grants, which encouraged settlement and, under certain conditions, tree planting. As long as governments maintained extensive land banks in sparsely settled regions this was a relatively low-cost incentive, which promoted both tree planting (not necessarily very effectively) and settlement. More recently, China has provided significant land allocations to farmers for tree growing.

The provision of free-of-charge seedlings and fertilizer has also been a common physical incentive. Such free inputs are appealing because they are straightforward and less intimidating - especially to small-scale investors - than more bureaucratic incentives such as grants and subsidized loans, which may require complicated forms and paperwork. However, free physical inputs often do not stimulate planting as effectively as cash grants, because most grants are financially more attractive and provide more flexibility than often bulky physical inputs. Yet, many forest agencies still favour the provision of free or low-cost seedlings because within their own administrative systems funds for nursery activities can be easily budgeted.

Cash grants and concessionary loans have proven popular at various times in most of the studied countries. These instruments have engendered significant planting in China, while in Thailand the effectiveness of grants was mixed, mainly because they were not sufficiently attractive. In a number of the studied countries, these more direct financial incentives have been followed by a more complex approach - namely, the offering of tax concessions for plantations. Tax breaks - which have been notably successful in Australia, New Zealand and the United States of America - can be especially effective in helping bridge the long gap between the initial plantation investment and later harvest revenues.

More recently, several countries, which earlier focused mainly on physical incentives and later indirect incentives, have shifted to the emphasis on enabling incentives, removing structural constraints and creating an attractive environment for plantation investment.

DIRECT INCENTIVES - WHAT CAN THEY ACHIEVE?

Assessing the impact of direct incentives in isolation from indirect and enabling incentives is very difficult, and the results can be misleading. In an environment characterized by strong disincentives (for example, complex requirements for obtaining permits for cutting, transporting and processing wood, low timber prices, inconsistent policies, high fire risks, high land prices, high interest rates, uncertain marketing opportunities) and an opaque bureaucracy, direct incentives may have only marginal effects. In the worst cases, they may lead to misallocation of funds, trigger investments in plantations that are ultimately not viable, or have long-term negative impacts on interest in growing trees.

Owing to a lack of monitoring, it is difficult to determine the extent to which direct incentives have accelerated planting relative to other factors. In some locations, extensive areas have been planted without direct support, which suggests that funds have sometimes been spent inefficiently or unnecessarily.

On the other hand, when the general investment climate is favourable and demand for wood increases, direct incentives can definitely increase the speed with which the private sector is drawn to forest plantations. The most effective direct incentives include tax concessions and favourable capital gains treatment. Loan and grant schemes have achieved mixed results - some being more generous than others - and have favoured predominantly large-scale investors.

There are five caveats to this general assessment:

• Direct incentives are difficult and costly to administer, and it is questionable whether the high transaction costs they incur make them an efficient tool, particularly for attracting small-scale investors;

• Tax concessions can only work if investors actually pay taxes. This is especially significant in countries where paying taxes is sometimes seen more as an option than a requirement;

• Direct incentives are easily abused. Free seedlings may be resold, loans used for unintended purposes and corruption is virtually impossible to control;³

• Direct incentives are frequently flawed if they are designed according to the interests of the provider (usually the government), rather than with the needs of the recipients in mind;

• In some instances, World Trade Organization rules or national policies may preclude the use of certain types of overtly protectionist incentives such as import restrictions.

INDIRECT INCENTIVES - A SOLID FOUNDATION FOR INVESTMENTS

The study results indicate that variable and enabling incentives generally play a much larger role in encouraging investments than direct incentives. Direct incentives can influence the speed to some extent, but not the direction of investments, or more general change.

As commercial investments in forest plantation development aim to maximize financial returns, high timber prices - and the perceptions that prices would continue to climb in the future - have sometimes triggered investments in tree growing. Perhaps the most attractive and tempting recent stimulus for many investors in Asia and the Pacific was the global spike in wood prices in 1993 and 1994, which triggered a planting boom in many countries. Conversely, when wood prices have been low generally, or especially where prices have been kept artificially low, plantation investments have been sluggish. Under such circumstances, investor interest is seriously dampened irrespective of the provision of other incentives. Examples include:

• Price controls, as they existed in New Zealand until 1965;

• Depressed timber prices due to cheaper imports (for example, Canadian exports to the United States);

• A policy of cheap raw material for the wood-processing industry (for example in Indonesia); and

• Illegal logging (for example in Indonesia and India).

Prices also need to be reasonably predictable and provide returns to investments comparable to, or better than, those from similar land uses (for example, oil-palm, rubber or pastoral farming). In Malaysia, current returns to investment in oil-palm are considerably higher than for fast-growing trees, thus discouraging potential investments in forest plantations. Alternative investment opportunities will always compete with forestry and even where the plantation sector is well established some investors may switch to other land-based investments such as dairy farming, as indicated by Terry McFadgen, the former chief executive of Fletcher Forests Ltd. in New Zealand. In early 2003, he warned that “if the forestry industry continues to perform at its current level and if dairy continues to perform better, then yes there will be some conversions” (Graham 2003). There never appears to be much room for complacency, even in a “success-story” country such as New Zealand.

A key factor in obtaining significant levels of investment in plantations has been political, institutional and macro-economic stability. Although it is difficult to disentangle specific factors from the overall investment environment, it is clear that investments are forthcoming when risks are perceived to be low and governments signal unambiguous support for private-sector involvement in plantation development (Clapp 1995). This has not been the case for the Philippines and Indonesia, which explains to a considerable extent the relatively poor performance of tree-planting by the private sector in these countries.

A crucial factor is resource security. The decollectivization of land and forest tenure in China, beginning in 1978, provides an excellent example of the importance of respected and protected property rights. A principal goal of the reform was to encourage farmers to manage forest resources sustainably and to plant trees. The reform has been neither smooth nor uniform, and forest tenure arrangements often vary even among townships. Consequently, not all collectives have been equally enthusiastic. However, a clear pattern is discernible: where decollectivization has gone furthest there have been significant increases in investments in tree growing (Lu et al. 2002).

Just as clear tenure arrangements have underpinned the success of forest plantation development in Australia, New Zealand, the United States of America and parts of China, uncertain tenure has constrained investment in Indonesia, Thailand and the Philippines. In extreme cases, tenure and land-use conflicts have resulted in the destruction of plantations and equipment (Kartodihardjo and Supriono 2000), which is certain to deter investors.

In New Zealand, the development of infrastructure (for example, roads, railways, modern port facilities, hydro-electric power stations) by the government paved the way for large-scale processing initiatives and assured potential planters that the government was serious about developing a viable plantation sector. Similar developments occurred in Australia and the United States of America. These measures were complemented by increased research and extension, which reduced risks, raised yields and effectively lowered the costs of plantation establishment.

In several countries, policies are in place to encourage plantation development, but little is done to translate them into action on the ground. It is critical to follow up supportive policies with strategies and actions that provide a tangible framework to encourage and enable investment. This may include examining incentive structures across all sectors of the economy to ensure a level playing field for investments in forest plantations. The role of the public sector as a forest owner and manager should regularly be reviewed to ensure that public-sector plantations do not compete unfairly with private-sector investments. Public-sector plantations are affected differently by taxes and land prices and often determine log prices and log allocation, as has been the case in Australia. In addition, the rates of return from public-sector plantations may not reflect the market cost of capital.

Removing impediments to plantation development often means reducing or eliminating subsidies in other directly competing sectors of the economy, especially in agriculture. In Thailand, for example, financial support through the Rubber Plantation Aid Fund for the replanting of rubber amounts to approximately US$1 000/ha, whereas the Private Reforestation Extension Project offered less than half that amount for timber plantations. If governments are truly committed to augmenting wood supplies, then such substantial differences provide the wrong signal to investors. Other factors may also sour the investment climate for plantations relative to other sectors, such as when markets for plantation products are restricted in discriminatory fashion, or when foreign investments in plantations are constrained relative to other sectors.

A key point is that policies need to be consistent over time. Frequent policy changes result in increased risks and provide a climate of insecurity for investors, especially given the inherently long-term nature of plantation investment. In some countries, frequent changes of government have resulted in repeated changes in policies and the erosion of support mechanisms. For example, between 1982 and 2002 Thailand had ten governments, and the new governments rarely followed the paths of their predecessors. Political stability has also led to conflicting policies and constrained investments in the Philippines and Indonesia.

In most countries, the expansion of plantations has been to some extent paralleled by increasing objections over the use of natural forests for timber production. As concern over the fate of natural forests increased, decision-makers passed a variety of harvesting restrictions in many countries (Durst et al. 2001). While this provided a window of opportunity for investments in plantations, environmental concerns over monoculture forest plantations also translated into a worry for investors. In Thailand, environmentalists warned that, “commercial eucalyptus plantations are incompatible both with forest conservation and with village livelihood(s)” (Lohmann, 1990, p. 9; see also Lang 2002). Although the discussion on the environmental impacts of plantations, especially related to catchment hydrology, is plagued by myths and misperceptions (Cossalter and Pye-Smith 2003), environmental campaigns against tree plantations have clearly affected investor behaviour in some countries, including the United States. In addition, it led to the condemnation of some “exotic species” such as Eucalyptus camaldulensis as an inherent evil, in many countries in Asia.

Finally, it must be asked whether incentives in any form are justified on social grounds. Forest plantations generate employment, but this benefit may be outweighed by job losses in agriculture at the local level and by the costs of significant restructuring in local economies (Tonts et al. 2001). In Australia, for example, there is widespread unease about the impact of plantations on demographic, economic and social structures. Key responses that have been used by both plantation companies and governments to resolve concerns include information dissemination, improved communication and consultation strategies, adjustments to statutory and strategic planning systems, and collaborative approaches that bring different stakeholders closer together (Schirmer and Tonts 2002).

Where social benefits are insignificant, the private sector, and particularly the processing industry, has an important role in motivating landowners to plant trees. In India, a legal ceiling on landholdings prohibits private companies from establishing large-scale plantations. To overcome this constraint, private companies have offered a number of incentives to smallholders, including technical assistance and buy-back guarantees (Saigal et al. 2002). Similar arrangements have been put in place in other countries (for example, Australia, Indonesia, New Zealand, the Philippines and Thailand), which indicates that private companies may be in a better position than governments to reach small-scale growers through outgrower schemes (Desmond and Race 2003).

There is broad agreement that high social benefits, coupled with insufficient or even negative private returns, are a rational justification for offering incentives to investors. However, in many cases the social benefits are not obvious, nor is tree-growing inherently unprofitable. Applied economic analysis is rarely used to assess whether a particular level of support is justified. This is not surprising, since broad agreement on how social benefits should be valued is even more elusive. Thus, incentives tend to be offered based on less tangible criteria, including in some cases political manoeuvring and favouritism.

CONCLUSIONS

The roles played by the private and public sectors in forest plantation development have undergone major changes in Asia and the Pacific, although the level of success in attracting private investors to plantations varies considerably. Plantation development can be divided into three stages: initiation, acceleration and maturation. Australia, New Zealand and the United States had reached the maturation stage by the 1990s, but most Asian countries are still in the initiation or early acceleration stage.

Direct incentives are most likely to be important in the initiation stage, to raise awareness and to increase the pace and scale of plantation establishment, especially to build up raw material supplies for a nascent processing sector. However, they can only be effective if an enabling environment already exists or if investors feel that first steps towards creating an enabling environment have been initiated. Direct incentives should be complemented and ultimately replaced by variable incentives and accompanied by research and extension. If a direct incentive becomes obsolete in the acceleration stage, this is a good sign of its success (Williams 2001).

Over the long term, a favourable investment climate, research, technical assistance and well-established markets usually have greater influence than direct incentives such as free seedlings, subsidized credit or cost-sharing of planting expenses. In countries with a long history of providing incentives, it has become evident that incentive systems must be timely, well-targeted and flexible if they are to engage the private sector in forest plantation development successfully.

In countries that have reached the maturation stage, it has been recognized that key measures to maintain private-sector interest in plantation development are related to the reduction of barriers and the removal of structural impediments and operational constraints. Some measures such as providing adequate tenure arrangements and resource security are difficult to undertake, but crucial to success. Others such as tax reforms, removing unnecessary regulations and eliminating bureaucratic procedures (licensing and permits) are just as important and in many cases easier to realize. While there is no single effective strategy, it is possible to outline some guiding principles that will contribute to achieving a viable forest plantation sector.

Guiding principles for plantation policy

Most people agree that forest plantations can help meet the increasing demands for wood and provide public goods and services, although in some cases they can also have negative social and environmental impacts. Most people also agree that appropriate incentives - particularly enabling incentives - play a key role in stimulating plantation development. However, there are two caveats that need to be considered. The first is to recognize that the forestry sector is not alone in asking “What does it take?” The agricultural sector has its own advocates, often backed by generous incentives of their own. Proponents of forestry need to recognize that alternative land uses may offer similar, or even greater, benefits to society. Under such circumstances it may be pointless to offer incentives for plantation development, since it may be more economically efficient to invest in alternative land uses.

The second caveat concerns the conventional belief that timber shortages will assure lucrative markets for wood indefinitely into the future. Recently, however, warnings of the exact opposite scenario have emerged, suggesting a possible timber glut in the future (Adams 2002). If this proves true, promoting too many plantations now may result in a rude awakening down the road for investors and those who encouraged them.

A final observation from the studies is that, in a historical context, incentives have largely been applied in an ad hoc manner. As improved understanding of the mechanisms and conditions related to economic growth and development has evolved, it has become apparent that, in many instances, plantation incentives have been less successful than they might otherwise have been, had various disincentives to plantation establishment also been addressed and had governments directed their attention also to creating enabling environments. Just as good physical site preparation is important for enhancing tree growth, so too, preparing a favourable policy and administrative foundation is crucial for supporting successful plantation development.

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