Forestry funding

Funding sources

No estimate exists of total funding going to forestry worldwide. However, actual annual funding from all sources for core forestry alone is estimated at about US$ 13 600 million. When associated investments are added, this annual total could rise to about US$ 20 000 million.¹ By comparison, UNCED estimated forestry funding needs (in 'Combating Deforestation': Chapter 11, Agenda 21) in developing countries alone to be US$ 31 250 million annually between 1993 and 2000, of which US$ 5 670 million would be concessionary and grant transfers from external sources (Table 1).

¹ Core activities are: forest resource development, wood production and processing; associated investments cover agroforestry, non-wood forest products, infrastructure and institution building. Source: Chandrasekharan, C. 'Status of financing for sustainable forestry management programmes' In Proceedings - Denmark/South Africa/UNDP Workshop on financial mechanisms and sources of finance for sustainable forestry. Pretoria, South Africa. 4-7 June 1996.

Funding sources

Forestry funding comes from three main sources: domestic official allocations; external Official Development Assistance (ODA); and the commercial private sector (both domestic and foreign). Non-profit funding sources such as trust funds are also emerging, principally to support the environmental and conservation activities of NGOs or community groups. In all developing regions, high priority is given to investment in forest resources development, including establishment of plantations. In general, the developing countries also give prominence to forest industries, utilization or other value-adding activities, while their ODA external partners have recently tended to show increasing favour towards natural resource conservation.

Domestic official funding

At a recent meeting, forestry officials in Africa called for 'more emphasis on local resources, given that prospects for external funding are not encouraging'.² This may be even more important as the nearly insurmountable debt obligations faced by many countries may soon threaten their creditworthiness and therefore their ability to continue to attract international private sector funds. The large domestic financing gaps, however, will make increasing internal funding for the forestry sector difficult for some countries, and creative solutions will be required.

² Funding for forestry development in Africa. Report of an in-session seminar. African Forestry and Wildlife Commission. Tenth Session, Sanbonani, South Africa, 27 November-1 December 1995. FAO, Rome, Doc. FO:MISC/96/1.

In all countries endowed with productive forests, domestic revenues from forests can be an important source of funding. An official Forest Fund, which captures funds through, for example, levies or taxes, is one mechanism used by many countries. In Indonesia, for example, the national Reforestation Fund receives 32 percent of total revenue³ which now stands at more than US$ 700 million and is used to promote the establishment of private timber estates. Another means to boost revenues is to levy charges against beneficiaries on the range of services provided by forests, the most novel one being fees on water from forests. Taxation of downstream beneficiaries has for long helped to fund upland conservation in Japan. Colombia transfers some hydropower revenues to an upland watershed management fund.

³ Domestic sources of finance for sustainable forest management - the case of Indonesia. Dr. Achmad Sumitro (Indonesia). In Proceedings - Denmark/South Africa/UNDP Workshop on financial mechanisms and sources of finance for sustainable forestry. Pretoria, South Africa. 4-7 June 1996.

Official Development Assistance (ODA)
Level of ODA

ODA given to developing countries is far from being satisfactorily monitored, yet, of all funding sources, it is comparatively the best documented. Of the estimated total annual forestry funding, the level of ODA given to developing countries was US$ 1 545 million for 19 93⁴ (Table 1). There are no estimates of ODA given to countries in transition. This 1993 total of ODA is only about 27 percent of estimated ODA needs specified by UNCED.

⁴ This amount represents ODA provided for 'forestry projects' and excludes forestry components of non-forestry projects. It is suggested that the gap may be counterbalanced by forestry projects having 'non-forestry components'. OECD estimates bilateral ODA commitments of DAC (see footnote 5) member countries for 'Combating deforestation' for 1993, is only US$ 174 million; for multilateral agencies, the estimate is zero (but US$ 222 million for 1994), figures that seem far too low to be accurate; if correct then they indicate a very bleak situation. (see Financial Flow Statistics: Adjustments for Monitoring the Financing of Agenda 21. Background paper No. 7, Commission on Sustainable Development, Fourth Session, 18 April-3 May 1996, New York. Division for Sustainable Development).

ODA for forestry grew by US$ 119 million (3 percent) per year between 1990 and 1993, a considerably slower rate than the 12 percent per annum which occurred between 1988 and 1990.

Thus, while international calls for more sustainable forest management efforts by developing countries grow, ODA is either in decline or failing to grow. The slow-down reflects overall reductions in ODA, which in DAC⁵ member countries fell to an average of 0.30 per cent of GNP in 1993, the lowest ratio since 1973.

⁵ DAG: Development Assistance Committee; an informal arrangement for consultation among the principal donor countries.

Since UNCED, international opinion is that forests warrant preferential allocation of funds. A recent workshop on financing for sustainable forestry held in Pretoria, South Africa, for example, considered that 'both socio-economic and environmental benefits of forestry justify an increase in the sector's share of ODA which now stands at only 3 percent of the total'.⁶ Estimates suggest that forestry accounts for only about 1.6 percent of combined 1993 official and private funding transfers to developing countries.

⁶ Report on the workshop on financial mechanisms and sources of finance for sustainable forestry. Proceedings - Denmark/South Africa/UNDP Workshop on financial mechanisms and sources of finance for sustainable forestry. Pretoria, S. Africa. 4-7 June 1996. In 1993, the ODA for forestry represented only about 3 percent of the ODA for all sectors which totaled US$ 53 000 million.

Table 1
Estimated annual 1993-2000 needs for forestry funding compared with actual 1993 flows⁷
(US$ million)

⁷ FAO/NFAP Unit

Agenda 21, Chapter 11 Programme areas	developing country annual funding needsa
	total	domestic sources	External aid
			1993 flows
			UNCED needs	actual	percentb
A: institutional development	2 500	1 640	860	338	39
B: resources development	10 000	6 300	3 700	1 170	26
C: sustainable utilization	18 000	17 120	880	-	-
D: assessment and monitoring	750	520	230	37	16
Total for Chapter 11	31 250 (100 percent)	25 580 (82 percent)	5 670 (18 percent)	1 545	27

^a Estimate: UNCED, Chapter 11, Agenda 21.
^b Actual flows as a percentage of UNCED estimates of external funding needs.

Sources and distribution

Table 2 shows the main sources of forestry ODA, while Table 3 gives the breakdown of 1993 ODA for forestry by region. Table 2 shows the dominance of bilateral funding, nearly 40 percent of which came from European Union countries in 1993.⁸ Loans dominated funding from Multilateral Development Banks (MDBs), which accounted for about 27 percent of total ODA, up from about 18 percent in 1990. UN organizations accounted for about 13 percent of ODA in 1993, of which nearly 60 percent was from the World Food Programme.

⁸ Some bilateral funds in the form of loans have not been Included in these statistics. For example, in 1995 a German bilateral agency (KfW) gave loans for forestry projects worth DM 712 million (approximately US$ 500 million).

The regions differ in the degree to which UNCED ODA targets have been achieved. Forestry aid (as for all ODA) is concentrated on only a few recipient countries - overall, about 37 percent of the total 1993 forestry ODA flows went to Asia and Oceania, 31 percent to Africa and 20 percent to Central and South America (including the Caribbean). There is a strong tendency for donors to apply aid 'eligibility' criteria and priorities or preferences, with the result that many countries needing assistance are almost entirely neglected.

Details of the levels and uses of ODA for some developing countries have been documented through FAO surveys on forestry funding.¹⁰ In regions such as Africa, ODA is very important; the 1995 FAO survey revealed, for example, that during the period 1990-94, more than 60 percent of responding countries relied on foreign sources for the greater part of forestry funding.

¹⁰ Surrey results are given in; (a) Report on the in-session seminar on forestry investment in Asia and the Pacific. Fifteenth session of the Asia-Pacific Forestry Commission, Colombo, Sri Lanka, August 1993, Report No. FO:MISC/93/14, FAO, Rome, 1994; (b) Report on the in-session seminar on funding for forestry development in Africa. Tenth session of the African Forestry and Wildlife Commission, Sanbonani, South Africa, November-December 1995. Document No. FO:MISC/96/1, FAO, Rome, 1996; and (c) Survey on funding for forestry development in Latin America and the Caribbean. Doc. FO:LAFC/96/5, Nineteenth Session of the Latin American and Caribbean Forestry Commission Panama City, Panama, 17-21 June 1996, FAO, Rome, 1996.

Table 2
Level of ODA for forestry, 1986-93 (US$ million)⁹

	1986		1988		1990		1993
categories of donors	value	percent	value	percent	value	percent	value	percent
bilateral aid	434.5	57	723.0	65	937.3	66	915.7	60
multilateral development
banks (MDBs)	142.5	19	200.3	18	253.7	18	420.3	27
UN Organizations	188.0	24	191.6	17	234.3	16	208.5	13
total	765.0	100	1 114.9	100	1 425.3	100	1 544.5	100

⁹ FAO/NFAP Unit.

Table 3
Estimated ODA needs for forestry and actual realization by geographic region, 1993 (US$ million)

region	UNCED estimate of annual needs	1993 actual	ODA in 1993 as approximate percentage of UNCED target
Africa	1 960	472	24
Asia and Oceania	2 120	574	27
South and Central America and the Caribbean	1 470	316	22
Near East	120	78	65
former USSR and European countries in transition	not available	22	-
multiple regions	-	83	-
total a	5 670	1 545	27

^a All numbers rounded off.
Note: No specific provision was made by UNCED for interregional activities or for countries in transition and East Europe.

Private sector funding

Since 1991, the private sector has accounted for all of the increase in international funding flows and now represents some 60 per cent of total external transfers to developing countries.¹¹ Net international private capital flows reached US$ 190 000 million in 1993, up substantially from US$ 9 000 million in 1986 (in all sectors). However, foreign private capital is, like ODA, poorly distributed among countries and is volatile.¹²

¹¹ Mobilizing external financial resources for sustainable development. Report of the Secretary-General, Commission on Sustainable Development, Fourth Session, 18 April-3 May 1996. Doc. E/CN. 17/1996/4

¹² Most international private investment benefited only about ten countries: China absorbed the largest share, with the remainder going mostly to India, Malaysia, Mexico, Chile, Argentina, Turkey Egypt, Morocco and Tunisia.

There is renewed interest in encouraging the private sector to be involved in sustainable forestry. The issue is how to 'sell' forestry opportunities as being competitive with other investment options and how to reduce the private sector's perception of risk. Current thinking is that, to gain the business community's confidence, it is best to adapt to forestry the financing approaches that have already been proven in sectors other than forestry, rather than to develop completely new instruments.

The need for an enabling policy and institutional environment for private sector operations is crucial (see 'Evolving institutional framework' on page 99). Private sector funding requires well-developed capital markets, which only a few developing countries have. To counteract the danger of continuing the concentration of private capital on such countries and leaving the rest marginalized, public support (especially ODA) will be needed to develop capacity in the weaker countries, many of which are in Africa. The public sector will also be needed to channel funding to small-scale investors (such as farmers and local communities) that are unattractive to the private sector due to the high individual transaction costs.

It should be noted that major successes of private capital in forestry may hitherto have been limited to investments in industrial forest resources and in forest industries. Environmental activities have not performed well under venture capital and equity finance: of 64 venture capital firms active in the United States with a total of US$ 140 million invested in environmental firms in 1991, around 12 with less than US$ 35 million invested between them remained by 1995. Environmental and energy-related stocks have shown poor performance.¹³ This may carry a warning for forestry investments dominated by environmental objectives.

¹³ Environment and energy firms account for less than 2 percent of US venture capital. See; Financial resources and mechanisms - Addendum - Report of the Secretary-General: Current trends in resource flows and debt. Commission on Sustainable Development, Fourth session, 18 April-3 May 1996. Doc E/CN.17/1996/4/Add.l.

Combined public and private funding sources

National Environmental Funds (NEFs) and Conservation Trust Funds (CTFs) have emerged recently as sources of grants for conservation. They are funded jointly by government budgets, ODA sources, corporate or personal philanthropic donations, or from the proceeds of debt forgiveness or debt-for-nature swaps. Since 1990, approximately US$ 370 million have been provided through NEFs to 17 developing countries, mainly for NGO and local community protected area activities.¹⁴ The volume of NEFs and CTFs is thought to be equivalent to less than 10 percent of total forestry ODA.

¹⁴ National environmental funds: a potential source of financing for forest management and conservation. Mark Dillenbeck, IUCN US. Paper prepared for 19th Forest Advisors Group meeting, Rome, December 1994.

Innovative funding mechanisms The search for innovative mechanisms is driven by a perception that existing ones do not suffice. There is a wide array of new or re-activated ideas of varying practicality such as Resource Franchise Agreements, under which specified uses of forests are restricted in return for the payment of premiums equal to the best developmental use option. Almost all are focused on funding environmental forestry and therefore are not accessible for utilization activities, which will thus have to continue to rely largely on traditional funding sources. Innovative mechanisms are no panacea; continued attention must therefore be given to strengthening mainstream mechanisms by increasing allocations of domestic funds and ODA, as well as by ensuring better coordination, more even coverage of countries, and capacity building for better aid absorption. Forestry should also seek to capture some of the resources released by programmes of privatization and subsidy reduction currently under way in many countries implementing structural adjustment reforms.

A UN Working Group which recently assessed the feasibility of innovative mechanisms for financing the protection of the global environment called for innovative mechanisms to be pursued alongside existing efforts to increase ODA as a share of GNP.¹⁵ Any new approaches will complement debt-for-nature swaps, which are probably the oldest innovative mechanism. As of December 1992, these had generated approximately US$ 76 million for conservation in developing countries.¹⁶

¹⁵ Mobilizing external financial resources for sustainable development. Report of the Secretary-General, Commission on Sustainable Development, Fourth Session, 18 April-3 May 1996. Doc. E/CN. 17/1996/4.

¹⁶ Combating Deforestation and the Non-legally Binding Authoritative. Statement of Principles fora Global Consensus on the Management, Conservation and Sustainable Development of All Types of Forests. Report of the Secretary General - Commission on Sustainable Development. Third Session, April 1995. Doc. E/CN. 17/1995/3 14 February 1995.

A number of innovative instruments were identified at the Third UN Expert Group Meeting on Financial Issues of Agenda 21 (Manila, February 1996), of which some relevant to forestry and biological diversity conservation are shown in Box 1.

Issues

Shortage of information is a major problem. Poor information undermines proper diagnosis of needs, monitoring of progress, as well as priority setting and targeting for funding. At its March 1996 session, the IPF requested FAO, in cooperation with other relevant agencies and organizations, 'to continue gathering and collating information as well as increasing its accessibility by all interested parties'. The challenge will be to motivate governments, agencies and the private sector to offer information freely on a regular basis.

Information is particularly needed on: domestic funding (both public and private); international private sector flows; funding distribution among beneficiary countries and among major objectives; and monitoring of the contribution of innovative mechanisms. Improved quality and reliability of valuation information would help funders set priorities when allocating budgets.

Weak policies and institutions restrict many developing countries' absorptive capacity for ODA financing, discourage private sector activity, and limit the ability of governments to extend support to small-scale individual or community investors.

There tends to be concentration of investment and aid on a few countries. Concentration of private sector funding can be explained by preference for profitable investments. However, bilateral ODA is also poorly distributed - perhaps due as much to economic attractiveness of beneficiaries as to historical and foreign policy considerations. What is less clear, however, is why the multilateral agencies are not spreading their assistance more equitably.

Future priorities for action

At the macro level, there are already significant funding initiatives, most notable being the World Bank's 'Highly Indebted Poor Countries Debt Initiative' and the International Monetary Fund's 'Extended Reach Initiative' for countries with difficult investment climates. Within the forestry sector, a logical future agenda on forestry funding, prioritized according to urgency, would appear to be:

· improving the information base on funding;

· diagnosing major areas of inefficiency in mainstream sources of funding, proposing improvements, and searching for new and additional resources; seeking ways to solve the marginalization of the majority of developing countries from the international financial sources, with particular focus on:

(a) enabling them to capture significant private sector funding; and

(b) diagnosing the causes of poor spread of funding by multilateral institutions and promoting improvement; and

· continuing the international dialogue on innovative funding mechanisms. In the long term, overall economic development of all countries and capacity building both for public services and for support to the private sector will be the keys to success.

Box 1 Examples of innovative financing mechanisms17 Tradeable carbon dioxide permits: no revenue estimates known. The Earth Council plans to launch a shareholder-owned Global Environment Trading System (GETS) operating from 1999 on a pilot basis. Some carbon offsets are already occurring (Belize, Costa Rica, Czech Republic, Ecuador, Guatemala, Indonesia, Malaysia, Paraguay, Russia, Uganda and the USA (certain states). Diversion of earnings on other commodities to forestry: revenue potential undetermined. Example: Colombia diverting income from coffee price support reimbursements by the European Union to SFM. Bio-prospecting fees: Costa Rica Deforestation charges: Brazil, Central African Republic Ecotourism charges: Costa Rica, Kenya, Thailand; and scientific tourism fees: Costa Rica, Indonesia, Madagascar Watershed charges: Costa Rica, Brazil, Indonesia Tradeable reforestation credits: Costa Rica Tradeable conservation credits: Costa Rica, Mexico Fiscal compensation for conservation areas: Brazil (certain states) Biodiversity patents fees Tax on air transport: potential annual revenue US$ 1 000 million (under UN committee discussion and not yet operational) Global taxes for the environment: unknown revenue potential. Such taxes are only at idea stage and are far from operational. They would involve a tax on economic activities that have negative global impacts (not necessarily environmental), which would be used to finance sustainable development. The Tobin tax on foreign exchange transactions: potential annual revenue US$ 30 000 million; US$ 150 000 million according to recent UNDP-supported research. Still under discussion. Insurance: at speculation stage. North-South transfers: under discussion in academic circles Diversion of military budgets to sustainable development: at speculation stage. 17 Main information source: Report of the Third Expert Group Meeting on Financial Issues of Agenda 21. 6-8 February 1996, Manila. Japan/Philippines/AsDB/ UN-DPCSD. New York, 1996; especially the paper by Steele, P. and Pearce, D. Promoting private sector financing for sustainable development in the Asia-Pacific region.