Forestry and the New Institutional Economics

An Application of Contract Theory to Forest Silvicultural Investment

Sen Wang, G. Cornelis van Kooten

• Publisher: Routledge
• Year: 2018
• Topic: Business
• eBook ISBN:
  9781351740357
• Subtopic: Business General
• Index: Business

This title was first published in 2001. Using a case study from British Columbia, this book addresses the economies of institutions, institutional change and transactions costs and develops the theory of the New Institutional Economics in the context of forestry institutions. This approach to economic analysis of forestry investment problems will emphasize the understanding of the linkages between the biological as well as institutional attributes of forestry activities.

1 Introduction

Forests are one of the most important natural resources on the planet, covering some 4.3 billion hectares (ha) or one-third of the world’s land area. Yet, this is less than the area capable of growing trees, which amounts to some 40% of the earth’s landmass. Forests are important as a source of income and employment because of the wood products industry, but they also contribute ecosystem services such as a carbon sink and weather regulation functions, absorb pollutants, provide recreational and scenic amenities, contribute wildlife habitat, and protect watersheds. Therefore, management of forestlands for both commercial timber production and other amenities is vital to the overall well being of society.

Of the globe’s forested area, 2,900 million ha or 68% is considered productive forestland, defined as land capable of growing merchantable stands of timber within a reasonable period of time (see Table 1.1). It is estimated that the standing volume of timber on productive forestlands is some 320 billion cubic meters (m³). Canada’s forests account for about 10% of the world’s forested land and 8% of its productive forestland; the United States accounts for about 7% of the world’s total forested land and the same proportion of productive forestland. As a country, only Russia has greater forest resources (Table 1.1).

The USA is the largest producer of softwood lumber and wood products in the world, followed by Canada and Russia (Tables 1.2). Some 70% of total roundwood and 90% of all the paper products produced globally come from forests in northern latitudes (Table 1.2). The majority of wood products are produced from coniferous forests in the Northern Hemisphere.

Production of pulp from hardwood species has become increasingly important as a result of technical advances in pulp making and the existence of substantial indigenous (boreal) stands of mixed hard and softwood species, and the use of hardwood species in plantation forests. Principal producers of pulp and softwood lumber are the USA, Canada, Sweden, Finland, Russia and Japan. Among tropical countries, only Brazil produces globally significant amounts of pulp, although the amount is relatively small (less than 5% of world production). Countries such as Chile, New Zealand and Australia are also expected to become important, at least in export markets.

Table 1.1: World Forest Resources

Table 1.2: World Forest Products Output (1997)

Tropical forests do not contribute large amounts to global industrial wood output. Even for countries such as Brazil that are significant in terms of pulp production, fiber comes from plantation forests. Less than one-third of the world’s industrial wood harvest originates with old-growth forests, or forests that have not previously been commercially exploited (Table 1.3). Commercial timber production from old growth occurs principally in Canada, Russia, Indonesia and Malaysia (Sedjo 1997). Industrial plantations account for more than one-third of industrial wood harvest, with the remainder accounted for by second-growth forests. The continuing trend toward intensively managed plantation forests occurs for both financial reasons and concerns related to security of supply, with increasing investment in the technology of growing trees stimulated by declining global reliance on old growth – the dwindling of the “old growth overhang” (Sedjo 1997). Increasingly trees are considered an agricultural crop, with rapidly growing trees competitive with annual crops as a land use (as is the case with loblolly pine (Pinus taeda) plantations in the US South and hybrid cottonwood plantations on irrigated agricultural lands in the US Pacific Northwest).

Table 1.3: Global Timber Harvests by Management Type

Canada is the world’s foremost exporter of wood products followed by the USA and the countries in Nordic Europe. Compared to other timber producing regions in the world, Canada and Russia are likely at a disadvantage in timber production because of climate (particularly in the interior regions of these countries); to a lesser degree, the same might be true of the Scandinavian countries.

Timber shortfalls have been forecast for the US Pacific Northwest and South and Canada, particularly British Columbia (BC). In BC, a “fall down” in timber production is predicted because of the time lag between the availability of virgin forests and second growth. This is caused by past delays in plantings and silvicultural investments and the mere fact that old-growth forests contain greater timber volume and are increasingly being set aside as protected areas. Globally these shortfalls will likely be covered by production of radiata pine (Pinus radiata) from Chile and New Zealand. Unless adequate investments are made in planting and silviculture, countries such as Canada will decline in importance in terms of world timber production. Unfortunately, reforestation and silvicultural investments on many sites are often uneconomic and it may well be that forests in these regions provide non-timber benefits to society that exceed their commercial timber value.

This book is about silvicultural investment and forest institutions, with particular focus on British Columbia. BC is chosen because it is currently the largest forest products exporting region in the world and its economy is likely more dependent on forestry than any other economy in the world (Wilson et al. 1998). Thus, the rapid technological and social (e.g., increasing demand for environmental services of forests) changes that are occurring in the sector are going to have a profound impact on the Province’s economy and institutions. Although this book focuses somewhat narrowly on British Columbia and silviculture, the lessons that it provides have implications, nonetheless, well beyond the Province and the world’s forestry sector. Even so, it is enough to consider only forestry and silvicultural investments in temperate forests because forests harbor much of the globe’s biodiversity, serve as a symbol of the planet’s health and are profoundly affected by silvicultural decisions in one location because the forest products sector is a globally-interdependent whole.

1.1 Background on British Columbia’s Forestry Sector

Within Canada, the Province of British Columbia, which is the country’s westernmost province, accounts for about half of all wood products output. BC has a population of 3.7 million and covers 96 million ha, of which forestland accounts for about 64%. Productive forest amounts to 51.1 million ha. A major factor in the exploitation of forest resources and the development of forest policy is that more than 95% of the forestland is publicly owned, almost entirely (excepting National Parks) by the Province (Natural Resources Canada 1999). TTiis level of public ownership is the highest of any political jurisdiction (Table 1.4), and a reason why much public policy focuses on forest tenure issues. It has also caused forest companies to devote greater attention to the Provincial political scene, as opposed to ensuring their competitiveness in the global economy. In the short term, more may be gained (or lost) by influencing Provincial policy makers than competing in the international marketplace.

Table 1.4: Working Forest Area, Public Ownership, Annual Growth and Harvest, Selected Jurisdictions (Data for Early- to Mid- 1990s)

For one and a half centuries, the forest resource has served as the cornerstone of the BC economy. However, the patterns of forest utilization have undergone changes over time. For the longest time, forests have essentially been “mined” (Pearse 1976). Concern for forest conservation did not emerge until the beginning of the twentieth century. Since then, changes in forest structure and species composition occurred, in part, due to enhanced utilization standards that became the norm as a consequence of demand and technological changes that were spurred by public policy. Aside from the sustained-timber-yield policy adopted as a result of a public inquiry in the early 1940s (Sloan 1945), relative scarcity of forest resources, concerns for production costs and heightened awareness of environmental issues contributed to the emergence of a distinct silviculture sector.

To understand the nuances of public policy related to forestry in BC, it is first necessary to grasp the essentials of the current tenure system. While the Province owns the majority of productive forestland, timber is harvested under basically two forms of tenure arrangement. The first grants forest companies long-term rights to harvest timber from a designated area, known as a Tree Farm License (TFL). Companies are permitted to harvest an amount of timber determined in conjunction with the BC Ministry of Forests (MoF), also known as the BC Forest Service (BCFS). Harvest levels are based on growth to ensure sustainability of the resource. For a license holder, the basis for timber operations is the five-year plan that the Licensee prepares and the Ministry approves. In managing a TFL, a company is encouraged to include its privately-held forestland in the overall plan. The Licensee is responsible for certain environmental aspects of forest management, most notably regeneration. TFLs are area based and guarantee holders access to timber for a period of 25 years, although the holder can renew the license for an additional 25 years after 15 years have expired. In return, the Licensees have built sawmills and pulp mills that ensure a level of jobs – perhaps the principal focus of government.

The second form of tenure is a volume-based license that permits a forest company (or individual) to cut a certain volume of timber from a particular area, known as a Timber Supply Area (TSA). The government manages TSAs. Again, jobs are a prime concern in the awarding of licenses to harvest timber. In the awarding of contracts to harvest trees on a TSA under the Small Business Forest Enterprise Program (SBFEP), for example, a low bid is only one criterion; others include a provision favoring “small business” and local job creation. TSAs dominate in the Interior of the Province, while TFLs are the predominate form of tenure on BC Coast.

Given the tenure arrangements, the relatively short history of silviculture in the Province bears out the necessity of integrating private initiatives into the undertaking of production and management activities on public land. The choice to retain public (referred to as Crown) ownership of forestlands, while allocating timber harvest rights to individuals and private companies via the sorts of leasing and licensing arrangements indicated above, seems to have worked effectively only in removing timber (Pearse 1988). The difficulty of having logged-off sites rapidly and appropriately regenerated had been a central concern to policy makers up to the late 1970s, and institutional restructuring to promote silviculture has been a key element in the overall reform of BC’s forest policy sector since the 1980s.

There have been four major trends in the evolution of BC’s silviculture. First, beginning with seedling production, silvicultural activities proceeded from planting merely for the purpose of reforestation of harvested sites toward forest renewal with greater emphasis on the enhancement of multiple forest values. After several decades of slow progress, this process has accelerated over the last 20 years.

Second, the institutional structure has evolved from a Provincial Forest Service focus and responsibility to one that placed greater responsibility for silviculture on forest tenure holders. For instance, in the 1950s, forest regeneration on the part of TFL holders was encouraged by government, although they under-performed this task as they lacked the necessary economic or mandatory incentives. Some replanting did occur on private land, however. During the 1960s, holders of harvest licenses were encouraged to perform reforestation in the TSAs, then known as Public Sustained Yield Units. The 1970s saw the implementation of the “credit against stumpage” system, whereby forest companies were effectively paid for forest regeneration activities. By the late 1980s, full responsibility for basic silviculture, at least the physical component, had been transferred from the Forest Service to the major licensees, except for operations under the SBFEP.¹

Third, in parallel, financial obligations for basic silviculture have gradually shifted from the Forest Service to the major licensees. It began with the government supply of seedlings for reforestation, free of charge, to private forestland owners in the 1950s; it progressed to a “stumpage offset” system (based on approved costs) that was initially adopted in 1964 and became “credit against stumpage” in the form of “Section 88” of the 1979 Forest Act; and culminated in 1987 with mandatory financial obligation for basic silviculture residing with the major licensees.

Lastly, quality standards have risen steadily in an increasingly regulated environment. For example, companies had to commit to replanting to free-to-grow status² (initially introduced in 1979) and the development of a pre-harvest silvicultural prescription (formally introduced in 1987) that was subsequently replaced by a five-year silvicultural plan (officially introduced in 1995). Indeed, the Forest Practices Code introduced fairly onerous harvest and renewal obligations that were phased in from 1995 onwards.

The first trend is concerned with the growth patterns, in terms of both scope and scale, of silvicultural programs. The second trend is reflective of the evolution of institutional structures for physical operations. The third trend is concerned with the financial arrangements necessary for carrying out silvicultural activities, while the final one is concerned with regulatory aspects of silvicultural operations. Specifically, silvicultural prescription is, conceptually, a good idea because it ensures the important position of silviculture in that cutting cannot proceed until a silvicultural plan is in place. Literally, silvicultural prescription becomes a key task that can have system-wide effects, the delay of which may hinder or jeopardize progress on cutting operations.

A chronology of the trends and other major events that shape BC’s silviculture sector is provided in Chapter 6. It is the evolution of historical driving forces behind institutional changes that provides the context in this book for analyzing silvicultural activities. Importantly, given the...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Tables
• List of Figures
• Foreword
• Preface
• 1 Introduction
• 2 Property Rights, Institutions and Market Failure
• 3 Market Failure and Forestry
• 4 Contracts, Information and Transaction Costs
• 5 Organizations, Regulation and Policy Instruments
• 6 The Silvicultural Contracting Sector
• 7 Contracting Out or In-house Delivery?
• 8 How to Hire and Pay Silvicultural Workers?
• 9 Silvicultural Investment and Institutional Restructuring
• References
• Index