Financial strategies: how to start?
1. Introduction
The IPF(Intergovernmental Panel on Forests)/IFF (Intergovernmental Forum on
Forests) processes identified the National Forest Programs (nfps) as a major
framework for channelling, prioritising and increasing financing to the forest
sector with special reference to sustainable forest management (SFM).
In the past, the planning of funding of national sectoral development programmes
was essentially based on gap analysis. Comparing the quantitative estimates of
resource needs with actual funding levels identified funding gaps. ODA was
usually resorted to fill the gaps, with varying degrees of success. However, the
situation is changing. Examples are the meeting in Paris 2005 on aid
effectiveness and the tendency to diminish activities through project and in stead
focus on sector wide approaches. With the evolution of thinking on aid, the
international policy dialogues on forest-related issues, and the work of different
public and private organisations, this mechanistic approach has been
questioned. It is progressively replaced by increased emphasis on the creation of
frame conditions conducive to investment, based on the qualitative
characterisation of the needs. The role of private investments, market-based
instruments, resource ownership and policy reforms is increasingly recognised as
entry point, often beyond the forest sector itself, which determines the financing
of SFM.
These developments led to the emergence of the concept of “financing strategy”.
Such strategies or related studies have now been prepared in many countries
like Ecuador, Guantemala, Brasil, Vietnam, Malawi, Costa Rica, Tanzania and
Guyana. Despite significant conceptual development, the financing issues remain
politically sensitive, and the mobilisation of financing and the operationalisation of
financing instruments technically complex. It should be linked with a nfp process,
and needs to be country-specific and flexible. It identifies and coordinates
interventions from global, regional, national and local levels. The goal of the
financing strategy is to raise the necessary resources for the implementation of a
nfp and Sustainable Forest Management (SFM) on a national scale. The
objectives are to mobilise new and additional resources, and to use existing
sources and instruments more efficiently by creating enabling conditions.
In many above cases, the preparation of a financing strategy or related study has
contributed towards breaking with the tradition of relying on aid as the only
solution for improving the sectoral financing. A wider selection of solutions is
being introduced, including various national financing mechanisms and
instruments. This is an important development, which may lead towards
increasing self-financing. At the same time, the financing strategies are providing
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a basis for forest sector wide approaches that are expected to increase
effectiveness, national ownership and also the impact of external assistance.
2. Lessons learnt from previous experiences
Country level experience on financing strategies confirm the importance of
addressing financing issues at the same time as a national forest programme is
being formulated. Declining public sector financing to forestry has been a general
trend in many countries, mainly due to constant budget deficits and subsequent
public sector retrenchment. Similarly, ODA to the forest sector has been
declining. Although the information is very scarce, it is estimated that the private
sector is presently the only growing source of financing for the forest sector.
Consequently, the national level financing strategies are focusing on:
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Increasing the public sector revenue that can be used for self-financing of
public sector institutions and development of various types of retention
schemes;
Improving the efficiency and effectiveness of ODA by supporting g the
introduction of Sector Wide Approaches (SWAps), which focus on
developing unified implementation mechanisms and financing delivery
systems;
Identifying institutional barriers and opportunities for market mechanisms;
Improving business environment by removing barriers for profitable private
sector investments in SFM, and thereby attracting new and additional
domestic and foreign investments in the sector;
Tapping new international mechanisms and instruments such as those
linked with CDM, CBD, and green Foreign Direct Investment.
Introduce innovative systems for financing of the sector.
3. Process of setting up a financial strategy
The following process phases can be recognized:
1.
Find a national institution interested to move ahead with the Financing
Strategy (ENFF). Usually it is the institution leading the country nfpn
(focal point).
2.
Establish an Advisory Committee in which major stakeholders are
represented and which advises on the process and content of the
national strategy.
3.
With the national institution and the Advisory committee, select two
national consultants: one from forestry, one from economics/financing.
4.
Provide them with ToR.1
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If possible parallel process should take place in different countries, as was the case in Latin
America. In such a situation a preparatory workshop for consultants can be organized to promote
a common approach in different countries.
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5.
6.
7.
The consultants carry out their work: i.e. prepared the draft Strategy
proposal in about three months.
They validate their proposal in a national workshop organized by the nfp
country focal point.
They fine-tune the documents and present them in the second subregional workshops (results also available in the web, under each subregion).
4. Concept Table of Contents of a Financial Strategy
a. Description and analysis of current situation
1.
Introduction
o Description of the nfp process and especially its relation to financial
aspects in the forest sector.
o Basic concepts used in the strategy. Examples are:
 multi-functionality of forests,
 bundling of financial mechanisms for different functions,
 inter-sectorality,
 sustainable use and conservation,
 access to and distribution of benefits,
 the nfp principles as principles underlying the strategy
2.
Description of current situation:
o Natural, planted forest sectors: areas per province, types of forest,
trends in forestation/deforestation. Threats and opportunities for the
forest use types, e.g. :
 Plantations
 Native forest for providing goods and services,
 Native forests for conservation of protected areas
 Community forests
o Principal production: timber, fuel wood, NTFPs:
 Attention for possible products of importance, but
neglected in national statistics.
 Volume, generated income,
 Contribution of forest sector to poverty alleviation,
contribution of forest sector to GDP,
 Competitiveness of forest sector.
 Trends in these indicators.
3.
Description of laws and regulations and their impact on the forests (the
political framework):
4.
Description of forest ownership structure:
o Identification of different owner or manager groups
o Importance of each group
o Access of the various groups to financial mechanisms
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5.
6.
o Identification of bottlenecks for the different groups: how can their
decision making be influenced?
Inventory of existing financial mechanisms:
o Input mechanisms
o Output mechanisms
Aspects are e.g.:
 Legal basis (official laws and regulations - if relevant)
 Rules of the mechanisms
 Sources and mechanisms of financing
 Agencies involved in the implementation of mechanism,
mechanisms in other sectors with possible application in the
forest sector.
 Access of different forest ownership groups to the
mechanism.
Identification of potential mechanisms. Examples:
o Improvement of existing mechanisms, including wider application of
mechanisms from other economic sectors
o Identified new mechanisms active on pilot scale in the country, with
a potential for wider application.
o Inventory of systems from other countries with possible application
in the country of study.
o Proposal for new mechanisms.
b. Strategic Action Plan
7.
8.
Priority setting, based on::
o Analysis of strengths and weaknesses of existing mechanisms (
SWOT analysis)
 Consider the set of available mechanisms per forest use
type ( bundling)
 Include potential new mechanisms (chapter 6)
o Policy framework (chapter 3)
o Identification of bottlenecks for the different groups (chapter 4)
Proposed input mechanisms:
o New (innovative) input mechanisms or adaptations of existing ones,
each with its target group(s), forest use type(s) and proposals for its
enabling environment. Examples:
 Working groups for execution of a forest credit program
 More information to stakeholders about the credit program
 Better project analysis for forest loans
 Management of statistics of credits
 National plan for afforestation and reforestation
 Fiscal measures (e.g. tax reduction)
 Combination with mechanisms applied in other sectors
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9.
Proposed new output mechanisms, or adaptation of existing ones, each
with its target group(s), foerest use type(s) and proposals for its
enabling environment. Examples:
o Necessary market regulation,
o Proposed pilot for new mechanism
o Agency responsible for a mechanism
o Fiscal measures to stimulate an output mechanism
o Combination with mechanisms applied in other sectors
10. Enabling environment (general), examples:
o Political framework (forest law)
o Negotiation climate and juridical security (e.g. land ownership, land
use planning)
o Increase support for international commerce and international free
trade
o Formation of human capital
o Knowledge management
o Investment climate
o Industrial development and transference of technology
o Policy to raise awareness on existing mechanisms (e.g. more
aggressive)
o Establishment of key partnerships between governmental
stakeholders at different levels, enterprises and associations.
11. Execution of the strategy
o For every action the involved actors
o Establishment of a permanent discussion forum about financing
forests where major stakeholders are involved
o Time frame
o Monitoring and Evaluation of the strategy
o Necessary conditions for implementation
 Sources of finance for execution of the strategy
 Guarantee of continuation of programmes
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Annex 1: Examples of strategy documents
Information taken from document (in Spanish) on the website
http://www.fao.org/forestry/site/38817/es/ (accessed 13-04-2007).
1. Brazil
1.a. Natural forests
Adalberto Veríssimo, 2005. Estrategias e mechanismos financeiros para
florestas nativas do Brasil. FAO
1.
Description of the natural forest sector: where is the forest, types of
forest use: protected areas private forest, special areas.
2.
Types of native forests
3.
Principal production: timber, fuelwood
4.
General concept of financing forests
5.
Institutional framework
6.
Inventory of existing financial mechanisms
7.
Strategic base for a financial strategy: the forest policy framework
8.
Recommendations on:
o Scale of financing
o Establishment of discussion forum about financing natural forests
o Working groups for execution of the forest credit programs
o More information to stakeholders about the credit programs
o Better project analysis for forest loans
o Management of statistics of credits
1.b. Planted forests
Jefferson B. Mendes, 2005. Estrategias e mechanismos financeiros para
florestas plantadas. FAO
1. Description of the planted forest: where is it, what species
2. Principal production: paper and cellulose, charcoal, timber products,
supply and demand in timber (trends), fuel wood for energy.
3. General concept of financing of planted forests
4. Institutional framework
5. Inventory of existing strategies and mechanisms for financing planted
forests. Analysis of their effectivety.
6. Inventory of strategies and mechanisms in other sectors weith potential for
planted forests
7. Significant experiences with financing of planted forests (some private
sector initiatives)
8. Strategic base for an investment environment in planted forests. Four
elements are needed: governmental policies, technologies, goods,
materials en services as inputs, and information. Impriovements are
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needed as to: planning and strategic silvicultural management, information
system and adaptation of financial mechanisms.
9. Recommendations on, for example:
 Adoption of a strategic management of the planted forest sector, taking
into consideration specific proposed actions on: participants in the
chain (enterprises, regional governments, stakeholders), governmental
policies, financial resources, inputs, goods and services, technologies,
information.
 More aggressive policy to raise awareness on existing mechanisms
 Promotion of more discussion in the sector to adjust existing
programmes to the reality.
 Guarantee of continuation of programmes
 Establishment of key partnerships between governmental stakeholders
at different levels, enterprises and associations.
 Adjustment of existing mechanisms using elements from financial
mechanisms in other sectors.
 Study of possibilities to reduce property tax for reforested areas.
2. Ecuador
Xavier Izko and Doris Cordero, 2007. Elementos para una estrategia nacional de
financiamiento forestal – Ecuador. FAO.
1. Multi-functionality of the forest and financial mechanisms
2. Legal and institutional context: national (including laws of other sectors:
water, tourism, mining, electricity), regional and local level.
3. Participation of the environmental and forest sector in national spending,
investment and contribution to national economy.
4. Existing financial mechanisms for: provision of environmental services,
environmental goods (timber etc.), and environmental goods& services
(combined).
5. Elements for as strategy: financial necessities, proposals on:
 Financial mechanisms for:
o Promotion of SFM of native forest for providing goods and
services.
o Conservation of protected areas and surroundings
o Development of productive forests
 Transversal and intersectoral mechanisms:
o Legal framework and institutional aspects
o Negotiation climate and juridical security (e.g. land ownership,
land use planning)
o Legal and institutional aspects of mechanisms for PES
o National plan for afforestation and reforestation
o Intersectoral perspectives
o Fiscal measures
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3. Guatemala
Axel M. Gómez Ch. and Roberto Cáceres E., 2006. Mechanismos de
financialmiento para el sector forestall de Guatemala.
a.
b.
c.
d.
e.
f.
g.
h.
i.
1. the political framework of the forest sector:
2. basic concepts: multi-functionality, inter-sectorality, sustainable use and
conservation, contribution of forest sector to poverty alleviation,
knowledge management access to and distribution of benefits
3. Existing mechanisms: analysis, conventional sources and mechanisms of
financing.
4. Potential mechanisms: improvement of existing mechanisms, identified
new mechanisms in Guatemala: water fund, fund for support in
reforestation, subsidy for assurance, municipal funds, payment for water
and for ecosystem services by municipalities. Proposal for new
mechanisms, inventory of interesting systems in Costa Rica, Colombia
and Brazil
5. Analysis of the legal framework, the institutional framework, economical
framework and contribution of the forest sector to GNP, competitiveness
of forest sector.
6. Priority actions and involved actors: analysis of scenario, (plantations,
knowledge management, industrial development, perspectives for PES,
required financing.
7. Action plan (for every action with involved actors):
Political framework
Increase support for international commerce and international free trade
Formation of human capital
Investment climate
Industrial development and transference of technology
PES
Execution of the strategy
Monitoring, Control and evaluation
Necessary conditions for implementation
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Annex 2: Lessons learnt from selected countries
Here below some lessons learnt from examples from Vietnam, Costa Rica,
Malawi, Tanzania and Guyana, prepared by Jyrki Salmi, Indufor Oy, Kulmakatu
15 E FIN-00100 Helsinki, Finland, 2005
1. Vietnam
The main conclusion of the study in Vietnam was that the government forest
financing strategy has focussed too heavily on subsidies. Instead, more attention
should be given to removing barriers for investments in profitable sustainable
forestry. Such barriers include:
i.
ii.
iii.
iv.
v.
vi.
unclear and weak tenure rights,
restrictive and controlling enterprise and business development policies
and legislation,
high taxation on economic activities,
administratively set timber prices that distort the markets,
poorly developed national financing sector, and
non-competitive policies and legislation regarding the foreign direct
investment and international portfolio investments.
These issues are presently being developed further under the joint governmentmulti-donor Forest Sector Support Program, which can eventually lead to a
Sector Wide Approach (SWAp).
2. Costa Rica
The Costa Rican case is characterised by various schemes and projects based
on innovative instruments (also see Reyes et al., this issue). This has provided a
"critical mass" of information, knowledge and expertise. Various important
instruments and mechanisms developed include:
i.
ii.
iii.
iv.
v.
vi.
the now dissolved Forest Development Fund,
National Fund for Financing Forestry (FONAFIFO),
INBio support to biodiversity development through small enterprises,
the IDB supported Central American Environmental Fund located in Costa
Rica,
ecotaxes, and
watershed conservation fees.
3. Malawi
In Malawi the key recommendations included:
i.
ii.
introduction of performance-related revenue systems for forestry,
partnerships in forestry,
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iii.
iv.
v.
vi.
establishment of an autonomous forestry entity,
introduction of forest funds,
improving the pricing and marketing of forest products, and
introduction of forest product grading and certification.
4. Tanzania
In Tanzania the financing study found that the establishment of a retention
scheme had been a major achievement. It enabled the gradual development of
the sectoral self-financing. The study made detailed recommendations in the
following areas:
i.
ii.
iii.
iv.
v.
vi.
expansion of revenue base,
improvement of revenue collection,
improvement of forest produce pricing system,
promotion of stakeholder involvement in domestic private sector
investments,
increasing foreign direct investment, and
optimising the use of foreign assistance and increasing the ownership.
Regarding the last point, the study proposed the introduction of SWAp, which is
presently being discussed by the government and key donors.
5. Guyana
In Guyana, the liberalisation of the economy and the removal of trade barriers
and obstacles have significantly improved the business environment. Similarly it
was assessed that the Guyana Forestry Commission should be significantly
strengthened. The narrow human resource base remains the major bottleneck.
The private forest sector has been facing adjustment to open and more
competitive business environment, which has been painful to many companies.
On the other hand, the new situation provides opportunities for well managed
companies. The study proposed further work on the following topics:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
concession bidding and auctioning,
performance bonds,
certification of forests and chain-of-custody certification of products,
micro-financing,
public/private partnerships,
domestic-foreign joint ventures,
clarifying existing property rights, and
the establishment of a national forest fund.
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