REVIEW OF IMPLEMENTATION OF THE FOREST
SECTOR POLICY
December 5, 1994

index

i. This report reviews implementation of the 1991 forest policy and assesses the continued relevance of the guidance and direction it provides. Because the review has been conducted only three years after the policy was issued, it is too early to identify development impacts. Instead, the review assesses changes in (a) the breadth and depth of analysis undertaken in forestry sector work, (b) the content of recently approved free standing forestry projects, and (c) the design of projects in other sectors that may affect forests. The focus of this review is on the Bank (and IDA) but, because the policy applies to the Bank Group, IPC operations are also included where appropriate.

ii. The policy paper was built on operational e) experience and the findings of a 1991 Operations Evaluation Department review. It was explicitly a forest, not a forestry, policy in recognition of the importance of the impact of macroeconomic and other sectoral policies on how forests are used. The policy paper diagnosed macroeconomic and sectoral policy failures, as well as market failures, as the principal causes of excessive harvests and inadequate investment in tree planting. It challenged governments, donors, and the Bank to reform policies, institutions, and investment priorities and called for significant changes in how forests are valued and used. The policy paper highlighted five main principles that were to guide Bank work on forests. These principles are listed below, with a summary of how they have been applied in the last three years.

• A multisectoral approach, whereby operations in other sectors are required to consider the implications for forest development and conservation. The Bank has applied its environmental assessment procedures to projects in all sectors that could have undesirable effects on forests. As a result, agriculture, energy, infrastructure, and mining projects have been modified. The effects of adjustment lending on forests have not been analyzed as part of this review, but the findings of recent research on economywide policies and the environment in general can also be expected to apply to forests in particular. Based on eleven country case studies, the research found that adjustment programs, especially the market liberalizing elements, are usually good for the environment. The research also found that unforeseen environmental harm can occur if policy, market or institutional imperfections persist elsewhere in the economy. k such cases, instead of suspending economywide reforms, the remedy is to be sought in specific additional measures to remove those imperfections. Further research is being undertaken, including another, more in-depth round of country case studies, as well as in the framework of ongoing research into the causes of tropical deforestation.

• International cooperation, by encouraging and supporting intentional initiatives to promote sustainable forest development and conservation, including international legal instruments and financing mechanisms. As an implementing partner of the Global Environment Facility, the Bank has provided active support for biodiversity conservation in forests. The Bank has also participated in preparation of the Convention to Combat Deforestation and in the Forestry Advisers Group, which was created to provide guidance for the Tropical Forestry Action Plan. Fruitful partnerships are developing with the International Institute for Applied Systems Analysis, the Food and Agriculture Organization, and many bilateral agencies, while the United Nations Commission on Sustainable Development provides the overarching framework for cooperation on follow up to Agenda 21 in general and to Chapter 11, Combating Deforestation, in particular. But the Bank could more actively facilitate dialogue among borrowing countries, other international organizations, and the donor community, to help translate commitments under the International Tropical Timber Agreement and the international conventions into specific targets.

• Policy reform and institutional strengthening, by identifying and rectifying policy and market failures, with special emphasis on expanding public participation in forest resource planning and management and mobilizing private sector resources and skills. Bank sector work and policy dialogue have greatly expanded and have emphasized forest valuation and new roles for the private sector. Coverage of social issues has increased, but is still inadequate. Some good models for local participation in forest management have been identified, together with some innovative institutional arrangements and financing mechanisms to deepen participation in project implementation. But more emphasis has to be placed on institutional reform even though forestry departments are slow to change and alternative institutional models are not yet proven: participation in forest decisionmaking remains far from adequate and the interests of many stakeholders arc still neglected.

• Resource expansion and intensification, by financing the creation of additional forest resources and the expansion and intensification of management of areas suitable for sustainable production of forest products. In the last three years, the Bank has provided finance for establishing more than two million hectares of plantations in developing countries. The Bank has increasingly included forestry activities, including agroforestry, in holistic national programs of extension and research and natural resources management. But more emphasis has to be placed on improving the technical quality of tree planting of all kinds and on contracting out work hitherto done directly by forestry departments.

• Preservation of intact natural forests, by supporting initiatives to expand forest areas designated as parks and reserves and by adopting, and encouraging governments to adopt, a precautionary approach to forest utilization, especially in moist tropical forests. In line with the prohibition in the policy paper, the Bank has not financed commercial logging in primary moist tropical forests. The Bank has dramatically increased its investment support for parks and protected areas and watershed management. In addition, biodiversity projects funded by the Global Environment Facility have become an important complement to the Bank’s work on forest protection. The Bank has also adopted a precautionary approach to temperate and boreal forests. Good precautionary practices are emerging in all kinds of forests, but international collaboration will be required to distill and disseminate best practices.

ii. More specifically, in the last three years the Bank has undertaken nine major pieces of forestry sector work, with improved breadth and depth of analysis, in contrast to only fifteen before FY92. In addition, the Bank has committed US$1.6 billion for twenty three forestry projects (ten Bank and thirteen IDA), with a significant shift in the composition of lending in the directions indicated in the policy paper, in contrast to US$2.6 billion for ninety seven projects before FY92. An assessment of forestry sector work undertaken in the last three years shows four striking changes:

• Much more is being done: staff input increased fivefold over FY88-90.

• Much of the work has been undertaken in countries that are important actors for the world's forests, including India, Indonesia, Malaysia, and Nigeria.

• A much wider range of issues has been examined, including macroeconomic and trade issues.

• The treatment of issues is much deeper, notably on forest valuation, revenue systems, and in some countries, land rights.

An assessment of lending for forestry projects during the last three years also shows four striking changes, compared with FY84-91:

• The volume of lending has more than doubled.

• The share of lending for protective and restorative activities has increased from 7 to 27 percent.

• The share of lending for alternative livelihoods has increased from 1 to 14 percent.

• The share of lending for resource expansion has declined from 32 to 23 percent, although the dollar amount increased by 12 percent, and road construction and maintenance has declined from 10 to just 0.4 percent.

iv. Yet the global forest resource base has continued to deadline since 1991, and controversy in the sector has grown. Although the rate of deforestation in the tropics appears to have slowed slightly in the 1990s, still about 13 million hectares are being deforested annually. Forest degradation from air pollution and radioactivity are severe problems in Eastern Europe and the former Soviet Union. While total investment in tree planting has grown, in the tropics notably to 2.6 million hectares annually, and understating of the underlying problems facing the sector has improved, enormous challenges remain: forests represent vast stocks of natural capital that must be mobilized to attack: poverty, but must not be misused or impoverished in the process.

v. This review also addresses the wider question of whether Bank-financed forestry operations have found an appropriate balance between the objectives of poverty reduction, environmental conservation, and production. The forestry portfolio has evolved during the last twenty years from a narrow focus on industrial plantations in the 1970s, to a concentration on fuelwood production without much attention to the larger policy context in the 1980s, to projects that are more comprehensive and diversified in the 1990s. The current portfolio is striking a much improved balance between the poverty reduction, environmental conservation, and production objectives, with about 40 percent allocated to each of social and environmental lending and 20 percent for industrial investments. Additional opportunities for using forest resources to reduce poverty are being sought in sector work (including through poverty assessments and national environmental action plans) and in dialogue with governments, as well as in the process of project identification and preparation.

vi. Given the directions set by the forest policy, the magnitude of what is at stake for the world's forests and forest-dependent peoples, and the areas indicated where further improvements can be made in Bank work, the Bank should increasingly concentrate its activities on the following four priorities:

• Target the use of forest resources to reduce poverty. The R>nk's top priority in the forest sector is to help countries use forest resources to reduce rural poverty. Governments can deepen the participation of people and communities living in or near forests and improve their livelihoods by supporting innovative institutional arrangements and financing mechanisms as part of a broad approach to rural development and poverty reduction. The Bank should also emphasize countries' capacities to rehabilitate large areas of secondary forests. Two of the ways the Bank can help promote the use of forest resources for the poor are through joint forest management, where rural communities carry out agreed management programs in exchange for a share of the benefits; and by watershed management activities targeted to the rural poor, through employment in establishing and maintaining watershed management works, and improving farm productivity on steeply-sloping forest margins by contour bunding and cultivation. While the Bank can provide the financial capital needed for such activities, governments must take the lead in directing more forest benefits to the poor, and in particular, to indigenous peoples. Significant changes are also needed in recognizing and expanding the role of women in forest management. These initiatives require shifting the role of forest administrations from being simply resource custodians for narrow sectoral interests to acting as agents of sustainable development.

• Reconcile conservation and utilization. Bank investment in the sector must stimulate reform of forest management to promote environmentally sound forest utilization by continuing to make most forestry lending (with the exceptions of projects that are clearly environmentally protective or that are oriented toward small farmers) conditional on government commitment to sustainable and conservation-oriented management. Where governments are prepared to make such a commitment, in addition to conservation the Bank will also support improved utilization and regulation of forest use. These latter activities are controversial, yet improved use and regulation of forests are necessary complements to forest conservation. Pursuit of these activities calls not only for possible policy and institutional changes, but improved information and managerial practices. However, the Bank Group will continue not to finance commercial logging in primary moist tropical forests. To complement its operational activities, the Bank will help facilitate dialogue on conservation and utilization among borrowing countries, other international organizations, and donors.

• Promote increased investment through policy and institutional reform. While directly contributing to investments that warrant public expenditure, the Bank must also help stimulate market driven responses to needs and opportunities by supporting policy and institutional reform. This includes support for the establishment of the legal and regulatory frameworks necessary to assure that a private sector strategy will be consistent with poverty reduction and environmental protection. Direct participation in the private sector strategy will be provided by IFC. Where environmental, social or other considerations warrant more direct public sector involvement in forest production, the Bank nay finance government managed activities while simultaneously pressing for reforms to expand private and community-based participation.

• Move beyond forestry. The Bank has responded to the challenge of anticipating and mitigating possible harmful effects on forests by projects in other sectors, and has also paid more attention to forest issues in its agricultural sector work and country economic work. Nevertheless, the burden of forest policy implementation has fallen on forestry operations despite their small share of total Bank lending. Given the relatively small sums involved in forestry projects and forestry agencies' limited influence and commitment, conditioning support for most forestry projects on governments' commitment to sustainable, conservation-oriented forestry may be insufficient. Thus the Bank: has broadened the audience for its analytical work on forests beyond forestry professionals to include others interested in forest policy. Broader and deeper analytical work on forests, and related work such as national environmental action plans, are permitting the incorporation of the intersectoral linkages needed for progress in the forest sector into country assistance strategies in an increasing number of countries.

vii. While the directions taken in sector work and in lending in the last three years are positive, some areas for improvement exist. Sector work should pay more attention to social issues, effective participation in decisionmaking, and institutional reform, and project work should stress poverty reduction and participatory approaches. Beyond forestry, the Bank should give (even more prominence to forest issues in agricultural sector work and country economic work.

viii. In addition to improving the focus of sector and project work and pursuing intersectoral linkages, specific actions must be taken to correct past shortcomings and to enhance systematic learning from experience in the following areas:

• Performance indicators and project monitoring. The Bank has developed indicators of forestry project and sector performance. These could be improved and could be used by other institutions. The Bank will work to this end during FY95 with a network of other interested institutions. Some good practices for both indicator selection and monitoring are emerging in both Bank-financed and other projects that need to be assessed and disseminated. The Bank will initiate this work in FY95 as part of the network: on indicators and with the Forestry Advisers Group.

• Sustainable forest management and the precautionary approach. The Bank is completing a review of management of moist tropical forests in Southeast Asia and Queensland, Australia, which will be submitted for international debate by March 1995. This review has a twofold objective: to provide operational guidance to staff and borrowers and to propose targets for measuring progress toward attainment of commitments under, for example, the International Tropical Timber Agreement. For temperate and boreal forests the Bank will participate in initiatives by the U.S. Forest Service and others to agree on guidelines for sustainable management. Bank staff will examine the boreal forests of Siberia as part of the Russian Federation Forest Policy Review, to be completed in October 1995. Good precautionary practices are emerging in all kinds of forests, in operations financed by the Bank and others, and best practices need to be distilled. The scope for international collaboration in this endeavor, as well as for non-timber forest products, will be determined in the framework of the review of progress of Agenda 21, Chapter 11, scheduled for completion in April 1995.

• Institutional reform. In March 1995 the Bank will launch a structured learning program concentrating on first-hand insights into actual forestry institutional reform through "live cases" presented regularly by Bank task managers, the reforming institution's assessment presented by the respective national project managers, and review of approached taken by other agencies and stakeholders and the resulting lessons learned.

Guidelines for improved environmental assessment of forestry projects. The results of a detailed survey of current practices within the Bank and elsewhere will be available in December 1994, as an Environmental Assessment Sourcebook Update on Forest Resource Management.

1. INTRODUCTION

When the forest sector policy paper (World Bank l991b) was issued in September 1991, the Bank Group committed itself to promoting conservation of natural forests and sustainable development of managed forest resources. The paper's analysis pointed to market and policy failures as the underlying causes of excessive forest depletion and inadequate investment in tree planting. As a result, the paper identified two key challenges: slowing alarmingly rapid rates of deforestation, especially in moist tropical forests, and ensuring adequate planting of new trees to meet rapidly growing demands for fuelwood and other forest products.

The policy paper built on operational experience with implementation of the 1978 Forest Sector Policy Paper and the findings of an Operations Evaluation D<partment review (World Bank 1991a). It called for significant changes in the ways in which developing country governments value and use forest resources, and highlighted five principles that were to guide the Bank's own work on forests.

The Bank's policy is a forest policy, not just a Forestry policy, in recognition of the importance of the impact of macroeconomic and other sectoral policies on how forests are used. The policy sets directions for forestry projects (projects designed to produce not only wood and fiber, but also non-timber products and services such as protection of biodiversity and watersheds) as well as operations in other sectors that could directly or indirectly affect forests. In many respects, the latter category could include virtually all Bank projects. While this review discusses agriculture, energy, infrastructure, and mining projects, its primary focus is on forestry sector work and free-standing forestry projects. This introductory chapter recalls the five principles that were to guide the Bank’s work on forests, and highlights recent developments affecting forests and the resulting challenges to implementing the forest policy. Chapter 2 reviews the Bank's forestry portfolio and analyzes forestry sector work and lending for free-stranding forestry projects. Chapter 3 explores three key questions for the future of the Bank’s work on forests. Chapter 4 concludes by examining future priorities.

The 1991 Forest Policy

The 1991 policy paper highlighted five main principles that were to guide the Bank's work on forests: a multisectoral approach, international cooperation, policy reform and institutional strengthening, resource expansion and intensification, and preservation of intact natural forests.

A Multisectoral Approach A critical consideration in the policy paper was the extent to which outcomes in the forest sector are inextricably linked to other sectors and the entire economy. Used as a source of raw materials, and converted to farm land by expanding agricultural populations, forest resources have historically been depleted by economic growth. Short-term growth based on resource depletion does, however, entail longer-term economic costs. Recent development patterns, which rely heavily on public investments in energy, infrastructure and agriculture, have accentuated these linkages and created a need to consider their impacts on forests explicitly in economic policymaking. Forest resources, and those dependent on them, also suffer from poor aggregate economic performance. Slow and inequitable growth forces unemployed labor into marginal agriculture and other economically rational but unsustainable pursuits at the forest frontier. A rapidly expanding poor population will put pressure on all natural resources, especially resources that are perceived to be open areas. Hence, forest resources are intimately linked to population and land tenure policies too.

By adopting an environmental impact assessment policy in 1989, the Bank recognized the importance of intersectoral linkages and began to meet this major challenge. The policy paper highlighted the need to use environmental assessment processes to minimize unintended effects on forests from projects in other sectors, and to use economic and sector work to analyze and raise awareness of the significance of intersectoral linkages.

International Cooperation. A second consideration in the policy paper was the pressing need for encouragement and support for international initiatives to promote sustainable forest development and conservation, including international legal instruments and financing mechanisms. In mid 1991, a number of initiatives were in various stages of discussion and formulation, including conventions on forests and biodiversity, but the likely outcomes were unclear.

Policy and Institutional Strengthening. A third consideration was the need for far-reaching reform of forest policies and the institutions responsible for managing the one-fourth of the world's land area occupied by forests. Earlier sector work and projects had addressed aspects of policy and institutional reform, but not successfully, as the 1991 Operations Evaluation Department review had pointed out. The policy paper called for more in-depth sector work to consider the full range of mutually-reinforcing policy and institutional reforms, by identifying and rectifying policy and market failures, with special emphasis on expanding public participation in forest resource planning and management, and mobilizing private sector resources and skills.

Resource Expansion and Intensification. A fourth concern was the urgent need to create additional forest resources, and expand and intensify management of areas suitable for sustainable production of forest products. Such efforts were to respond to severe shortages of fuelwood, forest fodder, and other forest products that impose intolerable burdens on the poor, especially women, in developing countries. With fuel as the major use of wood in the developing world, and with the Bank’s experience in social forestry, the policy paper reaffirmed the Bank's commitment to help increase the availability of and access to w5 for poor people and to investing in other productive aspects of the sector.

Preservation of Intact Natural Forests. A fifth consideration was the need to support initiatives to expand forest areas designated as parks and reserves by adopting, and encouraging governments to adopt, a precautionary approach to forest utilization, especially in moist tropical forests. Such efforts were to respond to divergences between private and social costs, the prevalence of forest externalities, and the risks of irreversible environmental damage. The policy paper highlighted moist tropical forests in view of (a) the uncertainties regarding full valuation of environmental services, (b) the inadequacy of knowledge concerning sustainable management of such systems, and (c) the irreversibilities associated with the loss of moist tropical forests. Specifically, the Bank undertook not to finance commercial logging in primary moist tropical forests and to provide greater financial support for parks and protected areas. Moreover, in all countries and for all types of forests, the policy paper made most forestry lending conditional on government commitment to sustainable and conservation-oriented forestry.² (² The exceptions were projects that are clearly environmentally protective (for example, reforestation to protect watersheds) or that are oriented toward small farmers (for example, farm and social forestry)).

Developments Since the Forest Policy Paper

In the last three years, the world's forest resource has continued to decline and the sector has become increasingly complex. Five trends and challenges emerge as the most important of this period: continued forest destruction, increased investment; growing and diversifying demands; expanding research efforts; and heightened global debate.

Continued Forest Destruction. The most recent data (FAO 1993) indicate that during the 1980s, deforestation in the tropics averaged 15 million hectares per year. The trend in the 1990s appears to be slightly more favorable, with 13 million hectares being deforested annually.³ (³ In Brazil deforestation rates appear to have reached their maximum in the late 1980s, after which they began to decline.) Data quality, however, continues to be poor, and uncertainties remain about the magnitude of forest destruction and the relative importance of different causes of destruction in particular areas. As discussed in the policy paper, deforestation will continue in response to growing demand for fuelwood, farm land, timber, and so on, and will be exacerbated if policy and market failures are not corrected. Unfortunately, few effective mechanisms are available to ensure that forest land can be converted to sustainable uses that provide lasting benefits for the poor. To counter all the pressures for continuing deforestation and practices that do not benefit the poor, policies and investments must increasingly be guided by the precautionary approach advocated in the policy paper.

In addition to land use conversion, other processes also damage forest lands. The forests of Eastern Europe and the former Soviet Union are being subjected to unprecedented stress from air pollution generated in other sectors and countries. High altitude forests in the Sudety and Carpathian mountains are being threatened by degeneration and even extinction, thereby threatening water regularity and quality and soil protection. Radiation damage has rendered enormous areas of forests in Belarus and Ukraine unusable, and industrial exploitation and conversion of primary forests in Siberia, Southeast Asia, and Central Africa are depleting the world's biodiversity, with unknown consequences for the future.

Increased Investment. Worldwide investment in tree planting amounts to 7 million hectares annually, of which 2.6 million hectares are in the tropics. Plantings in the tropics have increased significantly over the last decade, by of the order of 10 percent per year, but still amount to only 20 percent of losses from deforestation. In some countries, perverse incentives and lack of enforcement led to conversion of productive forests to mediocre plantations of exotics. Nonetheless, the current level of investment, representing about US$1.3 billion per year in the tropics alone, largely by the private sector, communities, and small farmers, indicates the potential for a large-scale response to market opportunities.

Growing and Diversifying Efforts. Demands for forest products and services are expanding and diversifying spurred by growing populations, the globalization of markets for industrial wood, and increased sensitivities about environmental linkages and the needs of forest-dependent peoples. Fuelwood demand, already the largest single category of wood use, is estimated to be increasing by 2.2 percent per year. The globalization of forest trade and of environmental concerns, as exemplified by demands for "green labeling," means that forest investment and harvesting decisions can no longer be made in isolation from environmental and social concerns. More locally, but indicative of a wider trend, people living in forests or along forest fringes are increasingly demanding involvement in forest management. This is manifest in resistance by people in Borneo to forest use by concessionaires, the Jharkand movement in Bihar in India, the Chiapas movement in southern Mexico, and in incipient movements elsewhere.

Expanding Research Efforts. During the last three years, the global community bas begun to recognize the poor state of knowledge about forests and forestry by launching new research efforts. Despite heavy research needs in traditional agricultural areas and pressing budget constraints, the Consultative Group on International Agricultural Research has acknowledged the importance of progress in forest research by adding two centers to its membership. The International Center for Research on Agroforestry and the Center for International Forestry Research now have expanded mandates to contribute needed innovations in forest technology and policy. Finally, the establishment of the European Forest Institute, which will investigate boreal forests as well as temperate forest, shows that the need for increased research is being more widely recognized.

Heightened Global Debate. Never before have such intense and high-level debates taken place about the methods and purposes of forest utilization and protection as in the last three years. These debates have become more complex and more frequent, both within counties (the U.S. Forest Summit) and at the international level (United Nations Conference all Environment and Development (UNCED), International Tropical Timber Agreement (ITTA}, the Conventions on Biological Diversity, Climate Change, and Desertification, and the Global Environment Facility).

Concern about the rights of indigenous people has become enmeshed with ecological concerns about fragile habitats. The public is increasingly demanding participation in many decisions that until recently were the exclusive purview of professional foresters and government officials. Demand is also growing for the clarification of indigenous peoples' legal rights. These new demands have arisen along with an increased awareness of forest services and the conflicts created by diverging interests in the use of specific areas. Such pressures become more apparent when forest boundaries are formalized, power and resources are concentrated in forest agencies, and external concessionaires displace traditional users.

While northern demands for tropical forest conservation have grown, southern tropical countries are exerting stronger claims to sovereignty over their resources, and demanding that northern countries apply the same standards of forest management as is being required of them. Agreement on a proposed forest convention proved impossible. Agreement vas, however, reached on a non-binding set of forest principles, and the recently concluded negotiations to renew the IT reaffirmed the commitment to achieve trade in tropical timber products from sustainable managed sources by the year 2000. In addition, under the IT consumer countries also committed themselves to sustainable management of their own forests by the same date. National commitments under the IT and the conventions on Biological Diversity, Climate Change, and Desertification provide opportunities for the Bank to engage in constructive dialogue with borrowing countries on sustainable and conservation-oriented forest management

The Challenge to the Bank. For the Bank -- an institution committed to reducing poverty through sustainable growth—the dynamism, uncertainty, and sensitivity of the forest sector pose great challenges and opportunities. Forests represent enormous stocks of natural capital that must be mobilized to attack poverty, but must not be misused or impoverished in the process. Forest sector development requires deeper, more varied, and more difficult processes of community participation than any other sector. Conflict resolution is an integral part of sectoral development and entrenched institutions and interests need radical reform. These challenges set the stage for the discussions about forest issues at UNCED in Rio de Janeiro in 1992, providing the impetus for a fundamental rethinking of how forests fit into the development process. Moreover, these challenges provide the background against which Bank efforts in the sector must be assessed.