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					                                                        -53-                                        Annex 1

                                   FORESTRY SECTOR ISSUES

                                                 A. Introduction

1.       As a potentially major source of public revenues and as a possible model for the fiscal
management of other publicly owned natural resources (such as fossil fuels, gems, minerals), forestry
merits special attention. Conditions in the forestry sector in Cambodia, however, continue to decline. In
1997, long-standing problems in the sector were compounded by the impact of the regional financial
crisis as well as by a political climate that helped undermine progress toward improved governance.
While data on illegal logging are inherently uncertain, the severity of illegal logging has worsened over
time. The best available estimate is that illegal logging in 1997 totaled between 3 and 4 million cubic
meters with an estimated loss to the government, even with depressed wood markets, well in excess of
US$60 million.1 Moreover, because illegal logging takes no account of forest management standards or
environmental safeguards, the true damage from illegal logging is even greater and, if left unchecked, it
could devastate the commercial potential of Cambodia’s forest resource in less than five years.

2.      To examine the leakage of public resources from the sector and also the impact of the regional
financial crisis, a simple financial model of the forestry sector, similar to that developed for the World
Bank/UNDP/FAO Forest Policy Assessment (1996), is applied. The model, which is calibrated to
accord closely with actual 1997 harvest levels, prices and timber theft, suggests that the government
stands to lose, in present value terms, over US$576 million over the next 30 years if present trends
are allowed to continue. This reflects the projected decimation of Cambodia’s commercial forest in five
years and diversions from the public budget of an average of over US$150 million per year while
commercial operations can continue. If, through concerted actions, the government can control illegal
logging and revive its efforts to introduce sustainable concession management, annual revenues over
a 30-year horizon could average over US$80 million, even starting from a low base for the initial few
years because of step-by step development of the concession system and slow recovery from depressed

3.       Actions that the government could take to provide stability to the sector have been identified
through studies undertaken with World Bank, UNDP, FAO and government of the Netherlands support.
These actions include: legislative reform; improved partnerships with the private sector through better
concession terms and regulations; the introduction of emergency measures to control illegal logging; and,
eventually, liberalization of the log trade. Reforms would be facilitated through fiscal decentralization
measures that would give provincial governments a greater stake in sustainable forest management and
civil service reform, including salary reform and the restructuring of public forestry agencies, so as to
minimize incentives for corruption in forest administration and the transport of forest products.

4.      This Annex summarizes data on selected issues facing forestry, 2 discusses its potential as a
source of public revenues and the impact of the regional financial crisis on the sector, and summarizes
investment and policy decisions now available to the government.

   This is based on a rough estimate, provided by consultants (DAI) to RGC, of a merchantable volume in the
commercial forest area of approximately 20 million cubic meters.
     This is not an exhaustive treatment of the forest sector. For greater depth on conservation of biodiversity and on
protected areas management, see the National Environmental Action Plan. For background on the industrial sector,
see World Bank/UNDP/FAO, Cambodia: Forest Policy Assessment, 1996. A study is under preparation by the
government, with support from the World Bank. Much of the material presented in this paper is based on output
related to this work.

                                         B. Issues and Progress to Date

5.      Despite its significant potential, forestry continues to make a very limited contribution to
sustainable development and poverty alleviation in Cambodia. Following on the World
Bank/FAO/UNDP Forest Policy Assessment, the Royal Government of Cambodia (RGC) commissioned
four technical studies aimed at producing detailed proposals on forest law enforcement, assessment of
concession contracts, forest concession management, and ways of improving the overall development
performance of forest policy. This work has identified specific policy and implementation measures
which the RGC could now begin to undertake.

6.      Forest Revenues and Illegal Logging. Work to date continues to support the contention in the
Assessment that the long-term solution to illegal logging is full scale development of a properly
regulated concession system and a managed network of parks and protected areas. However, in view of
the urgency of the situation, special measures are needed and could be managed under a special
interagency arrangement. This would include implementation of a routine monitoring and surveillance
system, deployment of specialized suppression measures, and institution of public education and
information campaigns. Detailed recommendations and proposals are available from the government’s

7.       Forest Law and Concession Contracts. In 1996, the Council of Ministers submitted to the
National Assembly draft legislation on forestry. A Bank-financed review of this legislation by the
government’s advisers found that the draft (i) did not resolve the confusion that results from the
patchwork of existing laws and regulations concerning forests; (ii) was not suited to the practical aspects
of forest management in Cambodia; (iii) did not provide procedures for the award of harvest rights; and
(iv) appeared to contemplate regulatory controls that are beyond the scope of RGC. Following these
suggestions, the government withdrew the draft with a view to resubmitting a revised draft with major
revisions that would link the legislation to a defined policy, clarify responsibilities of specific RGC
agencies, and lay the basis for consistent implementation. Detailed redrafting will require assistance
from international expertise.

8.        A critical issue is the disposition of Investment Agreements and long-term Timber Licenses
(concession contracts) issued by the RGC, committing nearly all of the country’s commercial forest area
to approximately 30 concessionaires. Legal advisers have concluded that although the contracts are
badly drafted and seriously biased against the RGC’s interests, the government could best move forward
with a case-by-case evaluation of concessionaire performance against contractual obligations. These
technical and financial evaluations could lead to individually tailored, bilateral renegotiation of contract
terms and, in some seriously flawed cases, termination of the contracts. Legal advisers have provided a
draft “model concession contract” and will provide basic training to staff on contract law applied to
forestry. International technical assistance in the form of specialized business representatives would be
required to assist the RGC in contract dispute resolution (draft terms of reference have been supplied by
the legal consultants).

9.       Forest Concession Management. The RGC, assisted by forest concession management
consultants, is well advanced in designing detailed revisions to the entire system of concession planning,
operation, and regulation. Proposals are being developed in consultation with key concessionaires and
Department of Forestry and Wildlife (DFW) staff, and are building on inventory methods already
established in the DFW under the UNDP-financed, FAO-executed Forest Inventory Project. A draft
Code of Forest Management Practice has been prepared and arrangements have been made for DFW
staff to work with concessionaires on management plan revision as a step toward bringing operations into
accordance with the new requirements.

10.     Full adoption of the revised concession management system would require issuance of
appropriate regulatory instruments as well as investment in equipment and vehicles, staff training, and
technical assistance (a portion of concession supervision could be contracted to third party monitors).
Implementation would begin on concessions already targeted with expansion to new areas depending on
the rate at which contract disputes can be resolved and the possible pace of capacity building and
contracting for additional services.

11.     Forest Policy. All these recommendations relate to the need for fundamental changes in how
forest policy is made and implemented in Cambodia. Beyond the specific measures discussed above,
analysis has reinforced the need to improve governance in the sector and has also assessed the ways in
which stakeholders are involved in forest management and forest policy (see Box 1) and ways to improve
compensation and working conditions for government foresters. Analysis has also highlighted the
inadequacy of land allocation procedures, indicated the need to find ways to employ forest resources to
support the demobilization and reintegration of military forces, and suggested the scope for using forest
revenues to support decentralization.

          Box 1. Village Livelihood Impacts of Industrial Forest Concessions--The Need for Reform
       A study by DFW staff in Kampong Thom province dramatically illustrates the need for changes in the way
commercial forests are utilized in Cambodia. Properly introduced, these reforms can be beneficial to local
communities, concessionaires, and the national Treasury.
         In a concession operated by an international investor, the study documents how the concession’s operations
have deprived villagers of road access, of the traditional use of the forest for resin and gum collection, and of the
harvest of small, non-commercial trees for firewood and other local uses. The concessionaire even bulldozed the area
around the village pagoda and used the area as a log dump. As relationships deteriorated, the company seized        ox-
carts and animals being used by villagers to collect logs in the concession area, and in another incident ox-carts were
burned and livestock killed. The deputy chief of the commune is quoted as saying, “I was unable to help my people
and my guess is perhaps that the burning of the company trucks is related.”
        In a neighboring concession, while relations are not perfect, a greater effort has been made by the
concessionaire to give villagers access to and use non-timber forest products. As a result, violence has been avoided
and commercial activities are proceeding unimpeded. These observations provide the basis for specific
recommendations for forest management regulations and demonstrate to DFW staff the need for proper regulation of
concessionaires and the involvement of local people in land allocation and forest management.
Source: Executive Secretariat of the National Committee on Forest Policy in association with ARD, “The Study of
Effects of Forests on Rural Livelihoods in Kampong Thom Province, Cambodia,” February 1998.

                      C. Weak Governance and the Effects of the Regional Financial Crisis

12.     Cambodia’s position as a relative latecomer to the international timber market and its relative
lack of a coherent long-term strategy have left it susceptible to shocks arising from financial dislocation
in East Asia. Thus, the onset of regional financial crisis in the second half of 1997 temporarily erode the
average stumpage value of Cambodian timber from more than US$70 per cubic meter to less than US$14
per cubic meter, and contributed to the acceleration of illegal logging to the level of 3-4 million cubic
meters. These results are the cumulative impact of the crisis working through several pathways: (i) a
general weakening of prices owing to contraction in key export markets (particularly Japan, Korea, and
Thailand); (ii) crisis-driven efforts to increase exports by Cambodia’s more established competitors
(primarily Malaysia and Indonesia); and (iii) the effect of the overall flattening of economic activity in
the domestic economy, which put greater pressure on weak sector governance to allow fellings to expand
beyond controlled or sustainable levels.

13.      Timber and Sawnwood Prices. World markets for timber, sawnwood, and wood based panels
are increasingly integrated and are highly responsive to developments in the global economy and to
policy actions by major market players. Prices for tropical logs from Asia reached their peak in 1993 and
started to decline in part because of the relaxation of restrictions that Malaysia had introduced on log
exports. This downward trend, from a peak of nearly US$400 per cubic meter, 3 brought prices down to
less than US$300 per cubic meter in 1995 (in nominal terms). This trend accelerated in 1997 because of
currency depreciations in the region and the collapse of demand. Malaysian log prices fell 11 percent
between the third and fourth quarters, and by December 1997 prices were below their December 1996

14.     Prior to the onset of the financial crisis in the second half of 1997, recession in Japan had
already begun to lower the demand for timber from Southeast Asia. Housing starts in Japan were down
by more than 20 percent in the last quarter of 1997 compared with the previous year. The currency
depreciations in Southeast Asia have also had a further strong negative impact on timber demand in the
region. Recorded imports of timber products by Thailand and the Philippines, the two largest net
importers in the region, have nearly come to a standstill.

15.     While the weakness of forestry sector administration means that detailed and highly reliable data
are not available on wood prices in Cambodia, RGC studies provide some indication of the development
of prices and markets. In 1996 the World Bank estimated that the average stumpage value (the economic
value of standing timber calculated from the border price of wood less all costs of felling, processing,
and transport) was approximately US$70 per cubic meter. By the 1997-98 logging season, however,
prices had deteriorated in line with the global and regional trends discussed above. Based on the best
information available, by early 1998 Cambodian stumpage values had deteriorated to below US$40 per
cubic meter.

16.     Market Responses. While comprehensive data are not available, industry observers report that
log exporters in Indonesia and Malaysia have responded to the drop in prices by attempting to accelerate
exports. This has been accentuated in the case of Indonesia by the lowering of export duties on logs from
the prohibitive level of taxation that had replaced the Indonesian log export ban approximately one year
ago. At the same time, the construction demand for wood in Thailand appears to have stalled in 1998.
The Vietnamese demand appears to continue to be strong owing partly to the need for reconstruction
following storms in 1997.

17.      Impacts in Cambodia. In Cambodia, these price trends have combined to place strong
downward pressures on wood prices. The estimated residual stumpage value of Cambodian logs given
above is based on conventionally measured costs of production. However, much of potential for
increasing government revenue lies in re-channeling private and unofficial rent capture. Ruzicka (1998)
offers a number of estimates of stumpage prices in Cambodia over the 1997-98 period.4 His estimates
are differentiated mainly by the extent to which explicit attention is given to unofficial charges (bribes
and other charges) and to the possibility that extra costs might be associated with achieving sustainable
forest management. While the latter is open to question because of strong evidence from many settings
that sustainable practices are actually cost reducing, the entrenched practice of extrabudgetary charges is
an important consideration with respect to the behavior of logging interests and to the prospects for
increasing government receipts from forestry, especially in the short term.
    For meranti logs delivered to Japan.
    Taxation and Policy Reform in Cambodian Forestry, Working Paper no.1, ARD Forestry Policy Reform

18.      Evidence of Unofficial Charges. Table 1 illustrates the problems associated with unofficial
payments and the reach of these practices. For a shipment of logs from the forest landing in east central
Cambodia to processing facilities near Phnom Penh, at least eight supplementary payments totaling
US$14 per cubic meter (or 11 percent of the CIF value of the shipment) are needed on top of official
royalties5 and unofficial charges associated with the original felling operation. The largest single
charge, US$7 per cubic meter (or 5.3 percent of the CIF value) is paid to provincial authorities and is
widely recognized as a significant source of resources for regular provincial operations. The second
single largest charge is to the local military US$1.70 (or 1.3 percent). In total, extrabudgetary charges
by forestry personnel amount to somewhat more than 4 percent. Total additional charges (often called
facilitation fees), including those directly associated with the felling operation, amount to approximately
US$50 per cubic meter. Logging operators in Cambodia claim that these charges, on top of official
royalties and other taxes, currently make profitable operation impossible. These levels of side payments
and extrabudgetary charges are indicative of weak governance in public resource management which has
been exacerbated by the stresses in the Cambodian economy as a result of the financial crisis, the
political events of July 1997, and the ensuing losses of financial support from various donors.

               Table 1: Selected Costs Associated with an Internal Log Shipment of 4,000 Cubic
                Meters from a Province in East Central Cambodia to Phnom Penh, 1997-98
                                                (in US dollars)
                                                         Per Cubic Meter      Shipment Total   Percent of
            Estimated Value (delivered)                        130.00             520,000         100

            Provincial Authorities                               7.00               28,000          5

            Military Authorities                                 1.70                6,800          1

            Provincial Forestry Officers                         0.88                3,500          1

            Foresters at Checkpoints                             2.75               11,000          2

            Foresters at Intervening Provinces                   0.50                2,000          0

            Forestry Officials at Final Destination              1.38                5,500          1

            Total Extrabudgetary Charge                         14.20               56,800         11

            Source: ARD report.

19.      Evidence of Illegal Timber Trade. Even more serious is the general breakdown of law and
order that appears to be taking place in the forestry sector. Table 2, based on work conducted for the
National Steering Committee on Forest Policy, illustrates the estimated distribution of illegal activity in
the forestry sector by province and by type of infraction. While the illegal activity is spread across the
country, it is interesting to note that nearly half of all illegal activity arises in two provinces (Koh Kong
and Kratie) and nearly three-quarters in only five (Koh Kong and Kratie plus Battambang, Rattanakiri
and Kampong Speu). In Koh Kong alone nearly 95 percent of illegal activity is the processing of
illegally felled logs for exports.6 Data and analyses of this kind are first step toward the design of an
effective and targeted law enforcement campaign.

     The government has decided to increase the official royalty from US$14 per cubic meter to US$54 beginning
     January 1, 1999. Realization of this remains to be seen as it could involve re-negotiating concession contracts.
     This suggests that the government’s log export ban is having an effect, but not an overall impact, on illicit

                     Table 2: Estimated Timber Trade by Province of Origin and Category, 1997-98
                                            (m3 Roundwood Equivalent)
              Province        Concession    Collection of Illegal Domestic Illegal Sawnwood     Total      Total Roundwood
                              Operations   Illegal Fellings and Export    in Domestic and     Roundwood     Equivalent (%)
                                                                Log Form         Exports      Equivalent
      Rattanakiri                  447                           300,000           12,800       313,247           7
      Stung Treng                                   100          110,000           96,000       206,100           5
      Kratie                   105,900         183,800           140,000         192,000        621,700          15
      Mondulkiri                                                14,500           19,200          33,700           1
      Kampong Thom              68,400         25,200           75,000           57,556         226,156           5
      Kampong Cham                                              45,000           66,667         111,667           3
      Kampong Speu                                              10,000          240,000         250,000           6
      Kampong Som               15,400                                          128,000         143,400           3
      Kampot                                                                    102,222         102,222           2
      Koh Kong                  58,300           300           15,000         1,392,000       1,465,600          35
      Battambang                                              250,000           200,000         450,000          11
      Bantey M. C.                                                               88,889          88,889           2
      Pursat                                                    70,000           96,000         166,000           4
      Preah Vihear                                              65,000                0          65,000           2
      Siem Reap                                                                        0              0           0
      Others                                    3,600                                  0          3,600           0
      Total                    248,447       213,000         1,094,500        2,691,333       4,247,280         100
      Percent of Total            6             5                26               63             100

                                D. Revenue Potential Under Alternative Scenarios

20.      With a view to contrasting the revenue potential from forestry under different policy
implementations, a simple financial model of the Cambodian forestry sector is developed. The model
provides a way to track sectoral performance and compare different scenarios according to several key
indicators, including harvest level, operated area, and government revenues. Initial data on the forest
resource, prices, price trends and costs, and the rate of harvesting are extrapolated by the model to yield,
for different policy scenarios, internally consistent predictions of the various performance measures. In
other words, for example, harvest levels are fed back through the model to ensure that future harvests are
consistent with future timber availability. The model is not an optimization model and is adjusted in
several respects by assumptions on the pace of the growth of harvesting.

21.     The model is applied for three alternative scenarios over the period of the next 30 years: (i) a
continuation of the current levels of illegal logging and minimal revenue collections from authorized
concessions and illegal log “collections”; (ii) full implementation of the currently conceived concession
system (based on essentially fixed royalties of US$14 per cubic meter); and (iii) an improved concession
policy framework, with phased introduction and royalties based on border price equivalents (see Table
3). The model calculates revenues on the basis of price projections, the level of logging activity
generated by government policy, and initial estimates of the area under management and the possible
pace of expansion. It uses data on the Cambodian forest resource, the current levels of illegal logging,
and recent prices and their prospects for recovery. 7

     The model employs price estimates based on current international market wood prices adjusted to stumpage
values by subtracting transport, harvest, and other costs. Prices are projected forward into time on the basis of World
Bank projections for tropical logs. Bank projections forecast recovery of the timber market from the effect of the
regional financial crisis and the resumption of a long term upward trend in real prices. Because the Bank projects
especially strong recovery in timber markets, the rate at which prices are projected to recover has been reduced by 75

                           Table 3: Assumptions in the Forestry Revenue Projection Model
          Parameter                           Base Case Value                Basis of Estimate

          Annual Allowable Cut                500,000 cubic meters           See text
          Royalty (existing contract rate)    US$14 per cubic meter          Concession contracts
          Royalty (economic value)            US$40                          Ruzicka (1998)

         Source: Staff estimates .

22.      For 1997, model results closely parallel actual results in the sector, with total fellings at
approximately 4.3 million cubic meters, of which a total of around 11 percent is officially or quasi-
officially sanctioned. Government royalty revenues come to approximately US$10 million (somewhat
more than the US$7 million now estimated for the 1997-98 season). Extrabudgetary flows, which derive
more closely from international prices than do official royalties, amount to approximately US$70

23.      To compare a continuation of this situation, the model projects the Cambodian forest into the
future requiring consistency over time between extractions and future harvests, and compares the results
to two alternatives: full development of the concession system under (i) the current set of contracts and
prices and under (ii) a full rent recovery policy. The full rent recovery policy would involve open trade,
market-based royalties, and harvests held to a sustainable level as recommended by the World Bank, the
UNDP, and the FAO (1996). Under current conditions, overexploitation has lowered the value of the
forest and is projected to remove some 25 million cubic meters, eliminating the commercial potential of
the forest in about five years (DAI report, 1998). Under the concession as planned scenario, production is
assumed grow to a peak level of extractions equal to approximately 3.6 million cubic meters per year in
2001 and to tail off to a depressed level of extractions of approximately 350,000 cubic meters for the
balance of the 30-year planning horizon. It is likely that the impact of the high level of logging
implicitly proposed for the current concession program would, by “high-grading” the forest, result in
even greater reductions in the long term potential of the forest, making the model results very
conservative in terms of its projected benefits to forest policy reform.

24.      For the full rent recovery scenario, the single most critical parameter in the model is the
estimated annual allowable cut (AAC). The AAC is intended to be the maximum level of extractions
that can be sustained into the future. In forests with even age and size distributions, the calculation of
AAC is relatively simple, provided that data are available on forest areas and stocking. In Cambodia,
where data are scarce and limited, and where the structure of the forest is badly skewed because of the
legacy of bad management, there may not be a single or unique harvest level that can be maintained over
time. It is more likely that the desirable harvest level will vary in response to the gradual evolution of the
uneven structure of the forest. This is partly subject to modification through the application of
silvicultural interventions (for example, enrichment planting, thinnings) and needs to be defined
operationally on the basis of detailed plans based on inventories and site assessment. On a national basis,
the key variables affecting the approximately desirable harvest level in the near future are the areas and
conditions of the various forest types shown in Table 4.

percent. In the model, this translates into recovery from stumpage of US$30 per cubic meter at present to pre-crisis
levels in four years increasing to above US$200 per cubic meter by 2010. To permit comparison of revenue streams
over time with quite different compositions, financial values are discounted at a rate of 10 percent.

                                      Table 4: Forest Cover in Cambodia
           Forest Type                                  Area               Percent of        Percent of
                                                                          Forest Area        Land Area

           Evergreen Closed                             634,869                 6                 3.5
           Evergreen Disturbed                        3,323,527                3                 18.3
           Evergreen Mosaic                             135,632                1                  0.8
           Semi-Evergreen Closed                        111,842                1                  0.6
           Semi-Evergreen Disturbed                   1,184,689               11                  6.5
           Semi-Evergreen Mosaic                         97,905                1                  0.5
           Deciduous                                  3,777,678               36                 20.8
           Deciduous Mosaic                             274,553                3                  1.5
           Regrowth                                     544,778                5                  3.0
           Swamp Regrowth                                23,591                 0                 0.1
           Swamp                                        222,150                 2                 1.2
           Mangrove                                      77,260                 1                 0.4
           Bamboo                                        21,823                 0                 0.1
           Swamp Mosaic                                 105,465                 1                 0.6
           Total Forest                              10,535,762               100                58.1

           Note: Totals may not add owing to rounding.
           Source: Department of Forestry and Wildlife, Inventory Office, data from Mekong River Commission
           Forest Cover Monitoring Project.

25.     With respect to the determination of an approximately sustainable harvest level, two forest types,
Evergreen and Deciduous, account for more than half of the total forest area, and the Deciduous forest
has limited commercial potential. Of the Evergreen forests, the great bulk falls into the Disturbed
category and it is here that the worst excesses of illegal and poorly control logging have taken place.
Evergreen Closed forests, which are believed to be well stocked, however, are in total only 6 percent of
total forest area and all of this area may not be suitable, for environmental and other reasons, for
commercial exploitation. The allowable cut depends critically, as well, on the condition of the Disturbed
Evergreen area, which could range from severely overlogged to areas with adequate regeneration.
Assuming the area of Evergreen forest could be reasonably well distributed and its regeneration potential
protected, the total area of approximately 4 million hectares with a growth of approximately 0.3 cubic
meters per hectare per year would yield an allowable cut in the range of 1-1.2 million cubic meters. If,
however, as appears to be the case, uncontrolled logging has significantly disrupted the structure of the
forest and delayed regeneration, a sustainable yield could be significantly lower. Consequently, for this
calculation it has been conservatively assumed that the annual allowable cut will be on the order of
500,000 cubic meters per year (under the assumption that controlled harvest would rise from 0 to
500,000 cubic meters over six years). This is equal to only 13 million cubic meters over the entire
planning horizon, allowing what should be adequate regeneration to ensure sustainability.

26.     The full rent recovery scenario generates a present net value return to the budget of US$631
million compared with only US$75 million under the continuation of the current situation. It should
be noted that the revenue enhancement under the full recovery scenario would be gradual as this scenario
assumes environmentally sustainable harvesting and step-by-step implementation of medium-term
recommendations to be made by the four studies.

                        Table 5: Revenue Potential from Forestry under Alternative Scenarios
                                                     Rent            Present Value    Average        Average           Average
                                                  Recovery             of Revenue      Annual     Extrabudgetary     Annual as %
                       Scenario                     Ratio              (30 years)    Government       Flows        of Total 1994 1/
                                                 (Percentage)                         Revenues     (until 2003)      Government
                                                                         Mn. $         Mn. $          Mn. $           Revenues
1: Continuation of Current Situation                   12                 75             3.2           151                2
2: Full Implementation of Existing System              39                 245           18.0            -                 9
3: Full Rent Recovery Policy                          100                 631           82.4            -                41

1/ Share of timber revenues was 17 percent in 1994 which was an all time high.
Source: Staff estimates.

                                               E. Recommendations and Assistance Needs

27.     The government must take the following "emergency measures" immediately to arrest the
deteriorating situation:

                 Stop granting new concessions.
                 Freeze granting approval for all new investments in wood processing.
                 Establish mechanisms for the monitoring and prevention of illegal log felling and exports.
                 Enforce cancellation of all permits for "collection" of logs and stop issuing new permits.
                 Strengthen the Forestry Department, with a clear mandate and responsibilities.

28.     Over the medium term, the government must implement the recommendations of the studies
assisted by the Bank technical assistance, which are essentially completed and which embody the
framework suggested by the Bank/UNDP/FAO and by the government's own forest policy consultants.

                 Log Control and Monitoring. The current forest law enforcement crisis justifies a special
                  effort to control illegal logging, increase revenue collection, and move toward a more
                  efficient log trade regime. A set of protocols for assessing the scope, spatial distribution,
                  and character of illegal logging has been tested and is being developed for transfer to the
                  RGC. Government has recently issued orders calling for cooperation by the military and
                  police in controlling illegal logging and several seizures of equipment of logs have been
                  published. These need to be reinforced with budgeted program. Proposals for log and
                  logging control are being developed as are recommendations for public awareness and
                  education and government staff training.

                 Legal Study. Concession contracts are badly biased against the government, but do specify
                  performance obligations which are likely to form a basis for a structured and legally
                  defensible challenge to individual contracts on a case-by-case basis. A draft model contract
                  has been prepared, comments on the draft forest law have been submitted, and a training
                  program has been conducted. Forest legislation needs to be resubmitted to the National
                  Assembly following revision. An earlier draft did not provide an effective platform for
                  forest exploitation and risks perpetuating the current system of arbitrary allocation of forest
                  resources and also does not resolve key institutional issues (for example, provincial-central
                  lines of authority).

                 Forest Concession Management. Concessions can provide the basis for sustainable
                  sectoral development provided a satisfactory policy framework is put in place, regulations
                  are strengthened, and security and technical guidelines are enforced. A system of planning,

             harvesting, and revenue systems will be provided and, following review and consultation,
             will need to be formalized through appropriate legislation or regulation and implemented
             through pilot projects.

            Forest Policy. Elements of the government's forest policy are at odds. Pressures for
             immediate revenues are now overwhelming concerns about sustainability, strong measures
             and commitment will be needed to redirect privately appropriated rent to the public
             treasury, land allocation is chaotic and arbitrary, community involvement in forest
             development is severely limited, and public statements are inconsistent.

29.      To reach these medium-term objectives, the government must take the following actions over the
next few months: prepare a proposal for illegal logging control; prepare the illegal logging monitoring
program; undertake a performance review of concessions, and prepare the Cambodia Code of Forest
Practice (CCFP) which is essentially an operational manual that lays out the rules for concession
operations. In the subsequent few months, these actions should be followed by: the preparation of revised
forest law; decisions on the termination or renegotiation of concession contracts; the issuance of a sub-
decree establishing the operational manual for concession management; the strengthening of the
implementation capacity of forestry management; and the strengthening of the law enforcement capacity
regarding illegal logging.

30.     Assistance Needs. The immediate assistance needs consist of four main activities: (i)
developing improved forest legislation; (ii) establishing special emergency measures to control illegal
logging; (iii) facilitating the resolution of contract disputes; and (iv) strengthening RGC supervision of
forest management on selected concessions. Basic guidelines for these activities are already available
from study results, although some additional effort is needed to cost out specific inputs. The DFW
Secretariat, which is now managing the technical assistance studies on behalf of the RGC would need to
be strengthened to serve as a project management unit for the implementation phase.

31.     Preconditions for assistance could include requiring commitments by the government to
eliminate logging authorizations outside of concession areas, to use the draft model concession contract,
to revise the draft forest legislation, and to consider replacing the log export ban with a temporary,
presumptive tax on log and sawnwood exports. 8 Commitments would also be sought from select
concessionaires to undertake to manage in accordance with draft management plans prepared under the
ongoing studies to formalize the proposed system for forest concession management through an
appropriate government order.

32.      Further development of this policy framework would also create a need for, and would allow for
the effective development of, substantial incentives in the regulatory and operational capacity of the
DFW. This would have to involve substantial investments in physical infrastructure (new and
rehabilitated field offices), equipment (transport, communications, field equipment), staff and forest
worker training, and planning and management systems.

    Agreement in principle has already been indicated by RGC on most of these points.

09/21/98 1:17 PM

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