Valuation Study

Cost of Timber Marketing

Attributes

Medium: Land

Country: Sri Lanka

Analytical Framework(s): Market Price of Output

Study Date: 2001

Publication Date: 2002

Major Result(s)

Study Note: Forest cover in Sri Lanka has declined drastically during the last century. Some of the remaining forests, which are under protection, harbor high levels of biodiversity and endemism. Illegal timber extraction is the most important cause of deforestation at present. The illegal logging now occurring in unprotected forests may extend to protected forests, if necessary policy measures are not implemented. The main policy currently employed to limit deforestation is a timber permit system. This study assesses that policy and four alternative policy measures: legislative approaches; establishment of forest plantations; improvements in the technical efficiency of saw-milling; and liberalization of the timber market. The study finds that the timber permit system has failed to protect Sri Lanka's forests. It has instead resulted in higher timber prices for consumers and lower prices for producers, allowing most of the timber rents to be extracted by timber traders. Furthermore, it has not promoted conservation: low producer prices provide a disincentive for growing trees, while high consumer prices encourage illegal timber extraction from natural forests. Despite the profitability of commercial forest plantations, the private sector does not invest in forestry because of the uncertainty created by the excessive regulatory system.

Study Details

Reference: H.M. Gunatilake, L.H.P. Gunaratne. 2002. Policy Options for Conserving Sri Lanka's Natural Forests. EEPSEA Research Report, No. 2002-RR.

Summary: The study found significant technical inefficiencies in sawmills. On average, the current output can be obtained with 28% less of all the inputs. Quality of logs, age of machinery, owner's management practices and current system charges are the determinants of technical efficiency. With plausible assumptions, the analysis shows that elimination of 50% of the technical inefficiency could prevent deforestation of about 7,390 ha per annum.

Site Characteristics: Forest lands cover only 30% of the land area in the world. Of the total forested area, 40% are tropical forests and 20% are woodlands. These tropical forests harbor a significantly higher proportion of the world's genetic materials. Sri Lanka contributes to the global wealth of genetic materials and biodiversity by harboring important tropical rainforests. It has a land area of 6.56 million ha, of which, 80% was closed-canopy natural forests at the beginning of the 20th century. This forest cover dwindled to about 18% by 1992. The annual rate of deforestation between 1956 and 1992 was more than 40,000 ha while the average annual replanting of forest plantations during the same period was only 2,000 ha. The factors contributing to deforestation and forest degradation are extensive and complex. Some factors which contributed to deforestation are outside the forestry sector. These factors include large agricultural and human settlement projects such as the Mahaweli project, shifting cultivation, excessive timber-harvesting and, harvesting non-timber forest products (NTFP). The potential for a large scale agricultural expansion is already realized in Sri Lanka. There is no room for such projects in the future. Shifting cultivation has been curtailed successfully. NTFP harvesting may or may not contribute to forest degradation depending on the situation. Given the above reasons, timber-harvesting seems to be the most important factor contributing to current deforestation in Sri Lanka.

Comments: Timber market liberalization was analyzed in a static framework, using various assumptions about demand and supply elasticities (i.e. the degree to which producers or consumers respond to changes in prices or incomes). The lowest impact was observed when price elasticity of demand and supply are inelastic. In that case, timber market liberalization would reduce local supply of timber by about 13%, leading to a saving of about 9,569 ha of natural forest annually. The four policy options were compared using criteria such as short-term and long-term implications, effectiveness, political feasibility and economic efficiency. Timber market liberalization was found to be the most attractive option for protecting natural forests in Sri Lanka.

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