Valuation Study

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Average Cost of Forest Plantations

Attributes

Medium: Land

Country: Indonesia

Analytical Framework(s): Other

Study Date: 1999

Publication Date: 2002

Major Result(s)

Category Resource/Environmental Good IDR
(1999)
IDR
(2014)1
USD
(2014)2
Government standard average cost with mechanized site preparation 3,743,000.00 7,911,055.08 643.31
Government standard average cost with manual site preparation 3,435,000.00 7,260,078.60 590.37
From sample (32 companies) average cost 4,243,990.00 8,969,927.50 729.41

About the Inflation Adjustment: Prices in Indonesia (IDR) changed by 111.36% from 1999 to 2014 (aggregated from annual CPI data), so the study values were multiplied by 2.11 to express them in 2014 prices. The study values could be expressed in any desired year (for example, to 2024) by following the same inflation calculation and being sensitive to directional (forward/backward) aggregations using your own CPI/inflation data.

Study Note: From a policy perspective, the elasticities of the stochastic frontier production model as well as the coefficients of the inefficiency models address a number of relevant issues. For instance, the skilled labor variable in the stochastic frontier production model is related to training and education policies in the plantation sector; the equipment variable is closely related to site preparation policies; and the government financial support variable is related to subsidy policies. In other words, policy implications can be derived from the interpretation of the elasticities of the coefficients of the model used in the study. This research will focus on the estimation of the efficiency levels of plantation firms and identifying what the determinants of efficiency levels are.

Study Details

Reference: Bambang Tri Hartono. 2002. Can Forest Plantations Alleviate Pressure on Natural Forests?. EEPSEA Research Report, No. 2002-RR.

Summary: This study examines the efficiency of the industrial timber and pulp plantation program in Indonesia using panel data from 1994 to 1998. Thirty-two companies from four provinces were included in this study. Firm-specific technical efficiencies were computed from the estimation of a stochastic frontier production function. The efficiency of a firm is measured by the shortfall of realized planting against what fully efficient firms could have produced using the same amount of inputs. The estimated technical efficiencies of the plantation firms varied widely, ranging from 0.12 to 0.93, and 0.13 to 0.93, with a mean value of about 0.60 for both analyses. This mean value of 0.60 indicates that during the period of study, the firms were, on average, 40% inefficient. This means that the firms could have performed almost twice as much as what they actually achieved during the period 1994 to 1998, with the given level of inputs. Considerable technical inefficiencies were found in the industrial timber and pulp plantation companies included in the study. Sub-optimal efficiency levels appeared to be a hindrance in alleviating the pressure on the natural rainforests. The results showed that plantation size, choice of scheme, and the involvement of local people were significant determinants affecting variations in the level of inefficiency. Self-financed schemes and the involvement of local people had serious adverse effects on efficiency. The involvement of local people was measured by local people employment in the plantation firms. The study found that the less efficient firms were generally those with a high proportion of local employees. Medium and large-scale plantations and pulp schemes were found to contribute to higher efficiency. This evidence contradicts the Government's policy of limiting landholding size and suggests that a governmental reform of transmigration and self-financed schemes is called for. The findings also advocate that the Government should proceed with the privatization of efficient medium and large-scale plantation companies.

Site Characteristics: The current forest-based industries in Indonesia, with a total installed capacity of 63.48 million cubic meters of logs per year, are expected to continue to be dependent upon tropical rainforests over the next several years. The capacity of forest resources to provide raw material support for forest-based industries is, however, becoming very limited. Official data from the Ministry of Forestry indicate that the existing commercial volume of standing stock could sustainably yield logs of 20 to 25 million cubic meters per year which is close to official log production figures. This means that sustainable yields can supply only about a third of the volume needed to keep existing forest-based industries operating at full capacity. Based on the current rate of harvesting, the timber supply situation in Indonesia presages a bleak future. Unless adequate remedial action is taken, the country's forest reserves will soon be depleted. It has, in fact, been predicted by the Ministry of Forestry that before the turn of the century, the annual log shortage of 44.45 million cubic meters is likely to be a serious problem faced by Indonesia.

Comments: The results of this research must be interpreted with caution as firms were not randomly selected for this study; rather, the purposive sampling technique was used. This study provides an overall measure of technical efficiency, identifying differences in technical efficiencies among different schemes and plantations of different sizes, and providing measures of local involvement and productivity.

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