Forest Management in Nepal - World Bank · Forests and Soil Conservation, and national consultants....

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WORLD BANK TECHNICAL PAPER NO. 445 714 Work in progress WTP445 for public discussion August 1999 Forest Management in Nepal Economics and Ecology Ian Hill Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Transcript of Forest Management in Nepal - World Bank · Forests and Soil Conservation, and national consultants....

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WORLD BANK TECHNICAL PAPER NO. 445

714

Work in progress WTP445

for public discussion August 1999

Forest Managementin Nepal

Economics and Ecology

Ian Hill

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WORLD BANK TECHNICAL PAPER NO. 44S

Forest Managementin NepalEconomics and Ecology

Ian Hill

The World Bank

Washington, D.C.

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Copyright ( 1999

The International Bank for Reconstruction

and Development/ THE WORLD BANK

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Washington, D.C. 20433, U.S.A.

All rights reserved

Manufactured in the United States of America

First printing August 1999

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sources cited in this paper may be informal documents that are not readily available.

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ISBN: 0-8213-4480

Library of Congress Cataloging-in-Publication Data

Forest management in Nepal : economics and ecology.p. cm. - (World Bank technical paper: #445)

ISBN 0-8213-4480-31. Forest Management-Nepal. 2. Forests and Forestry-Economic aspects-Nepal. I. World Bank. II. Series:

World Bank technical paper; no. 445.

SD235.N4765 1999

333.75' 17'095496-dc2l

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Contents

Preface ........................................................... vii

Currency Equivalents/Weights and Measures/Acronyms and Abbreviations ........ viii

Executive Summary ...................................................... ix

Introduction .......................................................... 1

A. The Importance of the Forest Sector in Nepal ....................... 1

Forest Cover ................................................ 2

Deforestation and Degradation .................................. 4

Impact of Deforestation and Degradation .......................... 4

B. The Report ................................................. 5

Chapter 1: Analytical Framework ......................................... 16

A. Approach .................................................. 7

Forest Products and Management Systems ......................... 7

Analytical Framework ......................................... 7

B. Implications for Biodiversity and Agricultural Production ............. 13

Biodiversity ................................................ 13

Agricultural Production Systems ................................ 14

Environmental Sustainability ................................... 14

Chapter 2: Financial and Economic Analysis of Alternatives .................... 16

A. Analytical Methods .......................................... 16

B. Results ................................................... 17

Results of Financial Analysis ................................... 17

Results of Economic Analysis .................................. 18

Chapter 3: Economic, Social, Institutional, and Legal Issues . . 21

A. Economic and Policy Issues ................................... 21

Economic Policy Issues ....................................... 21

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B. Social Dimensions ........................................... 23

C. Institutional Issues ........................................... 28

D. Legal Framework ........................................... 33

Chapter 4: Conclusions .................................................. 34

A. Strategies for Change ........................................ 34

Options for Change .......................................... 35

Policy Changes ............................................. 35

National Strategy. Change from Scenario 1 to Scenario 2:Options and Implications ...................................... 37

Economic Implications ....................................... 37

Global Strategy. Change from Scenario 1 or 2 to Scenario 3:Options and Implications ...................................... 37

Social Issues ............................................... 40

Institutional Issues ........................................... 40

Legal Issues ................................................ 41

B. From Study to Implementation ................................. 41

Strategies and Policies ........................................ 41

Investment Needs ........................................... 43

National Strategy: Investment Needs ............................. 43

Global Strategy: Investment Needs .............................. 44

Sources of Financing ......................................... 45

The Role of the Bank ........................................ 45

Annexes .......................................................... 47

Annex 1. Team Composition and List of Working Papers .............. 47

Annex 2. Models for Financial and Economic Analysis ................ 48

Annex 3. Acknowledgments .................................... 49

References .......................................................... 50

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List of Tables

Table 1 Areas of Natural Forest Types ...................................... 2

Table 2 Forest Products and use in Relation to Forest Type andPhysiographic Region ............................................ 8

Table 3 Scenarios for Use of Products that Are Primarily Inputs to Agriculture ...... 10

Table 4 Scenarios for Use of Products that Are Primarily Marketed ............... 11

Table 5 Accounting Stance and Analysis for the Three Scenarios ................. 17

Table 6 Components of Financial Analysis of Representative Models ofSelected Forest Products .18

Table 7 Components of Economic Analysis of Representative Models ofSelected Forest Products ......................................... 19

Table 8 Scenario-Specific Marketing Issues for the Seven Forest Products ......... 24

Table 9 Social Issues Affecting the Seven Forest Products in the Three Scenarios ... . 27

Table 10 Institutional Issues Affecting the Seven Products in the Three Scenarios ..... 29

Table 11 Legislative Issues Affecting the Seven Products in the Three Scenarios ...... 31

Table 12 Change from Scenario 1 to 2: Options and Implications .36

Table 13 Economic Benefits of Improved Management for the Forest Products:Fuelwood Use, Management of Timber Production in the Terai, andControl of Rhino Poaching .38

Table 14 Change from Scenario 2 to 3: Options and Implications .39

Table A.2. 1 General Economic Model for the Three Scenarios .48

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List of Figures

Figure 1 Latitudinal Distribution of Forest Types for Eastern and Central Nepal ....... 3

Figure 2 Latitudinal Distribution of Forest Types for Western Nepal ................ 3

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Preface

This study was undertaken by a team drawn from the World Bank, the Ministry ofForests and Soil Conservation, and national consultants. The main objective of the study is toprovide a better understanding of the ways in which forest resources are used in Nepal.Although there is an extensive literature on Nepal's natural resources, there has been insuffi-cient analysis of the costs and benefits of present and possible future sustainable and biodiver-sity-friendly management practices from household, national, and global perspectives. Themain focus of the present study is, therefore, to examine these issues systematically.

The report is not meant to provide a catalogue of present resources and their status,though the existing literature on Nepal's natural resources provided the framework for the study.Instead, the report presents the analytical approach and methods used, quantitative results offinancial and economic analyses, and a discussion of the results in terms of their implicationsfor future management of forest resources. Policy, social, institutional, and legal issues are dis-cussed, and possible strategies for a more sustainable and biodiversity-friendly use of forestresources in the future are identified.

The report should be of use to national and donor agencies concerned with the manage-ment of natural resources and conservation of biodiversity in Nepal, providing a framework forpossible future donor support to the sector. It highlights issues that are of importance in the for-mulation and implementation of natural resource management programs by government andnon-government agencies.

Ministry of Forests and Soil ConservationHis Majesty's Government of Nepal

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Currency Equivalents

Currency Unit = Nepali Rupees (Rs.)

US$1.00 = Rs. 65

Weights and Measures

The metric system is used throughout this report.

Acronyms and Abbreviations

CF Community ForestryCBO Community Based OrganizationDNPWC Department of National Parks and Wildlife ConservationFD Forest Department

FUG Forest User GroupGEF Global Environment FacilityGDP Gross Domestic ProductIUCN International Union for the Conservation of NatureLSMS Living Standards Measurement Survey

MFSC Ministry of Forests and Soil Conservation

NGO Nongovernment Organization

OP Operational PlanNTFP Nontimber Forest ProductTCN Timber Corporation of Nepal

The study was undertaken by a team drawn from the World Bank, the Ministry of Forests and Soil Conservation,and national consultants. Team members are listed in Annex 1. Financial support for consultant participation in thestudy was provided by Danish Trust Funds. The study team gratefully acknowledges the contributions made by alarge number of people and organizations in Nepal. Many of these contributors are listed in Annex 6 and the teamapologizes for any omissions. Data used in the study were generously made available to the team and detailed dis-cussions with those with long experience of natural resource management issues assisted greatly in the develop-ment of the study.

Vice President: Mieko NishimuzuCountry Director: Hans RothenbuhlerSector Managers: Michael Baxter and Ridwan AliTask Leader: Ian HillCo-task Leader: Ethel Sennhauser

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Executive Summary

Objectives. The objectives of the study are:

* To examine the costs and benefits of existing forest use from three perspectives-household, national, and global-with a particular focus on their impact on biodiversityand the sustainability of agricultural production systems

* To examine the divergence between private and public costs of existing forest use, com-pare this with more desirable sustainable practices, and suggest measures to reduce thisdivergence through changes in policy, institutions, or regulations, in light of the analy-sis of the social implications of proposed changes

* To prioritize areas for change, and to identify investment needs and ways in which donorsupport could facilitate the implementation of change.

The Forest Sector in Nepal. About 7.5 million ha, or 51 percent of the total land areaof Nepal, is covered by forests and shrub land, although only about half of this area is unde-graded natural forest. Almost 90 percent of the people of Nepal depend on these forests for fod-der, fuelwood, food, building materials, medicinal plants and fertilizers, which are vital for theirsubsistence. Forests also provide a source of income. Timber and fuelwood collection and themanagement of nontimber forest products (NTFP) is important in local economies and isincreasingly reflected in national economic figures. The importance of NTFP is also reflectedin the fact that in certain areas of the Himalayas, they provide up to 50 percent of the incomeof a household. Intensive pressure on forest ecosystems for the collection of a range of forestproducts, particularly fodder and fuelwood, which provides 68 percent of the energy supplies ofNepal, is leading to rapid degradation with significant adverse impacts on the sustainability ofagricultural production systems and on biodiversity.

Analytical Approach. This study focuses on forest use and biodiversity issues withinoverall crop/livestock management systems, based on illustrative analyses of a number of for-est products which are used by people to support their livelihood as part of the rural economy.They are representative of the much wider range of products used by rural people in Nepal.Seven groups of forest products are considered to be of particular significance because they areimportant for the maintenance of biodiversity and because they contribute to long-term sus-tainability of agricultural production systems and rural incomes. Of the seven products, grassand forage and fuelwood and tree based fodder are primarily inputs into agricultural production.Five products, timber, charcoal, bamboo/rattans, medicinal plants, and wildlife products, areprimarily marketed products that contribute directly to income generation. Because forest useis governed not only by economic factors but by cultural values and perceptions and institu-tional arrangements as well, the results of financial and economic analyses are presented with-in a broader socioeconomic, institutional, and legal framework.

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Analytical Framework. The utilization of forest resources by families in Nepal can beassumed to be optimal (for the household) from a financial point of view, given the technolo-gies and resources available to them. That is, each resource user makes decisions that maxi-mizes the expected return to the household, given all of the various constraints that he or shefaces. Such private use, however, when analyzed from an economic point of view, may havesignificant costs to society, either nationally or globally, for various reasons. These include theexistence of environmental externalities, and the differences between private and social timehorizons. To test these assumptions, three different scenarios have been developed:

* Scenario 1. The household perspective

* Scenario 2. The national perspective

* Scenario 3. The global perspective

Implications for Biodiversity and Agricultural Production. The implications of thesethree scenarios for biodiversity and agricultural production are discussed in qualitative terms.Scenario 1, largely the present situation, has a mainly negative impact on biodiversity, whichmay be of local or global significance, depending on species and habitat affected. Similarly, thisscenario has adverse impacts on agricultural production due to reduced availability of biomassand increased labor required for collection of fodder and fuelwood. Scenario 2, in which thereis a focus on improved forest management and reforestation activities involving User Groups(UGs), has beneficial biodiversity results and positive impacts on agricultural production,though these may be offset by the constraints on access to protected areas, buffer zones, or bio-diversity corridors. In Scenario 3, management practices are designed to have an optimal impacton biodiversity, which may exacerbate the adverse impacts on agricultural production systemsassociated with Scenario 2.

Financial and Economic Implications. The economic and financial implications of for-est use under the three scenarios were examined based on a general economic model which wasused to prepare representative models for each of the products. The analysis provides importantinsights into the use of forest products in Nepal, notwithstanding the limited number of prod-ucts examined and the fact that the economic models may need modification to take account ofregional differences. Other limitations result from the lack of a comprehensive systems per-spective, the difficulty of accounting for displaced effort, and data constraints.

Financial Returns for Labor. Not surprisingly, the net financial returns to labor for thecollection of the products in Scenario 1 are greater than the opportunity cost of labor (Rs. 25per day). However, there is a clear division in returns to labor amongst the seven products.Organized poachers of timber, wildlife, and a few collectors of medicinal plants are able toearn relatively huge sums as the reward for their illegal activities. Activities such as illegalfuelwood collection, some medicinal plant collection, and charcoal production provide rela-tively low returns, usually below the farm wage (Rs. 50 per day) but above the assumed oppor-tunity cost of labor. Thus, it cannot be assumed that unsustainable forest use is uniformly

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Executive Summary

highly profitable. In Scenario 2 the same pattern appears, but returns to labor can be signifi-cantly higher than the opportunity cost of labor even for fuelwood collection. Data constraintshave limited the analysis for Scenario 3, but it is likely that the addition of biodiversity-friend-ly management measures will reduce the financial incentives compared to those realized inScenario 2.

Results of Economic Analysis. The economic analysis shows that the net economiclosses to Nepal in Scenario 1 are significant when quantified values for the effects of deple-tion and some off-site costs are included. Not surprisingly, adding the costs of environmentalexternalities and resource depletion often worsens the Scenario 1 estimates of economic (notfinancial) net returns. The data show that management under Scenario 2 can pay dividendsfor Nepal, as almost every product considered shows positive incremental benefits fromadopting such practices compared to the results from Scenario 1. It is difficult to calculate thetotal benefits because of uncertainties about the areas and species affected, but illustrativeestimates for fuelwood, timber in the terai, and rhino poaching indicate that the total incre-mental benefit of Scenario 2 for just these three products amounts to almost 14 percent of the1997 forest sector gross domestic product (GDP) of Rs. 8.2 billion. The economic analysesalso demonstrate that most biodiversity-friendly management practices in Scenario 3 can beexpected to have economic costs for Nepal when compared to Scenario 2. Finally, Scenario3 always shows an incremental gain as compared to Scenario 1, demonstrating that the pro-motion of sustainable development is compatible with global biodiversity conservation formost of the forest products analyzed.

Issues. The divergence between existing behavior of individuals as part of a householdand behavior which is desirable from a public or national perspective has been demonstrated bythe financial and economic analyses. The divergence is determined by economic policy andsocial, institutional, and legal issues. Economic issues relate to pricing, licensing, royalties,export and import controls, energy supply, the role of the private sector, and incentives and mar-kets. Social issues involve questions of access and tenure, socioeconomic status, caste and eth-nic group, labor, and cultural values. Public sector institutions responsible for management offorest resources are affected by issues of staffing, the management process, and budget andresource constraints. Community institutions such as FUGs provide mechanisms for manage-ment of local resources. Public-private partnerships and linkages are another important institu-tional concern. The main legislative issues affecting the seven products are due to conflictsbetween different laws, conflicts of authority for the control of forest or forest product use, orlegislative lacunae.

Strategies for Change. The study shows that Scenario 1, representing present, largelyuncontrolled use, is not sustainable in either economic or environmental terms. Scenario 2,based on the introduction of management or technical interventions, would be environmentallymore sustainable and have significant benefits for Nepal. Further management and technicalinterventions would enable biodiversity-friendly measures to be introduced in Scenario 3, butthese would have economic costs for Nepal, as the benefits would be essentially benefits to

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Executive Summary

global biodiversity. If these benefits are to be realized, important strategic choices need to bemade by the nation and the global community:

National Strategy: Change to sustainable management practices for the benefitof the nation, that is a change from Scenario 1 to Scenario 2

Global Strategy: Change to sustainable, biodiversity-friendly managementpractices for the benefit of the global community, that is, achange from Scenario 1 or 2 to Scenario 3

Global Environmental Benefits. Economic considerations suggest that the nationalstrategy will be the first choice for the nation unless global resources are made available for theimplementation of the global strategy. The choice for the global community, therefore, iswhether funds can be made available to Nepal to manage resources in a manner that providesenvironmental benefits of global significance.

Options and Implications. A number of options for implementation of the two strate-gies have been identified. These include policy changes; regulation of access, largely throughcommunity management of resources; improved forest management; reintroduction of threat-ened species; the use of alternative technologies; and wider control of poaching. The significanteconomic benefits and real benefits to many individuals in changing from Scenario 1 toScenario 2 have been noted above. However, cultural norms may inhibit change, and individu-als are unlikely to change behavior without either a change in prices or a change in regulationsand policies, which would encourage new behavior or enforce existing controls.

Scenario 2 Versus Scenario 3. The study also shows that there are benefits to Nepal ofintroducing Scenario 3, but these are not as great as for Scenario 2. Thus, there are opportuni-ty costs to Nepal of introducing Scenario 3 as opposed to Scenario 2. Most of these opportu-nity costs result from foregone production from additional areas set aside for protection, orfrom reduced production due to restricted access. It is difficult to estimate the total magnitudeof these costs because of the absence of decisions on the activities, implementation arrange-ments, or size of any additional areas that might be protected or managed in biodiversity-friendly ways.

From Study to Implementation. To bring about any of these changes, whether fromScenario I to 2, or from Scenario 2 to 3, will depend upon decisions on strategies and policies,followed by the identification of investment needs and possible sources of financing. The nec-essary priority actions have been identified and include:

Strategies and Policies

* Strategic decisions on:

- National strategy and investment in the introduction of more sustainableresource management represented by Scenario 2.

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Executive Summary

Global strategy and further investments in biodiversity-friendly management ofresources, represented by Scenario 3.

Policies and the Legal Framework

- Change policies related to the regulation of prices, movement, and trade inforest products prior to the implementation of any measures to change fromScenario 1 to Scenarios 2 to 3.

- Review related energy policies and policies that may affect the incentivestructure for individuals and communities.

- Review and modify legislation as needed.

* Geographic Focus

- As in all areas changes should contribute to the primary objective of introducingmore sustainable and biodiversity-friendly resource management, reviewwhether secondary objectives of changes are to (1) maximize the financial andeconomic benefits (2) benefit the greatest number of families or (3) have animpact on poverty alleviation.

- Focus implementation of change according to chosen secondary objectives.

* Studies and Research

- Undertake priority studies and research to provide a better understanding ofsocial, institutional, or technical issues.

Investment Needs

* EEstimate investment needs on the basis of decisions on which areas are to be treated andthe phasing of initiatives for changing to either Scenario 2 or 3. Such decisions wouldbe reached during program formulation, but the likely types of investments needed forthe adoption of the national strategy and the global strategy include:

- National Strategy-Scenario 2

- Regulation of access through expansion of community-based forestry andbuffer-zone management programs and strengthening antipoaching controls.

- Institutional development of community organizations, Non-GovernmentOrganizations (NGOs), and Ministry of Forests and Soil Conservation(MFSC).

- Improvement of management and processing through improved planningand provision of technical advice.

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Executive Summary

- Improvement of production and processing technology through extension ofproven methods and research and development of appropriate new methods.

Global Strategy-Scenario 3

- Identification and establishment of additional protected areas through extensionof biodiversity habitats to buffer zones and the creation of wildlife orbiodiversity corridors.

- Reintroduction of threatened species.

- Improvement of technology.

- Identify Sources of Financing.

* National strategy-Scenario 2, which results in increased social benefits: Government,multilateral, and bilateral development assistance.

* rGlobal strategy-Scenario 3, which imposes opportunity and direct costs on Nepal:international funding sources such as the Global Environment Facility and some bilat-eral donors.

Although the report focuses on a few forest products and examines a limited range oftechnologies, it provides the analytical framework for consideration of other initiatives thatcould be included in wider natural resource management programs. It should, therefore, be ofuse to the users of forest resources and to national and international agencies concerned withthe management of natural resources and the conservation of biodiversity.

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Introduction

This report examines the impact of the use of forest products on biodiversity and the sus-tainability of agricultural production systems in Nepal, and the costs and benefits of these prac-tices to a household, the nation and the global community. Although there is an extensiveliterature on Nepal's natural resources, there has been insufficient analysis of the costs and ben-efits of present and possible future sustainable and biodiversity-friendly management practicesfrom household, national, and global perspectives. The main focus of the present study is, there-fore, to examine these issues systematically and provide a framework for consideration of futureinvestments in the natural resource and forestry sector, financed from either government ordonor funds. More specifically, the objectives of the study are:

* To examine the costs and benefits of existing forest use from three perspectives-house-hold, national, and global-with a particular focus on their impact on biodiversity andthe sustainability of agricultural production systems

* To examine the divergence between private and public costs of existing forest use, com-pare this with more desirable sustainable practices, and suggest measures to reduce thisdivergence through changes in policy, institutions, or regulations in light of the analysisof the social implications of proposed changes

To prioritize areas for change and to identify investment needs and ways in which donorsupport could facilitate the implementation of change.

A. Importance of the Forest Sector in Nepal

The economy of Nepal is characterized by a large rural sector based on subsistence agri-culture, accounting for 41 percent of the GDP and 83 percent of the employment. Primary agri-cultural activities are based on crops and livestock, while forestry and forest resourcemanagement are secondary supporting activities. Local people are, nevertheless, dependent onforest resources. Almost 90 percent of the people of Nepal depend for their subsistence onforests for fodder, fuelwood, food, building materials, medicinal plants, and fertilizers. Thisstrong dependency of agriculture and livestock on forest resources is one of the main charac-teristics of the rural production systems of Nepal.

Forests also provide a source of income. Fuelwood provides 68 percent of the energysupplies of Nepal, and although fuelwood used in rural areas is seldom traded, there is a sig-nificant demand in small urban areas and from brick industries that is met by traders who pur-chase fuelwood from rural collectors. The management of nontimber forest products (NTFP's)is important in local economies and is increasingly reflected in national economic figures. Forexample, every year almost 15,000 tons of medicinal plants are harvested and traded in Nepal,with a total value estimated at US$8.6 million, but these figures do not reflect the large

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Introduction

quantities of illegally traded NTFPs, nor the significant quantities of nontraded NTFPs collect-ed. The importance of these products is reflected in the fact that in certain areas of theHimalayas, NTFP provide up to 50 percent of a the income of a household. Timber productionby local communities or by commercial private sector agencies has a good economic potential,particularly in the terai, but policy and legal constraints have delayed its development up tonow. These activities have an important impact on forest ecosystems, and given the global sig-nificance of Nepal's biodiversity, there is an urgent need to mnitigate any adverse effects of pre-sent management systems.

Forest Cover

Data (McKinnon, 1997) indicate that about 7.5 million ha, or 51 percent of the total landarea of Nepal, are covered by forests and shrub land (see Table 1), although only about half ofthis area is undegraded natural forest. The 1998 Government of Nepal Master Plan for theForest Sector of Nepal presents are different figures, as only areas with more than 10 percentcrown cover classed as forests. This indicates that the forest area amount to 5.5 millionshectares, or about 37 percent of the total land area of Nepal. The MacKinnon figures are usedin this report.) The forest cover includes a wide range of forest types, reflecting the varied cli-mate and topography of Nepal. Areas of natural forest types are summarized in Table 1, andtheir latitudinal distribution in the eastern and western parts of Nepal are illustrated in Figures1 and 2.

Table 1. Areas of Natural Forest Types

Elevation (m) ForestType Area (million ha)

3000-4000 Birch 0.2Subalpine Conifer 0.2

2000-3000 Blue Pine <0.1Dry Deciduous 0.3MontaneWetTemperate 0.6Himalayan MoistTemperate 0.3

1000-2000 Subtropical Pine 0.2Subtropical Broad-Leaved HillSemi-evergreen Rainforest 0.9

< 1000 Tropical Moist Deciduous 1.1

Subtotal 3.8

Degraded Forests 3.7

Total 7.5Source:ProtectedAreas Systems Review of the Indo-Malayan Realm. 1997. J. MacKinnon, ed.Asian Bureau for Conservation,Ltd., Canterbury, England.

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Introduction

Figure 1. Latitudinal Distribution of Forest Types for Eastern and Central Nepal

Central and East Nepal

Nivazone5000 m.

Aloine pasture Alpine Meadows

4000e iperp -ickess, Sales sod Rhododendron tree line4000 m .

Birch forest Brch nd Rhododendron AbiesspeusebilisSubalpine HIGHHILLS Be Usilizone

3000e. \ Subalpine conifer ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~eeuo_ \ ~~~~~~~~Oaks and RhododendrosQuru

Montane wet temoerate forest uQerc -useellosaTemperate zone Rhododendron

\_ Oaks and Alnu

2000 m. Al-s Nepale-sis

So ubtro. i cal zone M I D Hl LLSSubtropical broad-leaved h Miche_i

Subtropical zone farest slihi etnpiIODOOm

TERAI & SIWALIKS Tropical moist deciduous

forest

Figure 2. Latitudinal Distribution of Forest Types for Western Nepal

West Nepal

Nivalzone

5000 e,

alpine meadows

\ Alpine

J-nipersiukeks, SBli nd Rhododeudre tree line4000 bm. buhes

Birch birch end

Subalpine HIGH HILLS \d Abies epe-eb lie, Benslazone Subalpine conifer dub

_ ~~~~~~~~~~~forest f.,..d binch3000vs

Que-cuseeea - pfulia

Temperate zone Dry deciduous forest Piece welii, Abie

0e m0. Quenusi ncana, Q.I Hireala an molTnf4er0ee laugi-

MID HIHl S forest (oaks)

Subtropical zone u l n Piene -. b.roh,.

mo00 m. _ forest:

TERAI & SIWALIKS Tronpica moist deciduousforest Shr ob..a

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Introduction

Deforestation and Degradation

The extent of deforestation and degradation is shown in Annex 2, which indicates thatmore than 50 percent of the original forests have disappeared, and almost half of the remainingforest land is now degraded scrub land. Data in Table 1 shows there are over 36 million ha ofdegraded forests. Recent studies suggest that although deforestation still occurs in areas of theterai and high hills, deforestation rates are decreasing in the middle hills. However, forest degra-dation, defined as the loss of the normal functions of the forest in terms of production and con-servation, is increasing due to the intensive pressure on these ecosystems for the collection of arange of forest products, particularly fodder and fuelwood (Annex 2).

The causes of deforestation and degradation of the land resources in Nepal have beenwidely discussed in the literature. In the 1980s, the so-called theory of Himalayan environmen-tal degradation attributed deforestation and catastrophic erosion to dramatic increases in popu-lation growth in recent decades. It has since been concluded, however, that most erosion andflooding in the Himalayas result from the characteristics of the geological and climatologicalenvironment (Metz, 1991). Deforestation and conversion of upland forests to agriculture, whichMetz suggested took place in historical times, probably had a lesser impact on upland erosionthan earlier reviews suggested, although even small increases may be important. Forest degra-dation is, however, identified as a serious and continuing problem, linked to the increasingdemand for forest products from a rising rural population. In 1957, the government attemptedto address the problem through nationalization of the forests, but this led to the breakdown oftraditional management systems and accelerated the process of degradation. Realizing this, thegovernment introduced the community forestry program, which aims to give communities con-trol over the management of local forest resources.

Impact of Deforestation and Degradation

The main impacts of deforestation and forest degradation are erosion, compromise ofthe sustainability of agricultural production systems, and diminishing biodiversity.

* EErosion. Although much erosion in Nepal may be geological in origin, deforestationand, to a lesser extent, forest degradation may result in significant localized erosion,resulting in loss of farmland through landslides and decreased productivity through lossof topsoil and downstream siltation effects. The regional impact of geological erosionand transnational downstream effects are a subject of debate and beyond the scope ofthis study.

Sustainability of Agricultural Production Systems. Forest loss and degradation has aneven more significant effect on the long-term sustainability of agriculture productionsystems, given the strong interdependence of agriculture and forests noted above. Dueto the constraints imposed by poverty, topography and soils, and the lack of adequatetransport and other infrastructure, there are few alternatives to existing productionsystems, at least in the short and medium term. Maintaining the sustainability of the

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Introduction

production systems must, therefore, be a high priority, as the social costs of breakdownwould be high, apart from the costs in terms of aesthetic or cultural values. Deforestationand degradation also have indirect effects on agricultural production. Although there aremany examples of the development of indigenous systems for management of degrad-ed forests, the response most poor families make to increasing scarcity of fuelwood andfodder is to spend more time on collection. This reduces the time available for agricul-ture. Forest degradation and loss affect the livestock sector, as the reduction in the avail-ability of fodder increases local grazing pressure, which, in turn, increases erosion oflands under cultivation. There may also be secondary effects on health, nutrition, andeducation.

Biodiversity. Biotic pressures on forests resulting in changes in the structure and dynam-ics of communities have had a significant impact on biodiversity. The need to mitigatethis impact is urgent in view of the global significance of Nepal's biodiversity. With only0.1 percent of the world's total area, Nepal contains 2 percent of the flowering plants, 8percent of the birds, and 4 percent of the mammals. Most of these species are globallyendangered, with nearly 500 of them cited in the Red Data Book of the Fauna of Nepalas having a high risk of local extinction. Nepal is also the most important mixing groundof flora and fauna for the Indo-Malayan and Paleartic realms with probably the lastrelicts of ecotone areas with low human disturbances. Botanically, Nepal is among therichest countries in the Indian Subcontinent, supporting the highest levels of plantendemism. As a signatory to the Convention of Biodiversity, Nepal has a national andinternational responsibility to conserve these resources and to mainstream biodiversityconservation into forest management practices (Article 6, CBD). The World Bank hasalso selected Nepal as a country study for the Global Overlays Program, which aims tomainstream biodiversity concerns into sectoral analysis, policy dialogue, and lendingoperations associated with forest conservation and management.

B. The Report

The report is divided into an introduction and four chapters. The introduction presentsthe objectives of the study and background information. The first chapter outlines the approachand analytical framework, presenting the three scenarios used to develop analytical models andthe implications of these for biodiversity and agricultural production. Chapter 2 presents themethods used and the results of economic and financial analyses of alternatives. Chapter 3 dis-cusses the analytical results in relation to national economic and other policies and to social,institutional, legal, or technical issues. The final chapter discusses strategies for change andexamines investment needs to bring about these changes. The report is supported by a series ofWorking Papers (see Annex 1).

The report and Working Papers are based on a detailed review of the extensive literatureon natural resource management in Nepal. Although for presentation purposes, citations havebeen kept to a minimum, this body of existing work provided the starting point for the study.

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Introduction

Much information was also provided by a network of researchers, scientists, and agencies, andtheir contributions are gratefully acknowledged (see Annex 3).

The report should be of use to the users of forest resources and to national and interna-tional agencies concerned with the management of natural resources and conservation of biodi-versity in Nepal and similar environments elsewhere. Although the report focuses on a numberof specific forest products, the issues highlighted are important in the formulation and imple-mentation of much wider natural resource management programs. The report should, therefore,be of use to government, nongovernment, and donor agencies involved in the sector. Themethodology, based on modeling resource use in three scenarios reflecting household, nation-al, and global perspectives, should provide a basis for academics and others to extend the analy-ses to other products and ecosystems. With some modification, the methodology could also beextended to analysis of a wider range of natural resources.

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1

Analytical Framework

A. Approach

Management of land resources involves a wide range of technologies and physicalconstraints, so it is difficult to undertake meaningful economic analyses that adequatelyreflect the complexity of the situation. An important analytical choice, therefore, has to bemade as to whether to model land management as a single, all-encompassing system or tofocus on a part of the system. In this study, it was decided that more meaningful results couldbe obtained through a focus on forest use and biodiversity issues within overall crop/livestockmanagement systems. Consequently, the analysis has concentrated on a number of forestproducts used by people to support their livelihood as part of the rural economy. Because for-est use in Nepal is linked to ways of life that are governed not only by economic factors butalso by cultural values and perceptions as well as institutional arrangements, the results areinterpreted within a broader socioeconomic, institutional, and legal framework. The study hasa wider significance in analyzing the management of forest resources from household, nation-al, and global perspectives.

Forest Products and Management Systems

Rural people use forests to obtain a range of products to support their livelihood, and theproducts can be classified according to the way in which they are used:

* Products that are primarily inputs into agricultural production systems through the pro-vision of fertilizers, fodder and bedding for cattle, material for tool construction, and asource of energy for domestic cooking

* Products that are primarily directly marketed, such as exploitation of timber, collectionof medicinal plants and other NTFPs, and poaching of wildlife

Seven forest products are considered to be of particular significance because they areimportant for the maintenance of biodiversity and and they contribute to long-term sustainabil-ity of agricultural production systems and rural incomes. They are representative of the muchwider range of products used by rural people in Nepal. Of the seven products, two are primari-ly inputs into agricultural production and five are primarily marketed products that contributedirectly to income generation. These seven products and their uses are shown in Table 2 in rela-tion to forest type and physiographic region.

Analytical Framework

The utilization of forest resources in Nepal by a household can be assumed to be opti-mal (to the household) from a financial perspective, given the technologies and resourcesavailable to them. That is, each individual resource user makes decisions that maximizes the

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Analytical Framework

Table 2. Forest Products and Use in Relation to Forest Type andPhysiographic Region

Forest Products Product Usea ForestType Physiographic Region

Products that are primarily inputs to agriculture

Grass, forage Grasses for thatch, rope-making. Tropical Moist Terai and SiwaliksLivestock grazing and feed Deciduous/Savanna in

Protected Areas andBuffer Zones

Tree-based fodder, Livestock grazing and feed Subtropical pine, moist Mid hillsforage, fuelwood Domestic cooking temperate, dry deciduous

Products that are primarily marketed

Timber Commercial timber industry Tropical Moist Deciduous Terai and Siwaliks

Charcoal, fuelwood Industry - blacksmiths, Montane wet temperate Mid hillsgoldsmiths, brass-making

Domestic cooking

Bamboo, rattan Cottage industry, construction Various subtropical andtemperate broad-leaved

Medicinal plants Commercial export Birch and rhododendron, Upper Mid hillssubalpine conifer, lowsubalpine

Wildlife products Illegal export, poaching All forest types Widespread

aLow intensity traditional uses, for example, of medicinal plants in traditional healing, are not considered in thisstudy. Nor were products from the high hills of Nepal considered, mainly because of data constraints.

expected return to the household, given the various constraints and social and culturalprescriptions that exist. Such private use, however, when analyzed from an economic point ofview, may for various reasons have significant costs to society, either nationally or globally.These include the existence of environmental externalities, and the differences between privateand social time horizons. To test these assumptions, three different scenarios, identified as 1,2, and 3, have been developed, reflecting household, national, and global perspectives.

The three scenarios are presented in more detail for each product in the working papers.In general, however, they can be characterized as follows:

Scenario 1. The Household Perspective. * Predominantly individual users or collectorsforming part of the household economic unit, with de facto open access, often illegal collection

* The household has been taken as the basic unit of consumption and production in rural Nepal, with indi-vidual household members contributing to the income of the unit as a whole. Household income generation inNepal is complex, given varying total and seasonal labor availability due to widespread male migration and theextensive contribution made by children to household labor. Standard economic analysis presenting returns to theindividual may not adequately reflect this complexity, but does provide an indication of the contribution of vari-ous activities to household income.

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Analytical Framework

of protected species, with frequent overharvesting of products, often using resource-damagingtechniques. This scenario reflects collection and use of forest products in many areas of Nepalat the present time.

Scenario 2. The National Perspective. This scenario generally involves regulatedaccess, often controlled by community or private sector organizations, management based onoperational plans, sustainable harvesting and improved technologies for processing, storage ortransport of the product. It reflects conditions where User Groups (UGs) have already beenestablished, though some products, particularly income-generating products, may not be con-trolled only by the UGs.

Scenario 3. The Global Perspective. Includes all the characteristics of Scenario 2 inmost cases, and specific measures to conserve or improve biodiversity as part of the manage-ment of the forest and its products in a way to yield benefits important to the global communi-ty, although not necessarily profitable to Nepal. It may also include the use of alternativetechnologies or the replacement of forest products with alternatives. Thus, it represents biodi-versity-friendly resource management and not merely preservation. This scenario is not as yetrepresented in Nepal.

Goals. The goals of the three scenarios are linked to the perspective they represent.In Scenario 1, the goal is to optimize returns to the household. In Scenario 2, the goal is tointroduce management measures and technologies that are nationally optimal while retainingor improving the returns to the household. This means providing users with forest productson a sustainable basis at affordable prices by integrating the conservation of biodiversityinto national land management programs. The main goal of Scenario 3 is the conservationof biodiversity that is globally significant, which may only be achieved by buildingon the strategies adopted for Scenario 2, particularly by integrating biodiversity conservationmeasures into national forest and land management programs, referred to as mainstreamingbiodiversity conservation. Scenarios 2 and 3 are not defined as optimal situations, becauseof the constraints of data and analytical techniques, but they do represent alternative strategiesthat improve on current management, either in terms of improved economic return to thenation or improved sustainability of resources use or biodiversity conservation. Scenario 3is defined as biodiversity-friendly resource management, but from the perspective ofbiodiversity the nationally preferred outcome may be identical to the globally preferredoutcome.

These scenarios are defined for each forest product in terms of the collector/user,access, products collected, the intensity of use, market or nonmarket orientation, and technol-ogy. The scenarios, therefore, reflect forest management systems and the details on each arepresented in Tables 3 and 4. It is important to remember that in almost all cases the individu-als taking action in each scenario are the same. The difference is the perspective from whichthe analysis is carried out.

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Table 3. Scenarios for Use of Products that Are Primarily Inputs to Agriculture D

Product Characteristic Scenario I Scenario 2 Scenario 3

Products that are primarily inputs to agriculture

Grasses -Terai Collector/User Individual Individual/community Individual/community/none

Access De facto open Regulated for all products IdemRegulated for thatching

Intensity of Use Local overexploitation Based on PA and BZ Idemmanagement plans

Market/Nonmarket Market for paper making, Market for paper making Idemnonmarket for others Nonmarket for others

Collection techniques Traditional. Controlled harvesting of grass IdemManagement practices Controlled harvesting of thatch. Fodder banks Biodiversity habitat extension

Illegal grazing Stall feeding in buffer zoneBZ management plans Wildlife corridors

Fuelwood and Fodder Collector/User Individual Community (FUGs) Idem

Access De facto open Regulated (FUGs) Idem

Intensity of use Selective exploitation Based on OPs Idem

Market/Nonmarket Mainly nonmarket Idem Idem

Technology Resource damaging Stall feeding Stall feeding, fodder banksRotational grazing District reserves and corridors

Wildlife management and speciesreintroduction in communityforests

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Table 4. Scenarios for Use of Products that Are Primarily Marketed

Product Characteristic Scenario I Scenario 2 Scenario 3 ,

Products that are primarily marketed

Timber Collector/User Individual Individual/HMGN/FUGs Idem

Access de facto open Regulated in private, CF, Idemor national forests

Intensity of use Underexploitation Sustainable harvesting IdemLocal over-exploitation

Market/Nonmarket Market Market Market

Technology Inappropriate. Based on management plans IdemUncontrolled grazing. including protection of sensitive Multistorey and multispecies

areas blocksWildlife corridors

Charcoal Collector/User Poor and landless caste Poor and landless caste Idem

Access De facto open access Regulated - Individual or FUG Idem

Intensity of use Localized overexploitation Sustainable harvest Idem

Market/Nonmarket Market Market Market

Technology Rudimentary earth mound Improved kilns Improved kilnskilns Selective wood collection and use and/or briquettes.

of lops and tops

Bamboo, Rattan Collector/user Individual Individual/FUGs Individual/FUGs

Access De facto open Regulated: private/CF Regulated: Private/CF

Intensity of use Localized overexploitation of Sustainable Sustainablebamboos/widespread overexploitationof rattan leading almost to extinction

Market/Nonmarket Market Market Market/nonmarket(conservation)

Technology Resource damaging Sustainable Idem. Reintroduction ofPlantation & enrichment threatened species.planting of high-value species Expansion of bamboo/

rattan habitats forendangered species.

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Table 4. Scenarios for Use of Products that Are Primarily Marketed (Cont.)

Product Characteristic Scenario I Scenario 2 Scenario 3

Medicinal Plants Collector/User Individual Individual/FUGs Idem (

Access De facto open access Regulated FUGs Idem 0

Intensity of use Widespread overexploitation Sustainable harvest Idem

Market/Nonmarket Market Market Market

Technology Inappropriate harvest Improved harvest/transport/storage Idem/transport/storage Cultivation income-generating species Species reintroduction.

Recognition of intellectualproperty rights

Wildlife Products Collector/User Individual: poachers Poachers in parks with no touristic OPTION 1: Nonevalue (high hills) OPTION 2: Individual/None elsewhere community

Access De facto open - illegal de facto open in high hills, none in OPTION 1: No accessprotected parks from the terai OPTION 2: Regulated

Intensity of use Localized overexploitation Illegal localized collection in high OPTION 1: No usehill parks OPTION 2: SustainableNo use in terai parks. harvest

Market/Nonmarket Market Market for high hill products OPTION l: No marketOPTION 2: Market

Technology Poaching, resource damaging Antipoaching units OPTION l: IdemTrade route controls OPTION 2: IdemAwareness campaigns in terai Captive breeding of musk deer

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Analytical Framework

B. Implications for Biodiversitv and Agricultural Production

The implications of the three scenarios for biodiversity and agricultural production areexamined below. The discussion is largely qualitative, as data are not available for quantitativeanalysis. The assessment of Scenario 1 is based on observations of the present situation, whileinformation from a limited number of areas provide evidence for Scenario 2. The discussion ofScenario 3 is based mainly on estimates and expert opinion.

Biodiversity

An assessment of the impact on biodiversity of the use of the seven forest products ispresented in the tables in the working papers for each of the three scenarios. Some commonimpacts can be identified and these are summarized below:

Scenario 1. The impact of Scenario 1 on biodiversity is mainly negative and can occurat a local or regional scale and may be of local or global significance. Impacts at aregional scale with global significance include, for example, the poaching of endangeredwildlife species with associated losses in the gene pool, or the extinction of indigenousrattan species and medicinal plants. Examples of local-level impacts that have a globalsignificance include localized degradation of rhododendron forests for charcoal produc-tion, particularly around urban centers, as the central and eastern Himalayas are the cen-ter of plant diversity for rhododendron species. The genetic losses associated withinterbreeding of the wild buffalo population of eastern Nepal with domestic cattle isanother example. National-scale impacts with only local significance are represented bythe changes in the structure, dynamics, and composition of the temperate and subtropi-cal hill forests due to unregulated access to fodder, fuelwood, and grazing.

Scenario 2. The focus on improved forest management and reforestation activitiesinvolving FUGs have beneficial biodiversity results. For example, community forestryprograms have contributed to a decrease in forest loss and an increase in natural regen-eration. Forest protection and reforestation have also created corridors that foster thereturn of wildlife species, such as leopards and sloth bears. However, management prac-tices oriented only to sustainable production may have negative implications for biodi-versity conservation in, for example, the introduction of exotic species or the inductionof successional changes due to fire control.

0 Scenario 3. In this scenario management practices are designed to have an optimalimpact on biodiversity. Many of the activities are focused on the direct conservation ofbiodiversity outside protected areas such as local reintroduction of rattan and medicinalplants in the wild, use of charcoal substitutes, and multistorey and multispecific man-agement. Nevertheless, in this scenario, the interests of local populations and biodiver-sity conservation may conflict if they are not taken into account in the planning phase.For example, wildlife returning to newly created habitats may severely damage crops.

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Analytical Framework

Agricultural Production Systems

The tables in the working papers present the impact of the use of the seven forest prod-ucts on the sustainability of agricultural production. Obviously, the impact of using those prod-ucts that directly support agriculture, such as fuelwood and fodder, is much greater than forthose products which are collected for income and are unrelated to the production system.General observations are summarized below:

Scenario I

Products that are primarily inputs to agriculture. Degrading forest resources andincreasing difficulty in obtaining fuelwood and fodder have negative impacts on thefarming system through reduced availability of biomass for compost, and use of manurefor fuel rather than organic fertilizer results in declining soil fertility. Loss of forestcover may increase erosion hazard. Indirect effects include reduced availability ofhousehold labor for on-farmn work and declining livestock productivity. These impactsaffect both the hills and the terai.

Products that are primarily marketed. The use of these products has less impact on thesustainability of agricultural production systems since they do not provide direct inputs.However, declining resources and increased difficulties of collection may have indirecteffects through reducing on-farm labor availability or simply reducing householdincomes and the ability to purchase necessary agricultural inputs.

i Scenario 2. Improved management resulting in a greater availability of forest products,particularly fuel and fodder, and the reduction in the labor required for their collection,has immediate positive impacts on agricultural production. Improvements in ruralincome may also result from increased availability of income-generating products suchas medicinal plants. These gains may be offset by the constraints on access to protectedareas, buffer zones, or biodiversity corridors, affecting the availability of fuelwood, fod-der, and grazing. In addition, extended buffer zones and antipoaching controls mayresult in greater crop damage and livestock loss due to wildlife.

* Scenario 3. The introduction of further biodiversity-friendly management practices mayexacerbate the adverse impacts noted in Scenario 2. Alternative technologies may alsodisplace traditional agricultural support services, for example, briquette manufacture inplace of charcoal may displace traditional blacksmiths who produce agricultural tools.

Environmental Sustainability

The adverse impacts on biodiversity of Scenario 1, which commonly represent the pre-sent situation, have been summarized above. There remains the question of whether the contin-ued use of forest products in the present manner is sustainable or not. There is also the widerquestion of the impact this resource use has on the sustainability of Nepal's land resources.

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Analytical Framework

For some of the forest products the answer is clear cut. Overharvesting of rattans hasalready meant that rattan, even for important religious ceremonies, is no longer available with-in Nepal. Selective harvesting of rhododendron for the production of charcoal is changing thestructure of the forests. The effects of poaching of wildlife are well documented throughout theworld and have very significant impacts on the survival of certain species. For Nepal, theInternational Union for the Conservation of Nature's (IUCN) Red List of Threatened Animals ofthe World lists 11 mammals, 5 birds, and 2 reptiles as endangered species and 22 mammals, 22birds, and 3 reptiles as vulnerable. Increasing amounts of time spent by communities in col-lecting medicinal plants reflect the overcollection and elimination of valuable species in certainareas. The conclusion must be that continued open access and uncontrolled harvesting of thesespecies is not sustainable.

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2

Financial and Economic Analysis of Alternatives

A. Analytical Methods

The economic and financial implications (Knowler and others) of forest use under thethree scenarios were examined based on a general economic model, presented in Annex 3. Thegeneral model was used to prepare models for each of the products, recognizing that the mod-els are representative of only a few of the products used by rural people in Nepal, and the factthat the models may need modification to account for regional variations. A key dimension ofthe analysis is the accounting stance used, that is, the perspective from which the analysis isdone. The different assumptions behind each scenario are summarized in Table 5. Financialanalysis reflects the prices and constraints faced by the individual, the driving force for presentmanagement practices, represented by Scenario 1, in which individuals, as part of a household,make decisions based on the real opportunity cost of their actions. They largely ignore exter-nalities, that is the impact of their actions that occur elsewhere, such as downstream erosion, orthe impact on biodiversity. A broader economic analysis will correct for price distortions thatmay be introduced by government policies, subsidies, or taxes and will include the costs andbenefits associated with externalities. This economic analysis is the appropriate accountingstance for Scenario 2, that is, the national perspective. In Scenario 3, economic analysis includesglobal externalities, or actions by Nepal that do not have any direct benefits for the nation, cre-ating little incentive to take these impacts into account in managing national resources, althoughthey may be important from a global community perspective.

It is recognized that the analysis has some limitations, since there are two generic issuesthat are not addressed by this form of product-specific analysis. The first issue is the problemof displaced effort, that is, what will individuals affected by a change from Scenario 1 to 2 or 3do with their time and energy? For example, if an individual reduces the collection of forestproducts to make charcoal, will they increase their efforts to collect firewood or medicinalplants for sale? Displaced efforts, and the need to earn a living may well mean that stopping oneunsustainable process may result in increased pressure elsewhere in the system on anotherresource, leading to unforeseen negative impacts. This distinction for the individual or house-hold is similar to the difference between partial-equilibrium versus general-equilibrium analy-sis of macroeconomic conditions and changes. The economic and financial results presentedhere for the various forest products are very much the result of a "partial-equilibrium" analysis.The social, institutional, and legal analyses add part of the broader "general-equilibrium" typeresults.

Linked to the problem of displaced effort is the second limitation of the analysis: the lackof a comprehensive systems perspective, analogous to a broader social, general-equilibrium

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Financial and Economic Analysis of Alternatives

Table 5. Accounting Stance and Analysis for the Three Scenarios

Accounting StanceScenario Perspective Values/Prices Used Analysis Environmental Externalities

I Individual Local Financial/economic Not included

2 National National Economic National included

3 Global Global Economic Global included

analysis. Any change has to be examined with respect to how changes in patterns of resourceuse will affect the overall rural economy, for example, via changes in relative prices of prod-ucts, labor, or capital. Any changes may also have important effects on the sustainability ofother parts of the agricultural production system and the underlying ecosystem. Despite theselimitations, the analysis provides important insights into the use of forest products in Nepal.

B. Results

Results of Financial Analysis

Financial analysis represents the incentives for the individual contributing to householdincome, and the results show some interesting, if perhaps predictable results. The results of thefinancial analysis of the use of the seven forest products under each of the three scenarios aresummarized in Table 6, based on representative models presented in the working papers. Dataconstraints meant that the analysis could not be completed for all products in all scenarios. Notsurprisingly, most models in Scenario 1 demonstrate that the net financial returns to labor forthese activities are greater than the opportunity cost of labor (Rs. 25 per day). However, thereis a clear division in returns to labor amongst the seven products. Organized poachers of tim-ber, wildlife, and a few collectors of medicinal plants are able to earn huge sums, by Nepalistandards, as the reward for their illegal activities. Meanwhile, those activities primarily under-taken by women, for example, illegal fuelwood collection and some medicinal plant collection,and individuals from socioeconomic groups with few alternatives, for example, charcoal pro-ducers, reap relatively low returns for their effort, usually below the farm wage (Rs. 50 per day)but above the assumed opportunity cost of labor. Thus, it cannot be assumed that unsustainableforest use is uniformly highly profitable. In addition, increasing scarcity of resources willincrease the labor requirement for their collection, reducing the incentives for exploitation.

In Scenario 2, the same pattern appears, but returns to labor can be significantly higherthan the opportunity cost of labor, even for fuelwood collection. For products that are primari-ly marketed, the returns remain high, with the exception of wildlife poaching, which is nolonger possible due to control. Managed harvests of timber in the terai under Scenario 2 pro-vides large financial returns to the government. Data constraints have limited the analysis forScenario 3, but it is likely that the addition of biodiversity-friendly management measures will

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Financial and Economic Analysis of Alternatives

Table 6. Components of Financial Analysis of Representative Models ofSelected Forest Products

Scenario I Scenario 2 Scenario 3

Terai Buffer Zone Grasses:flanalysis incompletea Hlanalysis incomplete Hl analysis incomplete

Fuelwood and Fodder:rHfuelwood collection from forests Ulcommunity forestry Hl analysis incompleteHnet return to labor of Rs. 25 per day Hlnet return to labor of Rs. 35 per day Hl analysis incomplete

Terai Timber:H protection/illegal forest use Hlmanagement for timber H management forH net financial return to government flnet financial return to government multiple use

of Rs. 90 per ha of Rs. 5,240 per ha H net financial return torlnet return to labor of Rs. 38 per government of

day for fuelwood and Rs. 360 per Rs. 3,970 per haday for timber

Charcoal:HItraditional earth mound technology Hanalysis incomplete IH analysis incompleteHlnet return to labor of Rs. 22 to

45 per day

Bamboo:

flnet return to labor of about Hbamboo plantation Hi negative net return toRs. 50 to Rs. 100 per day Hlnet return to labor of Rs. 270 per labor

day for mature plantationMedicinal Plants:Hlwild collection of Chiraito rIChiraito cultivation 11 analysis incompleteHlnet return to labor of Rs. 50 to Hjnet return to labor of Rs. 186 per day

Rs. 200 per day

Wildlife Poaching:H poaching of rhino and musk deer Hlenhanced antipoaching, rhino only H musk deer ranchingrHnet return to labor of Rs. 380 per rHnegative net return to labor H negative net return

day for rhino and Rs. 225 per day to laborfor musk deer

a An analysis was attempted but remains incomplete because of a lack of reliable data.

reduce the financial incentives compared to those realized in Scenario 2. This is shown by thedata for timber in the terai, though even under Scenario 3, the returns remain very much high-er than at present.

Results of Economic Analysis

Economic analysis of the use of the seven forest products under each of the three sce-narios was also undertaken; the results are summarized in Table 7. Representative models arealso presented in the working papers and, as with the financial analysis, data constraints meantthat the analysis could not be completed for all products in all scenarios.

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Table 7. Components of Economic Analysis of Representative Modelsof Selected Forest Products

Scenario I Scenario 2 Scenario 3

Terai Buffer Zone Grasses:flillegal grazing/cutting Hl sissoo-grass plantation H joint wildlife/livestock benefitsHnet loss of Rs. 40/yr. rl net benefit of Rs. 690/yr. H net benefit of Rs. I 60/yr.

(per household) (per household) (per household)H incremental gain of Rs. 730/yr. H incremental gain of Rs. 200/yr.

Fuelwood and Fodder:llfuelwood collection from Hl community forestry rl analysis incomplete

forests Hl net benefit of Rs. 190/yr.rHnet loss of Rs. 470/yr. (per household)

(per household) H incremental gain of Rs. 660/yr.

Terai Timber:Hlprotection/illegal forest use Hl management for timber HI management for multiple useHlnet benefit of Rs. 3,000/yr. H net benefit of Rs. 5,390/yr. Hl net benefit of Rs. 3,530/yr.

(per ha) (per ha) (per ha)H1 incremental gain of Rs. 2,390/yr. rl incremental gain of Rs. 530/yr.

Charcoal/industrial Fuelwood:Htraditional earth mound Hl beehive brick kiln H briquette production from

technology Hl net loss of Rs. 3,500/yr. (per t) residuesH net loss of Rs. 16,970/yr. (per t) Hl incremental gain of Rs. 13,470/yr. H net benefit of Rs. 680/yr. (per t)

rl incremental gain of Rs. 4,180/yr.

Bamboo/Rattan:Hinsufficient data to analyze n bamboo plantation Hl in situ regeneration of rattan

H net benefit of Rs. 9,500/yr. (per ha) H net loss of Rs. 7,100/yr. (per ha)H not comparable with Scenario 2

Medicinal Plants:H incomplete analysis H Chiraito cultivation Hl analysis incomplete

Hl net benefit of Rs. 30,700/yr(per ha) or Rs. 41 /yr. per kg.

Wildlife Poaching:Hlpoaching of rhino and musk Hl enhanced antipoaching, rhino only H musk deer ranching

deer Hl net present value benefit of H net loss of Rs. 480,000/yr.rInet present value benefit of Rs. 85,000 (per animal) (per musk deer ranch)

Rs. 9,000 (per animal) H| incremental present value gain HI not comparable with Scenario 2of Rs. 76,000

The data show that the net economic losses to Nepal in Scenario 1 are significant, whenquantified values for the effects of depletion and some off-site costs are included. This contrastswith the positive financial returns to the individual or household of the unsustainable harvest-ing patterns included in Scenario 1 and presented in the previous section. Not surprisingly,adding the costs of environmental externalities and resource depletion often worsen theScenario 1 estimates of economic (not financial) net returns. In some cases this change does not

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merely reduce the estimated level of profits but actually shows a loss. For example, for fuel-wood and fodder, the economic analysis of Scenario 1, shows the net economic benefits to benegative. The data show that management under Scenario 2 can pay dividends for Nepal, asalmost every product considered shows positive incremental benefits from adopting such prac-tices compared to the results from Scenario 1. This is not always true for medicinal plants andwildlife poaching in which the use of many products is severely restricted in Scenario 2. In thecase of charcoal, the gains in net economic benefits over the traditional technology depend ona change in technology and location of activity, and this results in a net loss in Scenario 2, whenviewed in isolation. Ironically, Scenario 3 for charcoal appears to generate higher net econom-ic benefits than Scenario 2,* though supplies of raw material such as rice straw may be limitedbecause of other demands for their use.

The economic analyses also demonstrate that most biodiversity-friendly managementpractices in Scenario 3 can be expected to have economic costs for Nepal when compared toScenario 2. For example, there are very high economic losses associated with wildlife ranching(Scenario 3), since the proposed system has substantial investment costs for specialized fenc-ing. Nor is there any incentive to protect wildlife in situ when this generates few national ben-efits. Understandably, Nepal has chosen to invest its limited funds available for wildlifeprotection and management in the terai, where the benefit is greatest. Finally, Scenario 3 alwaysshows an incremental gain as compared to Scenario 1, demonstrating that the promotion of sus-tainable development is compatible with global biodiversity conservation for most of the forestproducts analyzed.

In summary, the data and analyses show that Scenario 1, representing uncontrolled useof representative forest products, would not be sustainable in either environmental or econom-ic terms. A number of representative management or technical interventions have been identi-fied that would enable the change to be made to Scenario 2, which would be environmentallymore sustainable and could have significant benefits for Nepal. Similarly, further managementand technical interventions would enable biodiversity-friendly measures to be introduced inScenario 3, but these would impose economic costs on Nepal.

* Given the limited amount of cost data available to the mission, additional investigation is warranted inthis case.

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3

Economic, Social, Institutional, and Legal Issues

A. Economic and Policy Issues

The divergence between existing behavior of household members and desirable behav-ior from a public or national perspective has been demonstrated by the financial and economicanalyses presented in Chapter 2. They result from economic policy and marketing issues, whichare often closely interrelated, as policy decisions may directly affect the marketing. Policyissues are first discussed below, followed by a discussion of market issues in relation to theseven forest products.

Economic Policy Issues

Price Controls. Government policy is to control the price of timber, to ensure that tim-ber products are available at a fair price throughout Nepal, and to prevent exploitation. Untilrecently, the policy was implemented through the mandate given to the District DevelopmentCommittees (DDCs), District Forest Products Supplies Committees (DFPSCs), and the TimberCorporation of Nepal (TCN) to harvest and market timber from all government lands. In prac-tice, the policy has led to severe price distortions, as the three agencies have often set the saleprice at less than the cost of production merely to clear a stockpile of timber collected in accor-dance with district management plans, unrelated to the market demand. Implementation of thepolicy has been unsatisfactory, and the government is reviewing timber and fuelwood market-ing systems with a view to improving their efficiency.

Licensing. Licenses are required for the collection or harvest and movement of manyforest products. The trade in timber, fuelwood, medicinal plants, and a number of other non-timber forest products, such as resin, is controlled by the Forest Department through the issueof licenses. The objective is to prevent the overexploitation of resources, control illegal fellingor collection, and raise revenue through collection of royalties. In practice, the limited capaci-ty of the Forest Department to monitor the trade in forest products means that the licensing sys-tem is often bypassed and may encourage an illegal and totally uncontrolled trade. Villagersexperience hardship in having to travel long distances to obtain permits and there is also a neg-ative effect on the development of private plantations, since growers have to seek permits toharvest, fell, and transport trees grown on their own lands.

Royalties. For many forest products the royalty structure is only weakly related to theirreal market value; this is especially true for some timber species and medicinal plants. The mostextreme example is that of charcoal, where the royalties paid on charcoal are almost 15 timesless than the royalties paid on the collection of an equivalent amount of fuelwood. For manyproducts royalties are not collected, and this is compounded by a lack of skilled staff who areable to correctly identify products, particularly medicinal plants. Private growers may also be

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discouraged by the fact that their products are subject to royalty payments because there is nosystem to certify their origin on private lands. In addition, since royalties are usually paid by themiddlemen and traders, the collection of royalties is often far from the production area, so thereis little connection to sustainable rates of harvest, while illegal avoidance of royalty paymentsis easier.

Export and Import Controls. Government policy prohibits the export of timber in logform, and the policy is enforced through controls on movement of timber. There are two mainobjectives. The first is to prevent the wholesale destruction of Nepal's forests, particularly in theterai, through logging and export to the vast market in India. The second is to promote the estab-lishment of wood-based industries in Nepal. The effect has been to reduce the incentives for pri-vate sector involvement in forest management, and as the Forest Department does not have thecapacity to manage the available forest resources effectively, there has been a considerable lossof revenue to the nation. In addition, lack of management means that many sal forests are over-mature, regeneration is limited, and the value of the forest is declining.

Differences in export and import controls with India also affect trade in some otherforest products. Skins and products from endangered species cannot be exported from Indiaand import and sale are forbidden under the CITES convention, to which Nepal is a signato-ry. However, the lack of a comprehensive list of prohibited products means that the law is noteffectively enforced. Similarly, national supplies of rattan are now very limited, so users haveturned to rattan from India. This can be legally imported into Nepal, but export from India isillegal.

Energy. Fuelwood consumption, estimated to be about 4.3 million tons of oil equivalent(toe), provides 68 percent of Nepal's energy supplies and makes enormous demands on forestresources, possibly in excess of the sustainable annual yield. Present Government policies thatsubsidize fuelwood prices serve only to increase these demands. Development of other renew-able energy sources such as micro and mini hydropower schemes, biogas, and solar and windpower have a role in meeting rural energy needs, but policies on supply and pricing need to becoordinated if they are to have an impact on the demand for fuelwood, and hence on the use offorest resources. The government has taken steps to improve greater efficiency and fuel substi-tution in the industrial sector through the National Industrial Energy Management Plan, and asimilar initiative is required to encourage the use of alternative energy sources in the rural sec-tor and reduce fuelwood demand.

The Role of the Private Sector. Although this might be considered an institutional issue,the lack of a clear policy on the role of the private sector in forest management has significanteconomic implications. Government has preempted the management role and there have beenfew attempts to promote a private sector forest management culture. A formal contract rela-tionship to enable private companies to manage state forest land in the terai has not been sys-tematically developed. Consequently, potential investors are not confident of their rights within

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the present investment climate, so they are unwilling to make long-term investments in privateforestry.

Incentives. Individuals use resources to optimize financial returns, regardless of thecosts to society. Some incentives are needed to persuade them to adopt more biodiversity-friendly practices, which may have costs in terms of additional labor or restricted access, butthat have few direct benefits for the household. Subsidies frequently distort markets, so there isan important policy decision to be made as to what form incentives should take and how theyshould be made available.

Markets

Market failure occurs when a market price does not fully reflect the benefits and costsassociated with some action. For example, the price of fuelwood collected in an unsustainablemanner in the mid hills does not include any cost of downstream impacts from soil erosion andsedimentation caused by the improper collection methods, or the loss of biodiversity from habi-tat alteration. Since the observed market price (a financial price) does not reflect all the costsand benefits associated with an activity, an inappropriate decision is made concerning the levelof production. However, when markets do not exist, as in the case of some subsistence activi-ties such as fuelwood and fodder, price signals cannot be used to produce improved resourcemanagement

Common Market Issues Affecting Products. In Scenario 1, markets for the seven prod-ucts are significantly affected by the de facto open access regime. The market incentives areto exploit available resources for whatever can be sold in the short-term and are not orientedtowards ownership. This is particularly true of illegal activities such as wildlife poaching.Market controls, involving export bans, either between districts or internationally; price fix-ing; and control of sales from community forest all distort markets for some products, partic-ularly timber and fuelwood. These are noted in Table 8. Another common problem affectingthe marketing of the products is lack of market information. Collectors are unaware of theprices of the products in other parts of Nepal and may thus be exploited by buyers offeringprices below market price. In Scenario 2, successful marketing of many products will dependon some form of cooperative mechanisms, which are not well developed at present. InScenario 3, incentives to growers or collectors to adopt biodiversity-friendly technologies maythemselves distort markets.

Market Issues Affecting Individual Forest Products. Market issues related to the vari-ous forest products are presented in Table 8.

B. Social Dimensions

Although economic issues are a crucial dimension in the ways forests are managed,social sustainability and equity in benefit distribution are preconditions of environmental

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Table 8. Scenario-Specific Marketing Issues for the Seven Forest Products

Forest Product Scenario I Scenario 2 Scenario 3

Products that are primarily inputs to agriculture

Grasses - Terai Access to PAs is restricted, Differential subsidies to Stricter controls on accessbut grass collected at encourage establishment of may increase market pricessubsidized prices. fodder banks may affect price of grasses, with impact on

of grass collected from BZ. livestock sector.

Fuelwood and Controls on movement of FUG rules control sales and Idem Scenario 2.Fodder firewood between districts movement controls remain.

distorts prices in high- Subsidies in community forestrydemand areas. generate price distortions.

Products that are primarily marketed

Timber Export ban, movement Idem Scenario 1. Biodiversity conservationcontrols within Nepal, measures may increaseprice fixing, monopoly management and harvestingrole of TCN, and inter- costs.national differentials alldistort prices.

Charcoal Clandestine marketing Market arrangements for Idem Scenario 2.arrangements and evasion charcoal legitimately producedof royalties distort prices. from improved kilns yet to be

developed. Differential royaltieson wood harvested for charcoaland fuelwood distorts prices.

Bamboo, rattan Imports of rattan from Erratic demand due to lack Idem. No incentives forIndia and evasion of royal- of domestic industrial use cultivation of endangeredties reduce incentives for provides little incentive for species.cultivation. Highly variable cultivation of bamboos.prices.

Medicinal Plants Licensing of collection No cooperative structures for Market for endangeredcreates monopsony. improved storage, processing, species uncertain, so littleRoyalty evasion and cultural and marketing. incentive for their reintro-and ethnic factors lead to duction or cultivation.distortions. No qualitypremium and risk of adult-eration reduces prices.

Wildlife Products Illegal trade, control No market. No market.imposes enormous costson nation.

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sustainability. Social issues, such as access, socioeconomic status, caste, ethnicity, labor, andcultural values affect all the products and contribute to the divergence between private andpublic costs and benefits. These common factors are discussed first.

Access. Access cuts across other social analysis parameters, since it concerns entitle-ments and claims. Indigenous forest management systems have existed in Nepal for many years,particularly in remote areas. Scenario 1 reflects the breakdown of these systems following thenationalization of forests in the 1950s, resulting in unregulated, de facto open access to all theforest products examined. Increasing understanding of the traditional management systems anda recognition by government that communities can be good caretakers of forest, because of theirdependence on forest products, gave rise to the concept of community forestry. Designatedforests are handed over to Forest User Groups (FUGs) for protection and management, so thataccess is regulated by the community. Such community management of forest resources is afundamental characteristic of Scenarios 2 and 3. Although over 5,000 FUGs have been formed,the handover of forests to communities is constrained by the limited capacity of the ForestDepartment. Consequently, Nepal's forests still remain, for the most part, under an open accessregime. Future expansion of the community forest program may displace collectors andincrease pressure on national forests.

Socioeconomic Status, Caste, and Ethnic Group. One of the most important impacts ofthese factors is their influence on equity. In Scenario 1, these factors may affect access to andthe equitable distribution of forest products. This encourages families to overexploit theresources available to them, often illegally. Even the introduction of community managementin Scenarios 2 and 3 may not resolve these inequities as the FUG committee may be constitut-ed by members of the well-to-do elite, so that the needs of the more vulnerable, poor, lowercastes, or women are not given importance.

Heterogeneity of community populations also affects resource use, as the lack of socialcapital means common property resource management is more difficult, with a lack of cooper-ation between groups and sometimes competition for resources. A clear example is the prestigeassociated with large numbers of cattle amongst the Tharu, which puts excessive pressure ongrazing resources. Although many communities in the hills are heterogeneous, the problems aremost severe in the terai, as settlement and in-migration is relatively recent.

Labor. Another social issue that cuts across considerations of gender, children, andethnic group is that of labor. In the collection of products that support agriculture, such asgrasses, fuelwood, and fodder, women and children play a predominant role, almost regard-less of caste or ethnic group. Given their many other tasks in the subsistence economy of ruralNepal, women will try to minimize the labor used to collect fuelwood and fodder, which inScenario 1 leads to overexploitation of nearby forest resources, contributing to the divergencebetween private and public costs. Products that generate income, particularly charcoal mak-ing, the poaching of wildlife, and the collection of certain medicinal plants at high altitudes

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are the preserve of men, but their involvement in these activities may have indirect effects astheir absence increases the workload of women. In Scenarios 2 and 3, the greater availabili-ty of products from community-managed forests should reduce labor requirements, directlybenefiting women. However, male out-migration in search of wage employment with conse-quent reduction in the availability of farm labor is likely to continue. In Scenario 3, the intro-duction of biodiversity-friendly measures may actually increase labor requirements if, forexample, access to wildlife corridors is restricted.

Culture. Many aspects of Nepali culture reflect the close integration of spiritual valuesand beliefs with the natural environment. Rivers, lakes, mountain peaks, and forest areas areconsidered as sacred abodes of Hindu gods and goddesses. There is a deep-rooted belief thatspirits reside in the body of certain trees, plants, and animals, while certain species are protect-ed as the incarnation or favorites of Hindu and Buddhist deities. Areas of forest or lakes are tra-ditionally preserved close to places of worship and sites of religious significance, and killing ofanimals around such places prohibited. Such cultural values are favorable for conservation ofbiodiversity.

Cultural values also underpin many of the indigenous forest management practiceswhich have existed in Nepal for many years, particularly in remote areas. Communities haveregulated access to and harvest of a wide range of forest products, often based on the culturalvalue a group attaches to particular products. For example, indigenous knowledge of medicinalplants is held by specific groups who have traditional rights to harvest, while in some areas wildmushrooms are collected only by one group, even though others have access to the same areaof forest. Transhumant livestock owners have developed a management system that makeseffective use of seasonal availability of fodder in different ecological zones, often paralleled bya symbiotic relationship with settled cultivators whose lands gain fertility from animal manure.However, not all cultural values have positive effects on the environment; for example, prestigeassociated with ownership of large herds of livestock may result in overgrazing and degradationof forests and grasslands. In addition, an increasing population making more demands on finiteresources, increased market opportunities, and exposure to outside cultures are eroding bothreligious sentiment and cultural values, even in rural areas of Nepal, resulting in a gradualbreakdown of traditional management systems.

Social Issues Affecting Specific Forest Products. The most important social issuesaffecting the use or collection of specific products are summarized in Table 9. More detailsare given in the tables in the working papers. Not surprisingly, it can be seen that social issuesare of particular relevance to the management of products that support agriculture as theintroduction of more sustainable management practices, involving regulation of access, orchanges in species composition impact directly on the livelihoods of rural people. Forinstance, such changes may result in individual resentment of community enforced controls,increased labor requirements for fodder collection, or short-term reductions in agriculturalproduction. Particular social problems will occur if improved forest management does notmeet the needs of current users. For example, traditional charcoal makers are unlikely to be

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Table 9. Social Issues Affecting the Seven Forest Products in the Three Scenarios m..

Forest Product Scenario I Scenario 2 Scenario 3 2Products that are primarily inputs to agricultureGrasses -Terai Uncertainty of tenure and compen- Lack of representative CBOs to collabo- Additional restrictions on access to

sation in BZ and seasonal over- rate in PA and BZ management, with grasslands. Increased conflict with PAexploitation in PAs. Lack of social possible inequitable distribution of benefits authorities due to increased risks of cropcapital due to heterogeneity of from fodder banks and ecotourism. damage by wildlife.population. Conflicts with PA Conflicts with PA authorities due to crop Cauthorities due to crop damage damage by wildlife.by wildlife.

Fuelwood and Fodder Unregulated access. Operational plan priorities do not reflect Restricted access to biodiversity con-the needs of the disadvantaged, or distribu- servation areas not endorsed by commu-tion of benefits is inequitable, sometimes nities.due to unrepresentative FUG committees.

Products that are primarily marketedTimber Traditional farm-forest interface Equity concerns significant, as timber has Communities may be opposed to reduction

based on conditions in hills; not high value and FUGs have little experience in income from management of forests toadapted well to terai. Lack of of managing forests for commercial ex- provide a variety of habitats.management plans and illegal traction of timber. Operational plan related Zlogging restrict benefits to local to area that can be managed by FUGcommunities, is essential.

Charcoal Unregulated access. FUG may not provide for needs of Briquette technology may displacecharcoal producers, a minority group, traditional charcoal producers. Use offrom community forests. Poor charcoal agricultural residue for briquetteproducers may not be able to finance productions may reduce availability forimproved kilns. fuel, compost, and on-farm use.

Bamboo, rattan Unregulated access. High labor requirements for traditional No incentives for introduction ofplanting of bamboos. Improved technology threatened species. Expansion of bamboofor planting bamboo not widely known. habitats may increase wildlife crop damage,

particularly in the terai.Medicinal Plants Collectors dependent on medicinal Finance and knowledge for local value- Restricted access to areas where species

plant collection for household added processing may not be available. with high biodiversity significance are beingincome, leading to possible selective Individual intellectual property rights may reintroduced may not be acceptable tooverexploitation. Conflicting use/ be subsumed in FUG-managed area. communities.tenure for grazing and medicinalplant collection.

Wildlife Products Illegal poaching has little social Possible conflicts over access between Idem.significance for local communities. local communities and antipoaching units

and the army. Increased crop damage bywildlife.

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suited to the management of industrial briquette plants, so proposed technology changes mustminimize social costs.

C. Institutional Issues

The Ministry of Forests and Soil Conservation (MFSC) is the government agencyresponsible for management of forest resources. MFSC's mandate is the formulation andimplementation of forest policies, enforcement of forest laws, and the development of forestresources. In addition, there are a number of semiautonomous parastatal organizations withimportant roles in the forest sector. Private sector entrepreneurs are involved in marketing andto a more limited extent in production, while community organizations are playing an increas-ingly important role in forest management. Several international nongovernment organizations(NGOs) and a large number of local NGOs are also involved in the forest sector. Institutionalconstraints affect many of these organizations, contributing to the divergence between privateand public costs and affect the changes from Scenario 1 to Scenario 2 or 3. Those affectingMFSC are most significant, as it is the largest organization in the sector. Certain of the con-straints affect the collection and use of all the forest products examined, and these are dis-cussed first.

Staffing. MFSC has just over 10,000 staff, of whom 8,000 are technical. Senior staffare dedicated and well trained, and all Range Officers have technical forestry qualifications.However, there is little manpower planning within MFSC, so that staff numbers and skills arenot systematically linked to functional responsibilities or job descriptions, and there is animbalance between technical staff and the large numbers of administrative staff. The lack ofa human resource development plan means that there are no incentives for specialization,rewards are not linked to performance, and there are limited career prospects for middle-levelstaff. Training is mainly donor-funded and focused on community forestry because this is thedonors' priority. There is little assessment of other training needs and few opportunities. Thelack of a personnel information system limits the ability to improve the human resource sit-uation. These factors do not facilitate the development of a cadre of employees with the nec-essary skills and commitment to change that is required to move from Scenario I to Scenario2 or 3. Government rules restricting payment of field allowances to 90 days per year have themost direct impact on the expansion of community forestry, as staff are unable to interact withcommunities.

Management Process. Decision making is centralized with little systematic coordina-tion between the various departments of MFSC. Implementation responsibilities lie with theDistrict Forest Officer and his staff, who often do not receive adequate information or guide-lines to make appropriate technical judgments. Implementation is poorly monitored due to inad-equate management information flows. Frequent staff transfers at all levels lead to a lack ofcontinuity and accountability. Biodiversity conservation is focused in protected areas and fewdistrict FD staff have adequate knowledge to mainstream biodiversity conservation into forestmanagement.

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Table 10. Institutional Issues Affecting the Seven Products in the Three Scenarios

Forest Product Scenario I Scenario 2 Scenario 3

Products that are primarily inputs to agriculture

Grasses -Terai Lack of systematic outreach to Limited institutional capacity to design Increased possibility of crop damage oinvolve local communities in PA and implement BZ strategies. requires rapid institutional mechanismsand BZ management and regulate Little institutional support for develop- to deal with compensation claims.grass harvest. ment of alternative fodder supplies.

Fuelwood and Fodder FD unable to regulate exploitation Inadequate institutional capacity to sup- Poor coordination between FD andof national forest resources. port a nationwide community forestry DNPWC for biodiversity conservation. Z

program.Time spent in the field limited Inadequate partnerships betweenby daily allowance rules. MFSC and other stakeholders such as -

specialist NGOs to promote biodiv-ersity conservation outside PAs. to_

Products that are primarily marketed r

Timber Inadequate budget for implementa- Arrangements for FUG management of As for fuelwood and fodder.tion of forest management plans. high-value forests not finalized.FD unable to control illegal felling Role of FD to be defined in relationof timber. to private sector forest management

of forests.

Charcoal No FD strategy for regulation of No trained staff to promote and demon- No detailed feasibility study ofcharcoal production. strate improved kiln technology. Lack of briquette technologies. Lack of trained

targeted credit or financing mechanisms staff. Need to involve private sector.to facilitate adoption of improved kilns.

Bamboo, rattan No FD strategy to promote FUG operational plans do not promote Few incentives for FUGs to managemanagement and planting of bamboo and rattan plantation. bamboo and rattan plantations asbamboo and rattan areas. habitat for endangered species such

as the red panda.

Medicinal Plants Institutional responsibilities for FD staff lack expertise in NTFP prod- Uncertain FUG commitment toNTFP harvest, production, and uction storage and processing. programs to introduce species ofmarketing are dispersed. biodiversity significance that may be

of low value.

Wildlife Products DNPWC unable to control illegal Limited budgetary resources for Anti- No strategy for antipoaching controlspoaching. poaching Units. Limited FD expertise for nationwide. Limited knowledge of

wildlife management outside PAs. commercial captive breeding.

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Budget and Resources. The approved budget is usually about half of that planned, soresources are commonly constrained, particularly for operation and maintenance. The nationalexpenditure on the forestry sector is declining as a proportion of the total government budget,and there is a high dependency on foreign assistance as a source of finance. These constraintshave led to poor infrastructure and facilities to support field staff, directly affecting the man-agement of the forest, the development of community forestry, and, consequently, the exploita-tion of the forest resources.

Forest User Groups. There are over 7,000 FUGs forning the most numerous commu-nity institutions involved in the forest sector. There are clear institutional rules for their estab-lishment and constitution and an increasing demand from communities is reflected in the largenumber of FUGs that have been established but not formally recognized because of the limitedcapacity of the Forest Department to prepare and approve operational plans. Benefits reportedin a number of studies include improved fuelwood and fodder availability, income from harvestof overmature trees, and protection of water sources. The main constraints affecting the FUGsare social, as discussed in the previous section, or relate to the technical management andadministrative skills of the members.

Other Institutions. There are many hundreds of NGOs and other stakeholders involvedin the forest sector in Nepal, but no attempt has been made in this study to review their institu-tional capacity. One main institutional issue concerns the linkages between these organizations,the FUGs, and MFSC. Many NGOs have close working relationships with FUGs and othercommunity organizations, with forest management only part of a wide range of rural develop-ment activities. Relationships with MFSC range from cooperation to noncooperation, if notconfrontation, so there is a need to build on best practice. Another important institutional issuerefers to the poor collaboration between the different donors involved in the sector, with impor-tant consequences in the effectiveness of their development goals. Presently, more than 40donors are involved in the management of the natural resources of the country, and there is astrong need to strengthen the collaboration between them to optimize the use of these sourcesof funds.

Institutional Issues Affecting Specific Forest Products. The most important institu-tional issues affecting the use or collection of specific forest products in the three scenarios aresummarized in Table 10 and presented in more detail in the tables in the working papers. Someimportant issues can be highlighted. In Scenarios 2 and 3, it is envisaged that access will inmany cases be regulated by community organizations, but there is a limited government insti-tutional capacity to form, legally recognize, and support such organizations. In the managementof timber, institutional arrangements for sustainable commercial management are yet to bedeveloped, particularly the respective roles of government and the private sector. Bamboos andmedicinal plants are not regarded as part of mainstream forestry activities, so there is little insti-tutional expertise to deal with these commodities. Finally, wildlife poaching is seen as theresponsibility of wildlife wardens, even in areas outside protected areas, where they have nojurisdiction.

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Table 11. Legislative Issues Affecting the Seven Products in the Three Scenarios

Forest Product Scenario I Scenario 2 Scenario 3 0

Products that are primarily inputs to agriculture 0

Grasses -Terai Conflicts: Tenure claims in BZ. Land Idem. 0

Measurement and Survey Act, LocalGovernment Act, and Buffer Zone Rules.Formation of FUGs. Protected Manage-ment Rules and BZ Rules framed underSec. 16 C of NPWCA, 1973.

Fuelwood and Fodder Conflicts: Land allocation for CF DDC Lacunae: No provision for establishmentAct, Forest Act, Land Act, Roads Act. Own- of wildlife corridors in CF land, except asership and control of CF land. Forest Act, PAs.Pasture Land Nationalization Act, DDC Act. r

IQAuthority: Dispute settlements. Proced-ures not defined by ForestAct.Lacunae: Community not defined andrepresentation of committee not stipulated C

in Act and Rules.

Products that are primarily marketed

Timber Authority: Sale of timber by indivi- Conflict: Threatened species listed in

dual, DFPSC, other agencies, regu- Nepali law not in conformity with CITES

lated by DDC Chairman, CDD, DFO. and vice versa.Lacunae: Overharvested speciesnot included in list of protectedspecies.

Charcoal Conflicts: Production of charcoal.ForestAct of 1993 and DevelopmentBoard Act of 1996, which allow prod-uction of charcoal and briquettes.Differential royalties for wood forcharcoal and fuelwood.Authority: Not clear under any law.

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Table 11. Legislative Issues Affecting the Seven Products in the Three Scenarios (Cont.)

Forest Product Scenario I Scenario 2 Scenario 3

Bamboo, rattan Conflicts: Regulation. Forest Rulesof 1995, Environmental ProtectionAct, and Industrial Enterprises Act.Lacunae: No legislation is species-specific. No provision for protectionof endangered species. No regula-tions governing trade in rattan.

Medicinal Plants Authority: Licensing procedures Lacunae: No provision in legislation forovercomplicated, encouraging un- different royalties on cultivated medicinallicensed use. plants and those collected from the wild,Lacunae: Medicinal plants not reducing incentives for cultivation.defined in scientific terms. Licensinglegislation not supported by guide-lines for sustainable harvest.

IN) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CDWildlife Products Conflicts: CF and wildlife laws in Lacunae: No legislative provision for

community forests. establishment of wildlife corridors.Authority: NPWCA of 1973, DDCAct of 1991, and Local Administra-tion Act of 1971 give authority overwildlife products to several agencies.Lacunae: No regulations prohibitingimports of endangered species. Speciesin NPWC Act not representative, asit focuses on large mammals.

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Economic, Social, Institutional, and Legal Issues

D. Legal Framework

The main legislative issues affecting the seven products are due to conflicts between dif-ferent laws, conflicts of authority for the control of forest or forest product use, or legislativelacunae. The main legislative conflicts occur between the legislation drawn up specifically forthe protection and management of forests and forest resources, such as the Forest Act of 1993,the Forest Rules of 1995, and other legislation, including the Local Government Act and theLand Measurement and Survey Act. The conflicts relate mainly to ownership and control ofland, to rights to particular forest products, or to a lack of specificity in relation to products.There are also, however, a number of conflicts between Nepali law and international agree-ments to which Nepal is a signatory. Conflicts of authority occur where different laws giveauthority for use or control of forest lands or products to more than one agency, or give controlto one agency that cannot exercise that authority. Common legislative lacunae include a lack ofprecision in regard to species, or inadequate definitions of users or user groups. The mostimportant legislative issues are presented in Table 11 in relation to the three scenarios.

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4

Conclusions

A. Strategies for Change

Three scenarios have been examined representing alternative systems for the use andmanagement of forest products. Notwithstanding the limited number of products examined, ithas been shown that Scenario 1, representing present, largely uncontrolled use is not sustain-able in either economic or environmental terms. Scenario 2, based on the introduction of man-agement or technical interventions, would be environmentally more sustainable and havesignificant benefits for Nepal. Furthermore, management and technical interventions wouldenable biodiversity-friendly measures to be introduced in Scenario 3, but these would have eco-nomic costs for Nepal, as the benefits would be essentially benefits to global biodiversity. Anumber of government papers, such as the National Environmental Action Plan, the Master Planfor the Forest Sector, and the Agricultural Strategy Paper stress the importance of sustainableuse of natural resources. A change from the present unsustainable use of resources is thereforealready high on the national agenda. However, the change involves important strategic choices,to be made by the nation and the global community:

National Strategy: Change to sustainable management practices for the benefitof the nation, that is, a change from Scenario 1 to Scenario 2

Global Strategy: Change to sustainable, biodiversity-friendly managementpractices for the benefit of the global community, that is, a changefrom Scenario 1 or 2 to Scenario 3

Economic considerations suggest that the national strategy will be the first choice forthe nation, unless global resources are made available for the implementation of the globalstrategy. The choice for the global community is whether funds can be made available toNepal to manage resources in a manner that provides environmental benefits of global sig-nificance.

The two strategies are not mutually exclusive, since in most cases Scenario 3 buildson the management practices introduced under Scenario 2. However, a commitment to moveto Scenario 3 is important, as some measures need to be planned before Scenario 2 is fullyimplemented. For example, Scenario 2 involves the widespread introduction of communityforestry. This is also envisaged under Scenario 3, but options considered under Scenario 3 forthe establishment of wildlife corridors or district reserves would be precluded if operationalplans for land already transferred to the control of Forest User Groups do not make provisionfor such reserves.

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Options for Change

There are a number of options for changing from one scenario to another whose effectwould be to change the incentive structure. They can be considered in five main groups:

* Policy Changes introduced by government relating mainly to economic policies andmarkets.

* Regulation of Access mainly by community-based organizations, but also by govern-ment agencies. This affects all the products examined in this study and, in the case ofwildlife, involves complete control.

* Improved Management through devolution of management responsibilities to the low-est appropriate level, and improved field cultural practices, which affect all products butin particular, timber, fuelwood and fodder, bamboo and rattan, and medicinal plants. Thereintroduction of biodiversity-important species forms part of these improved manage-ment practices.

* Improved Technology for improved processing, storage, and transport mainly affectingcharcoal and medicinal plants.

* Protection of Additional Areas, which is particularly relevant in Scenario 3.

Changes in policy are discussed first, since these underpin both strategies. Other optionsfor change are discussed in relation to the two strategic choices together with their specificfinancial and economic implications. This is followed by a discussion of social, institutional,and legal issues common to both strategies. For each of the proposed options in Scenario 2,there is direct experience of the implementation of this option in Nepal or neighboring coun-tries, or they have been tested on a pilot basis. In Scenario 3 technical assumptions are realis-tic, but there is little direct experience of implementation.

Policy Changes

Correcting both economic policy and market failures is important to promote moresustainable resource use. In Nepal the prices for many of the products do not include impor-tant costs imposed on other parts of society. However, it is quite difficult for governments tomandate price changes and create "economic" prices, especially because an extensive openmarket for the goods is already operating. Governments are able to change policies more eas-ily, which can correct some of the more important market failures. In order to facilitate thetransition from Scenario I to 2 and onward to 3, a number of policies need to be reviewed.These include the following:

* Removal of price controls on a number of products, but in particular on timber

* Licensing of collection and trade in many forest products

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* Export controls and regulation of movement of timber and fuelwood both internation-ally and within Nepal

* Energy policies that subsidize fuelwood supplies, with a need to develop a strategy toimprove energy efficiency and utilize alternative energy sources for domestic as well asindustrial use

* Definition of the role of the private sector, particularly in forest management

* Incentives for individuals, families, or communities to adopt biodiversity-friendlypractices

Table 12. Change from Scenario 1 to 2: Options and Implications

Options for ChangeForest Product Scenario I to Scenario 2 Impact Benefit

Products that are primarily inputs to agriculture

Grasses -Terai Regulate access and grass collection, Increased grass supplies Incrementalbased on PA and BZ management Rs. 730/yr./hhplans endorsed by communities.Develop stall feeding, fodder banks,and grazing areas within the BZs.

Fuelwood and Fodder Extend management of community Improved fuelwood and Incrementalforests by representative FUG, based fodder supplies Rs. 660/yr./hhon operational plans. Develop stallfeeding

Products that are primarily marketed

Timber Manage forests for optimal timber Increased timber Incrementalharvest, based on forest management production Rs. 2390/yr./haplans. Regulate grazing.

Charcoal Include harvest of timber inputs for More efficient charcoal Incrementalcharcoal making in community forest production Rs. 13,470/yr./toperational plans. Introduce improvedtechnology.

Bamboo, rattan Sustainable harvesting from planted Increased bamboo Netbamboos. Enrichment planting of production Rs. 9,500/yr./habamboos.

Medicinal Plants Increase efficiency of harvest, storage, Higher market value Netand transport. Cultivate income- Increased production Rs. 30,700/yr./hagenerating species.

Wildlife Products Protect wildlife against poaching in Control of poaching Incrementalterai parks accessible to tourists. Rs. 76,000/animal

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National Strategy. Change from Scenario 1 to Scenario 2: Options and Implications

The options for changes, other than policy changes, and their likely impacts and eco-nomic consequences are summarized in Table 12.

Economic Implications

The results presented in Chapter 2 and summarized above demonstrate that there can beclear benefits to Nepal in moving from Scenario I to Scenario 2, which stem from the reduc-tion of externalities and the more sustainable management of selected natural resources. It isclear that the greatest impact comes from changes in the management of products that generateincome. It is difficult to calculate the total quantum of these benefits because of uncertainties ofareas and species affected. However, Table 13 illustrates the likely aggregate net benefits of achange from Scenario I to 2 for fuelwood, timber in the terai, and control of rhino poaching.All three examples show that the benefits are substantial, which for just these three productsamount to almost 14 percent of the 1997 forest sector GDP of Rs. 8.2 billion.

Financial Incentives. The figures presented in Table 12 and discussed in Chapter 2show that there are real benefits to households in changing from Scenario 1 to Scenario 2.However, poverty and cultural norms may inhibit change, and individuals are in any eventunlikely to change behavior without either a change in the prices that they perceive, or a changein regulations and policies, which would encourage new behavior or enforce existing controls.Hence, any proposed change must address how individual and household behavior is to bechanged through government or community action or investments, that is, the five groups ofchanges outlined in this chapter, Conclusions, Options for Change.

Transaction Costs. A change from Scenario 1 to Scenario 2 involves a change in trans-action costs, or a change in the costs associated with collecting, processing, or trading individ-ual products. These arise from changes in contracts or property rights and include the costs ofmonitoring or enforcing these. Most have been factored into the analytical models. Some trans-action costs rise in changing from Scenario 1 to Scenario 2, while others fall. In Scenario 1,transaction costs involve the costs of government-funded protection, and where products arecollected illegally, for example, in wildlife poaching or illegal felling of timber, include thecosts of fines when apprehended, or bribes to avoid prosecution. In Scenario 2 most transactioncosts fall as communities take responsibility for much of the protection, and illegal use isreduced. There may, however, be some rises in transaction costs due to the cost of establishingnew management arrangements, or of protecting community forests and other resources underlocal control, for example, the cost of developing fodder banks and alternative grazing resourcesoutside protected areas. Nevertheless, the financial and economic analyses show incrementalbenefits to households and the nation.

Global Strategy. Change from Scenario 1 or 2 to Scenario 3: Options and Implications

Scenario 3 includes all the sustainable management practices of Scenario 2, but intro-duces additional practices to ensure that resources are managed in a biodiversity-friendly and

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Table 13. Economic Benefits of Improved Management for the Forest Products:Fuelwood Use, Management of Timber Production in The Terai,

and Control of Rhino Poaching

% of Forest SectorScenario I Scenario 2 GDP

FuelwoodNo. of Households (millions)-in CF Program 0- not in CF Program 1.40

Net Economic Benefit (Rs. mil./yr.) 678 1358

Incremental Net Economic Benefit (Rs. mil./yr.) 0 423a 5. 1

Terai TimberNo. of Hectares- under sust. mgmt. 0 270,000- not under mgmt. 270,000 0

Net Economic Benefit (Rs. mil./yr.) 810 1455

Incremental Net Benefit (Rs. mil./yr.) 0 645 7.8

Rhino PoachingNo.Animals at RCNP- poached 460 0- protected 0 460

Net Economic Benefit (Rs. mil.) 4 39

Incremental Net Benefit (Rs. mil./yr.) 0 35 0.4

Total Incremental Net Benefit (Rs. mil./yr.) 0 1103 13.3

aThe Net Economic Benefit for Scenario I assumes there are no households in the CF program. However,there are already some 870,000 households in the program, so the incremental net benefit shown results fromthe inclusion of the 530,000 households not presently in the program.

not merely sustainable manner. That is, Scenario 3 uses a "global" perspective to identify man-agement options that maximize global biodiversity conservation benefits. Table 14 highlightsthese additional changes and summarizes their likely impact and economic consequences.

Economic Implications. Figures presented in Table 7 show that there are benefits toNepal of introducing Scenario 3, but these are not as great as for Scenario 2. Thus, there areopportunity costs to Nepal of trying to introduce Scenario 3 as opposed to Scenario 2. Most ofthese opportunity costs result from foregone production from additional areas set aside for pro-tection, or from reduced production due to restricted access. It is difficult to estimate the total

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magnitude of the costs because decisions on the activities, implementation arrangements, orsize of any additional areas that might be protected or managed in biodiversity-friendly wayshave not been made. However, as an illustration of likely costs, habitat expansion in theexisting buffer zone of Royal Chitwan National Park is likely to affect about 50,000 households,in which case the opportunity cost of Scenario 3 in this area is likely to be Rs. 26.5 millionper year, assuming a cost of Rs. 530/yr.Ihh. The transaction costs of changing to Scenario 3are higher than those incurred in changing to Scenario 2, largely due to the higher cost ofprotection.

Table 14. Change from Scenario 2 to 3: Options and Implications

Options for ChangeForest Product Scenario 2-3 Impact Cost/Benefit

Products that are primarily inputs to agriculture

Grasses - Terai Extend biodiversity habitat into Reduced grass supply OC Rs. 600/hhBuffer Zone Reduced harvest of OC Rs. 3,1 50/hh

forest productsIncreased tourisma

Fuelwood and Fodder Conserve or reintroduce threatened Reduced fuelwood OC Rs. 220/haspecies in community-managed forests supply. Management

costsa

Products that are primarily marketed

Timber Manage forests to provide variety of Reduced timber OC Rs. 2,200/hahabitats associated with globally productionsignificant species

Charcoal Eliminate selective harvesting of Alternative fuels Ben. Rs. 680/tonrhododendron species by replacing availablecharcoal with briquettes made fromwood waste and farm residues

Bamboo, rattan Reintroduce threatened species Management costs Cost: Rs. 7,1 00/haExpansion of bamboo habitats forendangered species, e.g., red panda

Medicinal Plants Reintroduce species with high bio- Management costsadiversity significance

Wildlife Products Protect wildlife against poaching in Management costsa Net lossall areas Alternative source ofInitiate captive breeding of selected animal productsspecies, e.g., musk deer, to produceanimal products

aAnalysis incomplete.Note: OC = opportunity cost of the proposed action.

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Conclusions

Social Issues

Successful transformation from Scenario 1 to Scenario 2 or 3 requires changes to addressthe identified social issues. Many of these issues are integral to Nepali society and are unlikelyto be easily resolved through government interventions. Thus, inequities due to caste, gender, orethnic affiliation will only be resolved slowly as society itself changes gradually. However, twogroups of social issues could be addressed through education, advice, and supervision of programimplementation. These relate to equity and to the adoption of new technologies.

Equity. Community forestry is now a central part of government's program of naturalresource management and the formation, and registration of Forest User Groups is controlledby the District Forest Officer. Community forest operational plans are usually drawn up by theForest Range Officer in consultation with the FUG committee. Equity considerations would beaddressed by ensuring that the plan represents the priorities of the disadvantaged, that is, the for-est is managed to produce the products most needed by those dependent on the forest. AlthoughFUG committees are not always truly representative, the distribution of products is usuallytransparent, though action to rectify misuse of power is needed in some instances.

Adoption of New Technology. Lack of knowledge and resources to adopt new tech-nologies imposes constraints on overcoming social issues. Thus poor charcoal producers aretrapped in a traditional production system because they lack the knowledge to use improvedkilns. More significantly, they lack the resources to purchase the kilns, even if they knew aboutthem. Scenario 3 could involve the substitution of charcoal by briquettes made from woodwaste and agricultural residues. This may displace the charcoal makers entirely, creating sig-nificant social problems. Similarly, lack of knowledge and finance restricts the opportunities toprocess and add value to medicinal plants in the areas of collection. Extension programs couldprovide the knowledge, but imaginative credit programs are required to provide the charcoalproducers and collectors of medicinal plants the opportunity to adopt the technology.

Institutional Issues

Most of the institutional issues relate to MFSC, particularly staff levels, skill mix,training, and incentives which have an adverse impact on present resource management andwould constrain changes from one scenario to another. Many of the actions to realize the fullpotential of the well-qualified staff could be initiated by the ministry. These include measuresto formulate and implement a human resource development plan, with staff skills and train-ing matched with clearly identified functional responsibilities. Improvements in managementprocesses with delegated decision-making authority linked to appropriate performancemonitoring, accountability, and continuity of posting could be introduced without the need forgovernment clearance. Other constraints such as budget allocations and the timeliness of bud-getary releases are beyond the control of MFSC.

Changes from Scenarios 1 to 2 and 2 to 3 will also require a greater institutional focuson the development of appropriate strategies for the management of resources within the

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protected areas and associated buffer zones, and for biodiversity conservation outside theseareas. For example, medicinal plants have a significant economic importance, and Scenario 2includes measures to ensure a more sustainable harvest, with improved storage and possiblyvalue-added processing. Table 10 highlights the lack of expertise among Forest Department(FD) staff, so there is a need to provide training and develop plans to involve FUGs or the pri-vate sector in realizing the potential advantages of Scenario 2. Similarly, Table 10 notes the lackof an FD strategy for management of charcoal production at the present time, leading to theoverexploitation of forest areas, particularly broad-leaved species. If there is to be a shift toScenario 2, with more sustainable harvesting of these species, then the FD needs to develop astrategy to regulate the production and promote the use of more efficient kilns.

Other institutional changes required involve greater coordination between the variousdepartments within MFSC and between various ministries. The main objective of Scenario 3 isto ensure that forest management is biodiversity-friendly, with particular emphasis on the con-servation of species of global significance. To achieve this objective, most FD staff will needtraining not only in biodiversity conservation, but in grazing management, fodder production,and technologies related to the production and processing of minor forest products. There is aparticular need to ensure that the Department of National Parks and Wildlife Conservation isinvolved in the conservation of biodiversity outside the protected areas. In addition, changingto Scenario 2 or 3 will require the development of closer partnerships between MFSC and otherstakeholders in the sector, particularly those with a concern for biodiversity.

Legal Issues

Legislative conflicts, conflicts of authority arising from existing legislation, and legisla-tive lacunae have been identified in Chapter 2. Addressing these issues requires careful reviewand change in legislation or additional laws.

B. From Study to Implementation

This study has demonstrated that there are clear benefits to Nepal in moving fromScenario 1, the present situation, to Scenario 2, which represents a more sustainable pattern offorest resource use and reflects a national perspective. Such a move will not be easy and hasmajor social, institutional, and legal requirements. The move from Scenario 2 to Scenario 3, thealternative that emphasizes global biodiversity concerns, will be even more difficult and willimpose additional costs on Nepal. To bring about any of these changes, whether from ScenarioI to 2, or from Scenario 2 to 3, will depend on decisions on strategies and policies, followed bythe identification of investment needs and possible sources of financing. Close collaborationbetween government and donors will be essential. The necessary priority actions are discussedin the following sections.

Strategies and Policies

Strategic Decisions. The first step towards realizing some of the alternatives and oppor-tunities identified in this study will consist of two strategic decisions by the government, at least

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in principle. The first is whether Nepal is willing to invest in more sustainable resource man-agement, represented by Scenario 2. The second is whether the government will make furtherinvestments in biodiversity-friendly management of resources, represented by Scenario 3, thatwould have global benefits but would impose direct opportunity costs on Nepal, although thesemight be met by the global community.

Policy Issues. The first priority action by government must be to address the policyissues identified in Conclusions, Policy Changes. Policies related to the regulation of prices,movement, and trade in forest products must be changed prior to the implementation of anymeasures to change from Scenario 1 to Scenarios 2 to 3. Related energy policies and other poli-cies that may affect the incentive structure for individuals and communities may require furtherstudy and be implemented in the medium term.

Geographic Focus. The main objective of changing from Scenario 1 to Scenario 2 is theintroduction of more sustainable management, but it has been shown that the changes also resultin financial and economic benefits. The geographic focus for introduction of the changes willdepend on whether, in making the changes, the secondary objective is to maximize benefits, toassist the greatest number of families, or to have an impact on poverty alleviation. It is clearfrom the analyses in Chapter 2 that the greatest financial and economic benefits are derivedfrom sustainable management of forest resources such as timber in the terai. However, otherproducts are more widely collected in the hills of Nepal, and some make a significant contribu-tion to the income of some of the poorest families. The areas in which the change from ScenarioI to Scenario 3 is focused is dependent on where globally significant biodiversity is most at risk.In Nepal, such areas are mainly concentrated in the middle and high hills.

Studies and Research. Detailed investigation and feasibility studies would be requiredas part of program formulation and prior to major investment. High priority topics wouldinclude:

* Institutional development, including a review of MFSC staffing, structure, and manage-ment processes

* Training needs assessment and review of curricula in training establishments to ensurebiodiversity concerns are adequately represented

* Timber and fuelwood marketing systems

* Incentives for communities to hire nongovernment technical staff to provide advice onforest management and production, and the processing and sale of nontimber forestproducts

Mechanisms for:

- Implementation of forest management plans in the terai, involving both MFSCand the private sector

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- Introduction of grazing management and forage development in communityforests

- Establishment of fodder banks in the terai and middle hills

* Financing schemes to assist charcoal producers to purchase or lease improved kilns andthe social and environmental impact of development of briquette industry

* Incentives for communities to establish conservation areas and reintroduce threatenedspecies, particularly medicinal plants

* Feasibility and costs of establishing biodiversity corridors

* Technology and costs of reintroducing selected threatened species

Investment Needs

Detailed calculations of investment needs are dependent on decisions on which areas areto be treated and the phasing of initiatives for changing to either Scenario 2 or 3. These deci-sions would be reached during program formulation, so it is only possible to identify the likelytypes of investments needed. These are discussed below for the adoption of the national andglobal strategies.

National Strategy: Investment Needs

Regulation of Access. The main investment needs to facilitate changes from Scenario 1to Scenario 2 relate to the actions identified above in this chapter, Conclusions, Option forChange of which regulation of access affects all the products examined. The most effective reg-ulation of access would be community based, involving an expansion of the community forestryprogram and development of community-based organizations around protected areas and bufferzones. Such an expansion would be endorsed by most communities because of the large andgrowing demand for community forestry, reflected in the backlog of FUGs that have beenformed but not formally constituted with approved operational plans for forest management.However, there are significant institutional constraints to the expansion of the program, due tothe limited capacity of MFSC to constitute and provide technical advice to FUGs.Consequently, investment would need to be concentrated on innovative programs to speed upFUG formation and to encourage FUGs to hire nongovemment technical staff to advise on for-est management, processing, storage and sale of forest produce, particularly nontimber forestproducts. In addition, if communities are given incentives, they will control illegal trade.

In some instances, regulation of access to forest products can only be effectively under-taken by government agencies, especially control of poaching and illicit felling and smugglingof timber from national forests remote from settlements. Investments are required to strengthenantipoaching patrols, initially focused in areas with high tourist potentials. Control of illicit tim-ber felling and smuggling is more difficult, given the problems of controlling trade over the long

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border with India, but given the appropriate policy environment, the private sector would makeefforts to control illegal trade.

Institutional Development. High priority must be given to developing skills and effec-tive management systems in communities, NGOs, and, as the nodal government agency in thesector, MFSC. Change from Scenario 1 to Scenario 2 or 3 is dependent on building institution-al capacity to expand community-based resource management programs, introduce new tech-nologies, improve controls, and expand the network of protected areas.

Improved Management. For the whole range of products, improved managementrequires investment in cadres of technical experts. For many of the products this would beincluded in the expansion of community forestry programs. Additional investments would beneeded to provide advice for the expansion of private sector forestry programs. Improved man-agement of rich sal forests in the terai for timber production would require the completion ofForest Management Plans and investments in their implementation, with a strong focus on pri-vate sector involvement. Investments would also be required for the cultivation of medicinalplants or the reintroduction of high-value rattan species.

Improved Technology. An important factor in the management of grasses in the teraiand the collection of fuelwood and fodder under Scenario 2 is the creation of fodder banks toreduce pressure on forest resources. Significant investments would be required for the effec-tive development of such fodder banks. The production of charcoal under Scenario 2 would bebased on the use of improved kilns. In addition to investments in building capacity to providetechnical advice to charcoal makers on the use of these kilns, innovative financing schemeswould be needed to enable the charcoal producers to construct the kilns. Improved technolo-gies for processing, storage, and transport of medicinal plants is also foreseen in Scenario 2.This would require investments in building skills and knowledge in MFSC, extension pro-grams to ensure collectors are aware of the improved technologies, and support for coopera-tive processing ventures.

Global Strategy -Investment Needs

The cost of introducing the biodiversity-friendly measures associated with Scenario 3have been identified in this chapter, Global Strategy, Economic Implications. A very significantelement of the costs is the opportunity cost, incurred for globally significant environmental con-cerns. The decision to be made by the global community is whether these global issues are suf-ficiently important to provide funding to Nepal to meet these opportunity costs, and, if so, whatthe level of funding should be. The magnitude of funding will depend on the areas to be pro-tected or managed in a biodiversity-friendly way. In addition to the opportunity costs, there willbe costs associated with program implementation, and these are discussed below.

Protection of AdditionalAreas. In many instances Scenario 3 involves the protection ofadditional areas, either through the extension of biodiversity habitats into the buffer zones ofprotected areas, or the development of wildlife or biodiversity corridors. In national forests, the

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Conclusions

costs of establishing these additional areas can be calculated and necessary investments pro-vided. In community forests the situation is more difficult. Establishing additional areas for pro-tection and managing them in a biodiversity-friendly way may require modifications inharvesting regimes, which may impose costs on the community. Investments must thereforeprovide incentives to communities to establish and manage these additional areas for biodiver-sity reasons.

Reintroduction of Threatened Species. In Scenario 3, it is envisaged that threatenedspecies would be reintroduced into forests, which would be managed to ensure the survival andspread of these species. The problems are similar to those related to the protection of addition-al areas. In national forests, the costs of reintroducing and managing these species can be cal-culated and investments provided, although in sal forests, managed to provide a variety ofhabitats in a multistorey, multispecies forest, these costs may be very significant, as the valueof the same forests managed to maximize timber production will be very high. In communityforests, reintroduction of threatened species would require the provision of incentives to com-munities, with the problem of finding mechanisms to provide these incentives.

Improved Technology. In Scenario 3, technology changes affect mainly charcoal pro-duction. One option would be to replace charcoal with briquettes made from wood waste andagricultural residue. Investments would be required in the development of such an industry,which is likely to be beyond the management capabilities of poor charcoal makers. As a result,they would lose their source of livelihood and there would be a need for investment in a socialmitigation plan for this group. Another option considered in Scenario 3 is to meet the demandfor some animal products by captive breeding programs. Supply of musk oil from captivebreeding of musk deer would reduce poaching, but investments would be high due to the costsof establishing fenced ranches.

Sources of Financing

Scenario 2 involves changes in resource management that increase social benefits forthe nation. Financing could, therefore, be obtained from conventional sources such as the gov-ernment's own budget and multilateral and bilateral donors. Scenario 3 represents the introduc-tion of biodiversity-friendly measures that imply opportunity and direct costs to Nepal. Thebiodiversity values are significant from a global perspective. International funding sources suchas the Global Environment Facility (GEF) were established to meet precisely these sorts of costsand, provided proposed investment programs met the other GEF criteria, would be an impor-tant source of funding for the introduction of Scenario 3. Some bilateral donors provide grantfunding for biodiversity concerns, including the establishment of biodiversity trust finds.

The Role of the Bank

Poverty reduction, improved nutrition, and increased employment are fundamentalobjectives of all Bank activities. Rural development is one of the most important ways ofachieving these objectives, and natural resources provide the basic natural capital for all rural

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development. Sustainable use of these resources, that is, Scenario 2, is essential to meet theBank's objectives, particularly in Nepal, where growing rural populations make ever increasingdemands on the finite natural resource base. The Bank also has an important role to play in pro-moting more biodiversity-friendly, sustainable, natural resource management, that is, Scenario3, if it is to achieve its public commitments to protection of the environment, the conservationof biodiversity, and the sustainable management of forests. In Nepal, the Bank can support nat-ural resource management programs through dialogue with government on the issues raised inthis report, the formulation of investment programs, and by helping to build partnershipsbetween public and private sector agencies involved in the sector.

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Annex 1

Team Composition and List of Working Papers

Speciality Team Members Working Papers

Task Team Leader 1. Hill

Economics D. Knowler EconomicsJ. Dixon Estimating Local National, and GlobalP. Nicholas Benefits and Costs

Ecology E. Sennhauser BiodiversityScenarios for Individual Forest Products

Social Sciences K. E. Anderson Social Dimensions IA. Shrestha Social Dimensions 11

Institutional Specialist R. C. Mishra Institutional Aspects

Forestry K. Shrestha Policy and Technical Issues

Law S. Dunghel Legal Issues

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Annex 2

Models for Economic Analysis

Economic Models

A general economic model was developed to analyze each of the three scenarios for theseven products. When all possible costs and benefits are included, i.e., a situation equivalent toa global accounting stance, net benefits can be estimated as shown in Table A.2. 1.

The incremental net benefits resulting from a shift from one scenario to another at indi-vidual, national, and global levels can be estimated.

* Private Level. Scenario 1 is preferred because each successive scenario entails higherprivate costs and the individual does not take into account economic costs and benefitsaccruing at the national and global levels.

* National Level. Economic costs such as externalities are fully taken into account so thatactivities incurring high external costs are discouraged. Any biodiversity benefits arejustified at the national level. Any incremental benefits at the global level are not takeninto account, so that activities favored under this scenario may not be most desirablefrom the global accounting stance.

* uGlobal Level. All benefits and costs are included so that activities where incrementalglobal biodiversity benefits exceed any incremental private/national costs are encour-aged, even though at the private and national levels no such incentive exists.

Table A.2.1 General Economic Model for the Three Scenarios

Scenario Theoretical Model

I NBI = BpI + Bgl - Cpl - Ce- Cu2 NB2 = Bp2 + Bg2 Cp2

3 NB3 = Bp3 + Bg3 - Cp3

NB 1, NB2, NB3 Net BenefitsBp , Bp2, Bp3 Private BenefitsBgl, Bg2, Bg3 Global Biodiversity BenefitsCp 1, Cp2, Cp3 Private CostsCe External CostsCu Depletion Premium or National Cost

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Annex 3

Acknowledgments

The production of this report has been based largely upon the substantial informationfacilitated by a wide network of researchers, scientists, conservation agencies, and governmentorganizations. We would like to thank these many individuals and organizations, without whosesupport this report could not have been produced. In particular, we would like to express ourgratitude to the Ministry of Forests and Soil Conservation, His Majesty's Government of Nepal,and especially to A. I. Joshi, K. R. Kanel, S. M. Amatya, and N. Poudel. Gratitude is also dueto the Ministry of Agriculture, Department of Livestock, His Majesty's Government of Nepal,the Water and Energy Commission, His Majesty's Government of Nepal, and particularly to JimNugent; the Timber Corporation of Nepal; Bilateral Cooperation programs, particularly M.Guntz, P. Rhode (GTZ), Steven Hunt (AusAID), D. Johnston, Fred Pollack (USAID), K. Shuler(SDC), B. Schultz (DANIDA); the King Mahendra Trust for Nature Conservation, with specialappreciation to J. P. Rana, M. Joshi, G. I. Thapa, and Arup Rajouria; ICIMOD, particularly toT. S. Papola, S. H. Malik, P. Tuluchan, P. Shengii; WWF Nepal, especially to M. N. Sherpa, U.R. Bhuju, K. K. Shrestha; and IUCN Nepal, with special appreciation to A. Chitrakar, T. B.Shresthra, A. Speczowka, and R. N. Suwal.

We would also like to express our gratitude to our peer reviewers, Ms. Susan Shen andMr. Shelton Davis of the World Bank, and to our advisor, A. Sfeir-Younis.

Finally, we are grateful for all the assistance, support, and friendly collaboration of HisMajesty's Government of Nepal and the Nepali people, without whose support and participa-tion we would not have been able to produce this report.

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References

Government of Nepal. 1998. Master Plan for the Forest Sector of Nepal. Ministry of Forestsand Soil Conservation.

Knowler, D., J. Dixon, and P. Nicholas. Details of the Models, Assumptions, and Calculations.The World Bank. Working Paper on Economic Dimensions.

MacKinnon, J., ed. 1997. Protected Areas Systems Review of the Indo-Malayan Realm. AsianBureau for Conservation Ltd., Canterbury, England.

Metz, J. 1991. A Reassessment of the Causes and Severity of Nepal's Environmental Crisis.World Development. Vol. 19, No. 7.

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