Improving Governance and Reducing Corruption in the Forestry Sector

1
Improving Governance and Reducing Corruption in
the Forestry Sector

• Nalin Kishor, FLEG Coordinator, World Bank
• Presentation at the Public Sector and
  Anticorruption Core Course, Washington DC, April
  23-26, 2007.

2
Organization

• Scale of the problem
• Fundamental causes of the problem
• Corruption typologies
• Search for solutions
• Examples of World Bank initiatives
• Summary

3
Scale of Corruption in the Forest Sector

• Corruption in the forest sector is globally
  pervasive
• Has many forms
• Criminal illegal logging, smuggling, extortion
• Legal but corrupt state capture, institutional
  erosion, rent seizing
• Scale is vast but quantitative estimates remain
  elusive
• Illegal logging on public lands estimated at
  gt10bn per annum

4
Does Corruption Contribute to Deforestation?
5
Costs of forest corruption include

• Livelihood losses to forest dependent communities
  
• Environmental losses local and global (climate
  change and biodiversity loss)
• Fiscal losses to the state from lost royalties
• Spread of crime and corruption to other sectors
• Undermining institutions (with growth
  implications)
• Undermining legitimate forest enterprises

6
World Banks Commitment to Forest Law Enforcement
and Governance

• The 2002 Forest Strategy commits the Bank to
  collaborate with borrower countries and partners
  to reduce by half the financial losses from
  illegal logging by 2013
• Since 2001 the Bank has actively engaged in
  high-profile efforts to halt illegal logging and
  related crimes in partnership with producer and
  consumer country governments, NGOs and
  responsible private companies
• Supported illegal logging related action in 32
  (out of 51) forestry projects (IBRD, IDA, GEF)
  for an estimated amount of 311 million USD (about
  11 of total project cost), including stand alone
  projects and forestry components in broader
  projects
• The Banks Forests Team in the Agriculture and
  Rural Development Department has a FLEG team
  which coordinates specific FLEG related
  activities collaborates with key staff in the
  Regions and Country Offices

7
Why are corruption and crime so globally
pervasive across the forest sector?

• Demand exceeds Sustainable Supply.
• Sustainable Supply is relatively inelastic (trees
  grow slowly).
• Hence, profits from unsustainable logging gt
  profits from sustainable logging.
• In addition costs of unsustainable logging are
  public and benefits private
• ? High rents from unsustainable harvesting
• (Indonesia milling capacity 50m cum,
  allowable cut 15m cum recipe for corruption)

8
Corruption Stains Timber Trade Forests Destroyed
in China's Race to Feed Global Wood-Processing
IndustryBy Peter S Goodman and Peter
FinnWashington Post Foreign ServiceSunday,
April 1, 2007 MYITKYINA, Burma -- The Chinese
logging boss set his sights on a thickly forested
mountain just inside Burma, aiming to harvest one
of the last natural stands of teak on Earth.He
handed a rice sack stuffed with 8,000 worth of
Chinese currency to two agents with connections
in the Burmese borderlands, the men said in
interviews. They used that stash to bribe
everyone standing between the teak and China. In
came Chinese logging crews. Out went huge logs,
over Chinese-built roads.
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Typology of Corruption (1)

• State Capture Institutional Erosion and Rent
  Seizing
• Philippines, India, Malaysia and Indonesia
  bequeathed strong forest institutions
• Timber boom 50s and 60s-gt dismantling of these
  institutions
• Why?
• Institutions are endogenous To capture high
  rents need to erode institutions that impede rent
  capture

10
Typology of Corruption (2)

• Grand Corruption and Rent Seeking
• Legal logging but contributions paid to gain
  access to timber concessions
• Problem is widespread from Malaysia to Australia
  and beyond
• Often accompanies land use decisions (cattle
  ranching in LAC)

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Typology of Corruption

• Commercial Scale Illegal Logging
• Big business, commercial operators, links to
  other crimes (drug, arms and people smuggling)
• Corruption Contagion
• Logs are bulky and can only be sold with
  connivance of a host of institutions (transport,
  customs, police.)
• ?More widespread institutional decay
• Weak institutions -gt impede development and
  growth

12
Typology of Corruption (cont.)

• Also linked to illegal logging
• Poor log tracking systems. The Alchemy of a Log

Broker illegal log Indonesia Gets 20/m3
Broker legal log Malaysia Gets 160/m3
Illegal Logger Indonesia Gets 2.2/m3
Buyer legal sawn-timber, Malaysia, pays 710/m3
Buyer, molded timber, US, pays 1000/m3
13
Typology of Corruption (3)

• Petty corruption and extortion
• Victims are most often subsistence dwellers
• In scale relatively small, but significant
  poverty and livelihood impacts
• Admits of straightforward solutions
• Vest clear and non-controversial property rights
• Community-based forest management community
  woodlots (supply-side intervention)

14
Supply Chain and Corruption Vulnerabilities

• Stage of
• production Type of vulnerability
• Forest estate Policy capture for legal but
  unsustainable supply of timber
• Bribery of politicians and forest guards for
  illegal supplies
• Bribery of officials to evade royalties and
  timber taxes
• Bribery in forest service for transfers to remote
  estates with high timber resources
• Transport and export of illegal logs
• Bribery of transporters to carry illegal logs
• Bribery of customs and transport officials,
  local police
• Bribery of bureaucrats for fraudulent permits
  for laundering illegal logs
• Milling and processing
• Bribery of police and bureaucrats when
  processing illegal lumber
• Destination retail outlets
• Policy capture to resist log tracking and anti
  money laundering legislation.

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Solutions (1)

• Solutions need to be incentive compatible
  institutions will not impose reforms that
  undermine their self interest
• Search for answers that
• Lower the rents from unsustainable logging
• Demand side interventions
• Commercial (IKEA type model)
• Responsible public procurement
• Green consumerism
• Interventions that make sustainable logging more
  attractive than unsustainable logging
• Payments for Environmental Services (esp. carbon)

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Solutions (2)

• Search for answers that
• Improve the supply of good governance and
  increase incentive to utilize legally harvested
  timber
• Put native forests under forest management plans
  and certification
• Development of industrial plantations
• Clear and equitable forest fiscal systems
• Institutional reform and strengthening
• Reform of forest service, incentive payments,
  transparency and accountability (global
  monitoring of forest stock, global log-tracking)
• Improving the forest law enforcement and
  compliance system

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Solutions (3)

• Improve the forest law enforcement and compliance
  system

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Operational Elements of Forest Law Enforcement
and Governance
Police capabilities, investigations, mobile
courts, prosecutorial capacity, penalty
provisions, surveillance and patrols
Forest monitoring systems, case tracking systems,
monitors, transparency
Forest management, deterrence, tenure reform,
demarcation, legislative reform, demand
reduction, alternative livelihoods
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Prevention

• Supply-demand imbalances
• Quality of legal and regulatory frameworks within
  and outside the forest sector
• Institutional structures and incentives
• Forest monitoring and information disclosure
• Capacity building and awareness

20
Detection

• Monitoring and surveillance to determine if and
  where crime is occurring
• Establishing a process to assess institutional
  weaknesses that create opportunity for timber
  theft
• Collecting evidence and documentation
• Establishing crime monitoring systems
• Use of independent forest monitors

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Suppression

• Last recourse
• Almost always involves use of force
• Risks need to be assessed in light of the
  probability of success, accountability and
  transparency of suppression effort, and skills
  and training available to law enforcers
• Empirically, suppression of forest crime in
  developing countries is very limited and
  essentially ineffectual, providing very little
  deterrence to further crimes

22
Examples of FLEG in Banks Portfolio Prevention

• Legal and regulatory reform in forest sector
  (Cameroon, Gabon, Congo DRC, Madagascar,
  Bosnia-Herzegovina, Croatia, Georgia, Romania,
  Argentina, Bolivia, Mexico)
• Improving revenue collection, concession systems
  (Congo Rep., Ghana, Tanzania, Cambodia, Georgia,
  Russia)
• National-level forest management plans and
  protected-area plans (Ghana, Cambodia, Bolivia)
• Demarcation of protected areas (Ghana, Uganda,
  Lao PDR, Vietnam, Argentina, Brazil, Honduras)
• Formalization of land tenure rights (Vietnam,
  Honduras)
• Public awareness activities (Cambodia, Romania)

23
Examples of FLEG in Banks Portfolio Detection

• Forest management information systems (Ghana, Lao
  PDR, Bosnia-Herzegovina, Georgia, Romania,
  Russia, India)
• Certification systems (Armenia, Russia, Mexico)
• Monitoring in field (Uganda, Peru)
• Guard houses, field inspection units, equipment
  for patrols (Lao PDR, Bosnia-Herzegovina,
  Georgia, Ecuador, Mexico)

24
World Bank Forestry Portfolio, by Region
Region Total Number of Projects Number of FLEG Projects Total Cost (US millions) Cost as of Total Forestry Portfolio Bank Commitment (US millions) FLEG Amount (US millions) FLEG as of Total Forestry Portfolio FLEG as of Total FLEG
AFR 9 5 515.1 19 289.7 108.9 21 35
EAP 8 7 772.9 29 431.1 40.3 5 13
ECA 11 9 396.5 15 265.6 32.7 8 11
LCR 19 13 691.9 26 328.8 123.1 18 40
MNA 3 0 203.5 8 139.5 0.0 0 0
SAR 1 1 127.1 5 108.2 5.8 5 2
                 
Total 51 35 2707.0 100 1562.9 310.8 11 100
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Indonesia (1) Earnings from legal and illegal
logging operations

• The total annual turnover associated with logging
  (legal and illegal) is estimated at US 6.6
  billion. Of this, the contribution of the legal
  portion of logging is modest with an annual
  turnover of US1.5 billion.
• The estimate of the associated value-added is US
  4.25 billion (this includes the value-added to
  illegal log exports) which forms about 3 of the
  GDP in 2000. As a point of comparison, this
  comprises about 17 of the value added
  contributed by the agricultural sector.
• Additional characteristics of the problem are
• Informal payments and bribes account for over
  US1 billion per annum.
• Legal logging activities are not protected from
  bribes and, of the total, more than 25
  originates from legally sanctioned timber!
• Log smuggling is a highly lucrative activity with
  about 50 of total value added being generated
  from the illegal export of logs.

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Indonesia (2) Promoting Transparency and Rule
of Law

• Strategy to combat illegal logging rests on two
  pillars
• 1. Promoting Transparency. To make accurate and
  up-to-date forest sector information continuously
  available to decision makers. This includes
• improving the information management process that
  generates and archives information on Indonesias
  forest and timber resources
• establishing a comprehensive disclosure policy
  that clearly articulates what information can be
  publicly disclosed and what is confidential
• developing effective disclosure mechanisms that
  allow multiple stakeholders to access accurate
  and up-to-date information on timber and forest
  resources
• encouraging an improved decision-making process
  able to utilize the information.

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Indonesia (3) Promoting Transparency and Rule of
Law

• Strategy to combat illegal logging rests on two
  pillars
• 2. Promoting Law Enforcement. Implementing and
  supporting a comprehensive framework of measures,
  designed through extensive multi-stakeholder
  consultations, to prevent, detect and suppress
  forest crimes and improve law enforcement in
  Indonesia. This framework includes the following
  
• support for the establishment of a forest crime
  case tracking system that will allow multiple
  stakeholders to monitor and hold the government
  to account for its law enforcement operations and
  judicial processes
• assistance with the implementation of Indonesias
  anti-money laundering legislation, as it relates
  to forest crimes
• continued support for an interagency forest law
  enforcement strike force
• support for participation by the Indonesian
  government in the Asia FLEG process.

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Solutions (4)

• Search for answers that
• Generate the demand for good governance and
  strengthen the political will
• National
• Improve accountability, develop strong
  multi-stakeholder processes (Philippines,
  Bolivia)
• Identify and cultivate champions (Indonesia)
• International Foster producer and consumer
  country collaboration at the regional and
  international levels (FLEG processes)

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Solutions (5)

• Search for answers that
• Galvanize international cooperation and provide a
  platform for action
• Forest Law Enforcement and Governance
  (ministerial) processes (collaborative actions by
  producer and consumer countries at the
  regional and international levels).
• FLEG active in EAP, AFR, ECA and LAC

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Regional FLEG Processes

• FLEG Ministerial Processes have been conducted in
  Asia (2001), Africa (2003), and the ENA Region
  (2005), with World Bank support.
• Co-organized by both producer and consumer
  countries, recognizing a shared responsibility to
  address a common problem.

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Components of Regional FLEG Processes

• Analytic country-level work to identify issues
  and options for solutions
• Multi-stakeholder technical meetings where
  experiences within forest law enforcement and
  governance are shared, and common agendas
  identified
• Inter-governmental negotiations for drafting of a
  ministerial declaration and action plan
• Regional stakeholder meetings as follow-up to
  ministerial declarations to establish
  partnerships, share best practices and tackle
  specific themes (e.g. customs collaboration)

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Role of the World Bank in Regional and
International FLEG Processes

• Using the Banks global mandate and reach to
  support integration and follow-up of regional
  FLEG ministerial conferences into existing
  regional structures.
• Using the Banks convening power to strengthen
  coordination and collaboration between
  international forest law enforcement and
  governance supporters and to engage with private
  sector actors and importing or intermediary
  countries in the forest products chain.
• Promoting linkages between the FLEG processes and
  initiatives for forest governance reforms at
  different levels (e.g. AFP, FLEGT, UNFF, FAO,
  ITTO).
• Strengthening linkages between regional FLEG
  processes and Bank projects and country dialog.

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Achievements of Regional FLEG Processes

• Increased awareness of causes and impacts of
  forest crime
• Established a shared sense of responsibility
  among both producer and consumer countries
• Provided understanding of the distinct roles of
  various stakeholders
• Created political platform and momentum
• Helped identify priority actions and facilitated
  exchange of experiences and best practices
• Helped generate data on forest crime as basis for
  multi-stakeholder discussions and as means for
  establishing baselines to monitor progress
• Provided a network of information sharing
• Influenced the incorporation of illegal logging
  and forest crime into several regional processes
  (ASEAN, COMIFAC, OTCA, CCAD)

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Going Forward with the Regional FLEG Processes

• Expressions of political commitment have value,
  but this needs to be better exploited.
• FLEG processes have been largely isolated from
  the mainstream of international criminal justice
  efforts.
• Regional discussions of common law enforcement
  problems have yet to identify or mobilize
  significant opportunities for multilateral
  enforcement action.
• Regional FLEG processes have to be made a strong
  force in supporting effective reforms of national
  level enforcement.

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Summary(1) World Banks Role in Forest Law
Enforcement and Governance

• Since 2001 the Bank has
• Acted as coordinator/secretariat for Regional
  Ministerial processes (S-E Asia 2001, Africa
  2003, Europe and Northern Asia 2005) and
  provided support for their follow-up
• Incorporated illegal logging into the policy
  dialogue in borrower countries (e.g. Cambodia,
  Indonesia, Cameroon, Congo DRC)
• Supported control of illegal logging related
  actions in 32 (out of 51) forestry projects
  (IBRD, IDA, GEF) for an estimated amount of 311
  million USD (about 11 of total project cost),
  including stand alone projects and forestry
  components in broader projects
• Initiated in 2005 a process to mainstream illegal
  logging related issues into broader governance
  programs and develop a corporate approach

36
Summary (2) Emerging Directions of the Bank in
Forest Law Enforcement and Governance

• Linking Forestry to Broader Governance and
  Anti-Corruption Work
• Public Sector Governance
• Governance and Anti-Corruption Diagnostics
• Legal and Regulatory Reform
• Financing Private Investment
• Corporate Social Responsibility
• Anti-Money Laundering/Asset Forfeiture
• Systematically integrating forest law enforcement
  and governance issues in country forestry
  dialogues in problem countries
• Targeting knowledge management to achieve
  synergies with other Bank operations

37
Summary (3) Emerging Directions of the Bank in
Forest Law Enforcement and Governance

• Strengthening Partnerships within the WBG
• With IFC in the private sector context
• Strengthening Partnerships outside the WBG
• Regional institutions (ASEAN, OTCA, EAC, COMIFAC)
• Donor agencies

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• Thank you
• www.worldbank.org/fleg
• www.worldbank.org/forests