Page 1 Socialist Republic of Vietnam Aligning P ublic S pending wit h S tr ategic P r ior it ies in t he F or estr y S ector The World Bank East Asia and the Pacific Region Sustainable Development Department 53101 Page 2 © 2010 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, NW Washington, D.C. 20433 USA (202) 473-1000 Internet: www.worldbank.org All rights reserved This study was prepared by the Social, Environment and Rural Sustainable Development Unit (EASER) of the Sustainable Development Department of East Asia and Pacific Region of the World Bank with grant support from the European Union. This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank, the governments they represent or the European Union. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e- mail pubrights@worldbank.org Page 3 Socialist Republic of Vietnam Aligning Public Spending with Strategic Priorities in the Forestry Sector The World Bank East Asia and the Pacific Region Sustainable Development Department Page 4 i Vietnam: Aligning Public Spending with Strategic Priorities in the Forestry Sector Abbreviations and Acronyms....................................................................................................iii   Executive Summary...................................................................................................................iv   Introduction.................................................................................................................................1   Chapter 1. Forestry Sector Resources and Performance........................................................4   A. The State of Vietnam’s Forest Resources..........................................................................................4   B. Sector Performance and Main Driver of Growth ..............................................................................5   Chapter 2. Sector Policy Framework and Development Strategy .........................................9   A. Overall Policy Directions..................................................................................................................9   B. Forestry Legislative Framework.....................................................................................................10   C. Five Million Hectares Reforestation Program.................................................................................13   D. State Forest Enterprise Reforms......................................................................................................14   E. Forest Land Re-classification ..........................................................................................................17   F. National Forest Development Strategy............................................................................................17   G. Production Forest Development Policy...........................................................................................17   Chapter 3. Public Expenditure in the Forestry Sector..........................................................20   A. Structure and Trends in Forestry Sector Expenditure .....................................................................20   B. Function — Expenditure on the 5MHRP and Other Programs.......................................................23   C. Conduct — Institutional Responsibilities in Forestry Expenditure Planning and Reporting..........28   D. Performance — Implementation Achievements .............................................................................29   Chapter 4. Recommendations: Securing and Monitoring Resource Flows........................42   Annex A. MOF Forest Sector Expenditure Data, 2001-2005 ...............................................45   Annex B. MARD Forest Sector Expenditure Data, 2001-2005............................................52   Annex C. MPI/National Assembly Forest Sector Expenditure Data, 2001-05....................56   Annex D. Summary of Investment Performance in the Forest Sector.................................64   Annex E. Forest Dependency: Implications for Land Use, Poverty and Government Programs (VHLSS Results) .....................................................................................................66   Bibliography..............................................................................................................................76   Page 5 ii Figures and Tables Figure 1. Land-use changes, 1998 to 2005............................................................................................4   Figure 2. Changes in Natural Forest and Plantation Forest Areas, 1995 to 2005 .................................5   Figure 3. Annual real rate of growth of GDP, agriculture and forestry, 1996-2006.............................6   Figure 4. Vietnam’s Trade in Timber and Timber Products, 2001-05..................................................7   Figure 5. Forest Land Allocated by Main Types of Forestland Owners.............................................15   Figure 6. Annual Change Public Expenditure on Forestry (2000-04).................................................20   Figure 7. Forestry Sector Expenditure, 2001-05..................................................................................21   Figure 8. Total forestry sector and 5MHRP funding, 2001-05 ...........................................................24   Figure 9. 5MHRP Funding from Different Sources in % ...................................................................25   Figure 10. 5MHRP Funding by Central and Local Government ........................................................26   Figure 11. 5MHRP Funding by Central and Subnational Levels........................................................27   Figure 12. Annual Increment in Plantation Forest Area and ODA and Subsidized Credit during 2001- 05..................................................................................................................................................35   Figure 13. Average Plantation Establishment Cost in Selected Countries...........................................37   Figure 14. Mean Annual Increment in Eucalyptus Plantations in Selected Countries.........................37   Figure 15. Share of Agriculture and Forestland with Land Use Rights Certificates, 2002-06............38   Figure 16. Number of Households (HH) with Land Use Rights Certificates for Agriculture and Forestland, 1998-2005..................................................................................................................38   Figure E1. Forest-Dependent Households Land Use, 2004.................................................................71   Figure E2. Non-Forest Dependent Household, 2004...........................................................................72   Table 1. Contribution of Economic Sectors to GDP 2001-06................................................................6   Table 2. Estimated Domestic Timber Supply and Demand Balance 2001–05 ......................................8   Table 3. Land Law Applicable to Forestry Land Sub-Categories........................................................11   Table 4. Legal Provisions relating to Different Forest Owners and Forest Categories........................12   Table 5. Targets for the 5MHRP, 1998 and 2006................................................................................13   Table 6. Overview of the 5 Forestry Programs of the National Forest Development Strategy 2006-20 ......................................................................................................................................................19   Table 7. Agriculture and Forestry Expenditures, 2001-04..................................................................22   Table 8. MARD Forestry Capital Expenditure by Source and Recurrent Expenditure, 2001-04........23   Table 9. Total Forestry Sector and 5MHRP Funding, 2001-05..........................................................24   Table 10. 5MHRP Funding from Different Sources............................................................................26   Table 11. 5MHRP Spending Units.......................................................................................................27   Table 12. Area Targets and Achievements for Protection, Special Use, and Production Forests under the 5MHRP (1998-2010)..............................................................................................................32   Table 13. Forest Plantation Area in Vietnam.......................................................................................34   Table 14. Plantation Establishment Cost: Vietnam, Laos and Southern China ...................................36   Table E1. Average Rural Household and Forest Dependency Characteristics (1992, 2002, 2004).....67   Table E2. Average Rural Household Income: Sources and Forest Dependency.................................68   Table E3. Support Services for Forest Dependent and Other Rural Households, 2004.......................70   Table E5. Share of Income Sources by Poverty and Forest Dependency, 2004..................................72   Page 6 iii Abbreviations and Acronyms 5MHRP Five Million Hectare Reforestation Program FMPB Forest Management Protection Board GDP Gross domestic product GSO General Statistics Office LURC Land use rights certificate MARD Ministry of Agriculture and Rural Development MPI Ministry of Planning and Investment MOF Ministry of Finance ODA Official development assistance SFE State Forest Enterprise VHLSS Vietnam Household Living Standard Survey VND Vietnamese Dong Page 7 iv Executive Summary Vietnam’s forests remain dependent on public resources, including international development assistance, for the delivery of public and private services that include timber production, state forest management, forest protection and biodiversity conservation, and extension and research. Public subsidies are also provided to smallholder forest owners to stimulate investments into the sector. For the Government it is important to efficiently manage public resources as well as secure adequate resource flows from private actors to achieve the sector’s development objectives. This study provides an overview of the more recent developments in the forestry sector as well as basic analytical support to the Government, in particular policy makers in the Ministry of Agriculture and Rural Development, the Ministry of Finance, and the Ministry of Planning and Investment, with regard to structure, trends, and main functions of public and other expenditure in the forestry sector. The study assesses resource adequacy and whether public spending is appropriately prioritized and aligned with sector objectives. Given the constraints of limited availability and quality of data, the overall picture of sector expenditure remains incomplete, but it nevertheless provides a useful basis for further analytical work and discussion. Vietnam’s forest resources . Vietnam has experienced a significant increase in forest area over the past decade and since the 1990s has reversed the trend of decade-long deforestation. Forests cover approximately 12.7 million hectares or 38 percent of the total land area, of which 10.2 million hectares is classified as natural forests and about 2.5 million hectares is plantation forests. The area under plantations has doubled since 1995. A number of ambiguities in the statistics exist, however, with regard to actual extent, quality and productivity of forests. Land designated for forestry totals about 14.7 million hectares and has increased from 11.6 million hectares in 2000. Most of this increase is the result of the re-designation of previously unused or degraded land into agriculture and forestry land rather than the expansion of actual forests. Sector performance and driver of growth . Vietnam’s forests provide about 4 percent of agriculture GDP and less than 1 percent of national GDP. The contribution of forestry to GDP has been steadily declining over the past decade as the economy is transitioning. Real growth in the sector has been close to 1 percent, far less than the agricultural growth (4 percent) and overall growth (7.5 percent) during 2001-2006. With Vietnam’s integration into the global economy, timber processing has however become important for overall economic development because of a rapidly growing export-oriented timber products industry and increasing employment. Demand for timber has greatly increased to meet the needs of this growing industry but, based on available data, a supply response from domestic timber resources has been absent. Instead, rapidly increasing imports or other sources appear to have filled most of the gap. In general, Vietnam’s forests do not contribute as they should to economic development through provision of timber and forest products and services. Forests remain critically important as livelihood source for specific segments of the rural population. About 5 percent of all households in Vietnam can be characterized as forest- dependent households with incomes from various forest uses accounting for more than 15 Page 8 v percent of household income. Most of these households are located in the remote upland areas and are less well connected to the rest of the economy. The share of ethnic minorities among the forest-dependent households is comparatively high, and two-thirds of all forest-dependent households are poor with incomes below the poverty line. Noteworthy, the poverty status of forest-dependent households has generally not much improved over the past years while poverty among non-forest dependent households has decreased rapidly. Forests also play an important role in biodiversity conservation and environmental protection, particularly for watershed and increasingly for coastal protection. Protection and conservation, although not easily quantifiable, are the primary public goods functions in forest resource management. Expenditure management must therefore take this dimension of service delivery into account. Forestry sector policy directions . Vietnam’s forestry policy seeks to increase overall forest cover, protect natural forests, promote forest tenure reform and land allocation, reform state forest enterprises, and improve forest-based livelihoods and employment opportunities. The three principal laws that govern forestry include Land Law (2004), the Forest Protection and Development Law (2005), which provides the legal framework for the management of forests, and the Law on Environmental Protection (2005). In addition, a number of programs and policies have important implications for forestry. The Five Million Hectares Reforestation Program (5MHRP) has the overall objective of increasing forest coverage. It aims at building a forest resource base for the forest industry, creating jobs and income, contributing to poverty reduction and livelihoods, decentralizing forest management, reducing shifting cultivation, and facilitating the application of advanced technologies in seedling production, plantation forestry, and forest product processing. The program, which has been under implementation since 1998, has received mixed internal evaluations. Despite its multiple objectives, program funds have primarily been directed to environmental services while other aspects have received limited attention and funding. Targets for forest protection objectives were generally achieved while targets for regeneration and new plantations were much below originally set targets. Most recently, some adjustments have been introduced to improve the effectiveness of the program. A new Production Forest Development Policy was issued in 2007 to encourage investment in forest plantations and bolster efforts to reach the plantation development targets set in the 5MHRP. The Policy has several improvements as focuses on smallholder production forestry, stresses the need for secure forest tenure and makes provisions to subsidize various aspects of plantation forestry. It remains unclear, however, which specific investments are to be funded by the public resources and whether public subsidies to production forestry rather than private sector activity will advance the achievement of the sector targets. State forest enterprises have been a focus of reform efforts in recent years. They control around 37 percent of all forestland in Vietnam. Many years of over-exploitation of natural forests had exhausted the natural production base of these enterprises and many have become dependent on subsidies from the 5MHRP. Reforms efforts have been ongoing for some time to separate business activities from those of public goods management but these reforms have not Page 9 vi visibly progressed. The continuing heavy dependency of many enterprises on public subsidies represents a major challenge to current reform efforts. A National Forestry Development Strategy 2006-2020 was approved in 2007 with ambitious targets for plantation establishment, forest management, and policy and institutional reforms. In general, the strategy seeks to focus more on market-based approaches to sector financing and on the increased roles and responsibilities for local forest owners. Specifically, the strategy includes programs for sustainable forest management, protection, biodiversity conservation, and environmental services; and wood processing and trading. It also includes support programs such as research, education, and forestry extension; and forestry policy reform. Recent trends in forest sector expenditure . Expenditure data has been collected from the Ministry of Finance, Ministry of Planning and Investment, and the Ministry of Agriculture and Rural Development (MARD). The individual data sources show large discrepancies based on different reporting formats and scope and these data cannot satisfactorily be reconciled and thus give only an incomplete picture of overall sector funding. The main trends observed include the following: Total sector expenditure averaged about US$67 million between 2001 and 2004. It has been declining in both absolute terms and relative to agriculture expenditure but still accounts for more than one-quarter of total agricultural expenditure, significantly higher than the s ector’s contribution to agricultural GDP. Capital expenditure declined between 2001 and 2005 and in 2005 was less than US$48 million down from about US$63 million in 2001. Overseas development assistance (ODA) accounted for more than 40 percent of all capital spending in 2001 but declined to about one-fifth of capital spending by 2005. In absolute terms, it steadily declined from US$28 million in 2001 to US$10 million in 2005. Subsidized credit through domestic policy banks also declined over the five-year period from US$18 million to US$10 million. With decreasing shares of ODA and subsidized credit, the relative importance of the 5MHRP as main source of capital expenditure increased from 14 percent (2001) to 22 percent (2005) or from US$9 million (2001) to US$11 million (2005). State funding for infrastructure investments declined sharply during 2001-2004 but increased slightly in 2005. The relative importance of foreign direct investment rose from 5 percent to 22 percent on overall sector spending during the five-year period in line with policy changes toward more market orientation. In absolute terms, however, the influx of foreign direct investment has not been sufficient to compensate for the decline in ODA. Growth in foreign direct investment has also been volatile from year to year. Most of it has been directed toward the timber products industry and not towards investments in developing timber resources. Household investments in forestry steadily declined in absolute terms (approximately US$1.5 million in 2005) while investments by enterprises and State Forest Enterprises, small in absolute terms, increased slightly. Overall program funding for the 5MHRP averaged approximately US$21 million with a decreasing trend. Between 2001 and 2005, about three quarters of 5MHRP funds were spent at the subnational levels and only a small portion of program funds was managed at the central level. Page 10 vii Implementation achievements . Recent evaluations of the forestry sector and the 5MHRP, state that sector objectives have often not been achieved and the sector is underperforming. Three key aspects of sector achievements and the performance and efficiency of sector expenditure are discussed: What have been the returns to sector investments in terms of increased plantation areas and improved forest protection? What achievements have been made in forestland allocation? What have been the poverty-reducing impacts of forestry sector investments? Timber plantations . Vietnam has good potential for plantation development. Comparative advantages include competitive cost structures, potential for reasonable tree growth, a good strategic location to access international markets, and growing international and local demand for wood. Plantation development began in the 1980s and total forest plantation area today is estimated to be 2.5 million hectares, including 1.4 million hectares of timber plantations. Public investments, especially through the 5MHRP, have had only a limited impact on the expansion of commercial forest plantations areas. The most important funding sources for such investments have been ODA, subsidized credit (to State Forest Enterprises), and to a lesser extent smallholder investments. With declining ODA and declining credit, plantation area growth has declined significantly and the country has not been able to mobilize sufficient resources from other sources to offset declining ODA investments. Forest protection . Forest protection has been an important component of the 5MHRP and overall sector strategy. Transfer payments to households for “providing protection services” are aimed at protecting watersheds and special-use forests and supporting rural livelihoods. National achievement of protection targets was measured by the total area of plots assigned for “protection” but not by the extent of forest losses prevented. An important question regarding the forest protection program is whether protection contracts are actually directed to those forests that are most critical with regard to protecting watersheds and how to achieve positive impacts on the households’ income or livelihood status. Although in many instances these two components may be complementary, there are also many instances when they are not. This is particularly true in less critical watershed areas where often better income opportunities from alternative agro-forestry exist and livelihood subsidies may not be needed. Households that have had the ability to take advantage of such alternative opportunities have been cited as the main reason for low participation rates in the protection contracts program, which in such cases has been deemed unsuccessful. Subsidies may have also distorted the allocation and use of government resources in forest development. Government evaluations have acknowledged that over the past 10 years the forest protection program has often been promoted in places where environmental protection need not be given priority, such as in non- critical protection forests and production forests. Comprehensive land use planning at provincial and local levels would be required to identify critical areas that need protection and non-critical areas that can be re-classified for income-generating land use other than from forestry. Forest tenure reform and land allocation . Forestland allocation is an important component of the Government’s forestry sector strategy. It involves the devolution of forest management authority from the state to the local level and encourages the protection and restoration of forest Page 11 viii cover in upland areas. However, slow progress and delays in forest tenure reform have not created attractive investment conditions for the private sector, particularly smallholders. Forestland allocation has progressed much slower than land allocation for agriculture use. By 2006, only 55 percent of land classified as forestland had been allocated to households based on land use rights certificates as compared to 81 percent of all agriculture land. Similarly, the number of households that have been granted land use rights certificates for forestland has remained small in comparison to the number of households with land use rights certificates for agriculture use. Furthermore, the limited impact of forestland allocation has been attributed to inadequate land use planning. From a public expenditure perspective, the current forest policy framework is not very clear on forestland allocation planning and implementation procedures and responsibilities. Neither MARD nor Ministry of Natural Resources and Environment report on expenditures related to the land allocation and land use planning processes and it is unclear whether budgets are actually being allocated support this process. Forest-dependency and poverty . Forest-dependent households are significantly poorer than non-forestry dependent households. Using the World Bank consumption-based poverty line, poverty headcount of forest-dependent households remained high at nearly 62 percent and much higher than for non-forest-dependent households with a poverty rate of 20 percent in 2004. Poverty of forest-dependent households has not declined over the past years while the poverty headcount of other households decreased at an annual rate of 5 percent. Within the group of forest-dependent households, ethnic minority households remain significantly poorer than non-minority households. Between 2002 and 2004, forestry income growth has been quite high for forest-dependent households. On average, income from forestry increased by 18 percent annually. It is likely that lowland households have been able to take advantage of the plantation development, particularly in the central coastal areas, to supply the booming timber products industries. Poorer forest-dependent households in more remote areas have not been able to capitalize on these opportunities. Growth of forestry income among poor forest- dependent households has been only 4 percent. The analysis indicates that government subsidies to forestry under the current programs may have had a limited impact on improving the lives of the poorest households. Recommendations . The National Forest Development Strategy 2006-2020 defines an ambitious development program for the forestry sector. The biggest challenge to successful implementation is probably the task to formulate the desired and appropriate structure and composition of resources and securing the resource flows into the sector through determined reform efforts. In view of the current expenditure patterns and the programs formulated in the National Forest Development Strategy, a number of specific aspects emerge which require further consideration. Securing future resource flows. There is currently a major mismatch between actual sector financing and projected financing needs: while the implementation of the Strategy requires US$400 million annually over the 2006-2020 period, current investment levels from public and private sources are probably more realistically in the range of US$50 –60 million, or about 15 percent of what is projected. The significant increases in budget allocations and resource flows assumed by the Strategy may be unrealistic in light of recent trends observed across different Page 12 ix public and private financing sources. A key aspect of future reform will be to strengthen the incentives and business enabling environment for private corporate and individual sector actors to invest in upstream forestry development at a time when overseas development assistance and public funding is decreasing or is redirected to public goods functions. Changing the role of private and public sectors . A broad range of functions and activities will be undertaken by the public sector that, as the Strategy acknowledges, has so far constrained the growth of the sector, particularly its limited staff capacity and the poor performance of public administration. The Strategy suggests a gradual change in the role of the public sector to one in which expenditure and activities are focused increasingly upon the creation of an enabling environment to attract private investment in the forestry sector. Particular public functions that are recognized as fitting into the Strategy plan are development and management of special-use, protection, and production forests; forestry extension; and development of a modern forest management system. However, there are a number of contradictions in the Strategy and the activities presently undertaken by the public sector. State Forest Enterprises, for example, still absorb a significant share of public resources. Administratively directed subsidies and funding to often non-viable State Forest Enterprises reduce the resources available for other public functions and distract government from its role as facilitator toward stronger private engagement. In addition, the new Production Forest Policy appears to indicate a stronger role of government in commercial production forestry, which may be more appropriately undertaken by private sector actors. Improving monitoring and evaluation . A specific issue concerns the question of whether the current public resource flows into upstream forestry are adequate to fulfill basic public functions articulated in the Strategy. Given the data situation however, it is difficult to determine whether upstream forestry is presently underfunded or whether an improved targeting and more efficient use of available resources is required to achieve sector objectives that are of public goods nature. Forestry consumes between 20 to 25 percent of agriculture public expenditure while it contributes only a mere 4 percent to agriculture output, making investments in forestry relatively inefficient. The relative inefficiency has been documented in the G overnment’s recent sector evaluations, but more analysis would be useful to pinpoint specific inefficiencies. Improving overall understanding of the adequacy of current resource levels, sector performance, and efficiency of investments requires stronger focus on project evaluation, improved financial and economic analysis of sector activities, and introduction of impact evaluations and better reporting of public spending. Improving basic expenditure management . Currently, no consolidated and comprehensive overview of public and other sector expenditure is available that provides a satisfactory picture of status of sector financing and flow of resources into the sector. Expenditure planning and reporting responsibilities are spread between different ministries as well as different administrative levels. Specifically, planning of recurrent and capital budgets is separated between two ministries, and recurrent and capital budgets are only weakly linked and coordinated. This is compounded by different expenditure reporting and classification systems that do not allow the monitoring of spending along programs or sector objectives. In addition, Page 13 x expenditure analysis is further complicated by the fact that subnational expenditures may not be fully captured in the spending data that is held at the central level. There are significant inconsistencies and gaps in the overall expenditure picture, which may also include over- and under-estimations of different expenditure. It is therefore difficult to identify the actual resource needs and commitment for existing programs and activities (baseline spending) and to assess the funds available for new programs or activities and assess funding gaps. It is therefore recommended to include forestry into the ongoing efforts within MARD to formulate a medium-term expenditure framework. The transition to medium-term expenditure planning brings with it the advantages of longer-term expenditure planning based on available resources and better predictability of available resources. It also serves as a tool to bring together planning for capital and recurrent budgets, and national and provincial budgets, and helps clarify baseline expenditure needs and resource availability for new initiatives. Areas that need specific attention include the modernization of expenditure classification, tracking, and reporting system. Page 14 1 Vietnam: Aligning Public Spending with Strategic Priorities in the Forestry Sector Introduction Forestry plays an important role in overall economic development as well as in rural poverty reduction in Vietnam. The Government of Vietnam has made great efforts over the past decade to strengthen the contribution of forestry to rural growth and poverty reduction and to advance the performance of the sector. These efforts include the implementation of the Five-Million Hectare Reforestation Program (1998-2010), the reform of the state forest enterprises combined with the reallocation of unused or degraded forestland to smallholders, and the establishment of a nationwide system of biodiversity conservation areas. A 2007 Forestry Development Strategy (2006-2020) reconfirms government commitment to forestry and provides the strategic direction of a gradual transition from a centrally planned to a more market-oriented forestry sector. The Strategy states specific sector objectives that center around the development and sustainable management of new timber resources, job creation in forestry and the timber product industry, livelihood support to forest-dependent people, environmental protection and biodiversity conservation, improved service delivery, and institutional and policy reforms. Most recently, this Strategy has been complemented by a new Policy on Production Forest Development (Decision 147/2007/QD-TTg) shifting the focus of government attention from subsidies in forest protection toward forestry production in order to meet the country’s ambitious forest plantations targets. Public expenditure is one important tool of government to achieve the country’s sector development objectives. In Vietnam, forestry remains dependent on public resources, including international development assistance, for a broad mix of public and private functions that include investments in productive forest plantation capacity, direct subsidies to State Forest Enterprises, subsidies to forest protection management, funding of protected areas, and investments in extension and research. In addition, public resources are being channeled to policy banks that provide subsidized credits to smallholders for commercial plantations and directed policy loans to enterprises. A useful framework for analyzing public expenditure generally includes four dimensions: structure, function , conduct, and performance : · Structure describes the composition of expenditure in terms of recurrent and capital spending, central- and subnational-level shares of spending, sources of sector expenditures, and other variables. · Function characterizes expenditure along specific purposes, programs, or sector objectives, · Conduct analyzes the institutions, specific rules and regulations, and mechanisms that govern planning, budgeting, and allocation of resources and how public resources are delivered and accounted for. Page 15 2 · Performance seeks to capture the quantifiable benefits of sector spending and assesses the efficiency and impacts of public expenditure. Once such a framework is established and relevant data has been collected and analyzed, a more normative dialogue focusing on the roles of the public and private sectors, as well as on the realignment of expenditure with sector priority objectives, becomes possible. To date, however, understanding of the structure, function, conduct, and performance of public expenditure in Vietnam’s forestry sector remains incomplete, and very little systematic analysis of the areas and magnitude of public and private spending has been done. The overall purpose of this study is to provide basic analytical support to the government, in particular policy makers at the Ministry of Agriculture and Rural Development, the Ministry of Finance, and the Ministry of Planning and Investment, the donor community, and other stakeholders by reviewing the overall structure, recent trends, and main functions of public expenditure in the forestry sector. The study goes on to assess whether public spending is appropriately prioritized or, more specifically, whether the recent sector reforms have promoted an efficient and plausible separation of public and private sector roles in forestry. As in other expenditure reviews, especially for countries that are governed in a more decentralized way, this study is constrained by the limited availability of data and the often-poor quality of existing data. Hence, the overall picture uncovered by the study remains incomplete, but it nevertheless provides a useful basis for further analytical work and policy discussion. With regard to conduct of public spending, this study only touches on expenditure planning and reporting responsibilities of the involved institutions and does not analyze in detail the conduct of public spending in the forestry sector. This aspect of reporting is generally done more appropriately as part of a broader dialogue on strengthening a country’s overall fiscal management system. For the purpose of this study, the forestry sector is defined narrowly and more in line with current practice of the Government of Vietnam, Ministry of Finance, and the General Statistics Office (GSO). It comprises the management and development of forest resources for production, protection and biodiversity conservation purposes, but excludes downstream activities, such as timber and wood processing, transportation, and trade. These activities are to a large extent privately organized and because of their private goods nature receive (as they should) only few or no public resources. The study also does not involve an analysis of revenue generation in the forestry sector due to severe data limitations. Chapter 1 presents an overview of Vietnam’s forest resources and an analysis of the forestry sector’s contribution to overall economic growth. Chapter 2 follows with a review of the legal and policy framework. Chapter 3 provides an overview of the general structure of public sector expenditure based on government data available at the central level and touches on functional programs as well as some aspects of the conduct of spending public resources. Chapter 4 concludes with a discussion of the findings and a number of recommendations to gradually improve the performance of forest sector expenditures and alignment with strategic programs Page 16 3 and priorities. Expenditure data used for this analysis is provided in Annexes A-C and was collected from the Ministry of Finance, Ministry of Planning and Investment, and the Ministry of Agriculture and Rural Development. The World Bank conducted this study with grant support from the European Commission and in close coordination with the International Cooperation Department of the Ministry of Agriculture and Rural Development. Page 17 4 Chapter 1. Forestry Sector Resources and Performance Vietnam has experienced a significant increase in forested area over the past decade and has been able since the early 1990s to reverse the trend of decade-long deforestation to reforestation. A. The State of Vietnam’s Forest Resources Actual forests in Vietnam are estimated to cover 12.74 million hectares or 38 percent of total land area. Of this total, approximately 10.19 million hectares (80 percent) is classified as natural forests and the balance (2.55 million hectares) as plantation forests. 1 However, a mbiguities in current statistics on Vietnam’s forests with regard to their actual extent, quality and productivity exist in part from the differing land use and forest classification systems. Land designated for forestry totals about 14.7 million hectares and has increased from 11.6 million hectares in 2000. Most of this increase is the result of the re-designation and conversion of previously unused or degraded land into agriculture and forestry land (Figure 1). Figure 1. Land-use changes, 1998 to 2005 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 1998 2002 2005 Year A r e a , m i l l i o n h a Land for Forestry Agriculture Area Unused Land Area Source : MONRE data, 2007. Areas classified as natural forest have grown annually by an estimated 3 percent over the past decade or by 2 million hectares in total. This area increase is likely a result of re-designation of land. It is also commonly reported that 80 percent of the natural forest areas are poorly stocked and degraded or contain young, regenerating secondary forests. The area under forest plantations has increased by approximately 11 percent per annum or by a total of 1.28 million hectares since 1995 (Figure 2). Average stocking volume in timber plantation forests is estimated to be in the range of 22 cubic meters per hectare, which in international comparison (taking similar ecological conditions into consideration) is very low. 1 GSO. Statistical Yearbook of Vietnam 2007 (2008). Page 18 5 Figure 2. Changes in Natural Forest and Plantation Forest Areas, 1995 to 2005 0 2 4 6 8 10 12 14 1 9 9 5 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Year A r e a , m i l l i o n h a Natural Planted Source : MARD data, 2005. In addition to the distin ction between natural and plantations forests, Vietnam’s forests are also classified along functional categories: production forests, protection forests, and special-use forests (forest conservation areas, national parks). According to Ministry of Agriculture and Rural Development (MARD) data, 2 the ratio of these functional categories to total forest area (12.6 million hectares) is as follows: ƒ Production forests – 4.48 million hectares (36 percent); ƒ Protection forests – 6.19 million hectares (50 percent); ƒ Special-use forests – 1.92 million hectares (14 percent). Out of the 4.48 million hectares of production forests, 3.10 million hectares are natural forests and 1.38 million hectares are plantations. An estimated 950,000 hectares of the protection forests (or 14 percent of all protection forests) are agro-plantations of different kinds, including fruit tree plantations and permanent crops, which are included under this category. According to the General Statistics Office (GSO), forest plantations including agro-plantations, increased by about 65,000 hectares between 2006 and 2007. 3 B. Sector Performance and Main Driver of Growth Vietnam’s forests provided approximately 4 percent of agriculture GDP and less than 1 percent of national GDP in 2005. The contribution of the sector to both agriculture and total GDP has been steadily declining, in real terms, over the past decade (Table 1). Real growth in the sector has been close to 1 percent, far less than the agricultural sector growth (averaging 4 percent) and overall growth (averaging 7.5 percent) over the same period (Figure 3). The total annual value of output from forestry has averaged a modest US$385 million over the past five years. It is widely acknowledged that Vietnam’s forests do not contribute as they should to 2 MARD. Review of the Implementation of the Five Million Hectare Afforestation Program, 1998-2005 (2005). 3 GSO. Statistical Yearbook of Vietnam 2007 (2008). Page 19 6 development through provision of timber, forest products or services, including environmental services. Table 1. Contribution of Economic Sectors to GDP 2001-06 Constant VND trillion 2001 2002 2003 2004 2005 2006 Amount % Amount % Amount % Amount % Amount % Amount % Agriculture 55.6 19.0 57.9 18.5 59.8 17.8 62.1 17.1 64.1 16.3 66.1 15.5 Forestry 2.6 0.9 2.6 0.8 2.6 0.8 2.6 0.7 2.6 0.7 2.7 0.6 Fishing 7.4 2.5 7.9 2.5 8.5 2.5 9.2 2.5 10.2 2.6 11.0 2.6 Industry 76.5 26.2 83.4 26.6 92.0 27.4 101.6 28.0 112.2 28.5 123.4 29.0 Services 150.4 51.4 161.5 51.6 173.4 51.6 187.0 51.6 204.0 51.9 222.2 52.2 TOTAL 292.5 100.0 313.2 100.0 336.2 100.0 362.4 100.0 393.0 100.0 425.4 100.0 Source : General Statistics Office. Figure 3. Annual real rate of growth of GDP, agriculture and forestry, 1996-2006 0 5 10 15 20 25 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 P r e l . 2 0 0 6 Year G r o w t h , % GDP Agriculture Forest sector Forest products Source : General Statistics Office. With Vietnam integrating into the global economy, the forestry sector derives its current importance to overall economic development primarily from the processing sector and an export-oriented timber products industry. Adding the total output of the timber products industry, including pulp and paper products, the total contribution of the forestry sector to GDP rises to more than 5 percent. 4 Annual growth rates in forest products and pulp and paper industries have increased sharply over the past decade — from less than 4 percent in 1996 to approximately 20 percent in 2005 with somewhat slowing rates of growth thereafter. 4 GSO (2005). Page 20 7 Robust growth has contributed to strong job creation in this sub-sector. Employment in the timber products industry has sharply increased over the past five years to 2005, reaching nearly one million peopl e, or 2.4 percent of the country’s labor force in that year. By contrast, public sector employment in the forestry sector, including State Forest Enterprises and Forest Protection Management Boards (FPMB), is negligible. The growth of Vietnam’s timber products industry has not been associated with an increase in timber supply from domestic sources but with a surge in timber imports (Figure 4), further highlighting the relatively poor performance of domestic timber supply. Vietnam has emerged as a major importer of timber and re-exporter of timber products, especially furniture and other timber products. Figure 4. Vietnam’s Trade in Timber and Timber Products, 2001-05 0.0 1.0 2.0 3.0 4.0 5.0 6.0 2001 2002 2003 2004 2005 Year R W E , m i l l i o n m 3 Import Export Source : Timber Product Processing Association (VIFORES), Customs data. Timber imports grew at an annual rate of close to 50 percent between 2001 and 2005, from 0.88 million cubic meters to 4.78 million cubic meters round-wood equivalent, respectively. During the same period, exports of timber products increased sharply, from approximately 0.8 million to 3.1 million cubic meters round-wood equivalent. During the same period, domestic timber production (gross timber output) is reported to have averaged approximately 2.6 million cubic meters, with the most important timber-producing regions being the north-east and the Mekong River Delta, both contributing about half a million cubic meters annually. 5 Three-quarters of the domestic timber supply (about 1.6 to 1.9 million cubic meters) is currently sourced from the plantation forestry sector, while an estimated 0.7 to 1 million cubic meters originates from natural forests — above the official logging quota of 150,000 cubic meters (2007 data) but far below the country’s current timber demand and growth potential. 5 GSO (2005). Page 21 8 Total domestic demand is estimated to be 8.8 million cubic meters per annum averaged during 2003 to 2005. The reported supply from domestic resources therefore accounts for only 30 percent of total timber demand, leaving an annual supply gap of approximately 2.7 million cubic meters (averaged over 2003-2005), which is not accounted for by reported imports (Table 2). Table 2. Estimated Domestic Timber Supply and Demand Balance 2001 –05 Million cubic meters 2001 2002 2003 2004 2005 Estimated domestic demand (MARD) n.a. n.a. 8.37 8.51 9.39 Gross timber output (GSO) 2.397 2.504 2.44 2.63 2.97 Estimated imports (MARD) 0.88 1.06 1.95 3.36 4.78 Estimated exports (MARD) 0.836 1.09 1.136 2.354 3.14 Domestic supply minus demand -5.93 -5.88 -6.42 Total supply gap -3.98 -2.52 -1.64 Note : n.a. = not available. In general, forestry in rural areas is of some importance but limited in its role to the rural household economy. Forestry is often one element of a household’s agriculture occupation and complements household income. It is not practical to separate forestry from agriculture in mixed forestry-farming land use systems and to estimate the share of the rural labor force employed in forestry. Forestry, in this narrow sense, has not been a significant driver of rural poverty reduction over the past years as compared to agriculture. In addition to its overall contribution to the economy, forests remain critically important as livelihood source for specific segments of the rural population. About 5 percent of all households in Vietnam can be characterized as forest-dependent households with incomes from various forest uses accounting for more than 15 percent of total household income. Most of these households are located in the remote upland areas and are less well connected to the rest of the economy. The share of ethnic minorities among these forest-dependent households is comparatively high, and two-thirds of all forest-dependent households are poor with incomes below the poverty line. Noteworthy, the poverty status of these forest-dependent households has generally not improved over the past years while poverty among non-forest dependent households, primarily in agriculture and urban areas, has decreased more rapidly by about 5 percentage points annually. Timber production is practically the only forest component that has a clear market value and hence consistently dominates all other interests. Forests, however, also play an important role in biodiversity conservation and environmental protection, particularly for watershed and increasingly for coastal protection. Protection functions, although not easily quantifiable, are the primary public goods functions in forest resource management; public expenditure management must therefore take this dimension of service delivery into account. Page 22 9 Chapter 2. Sector Policy Framework and Development Strategy Vietnam’s forestry policy seeks to increase overall forest cover and protect natural forests, promote forestland tenure reform and land allocation, reform State Forest Enterprises, and improve forest-based livelihoods and employment opportunities. A. Overall Policy Directions The Central Communist Party decisions and resolutions provide the broad framework for the forestry sector policy. The National Assembly translates these into laws while line ministries issue the subsequent decrees, decisions, and implementation guidelines. Provincial party and local authorities also play a role in policy formulation leading at times to inconsistent policy direction and implementation in different parts of the country. Policy and particularly the legal and program frameworks in forestry and related sectors are complex and sometimes appear confusing. The 2001 Party policy established five objectives to be realized by 2010: (a) increasing overall forest coverage to 43 percent of the national land area; (b) completing the allocation of forestry land to households and other entities; (c) promoting forestry-based livelihoods; (d) protecting 10 million hectares of natural forests through management contracts with smallholder households; and (e) accelerating the development of forest plantations. 6 A Party resolution in 2004 on environmental protection emphasized actions to be taken to conserve watershed and coastal-protection forests and to reduce the impact of road construction on forests. The resolution also called on the Government to allocate not less than 1 percent of its expenditure to environmental protection. 7 Reform of State Forest Enterprises has been an important policy objective since the late 1980s, although progress in reform implementation has been slow. In order to address this, a 2003 decision 8 requires more intensive government and provincial action on reform through reforming State Forest Enterprises by any of the following: ƒ Establishing Forest Management Protection Boards where state forest enterprises are responsible for mainly protection or special-use forests. Forest Protection Management 6 The 2001-2010 Strategy on accelerating Socialist-oriented industrialization and modernization, building infrastructure base to lead Vietnam to be an industrial economy by 2020. Social Economic Development Orientation in 2001-2005; CPV IX Congress document 2001; Social Economic Development Orientation in 2006- 2010; CPV X Congress document 2006 7 Environment Protection in the Period of Industrialization and Modernization (CPV, No.41-NQ/TW, November 15, 2004). 8 Continue to Restructuring, Reform and Develop State Enterprises In Agriculture And Forestry Sector (Politburo of the CPV, Decision 28/NQ/TW, 16 June 2003). Page 23 10 Boards would be subsidized by state funds, supplemented where possible from tourism income. ƒ Granting state forest enterprises ‘forest company status’ in cases where intensive plantation development integrated with processing is deemed feasible. ƒ Transforming State Forest Enterprises into private companies where they hold substantial commercial plantation forests. In cases where the state forest enterprises hold only small areas of forested land, transformation options include the release of the land to either local authorities to allow it to be re-allocated to households or communities, or to public-service entities such as forest extension centers focusing on seedling production. B. Forestry Legislative Framework Between 1997 and 2006, the National Assembly passed laws on land use with important implications for forestry. Approved by the National Assembly in 2003, the Land Law was enacted July 2004. 9 It re- affirms that land is the property of the State but that certain types of land can be allocated to public or private entities by the government for periods of between 20 and 70 years, with user rights set out in Land Use Right Certificates (Red Books). For most land issued with Red Books, users can transfer it to other land users or exchange land, as needed. Users can also use land as collateral for loans, and land can also be inherited. The Land Law establishes three categories of land — agricultural, non-agricultural, and non- use land. Forestry land is a sub-category of agricultural land. Within the forestry land sub- category, forests are further categorized into production, protection, and special-use (national parks and nature reserves), consistent with the Forest Protection and Development Law (Table 3). Rights to forestry land remain limited. Private ownership is not allowed, but it is possible to inherit, transfer, or exchange forestland. The Land Law also helped to clarify the framework for forestry land tenure and created for the first time the opportunity to allocate forestry land to communities as well as to individual households, public management boards, and other state entities. Under the Land Law, protection and special-use forests are assigned to Forest Protection Management Boards or, where these are not in place, to district authorities. These forests therefore require a public subsidy to cover their management costs due to their public goods nature. Forest Protection Management Boards or local authorities can issue forest protection contracts (referred to as Green Books) to individuals and households or to economic entities, for protection or ecotourism purposes. Production forestland can be used by forestry land users in accordance with the land-use purpose assigned in the 10-year land-use classification. This can include the rental of forestry 9 Land Law 2003, Decision 13/3003/QH11, November 26, 2003, National Assembly. Page 24 11 land from the state by economic entities (such as forestry companies), households, individuals, foreigners, and Vietnamese living overseas. Table 3. Land Law Applicable to Forestry Land Sub-Categories Forestry Land Sub-category Land user Production Protection Special-use Forest Protection Management Boards Not applicable Assigned for protection Assigned for protection Economic entities Assigned or rented with an annual fee for planting forests and permanent trees, agro- forestry and aquaculture Rented for eco- tourism services Rented for ecotourism services Households and individual Assigned or rented with an annual fee for planting forests and tree crops. Sub-contracted by FMPB Sub-contracted by FMPB Foreign and overseas Vietnamese Assigned, rented with an annul fee, or one-off payment for planting forests, ecotourism and services Not applicable Not applicable The Forest Protection and Development Law of 2005 provides the legal framework for the management of forests. 10 Consistent with the Land Law, it defines forests according to production, protection, and special use. The Forest Protection and Development Law also provides for the assignment of forests to communities for the first time. This reform reflects changes to the Land Law in 2003. Both laws now provide the basis for community forestry and the co-management of forests. The Forest Protection and Development Law also provides clearer terms for the leasing of production forests, including to households. It confers responsibility on forest owners for protection and, to ensure implementation, requires some ministries, including the Ministry of Public Security, the National Ministry of Defense, and the Ministry of Natural Resources and Environment, to collaborate with the Ministry of Agriculture and Rural Development at the provincial level and below. The Forest Protection and Development Law recognizes 8 distinct categories of forest ownership, with varying responsibilities and rights for forest management (Table 4). In accordance with forest management regulations, the production forest owners permit most types of forestry use. Within certain limits, non-timber forest products can be harvested, and deadwood can be collected in both production and protection forests. The Law imposes a more-restrictive management framework for special-use forests, providing for only deadwood collection within ‘service areas’ (that usually cover only a small proportion of each special-use forest) and allowing Forest Protection Management Boards to contract out both forestry protection and development responsibilities for forest areas in the ‘rehabilitation zones’ (usually the largest proportion of a special-use forest). 10 Forest Protection and Development Law 2005 (No. 29/2004/QH11, December 3, 2004), Final amended version after the 6th Congress of the XI National Assembly. Unofficial translation by Forest Sector Support Program Coordination Office. Page 25 12 The Law on Environmental Protection 2005 prohibits all activities that destroy or damage forests. 11 It specifies requirements for strategic and project-level environmental assessment, including for both forestry projects and projects that could impact on forests. Table 4. Legal Provisions relating to Different Forest Owners and Forest Categories Production forest Natural forest Plantation forest Forest owner category Special-use forest Protection forest State invested Private invested FMPB Assigned forest free of charge Assigned forest free of charge Assigned forest free of charge Assigned forest free of charge n.a. Economic entity Rented with annual fee for eco- tourism development Assigned forest free of charge. Rent with annual fee for eco-tourism, agro-forestry, aquaculture Assigned free of charge for seedling production; against fee in other cases. Rent against annual fee for eco-tourism, agro-forestry, aquaculture Assigned free of charge for seedling production; against fee in other cases. Rent with annual fee for eco-tourism, agro-forestry, aquaculture Assigned leased forestland. Forest use- right, own forest Individual n.a. Assigned forest free of charge Assigned free of charge. Rented against fee for eco-tourism; agro- forestry, aquaculture Assigned free of charge. Rented against fee for eco-tourism; agro-forestry, aquaculture Assigned leased forestland Household n.a. Assigned forest free of charge Assigned free of charge. Rented against fee for eco-tourism; agro- forestry, aquaculture Assigned free of charge. Rented against fee for eco-tourism; agro-forestry, aquaculture Assigned leased forestland Military n.a. Assigned forest free of charge Assigned free of charge Assigned free of charge n.a. Forestry study, training organization Assigned forest free of charge n.a. n.a. n.a. n.a. Overseas Vietnamese n.a. n.a. n.a. Rent against fee for eco-tourism, agro- forestry, aquaculture n.a. Foreign n.a. n.a. n.a. Rented against fee for eco-tourism; agro-forestry; aquaculture n.a. 11 Law on Environmental Protection (National Assembly, No. 52/2005/QH11, November 29, 2005). Page 26 13 C. Five Million Hectares Reforestation Program The Five Million Hectares Reforestation Program (5MHRP) 1998-2010 is a national target program in the forestry sector. With an overall objective to increase countrywide forest coverage to 43 percent, the 5MHRP objectives also include (a) building a forest resource base for the forest processing industry; (b) creating jobs and income; (c) contributing to poverty reduction and livelihoods, security, and defense; (d) decentralizing forest management to local authorities, especially the commune level; (e) reducing shifting cultivation; (f) mobilizing overseas development assistance (ODA) for forest development; and (g) supporting the application of advanced technologies in forest seedling production, timber plantation forestry, and forest product processing. The 5MHRP delivers support from the center to the provinces for both the establishment of new plantations and the protection of existing forests. The provinces usually subcontract with State Forest Enterprises and Forest Protection Management Boards to issue forest planting and protection contracts with households. The program includes provision of subsidized loans for plantations. The 5MHRP has been complemented by other programs formulated in forestry strategy documents, including programs on (a) sustainable forest management and development to establish a permanent national forest estate; (b) forest product processing development; (c) forest resource inventory and monitoring; (d) seed development; and (e) human resources development that have been formulated in previous forest strategies. The 5MHRP has been under implementation since 1998 and was reviewed by the National Assembly in 2005/6. Implementation was behind schedule with generally weak outcomes. Despite its multiple objectives, there is a general opinion that 5MHRP funds and subsidies have primarily been directed to environmental services (protection contracts) while other aspects have received limited focus and attention. From 1998 to 2005, over 2.4 million hectares of forests have been provided with protection contracts; about 0.8 million hectares of forests were reportedly regenerated; and 1.5 million hectares of protection, special-use forests or plantations were planted. Planned targets were achieved for forest protection objectives while targets for regeneration and new plantations were much below originally set targets. To date, many regions still have large areas of bare land and denuded hills, especially in the Northwest region. In response to this review, the National Assembly revised the 5MHRP targets and adjusted cost norms set for plantations and forest protection in several areas; the overall target of achieving 43 percent forest cover by 2010 was retained (Table 5). Table 5. Targets for the 5MHRP, 1998 and 2006 Target 1998 original target 2006 revised target Forest cover 43% 43% Protection contracts 2,000,000 hectare/year 1,500,000 hectare /year New plantations 5,000,000 hectare 3,409,368 hectare Special-use and protection forests 1,000,000 hectare 894,812 hectare Production forests 2,000,000 hectare forest trees 1,000,000 hectare agriculture commodity species/tree crops) 1,394,556 hectare forest trees (agriculture commodity species/tree crops excluded from 5MHRP) Page 27 14 Target 1998 original target 2006 revised target Special-use & plantation forest regeneration, including ƒ existing areas ƒ new areas 1,000,000 hectare n.a. n.a. 1,120,000 hectare 403,000 hectare 403,000 hectare Total investment ƒ state budget ƒ other sources US$1,718 million n.a. n.a Approximately US$ 900 million US$300 million US$600 million Cost norms Forest protection VND 50,000/ hectare/year VND 100,000/ hectare/year Natural forest regeneration VND 1,000,000/ha/6 years n.a. Reforestation VND 2,500,000/ hectare VND 5,000,000/ hectare Production forest plantation VND 2,000,000/hectare (for valuable species with rotations more than 30 years) VND 2,000,000/ hectare Management fee 8% (central 0.7%, local 1.3%, project owner 6%) 10% (central 0.7%, local 1.3%, project owner 8%) Infrastructure n.a. 10% of total funds available D. State Forest Enterprise Reforms State forest enterprises have been a major focus of reform efforts in recent years but still control around 37 percent of all forestland in Vietnam (Figure 5). Many years of over- exploitation of natural forests had exhausted the natural production base of State Forest Enterprises, and by the 1990s many had little prospect of becoming economically viable entities. Instead, many State Forest Enterprises became dependent on subsidies from the 5MHRP for planting and protection activities. Reforms began with the Law on State-Owned Enterprises in 1995 and Decision 187/TTg in 1999 and more recently with Decree 200/2004/ND-CP in 2004. The reforms had a common objective — to separate business activities (logging and other extractive uses of forest resources) from those of public goods management (protecting watersheds and coasts and conserving biodiversity). The heavy dependency of many State Forest Enterprises on public subsidies represents a major challenge to current reform efforts. Provincial authorities have shown little enthusiasm for reforming the State Forest Enterprises, and many remain dependent for their survival on contract management subsidies and fees under the 5MHRP. Without this central support, the funding burden — including salary and pension commitments for State Forest Enterprise staff, as well the high levels of debt — would act as a drain on the provincial budgets. Clearly, the current funding arrangements are a major disincentive to the reform of the State Forest Enterprises. Box 1 provides more details about the continuing reform process of State Forest Enterprises. Page 28 15 Figure 5. Forest Land Allocated by Main Types of Forestland Owners Source : MONRE (2005). Box 1. Vietnam’s State Forest Enterprises – An Unfinished Reform Process State Forest Enterprises are semi-autonomous state-owned entities that were initially created to be responsible for the management of all production forestland in Vietnam. In the late 1990s, there were 403 State Forest Enterprises, located in 43 provinces. By 2006, the number fell to 350. In 1997, State Forest Enterprises still controlled 6.8 million hectares of land, including protection and production forests, barren land, and agriculture land. By 2006, the area under State Forest Enterprise control and management had been reduced substantially. Since 2007, some State Forest Enterprises have been renamed State Forest Companies. The Provincial Departments of Agriculture and Rural Development are responsible for a majority of the State Forest Enterprises. About 10 percent are administered centrally under MARD. State Forest Enterprises ’ main business activities include timber harvesting from natural and plantation forests, the operation of sawmills, non- wood forest product processing, and seedling production. In 1997, the average State Forest Enterprise produced an (estimated) average of 2,300 cubic meters of timber, both from natural forests and plantations. State Forest Enterprises have an important stake in forest plantation development and control, probably about 25-30 percent of all production forest plantations. These plantations are generally more productive and comprise larger plots than plantations owned by smallholder households. State Forest Enterprises also have a key role in forest protection contracts and seedling production targeted to protection areas. In the late 1990s, average turnover was US$133,000 but no up-to-date analysis exists on the revenues and profitability of State Forest Enterprises. More recently, some State Forest Enterprises have established joint ventures with private foreign companies, such as VIJACHIP, a joint venture between Nissho Iwai Company and Vietnamese Government. Loc Binh State Forest Enterprise in Lang Son Province Established in 1993, Loc Binh State Forest Enterprise received a land use title (Red Book) in 1997 covering a total land area of 7,000 hectares of production forests. Local communities have occupied or claimed an area of 1,700 hectare, which will be re-allocated to them. Presently 330 hectares of this “encroached” land is under protection contracts with the local Forest Protection Division. The Loc Binh State Forest Enterprise’s actual production forest area is 5,300 hectares of which 4,100 hectares are forest plantations and 1,200 hectares of bare land. Plantations comprise stands of pine (65 percent), eucalyptus (30 percent) and acacia (5 percent). Annual timber production is 3,700 cubic meters. Productivity of existing plantations is low, with mean annual increment of about 4 cubic meters per hectare (for pine stands). Annual turnover was VND3.9 billion (or approximately US4220,000) in 2006. Sales included timber sales (46 percent), 0 500,000 1,000,000 1 ,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 Households SFEs FMBs State owned organizations Other economic organizations H a Page 29 16 services (44 percent), and resin sales (10 percent). Services comprise seedling production for the 5MHRP, plantation design for households, and administering forest protection contracts. Resin tapping is contracted to local entrepreneurs. The Government provides support to the Loc Binh State Forest Enterprise in form of subsidized loans, provision of land (with so far no obligation to pay rent on the land), subsidies for plantation establishment, and transfer payments to provide the above-mentioned services. The State Forest Enterprise has an outstanding loan of VND2.5 billion from the Development Assistance Fund. With a net income of VND100 million (or about US$6,000) in 2006, the Loc Binh State Forest Enterprise is almost totally dependent on government support and will unlikely become a profitable company on its own; but no future strategy exists. Bao Lam State Forest Company in Lam Dong Province In transition to becoming a State Forest Company, Bao Lam State Forest Enterprise in 2007 had 23,700 hectares total land area of which 15,500 hectares were production forests and 8,200 hectares were protection forests. Forested area comprises 18,500 hectares of natural forests and 3,785 hectares of plantations; 310 hectares are unforested, and 958 hectares are under agriculture and expected to be transferred to individual households. In 2006, about 10,000 hectares had forest protection contracts under the 5MHRP benefiting 419 households. Protection forest areas are scattered small areas inside the production forests. Wood production takes place only in natural forest with an annual allowable cut of 1,500 cubic meters. The turnover from timber sales is estimated to be VND 4 billion (US$230,000). The annual productivity of the pine plantations is estimated at 7 to 8 cubic meters per hectare below potential site productivity. The new acacia plantations are expected to have much higher yields and there are plans to replace pine plantations with acacia. The company is looking for joint venture partners for plantation forestry and prospective alternative production opportunities. Bao Lam State Forest Enterprise was not obliged to pay any rent for its allocated land. In the future, the State Forest Company must pay rent (at least for its the plantation assets). Since the Government will continue to set annual quotas for natural forest production at relatively sho rt notice and often after “negotiations” with the Department of Agriculture and Rural Development, the Company’s annual and longer-term planning ability is limited. The Government will also continue to support the protection function of the State Forest Company, but the cost of funding will have to come from timber revenues. The value of previously invested plantation stock will be “given” to the Company as initial investment capital. Any further capital needs will have to be obtained from government loans at 0.8 percent per month. In addition, the Bao Lam State Forest Company will receive government subsidies for new plantation establishment. The annual quota is not an appropriate system for long-term profitable business and developing more valuable forest assets. It is quite difficult to develop a self-sustaining private company under these conditions. It is quite unlikely that the Company will be profitable in the future. The reform measures set out in Decree 200 require State Forest Enterprises with more than 5,000 hectares of protection forest land to become Forest Protection Management Boards, those with less than 1,000 hectare of total forest land are required to become forest service companies (for nursery operation), and those with the potential to develop significant plantations are required to become integrated plantation and processing forest companies. State forest enterprises that hold scattered forest resources with little productive value are required to return their holdings to district authorities for re-allocation. In most cases, such returned forestland is allocated to former employees of State Forest Enterprises and households. The government also issued a special policy on reallocating forestland from State Forest Enterprises to local ethnic people in 2005 (Decree 146/2005/QD-TTg). Owners of forestland allocated under Page 30 17 Decree 146 have rights as defined by the Land Law, but the land cannot be sold within 10 years after initial allocation. E. Forest Land Re-classification In December 2005, the Government introduced reforms designed to revise the proportion of land classified for protection, production, and special use through the introduction of Directive 38/2005/CT-TTg. This was deemed necessary because the 5MHRP had, for many years, encouraged the provinces to over-report the area of protection forests to enable them to benefit from central state funding from the program subsidies. The reform required provinces to reduce the area of protection forest to approximately 5 million hectares, with a simultaneous increase in the area classified as production forests. The overall effect of this ongoing reform is to lower by half the proportion of forest estate requiring government subsidy through the 5MHRP thus releasing the resources required to finance the doubling of cost norms for forest protection contracts for the remaining protection and special-use forests. F. National Forest Development Strategy In 2007, the Prime Minister approved the National Forestry Development Strategy 2006-2020, which succeeded an earlier forestry strategy and earlier programs. 12 The new National Forest Development Strategy does not make specific reference to the 5MHRP but states ambitious targets for plantation establishment, forest management, and policy and institutional reforms and retains a focus on subsidized plantation and forest protection contracts. In general, the Forest Development Strategy seeks to focus more on market-based approaches to sector financing (including foreign direct investment, and a separation of private and public functions) and on socialization, a term used to describe the increased roles and responsibilities for local forest owners. Specifically, the Forest Development Strategy outlines three development programs: (a) sustainable forest management and development; (b) forest protection, biodiversity conservation, and environmental services; and (c) wood processing and trading. It also includes two support programs: (d) research, education, and forestry extension; and (e) forestry sector policy reform, planning, and monitoring. Each of the programs contains a number of ambitious development goals, which are summarized in Table 6. Total financing of strategy implementation is estimated to be approximately US$6.5 billion. G. Production Forest Development Policy In 2007, the Government issued a new Production Forest Development Policy (2007-2015) in order to encourage investment in forest plantations and production forestry and to bolster efforts to reach the plantation development targets set in the 5MHRP. 13 This policy resulted from a number of critical internal evaluations of the 5MHRP and represented a shift in the government’s focus away from subsidies for protection and special-use forests toward 12 Decision No. 18/2007/QD-TTg, 5/2/2007. 13 Issuance of the Production Forest Development Policy 2007-2015 (PMO Decision No.: 147/2007/QD-TTg). Page 31 18 investments and subsidies for production forestry. The specific objectives of the policy are to encourage the development of 2 million hectares of plantations — at a rate of 250,000 hectares each year until 2015 — and, in so doing, to contribute to livelihoods and employment and the supply of raw materials for the country’s fast-growing wood-processing industry. The policy targets specific geographical areas, including the central highlands and remote mountainous areas in the northwest and center and offers preferential terms and cost norms for ethnic minority and poor communities and households. It makes provision to subsidize various aspects of plantation forestry, including seed and tree-nursery development, the building of forest roads, and the cost of transport from the wood-processing factories established in the northwest region. The Policy has several improvements over previous national programs. It focuses on smallholder production forestry and stresses the need for land allocation as a precondition. It promotes further decentralization of implementation down to district, commune and village levels. It addresses the urgent need for improvement of the quality and quantity of forest reproduction material in decentralized nurseries, training of forestry staff and extension, as well as monitoring and control systems. The Policy will be implemented through the 5MHRP and will commit the state to a total investment of VND 9,000 billion or approximately US$500 million. It remains unclear, however, which specific investments are to be funded by the public resources and whether public subsidies to production forestry rather than private sector activity will advance the achievement of the sector targets. Page 32 19 Table 6. Overview of the 5 Forestry Programs of the National Forest Development Strategy 2006- 20 Program Targets Sustainable Forest Management and Development ƒ Establishment of the forest estate, including 3.63 million hectare of natural forests and 4.15 million hectare of plantation forests ƒ Completion of land allocation by 2010 ƒ Institution of forest management plans and periodic inventories for all types of forests and ownership arrangements ƒ Increase in timber production to 9.7 million cubic meters per year by 2010 and 20- 24 million cubic meters per year by 2020 ƒ Increase in pulp wood production to 3.4 million cubic meters per year by 2010, and 8.3 million cubic meters per year by 2020 ƒ Target average annual increment of 15 cubic meters per hectare based in plantation forests ƒ Enrichment planting in 0.5 million hectare of poor degraded natural forests ƒ Plantation of 1.0 million hectare of new forests by the year 2010 and 1.5 million hectare by 2020 ƒ Plantation of 200 million scattered trees, equivalent to 100,000 hectare of plantation forests annually ƒ Forest management certification for at least 30 percent of all production forest areas Forest Protection, Biodiversity Conservation and Environmental Services Development ƒ Allocation of 1.5 million hectare of special use forests and protection forests and issuance of protection contracts by 2010 ƒ Reduction of forest law violations by 80 percent and infrastructure investments for forest protection and control ƒ Demarcation of 5.68 million hectare protection forest and 2.16 million hectare of special use forests and allocation to permanent owners ƒ Piloting of community-based forest management models ƒ Establishment of a Forest Protection and Development Fund by 2007 Forest Products Processing and Trade ƒ Establishment of processing capacities: 6 million cubic meters per year of sawn timber; 320,000 cubic meters of particle board; 220,000 cubic meters of MDF ƒ Exportation of wood products worth US$7 billion and non-timber forest products worth US$0.8 billion ƒ Employment of 1.5 million workers Research, Education and Forestry Extension ƒ Research in key areas, such as bio-technology, processing of non-timber forest products, plantation forestry, agro-forestry, rehabilitation of degraded natural forests, environmental services. ƒ Improving forestry training institutions and curricula and provision of training to students, technical staff and forest owners ƒ Improve the quality of the forest extension system, including delivery of extension services through the private sector Institutional Development, Policy Reform and Sector Monitoring ƒ Completion of the policy, legal and forestry institutional systems towards decentralization and market orientation ƒ Institutional reforms to increase the effectiveness and improve functions of the state forest management system ƒ Establishment of state forest extension system ƒ Integration of sector planning and monitoring and evaluation. Page 33 20 Chapter 3. Public Expenditure in the Forestry Sector The following review of expenditure patterns focuses on public expenditure. The discussion expands to other sources of expenditure whenever data on non-public expenditure is available with the purpose to highlight the importance of these expenditure sources and provide a broader overview of forest sector financing. Expenditure data available from Ministry of Finance (MOF), Ministry of Planning and Investment (MPI), and the Ministry of Agriculture and Rural Development is reviewed separately because the individual data sources show large discrepancies based on different reporting formats and scope, which cannot satisfactorily be reconciled. A. Structure and Trends in Forestry Sector Expenditure Ministry of Finance data . Annual public expenditure on the forestry sector, as reported by MOF, averaged VND243 billion or approximately USD14 million between 2000 and 2004. Forestry expenditure accounted for about 6 percent of agriculture expenditure during this period, which is slightly more than forestry’s contribution to agriculture GDP of 4 percent. Growth in forestry expenditure has been declining in recent years (Figure 6). Figure 6. Annual Change Public Expenditure on Forestry (2000-04) -20 -15 -10 -5 0 5 10 15 20 25 30 2000 2001 2002 2003 2004 Year % Forestry Non-Forestry (Agriculture + Fisheries) The MOF expenditure data (see Annex A for MOF forest expenditure data) is disaggregated into capital and recurrent spending, but MOF only reports on a small fraction of domestic capital spending. Hence, interpreting MOF-reported capital spending has limited value. Capital expenditure distinguishes between expenditure on fixed assets and capital investments, as well as between functional programs (i.e., forestation and forestry-related services). Page 34 21 However, no further definition is available of what specific activities are included under these categories, and overall amounts are very small. Recurrent expenditure, averaging approximately US$8.5 million over the five-year period and comprising about 60 percent of all MOF-reported expenditure, includes goods and services, salaries and wages, subsidies and transfers, and other expenditure. Salaries and wages account for about one-third of the recurrent budget. About 80 percent of all MOF-reported expenditure is decentralized to the provincial level. Ministry of Agriculture and Rural Development data . The MARD provides a more comprehensive picture of overall sector expenditure based on records of different funding sources (see Annex B for MARD forest expenditure data). The MARD also records official development assistance; infrastructure spending under the state budget; public funding for the 5MHRP (under MARD responsibility); and some off-budget sources, such as foreign direct investment, household and enterprise investments. According to MARD data, the total flow of funds into the forestry sector has been significantly greater than MOF data on the state budget indicate. This discrepancy results because MOF data do not include expenditure on the 5MHRP (Program 661), which makes up a relatively large share of sector financing. The MOF data cover expenditure on forestry implemented by all ministries and central agencies. The MARD data, on the other hand, includes only those expenditures for which MARD has implementation responsibility. The MARD data also include forestry-related infrastructure investments, training, environmental services, as well as expenditure by other ownership types (foreign direct investment and households) while this is not the case with MOF data. Total MARD-reported expenditure averaged about US$67 million between 2001 and 2004, although the amount has been declining, in both absolute terms and relative to agriculture expenditure (Figure 7 and Table 7). MARD is not providing for any spending analysis along major strategic programs, including the 5MHRP, sector outputs, or functional categories. Figure 7. Forestry Sector Expenditure, 2001-05 0 200 400 600 800 1,000 1,200 1,400 2001 2002 2003 2004 2005 Year B i l l i o n V N D Source : MARD (2007). Page 35 22 Table 7. Agriculture and Forestry Expenditures, 2001-04 Constant VND billion 2001 2002 2003 2004 2005 Agriculture expenditure* 4,132 3,874 3,689 4,189 - Forest sector expenditure – MOF 241 268 260 210 - Forest sector expenditure – MARD 1,203 1,142 1,060 937 932 Forest sector expenditure – MARD (US$ million-estimate) 75.2 71.4 66.3 59 55 Forestry expenditure** as share of agriculture expenditure 29 29 29 22 - Note: * MOF data; ** MARD data. Breaking down the MARD-provided sources of sector financing (public and other sources) exhibits some overall trends (Table 8) as follows: ƒ Overall sector expenditure . Forestry sector expenditure accounted for more than one- quarter of total agricultural expenditure, significantly higher than the sub- sector’s contribution to agricultural GDP over this period. ƒ Capital (investment) spending . Total and capital expenditure declined between 2001 and 2005 (in constant terms). In 2005, total capital expenditure was less than US$48 million down from about US$63 million in 2001. ƒ Overseas development assistance . ODA accounted for more than 40 percent of all capital spending in 2001 but declined to about one-fifth of capital spending by 2005. In absolute terms, ODA steadily declined from about US$28 million in 2001 to about US$10 million in 2005. ƒ Subsidized credit . Subsidized credit through domestic policy banks declined over the five-year period from one-third to about one-fifth of capital spending. In absolute terms, subsidized credit decreased from about US$18 million to about US$10 million. ƒ State funding through the 5MHRP . With decreasing shares of ODA and subsidized credit, the relative importance of the 5MHRP as source of capital expenditure (under MARD responsibility) increased from 14 percent (2001) to 22 percent (2005). In absolute terms, 5MHRP contribution to sector financing increased slightly from about US$9 million (2001) to US$11 million (2005). ƒ State funding for infrastructure . State funding for infrastructure investments declined sharply during 2001-2004 but increased again to about US$2.8 million in 2005. ƒ Foreign direct investment . The relative importance of foreign direct investment rose from 5 percent to 22 percent on overall sector spending during the five-year period in line with policy changes toward more market orientation. In absolute terms, however, the influx of foreign direct investment has not been sufficient to compensate for the Page 36 23 decline in ODA. Foreign direct investment increased from a low base of about US$3 million in 2001 to about US$11 million in 2005. Growth in foreign direct investment has been volatile. It is also important to note that most of foreign direct investments have actually been directed toward the timber products industry and do not represent upstream investments in developing domestic timber supply sources. ƒ Household investment activity . Household investments in forestry steadily declined in absolute terms (approximately US$1.5 million in 2005) while investments by enterprises and State Forest Enterprises, small in absolute terms, increased slightly. ƒ Recurrent spending . MARD recurrent spending averaged about US$7.1 million over the five-year period (below MOF-reported data) and accounted for around 11 percent of total spending. Table 8. MARD Forestry Capital Expenditure by Source and Recurrent Expenditure, 2001-04 Constant VND billion 2001 2002 2003 2004 2005 Total expenditure 1,203 1,142 1,060 937 932 Capital expenditure ( by source ) 1,072 1,012 935 838 813 ODA 454 315 275 223 172 Credit to State Forest Enterprise 308 333 240 201 175 5MHRP 148 146 139 148 181 Infrastructure investments (state budget) 66 44 24 20 47 Foreign direct investment 50 122 199 189 180 Investment by households (subsidized loans) 34 32 30 26 26 Others 6 12 3 11 12 Investment by enterprises and State Forest Enterprises 5 7 25 21 20 Recurrent Expenditure 131 130 125 100 119 Local 86 74 64 47 70 Central ( by purpose ) 44 57 61 53 49 Research and development 8 9 8 7 6 Training 14 21 18 21 22 Economic service 2 4 5 4 5 Forestry service 16 20 23 15 15 Environmental service - - - 0 0 Administration 1 0 0 0 0 Fees and charges (units under MARD) 4 2 7 4 1 B. Function — Expenditure on the 5MHRP and Other Programs Ministry of Planning and Investment data (5MHRP) . The 5MHRP is the G overnment’s main program in forestry for channeling public investments in the sector. In absolute terms, 5MHRP spending averaged approximately US$21 million in 2001-2005 but has declined from US$24 in 2001 to US$18 million in 2005 (Table 9 and Figure 8). According to data reported by the Page 37 24 National Assembly (based on MPI data), 14 expenditure on the 5MHRP has been substantially higher than reported by MARD. The program accounted for more than one-third of all sector expenditure as opposed to about one-fifth as per MARD figures above. No disaggregation between capital and recurrent spending is available. Ministries other then MARD and central- level government agencies are also involved in program implementation, but little information is available on this engagement. Table 9. Total Forestry Sector and 5MHRP Funding, 2001-05 Constant VND billion 2001 2002 2003 2004 2005 Total (MARD) 1,203 1,142 1,060 937 932 Program 661 (MARD) 148 146 139 148 181 Program 661 (National Assembly) 404 446 352 293 313 % of total Program 661 (MARD) 12 13 13 16 19 Program 661 (National Assembly) 34 39 33 31 34 Figure 8. Total forestry sector and 5MHRP funding, 2001-05 0 200 400 600 800 1,000 1,200 1,400 2001 2002 2003 2004 2005 Year B i l l i o n V N D Total (MARD) Total 661 (MARD) Total 661 (NA) When analyzing MPI/National Assembly data, however, it is important to note that 5MHRP is comprised of multiple (public and non-public) funding sources, including contributions from the central and subnational (provincial) budgets, policy loans from state policy banks, foreign investments (although unclear whether this includes both ODA and foreign direct investment), State Forest Enterprise and household investments, as well as revenues from the collection of natural resource tax and timber sales tax. It is also important to note that the National 14 MPI report dated October 10, 2005 on 5MRHP Implementation 1998-2005; Government report dated October 2005 on the Implementation of Policies Supporting Agricultural and Rural Development during 2001-2005. Page 38 25 Assembly data includes various spending units, including MARD, the Ministry of Defense, as well as the Youth Union, the Economic Zone of Dung Quat, and the Central Treasury. In contrast, MARD records 5MHRP spending, for which it is responsible, as single funding source, separate from these other sources. A satisfactory comparison of MPI and MARD data on the 5MHRP is not possible. Overall trends in the composition of overall 5MHRP funding sources (Figure 9, Table 10), however, show the following trends: ƒ Total program spending . During 2001-2005, 5MHRP spending averaged approximately US$21 million. It declined over the five-year period from US$24 in 2001 to US$18 million in 2005. ƒ Central and local budget spending . Central and local budget contributions to the program increased from 40 to 50 percent of overall program funding but declined in absolute terms in line with overall funding decline for the program. ƒ Foreign direct investment . Foreign investments declined in absolute terms (from about US$7 million in 2001 to less than US$5 million in 2005) and in relative terms, contradicting MARD data. ƒ Loans to State Forest Enterprises . Investments in form of loans to State Forest Enterprises have been decreasing in absolute and relative terms over the five-year period contradicting MARD data. ƒ Enterprise investments . Investments by enterprises and households have been decreasing in absolute and relative terms. Figure 9. 5MHRP Funding from Different Sources in % 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2001 2002 2003 2004 2005 2006 Year Central Budget Local Budget Loan Foreign Investment Fund from enterprises and households From natural tax and timber sale Source : National Assembly data. Page 39 26 Table 10. 5MHRP Funding from Different Sources Constant VND billion 2001 2002 2003 2004 2005 Central budget 138 136 137 124 134 Local budget 29 41 35 26 21 Loan 68 97 55 29 38 Foreign Investment 117 111 86 76 84 Fund from enterprises and households 44 47 33 29 26 Natural resource tax and timber sale 9 13 7 10 10 Total disbursement 404 446 352 293 313 Estimated US$ equivalent (million) 23.5 26.2 20.7 17.2 18.4 Source : National Assembly data. Between 2001 and 2005, about 74 to 77 percent of 5MHRP funds were spent at the subnational levels and only a small portion of program funds was managed at the central level (Figure 10). Central spending units include MARD, the Ministry of Defense, as well as the Youth Union, the Economic Zone of Dung Quat, and the Central Treasury (Table 11). Foreign projects constitute about 80 percent of central-level program expenditure although MPI data on foreign- funded projects does not match MARD data on ODA. Figure 10. 5MHRP Funding by Central and Local Government 0 50 100 150 200 250 300 350 400 2001 2002 2003 2004 2005 2006 Year B i l l i o n V N D Central Local Source : National Assembly data. Page 40 27 Table 11. 5MHRP Spending Units Constant VND billion 2001 2002 2003 2004 2005 2006 C entral 1 06 100 92 76 73 16 MARD 11 11 14 11 10 8 Ministry of Defense 3 2 3 3 4 5 Foreign projects 90 85 72 60 56 0 Others* 2 2 2 2 3 3 Local 298 345 261 217 240 253 Total 404 446 352 293 313 284 Local in % of total 74 77 74 74 77 89 Source : National Assembly data. Note : * Others includes Youth Union, the Economic Zone of Dung Quat, and the Central Treasury. Deviations of actual expenditure from planned expenditure under the program were in the order of 10 percent of under- or over-spending, however, with variations at the level of individual provinces (Figure 11). Figure 11. 5MHRP Funding by Central and Subnational Levels Planned versus Actual Expenditure - 5MHRP 85% 90% 95% 100% 105% 110% 115% 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 Central Level Planned versus Actual Expenditure - 5MHRP 85% 90% 95% 100% 105% 110% 115% 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 Local level Expenditures on other sector programs that complement the 5MHRP are not reported systematically. These other programs include the Sustainable Forest Management and Development Program, Forest Product Processing Development Program, Forest Resource Inventory and Monitoring Program, Seed Development Program, and Human Resources Development Program. For the Sustainable Forest Management and Development and the Wood and Forest Product Processing Development Programs, neither budget nor expenditure data are available. Spending on the Forest Resource Inventory and the Seed Production Programs has been governed by separate decrees and regulations that provide data on program spending. For the period from 2001 to 2005, MARD expenditure on these two programs is estimated to have averaged US$350,000 and US$250,000 per year, respectively. Page 41 28 C. Conduct — Institutional Responsibilities in Forestry Expenditure Planning and Reporting This section provides a brief overview of the conduct of public expenditures with a focus on budget formulation and expenditure reporting. The Ministry of Finance and Ministry of Planning and Investment both report on central and provincial public expenditure relating to the forestry sector but on different aspects and in different formats. The MOF is responsible for the formulation and consolidation of the state budget as proposed by the 64 provinces and central ministries during the budget process. Specifically, MOF prepares the consolidated plan for the recurrent expenditure of all ministries and central units as well as transfers from the central to the provincial budgets. The MOF also co-operates with the MPI in the preparation of the capital budget. The MOF reports actual expenditures in forestry as part of the agriculture budget, disaggregated by economic classification (development and recurrent expenditure), the level of fiscal administration (central and provincial budgets), and along function or activity lines, albeit highly aggregated. Development expenditure includes spending on fixed assets and capital investments. Recurrent expenditures include salaries and wages, goods and services, subsidies and transfers. Functional categories include “Forestry and Related Services” and “Forestation” although no further definition of these functional categories exists. The MOF does not report expenditure data on targeted programs, such as the 5MHRP, nor on externally financed donor projects. Hence there is a significant degree of under-reporting of total sector expenditure. The MPI has the main responsibility for drafting the Socio-Economic Development Plan, including the State Investment Plan, and for allocating the capital expenditure within the budget. Like the MOF in the case of recurrent expenditure, the MPI issues the guidelines and circulars on the details of the Investment Plan and is responsible for allocating capital expenditure to subnational entities. It consolidates the individual ministries’ investment plans and consults with Government on the annual investment plan and the allocation of capital expenditure to specific projects. The MPI reports budget data and actual expenditure (including that from some off-budget sources) of the capital budget relating to forestry and forestry-related projects. The latter group includes projects addressing watershed protection, rural development (with forestry components), plantation forestry development, protection forest plantations, and special-use forests. Data is further disaggregated between domestic and ODA sources of funds. The MPI also records expenditure information on the targeted programs and reports on the 5MHRP by province and by those ministries that have implementation responsibility for the program. These include the Ministries of Agriculture and Rural Development, Defense, Police and Industry, as well as the Central Communist Youth League. The MPI also reports on the sector funding — credit, external (foreign) sources, enterprise-owned sources, natural resource tax revenue, and sales of standing trees. The MPI does not record or report on recurrent expenditure data (the responsibility of the MOF) and hence is under-reporting total expenditure as in the case of the MOF. Page 42 29 The MARD is responsible for the preparation of the recurrent and capital budgets for the agriculture sector, including forestry, at the central level and allocates budgets to individual departments and units of the ministry. The MARD also prepares the budget for those components or activities of the 5MHRP that are within the ministry’s portfolio, for submission to the MPI and the MOF. The MARD does not formally report on expenditure but maintains a database on forestry expenditure, with more detailed breakdowns of both capital and recurrent expenditure. Capital spending includes data on the 5MHRP, infrastructure development, credit, enterprise and household investments, foreign direct investment, and overseas development assistance. Recurrent expenditure is also recorded at a more disaggregated level than in MOF. The MARD does not however record expenditure on the functional categories nor on the strategic programs of the forestry sector documented in the National Forest Development Strategy or its predecessor strategy. At the subnational level, the Provincial People’s Councils are responsible for budget formulation and estimates of transfers required from the central budget and contingencies. The Provincial People’s Committees decide upon the detailed provincial budget allocations after the approval by the National Assembly of the budget plan and by the Provincial People’s Council of the provincial budget. The provincial-level Departments of Finance and Planning and Investment have duties mirroring those of the MOF and the MPI at the central level. With expenditure planning and reporting responsibilities spread between three ministries at different administrative levels, there is no consolidated overview available of public funding (including support provided by development partners) of the forestry sector. This is compounded by different expenditure reporting and classification systems. In addition, expenditure analysis is further complicated by the fact that subnational expenditures may not be fully captured in the spending data that is held at the central level. Finally, externally financed projects that are classified as capital expenditure may also include significant amounts of recurrent expenditure. The amount of recurrent expenditure may well be an underestimate while there are significant inconsistencies and gaps in the overall expenditure picture — as the comparison of data between different ministries reveals in Box 2. D. Performance — Implementation Achievements F orestry’s contribution (defined as upstream primary production) to overall growth is small, and its share on total and agriculture GDP is declining. This trend is a reflection of the general decline in importance of forestry as a sector at a time when countries are industrializing and the main sources of growth are gradually shifting from the primary to the industry and services sectors. In quantifiable terms, forestry consumed between 20 to 25 percent of agriculture expenditure while it contributed only a mere 4 percent to agriculture output, indicating that investments in forestry have been relatively inefficient. With no significant high-value natural forest resources designated for production remaining and poor timber production performance in the existing forests, the contribution of upstream forestry to the overall economy is currently largely derived from public goods through environmental protection and conservation services. Page 43 30 Box 2. The Formulation and Implementation of the Forestry Sector Budget At the central level, the National Assembly, Ministry of Finance, Ministry of Planning and Investment, Ministry of Agriculture and rural Development, and other line ministries that have forest-related activities within their portfolios are involved in the forestry budget preparation process. At the local level, the governmental bodies include the Provincial People’s Council, the Provincial People’s Committee, the Department of Finance, the Department of Agriculture and Rural Development, the Department of Planning and Investment, as well as other departments involved with the sector (such as the Ministry of Defense). Budget preparation . Each year in June, the Government issues a directive for commencement of budget formulation and provides budget allocation norms for the coming year to the ministries, provinces, and State Forest Enterprises.* The MARD, the provinces, and State Forest Enterprises prepare the budgets for the forestry sector, including for the 5MHRP, in accordance with the directives and MOF and MPI guidelines. The MARD prepares the forestry budget as part of its overall budget preparation work. By the end of July the recurrent budget is forwarded to MOF while the capital budget is sent to MPI. During August to September, MPI and MOF consolidate the recurrent and capital budget submissions and negotiate final budget allocations between various agencies and levels of government. At the end of September, MOF and MPI submit to the National Assembly a consolidated Socio-Economic Plan and the Budget Plan, where it is discussed and approved. In November the Prime Minister agrees on the allocation of budget resources to the ministries and provinces. The MPI and MOF subsequently (by end November) provide the ministries and provinces with details of their budget allocations and the associated guidelines. These in turn provide detailed budget allocation plans for their own departments and units. Budget implementation. After sector allocations have been finalized, departments and units draw up their respective plans to implement their programs of work and detail the associated budgets associated. The State Treasury subsequently disburses funds to the units. Within the forestry sector there are two units involved with budget implementation: the administration unit and the public services (state-owned enterprise) unit. As far as the administration and public service units are concerned, the Government provides them with a block grant and gives them a degree of financial autonomy. The units implement the activities in accordance with their budgets. At the end of the financial year, the units report to the financial management authority. The state-owned enterprises receive their budgets directly from the state, which also has oversight and audit functions. Forestry expenditure, as with all public expenditure, is subject to an annual audit, with all reports being sent to the National Assembly for approval. However, there is insufficient capacity within the State Audit Unit to carry out all of required audits required. For this reason, only a sample of ministries, provinces, and national programs are chosen to be audited each year. For this reason, the 5MHRP has never been audited. Allocation norms. The forestry sector, the administration units, and the service delivery units receive the same allocation norms, which remain stable for a three-year period. In 2004, the Government issued a general norm, part of which was of relevance to the forestry sector, for administration expenditure at the ministerial level. It was set at VND 24.5 million per annum. The allocation norms are based on the size of population, with each province then deciding the allocation norm for each provincial administration unit. For the 5MHRP, norms have been maintained at the same level for eight years. By applying the same allocation norm to all provinces and for all units without considering the specific condition of each forest and the types of timber being grown, the quality of the tree planting in different areas is adversely affected. Recently cost norms have been revised and increased. * In 2006, for example, the Government issued the Directive No. 19/CT-TTG dated 12-6-2006 concerning formulation of the 2007 Socio-Economic Plan and the Budget Plan, while Decision No. 151/QD-TTG of June 29 specified the budget norms for recurrent expenditure to be applied in the drafting process. Page 44 31 Recent government evaluations of the forestry sector, especially of the 5MHRP, state that sector objectives have often not been achieved and the sector is underperforming. 15 Particularly, the interventions supported under the previous forest strategies and programs to improve forest protection and management, increased domestic supply, and reduced rural poverty have provided mixed results. Five key weaknesses identified are generally described as the following: ƒ Financial returns in the sector are poor. ƒ Plantation and output targets are not being reached. ƒ Low-quality forests and forest products are a result of inappropriate cost norms and insufficient investment levels. ƒ Public expenditures are unbalanced with more resources being spent on protection and special-use forests than on production forests. ƒ Forestry investments have limited poverty-reducing impacts. The following discussion focuses on some aspects related to the performance and efficiency of forest sector expenditure, along with some of the key objectives formulated for the sector: (a) what have been the returns to sector investments in terms of improved forest protection as well as increased plantation areas; (b) what achievements have been made in forestland allocation; and (c) what have been the poverty-reducing impacts of forestry sector investments. A summary of forest investment performance is included in Annex E. Forest protection . Forest protection based on forestland assignments and protection contracts with households and forest enterprises has been an important component of the 5MHRP and overall sector strategy. Payments to households for ‘providing protection services” are aimed at protecting watersheds and special-use forests but also at supporting rural livelihoods. National achievement of protection targets was measured by the total number and area of plots assigned but not by the extent of forest losses prevented. Bare or low-grade forests were expected to be naturally regenerated under this program, but the extent of such impacts is generally not known. By 2005, the actual area covered by protection contracts exceeded the 5MHRP 2010 targets by 21 percent (Table 12). Studies on economic or financial impacts of the forest protection program are limited. Some estimates of internal rate of returns for natural forest regeneration are in the range of 7 to 19 percent. In a number of provinces, the program is reported to have made visibly positive impacts on improved forest condition and on the local economy. Protection contracts and income transfer have also assisted rural households in improving food security and to curb swidden cultivation. Poverty reduction impacts are sometimes mentioned but since the number of households engaged in forest protection and management contracts is relatively small, such contracts (and associated payments) may not have had a significant impact on poverty reduction. Some unintended impacts of contracts revolve around the allocation of product usage rights in ways that undermine traditional product-sharing rights, sometimes with the 15 Forest Development Department, MARD 2005. Forest Science Institute (2005); NA (2006). Page 45 32 consequence of poorer households losing access to resources, or result in inequitable sharing of benefits from the sale of forest products (see also Box 3). Table 12. Area Targets and Achievements for Protection, Special Use, and Production Forests under the 5MHRP (1998-2010) Sector Programs (under 5MHRP) Target 1998 –2010 Actual 1998–2005 Actual to 2010 target hectare (‘000) (%) 1 Protection contracts for protection and special use forests 2,000 2,416 121 2 Conservation forest zoning and new planting 2,000 1,409 n.a. 2.1 Forest regeneration (a) natural regeneration (b) replenishment 1,000 764 (a) 546 (b) 118 76 2.2 New planting 1,000 645 65 3 New production forest 3,000 779 3.1 Industrial materials & agro-forestry products 2,000 664 33 3.2 Industrial tree crops & fruit trees 1,000 115 12 Source : MARD (2006) and National Assembly Supervision Report on 5MHRP (September 2006). An important question regarding the forest protection program is how to assess the preconditions that make the program successful, such as the achievement of forest protection on the one hand while achieving positive impacts on the households’ income or livelihood status on the other; and how the program can be designed so as to minimize any negative impacts. Equally important is the question pertaining to whether forest protection contracts are actually directed to those forests that are most critical with regard to protecting watersheds. A clear distinction on whether to expend subsidies for critical forest protection or for poverty alleviation in the forest protection contract program is needed. Although in many instances these two components may be complementary, there are also many instances when they are not. This is particularly true in less critical watershed areas where often better income opportunities from alternative agro-forestry exist and livelihood subsidies may not be needed. Households that have had the ability to take advantage of such alternative opportunities have been cited as the main reason for low participation rates in the protection contracts program, which in such cases has been deemed unsuccessful in their inability to meet the target of area to be forested or protected. Page 46 33 Box 3. Challenges in Balancing Protection, Production and Agriculture Development: The Da Nhim Forest Protection Management Board Da Nhim Forest Protection Management Board was established in 1987 to manage the water reservoir of the Da Ninh hydropower plant in Lac Duong, Lam Dong Province. The FPMB area covers nearly 54,000 hectares of mostly old growth pine plantations that are considered natural forests. Under the 5MHRP, the Da Nhim FPMB issues protection contracts to households for the protection of the reservoir, focuses on some natural regeneration, carries out tending activities in previously replanted plantations, and conducts occasional auction sales of for timber extracted from infrastructure works or confiscated from illegal harvesting. Encroachment on forest areas in the past has been relatively limited and been characterized as “slow and long term.” Since 2003, with the construction of a road that cuts through the Da Nhim Forest, pressure on timber resources and encroachment on forestland, mainly for coffee growing have increased. Ongoing land use reclassification has proposed that 4,000 hectares of protection forest be converted to agriculture (taking into account past encroachment and land conversion and the allocation of agriculturally suitable land for land-poor households). Another 10,000 hectares of less critical protection forests would be converted to production forests, and the remaining 40,000 hectares would remain as critical protection forests to be protected by a new community forest protection arrangement rather than through household protection contracts. Since 2005, the Da Nhim FPMB has been given “semi-subsidized” status and is permitted to conduct business activities, which includes timber auctions to supplement its income. The FPMB no longer receives provincial subsidies but still implements protection contracts for about 24,000 hectares under the 5MHRP. The reclassification of 10,000 hectares of protection forests into production forests to be managed for commercial purposes by the FPMB are perceived as necessary to ensure adequate income sources for the FPMB in the long run. The recent reclassification indicates an inherent contradiction in the current forest classification system in Vietnam where protection and production functions of forests are meant to be separated spatially and institutionally. While land-use planning can be a helpful tool in separating production and protection functions at the site level, the more relevant question is whether a strict separation of such public and private function in forestry is feasible at all and whether a system of separate production forest and protection forest entities is flexible enough to respond to changing demands on what services are to be provided. Multi-functional forestry, balancing environmental as well production functions at the forest management unit level rather that at the macro-level, may be a more promising approach for the long term. A related question is to what extent the subsidies to households have distorted the allocation and use of government resources in forest development. Government evaluations (e.g., the 2005/2006 evaluation of 5MHRP by MPI) have acknowledged that over the past 10 years the forest protection programs, especially the contracts for protection and for regeneration and replenishment, have often been promoted in places where environmental protection need not be given priority, such as in non-critical protection forests and production forests. To address this shortcoming, comprehensive land use planning at the provincial and local levels is required to identify critical areas that need protection and non-critical areas that can be re-classified for income-generating land use other than from forestry. This needs to be combined with putting in place guidelines and monitoring systems to ensure that the land use plans are properly implemented in conjunction with a program to grant land use rights certificates for their proper use. Page 47 34 Returns to public expenditure in terms of timber plantation growth . In general, Vietnam has good potential for forest plantation development. Comparative advantages include competitive cost structures, potential for reasonable tree growth, a good strategic location from an international market point of view, and growing international and local demand for wood. The main limiting factor is the marginal potential for new large-scale plantations due to the scarce availability of suitable land. Total forest plantation area is estimated to be around 2.5 million hectares, including 1.4 million hectares of plantations for timber production. Plantation development started in the 1980s. Species planted were mainly Eucalyptus and tropical pines, and plantations were established with poor genetic material and used extensive plantation and maintenance techniques. As a result of this, many of these plantations are of poor quality and low yielding, with mean annual increment below 10 cubic meters per hectare and a low-growing stock of less than 40 cubic meters per hectares at the age of 6-7 years. Beginning in the 2000s, vegetative propagation techniques became more common in Vietnam and anecdotal evidence suggests that, in combination with improved silviculture techniques, fertilization, etc., the quality of commercial plantations is now gradually but visibly increasing. Most common plantation species are Acacia mangium, A. auriculiformis, and the hybrid A. mangium x A. auriculiformis . Some plantations of Eucalyptus urophylla clones have been established. Commercial plantations in Central Coast Region of Vietnam are estimated to produce about 15 to 20 cubic meters per hectare and year during initial rotation cycles of 6 to 7 years (Table 13). Table 13. Forest Plantation Area in Vietnam Hectares Province Total land area Total plantation Protection forest plantations Production forest plantations Northern Upland 10,114,797 906,840 332,220 574,622 Red River Delta 688,923 42,080 28,967 13,113 Total Central Coast, Highland 13,860,969 903,628 371,900 531,728 Southeast 3,475,338 200,135 123,973 76,162 Mekong Delta 3,712,681 253,623 72,102 181,521 Total 33,019,610 2,306,306 929,162 1,377,146 Source : MARD – Forest Inventory and Planning Institute, 2006. As is widely acknowledged, public investments in forestry, especially through the 5MHRP, had only limited impact on the expansion of commercial forest plantations areas. As previously discussed, the government’s original target of establishing 2 million hectares of commercial plantation was not achieved and only about 660,000 hectares of timber plantations were established during 1998-2005. In addition, only 12 percent of the 1 million hectare target for industrial tree crops and fruit trees was achieved. With the 5MHRP funding primarily directed Page 48 35 at protection purposes and payments for environmental services, the limited returns with regard to expanded forest plantation areas and increased timber supply are not surprising. A correlation exists between funding sources — ODA, subsidized credit (to State Forest Enterprises), and smallholder investments — and plantation area growth indicating however that these funding sources have been the most important investment avenues for plantation establishment in recent years. With declining ODA and declining credit during 2001 and 2005, plantation growth also declined (Figure 12). Household investments — albeit much smaller and less important than ODA funding with recorded smallholder investments accounting for 10 to 15 percent of ODA — also declined along a similar trend line. It is important to note that Vietnam has remained highly depended on external donor financing for establishing plantations, which may have accounted for about half of all plantation investments during these years. Interestingly, increasing foreign direct investment is not reflected in an increase in plantation area confirming that those investments are more directed toward downstream processing. Figure 12. Annual Increment in Plantation Forest Area and ODA and Subsidized Credit during 2001-05 - 20 40 60 80 100 120 140 160 1 80 200 2001 2002 2003 2004 2005 0 0 0 h a 0 100 200 300 400 500 600 700 800 900 B i l l i o n V N D Left Axis - Annually Planted, 000 ha Right Axis - ODA and Credit International comparison of plantations . Compared to Vietnam, plantations in southern China consist mostly of Eucalyptus hybrids. The more recently established and well-managed plantations can reach mean annual increments as high as 25 cubic meters per hectare. Plantation establishment costs in China are competitive in international comparison but well above the Vietnamese level. The state and state-owned forest farms have invested in tree breeding, and companies managing plantations are typically purchasing the clonal material and do not manage seedling production themselves. Plantations are typically located in hilly areas with relatively steep slopes. Southern China’s successful plantation performance is an outcome of a highly intensive silvicultural regime: high-quality genetic material combined with high fertilizer inputs. Plantation plots are generally larger than in Vietnam. Future potential is mainly based on converting existing poorer plantations with new improved planting materials Page 49 36 rather than new plantation areas. In Lao PDR, plantation investments are still limited, although the state has an increasing interest in commercial plantation development. Suitable areas for plantation development are however are more limited, and sector growth potential in Lao PDR is primarily with sustainably managing the country’s large natural forests (Table 14). Table 14. Plantation Establishment Cost: Vietnam, Laos and Southern China US$ per hectare Cost item Vietnam Central Coast China Guangxi Lao PDR Savannaketh Land rent for private investor 70-140 65-525 70-140 Site and soil preparation, plantation roads 125 250 335 Planting material + planting 93 64 100 Fertilizing 295 690 212 Weed control 255 135 181 Maintenance (fire prevention, phytosanitary control, etc.) 130 26 183 TOTAL 968-1,038 1,230 - 1,690 1,081-1,151 Source : Indufor (January 2007). Costs are average costs and collected during field missions in Central Vietnam; Guangxi, China; and Savannaketh, Lao PDR. The forest planting program under the 5MHRP essentially provided fixed payments and materials (seedling and fertilizer) in kind to households with little or no cost sharing required from households. Since 2003, Government provided VND 1.5 million per hectare in grant funding to assist households in purchasing high-quality seeds and fertilizer under a new forest planting initiative, but progress has been slow. Following the National Assembly evaluation of the 5MHRP (at the end of 2005 and 2006), the Government decided to place more emphasis on production forestry with plans to increase forest cost norms for public investment support. Estimated plantation establishment cost on a per hectare basis however showed little change during 2002-2005, with investment per hectare estimated in the range of US$1,000, which is low in comparison with other countries. In China, plantation establishment costs are estimated to be in the range of US$1,200 to US$1,600 and about US$2,800 in Brazil. Government evaluations has pointed out that cost norms for plantation establishment have been too low and, as a result, plantation quality has remained poor and below standard (Figure 13). In general, plantation establishment costs in Southeast Asia are very competitive in international comparison. This is due to rental land tenure arrangements with relatively low initial investments in land purchases and leases since the state maintains land ownership in these countries. Plantation establishment cost increases significantly when the individual investor needs to purchase the land. Plantation performance in terms of tree growth and actual viability in Southeast Asia is still far from the leading plantation countries in Latin America (Figure 14). Page 50 37 Figure 13. Average Plantation Establishment Cost in Selected Countries 0 500 1000 1500 2000 2500 3000 Mozambique Vietnam Laos China Mexico Uruguay Brazil USD/ha Source: Indufor Databank QIV/2006 Figure 14. Mean Annual Increment in Eucalyptus Plantations in Selected Countries 0 5 10 15 20 25 30 35 40 45 Mozambique Vietnam Laos China Mexico Uruguay Brazil m³/ha Source: Indufor Databank QIV/2006 Forestland tenure reform and land allocation . Forestland allocation is an important componen t of the Government’s program and National Forestry Strategy and involves the devolution of forest management authority from the state to the local level. The objective of forestland allocation is to encourage the protection and restoration of forest cover in upland areas, and the rationale of devolution was that households (individually or as a group) would be more interested in forest protection and management if they had formal rights to forestland. Sector evaluations reveal however that sector performance and achievement of targets have been hampered by slow progress in forestland allocation, and delays in forestland tenure reform Page 51 38 have not created attractive investment conditions for the private sector, particularly smallholders. Forestland allocation has in fact progressed much slower than land allocation for agriculture use. By 2006, only 55 percent of land classified as forestland had been allocated to households based on land use rights certificates as compared to 81 percent of all agriculture land (Figure 15). Figure 15. Share of Agriculture and Forestland with Land Use Rights Certificates, 2002-06 5 5 81 3 6 31 4 2 7 3 70 7 2 0 10 20 30 40 50 60 7 0 8 0 9 0 2002 2004 2005 2006 Year % % of forest land with LURC % agr.land with LURC Source : MONRE (2007). Similarly, the number of households that have been granted land use rights certificates for forestland has remained small in comparison to the number of households with land use rights certificates for agriculture use. Performance and progress of land allocation is mixed across different regions and provinces, with the Northern Region lagging behind other regions. It is estimated that annually only 7,000 households are being allocated forestry land and are being granted with land use rights certificates for such land (Figure 16). Figure 16. Number of Households (HH) with Land Use Rights Certificates for Agriculture and Forestland, 1998-2005 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 1998 1999 2000 2001 2002 2003 2004 2005 Year Number of HHs Number of HHs have LURC for forest land Number of HHs have LURC for agr.land Page 52 39 Source : MONRE (2007). Only few studies on impacts of the land allocation program have been done. Ravallion and van der Walle in a World Bank s tudy found that land allocation in Vietnam favored the “land poor” and the land allocation process tended to respond to the inequities (“inefficiencies”) that originally occurred during de-collectivization as households who started with inordinately low amounts of agricultural land tended to increase their holdings over time. 16 Castella and Quang in a 2002 study in Northern Vietnam found that the forestland allocation policy often restricted access to swidden agriculture land affecting food production of upland households. 17 To date, the relationship between security of tenure of forestland and forest cover remains somewhat unclear. 18 In practice, as reported by the General Statistical Office and the PEN II Study, land has often been used differently than originally stipulated under land allocation; land allocation remains slow and is at times inequitable; and the land allocation decisions are not as transparent as they should be. In addition, the limited impact of forestland allocation has been attributed to inadequate land use planning. Poor land use plans have resulted in inefficient and inequitable land allocation because of the following reasons: · Rural households have not been able to actively participate in the land use planning process and the land use planning is not linked to land potential and specific conditions of communes and villages but is mainly completed on maps at the provincial and district cadastral agencies rather than in the field · Land use planning had been incomplete often resulting in unclear boundaries, which are not approved by Provincial People’s Committees as the legal framework for planning the special use forest, protection forest, and production forest, and detailed land use planning guidelines have yet to be established · There is a lack of coordination in the land use planning process between the forestry and the land administration agencies · State Forest Enterprise restructuring, which has important implications for land allocation and land use planning, has been slow with limited land areas being released for allocation to households From a public expenditure perspective, the current forest policy framework is not very clear on forestland allocation planning and implementation procedures and responsibilities. Neither 16 Ravallion, Martin, and Dominique Van der Walle, “Land Allocation in Vietnam’s Agrarian Transition,” Policy Research Working Paper Series 2951 (World Bank, 2003). 17 Castella, J.-C., and Dang Dinh Quang (eds), Doi Moi In The Mountains: Land Use Changes and Farmers' Livelihood Strategies in Bac Kan Province, Vietnam (Hanoi: The Agricultural Publishing House, 2002). 18 Vietnam Poverty and Environment Nexus Study, Phase II (PEN II): Land Resource – Poverty Study in Vietnam (World Bank, 2005). Page 53 40 MARD nor MONRE report on expenditures related to the land allocation and land use planning processes, and apparently no budgets are being allocated at central or local levels to support this process. Forest-dependency and poverty . For the purpose of this study, data of past Vietnam Household Living Standard Surveys (VHLSS) 2002 and 2004 were analyzed and ”forest dependency” was selected as one criterion to assess impacts of forest expenditure on rural livelihoods. (For a more detailed review of VHLSS results, see Annex E). Forest dependency was defined for a household whose income share from forestry is above 15 percent of total income. Based on the definition for forest dependency, some patterns emerged. 19 Between 2002-2004, the share of forest-dependent households decreased to 4.8 percent of all households, down from 6 percent in 2002. In 2004, the regions with the highest share of forest-dependent households were the Northwest (24 percent), Northeast (15 percent), North-Central Coast and Central Highlands (both with less than 12 percent) showing a clear concentration of forest-dependent households in upland areas. Overall, forest-dependent households are significantly poorer than other households. Overall income of forest-dependent households comes to only about half of the income of non-forest-dependent households. Using the World Bank consumption-based poverty line, poverty headcount of forest-dependent households remained high at nearly 62 percent and much higher than for non-forest-dependent households with a poverty rate of 20 percent in 2004. Poverty of forest-dependent households did not decline over the past years while the poverty headcount of other households decreased at an annual rate of 5 percent. Poverty rates among forest-dependent households are highest in the Northwest, North-Central Coast, and Central Highlands. Within the group of forest- dependent households, ethnic minority households remain significantly poorer than non- minority households. Incomes of poor forest-dependent households have been much lower as compared to non-poor forest-dependent households. Among the poor households in Vietnam, the living standards of poor forest-dependent households are much lower than other poor households. For non-forest-dependent households, wage incomes contribute about one-fourth of total income while wage incomes are much less important for forest-dependent households, comprising only around 8 percent of total income. Forest-dependent households depend heavily on income from agriculture at about 50 percent of total income. For other households, agriculture contributes on average 37 percent of total income. Income from forestry contributes about one-third of total income for forest-dependent households as compared to less that 2 percent for non-forest-dependent households. It is noteworthy that income from forestry has become more important for Kinh and Hoa forest- dependent households, increasing from 30.7 percent in 2002 to 33.4 percent in 2004 while this share of other ethnic minority forest-dependent households decreased slightly from 31 percent to 30 percent. 19 Based on the analysis of the data from VHLSS 2002 and 2004. Page 54 41 Between 2002 and 2004, forestry income growth has been quite high for forest-dependent households. On average, income from forestry increased by 18 percent annually. It is likely that Kinh and Hoa households have been able to take advantage of the plantation development in some lowland areas, such as the central coastal areas, to supply the booming timber products industries. Poorer forest-dependent households in more remote areas have not been able to capitalize on these opportunities. Growth of forestry income among poor forest-dependent households has been only 4 percent. It has been much lower that income growth of non-poor forest-dependent households, which amount to nearly 30 percent during this period. The analysis indicates that government subsidies to forestry under the current programs may have had very limited impacts on improving the lives of the poorest households. Finally, the percentage of non-forest-dependent households with land use rights certificates is higher than the share of forest-dependent households with land use rights certificate. Despite the big increase in land use rights certificates across the country, non-poor and Kinh and Hoa households display a significantly higher percentage of land with certificates than poor and other ethnic minority households. Page 55 42 Chapter 4. Recommendations: Securing and Monitoring Resource Flows The National Forest Development Strategy 2006-2020 defines an ambitious development program for the forestry sector over the coming years. The Strategy is formulated around five major programs. Specifically, the National Forest Development Strategy outlines three development programs: (a) sustainable forest management and development; (b) forest protection, biodiversity conservation, and environmental services; and (c) wood processing and trading. It also includes two support programs: (d) research, education, and forestry extension; and (e) forestry sector policy reform, planning, and monitoring. In addition, the Strategy proposes to consolidate the count ry’s forest estate, policy, and institutions; improve the management and protection of forest resources to achieve international standards; complete forest land allocation; and significantly increase forest areas and timber production and the sector’s contribution to the environment, poverty reduction, and biodiversity. Both timber and pulp production are forecast to rise at annual rates of 9 percent beginning in 2010. An annual growth rate of 5 percent is targeted for the sector. The Strategy also proposes diversified funding sources to develop the sector and increased volumes of capital from the private sector, donors, and foreign direct investment. The Strategy recognizes the important role of the private sector that is being particularly encouraged to invest in forest-product processing. Implementation of the National Forest Development Strategy will be challenging however. The biggest challenge for those engaged in forestry in Vietnam is the task of formulating the desired and appropriate structure and composition of resources and securing the resource flows into the sector. A mix of improvements in administrative, regulatory instruments, and market signals is likely to be the most practical recourse for securing investment resources from the public and private sector over time. In analyzing the National Forest Development Strategy in view of the current expenditure patterns, a number of specific aspects emerge which require further consideration as forestry is progressing in its transition to more market orientation. Securing future resource flows through better incentives for diverse actors. The analysis presented in this report indicates that there is currently a major mismatch between actual sector financing and projected financing needs: while the implementation of the National Forest Development Strategy requires US$400 million annually over the 2006-2020 period, current investment levels from public and private sources are probably more realistically in the range of US$50–60 million, or about 15 percent of what is projected. The significant increases in budget allocations and resource flows assumed by the National Forest Development Strategy may be unrealistic in light of recent trends observed across different public and private financing sources. A key aspect of future reform will be to strengthen the incentives and business enabling environment for private corporate and individual sector actors to invest in upstream forestry development at a time when overseas development assistance and public funding is decreasing or is redirected to public goods functions. Changing the role of private and public sectors . A broad range of functions and activities will be undertaken by the public sector that, as the Strategy acknowledges, has so far constrained Page 56 43 the growth of the sector, particularly its limited staff capacity and the poor performance of public administration. The National Forest Development Strategy suggests a gradual change in the role of the public sector to one in which expenditure and activities are focused increasingly upon the creation of an enabling environment to attract private investment in the forestry sector. Particular public functions that are recognized as fitting into the Strategy plan are development and management of special-use, protection, and production forests; forestry extension; and development of a modern forest management system. However, there are still a number of contradictions in the Strategy and the activities presently undertaken by the public sector. State Forest Enterprises, for example, still absorb a significant share of public resources. Administratively directed subsidies and funding to often non-viable State Forest Enterprises reduce the resources available for other public functions and distract government from its role as facilitator toward stronger private engagement. In addition, the new production forest policy appears to indicate a stronger role of government in commercial production forestry, which may be more appropriately undertaken by private sector actors. With regard to the National Forest Development Strategy, it does not show the relative importance, in terms of funding, between the various forest types that are to be supported nor between the functions that are to be undertaken by the public sector. The S trategy proposes a “more rational allocation” of public funds for investment in the sector, but does not provide details. It is recommended to resolve these contradictions and accelerate the reform of State Forest Enterprises. Improving expenditure monitoring and evaluation . A specific issue concerns the question of whether the current public resource flows into upstream forestry are adequate to fulfill basic public functions articulated in the Strategy. Given the data situation however, it is difficult to determine whether upstream forestry is presently underfunded or whether an improved targeting and more efficient use of available resources is required to achieve sector objectives that are of public goods nature. As has been pointed out, forestry consumed between about 20 percent to 25 percent of agriculture public expenditure while it contributed only a mere 4 percent to total agriculture output, making investments in forestry relatively inefficient. The relative inefficiency of public forest investments has been documented in the Government’s recent sector evaluations, but more analysis would be useful to pinpoint specific inefficiencies. Therefore, improving overall understanding of the adequacy of current resource levels, sector performance, and efficiency of investments requires stronger focus on project evaluation, improved financial and economic analysis of sector activities, and introduction of impact evaluations and better reporting of public spending. Improving basic expenditure management . With regard to expenditure management aspects, no consolidated and comprehensive overview of public and other sector expenditure is available that provides a satisfactory picture of status of sector financing and flows of resources — private or public — into the sector. Expenditure planning and reporting responsibilities are spread between different ministries as well as different administrative levels. Specifically, planning of recurrent and capital budgets is separated between two ministries, and recurrent and capital budgets are only weakly linked and coordinated. This is compounded by different Page 57 44 expenditure reporting and classification systems that do not allow the monitoring of spending along programs or sector objectives. In addition, expenditure analysis and management is further complicated by the fact that subnational expenditures may not be fully captured in the spending data that is held at the central level. As the analysis has shown, there are significant inconsistencies and gaps in the overall expenditure picture, which may also include over- and under-estimations of different expenditure. Specifically with regard to the National Forest Development Strategy, recurrent cost estimates for the coming years appear to have been drawn up in a mechanistic manner, by using historical ratios of recurrent to capital expenditure, rather than any systematic costing exercise that calculates the recurrent cost implications of planned investment expenditures over the Strategy period. It is therefore difficult to identify the actual resource needs and commitment for existing programs and activities (baseline spending) and to assess the funds available for new programs or activities and assess funding gaps. It is therefore recommended to fully include the forestry sector into the ongoing efforts within MARD to formulate a medium-term expenditure framework. The transition to medium-term expenditure planning brings with it the advantages of longer-term expenditure planning based on available resources and better predictability of available resources. It also serves as a tool to bring together planning for capital and recurrent budgets, and national and provincial budgets, and helps clarify baseline expenditure needs and resource availability for new initiatives. Areas that need specific attention include the modernization of expenditure classification, tracking, and reporting system. Page 58 45 Annex A. MOF Forest Sector Expenditure Data, 2001-2005 Page 59 46 Million VND 1999 2000 2001 2002 2003 2004 Forestry and related service 166,365 201,879 221,144 240,018 223,436 188,915 Forestation 30,188 33,244 20,576 27,944 37,284 21,253 Total 196,553 235,123 241,720 267,962 260,720 210,168 % 1999 2000 2001 2002 2003 2004 Forestry and related service 85% 86% 91% 90% 86% 90% Forestation 15% 14% 9% 10% 14% 10% Total 100% 100% 100% 100% 100% 100% Page 60 47 Forestation accounts for as little as 9-15% of the forestry budget. Forestation expenditures have been on a decline from 15 to 10% during the period from 1999 to 2004. Page 61 48 Page 62 49 Page 63 50 Page 64 51 Page 65 52 Annex B. MARD Forest Sector Expenditure Data, 2001-2005 1 MARD Data -- E xpenditure for forestry for period 2001-2005, constant 1994 prices, VND billion 2001 2002 2003 2004 2005 Total 1,202.74 1,142.27 1,060.45 937.49 932.04 Growth in forestry (5.0) (7.2) (11.6) (0.6) According to MARD, state budget expenditures in forestry were significantly declining during the period of 2001-04, more than 5-10% annually. This pattern changed in 2004-05, when budget remained relatively stable with just slight decline of 0.6%. Page 66 53 2 MARD Data VND million Forestry 2001 2002 2003 2004 2005 Capital 1,071.93 1,011.95 935.33 837.85 812.65 -24% Recurrent 130.81 130.32 125.12 99.63 119.39 -9% Total 1,202.74 1.142.27 1,060.45 937.49 932.04 -23% Percentage Forestry 2001 2002 2003 2004 2005 Capital 89 89 88 89 87 Recurrent 11 11 12 11 13 100 100 100 100 100 Over the five year period, capital expenditures declined by 24%; recurrent expenditures, however, declined at the lower level of 9%. Nevertheless, the total structure of state budget expenditures remained stable over the period with 87 -89% in capital and 11-13% in recurrent expenditures. Page 67 54 Page 68 55 Page 69 56 5 MARD DATA Recurrent expenditures by fiscal level VNB billion Forestry 2001 2002 2003 2 Central 44.40 56.51 61.19 5 Local 86.41 73.81 63.93 4 Total 130.81 130.32 125.12 9 Percentage Forestry 2001 2002 2003 2 Central 34 43 49 Local 66 57 51 100 100 100 Annex C. Page 70 57 MPI/National Assembly Forest Sector Expenditure Data, 2001-05 661 Program 1 Total disbursement, VND million, Constant 1994 prices 2000 2001 2002 2003 2004 2005 2006 Central 111,878 106,096 100,539 91,689 76,335 73,291 30,954 Local 291,402 298,223 345,189 260,707 216,694 239,780 253,260 Total 403,280 404,319 445,728 352,397 293,029 313,071 284,214 Total disbursement, % 2000 2001 2002 2003 2004 2005 2006 Central 28 26 23 26 26 23 11 Local 72 74 77 74 74 77 89 Total 100 100 100 100 100 100 100 Page 71 58 Page 72 59 Page 73 60 Page 74 61 Page 75 62 Page 76 63 Page 77 6 4 A n n e x D . S u m m a r y o f I n v e s t m e n t P e r f o r m a n c e i n t h e F o r e s t S e c t o r I n v e s t m e n t s C h a r a c t e r i s t i c s C a s e s P e r f o r m a n c e P r e c o n d i t i o n s R o l e o f g o v e r n m e n t s u p p o r t P r o d u c t i o n - o r i e n t e d i n v e s t m e n t s S F C n u r s e r y / p r i v a t e m e d i u m - l a r g e - s c a l e D e m a n d d r i v e n b y G o v e r n m e n t p r o g r a m s o r c o m m e r c i a l p u r p o s e s . T h e l e v e l o f t e c h n o l o g y i s s t i l l q u i t e l o w , e v e n s o m e h i g h - t e c h a p p l i e d e . g . , t i s s u e c u l t u r e . T h e c l o n e s a r e c o n t r o l l e d b y c e n t r a l g o v e r n m e n t . L a m D o n g , B i n h P h u o c S e l d o m f i n a n c i a l l y v i a b l e i f p r o d u c i n g o n l y f o r e s t t r e e s a n d a p p l y i n g a p p r o p r i a t e t e c h n o l o g y . E x i s t i n g d e m a n d . V i a b l e i f t h e p r o d u c t i o n p o r t f o l i o c a n b e d i v e r s i f i e d w i t h d e m a n d e d n o n - t i m b e r t r e e s . C r u c i a l f o r f o r e s t t r e e s e e d l i n g s : p r o v i d i n g q u a l i t y s e e d s a n d c r e a t i n g t h e d e m a n d . F a r m / p r i v a t e n u r s e r y D r i v e n b y g o v e r n m e n t d e m a n d . S m a l l - s c a l e p r o d u c t i o n a n d o f t e n l i n k e d t o s o m e o n - g o i n g p l a n t a t i o n p r o g r a m . L o w - c a p i t a l i n v e s t m e n t s a n d l o w t e c h n o l o g y . G e n e r a l i n n o r t h e r n V i e t n a m C a n b e v i a b l e f o r f a r m e r s a n d e l i m i n a t e s t h e l o g i s t i c a l p r o b l e m s o f s e e d l i n g d e l i v e r y . P u r c h a s e r c o n t r a c t t o e n s u r e d e m a n d . Q u a l i t y c o n t r o l b y o t h e r e n t i t i e s . S e e d s u p p l y . C r u c i a l f o r s e e d s u p p l y a n d q u l i t y c o n t r o l . M o s t l y c r e a t i n g t h e d e m a n d . C o m p a n y / S F C c o m m e r c i a l p l a n t a t i o n T o t a l a r e a s 5 0 0 - 3 , 0 0 0 o f e a c h c o m p a n y . T h e m a i n p u r p o s e i f t o h a v e s h o r t r o t a t i o n t i m b e r f o r c h i p p r o d u c t i o n . O f t e n p a r t n e r s h i p s w i t h f o r e i g n c o m p a n i e s . L a m D o n g B i n h P h u c O t h e r : A D B , W B s t u d i e s , V I J A C H I P E x i s t i n g p l a n t a t i o n s m o s t l y p o o r . S o m e n e w p l a n t a t i o n b e c o m i n g v i a b l e . D e m a n d f o r w o o d a n d w o o d p a y i n g c a p a c i t y . D e s i g n , s i l v i c u l t u r a l r e g i m e w i t h i n p u t s a n d g o o d m a n a g e m e n t . I f d i r e c t e d c o r r e c t l y i m p o r t a n t . C a n b e p e r v e r s e i f t o o r i g i d - e . g . d i s t o r t i n g o p t i m a l l a n d u s e . F a r m / h o u s e h o l d f o r e s t p l a n t a t i o n S m a l l a r e a 5 - 3 0 h a , s h o r t r o t a t i o n a n d t i m b e r f o r c h i p p i n g - s o l d f o r c o m p a n y a t r o a d s i d e . D e p e n d s o n l o g i s t i c l o c a t i o n a n d f i n a n c i n g . T h e s e c a s e s a r e c o m m o n . L a n g S o n , E x i s t i n g p l a n t i o n p o o r . S o m e h a v e g o o d p e r s p e c t i v e s b u t l a c k e x p e r i e n c e i n p r a c t i c e . E x t e n s i o n s e r v i c e a n d f i n a n c i a l s u p p o r t . D e m a n d f o r w o o d a n d w o o d p a y i n g c a p a c i t y . D e s i g n , s i l v i c u l t u r a l r e g i m e w i t h i n p u t s a n d g o o d m a n a g e m e n t . F u n d a m e n t a l t o c r e a t e t h e c r i t i c a l m a s s . U n l i k e l y w i t h o u t . F a r m / h o u s e h o l d a g r o - f o r e s t r y S m a l l - a r e a , i n t e r c r o p p i n g , l o n g e r r o t a t i o n s , p r o d u c t i o n o f l a r g e r d i m e n s i o n e . g . f o r s a w t i m b e r o r f u r n i t u r e . R e a l c a s e s a r e f e w . B i n h P h u o c - r u b b e r / c a s h e w / a c a c i a G o o d p e r f o r m a n c e i f e x t e n s i o n i n p l a c e . E x t e n s i o n s e r v i c e a n d i n s o m e c a s e s f i n a n c i a l s u p p o r t . P r o c e s s i n g - S F E / S F C M a i n l y s m a l l s a w m i l l s , b a m b o o p r o c e s s i n g . L a m D o n g B i n h P h u o v P o o r - m e d i u m p e r f o r m a n c e . M a r k e t d r i v e n a n d b u s i n e s s o r i e n t e d m a n a g e m e n t . C r e a t e c o n d i t i o n s f o r v a l u e c h a i n . C o n t i n u e r e f o r m t o o u t s o u r c e p r o t e c t i o n f u n c t i o n s Page 78 6 5 I n v e s t m e n t s C h a r a c t e r i s t i c s C a s e s P e r f o r m a n c e P r e c o n d i t i o n s R o l e o f g o v e r n m e n t s u p p o r t P r o c e s s i n g - p r i v a t e e n t r e p r e n e u r L a n g S o n L a m D o n g B i n h P h u o c G o o d p e r f o r m a n c e . M a r k e t s a n d w o o d s u p p l y . F a c i l i t a t e w o o d s u p p l y J o i n t - v e n t u r e , S t a t e C o r p o r a t i o n T h e r e a r e s e v e r a l o p t i o n s t o b e i d e n t i f i e d s e p a r a t e l y ; c h i p p i n g , s a w m i l l s , p a n e l s , f u r n i t u r e . C h i p p i n g , s a w m i l l , f u r n i t u r e . L a m D o n g B i n h P h u o c G o o d p e r f o r m a n c e . M a r k e t s a n d w o o d s u p p l y ; m a n a g e m e n t . F a c i l i t a t e j o i n t v e n t u r e s . F o r e s t p r o t e c t i o n a n d c o n s e r v a t i o n S t a t e p r o t e c t i o n p l a n t a t i o n ( F o r e s t m a n a g e m e n t b o a r d ) P l a n t a t i o n s e s t a b l i s h e d f o r p r o t e c t i o n p u r p o s e s ; s o m e t i m e s p r o d u c t i o n s c h e m e s c o m b i n e d . L a m D o n g M e d i u m : p r o b l e m s w i t h e n c r o a c h i n g r e m a i n s . C r i t i c a l p r o t e c t i o n a r e a . F u n d a m e n t a l . F a r m p r o t e c t i o n p l a n t a t i o n ( p r o t e c t i o n c o n t r a c t ) O f t e n t h e o n l y b e n e f i t i s t h e c o n t r a c t v a l u e . I n s o m e c a s e s t h e f a r m e r m i g h t h a v e s o m e p r o d u c t i o n b e n e f i t s . L a m D o n g M e d i u m o t h e r f a r m e r s e n c r o a c h i n g t h e p r o t e c t i o n a r e a . N o m e a n s f o r r e s o l u t i o n . N o d e m a n d f o r p r o t e c t i o n l a n d , i . e . s u f f i c i e n t i n c o m e f r o m p r o d u c t i o n l a n d ( a g r i c u l t u r e a n d f o r e s t r y ) w i t h i n t h e c o m m u n i t y . F u n d a m e n t a l . S e r v i c e P r o v i s i o n E s t a b l i s h e d t e c h n i c a l a s s i s t a n c e s e r v i c e s P r o v i s i o n o f t e c h n i c a l a s s i s t a n c e f o r c o n t r a c t f a r m e r s w h o w i l l p r o d u c e w o o d o r o t h e r p r o d u c t s . T h e s e r v i c e s c o v e r a d v i c e i n s i t e s e l e c t i o n , p r e p a r a t i o n , p l a n t i n g a n d m a i n t e n a n c e . B i n h P h u o c P o o r f o r f o r e s t r y – b e c a u s e t h e s e r v i c e s f o c u s o n a g r i c u l t u r e a n d d o n o t c o v e r a n y f o r e s t t r e e c r o p s b e s i d e s c a s h e w , r u b b e r a n d c o c o a . F u n d a m e n t a l . D o n o r - s u p p o r t e d e x t e n s i o n S u p p o r t f o r p l a n t a t i o n e s t a b l i s h m e n t c o v e r i n g t h e f u l l p a c k a g e : d e s i g n , t e c h n i c a l a s s i s t a n c e , i n p u t s i n k i n d . L a n g S o n G o o d . K f W s u p p o r t e d e x t e n s i o n h a s h a d g o o d r e s u l t s . D e m a n d d r i v e n a n d l i n k e d w i t h o t h e r f i n a n c i a l s u p p o r t . L i n k e d w i t h p e r f o r m a n c e . F u n d a m e n t a l . Page 79 66 Annex E. Forest Dependency: Implications for Land Use, Poverty and Government Programs (VHLSS Results) It is important to understand the structure of forest dependency of rural households and the nature of socio-economic changes faced by them before one can adequately assess the impact of forestry-related programs and policies. Rural Household Characteristics and the Status of the Forest Dependent Household This section looks at general characteristics of rural households and forest dependency to get a broad profile for selected periods and, data permitting, review the implications of their changes over time. The period covered roughly coincides with the start of the large forestry programs that began in 1992 as the 327 Program and later (in 1998) became the Five Million Hectare Reforestation Program. The review is first undertaken for the average rural household before an analysis is made of forest dependency and its implications, especially with respect to poverty and non-poverty status. The analysis relies on the Vietnamese Household Living Standards Surveys (VHLSS) of 1992, 2002, and 2004. The VHLSS 2002 and especially the VHLSS 2004 provide more in-depth insights into the socio-economic status of rural households in Vietnam than previous surveys. Their sample size is sufficient to establish a new category of rural households, the forest- dependent household and permit a comparison of changes between this category and non- forest-dependent households. The 1992 survey does not allow for such categorization but has a broadly comparable questionnaire, 20 which permits a comparison with 2002 and 2004 data regarding the role of forestry and forest-related income vis- à-vis agriculture and the changing socio-economic structure of the rural household. Basic rural household characteristics . The average rural household has been declining in size from 5.0 in 1992 to 4.4 in 2004 (Table E1). The percentage of households of working age has increased. Real income per capita of the average rural household has also increased with a faster rate of increase during the second half of the 1992–2004 period. The poverty headcount has declined from 63 percent in 1992 to 22 percent in 2004. The rate of decline has slowed down, indicating the increasing difficulty in improving the lot of the ‘hard core’ poverty group. In 1992, households that had some income from forestry (forest-related households) accounted for 19 percent of all rural households; by 2004, this figure had risen to 30 percent. By the 2000s, forest-dependent households, those who derive more than 15 percent of total income from forestry activities within their holdings (including hunting and harvesting from natural forests), remain a small proportion (5-6 percent) of all rural households. 20 The year 1998 was excluded because the VHLSS questionnaire was incompatible with the other years, and there were sampling problems. Page 80 67 Table E1. Average Rural Household and Forest Dependency Characteristics (1992, 2002, 2004) a/ Based on January 2004 prices. b/ Real income – Real consumption/Real income. c/ Based on poverty line -- consumption method. d / Rural households with less than 15% forestry income. e/ Rural households with forestry income at least 15% of total income. Forest-dependent households have seen a faster increase in real income per capita than non- forest-dependent households between 2002 and 2004. The implied savings ratio 21 for forest- dependent households, which was low in 2002, has risen substantially by 2004, partly the result of having less household members to upkeep. The opposite took place for non-forest- dependent households as their real consumption per capita increased at a much faster rate than their real income increase. Despite this improvement, the poverty rate of forest-dependent households remains very high (about 62 percent) and has changed little. This is in sharp contrast with the non-forest-dependent households, for whom the poverty rate declined from 30 percent in 2002 to 20 percent in 2004. The relative lack of improvement in the poverty status of the forest-dependent households is particularly troubling and needs further analysis. In terms of the sources of income growth , it is interesting to note the declining importance of agriculture in average rural household income (Table E2). While income from forestry and aquaculture have improved in their total income share, wages and non-farm sources of income (together comprising 38 percent of total) have become more important than agriculture (37 percent), excluding aquaculture, which had been negligible in the 1990s but in 2002-2004 accounted for more than 4 percent of total rural household income. The relative importance of forestry as an income source improved somewhat in 2002 & 2004 (compared to the pre-large program situation of 1992) but whether it is due to Government’s forestry programs or other factors cannot be discerned from the data. 21 (Real income – Real consumption)/Real income. Average rural household Average forest dependent household d/ Average non-forest dependent household e/ Rural household characteristics 1992 2002 2004 2002 2004 2002 2004 Average # household members 5.0 4.5 4.4 5.2 4.4 4.5 4.4 % household of working age 50 55 58 52 54 55 58 Real income per capita (VND) a/ 1,940 4,082 4,941 2,081 2,678 4,213 5,056 Real consumption per capita (VND) a/ 1,153 2,799 3,569 1,904 2,038 2,858 3,646 Implied savings ratio (%) b/ 41 32 28 9 24 32 28 Poverty rate (%) c/ 63.2 32.0 22.0 63.7 61.8 29.9 20.0 Page 81 68 The forest-dependent household is still overwhelmingly dependent on agriculture and forestry as an income source (82 percent in 2002 to 78 percent in 2004), much more than the non-forest- dependent households (41 percent in 2002 and 38 percent in 2004). The share of non-forest- dependent household wage income (about 25 percent) and non-farm income (about 14 percent) were quite stable sources of income in 2002 and 2004; and they far outweigh the equivalent shares for forest-dependent households (about 7 percent for wages and about 2 percent for non- farm income). During the same period, in contrast to the stable nature of forestry share in rural income (31 percent for forest-dependent and 1 percent for non-forest-dependent households), the growth in wage income for the forest-dependent households has been faster than that for non-forest-dependent households, indicating that opportunities for wage income have improved for forest-dependent households. Table E2. Average Rural Household Income: Sources and Forest Dependency Rural household income sources Average rural household Average forest- dependent household Average non-forest- dependent household % of total income from: 1992 2002 2004 2002 2004 2002 2004 Agriculture 45.1 40.2 37.3 50.9 47.8 39.5 36.7 Forestry a/ 1.4 3.0 2.6 30.9 30.8 1.2 1.2 Aquaculture 0.6 4.2 3.9 1.9 2.0 4.3 4.0 Wages 16.1 23.4 24.4 6.4 8.3 24.5 25.2 Non-farm activities 18.4 13.9 13.4 2.8 2.3 14.6 14.0 Other (social) income b/ 17.5 15.4 18.4 7.0 8.6 15.9 18.9 % household land with land use rights certificate n.a. 38.0 73.9 32.9 64.6 38.4 74.4 a/ Including harvesting from natural forests; b/ Scholarships, health assistance & remittances The VHLSS information on other sources of income and the accessibility to social support and governmental support services provides an interesting perspective of the possible role of government programs on the rural household. From Table E2, g overnment’s social assistance, such as scholarships, health assistance, and family remittances have always been a significant component (15-18 percent) of rural incomes; but it has been the non-forest-dependent households rather than the forest-dependent that has benefited more from them. In 2002 and 2004, social assistance accounted for 16-19 percent of non-forest-dependent household income, more than twice that of their equivalent share for forest-dependent households. Such skewed distribution (Table E3) may be an indication of (a) inaccessibility to government services for the poor forest-dependent households; (b) poor focus of agricultural extension; (c) Page 82 69 inadequate or unclear targeting of households in social forestry programs; or (d) just political clout and the relative ability of local government to fund the social assistance. While forest-dependent households already have greater access to agricultural extension services than the non-forest-dependent households (46 percent and 35 percent, respectively), the information provided by the extension service focuses essentially on agricultural planting (reaching 97 percent of households) and animal rearing (56 percent) while market information and credit access information are hardly available (9 percent and 8 percent, respectively) let alone forestry extension (not mentioned at all). Forest-dependent households have greater access to poverty support programs (74 percent) compared to non-forest-dependent households (38 percent) because these poverty support programs are geographically targeted at remote and mountainous areas and focus on poor beneficiaries. There is a strong correlation between those characteristics and forest dependency. Poverty-targeted programs aimed at remote and mountainous areas (Programs 135 and 143) are likely to be more successful in reaching the forest-dependent households than the broad forestry development programs. This targeted outreach may have succeeded in improving the forest- dependent households’ forest income share by only 1-2 percent. Furthermore, the lack of road infrastructure does not seem to have unduly handicapped the forest-dependent households (85 percent access to commune roads) compared to the non- forest-dependent households (87 percent access) overall. 22 This is primarily because the poverty-oriented Program 135 (in practice, largely a rural roads program) was appropriately targeted to the more remote and mountainous areas, thus addressing the road accessibility handicap for the forest-dependent households. Rural households’ access to social assistance seems to be concentrated in the richer regions such as the Red River Delta, South Central Coast, and South East. Households have benefited either because provincial governments can afford the provision of such assistance or higher remittances have played a more prominent role in these richer regions. The gap with regard to access to commune marketplaces between forest-dependent and non-forest-dependent remains a handicap that further reduces the possible impact of government extension programs. 22 While true on an overall basis, there are some regions where discrepancy between forest-dependent and non- forest- dependent households’ access to commune roads are sufficiently large enough to warrant greater attention. The greatest discrepancy is found in the Mekong River Delta (63% accessibility for non-farm-dependent versus 47% accessibility for forest-dependent); South Central Coast (97% versus 85%); Central Highlands (95% versus 84%): North Central Coast (95% versus 88%); and North East (91% versus 86%). Also, on an overall basis, the poor forest-dependent households (83% access) are still worse off than the non- poor forest-dependent household (90% access), while the difference for the non-forest-dependent is less (85% for poor households versus 87% for non-poor households). Page 83 70 Table E3. Support Services for Forest Dependent and Other Rural Households, 2004 % of households Types of government support and services Average rural household Average forest- dependent household Average non- forest-dependent household Access to agriculture extension information a / 35.1 45.6 34.5 Access to poverty support programs b/ 40.1 74.4 37.9 Access to commune (hamlet) roads 86.5 85..1 86.6 Access to commune (hamlet) markets 53.5 32.3 54.9 a/ Over the past 12 months. b/ Program 135 and 143. In summary, it is not sufficient to provide road transport infrastructure, and access to agricultural production extension information without providing the conditions that can bring about actual productivity improvements and marketability of the product, such as credit and marketing access. Rural Poverty Characteristics and the Forest Dependent Household. Agriculture, forestry, and aquaculture are still the predominant sources of income for rural households and, in particular, forest-dependent households. An analysis of the differences in the structure of land use between poor and non-poor rural households provides another avenue to look at what characterizes poverty among the land users and what are the potential options to escape from poverty. In very general terms, a greater land area devoted to perennial tree crops (especially in 2004) distinguishes the non-poor from the poor rural household (Table E4). In 1992, the poor also had smaller areas devoted to annual crops as compared to the non-poor; but by 2002-2004, there had been a reversal of this characteristic. The poor also increased their use of forest area much more than the non-poor. The trends in the use of annual crop land and forestland seem to confirm the greater success of non-poor households in increasing wage and non-farm incomes as compared to the poor who remain dependent on agriculture and forestry land use. Page 84 71 Table E4. Rural Household Land-use, by Poor and Non-Poor, 1992-2004 1992 hectare per household 2002 hectare per household 2004 hectare per household Poor Non Poor Poor Non Poor Poor Non Poor Total land area 0.818 1.254 0.835 0.576 0.739 0.715 Annual crops 0.716 1.089 0.440 0.328 0.417 0.370 Forestry area 0.033 0.031 0.231 0.082 0.182 0.094 Perennial trees 0.061 0.113 0.120 0.123 0.052 0.123 Other a/ 0.008 0.020 0.044 0.043 0.089 0.127 a/ Includes home gardens, water surfaces, and unused land. (N.B. categories covered are not comparable). For 2004, where the most up-to-date and widest data coverage is available, the differences in the pattern of land use between poor and non-poor households can be seen by comparing the Figures E1 and E2, one for each of forest-dependent and non-forest-dependent categories. The common pattern that differentiates the poor from the non-poor households (for both forest- dependent and non-forest-dependent households ) is in the “perennial tree”, “water surfaces,” and “other” areas. Non-poor households for both categories have proportionately larger areas under perennial tree crops and more water surfaces than the poor households. The distribution of “other” use shows that escape from poverty is related to the ability to have more home gardens and fishponds close to the residence. Figure E1. Forest-Dependent Households Land Use, 2004 Forest Dependant HH Land Use, 2004 0.0 2,000.0 4,000.0 6,000.0 8,000.0 10,000.0 12,000.0 14,000.0 A g r i c . P l a n t i n g s A n n u a l C r o p P e r e n n i a l T r e e s F o r e s t A r e a W a t e r S u r f a c e P a s t u r e & S w i d d e n O t h e r Land Use Type L a n d U s e ( m 2 ) Total Non Poor Poor Page 85 72 Figure E2. Non-Forest Dependent Household, 2004 Non Forest Dependant HH, 2004 0.0 1,000.0 2,000.0 3,000.0 4,000.0 5,000.0 6,000.0 A g r i c . P l a n t i n g s A n n u a l C r o p P e r e n n i a l T r e e s F o r e s t A r e a W a t e r S u r f a c e P a s t u r e & S w i d d e n O t h e r Land Use Type L a n d U s e ( m 2 ) Total Non Poor Poor Separately, for the forest-dependent household, the non-poor households had significantly more forest area and proportionately more pasture and swidden land as well. But for the non-forest- dependent household, these differences were not significant between the poor and the non-poor, which imply that differences in other (non-land use) factors must have been operable. This assumption can be verified by looking at the income sources for poor versus non-poor households in each of the forest-dependent and non-forest-dependent categories (Table E5). Table E5. Share of Income Sources by Poverty and Forest Dependency, 2004 % of total income Forest-dependent household Non-forest-dependent household Total rural household Income source Poor Non-poor Poor Non-poor Poor Non-poor Agriculture 51.3 42.4 44.9 34..7 45.8 34.9 Forestry 30.1 31.9 2.8 0.8 6.5 1.6 Aquaculture 2.2 1.8 3.8 4.0 3.5 4.0 Subtotal 83.5 76.1 51.5 39.5 55.8 40.5 Wages 8.2 8.5 26.4 24.9 24.0 24.5 Non-farm activities 1.2 4.1 6.6 15.8 5.9 15.5 Other (social) sources a/ 7.0 11.2 15.5 19.7 14.3 19.5 % household land with land use rights certificate 62.8 67.5 69.2 75.8 68.3 75.5 a/ Scholarships, health assistance & remittances. Page 86 73 The most striking point in Table E5 is the fact that the forest-dependent poor are (a) much more dependent on agriculture (51 percent) than the non forest dependent poor (45 percent); and (b) much more dependent on agriculture (51 percent) than on forestry (30 percent). Hence, under the broader definition of agriculture (to include agriculture, forestry, and aquaculture), the reliance on agriculture by the forest-dependent poor (84 percent) in comparison with the non- forest-dependent poor (52 percent) is even more stark. In terms of income share for both dependency categories, the most important income advantages the non-poor have over the poor are their access to (a) non-farm income sources; and, to a lesser extent, (b) social income sources. The non-poor in both forest-dependent and non-forest dependent households seem to be able to better avail themselves of social subsidies than the poor. However, there appears to be little advantage that the non-poor has over the poor in terms of the share of wage income for both dependency categories. In summary, despite the example (given by the non-poor) of improving their income status through non-farm income and social income sources, what is clear is that the promotion of high-value agriculture, forestry, and aquaculture will still have an important role to play in improving the status of the forest dependent poor. The VHLSS also show that, for both categories of forest dependency, the non-poor households have a significant advantage over the poor households in terms of the share of farm household land with long-term land use rights certificates. However, the question of what this means in relation to the socio-economic status of the rural households is discussed in the following section. The Impact of Land Use Right Certificate Issuance Programs Land use rights certificate issuance and land allocation are expected to have distinct and positive impacts on the ability to mortgage land and long-term investment for all land users in general and for forestland users in particular. The extent of the impact varies among different groups of land users and different geographical areas. For the purpose of this analysis, land users are divided into three groups: (a) the poor group, consisting of ethnic minority land users and land users in remote areas; (b) the medium group, consisting of land users neither in remote areas nor urban areas; and (b) the rich group, consisting of land users in urban areas and coastal areas. For Group 1 , the poor group of land users, it is not clear whether possessing an land use rights certificate has much impact on access to land mortgages or capital investments. An analysis of household survey data for 1993 and 1998 shows no correlation between provincial performance in land titling and household access to credit. 23 The PEN II (2005) study concluded that there is almost no correlation between allocation of forestland and poverty reduction and the environment. This however does not mean that there is a lack of security in land use. The findings imply that it is not a change in the legality of land use that is critical to poverty 23 Quy Toan Do & Lakshmi Iyer. Land Rights and Economic Development: Evidence from Viet Nam. (November 2003). Page 87 74 reduction but rather how the land is used. A survey (under the same study) in Binh Dinh showed that regardless of whether land was allocated or not, land users still kept their traditional land use practice and slash-and-burn practices were still common. 24 Three aspects of the limited impact of land use rights certificate on the access to land mortgaging for Group 1 follow: · Many land users are not fully aware of the role and benefit of land use rights certificates. In Dak Lak, “ some villagers are indifferent to land use rights certificates because they perceive forest land use rights certificate as no more than pieces of paper”. 25 Or, “the local people see the land use rights certificates as merely a proof for borrowing money but not a certificate with all its functions”. 26 · Customary land use, particularly in ethnic minority communities, is common. With the traditional way of defining ownership to land, there is little need to know about the value of land use rights certificates. 27 Community ownership to land is often more important than personal ownership. As a consequence of not fully understanding the implications of land use rights certificate ownership, land losses of ethnic minority communities have increased. 28 · Most of these groups are beneficiaries of government support programs (Program 134 or 135) and therefore have access to mortgaging regardless of whether they are holding land use rights certificates or not. For Group 2, medium group of land users, the impact of land use rights certificate on the access to credit and investment is fairly clear. Most of the land users live in agricultural and forestry areas where the land use rights certificate coverage is high (over 90 percent). Therefore having a land use rights certificate for mortgaging is an integral part of economic life. The Khmer in the Mekong River Delta see “the title as their bowl of rice” 29 and when asked which of the rights to land was important, mortgaging was rated second to inheritance. Many households have made investment in farmsteads when their land was granted a land use rights certificate. 30 These households have turned their small-scale household economies into 24 Vietnam Poverty and Environment Nexus (PEN) Study, Phase II: Land Resource – Poverty Study in Vietnam (World Bank, 2005). 25 Nguyen Quang Tan, Trends in Forest Ownership, Forest Resources Tenure and Institutional Arrangements: Are They Contributing to Better Forest Management and Poverty Reduction? Case Study in Vietnam (2005). 26 Vietnam Poverty and Environment Nexus (PEN) Study, Phase II: Land Resource – Poverty Study in Vietnam (World Bank, 2005). 27 The research in Dak Lak shows that despite village relocation and state property claim to the forest, Cham ethnic villagers still maintain a traditional system of forest resource ownership. Traditionally, when someone first clears a patch of forest for cultivation, they would plant several mango trees to mark ownership. Elsewhere, local people have a traditional way of claiming ownership to timber trees, which is based on a “first-see, first-own” basis. 28 Nguyen Ngoc, Two Critical Vultural Issues in Sustainable Development in Tay Nguyen Highlands. (2005). 29 Interview with female famer in Vinh Long Province, Social Survey for Completion and Modernization, Vietnam Land Administration System Project, preparation phase (SIDA and World Bank, 2007). 30 In Nghia Hanh district, Quang Ngai, since land use rights certificates were granted, more than 50 farmer households have started investing in integrated farmstead models of “garden-pond-shed” or “garden-hill-forest”. Page 88 75 commercial production farmstead economies. 31 In many cases, the land user is able to mortgage his land even without a land use rights certificate since, according to Article 50 of Land Law 2003, only certain legal land deeds are required to be eligible for mortgage transactions. Many branches of the Agricultural and Rural Development Bank accept land mortgages as long as there is some verification by the local government that the right to the land is valid and the land is free of disputes, even without a land use rights certificate. However, not all lenders give mortgage free loans. In those instances, land use rights certificates are very important For Group 3, the rich group of land users, holding a land use rights certificate greatly impacts mortgaging activities, particularly for long-term investments. However, there has been limited research on this aspect. A survey of 665 small enterprises in the 12 provinces and cities of Vietnam in 2006 showed that 242 of them (36 percent) would have made more investments in their land if they had had right to land use for longer periods of time, and 153 (23 percent) would have invested more if their properties could have been mortgaged. 32 From a regional perspective, mortgaging is most active in the Southern region and less in the Central and N orthern regions. A survey in An Giang shows “approximately 90 percent of land use rights certificate holders use it as security for bank loans at some point of time”. 33 It should be noted that most of the mortgages in the South (i.e., the Mekong River Delta) are infortmal mortgages. Informal mortgages often lead to sale and loss of land when the borrower fails to pay off the debt. Informal mortgaging may accommodate loans of 33 percent to 50 percen of the value of the land while it is 50 percent for formal mortgaging. In summary, there has been no comprehensive research that provides a clear conclusion on the impact of holding a land use rights certificate on land mortgaging or long-term investment in land. It is clear that the impact is positive and directly proportional to how wealthy the land user is. From a geographic perspective, it is also recognizable that it is in the South that mortgaging has had the strongest impacts. 31 http://www.quangngai.gov.vn/quangngai/tiengviet/bangtin/2005/5163/# 32 Vietnam – Better Land Regulation and Administration for Private Sector Development Program (funded by FIAS, MPDF and World Bank, 2006). 33 ADB (2005). Page 89 76 Bibliography Brandt, Loren. 2006. Land Access, Land Markets and their Distributive Implications in Rural Vietnam. Summary Report. Castella J.-C., and Dang Dinh Quang (eds), 2002. Doi Moi In The Mountains: Land Use Changes and Farmers' Dinh Duc Thuan. 2005. Forestry Poverty Reduction and Rural Livelihoods in Vietnam. Forest Sector Support Partnership. 2005. Vietnam Forest Sector Monitoring and Information Systems, Sector Indicators and Baseline Data Report. GSO (General Statistical Office). 2008. Statistical Yearbook of Vietnam 2007. GSO. 2007. Statistical Yearbook of Vietnam 2006. 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