Forest management in Nepal : economics and ecology

WORLD BANK TECHNICAL PAPER NO. 445 714 Work in progress WTP445 for public discussion August 1999 Forest Management in Nepal Economics and Ecology Ian Hill  Recent World Bank Technical Papers No. 368 Pohl, Anderson, Claessens, and Djankov, Privatization and Restructuring in Central and Eastern Europe: Evidence and Policy Options No. 369 Costa-Pierce, From Farmers to Fishers: Developing Reservoir Aquaculture for People Displaced by Dams No. 370 Dejene, Shishira, Yanda, and Johnsen, Land Degradation in Tanzania: Perception from the Village No. 371 Essama-Nssah, Analyse d'une repartition du niveau de vie No. 372 Cleaver and Schreiber, Inverser la spriale: Les interactions entre la population, I'agriculture et l'environnement en Afrique subsaharienne No. 373 Onursal and Gautam, Vehicular Air Pollution: Experiences from Seven Latin American Urban Centers No. 374 Jones, Sector Investment Programs in Africa: Issues and Experiences No. 375 Francis, Milimo, Njobvo, and Tembo, Listening to Farmers: Participatory Assessment of Policy Reform in Zambia's Agriculture Sector No. 376 Tsunokawa and Hoban, Roads and the Environment: A Handbook No. 377 Walsh and Shah, Clean Fuels for Asia: Technical Options for Moving toward Unleaded Gasoline and Low-Sulfur Diesel No. 378 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Kathmandu Valley Report No. 379 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Jakarta Report No. 380 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Metro Manila Report No. 381 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Greater Mumbai Report No. 382 Barker, Tenenbaum, and Woolf, Governance and Regulation of Power Pools and System Operators: An International Comparison No. 383 Goldman, Ergas, Ralph, and Felker, Technology Institutions and Policies: Their Role in Developing Technological Capability in Industry No. 384 Kojima and Okada, Catching Up to Leadership: The Role of Technology Support Institutions in Japan's Casting Sector No. 385 Rowat, Lubrano, and Porrata, Competition Policy and MERCOSUR No. 386 Dinar and Subramanian, Water Pricing Experiences: An International Perspective No. 387 Oskarsson, Berglund, Seling, Snellman, Stenback, and Fritz, A Planner's Guide for Selecting Clean-Coal Technologies for Power Plants No. 388 Sanjayan, Shen, and Jansen, Experiences with Integrated-Conservation Development Projects in Asia No. 389 International Commission on Irrigation and Drainage (ICID), Planning the Management, Operation, and Maintenance of Irrigation and Drainage Systems: A Guide for the Preparation of Strategies and Manuals No. 390 Foster, Lawrence, and Morris, Groundwater in Urban Development: Assessing Management Needs and Formulating Policy Strategies No. 391 Lovei and Weiss, Jr., Environmental Management and Institutions in OECD Countries" Lessons from Experience No. 392 Felker, Chaudhuri, Gyorgy, and Goldman, The Pharmaceutical Industry in India and Hungary: Policies, Institutions, and Technological Development No. 393 Mohan, ed., Bibliography of Publications: Africa Region, 1990-97 No. 394 Hill and Shields, Incentives for Joint Forest Management in India: Analytical Methods and Case Studies No. 395 Saleth and Dinar, Satisfying Urban Thirst: Water Supply Augmentation and Pricing Policy in Hyderabad City, India No. 396 Kikeri, Privatization and Labor: What Happens to Workers When Governments Divest? 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All rights reserved Manufactured in the United States of America First printing August 1999 Technical Papers are published to communicate the results of the Bank's work to the development community with the lest possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use, is granted by the World Bank, provided that the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422. ISBN: 0-8213-4480 Library of Congress Cataloging-in-Publication Data Forest management in Nepal : economics and ecology. p. cm. - (World Bank technical paper: #445) ISBN 0-8213-4480-3 1. Forest Management-Nepal. 2. Forests and Forestry-Economic aspects-Nepal. I. World Bank. II. Series: World Bank technical paper; no. 445. SD235.N4765 1999 333.75' 17'095496-dc2l  Contents Preface ........................................................... vii Currency Equivalents/Weights and Measures/Acronyms and Abbreviations ........ viii Executive Summary ...................................................... ix Introduction .......................................................... 1 A. The Importance of the Forest Sector in Nepal ....................... 1 Forest Cover ................................................ 2 Deforestation and Degradation .................................. 4 Impact of Deforestation and Degradation .......................... 4 B. The Report ................................................. 5 Chapter 1: Analytical Framework ......................................... 16 A. Approach .................................................. 7 Forest Products and Management Systems ......................... 7 Analytical Framework ......................................... 7 B. Implications for Biodiversity and Agricultural Production ............. 13 Biodiversity ................................................ 13 Agricultural Production Systems ................................ 14 Environmental Sustainability ................................... 14 Chapter 2: Financial and Economic Analysis of Alternatives .................... 16 A. Analytical Methods .......................................... 16 B. Results ................................................... 17 Results of Financial Analysis ................................... 17 Results of Economic Analysis .................................. 18 Chapter 3: Economic, Social, Institutional, and Legal Issues . . 21 A. Economic and Policy Issues ................................... 21 Economic Policy Issues ....................................... 21 -lii-  B. Social Dimensions ........................................... 23 C. Institutional Issues ........................................... 28 D. Legal Framework ........................................... 33 Chapter 4: Conclusions .................................................. 34 A. Strategies for Change ........................................ 34 Options for Change .......................................... 35 Policy Changes ............................................. 35 National Strategy. Change from Scenario 1 to Scenario 2: Options and Implications ...................................... 37 Economic Implications ....................................... 37 Global Strategy. Change from Scenario 1 or 2 to Scenario 3: Options and Implications ...................................... 37 Social Issues ............................................... 40 Institutional Issues ........................................... 40 Legal Issues ................................................ 41 B. From Study to Implementation ................................. 41 Strategies and Policies ........................................ 41 Investment Needs ........................................... 43 National Strategy: Investment Needs ............................. 43 Global Strategy: Investment Needs .............................. 44 Sources of Financing ......................................... 45 The Role of the Bank ........................................ 45 Annexes .......................................................... 47 Annex 1. Team Composition and List of Working Papers .............. 47 Annex 2. Models for Financial and Economic Analysis ................ 48 Annex 3. Acknowledgments .................................... 49 References .......................................................... 50 -iv-  List of Tables Table 1 Areas of Natural Forest Types ...................................... 2 Table 2 Forest Products and use in Relation to Forest Type and Physiographic Region ............................................ 8 Table 3 Scenarios for Use of Products that Are Primarily Inputs to Agriculture ...... 10 Table 4 Scenarios for Use of Products that Are Primarily Marketed ............... 11 Table 5 Accounting Stance and Analysis for the Three Scenarios ................. 17 Table 6 Components of Financial Analysis of Representative Models of Selected Forest Products .18 Table 7 Components of Economic Analysis of Representative Models of Selected Forest Products ......................................... 19 Table 8 Scenario-Specific Marketing Issues for the Seven Forest Products ......... 24 Table 9 Social Issues Affecting the Seven Forest Products in the Three Scenarios ... . 27 Table 10 Institutional Issues Affecting the Seven Products in the Three Scenarios ..... 29 Table 11 Legislative Issues Affecting the Seven Products in the Three Scenarios ...... 31 Table 12 Change from Scenario 1 to 2: Options and Implications .36 Table 13 Economic Benefits of Improved Management for the Forest Products: Fuelwood Use, Management of Timber Production in the Terai, and Control of Rhino Poaching .38 Table 14 Change from Scenario 2 to 3: Options and Implications .39 Table A.2. 1 General Economic Model for the Three Scenarios .48 -v-  List of Figures Figure 1 Latitudinal Distribution of Forest Types for Eastern and Central Nepal ....... 3 Figure 2 Latitudinal Distribution of Forest Types for Western Nepal ................ 3 -vi-  Preface This study was undertaken by a team drawn from the World Bank, the Ministry of Forests and Soil Conservation, and national consultants. The main objective of the study is to provide a better understanding of the ways in which forest resources are used in Nepal. Although there is an extensive literature on Nepal's natural resources, there has been insuffi- cient analysis of the costs and benefits of present and possible future sustainable and biodiver- sity-friendly management practices from household, national, and global perspectives. The main focus of the present study is, therefore, to examine these issues systematically. The report is not meant to provide a catalogue of present resources and their status, though the existing literature on Nepal's natural resources provided the framework for the study. Instead, the report presents the analytical approach and methods used, quantitative results of financial and economic analyses, and a discussion of the results in terms of their implications for future management of forest resources. Policy, social, institutional, and legal issues are dis- cussed, and possible strategies for a more sustainable and biodiversity-friendly use of forest resources in the future are identified. The report should be of use to national and donor agencies concerned with the manage- ment of natural resources and conservation of biodiversity in Nepal, providing a framework for possible future donor support to the sector. It highlights issues that are of importance in the for- mulation and implementation of natural resource management programs by government and non-government agencies. Ministry of Forests and Soil Conservation His Majesty's Government of Nepal -vii-  Currency Equivalents Currency Unit = Nepali Rupees (Rs.) US$1.00 = Rs. 65 Weights and Measures The metric system is used throughout this report. Acronyms and Abbreviations CF Community Forestry CBO Community Based Organization DNPWC Department of National Parks and Wildlife Conservation FD Forest Department FUG Forest User Group GEF Global Environment Facility GDP Gross Domestic Product IUCN International Union for the Conservation of Nature LSMS Living Standards Measurement Survey MFSC Ministry of Forests and Soil Conservation NGO Nongovernment Organization OP Operational Plan NTFP Nontimber Forest Product TCN Timber Corporation of Nepal The study was undertaken by a team drawn from the World Bank, the Ministry of Forests and Soil Conservation, and national consultants. Team members are listed in Annex 1. Financial support for consultant participation in the study was provided by Danish Trust Funds. The study team gratefully acknowledges the contributions made by a large number of people and organizations in Nepal. Many of these contributors are listed in Annex 6 and the team apologizes for any omissions. Data used in the study were generously made available to the team and detailed dis- cussions with those with long experience of natural resource management issues assisted greatly in the develop- ment of the study. Vice President: Mieko Nishimuzu Country Director: Hans Rothenbuhler Sector Managers: Michael Baxter and Ridwan Ali Task Leader: Ian Hill Co-task Leader: Ethel Sennhauser -viii-  Executive Summary Objectives. The objectives of the study are: * To examine the costs and benefits of existing forest use from three perspectives- household, national, and global-with a particular focus on their impact on biodiversity and the sustainability of agricultural production systems * To examine the divergence between private and public costs of existing forest use, com- pare this with more desirable sustainable practices, and suggest measures to reduce this divergence through changes in policy, institutions, or regulations, in light of the analy- sis of the social implications of proposed changes * To prioritize areas for change, and to identify investment needs and ways in which donor support could facilitate the implementation of change. The Forest Sector in Nepal. About 7.5 million ha, or 51 percent of the total land area of Nepal, is covered by forests and shrub land, although only about half of this area is unde- graded natural forest. Almost 90 percent of the people of Nepal depend on these forests for fod- der, fuelwood, food, building materials, medicinal plants and fertilizers, which are vital for their subsistence. Forests also provide a source of income. Timber and fuelwood collection and the management of nontimber forest products (NTFP) is important in local economies and is increasingly reflected in national economic figures. The importance of NTFP is also reflected in the fact that in certain areas of the Himalayas, they provide up to 50 percent of the income of a household. Intensive pressure on forest ecosystems for the collection of a range of forest products, particularly fodder and fuelwood, which provides 68 percent of the energy supplies of Nepal, is leading to rapid degradation with significant adverse impacts on the sustainability of agricultural production systems and on biodiversity. Analytical Approach. This study focuses on forest use and biodiversity issues within overall crop/livestock management systems, based on illustrative analyses of a number of for- est products which are used by people to support their livelihood as part of the rural economy. They are representative of the much wider range of products used by rural people in Nepal. Seven groups of forest products are considered to be of particular significance because they are important for the maintenance of biodiversity and because they contribute to long-term sus- tainability of agricultural production systems and rural incomes. Of the seven products, grass and forage and fuelwood and tree based fodder are primarily inputs into agricultural production. Five products, timber, charcoal, bamboo/rattans, medicinal plants, and wildlife products, are primarily marketed products that contribute directly to income generation. Because forest use is governed not only by economic factors but by cultural values and perceptions and institu- tional arrangements as well, the results of financial and economic analyses are presented with- in a broader socioeconomic, institutional, and legal framework. -ix-  Executive Summary Analytical Framework. The utilization of forest resources by families in Nepal can be assumed to be optimal (for the household) from a financial point of view, given the technolo- gies and resources available to them. That is, each resource user makes decisions that maxi- mizes the expected return to the household, given all of the various constraints that he or she faces. Such private use, however, when analyzed from an economic point of view, may have significant costs to society, either nationally or globally, for various reasons. These include the existence of environmental externalities, and the differences between private and social time horizons. To test these assumptions, three different scenarios have been developed: * Scenario 1. The household perspective * Scenario 2. The national perspective * Scenario 3. The global perspective Implications for Biodiversity and Agricultural Production. The implications of these three scenarios for biodiversity and agricultural production are discussed in qualitative terms. Scenario 1, largely the present situation, has a mainly negative impact on biodiversity, which may be of local or global significance, depending on species and habitat affected. Similarly, this scenario has adverse impacts on agricultural production due to reduced availability of biomass and increased labor required for collection of fodder and fuelwood. Scenario 2, in which there is a focus on improved forest management and reforestation activities involving User Groups (UGs), has beneficial biodiversity results and positive impacts on agricultural production, though these may be offset by the constraints on access to protected areas, buffer zones, or bio- diversity corridors. In Scenario 3, management practices are designed to have an optimal impact on biodiversity, which may exacerbate the adverse impacts on agricultural production systems associated with Scenario 2. Financial and Economic Implications. The economic and financial implications of for- est use under the three scenarios were examined based on a general economic model which was used to prepare representative models for each of the products. The analysis provides important insights into the use of forest products in Nepal, notwithstanding the limited number of prod- ucts examined and the fact that the economic models may need modification to take account of regional differences. Other limitations result from the lack of a comprehensive systems per- spective, the difficulty of accounting for displaced effort, and data constraints. Financial Returns for Labor. Not surprisingly, the net financial returns to labor for the collection of the products in Scenario 1 are greater than the opportunity cost of labor (Rs. 25 per day). However, there is a clear division in returns to labor amongst the seven products. Organized poachers of timber, wildlife, and a few collectors of medicinal plants are able to earn relatively huge sums as the reward for their illegal activities. Activities such as illegal fuelwood collection, some medicinal plant collection, and charcoal production provide rela- tively low returns, usually below the farm wage (Rs. 50 per day) but above the assumed oppor- tunity cost of labor. Thus, it cannot be assumed that unsustainable forest use is uniformly -x-  Executive Summary highly profitable. In Scenario 2 the same pattern appears, but returns to labor can be signifi- cantly higher than the opportunity cost of labor even for fuelwood collection. Data constraints have limited the analysis for Scenario 3, but it is likely that the addition of biodiversity-friend- ly management measures will reduce the financial incentives compared to those realized in Scenario 2. Results of Economic Analysis. The economic analysis shows that the net economic losses to Nepal in Scenario 1 are significant when quantified values for the effects of deple- tion and some off-site costs are included. Not surprisingly, adding the costs of environmental externalities and resource depletion often worsens the Scenario 1 estimates of economic (not financial) net returns. The data show that management under Scenario 2 can pay dividends for Nepal, as almost every product considered shows positive incremental benefits from adopting such practices compared to the results from Scenario 1. It is difficult to calculate the total benefits because of uncertainties about the areas and species affected, but illustrative estimates for fuelwood, timber in the terai, and rhino poaching indicate that the total incre- mental benefit of Scenario 2 for just these three products amounts to almost 14 percent of the 1997 forest sector gross domestic product (GDP) of Rs. 8.2 billion. The economic analyses also demonstrate that most biodiversity-friendly management practices in Scenario 3 can be expected to have economic costs for Nepal when compared to Scenario 2. Finally, Scenario 3 always shows an incremental gain as compared to Scenario 1, demonstrating that the pro- motion of sustainable development is compatible with global biodiversity conservation for most of the forest products analyzed. Issues. The divergence between existing behavior of individuals as part of a household and behavior which is desirable from a public or national perspective has been demonstrated by the financial and economic analyses. The divergence is determined by economic policy and social, institutional, and legal issues. Economic issues relate to pricing, licensing, royalties, export and import controls, energy supply, the role of the private sector, and incentives and mar- kets. Social issues involve questions of access and tenure, socioeconomic status, caste and eth- nic group, labor, and cultural values. Public sector institutions responsible for management of forest resources are affected by issues of staffing, the management process, and budget and resource constraints. Community institutions such as FUGs provide mechanisms for manage- ment of local resources. Public-private partnerships and linkages are another important institu- tional concern. The main legislative issues affecting the seven products are due to conflicts between different laws, conflicts of authority for the control of forest or forest product use, or legislative lacunae. Strategies for Change. The study shows that Scenario 1, representing present, largely uncontrolled use, is not sustainable in either economic or environmental terms. Scenario 2, based on the introduction of management or technical interventions, would be environmentally more sustainable and have significant benefits for Nepal. Further management and technical interventions would enable biodiversity-friendly measures to be introduced in Scenario 3, but these would have economic costs for Nepal, as the benefits would be essentially benefits to -xi-  Executive Summary global biodiversity. If these benefits are to be realized, important strategic choices need to be made by the nation and the global community: National Strategy: Change to sustainable management practices for the benefit of the nation, that is a change from Scenario 1 to Scenario 2 Global Strategy: Change to sustainable, biodiversity-friendly management practices for the benefit of the global community, that is, a change from Scenario 1 or 2 to Scenario 3 Global Environmental Benefits. Economic considerations suggest that the national strategy will be the first choice for the nation unless global resources are made available for the implementation of the global strategy. The choice for the global community, therefore, is whether funds can be made available to Nepal to manage resources in a manner that provides environmental benefits of global significance. Options and Implications. A number of options for implementation of the two strate- gies have been identified. These include policy changes; regulation of access, largely through community management of resources; improved forest management; reintroduction of threat- ened species; the use of alternative technologies; and wider control of poaching. The significant economic benefits and real benefits to many individuals in changing from Scenario 1 to Scenario 2 have been noted above. However, cultural norms may inhibit change, and individu- als are unlikely to change behavior without either a change in prices or a change in regulations and policies, which would encourage new behavior or enforce existing controls. Scenario 2 Versus Scenario 3. The study also shows that there are benefits to Nepal of introducing Scenario 3, but these are not as great as for Scenario 2. Thus, there are opportuni- ty costs to Nepal of introducing Scenario 3 as opposed to Scenario 2. Most of these opportu- nity costs result from foregone production from additional areas set aside for protection, or from reduced production due to restricted access. It is difficult to estimate the total magnitude of these costs because of the absence of decisions on the activities, implementation arrange- ments, or size of any additional areas that might be protected or managed in biodiversity- friendly ways. From Study to Implementation. To bring about any of these changes, whether from Scenario I to 2, or from Scenario 2 to 3, will depend upon decisions on strategies and policies, followed by the identification of investment needs and possible sources of financing. The nec- essary priority actions have been identified and include: Strategies and Policies * Strategic decisions on: - National strategy and investment in the introduction of more sustainable resource management represented by Scenario 2. -xii-  Executive Summary Global strategy and further investments in biodiversity-friendly management of resources, represented by Scenario 3. Policies and the Legal Framework - Change policies related to the regulation of prices, movement, and trade in forest products prior to the implementation of any measures to change from Scenario 1 to Scenarios 2 to 3. - Review related energy policies and policies that may affect the incentive structure for individuals and communities. - Review and modify legislation as needed. * Geographic Focus - As in all areas changes should contribute to the primary objective of introducing more sustainable and biodiversity-friendly resource management, review whether secondary objectives of changes are to (1) maximize the financial and economic benefits (2) benefit the greatest number of families or (3) have an impact on poverty alleviation. - Focus implementation of change according to chosen secondary objectives. * Studies and Research - Undertake priority studies and research to provide a better understanding of social, institutional, or technical issues. Investment Needs * EEstimate investment needs on the basis of decisions on which areas are to be treated and the phasing of initiatives for changing to either Scenario 2 or 3. Such decisions would be reached during program formulation, but the likely types of investments needed for the adoption of the national strategy and the global strategy include: - National Strategy-Scenario 2 - Regulation of access through expansion of community-based forestry and buffer-zone management programs and strengthening antipoaching controls. - Institutional development of community organizations, Non-Government Organizations (NGOs), and Ministry of Forests and Soil Conservation (MFSC). - Improvement of management and processing through improved planning and provision of technical advice. -xiii-  Executive Summary - Improvement of production and processing technology through extension of proven methods and research and development of appropriate new methods. Global Strategy-Scenario 3 - Identification and establishment of additional protected areas through extension of biodiversity habitats to buffer zones and the creation of wildlife or biodiversity corridors. - Reintroduction of threatened species. - Improvement of technology. - Identify Sources of Financing. * National strategy-Scenario 2, which results in increased social benefits: Government, multilateral, and bilateral development assistance. * rGlobal strategy-Scenario 3, which imposes opportunity and direct costs on Nepal: international funding sources such as the Global Environment Facility and some bilat- eral donors. Although the report focuses on a few forest products and examines a limited range of technologies, it provides the analytical framework for consideration of other initiatives that could be included in wider natural resource management programs. It should, therefore, be of use to the users of forest resources and to national and international agencies concerned with the management of natural resources and the conservation of biodiversity. -xiv-  Introduction This report examines the impact of the use of forest products on biodiversity and the sus- tainability of agricultural production systems in Nepal, and the costs and benefits of these prac- tices to a household, the nation and the global community. Although there is an extensive literature on Nepal's natural resources, there has been insufficient analysis of the costs and ben- efits of present and possible future sustainable and biodiversity-friendly management practices from household, national, and global perspectives. The main focus of the present study is, there- fore, to examine these issues systematically and provide a framework for consideration of future investments in the natural resource and forestry sector, financed from either government or donor funds. More specifically, the objectives of the study are: * To examine the costs and benefits of existing forest use from three perspectives-house- hold, national, and global-with a particular focus on their impact on biodiversity and the sustainability of agricultural production systems * To examine the divergence between private and public costs of existing forest use, com- pare this with more desirable sustainable practices, and suggest measures to reduce this divergence through changes in policy, institutions, or regulations in light of the analysis of the social implications of proposed changes To prioritize areas for change and to identify investment needs and ways in which donor support could facilitate the implementation of change. A. Importance of the Forest Sector in Nepal The economy of Nepal is characterized by a large rural sector based on subsistence agri- culture, accounting for 41 percent of the GDP and 83 percent of the employment. Primary agri- cultural activities are based on crops and livestock, while forestry and forest resource management are secondary supporting activities. Local people are, nevertheless, dependent on forest resources. Almost 90 percent of the people of Nepal depend for their subsistence on forests for fodder, fuelwood, food, building materials, medicinal plants, and fertilizers. This strong dependency of agriculture and livestock on forest resources is one of the main charac- teristics of the rural production systems of Nepal. Forests also provide a source of income. Fuelwood provides 68 percent of the energy supplies of Nepal, and although fuelwood used in rural areas is seldom traded, there is a sig- nificant demand in small urban areas and from brick industries that is met by traders who pur- chase fuelwood from rural collectors. The management of nontimber forest products (NTFP's) is important in local economies and is increasingly reflected in national economic figures. For example, every year almost 15,000 tons of medicinal plants are harvested and traded in Nepal, with a total value estimated at US$8.6 million, but these figures do not reflect the large -1-  Introduction quantities of illegally traded NTFPs, nor the significant quantities of nontraded NTFPs collect- ed. The importance of these products is reflected in the fact that in certain areas of the Himalayas, NTFP provide up to 50 percent of a the income of a household. Timber production by local communities or by commercial private sector agencies has a good economic potential, particularly in the terai, but policy and legal constraints have delayed its development up to now. These activities have an important impact on forest ecosystems, and given the global sig- nificance of Nepal's biodiversity, there is an urgent need to mnitigate any adverse effects of pre- sent management systems. Forest Cover Data (McKinnon, 1997) indicate that about 7.5 million ha, or 51 percent of the total land area of Nepal, are covered by forests and shrub land (see Table 1), although only about half of this area is undegraded natural forest. The 1998 Government of Nepal Master Plan for the Forest Sector of Nepal presents are different figures, as only areas with more than 10 percent crown cover classed as forests. This indicates that the forest area amount to 5.5 millions hectares, or about 37 percent of the total land area of Nepal. The MacKinnon figures are used in this report.) The forest cover includes a wide range of forest types, reflecting the varied cli- mate and topography of Nepal. Areas of natural forest types are summarized in Table 1, and their latitudinal distribution in the eastern and western parts of Nepal are illustrated in Figures 1 and 2. Table 1. Areas of Natural Forest Types Elevation (m) ForestType Area (million ha) 3000-4000 Birch 0.2 Subalpine Conifer 0.2 2000-3000 Blue Pine <0.1 Dry Deciduous 0.3 MontaneWetTemperate 0.6 Himalayan MoistTemperate 0.3 1000-2000 Subtropical Pine 0.2 Subtropical Broad-Leaved Hill Semi-evergreen Rainforest 0.9 < 1000 Tropical Moist Deciduous 1.1 Subtotal 3.8 Degraded Forests 3.7 Total 7.5 Source: ProtectedAreas Systems Review of the Indo-Malayan Realm. 1997. J. MacKinnon, ed.Asian Bureau for Conservation, Ltd., Canterbury, England. -2-  Introduction Figure 1. Latitudinal Distribution of Forest Types for Eastern and Central Nepal Central and East Nepal Nivazone 5000 m. Aloine pasture Alpine Meadows 4000e iperp -ickess, Sales sod Rhododendron tree line 4000 m . Birch forest Brch nd Rhododendron Abiesspeusebilis Subalpine HIGHHILLS Be Usili zone 3000e. \ Subalpine conifer ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~eeuo _ \ ~~~~~~~~Oaks and RhododendrosQuru Montane wet temoerate forest uQerc -useellosa Temperate zone Rhododendron \_ Oaks and Alnu 2000 m. Al-s Nepale-sis So ubtro. i cal zone M I D Hl LLSSubtropical broad-leaved h Miche_i Subtropical zone farest slihi etnpi IODOOm TERAI & SIWALIKS Tropical moist deciduous forest Figure 2. Latitudinal Distribution of Forest Types for Western Nepal West Nepal Nival zone 5000 e, alpine meadows \ Alpine J-nipersiukeks, SBli nd Rhododeudre tree line 4000 bm. buhes Birch birch end Subalpine HIGH HILLS \d Abies epe-eb lie, Bensla zone Subalpine conifer dub _ ~~~~~~~~~~~forest f.,..d binch 3000vs Que-cuseeea - pfulia Temperate zone Dry deciduous forest Piece welii, Abie 0e m0. Quenusi ncana, Q. I Hireala an molTnf4er0ee laugi- MID HIHl S forest (oaks) Subtropical zone u l n Piene -.b.roh,. mo00 m. _ forest: TERAI & SIWALIKS Tronpica moist deciduous forest Shr ob..a -3-  Introduction Deforestation and Degradation The extent of deforestation and degradation is shown in Annex 2, which indicates that more than 50 percent of the original forests have disappeared, and almost half of the remaining forest land is now degraded scrub land. Data in Table 1 shows there are over 36 million ha of degraded forests. Recent studies suggest that although deforestation still occurs in areas of the terai and high hills, deforestation rates are decreasing in the middle hills. However, forest degra- dation, defined as the loss of the normal functions of the forest in terms of production and con- servation, is increasing due to the intensive pressure on these ecosystems for the collection of a range of forest products, particularly fodder and fuelwood (Annex 2). The causes of deforestation and degradation of the land resources in Nepal have been widely discussed in the literature. In the 1980s, the so-called theory of Himalayan environmen- tal degradation attributed deforestation and catastrophic erosion to dramatic increases in popu- lation growth in recent decades. It has since been concluded, however, that most erosion and flooding in the Himalayas result from the characteristics of the geological and climatological environment (Metz, 1991). Deforestation and conversion of upland forests to agriculture, which Metz suggested took place in historical times, probably had a lesser impact on upland erosion than earlier reviews suggested, although even small increases may be important. Forest degra- dation is, however, identified as a serious and continuing problem, linked to the increasing demand for forest products from a rising rural population. In 1957, the government attempted to address the problem through nationalization of the forests, but this led to the breakdown of traditional management systems and accelerated the process of degradation. Realizing this, the government introduced the community forestry program, which aims to give communities con- trol over the management of local forest resources. Impact of Deforestation and Degradation The main impacts of deforestation and forest degradation are erosion, compromise of the sustainability of agricultural production systems, and diminishing biodiversity. * EErosion. Although much erosion in Nepal may be geological in origin, deforestation and, to a lesser extent, forest degradation may result in significant localized erosion, resulting in loss of farmland through landslides and decreased productivity through loss of topsoil and downstream siltation effects. The regional impact of geological erosion and transnational downstream effects are a subject of debate and beyond the scope of this study. Sustainability of Agricultural Production Systems. Forest loss and degradation has an even more significant effect on the long-term sustainability of agriculture production systems, given the strong interdependence of agriculture and forests noted above. Due to the constraints imposed by poverty, topography and soils, and the lack of adequate transport and other infrastructure, there are few alternatives to existing production systems, at least in the short and medium term. Maintaining the sustainability of the -4-  Introduction production systems must, therefore, be a high priority, as the social costs of breakdown would be high, apart from the costs in terms of aesthetic or cultural values. Deforestation and degradation also have indirect effects on agricultural production. Although there are many examples of the development of indigenous systems for management of degrad- ed forests, the response most poor families make to increasing scarcity of fuelwood and fodder is to spend more time on collection. This reduces the time available for agricul- ture. Forest degradation and loss affect the livestock sector, as the reduction in the avail- ability of fodder increases local grazing pressure, which, in turn, increases erosion of lands under cultivation. There may also be secondary effects on health, nutrition, and education. Biodiversity. Biotic pressures on forests resulting in changes in the structure and dynam- ics of communities have had a significant impact on biodiversity. The need to mitigate this impact is urgent in view of the global significance of Nepal's biodiversity. With only 0.1 percent of the world's total area, Nepal contains 2 percent of the flowering plants, 8 percent of the birds, and 4 percent of the mammals. Most of these species are globally endangered, with nearly 500 of them cited in the Red Data Book of the Fauna of Nepal as having a high risk of local extinction. Nepal is also the most important mixing ground of flora and fauna for the Indo-Malayan and Paleartic realms with probably the last relicts of ecotone areas with low human disturbances. Botanically, Nepal is among the richest countries in the Indian Subcontinent, supporting the highest levels of plant endemism. As a signatory to the Convention of Biodiversity, Nepal has a national and international responsibility to conserve these resources and to mainstream biodiversity conservation into forest management practices (Article 6, CBD). The World Bank has also selected Nepal as a country study for the Global Overlays Program, which aims to mainstream biodiversity concerns into sectoral analysis, policy dialogue, and lending operations associated with forest conservation and management. B. The Report The report is divided into an introduction and four chapters. The introduction presents the objectives of the study and background information. The first chapter outlines the approach and analytical framework, presenting the three scenarios used to develop analytical models and the implications of these for biodiversity and agricultural production. Chapter 2 presents the methods used and the results of economic and financial analyses of alternatives. Chapter 3 dis- cusses the analytical results in relation to national economic and other policies and to social, institutional, legal, or technical issues. The final chapter discusses strategies for change and examines investment needs to bring about these changes. The report is supported by a series of Working Papers (see Annex 1). The report and Working Papers are based on a detailed review of the extensive literature on natural resource management in Nepal. Although for presentation purposes, citations have been kept to a minimum, this body of existing work provided the starting point for the study. -5-  Introduction Much information was also provided by a network of researchers, scientists, and agencies, and their contributions are gratefully acknowledged (see Annex 3). The report should be of use to the users of forest resources and to national and interna- tional agencies concerned with the management of natural resources and conservation of biodi- versity in Nepal and similar environments elsewhere. Although the report focuses on a number of specific forest products, the issues highlighted are important in the formulation and imple- mentation of much wider natural resource management programs. The report should, therefore, be of use to government, nongovernment, and donor agencies involved in the sector. The methodology, based on modeling resource use in three scenarios reflecting household, nation- al, and global perspectives, should provide a basis for academics and others to extend the analy- ses to other products and ecosystems. With some modification, the methodology could also be extended to analysis of a wider range of natural resources. -6-  1 Analytical Framework A. Approach Management of land resources involves a wide range of technologies and physical constraints, so it is difficult to undertake meaningful economic analyses that adequately reflect the complexity of the situation. An important analytical choice, therefore, has to be made as to whether to model land management as a single, all-encompassing system or to focus on a part of the system. In this study, it was decided that more meaningful results could be obtained through a focus on forest use and biodiversity issues within overall crop/livestock management systems. Consequently, the analysis has concentrated on a number of forest products used by people to support their livelihood as part of the rural economy. Because for- est use in Nepal is linked to ways of life that are governed not only by economic factors but also by cultural values and perceptions as well as institutional arrangements, the results are interpreted within a broader socioeconomic, institutional, and legal framework. The study has a wider significance in analyzing the management of forest resources from household, nation- al, and global perspectives. Forest Products and Management Systems Rural people use forests to obtain a range of products to support their livelihood, and the products can be classified according to the way in which they are used: * Products that are primarily inputs into agricultural production systems through the pro- vision of fertilizers, fodder and bedding for cattle, material for tool construction, and a source of energy for domestic cooking * Products that are primarily directly marketed, such as exploitation of timber, collection of medicinal plants and other NTFPs, and poaching of wildlife Seven forest products are considered to be of particular significance because they are important for the maintenance of biodiversity and and they contribute to long-term sustainabil- ity of agricultural production systems and rural incomes. They are representative of the much wider range of products used by rural people in Nepal. Of the seven products, two are primari- ly inputs into agricultural production and five are primarily marketed products that contribute directly to income generation. These seven products and their uses are shown in Table 2 in rela- tion to forest type and physiographic region. Analytical Framework The utilization of forest resources in Nepal by a household can be assumed to be opti- mal (to the household) from a financial perspective, given the technologies and resources available to them. That is, each individual resource user makes decisions that maximizes the -7-  Analytical Framework Table 2. Forest Products and Use in Relation to Forest Type and Physiographic Region Forest Products Product Usea ForestType Physiographic Region Products that are primarily inputs to agriculture Grass, forage Grasses for thatch, rope-making. Tropical Moist Terai and Siwaliks Livestock grazing and feed Deciduous/Savanna in Protected Areas and Buffer Zones Tree-based fodder, Livestock grazing and feed Subtropical pine, moist Mid hills forage, fuelwood Domestic cooking temperate, dry deciduous Products that are primarily marketed Timber Commercial timber industry Tropical Moist Deciduous Terai and Siwaliks Charcoal, fuelwood Industry - blacksmiths, Montane wet temperate Mid hills goldsmiths, brass-making Domestic cooking Bamboo, rattan Cottage industry, construction Various subtropical and temperate broad-leaved Medicinal plants Commercial export Birch and rhododendron, Upper Mid hills subalpine conifer, low subalpine Wildlife products Illegal export, poaching All forest types Widespread aLow intensity traditional uses, for example, of medicinal plants in traditional healing, are not considered in this study. Nor were products from the high hills of Nepal considered, mainly because of data constraints. expected return to the household, given the various constraints and social and cultural prescriptions that exist. Such private use, however, when analyzed from an economic point of view, may for various reasons have significant costs to society, either nationally or globally. These include the existence of environmental externalities, and the differences between private and social time horizons. To test these assumptions, three different scenarios, identified as 1, 2, and 3, have been developed, reflecting household, national, and global perspectives. The three scenarios are presented in more detail for each product in the working papers. In general, however, they can be characterized as follows: Scenario 1. The Household Perspective. * Predominantly individual users or collectors forming part of the household economic unit, with de facto open access, often illegal collection * The household has been taken as the basic unit of consumption and production in rural Nepal, with indi- vidual household members contributing to the income of the unit as a whole. Household income generation in Nepal is complex, given varying total and seasonal labor availability due to widespread male migration and the extensive contribution made by children to household labor. Standard economic analysis presenting returns to the individual may not adequately reflect this complexity, but does provide an indication of the contribution of vari- ous activities to household income. -8-  Analytical Framework of protected species, with frequent overharvesting of products, often using resource-damaging techniques. This scenario reflects collection and use of forest products in many areas of Nepal at the present time. Scenario 2. The National Perspective. This scenario generally involves regulated access, often controlled by community or private sector organizations, management based on operational plans, sustainable harvesting and improved technologies for processing, storage or transport of the product. It reflects conditions where User Groups (UGs) have already been established, though some products, particularly income-generating products, may not be con- trolled only by the UGs. Scenario 3. The Global Perspective. Includes all the characteristics of Scenario 2 in most cases, and specific measures to conserve or improve biodiversity as part of the manage- ment of the forest and its products in a way to yield benefits important to the global communi- ty, although not necessarily profitable to Nepal. It may also include the use of alternative technologies or the replacement of forest products with alternatives. Thus, it represents biodi- versity-friendly resource management and not merely preservation. This scenario is not as yet represented in Nepal. Goals. The goals of the three scenarios are linked to the perspective they represent. In Scenario 1, the goal is to optimize returns to the household. In Scenario 2, the goal is to introduce management measures and technologies that are nationally optimal while retaining or improving the returns to the household. This means providing users with forest products on a sustainable basis at affordable prices by integrating the conservation of biodiversity into national land management programs. The main goal of Scenario 3 is the conservation of biodiversity that is globally significant, which may only be achieved by building on the strategies adopted for Scenario 2, particularly by integrating biodiversity conservation measures into national forest and land management programs, referred to as mainstreaming biodiversity conservation. Scenarios 2 and 3 are not defined as optimal situations, because of the constraints of data and analytical techniques, but they do represent alternative strategies that improve on current management, either in terms of improved economic return to the nation or improved sustainability of resources use or biodiversity conservation. Scenario 3 is defined as biodiversity-friendly resource management, but from the perspective of biodiversity the nationally preferred outcome may be identical to the globally preferred outcome. These scenarios are defined for each forest product in terms of the collector/user, access, products collected, the intensity of use, market or nonmarket orientation, and technol- ogy. The scenarios, therefore, reflect forest management systems and the details on each are presented in Tables 3 and 4. It is important to remember that in almost all cases the individu- als taking action in each scenario are the same. The difference is the perspective from which the analysis is carried out. -9-  Table 3. Scenarios for Use of Products that Are Primarily Inputs to Agriculture D Product Characteristic Scenario I Scenario 2 Scenario 3 Products that are primarily inputs to agriculture Grasses -Terai Collector/User Individual Individual/community Individual/community/none Access De facto open Regulated for all products Idem Regulated for thatching Intensity of Use Local overexploitation Based on PA and BZ Idem management plans Market/Nonmarket Market for paper making, Market for paper making Idem nonmarket for others Nonmarket for others Collection techniques Traditional. Controlled harvesting of grass Idem Management practices Controlled harvesting of thatch. Fodder banks Biodiversity habitat extension Illegal grazing Stall feeding in buffer zone BZ management plans Wildlife corridors Fuelwood and Fodder Collector/User Individual Community (FUGs) Idem Access De facto open Regulated (FUGs) Idem Intensity of use Selective exploitation Based on OPs Idem Market/Nonmarket Mainly nonmarket Idem Idem Technology Resource damaging Stall feeding Stall feeding, fodder banks Rotational grazing District reserves and corridors Wildlife management and species reintroduction in community forests  Table 4. Scenarios for Use of Products that Are Primarily Marketed Product Characteristic Scenario I Scenario 2 Scenario 3 , Products that are primarily marketed Timber Collector/User Individual Individual/HMGN/FUGs Idem Access de facto open Regulated in private, CF, Idem or national forests Intensity of use Underexploitation Sustainable harvesting Idem Local over-exploitation Market/Nonmarket Market Market Market Technology Inappropriate. Based on management plans Idem Uncontrolled grazing. including protection of sensitive Multistorey and multispecies areas blocks Wildlife corridors Charcoal Collector/User Poor and landless caste Poor and landless caste Idem Access De facto open access Regulated - Individual or FUG Idem Intensity of use Localized overexploitation Sustainable harvest Idem Market/Nonmarket Market Market Market Technology Rudimentary earth mound Improved kilns Improved kilns kilns Selective wood collection and use and/or briquettes. of lops and tops Bamboo, Rattan Collector/user Individual Individual/FUGs Individual/FUGs Access De facto open Regulated: private/CF Regulated: Private/CF Intensity of use Localized overexploitation of Sustainable Sustainable bamboos/widespread overexploitation of rattan leading almost to extinction Market/Nonmarket Market Market Market/nonmarket (conservation) Technology Resource damaging Sustainable Idem. Reintroduction of Plantation & enrichment threatened species. planting of high-value species Expansion of bamboo/ rattan habitats for endangered species.  Table 4. Scenarios for Use of Products that Are Primarily Marketed (Cont.) Product Characteristic Scenario I Scenario 2 Scenario 3 Medicinal Plants Collector/User Individual Individual/FUGs Idem ( Access De facto open access Regulated FUGs Idem 0 Intensity of use Widespread overexploitation Sustainable harvest Idem Market/Nonmarket Market Market Market Technology Inappropriate harvest Improved harvest/transport/storage Idem /transport/storage Cultivation income-generating species Species reintroduction. Recognition of intellectual property rights Wildlife Products Collector/User Individual: poachers Poachers in parks with no touristic OPTION 1: None value (high hills) OPTION 2: Individual/ None elsewhere community Access De facto open - illegal de facto open in high hills, none in OPTION 1: No access protected parks from the terai OPTION 2: Regulated Intensity of use Localized overexploitation Illegal localized collection in high OPTION 1: No use hill parks OPTION 2: Sustainable No use in terai parks. harvest Market/Nonmarket Market Market for high hill products OPTION l: No market OPTION 2: Market Technology Poaching, resource damaging Antipoaching units OPTION l: Idem Trade route controls OPTION 2: Idem Awareness campaigns in terai Captive breeding of musk deer  Analytical Framework B. Implications for Biodiversitv and Agricultural Production The implications of the three scenarios for biodiversity and agricultural production are examined below. The discussion is largely qualitative, as data are not available for quantitative analysis. The assessment of Scenario 1 is based on observations of the present situation, while information from a limited number of areas provide evidence for Scenario 2. The discussion of Scenario 3 is based mainly on estimates and expert opinion. Biodiversity An assessment of the impact on biodiversity of the use of the seven forest products is presented in the tables in the working papers for each of the three scenarios. Some common impacts can be identified and these are summarized below: Scenario 1. The impact of Scenario 1 on biodiversity is mainly negative and can occur at a local or regional scale and may be of local or global significance. Impacts at a regional scale with global significance include, for example, the poaching of endangered wildlife species with associated losses in the gene pool, or the extinction of indigenous rattan species and medicinal plants. Examples of local-level impacts that have a global significance include localized degradation of rhododendron forests for charcoal produc- tion, particularly around urban centers, as the central and eastern Himalayas are the cen- ter of plant diversity for rhododendron species. The genetic losses associated with interbreeding of the wild buffalo population of eastern Nepal with domestic cattle is another example. National-scale impacts with only local significance are represented by the changes in the structure, dynamics, and composition of the temperate and subtropi- cal hill forests due to unregulated access to fodder, fuelwood, and grazing. Scenario 2. The focus on improved forest management and reforestation activities involving FUGs have beneficial biodiversity results. For example, community forestry programs have contributed to a decrease in forest loss and an increase in natural regen- eration. Forest protection and reforestation have also created corridors that foster the return of wildlife species, such as leopards and sloth bears. However, management prac- tices oriented only to sustainable production may have negative implications for biodi- versity conservation in, for example, the introduction of exotic species or the induction of successional changes due to fire control. 0 Scenario 3. In this scenario management practices are designed to have an optimal impact on biodiversity. Many of the activities are focused on the direct conservation of biodiversity outside protected areas such as local reintroduction of rattan and medicinal plants in the wild, use of charcoal substitutes, and multistorey and multispecific man- agement. Nevertheless, in this scenario, the interests of local populations and biodiver- sity conservation may conflict if they are not taken into account in the planning phase. For example, wildlife returning to newly created habitats may severely damage crops. -13-  Analytical Framework Agricultural Production Systems The tables in the working papers present the impact of the use of the seven forest prod- ucts on the sustainability of agricultural production. Obviously, the impact of using those prod- ucts that directly support agriculture, such as fuelwood and fodder, is much greater than for those products which are collected for income and are unrelated to the production system. General observations are summarized below: Scenario I Products that are primarily inputs to agriculture. Degrading forest resources and increasing difficulty in obtaining fuelwood and fodder have negative impacts on the farming system through reduced availability of biomass for compost, and use of manure for fuel rather than organic fertilizer results in declining soil fertility. Loss of forest cover may increase erosion hazard. Indirect effects include reduced availability of household labor for on-farmn work and declining livestock productivity. These impacts affect both the hills and the terai. Products that are primarily marketed. The use of these products has less impact on the sustainability of agricultural production systems since they do not provide direct inputs. However, declining resources and increased difficulties of collection may have indirect effects through reducing on-farm labor availability or simply reducing household incomes and the ability to purchase necessary agricultural inputs. i Scenario 2. Improved management resulting in a greater availability of forest products, particularly fuel and fodder, and the reduction in the labor required for their collection, has immediate positive impacts on agricultural production. Improvements in rural income may also result from increased availability of income-generating products such as medicinal plants. These gains may be offset by the constraints on access to protected areas, buffer zones, or biodiversity corridors, affecting the availability of fuelwood, fod- der, and grazing. In addition, extended buffer zones and antipoaching controls may result in greater crop damage and livestock loss due to wildlife. * Scenario 3. The introduction of further biodiversity-friendly management practices may exacerbate the adverse impacts noted in Scenario 2. Alternative technologies may also displace traditional agricultural support services, for example, briquette manufacture in place of charcoal may displace traditional blacksmiths who produce agricultural tools. Environmental Sustainability The adverse impacts on biodiversity of Scenario 1, which commonly represent the pre- sent situation, have been summarized above. There remains the question of whether the contin- ued use of forest products in the present manner is sustainable or not. There is also the wider question of the impact this resource use has on the sustainability of Nepal's land resources. -14-  Analytical Framework For some of the forest products the answer is clear cut. Overharvesting of rattans has already meant that rattan, even for important religious ceremonies, is no longer available with- in Nepal. Selective harvesting of rhododendron for the production of charcoal is changing the structure of the forests. The effects of poaching of wildlife are well documented throughout the world and have very significant impacts on the survival of certain species. For Nepal, the International Union for the Conservation of Nature's (IUCN) Red List of Threatened Animals of the World lists 11 mammals, 5 birds, and 2 reptiles as endangered species and 22 mammals, 22 birds, and 3 reptiles as vulnerable. Increasing amounts of time spent by communities in col- lecting medicinal plants reflect the overcollection and elimination of valuable species in certain areas. The conclusion must be that continued open access and uncontrolled harvesting of these species is not sustainable. -15-  2 Financial and Economic Analysis of Alternatives A. Analytical Methods The economic and financial implications (Knowler and others) of forest use under the three scenarios were examined based on a general economic model, presented in Annex 3. The general model was used to prepare models for each of the products, recognizing that the mod- els are representative of only a few of the products used by rural people in Nepal, and the fact that the models may need modification to account for regional variations. A key dimension of the analysis is the accounting stance used, that is, the perspective from which the analysis is done. The different assumptions behind each scenario are summarized in Table 5. Financial analysis reflects the prices and constraints faced by the individual, the driving force for present management practices, represented by Scenario 1, in which individuals, as part of a household, make decisions based on the real opportunity cost of their actions. They largely ignore exter- nalities, that is the impact of their actions that occur elsewhere, such as downstream erosion, or the impact on biodiversity. A broader economic analysis will correct for price distortions that may be introduced by government policies, subsidies, or taxes and will include the costs and benefits associated with externalities. This economic analysis is the appropriate accounting stance for Scenario 2, that is, the national perspective. In Scenario 3, economic analysis includes global externalities, or actions by Nepal that do not have any direct benefits for the nation, cre- ating little incentive to take these impacts into account in managing national resources, although they may be important from a global community perspective. It is recognized that the analysis has some limitations, since there are two generic issues that are not addressed by this form of product-specific analysis. The first issue is the problem of displaced effort, that is, what will individuals affected by a change from Scenario 1 to 2 or 3 do with their time and energy? For example, if an individual reduces the collection of forest products to make charcoal, will they increase their efforts to collect firewood or medicinal plants for sale? Displaced efforts, and the need to earn a living may well mean that stopping one unsustainable process may result in increased pressure elsewhere in the system on another resource, leading to unforeseen negative impacts. This distinction for the individual or house- hold is similar to the difference between partial-equilibrium versus general-equilibrium analy- sis of macroeconomic conditions and changes. The economic and financial results presented here for the various forest products are very much the result of a "partial-equilibrium" analysis. The social, institutional, and legal analyses add part of the broader "general-equilibrium" type results. Linked to the problem of displaced effort is the second limitation of the analysis: the lack of a comprehensive systems perspective, analogous to a broader social, general-equilibrium -16-  Financial and Economic Analysis of Alternatives Table 5. Accounting Stance and Analysis for the Three Scenarios Accounting Stance Scenario Perspective Values/Prices Used Analysis Environmental Externalities I Individual Local Financial/economic Not included 2 National National Economic National included 3 Global Global Economic Global included analysis. Any change has to be examined with respect to how changes in patterns of resource use will affect the overall rural economy, for example, via changes in relative prices of prod- ucts, labor, or capital. Any changes may also have important effects on the sustainability of other parts of the agricultural production system and the underlying ecosystem. Despite these limitations, the analysis provides important insights into the use of forest products in Nepal. B. Results Results of Financial Analysis Financial analysis represents the incentives for the individual contributing to household income, and the results show some interesting, if perhaps predictable results. The results of the financial analysis of the use of the seven forest products under each of the three scenarios are summarized in Table 6, based on representative models presented in the working papers. Data constraints meant that the analysis could not be completed for all products in all scenarios. Not surprisingly, most models in Scenario 1 demonstrate that the net financial returns to labor for these activities are greater than the opportunity cost of labor (Rs. 25 per day). However, there is a clear division in returns to labor amongst the seven products. Organized poachers of tim- ber, wildlife, and a few collectors of medicinal plants are able to earn huge sums, by Nepali standards, as the reward for their illegal activities. Meanwhile, those activities primarily under- taken by women, for example, illegal fuelwood collection and some medicinal plant collection, and individuals from socioeconomic groups with few alternatives, for example, charcoal pro- ducers, reap relatively low returns for their effort, usually below the farm wage (Rs. 50 per day) but above the assumed opportunity cost of labor. Thus, it cannot be assumed that unsustainable forest use is uniformly highly profitable. In addition, increasing scarcity of resources will increase the labor requirement for their collection, reducing the incentives for exploitation. In Scenario 2, the same pattern appears, but returns to labor can be significantly higher than the opportunity cost of labor, even for fuelwood collection. For products that are primari- ly marketed, the returns remain high, with the exception of wildlife poaching, which is no longer possible due to control. Managed harvests of timber in the terai under Scenario 2 pro- vides large financial returns to the government. Data constraints have limited the analysis for Scenario 3, but it is likely that the addition of biodiversity-friendly management measures will -17-  Financial and Economic Analysis of Alternatives Table 6. Components of Financial Analysis of Representative Models of Selected Forest Products Scenario I Scenario 2 Scenario 3 Terai Buffer Zone Grasses: flanalysis incompletea Hlanalysis incomplete Hl analysis incomplete Fuelwood and Fodder: rHfuelwood collection from forests Ulcommunity forestry Hl analysis incomplete Hnet return to labor of Rs. 25 per day Hlnet return to labor of Rs. 35 per day Hl analysis incomplete Terai Timber: H protection/illegal forest use Hlmanagement for timber H management for H net financial return to government flnet financial return to government multiple use of Rs. 90 per ha of Rs. 5,240 per ha H net financial return to rlnet return to labor of Rs. 38 per government of day for fuelwood and Rs. 360 per Rs. 3,970 per ha day for timber Charcoal: HItraditional earth mound technology Hanalysis incomplete IH analysis incomplete Hlnet return to labor of Rs. 22 to 45 per day Bamboo: flnet return to labor of about Hbamboo plantation Hi negative net return to Rs. 50 to Rs. 100 per day Hlnet return to labor of Rs. 270 per labor day for mature plantation Medicinal Plants: Hlwild collection of Chiraito rIChiraito cultivation 11 analysis incomplete Hlnet return to labor of Rs. 50 to Hjnet return to labor of Rs. 186 per day Rs. 200 per day Wildlife Poaching: H poaching of rhino and musk deer Hlenhanced antipoaching, rhino only H musk deer ranching rHnet return to labor of Rs. 380 per rHnegative net return to labor H negative net return day for rhino and Rs. 225 per day to labor for musk deer a An analysis was attempted but remains incomplete because of a lack of reliable data. reduce the financial incentives compared to those realized in Scenario 2. This is shown by the data for timber in the terai, though even under Scenario 3, the returns remain very much high- er than at present. Results of Economic Analysis Economic analysis of the use of the seven forest products under each of the three sce- narios was also undertaken; the results are summarized in Table 7. Representative models are also presented in the working papers and, as with the financial analysis, data constraints meant that the analysis could not be completed for all products in all scenarios. -18-  Financial and Economic Analysis of Alternatives Table 7. Components of Economic Analysis of Representative Models of Selected Forest Products Scenario I Scenario 2 Scenario 3 Terai Buffer Zone Grasses: flillegal grazing/cutting Hl sissoo-grass plantation H joint wildlife/livestock benefits Hnet loss of Rs. 40/yr. rl net benefit of Rs. 690/yr. H net benefit of Rs. I 60/yr. (per household) (per household) (per household) H incremental gain of Rs. 730/yr. H incremental gain of Rs. 200/yr. Fuelwood and Fodder: llfuelwood collection from Hl community forestry rl analysis incomplete forests Hl net benefit of Rs. 190/yr. rHnet loss of Rs. 470/yr. (per household) (per household) H incremental gain of Rs. 660/yr. Terai Timber: Hlprotection/illegal forest use Hl management for timber HI management for multiple use Hlnet benefit of Rs. 3,000/yr. H net benefit of Rs. 5,390/yr. Hl net benefit of Rs. 3,530/yr. (per ha) (per ha) (per ha) H1 incremental gain of Rs. 2,390/yr. rl incremental gain of Rs. 530/yr. Charcoal/industrial Fuelwood: Htraditional earth mound Hl beehive brick kiln H briquette production from technology Hl net loss of Rs. 3,500/yr. (per t) residues H net loss of Rs. 16,970/yr. (per t) Hl incremental gain of Rs. 13,470/yr. H net benefit of Rs. 680/yr. (per t) rl incremental gain of Rs. 4,180/yr. Bamboo/Rattan: Hinsufficient data to analyze n bamboo plantation Hl in situ regeneration of rattan H net benefit of Rs. 9,500/yr. (per ha) H net loss of Rs. 7,100/yr. (per ha) H not comparable with Scenario 2 Medicinal Plants: H incomplete analysis H Chiraito cultivation Hl analysis incomplete Hl net benefit of Rs. 30,700/yr (per ha) or Rs. 41 /yr. per kg. Wildlife Poaching: Hlpoaching of rhino and musk Hl enhanced antipoaching, rhino only H musk deer ranching deer Hl net present value benefit of H net loss of Rs. 480,000/yr. rInet present value benefit of Rs. 85,000 (per animal) (per musk deer ranch) Rs. 9,000 (per animal) H| incremental present value gain HI not comparable with Scenario 2 of Rs. 76,000 The data show that the net economic losses to Nepal in Scenario 1 are significant, when quantified values for the effects of depletion and some off-site costs are included. This contrasts with the positive financial returns to the individual or household of the unsustainable harvest- ing patterns included in Scenario 1 and presented in the previous section. Not surprisingly, adding the costs of environmental externalities and resource depletion often worsen the Scenario 1 estimates of economic (not financial) net returns. In some cases this change does not -19-  Financial and Economic Analysis of Alternatives merely reduce the estimated level of profits but actually shows a loss. For example, for fuel- wood and fodder, the economic analysis of Scenario 1, shows the net economic benefits to be negative. The data show that management under Scenario 2 can pay dividends for Nepal, as almost every product considered shows positive incremental benefits from adopting such prac- tices compared to the results from Scenario 1. This is not always true for medicinal plants and wildlife poaching in which the use of many products is severely restricted in Scenario 2. In the case of charcoal, the gains in net economic benefits over the traditional technology depend on a change in technology and location of activity, and this results in a net loss in Scenario 2, when viewed in isolation. Ironically, Scenario 3 for charcoal appears to generate higher net econom- ic benefits than Scenario 2,* though supplies of raw material such as rice straw may be limited because of other demands for their use. The economic analyses also demonstrate that most biodiversity-friendly management practices in Scenario 3 can be expected to have economic costs for Nepal when compared to Scenario 2. For example, there are very high economic losses associated with wildlife ranching (Scenario 3), since the proposed system has substantial investment costs for specialized fenc- ing. Nor is there any incentive to protect wildlife in situ when this generates few national ben- efits. Understandably, Nepal has chosen to invest its limited funds available for wildlife protection and management in the terai, where the benefit is greatest. Finally, Scenario 3 always shows an incremental gain as compared to Scenario 1, demonstrating that the promotion of sus- tainable development is compatible with global biodiversity conservation for most of the forest products analyzed. In summary, the data and analyses show that Scenario 1, representing uncontrolled use of representative forest products, would not be sustainable in either environmental or econom- ic terms. A number of representative management or technical interventions have been identi- fied that would enable the change to be made to Scenario 2, which would be environmentally more sustainable and could have significant benefits for Nepal. Similarly, further management and technical interventions would enable biodiversity-friendly measures to be introduced in Scenario 3, but these would impose economic costs on Nepal. * Given the limited amount of cost data available to the mission, additional investigation is warranted in this case. -20-  3 Economic, Social, Institutional, and Legal Issues A. Economic and Policy Issues The divergence between existing behavior of household members and desirable behav- ior from a public or national perspective has been demonstrated by the financial and economic analyses presented in Chapter 2. They result from economic policy and marketing issues, which are often closely interrelated, as policy decisions may directly affect the marketing. Policy issues are first discussed below, followed by a discussion of market issues in relation to the seven forest products. Economic Policy Issues Price Controls. Government policy is to control the price of timber, to ensure that tim- ber products are available at a fair price throughout Nepal, and to prevent exploitation. Until recently, the policy was implemented through the mandate given to the District Development Committees (DDCs), District Forest Products Supplies Committees (DFPSCs), and the Timber Corporation of Nepal (TCN) to harvest and market timber from all government lands. In prac- tice, the policy has led to severe price distortions, as the three agencies have often set the sale price at less than the cost of production merely to clear a stockpile of timber collected in accor- dance with district management plans, unrelated to the market demand. Implementation of the policy has been unsatisfactory, and the government is reviewing timber and fuelwood market- ing systems with a view to improving their efficiency. Licensing. Licenses are required for the collection or harvest and movement of many forest products. The trade in timber, fuelwood, medicinal plants, and a number of other non- timber forest products, such as resin, is controlled by the Forest Department through the issue of licenses. The objective is to prevent the overexploitation of resources, control illegal felling or collection, and raise revenue through collection of royalties. In practice, the limited capaci- ty of the Forest Department to monitor the trade in forest products means that the licensing sys- tem is often bypassed and may encourage an illegal and totally uncontrolled trade. Villagers experience hardship in having to travel long distances to obtain permits and there is also a neg- ative effect on the development of private plantations, since growers have to seek permits to harvest, fell, and transport trees grown on their own lands. Royalties. For many forest products the royalty structure is only weakly related to their real market value; this is especially true for some timber species and medicinal plants. The most extreme example is that of charcoal, where the royalties paid on charcoal are almost 15 times less than the royalties paid on the collection of an equivalent amount of fuelwood. For many products royalties are not collected, and this is compounded by a lack of skilled staff who are able to correctly identify products, particularly medicinal plants. Private growers may also be -21-  Economic, Social, Institutional, and Legal Issues discouraged by the fact that their products are subject to royalty payments because there is no system to certify their origin on private lands. In addition, since royalties are usually paid by the middlemen and traders, the collection of royalties is often far from the production area, so there is little connection to sustainable rates of harvest, while illegal avoidance of royalty payments is easier. Export and Import Controls. Government policy prohibits the export of timber in log form, and the policy is enforced through controls on movement of timber. There are two main objectives. The first is to prevent the wholesale destruction of Nepal's forests, particularly in the terai, through logging and export to the vast market in India. The second is to promote the estab- lishment of wood-based industries in Nepal. The effect has been to reduce the incentives for pri- vate sector involvement in forest management, and as the Forest Department does not have the capacity to manage the available forest resources effectively, there has been a considerable loss of revenue to the nation. In addition, lack of management means that many sal forests are over- mature, regeneration is limited, and the value of the forest is declining. Differences in export and import controls with India also affect trade in some other forest products. Skins and products from endangered species cannot be exported from India and import and sale are forbidden under the CITES convention, to which Nepal is a signato- ry. However, the lack of a comprehensive list of prohibited products means that the law is not effectively enforced. Similarly, national supplies of rattan are now very limited, so users have turned to rattan from India. This can be legally imported into Nepal, but export from India is illegal. Energy. Fuelwood consumption, estimated to be about 4.3 million tons of oil equivalent (toe), provides 68 percent of Nepal's energy supplies and makes enormous demands on forest resources, possibly in excess of the sustainable annual yield. Present Government policies that subsidize fuelwood prices serve only to increase these demands. Development of other renew- able energy sources such as micro and mini hydropower schemes, biogas, and solar and wind power have a role in meeting rural energy needs, but policies on supply and pricing need to be coordinated if they are to have an impact on the demand for fuelwood, and hence on the use of forest resources. The government has taken steps to improve greater efficiency and fuel substi- tution in the industrial sector through the National Industrial Energy Management Plan, and a similar initiative is required to encourage the use of alternative energy sources in the rural sec- tor and reduce fuelwood demand. The Role of the Private Sector. Although this might be considered an institutional issue, the lack of a clear policy on the role of the private sector in forest management has significant economic implications. Government has preempted the management role and there have been few attempts to promote a private sector forest management culture. A formal contract rela- tionship to enable private companies to manage state forest land in the terai has not been sys- tematically developed. Consequently, potential investors are not confident of their rights within -22-  Economic, Social, Institutional, and Legal Issues the present investment climate, so they are unwilling to make long-term investments in private forestry. Incentives. Individuals use resources to optimize financial returns, regardless of the costs to society. Some incentives are needed to persuade them to adopt more biodiversity- friendly practices, which may have costs in terms of additional labor or restricted access, but that have few direct benefits for the household. Subsidies frequently distort markets, so there is an important policy decision to be made as to what form incentives should take and how they should be made available. Markets Market failure occurs when a market price does not fully reflect the benefits and costs associated with some action. For example, the price of fuelwood collected in an unsustainable manner in the mid hills does not include any cost of downstream impacts from soil erosion and sedimentation caused by the improper collection methods, or the loss of biodiversity from habi- tat alteration. Since the observed market price (a financial price) does not reflect all the costs and benefits associated with an activity, an inappropriate decision is made concerning the level of production. However, when markets do not exist, as in the case of some subsistence activi- ties such as fuelwood and fodder, price signals cannot be used to produce improved resource management Common Market Issues Affecting Products. In Scenario 1, markets for the seven prod- ucts are significantly affected by the de facto open access regime. The market incentives are to exploit available resources for whatever can be sold in the short-term and are not oriented towards ownership. This is particularly true of illegal activities such as wildlife poaching. Market controls, involving export bans, either between districts or internationally; price fix- ing; and control of sales from community forest all distort markets for some products, partic- ularly timber and fuelwood. These are noted in Table 8. Another common problem affecting the marketing of the products is lack of market information. Collectors are unaware of the prices of the products in other parts of Nepal and may thus be exploited by buyers offering prices below market price. In Scenario 2, successful marketing of many products will depend on some form of cooperative mechanisms, which are not well developed at present. In Scenario 3, incentives to growers or collectors to adopt biodiversity-friendly technologies may themselves distort markets. Market Issues Affecting Individual Forest Products. Market issues related to the vari- ous forest products are presented in Table 8. B. Social Dimensions Although economic issues are a crucial dimension in the ways forests are managed, social sustainability and equity in benefit distribution are preconditions of environmental -23-  Economic, Social, Institutional, and Legal Issues Table 8. Scenario-Specific Marketing Issues for the Seven Forest Products Forest Product Scenario I Scenario 2 Scenario 3 Products that are primarily inputs to agriculture Grasses - Terai Access to PAs is restricted, Differential subsidies to Stricter controls on access but grass collected at encourage establishment of may increase market prices subsidized prices. fodder banks may affect price of grasses, with impact on of grass collected from BZ. livestock sector. Fuelwood and Controls on movement of FUG rules control sales and Idem Scenario 2. Fodder firewood between districts movement controls remain. distorts prices in high- Subsidies in community forestry demand areas. generate price distortions. Products that are primarily marketed Timber Export ban, movement Idem Scenario 1. Biodiversity conservation controls within Nepal, measures may increase price fixing, monopoly management and harvesting role of TCN, and inter- costs. national differentials all distort prices. Charcoal Clandestine marketing Market arrangements for Idem Scenario 2. arrangements and evasion charcoal legitimately produced of royalties distort prices. from improved kilns yet to be developed. Differential royalties on wood harvested for charcoal and fuelwood distorts prices. Bamboo, rattan Imports of rattan from Erratic demand due to lack Idem. No incentives for India and evasion of royal- of domestic industrial use cultivation of endangered ties reduce incentives for provides little incentive for species. cultivation. Highly variable cultivation of bamboos. prices. Medicinal Plants Licensing of collection No cooperative structures for Market for endangered creates monopsony. improved storage, processing, species uncertain, so little Royalty evasion and cultural and marketing. incentive for their reintro- and ethnic factors lead to duction or cultivation. distortions. No quality premium and risk of adult- eration reduces prices. Wildlife Products Illegal trade, control No market. No market. imposes enormous costs on nation. -24-  Economic, Social, Institutional, and Legal Issues sustainability. Social issues, such as access, socioeconomic status, caste, ethnicity, labor, and cultural values affect all the products and contribute to the divergence between private and public costs and benefits. These common factors are discussed first. Access. Access cuts across other social analysis parameters, since it concerns entitle- ments and claims. Indigenous forest management systems have existed in Nepal for many years, particularly in remote areas. Scenario 1 reflects the breakdown of these systems following the nationalization of forests in the 1950s, resulting in unregulated, de facto open access to all the forest products examined. Increasing understanding of the traditional management systems and a recognition by government that communities can be good caretakers of forest, because of their dependence on forest products, gave rise to the concept of community forestry. Designated forests are handed over to Forest User Groups (FUGs) for protection and management, so that access is regulated by the community. Such community management of forest resources is a fundamental characteristic of Scenarios 2 and 3. Although over 5,000 FUGs have been formed, the handover of forests to communities is constrained by the limited capacity of the Forest Department. Consequently, Nepal's forests still remain, for the most part, under an open access regime. Future expansion of the community forest program may displace collectors and increase pressure on national forests. Socioeconomic Status, Caste, and Ethnic Group. One of the most important impacts of these factors is their influence on equity. In Scenario 1, these factors may affect access to and the equitable distribution of forest products. This encourages families to overexploit the resources available to them, often illegally. Even the introduction of community management in Scenarios 2 and 3 may not resolve these inequities as the FUG committee may be constitut- ed by members of the well-to-do elite, so that the needs of the more vulnerable, poor, lower castes, or women are not given importance. Heterogeneity of community populations also affects resource use, as the lack of social capital means common property resource management is more difficult, with a lack of cooper- ation between groups and sometimes competition for resources. A clear example is the prestige associated with large numbers of cattle amongst the Tharu, which puts excessive pressure on grazing resources. Although many communities in the hills are heterogeneous, the problems are most severe in the terai, as settlement and in-migration is relatively recent. Labor. Another social issue that cuts across considerations of gender, children, and ethnic group is that of labor. In the collection of products that support agriculture, such as grasses, fuelwood, and fodder, women and children play a predominant role, almost regard- less of caste or ethnic group. Given their many other tasks in the subsistence economy of rural Nepal, women will try to minimize the labor used to collect fuelwood and fodder, which in Scenario 1 leads to overexploitation of nearby forest resources, contributing to the divergence between private and public costs. Products that generate income, particularly charcoal mak- ing, the poaching of wildlife, and the collection of certain medicinal plants at high altitudes -25-  Economic, Social, Institutional, and Legal Issues are the preserve of men, but their involvement in these activities may have indirect effects as their absence increases the workload of women. In Scenarios 2 and 3, the greater availabili- ty of products from community-managed forests should reduce labor requirements, directly benefiting women. However, male out-migration in search of wage employment with conse- quent reduction in the availability of farm labor is likely to continue. In Scenario 3, the intro- duction of biodiversity-friendly measures may actually increase labor requirements if, for example, access to wildlife corridors is restricted. Culture. Many aspects of Nepali culture reflect the close integration of spiritual values and beliefs with the natural environment. Rivers, lakes, mountain peaks, and forest areas are considered as sacred abodes of Hindu gods and goddesses. There is a deep-rooted belief that spirits reside in the body of certain trees, plants, and animals, while certain species are protect- ed as the incarnation or favorites of Hindu and Buddhist deities. Areas of forest or lakes are tra- ditionally preserved close to places of worship and sites of religious significance, and killing of animals around such places prohibited. Such cultural values are favorable for conservation of biodiversity. Cultural values also underpin many of the indigenous forest management practices which have existed in Nepal for many years, particularly in remote areas. Communities have regulated access to and harvest of a wide range of forest products, often based on the cultural value a group attaches to particular products. For example, indigenous knowledge of medicinal plants is held by specific groups who have traditional rights to harvest, while in some areas wild mushrooms are collected only by one group, even though others have access to the same area of forest. Transhumant livestock owners have developed a management system that makes effective use of seasonal availability of fodder in different ecological zones, often paralleled by a symbiotic relationship with settled cultivators whose lands gain fertility from animal manure. However, not all cultural values have positive effects on the environment; for example, prestige associated with ownership of large herds of livestock may result in overgrazing and degradation of forests and grasslands. In addition, an increasing population making more demands on finite resources, increased market opportunities, and exposure to outside cultures are eroding both religious sentiment and cultural values, even in rural areas of Nepal, resulting in a gradual breakdown of traditional management systems. Social Issues Affecting Specific Forest Products. The most important social issues affecting the use or collection of specific products are summarized in Table 9. More details are given in the tables in the working papers. Not surprisingly, it can be seen that social issues are of particular relevance to the management of products that support agriculture as the introduction of more sustainable management practices, involving regulation of access, or changes in species composition impact directly on the livelihoods of rural people. For instance, such changes may result in individual resentment of community enforced controls, increased labor requirements for fodder collection, or short-term reductions in agricultural production. Particular social problems will occur if improved forest management does not meet the needs of current users. For example, traditional charcoal makers are unlikely to be -26-  Table 9. Social Issues Affecting the Seven Forest Products in the Three Scenarios m .. Forest Product Scenario I Scenario 2 Scenario 3 2 Products that are primarily inputs to agriculture Grasses -Terai Uncertainty of tenure and compen- Lack of representative CBOs to collabo- Additional restrictions on access to sation in BZ and seasonal over- rate in PA and BZ management, with grasslands. Increased conflict with PA exploitation in PAs. Lack of social possible inequitable distribution of benefits authorities due to increased risks of crop capital due to heterogeneity of from fodder banks and ecotourism. damage by wildlife. population. Conflicts with PA Conflicts with PA authorities due to crop C authorities due to crop damage damage by wildlife. by wildlife. Fuelwood and Fodder Unregulated access. Operational plan priorities do not reflect Restricted access to biodiversity con- the needs of the disadvantaged, or distribu- servation areas not endorsed by commu- tion of benefits is inequitable, sometimes nities. due to unrepresentative FUG committees. Products that are primarily marketed Timber Traditional farm-forest interface Equity concerns significant, as timber has Communities may be opposed to reduction based on conditions in hills; not high value and FUGs have little experience in income from management of forests to adapted well to terai. Lack of of managing forests for commercial ex- provide a variety of habitats. management plans and illegal traction of timber. Operational plan related Z logging restrict benefits to local to area that can be managed by FUG communities, is essential. Charcoal Unregulated access. FUG may not provide for needs of Briquette technology may displace charcoal producers, a minority group, traditional charcoal producers. Use of from community forests. Poor charcoal agricultural residue for briquette producers may not be able to finance productions may reduce availability for improved kilns. fuel, compost, and on-farm use. Bamboo, rattan Unregulated access. High labor requirements for traditional No incentives for introduction of planting of bamboos. Improved technology threatened species. Expansion of bamboo for planting bamboo not widely known. habitats may increase wildlife crop damage, particularly in the terai. Medicinal Plants Collectors dependent on medicinal Finance and knowledge for local value- Restricted access to areas where species plant collection for household added processing may not be available. with high biodiversity significance are being income, leading to possible selective Individual intellectual property rights may reintroduced may not be acceptable to overexploitation. Conflicting use/ be subsumed in FUG-managed area. communities. tenure for grazing and medicinal plant collection. Wildlife Products Illegal poaching has little social Possible conflicts over access between Idem. significance for local communities. local communities and antipoaching units and the army. Increased crop damage by wildlife.  Economic, Social, Institutional, and Legal Issues suited to the management of industrial briquette plants, so proposed technology changes must minimize social costs. C. Institutional Issues The Ministry of Forests and Soil Conservation (MFSC) is the government agency responsible for management of forest resources. MFSC's mandate is the formulation and implementation of forest policies, enforcement of forest laws, and the development of forest resources. In addition, there are a number of semiautonomous parastatal organizations with important roles in the forest sector. Private sector entrepreneurs are involved in marketing and to a more limited extent in production, while community organizations are playing an increas- ingly important role in forest management. Several international nongovernment organizations (NGOs) and a large number of local NGOs are also involved in the forest sector. Institutional constraints affect many of these organizations, contributing to the divergence between private and public costs and affect the changes from Scenario 1 to Scenario 2 or 3. Those affecting MFSC are most significant, as it is the largest organization in the sector. Certain of the con- straints affect the collection and use of all the forest products examined, and these are dis- cussed first. Staffing. MFSC has just over 10,000 staff, of whom 8,000 are technical. Senior staff are dedicated and well trained, and all Range Officers have technical forestry qualifications. However, there is little manpower planning within MFSC, so that staff numbers and skills are not systematically linked to functional responsibilities or job descriptions, and there is an imbalance between technical staff and the large numbers of administrative staff. The lack of a human resource development plan means that there are no incentives for specialization, rewards are not linked to performance, and there are limited career prospects for middle-level staff. Training is mainly donor-funded and focused on community forestry because this is the donors' priority. There is little assessment of other training needs and few opportunities. The lack of a personnel information system limits the ability to improve the human resource sit- uation. These factors do not facilitate the development of a cadre of employees with the nec- essary skills and commitment to change that is required to move from Scenario I to Scenario 2 or 3. Government rules restricting payment of field allowances to 90 days per year have the most direct impact on the expansion of community forestry, as staff are unable to interact with communities. Management Process. Decision making is centralized with little systematic coordina- tion between the various departments of MFSC. Implementation responsibilities lie with the District Forest Officer and his staff, who often do not receive adequate information or guide- lines to make appropriate technical judgments. Implementation is poorly monitored due to inad- equate management information flows. Frequent staff transfers at all levels lead to a lack of continuity and accountability. Biodiversity conservation is focused in protected areas and few district FD staff have adequate knowledge to mainstream biodiversity conservation into forest management. -28-  Table 10. Institutional Issues Affecting the Seven Products in the Three Scenarios Forest Product Scenario I Scenario 2 Scenario 3 Products that are primarily inputs to agriculture Grasses -Terai Lack of systematic outreach to Limited institutional capacity to design Increased possibility of crop damage o involve local communities in PA and implement BZ strategies. requires rapid institutional mechanisms and BZ management and regulate Little institutional support for develop- to deal with compensation claims. grass harvest. ment of alternative fodder supplies. Fuelwood and Fodder FD unable to regulate exploitation Inadequate institutional capacity to sup- Poor coordination between FD and of national forest resources. port a nationwide community forestry DNPWC for biodiversity conservation. Z program.Time spent in the field limited Inadequate partnerships between by daily allowance rules. MFSC and other stakeholders such as - specialist NGOs to promote biodiv- ersity conservation outside PAs. to_ Products that are primarily marketed r Timber Inadequate budget for implementa- Arrangements for FUG management of As for fuelwood and fodder. tion of forest management plans. high-value forests not finalized. FD unable to control illegal felling Role of FD to be defined in relation of timber. to private sector forest management of forests. Charcoal No FD strategy for regulation of No trained staff to promote and demon- No detailed feasibility study of charcoal production. strate improved kiln technology. Lack of briquette technologies. Lack of trained targeted credit or financing mechanisms staff. Need to involve private sector. to facilitate adoption of improved kilns. Bamboo, rattan No FD strategy to promote FUG operational plans do not promote Few incentives for FUGs to manage management and planting of bamboo and rattan plantation. bamboo and rattan plantations as bamboo and rattan areas. habitat for endangered species such as the red panda. Medicinal Plants Institutional responsibilities for FD staff lack expertise in NTFP prod- Uncertain FUG commitment to NTFP harvest, production, and uction storage and processing. programs to introduce species of marketing are dispersed. biodiversity significance that may be of low value. Wildlife Products DNPWC unable to control illegal Limited budgetary resources for Anti- No strategy for antipoaching controls poaching. poaching Units. Limited FD expertise for nationwide. Limited knowledge of wildlife management outside PAs. commercial captive breeding.  Economic, Social, Institutional, and Legal Issues Budget and Resources. The approved budget is usually about half of that planned, so resources are commonly constrained, particularly for operation and maintenance. The national expenditure on the forestry sector is declining as a proportion of the total government budget, and there is a high dependency on foreign assistance as a source of finance. These constraints have led to poor infrastructure and facilities to support field staff, directly affecting the man- agement of the forest, the development of community forestry, and, consequently, the exploita- tion of the forest resources. Forest User Groups. There are over 7,000 FUGs forning the most numerous commu- nity institutions involved in the forest sector. There are clear institutional rules for their estab- lishment and constitution and an increasing demand from communities is reflected in the large number of FUGs that have been established but not formally recognized because of the limited capacity of the Forest Department to prepare and approve operational plans. Benefits reported in a number of studies include improved fuelwood and fodder availability, income from harvest of overmature trees, and protection of water sources. The main constraints affecting the FUGs are social, as discussed in the previous section, or relate to the technical management and administrative skills of the members. Other Institutions. There are many hundreds of NGOs and other stakeholders involved in the forest sector in Nepal, but no attempt has been made in this study to review their institu- tional capacity. One main institutional issue concerns the linkages between these organizations, the FUGs, and MFSC. Many NGOs have close working relationships with FUGs and other community organizations, with forest management only part of a wide range of rural develop- ment activities. Relationships with MFSC range from cooperation to noncooperation, if not confrontation, so there is a need to build on best practice. Another important institutional issue refers to the poor collaboration between the different donors involved in the sector, with impor- tant consequences in the effectiveness of their development goals. Presently, more than 40 donors are involved in the management of the natural resources of the country, and there is a strong need to strengthen the collaboration between them to optimize the use of these sources of funds. Institutional Issues Affecting Specific Forest Products. The most important institu- tional issues affecting the use or collection of specific forest products in the three scenarios are summarized in Table 10 and presented in more detail in the tables in the working papers. Some important issues can be highlighted. In Scenarios 2 and 3, it is envisaged that access will in many cases be regulated by community organizations, but there is a limited government insti- tutional capacity to form, legally recognize, and support such organizations. In the management of timber, institutional arrangements for sustainable commercial management are yet to be developed, particularly the respective roles of government and the private sector. Bamboos and medicinal plants are not regarded as part of mainstream forestry activities, so there is little insti- tutional expertise to deal with these commodities. Finally, wildlife poaching is seen as the responsibility of wildlife wardens, even in areas outside protected areas, where they have no jurisdiction. -30-  Table 11. Legislative Issues Affecting the Seven Products in the Three Scenarios Forest Product Scenario I Scenario 2 Scenario 3 0 Products that are primarily inputs to agriculture 0 Grasses -Terai Conflicts: Tenure claims in BZ. Land Idem. 0 Measurement and Survey Act, Local Government Act, and Buffer Zone Rules. Formation of FUGs. Protected Manage- ment Rules and BZ Rules framed under Sec. 16 C of NPWCA, 1973. Fuelwood and Fodder Conflicts: Land allocation for CF DDC Lacunae: No provision for establishment Act, Forest Act, Land Act, Roads Act. Own- of wildlife corridors in CF land, except as ership and control of CF land. Forest Act, PAs. Pasture Land Nationalization Act, DDC Act. r IQ Authority: Dispute settlements. Proced- ures not defined by ForestAct. Lacunae: Community not defined and representation of committee not stipulated C in Act and Rules. Products that are primarily marketed Timber Authority: Sale of timber by indivi- Conflict: Threatened species listed in dual, DFPSC, other agencies, regu- Nepali law not in conformity with CITES lated by DDC Chairman, CDD, DFO. and vice versa. Lacunae: Overharvested species not included in list of protected species. Charcoal Conflicts: Production of charcoal. ForestAct of 1993 and Development Board Act of 1996, which allow prod- uction of charcoal and briquettes. Differential royalties for wood for charcoal and fuelwood. Authority: Not clear under any law.  Table 11. Legislative Issues Affecting the Seven Products in the Three Scenarios (Cont.) Forest Product Scenario I Scenario 2 Scenario 3 Bamboo, rattan Conflicts: Regulation. Forest Rules of 1995, Environmental Protection Act, and Industrial Enterprises Act. Lacunae: No legislation is species- specific. No provision for protection of endangered species. No regula- tions governing trade in rattan. Medicinal Plants Authority: Licensing procedures Lacunae: No provision in legislation for overcomplicated, encouraging un- different royalties on cultivated medicinal licensed use. plants and those collected from the wild, Lacunae: Medicinal plants not reducing incentives for cultivation. defined in scientific terms. Licensing legislation not supported by guide- lines for sustainable harvest. IN) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CD Wildlife Products Conflicts: CF and wildlife laws in Lacunae: No legislative provision for community forests. establishment of wildlife corridors. Authority: NPWCA of 1973, DDC Act of 1991, and Local Administra- tion Act of 1971 give authority over wildlife products to several agencies. Lacunae: No regulations prohibiting imports of endangered species. Species in NPWC Act not representative, as it focuses on large mammals.  Economic, Social, Institutional, and Legal Issues D. Legal Framework The main legislative issues affecting the seven products are due to conflicts between dif- ferent laws, conflicts of authority for the control of forest or forest product use, or legislative lacunae. The main legislative conflicts occur between the legislation drawn up specifically for the protection and management of forests and forest resources, such as the Forest Act of 1993, the Forest Rules of 1995, and other legislation, including the Local Government Act and the Land Measurement and Survey Act. The conflicts relate mainly to ownership and control of land, to rights to particular forest products, or to a lack of specificity in relation to products. There are also, however, a number of conflicts between Nepali law and international agree- ments to which Nepal is a signatory. Conflicts of authority occur where different laws give authority for use or control of forest lands or products to more than one agency, or give control to one agency that cannot exercise that authority. Common legislative lacunae include a lack of precision in regard to species, or inadequate definitions of users or user groups. The most important legislative issues are presented in Table 11 in relation to the three scenarios. -33-  4 Conclusions A. Strategies for Change Three scenarios have been examined representing alternative systems for the use and management of forest products. Notwithstanding the limited number of products examined, it has been shown that Scenario 1, representing present, largely uncontrolled use is not sustain- able in either economic or environmental terms. Scenario 2, based on the introduction of man- agement or technical interventions, would be environmentally more sustainable and have significant benefits for Nepal. Furthermore, management and technical interventions would enable biodiversity-friendly measures to be introduced in Scenario 3, but these would have eco- nomic costs for Nepal, as the benefits would be essentially benefits to global biodiversity. A number of government papers, such as the National Environmental Action Plan, the Master Plan for the Forest Sector, and the Agricultural Strategy Paper stress the importance of sustainable use of natural resources. A change from the present unsustainable use of resources is therefore already high on the national agenda. However, the change involves important strategic choices, to be made by the nation and the global community: National Strategy: Change to sustainable management practices for the benefit of the nation, that is, a change from Scenario 1 to Scenario 2 Global Strategy: Change to sustainable, biodiversity-friendly management practices for the benefit of the global community, that is, a change from Scenario 1 or 2 to Scenario 3 Economic considerations suggest that the national strategy will be the first choice for the nation, unless global resources are made available for the implementation of the global strategy. The choice for the global community is whether funds can be made available to Nepal to manage resources in a manner that provides environmental benefits of global sig- nificance. The two strategies are not mutually exclusive, since in most cases Scenario 3 builds on the management practices introduced under Scenario 2. However, a commitment to move to Scenario 3 is important, as some measures need to be planned before Scenario 2 is fully implemented. For example, Scenario 2 involves the widespread introduction of community forestry. This is also envisaged under Scenario 3, but options considered under Scenario 3 for the establishment of wildlife corridors or district reserves would be precluded if operational plans for land already transferred to the control of Forest User Groups do not make provision for such reserves. -34-  Conclusions Options for Change There are a number of options for changing from one scenario to another whose effect would be to change the incentive structure. They can be considered in five main groups: * Policy Changes introduced by government relating mainly to economic policies and markets. * Regulation of Access mainly by community-based organizations, but also by govern- ment agencies. This affects all the products examined in this study and, in the case of wildlife, involves complete control. * Improved Management through devolution of management responsibilities to the low- est appropriate level, and improved field cultural practices, which affect all products but in particular, timber, fuelwood and fodder, bamboo and rattan, and medicinal plants. The reintroduction of biodiversity-important species forms part of these improved manage- ment practices. * Improved Technology for improved processing, storage, and transport mainly affecting charcoal and medicinal plants. * Protection of Additional Areas, which is particularly relevant in Scenario 3. Changes in policy are discussed first, since these underpin both strategies. Other options for change are discussed in relation to the two strategic choices together with their specific financial and economic implications. This is followed by a discussion of social, institutional, and legal issues common to both strategies. For each of the proposed options in Scenario 2, there is direct experience of the implementation of this option in Nepal or neighboring coun- tries, or they have been tested on a pilot basis. In Scenario 3 technical assumptions are realis- tic, but there is little direct experience of implementation. Policy Changes Correcting both economic policy and market failures is important to promote more sustainable resource use. In Nepal the prices for many of the products do not include impor- tant costs imposed on other parts of society. However, it is quite difficult for governments to mandate price changes and create "economic" prices, especially because an extensive open market for the goods is already operating. Governments are able to change policies more eas- ily, which can correct some of the more important market failures. In order to facilitate the transition from Scenario I to 2 and onward to 3, a number of policies need to be reviewed. These include the following: * Removal of price controls on a number of products, but in particular on timber * Licensing of collection and trade in many forest products -35-  Conclusions * Export controls and regulation of movement of timber and fuelwood both internation- ally and within Nepal * Energy policies that subsidize fuelwood supplies, with a need to develop a strategy to improve energy efficiency and utilize alternative energy sources for domestic as well as industrial use * Definition of the role of the private sector, particularly in forest management * Incentives for individuals, families, or communities to adopt biodiversity-friendly practices Table 12. Change from Scenario 1 to 2: Options and Implications Options for Change Forest Product Scenario I to Scenario 2 Impact Benefit Products that are primarily inputs to agriculture Grasses -Terai Regulate access and grass collection, Increased grass supplies Incremental based on PA and BZ management Rs. 730/yr./hh plans endorsed by communities. Develop stall feeding, fodder banks, and grazing areas within the BZs. Fuelwood and Fodder Extend management of community Improved fuelwood and Incremental forests by representative FUG, based fodder supplies Rs. 660/yr./hh on operational plans. Develop stall feeding Products that are primarily marketed Timber Manage forests for optimal timber Increased timber Incremental harvest, based on forest management production Rs. 2390/yr./ha plans. Regulate grazing. Charcoal Include harvest of timber inputs for More efficient charcoal Incremental charcoal making in community forest production Rs. 13,470/yr./t operational plans. Introduce improved technology. Bamboo, rattan Sustainable harvesting from planted Increased bamboo Net bamboos. Enrichment planting of production Rs. 9,500/yr./ha bamboos. Medicinal Plants Increase efficiency of harvest, storage, Higher market value Net and transport. Cultivate income- Increased production Rs. 30,700/yr./ha generating species. Wildlife Products Protect wildlife against poaching in Control of poaching Incremental terai parks accessible to tourists. Rs. 76,000/animal -36-  Conclusions National Strategy. Change from Scenario 1 to Scenario 2: Options and Implications The options for changes, other than policy changes, and their likely impacts and eco- nomic consequences are summarized in Table 12. Economic Implications The results presented in Chapter 2 and summarized above demonstrate that there can be clear benefits to Nepal in moving from Scenario I to Scenario 2, which stem from the reduc- tion of externalities and the more sustainable management of selected natural resources. It is clear that the greatest impact comes from changes in the management of products that generate income. It is difficult to calculate the total quantum of these benefits because of uncertainties of areas and species affected. However, Table 13 illustrates the likely aggregate net benefits of a change from Scenario I to 2 for fuelwood, timber in the terai, and control of rhino poaching. All three examples show that the benefits are substantial, which for just these three products amount to almost 14 percent of the 1997 forest sector GDP of Rs. 8.2 billion. Financial Incentives. The figures presented in Table 12 and discussed in Chapter 2 show that there are real benefits to households in changing from Scenario 1 to Scenario 2. However, poverty and cultural norms may inhibit change, and individuals are in any event unlikely to change behavior without either a change in the prices that they perceive, or a change in regulations and policies, which would encourage new behavior or enforce existing controls. Hence, any proposed change must address how individual and household behavior is to be changed through government or community action or investments, that is, the five groups of changes outlined in this chapter, Conclusions, Options for Change. Transaction Costs. A change from Scenario 1 to Scenario 2 involves a change in trans- action costs, or a change in the costs associated with collecting, processing, or trading individ- ual products. These arise from changes in contracts or property rights and include the costs of monitoring or enforcing these. Most have been factored into the analytical models. Some trans- action costs rise in changing from Scenario 1 to Scenario 2, while others fall. In Scenario 1, transaction costs involve the costs of government-funded protection, and where products are collected illegally, for example, in wildlife poaching or illegal felling of timber, include the costs of fines when apprehended, or bribes to avoid prosecution. In Scenario 2 most transaction costs fall as communities take responsibility for much of the protection, and illegal use is reduced. There may, however, be some rises in transaction costs due to the cost of establishing new management arrangements, or of protecting community forests and other resources under local control, for example, the cost of developing fodder banks and alternative grazing resources outside protected areas. Nevertheless, the financial and economic analyses show incremental benefits to households and the nation. Global Strategy. Change from Scenario 1 or 2 to Scenario 3: Options and Implications Scenario 3 includes all the sustainable management practices of Scenario 2, but intro- duces additional practices to ensure that resources are managed in a biodiversity-friendly and -37-  Conclusions Table 13. Economic Benefits of Improved Management for the Forest Products: Fuelwood Use, Management of Timber Production in The Terai, and Control of Rhino Poaching % of Forest Sector Scenario I Scenario 2 GDP Fuelwood No. of Households (millions) -in CF Program 0 - not in CF Program 1.40 Net Economic Benefit (Rs. mil./yr.) 678 1358 Incremental Net Economic Benefit (Rs. mil./yr.) 0 423a 5. 1 Terai Timber No. of Hectares - under sust. mgmt. 0 270,000 - not under mgmt. 270,000 0 Net Economic Benefit (Rs. mil./yr.) 810 1455 Incremental Net Benefit (Rs. mil./yr.) 0 645 7.8 Rhino Poaching No.Animals at RCNP - poached 460 0 - protected 0 460 Net Economic Benefit (Rs. mil.) 4 39 Incremental Net Benefit (Rs. mil./yr.) 0 35 0.4 Total Incremental Net Benefit (Rs. mil./yr.) 0 1103 13.3 aThe Net Economic Benefit for Scenario I assumes there are no households in the CF program. However, there are already some 870,000 households in the program, so the incremental net benefit shown results from the inclusion of the 530,000 households not presently in the program. not merely sustainable manner. That is, Scenario 3 uses a "global" perspective to identify man- agement options that maximize global biodiversity conservation benefits. Table 14 highlights these additional changes and summarizes their likely impact and economic consequences. Economic Implications. Figures presented in Table 7 show that there are benefits to Nepal of introducing Scenario 3, but these are not as great as for Scenario 2. Thus, there are opportunity costs to Nepal of trying to introduce Scenario 3 as opposed to Scenario 2. Most of these opportunity costs result from foregone production from additional areas set aside for pro- tection, or from reduced production due to restricted access. It is difficult to estimate the total -38-  Conclusions magnitude of the costs because decisions on the activities, implementation arrangements, or size of any additional areas that might be protected or managed in biodiversity-friendly ways have not been made. However, as an illustration of likely costs, habitat expansion in the existing buffer zone of Royal Chitwan National Park is likely to affect about 50,000 households, in which case the opportunity cost of Scenario 3 in this area is likely to be Rs. 26.5 million per year, assuming a cost of Rs. 530/yr.Ihh. The transaction costs of changing to Scenario 3 are higher than those incurred in changing to Scenario 2, largely due to the higher cost of protection. Table 14. Change from Scenario 2 to 3: Options and Implications Options for Change Forest Product Scenario 2-3 Impact Cost/Benefit Products that are primarily inputs to agriculture Grasses - Terai Extend biodiversity habitat into Reduced grass supply OC Rs. 600/hh Buffer Zone Reduced harvest of OC Rs. 3,1 50/hh forest products Increased tourisma Fuelwood and Fodder Conserve or reintroduce threatened Reduced fuelwood OC Rs. 220/ha species in community-managed forests supply. Management costsa Products that are primarily marketed Timber Manage forests to provide variety of Reduced timber OC Rs. 2,200/ha habitats associated with globally production significant species Charcoal Eliminate selective harvesting of Alternative fuels Ben. Rs. 680/ton rhododendron species by replacing available charcoal with briquettes made from wood waste and farm residues Bamboo, rattan Reintroduce threatened species Management costs Cost: Rs. 7,1 00/ha Expansion of bamboo habitats for endangered species, e.g., red panda Medicinal Plants Reintroduce species with high bio- Management costsa diversity significance Wildlife Products Protect wildlife against poaching in Management costsa Net loss all areas Alternative source of Initiate captive breeding of selected animal products species, e.g., musk deer, to produce animal products aAnalysis incomplete. Note: OC = opportunity cost of the proposed action. -39-  Conclusions Social Issues Successful transformation from Scenario 1 to Scenario 2 or 3 requires changes to address the identified social issues. Many of these issues are integral to Nepali society and are unlikely to be easily resolved through government interventions. Thus, inequities due to caste, gender, or ethnic affiliation will only be resolved slowly as society itself changes gradually. However, two groups of social issues could be addressed through education, advice, and supervision of program implementation. These relate to equity and to the adoption of new technologies. Equity. Community forestry is now a central part of government's program of natural resource management and the formation, and registration of Forest User Groups is controlled by the District Forest Officer. Community forest operational plans are usually drawn up by the Forest Range Officer in consultation with the FUG committee. Equity considerations would be addressed by ensuring that the plan represents the priorities of the disadvantaged, that is, the for- est is managed to produce the products most needed by those dependent on the forest. Although FUG committees are not always truly representative, the distribution of products is usually transparent, though action to rectify misuse of power is needed in some instances. Adoption of New Technology. Lack of knowledge and resources to adopt new tech- nologies imposes constraints on overcoming social issues. Thus poor charcoal producers are trapped in a traditional production system because they lack the knowledge to use improved kilns. More significantly, they lack the resources to purchase the kilns, even if they knew about them. Scenario 3 could involve the substitution of charcoal by briquettes made from wood waste and agricultural residues. This may displace the charcoal makers entirely, creating sig- nificant social problems. Similarly, lack of knowledge and finance restricts the opportunities to process and add value to medicinal plants in the areas of collection. Extension programs could provide the knowledge, but imaginative credit programs are required to provide the charcoal producers and collectors of medicinal plants the opportunity to adopt the technology. Institutional Issues Most of the institutional issues relate to MFSC, particularly staff levels, skill mix, training, and incentives which have an adverse impact on present resource management and would constrain changes from one scenario to another. Many of the actions to realize the full potential of the well-qualified staff could be initiated by the ministry. These include measures to formulate and implement a human resource development plan, with staff skills and train- ing matched with clearly identified functional responsibilities. Improvements in management processes with delegated decision-making authority linked to appropriate performance monitoring, accountability, and continuity of posting could be introduced without the need for government clearance. Other constraints such as budget allocations and the timeliness of bud- getary releases are beyond the control of MFSC. Changes from Scenarios 1 to 2 and 2 to 3 will also require a greater institutional focus on the development of appropriate strategies for the management of resources within the -40-  Conclusions protected areas and associated buffer zones, and for biodiversity conservation outside these areas. For example, medicinal plants have a significant economic importance, and Scenario 2 includes measures to ensure a more sustainable harvest, with improved storage and possibly value-added processing. Table 10 highlights the lack of expertise among Forest Department (FD) staff, so there is a need to provide training and develop plans to involve FUGs or the pri- vate sector in realizing the potential advantages of Scenario 2. Similarly, Table 10 notes the lack of an FD strategy for management of charcoal production at the present time, leading to the overexploitation of forest areas, particularly broad-leaved species. If there is to be a shift to Scenario 2, with more sustainable harvesting of these species, then the FD needs to develop a strategy to regulate the production and promote the use of more efficient kilns. Other institutional changes required involve greater coordination between the various departments within MFSC and between various ministries. The main objective of Scenario 3 is to ensure that forest management is biodiversity-friendly, with particular emphasis on the con- servation of species of global significance. To achieve this objective, most FD staff will need training not only in biodiversity conservation, but in grazing management, fodder production, and technologies related to the production and processing of minor forest products. There is a particular need to ensure that the Department of National Parks and Wildlife Conservation is involved in the conservation of biodiversity outside the protected areas. In addition, changing to Scenario 2 or 3 will require the development of closer partnerships between MFSC and other stakeholders in the sector, particularly those with a concern for biodiversity. Legal Issues Legislative conflicts, conflicts of authority arising from existing legislation, and legisla- tive lacunae have been identified in Chapter 2. Addressing these issues requires careful review and change in legislation or additional laws. B. From Study to Implementation This study has demonstrated that there are clear benefits to Nepal in moving from Scenario 1, the present situation, to Scenario 2, which represents a more sustainable pattern of forest resource use and reflects a national perspective. Such a move will not be easy and has major social, institutional, and legal requirements. The move from Scenario 2 to Scenario 3, the alternative that emphasizes global biodiversity concerns, will be even more difficult and will impose additional costs on Nepal. To bring about any of these changes, whether from Scenario I to 2, or from Scenario 2 to 3, will depend on decisions on strategies and policies, followed by the identification of investment needs and possible sources of financing. Close collaboration between government and donors will be essential. The necessary priority actions are discussed in the following sections. Strategies and Policies Strategic Decisions. The first step towards realizing some of the alternatives and oppor- tunities identified in this study will consist of two strategic decisions by the government, at least -41-  Conclusions in principle. The first is whether Nepal is willing to invest in more sustainable resource man- agement, represented by Scenario 2. The second is whether the government will make further investments in biodiversity-friendly management of resources, represented by Scenario 3, that would have global benefits but would impose direct opportunity costs on Nepal, although these might be met by the global community. Policy Issues. The first priority action by government must be to address the policy issues identified in Conclusions, Policy Changes. Policies related to the regulation of prices, movement, and trade in forest products must be changed prior to the implementation of any measures to change from Scenario 1 to Scenarios 2 to 3. Related energy policies and other poli- cies that may affect the incentive structure for individuals and communities may require further study and be implemented in the medium term. Geographic Focus. The main objective of changing from Scenario 1 to Scenario 2 is the introduction of more sustainable management, but it has been shown that the changes also result in financial and economic benefits. The geographic focus for introduction of the changes will depend on whether, in making the changes, the secondary objective is to maximize benefits, to assist the greatest number of families, or to have an impact on poverty alleviation. It is clear from the analyses in Chapter 2 that the greatest financial and economic benefits are derived from sustainable management of forest resources such as timber in the terai. However, other products are more widely collected in the hills of Nepal, and some make a significant contribu- tion to the income of some of the poorest families. The areas in which the change from Scenario I to Scenario 3 is focused is dependent on where globally significant biodiversity is most at risk. In Nepal, such areas are mainly concentrated in the middle and high hills. Studies and Research. Detailed investigation and feasibility studies would be required as part of program formulation and prior to major investment. High priority topics would include: * Institutional development, including a review of MFSC staffing, structure, and manage- ment processes * Training needs assessment and review of curricula in training establishments to ensure biodiversity concerns are adequately represented * Timber and fuelwood marketing systems * Incentives for communities to hire nongovernment technical staff to provide advice on forest management and production, and the processing and sale of nontimber forest products Mechanisms for: - Implementation of forest management plans in the terai, involving both MFSC and the private sector -42-  Conclusions - Introduction of grazing management and forage development in community forests - Establishment of fodder banks in the terai and middle hills * Financing schemes to assist charcoal producers to purchase or lease improved kilns and the social and environmental impact of development of briquette industry * Incentives for communities to establish conservation areas and reintroduce threatened species, particularly medicinal plants * Feasibility and costs of establishing biodiversity corridors * Technology and costs of reintroducing selected threatened species Investment Needs Detailed calculations of investment needs are dependent on decisions on which areas are to be treated and the phasing of initiatives for changing to either Scenario 2 or 3. These deci- sions would be reached during program formulation, so it is only possible to identify the likely types of investments needed. These are discussed below for the adoption of the national and global strategies. National Strategy: Investment Needs Regulation of Access. The main investment needs to facilitate changes from Scenario 1 to Scenario 2 relate to the actions identified above in this chapter, Conclusions, Option for Change of which regulation of access affects all the products examined. The most effective reg- ulation of access would be community based, involving an expansion of the community forestry program and development of community-based organizations around protected areas and buffer zones. Such an expansion would be endorsed by most communities because of the large and growing demand for community forestry, reflected in the backlog of FUGs that have been formed but not formally constituted with approved operational plans for forest management. However, there are significant institutional constraints to the expansion of the program, due to the limited capacity of MFSC to constitute and provide technical advice to FUGs. Consequently, investment would need to be concentrated on innovative programs to speed up FUG formation and to encourage FUGs to hire nongovemment technical staff to advise on for- est management, processing, storage and sale of forest produce, particularly nontimber forest products. In addition, if communities are given incentives, they will control illegal trade. In some instances, regulation of access to forest products can only be effectively under- taken by government agencies, especially control of poaching and illicit felling and smuggling of timber from national forests remote from settlements. Investments are required to strengthen antipoaching patrols, initially focused in areas with high tourist potentials. Control of illicit tim- ber felling and smuggling is more difficult, given the problems of controlling trade over the long -43-  Conclusions border with India, but given the appropriate policy environment, the private sector would make efforts to control illegal trade. Institutional Development. High priority must be given to developing skills and effec- tive management systems in communities, NGOs, and, as the nodal government agency in the sector, MFSC. Change from Scenario 1 to Scenario 2 or 3 is dependent on building institution- al capacity to expand community-based resource management programs, introduce new tech- nologies, improve controls, and expand the network of protected areas. Improved Management. For the whole range of products, improved management requires investment in cadres of technical experts. For many of the products this would be included in the expansion of community forestry programs. Additional investments would be needed to provide advice for the expansion of private sector forestry programs. Improved man- agement of rich sal forests in the terai for timber production would require the completion of Forest Management Plans and investments in their implementation, with a strong focus on pri- vate sector involvement. Investments would also be required for the cultivation of medicinal plants or the reintroduction of high-value rattan species. Improved Technology. An important factor in the management of grasses in the terai and the collection of fuelwood and fodder under Scenario 2 is the creation of fodder banks to reduce pressure on forest resources. Significant investments would be required for the effec- tive development of such fodder banks. The production of charcoal under Scenario 2 would be based on the use of improved kilns. In addition to investments in building capacity to provide technical advice to charcoal makers on the use of these kilns, innovative financing schemes would be needed to enable the charcoal producers to construct the kilns. Improved technolo- gies for processing, storage, and transport of medicinal plants is also foreseen in Scenario 2. This would require investments in building skills and knowledge in MFSC, extension pro- grams to ensure collectors are aware of the improved technologies, and support for coopera- tive processing ventures. Global Strategy -Investment Needs The cost of introducing the biodiversity-friendly measures associated with Scenario 3 have been identified in this chapter, Global Strategy, Economic Implications. A very significant element of the costs is the opportunity cost, incurred for globally significant environmental con- cerns. The decision to be made by the global community is whether these global issues are suf- ficiently important to provide funding to Nepal to meet these opportunity costs, and, if so, what the level of funding should be. The magnitude of funding will depend on the areas to be pro- tected or managed in a biodiversity-friendly way. In addition to the opportunity costs, there will be costs associated with program implementation, and these are discussed below. Protection of AdditionalAreas. In many instances Scenario 3 involves the protection of additional areas, either through the extension of biodiversity habitats into the buffer zones of protected areas, or the development of wildlife or biodiversity corridors. In national forests, the -44-  Conclusions costs of establishing these additional areas can be calculated and necessary investments pro- vided. In community forests the situation is more difficult. Establishing additional areas for pro- tection and managing them in a biodiversity-friendly way may require modifications in harvesting regimes, which may impose costs on the community. Investments must therefore provide incentives to communities to establish and manage these additional areas for biodiver- sity reasons. Reintroduction of Threatened Species. In Scenario 3, it is envisaged that threatened species would be reintroduced into forests, which would be managed to ensure the survival and spread of these species. The problems are similar to those related to the protection of addition- al areas. In national forests, the costs of reintroducing and managing these species can be cal- culated and investments provided, although in sal forests, managed to provide a variety of habitats in a multistorey, multispecies forest, these costs may be very significant, as the value of the same forests managed to maximize timber production will be very high. In community forests, reintroduction of threatened species would require the provision of incentives to com- munities, with the problem of finding mechanisms to provide these incentives. Improved Technology. In Scenario 3, technology changes affect mainly charcoal pro- duction. One option would be to replace charcoal with briquettes made from wood waste and agricultural residue. Investments would be required in the development of such an industry, which is likely to be beyond the management capabilities of poor charcoal makers. As a result, they would lose their source of livelihood and there would be a need for investment in a social mitigation plan for this group. Another option considered in Scenario 3 is to meet the demand for some animal products by captive breeding programs. Supply of musk oil from captive breeding of musk deer would reduce poaching, but investments would be high due to the costs of establishing fenced ranches. Sources of Financing Scenario 2 involves changes in resource management that increase social benefits for the nation. Financing could, therefore, be obtained from conventional sources such as the gov- ernment's own budget and multilateral and bilateral donors. Scenario 3 represents the introduc- tion of biodiversity-friendly measures that imply opportunity and direct costs to Nepal. The biodiversity values are significant from a global perspective. International funding sources such as the Global Environment Facility (GEF) were established to meet precisely these sorts of costs and, provided proposed investment programs met the other GEF criteria, would be an impor- tant source of funding for the introduction of Scenario 3. Some bilateral donors provide grant funding for biodiversity concerns, including the establishment of biodiversity trust finds. The Role of the Bank Poverty reduction, improved nutrition, and increased employment are fundamental objectives of all Bank activities. Rural development is one of the most important ways of achieving these objectives, and natural resources provide the basic natural capital for all rural -45-  development. Sustainable use of these resources, that is, Scenario 2, is essential to meet the Bank's objectives, particularly in Nepal, where growing rural populations make ever increasing demands on the finite natural resource base. The Bank also has an important role to play in pro- moting more biodiversity-friendly, sustainable, natural resource management, that is, Scenario 3, if it is to achieve its public commitments to protection of the environment, the conservation of biodiversity, and the sustainable management of forests. In Nepal, the Bank can support nat- ural resource management programs through dialogue with government on the issues raised in this report, the formulation of investment programs, and by helping to build partnerships between public and private sector agencies involved in the sector. -46-  Annex 1 Team Composition and List of Working Papers Speciality Team Members Working Papers Task Team Leader 1. Hill Economics D. Knowler Economics J. Dixon Estimating Local National, and Global P. Nicholas Benefits and Costs Ecology E. Sennhauser Biodiversity Scenarios for Individual Forest Products Social Sciences K. E. Anderson Social Dimensions I A. Shrestha Social Dimensions 11 Institutional Specialist R. C. Mishra Institutional Aspects Forestry K. Shrestha Policy and Technical Issues Law S. Dunghel Legal Issues -47-  Annex 2 Models for Economic Analysis Economic Models A general economic model was developed to analyze each of the three scenarios for the seven products. When all possible costs and benefits are included, i.e., a situation equivalent to a global accounting stance, net benefits can be estimated as shown in Table A.2. 1. The incremental net benefits resulting from a shift from one scenario to another at indi- vidual, national, and global levels can be estimated. * Private Level. Scenario 1 is preferred because each successive scenario entails higher private costs and the individual does not take into account economic costs and benefits accruing at the national and global levels. * National Level. Economic costs such as externalities are fully taken into account so that activities incurring high external costs are discouraged. Any biodiversity benefits are justified at the national level. Any incremental benefits at the global level are not taken into account, so that activities favored under this scenario may not be most desirable from the global accounting stance. * uGlobal Level. All benefits and costs are included so that activities where incremental global biodiversity benefits exceed any incremental private/national costs are encour- aged, even though at the private and national levels no such incentive exists. Table A.2.1 General Economic Model for the Three Scenarios Scenario Theoretical Model I NBI = BpI + Bgl - Cpl - Ce- Cu 2 NB2 = Bp2 + Bg2 Cp2 3 NB3 = Bp3 + Bg3 - Cp3 NB 1, NB2, NB3 Net Benefits Bp , Bp2, Bp3 Private Benefits Bgl, Bg2, Bg3 Global Biodiversity Benefits Cp 1, Cp2, Cp3 Private Costs Ce External Costs Cu Depletion Premium or National Cost -48-  Annex 3 Acknowledgments The production of this report has been based largely upon the substantial information facilitated by a wide network of researchers, scientists, conservation agencies, and government organizations. We would like to thank these many individuals and organizations, without whose support this report could not have been produced. In particular, we would like to express our gratitude to the Ministry of Forests and Soil Conservation, His Majesty's Government of Nepal, and especially to A. I. Joshi, K. R. Kanel, S. M. Amatya, and N. Poudel. Gratitude is also due to the Ministry of Agriculture, Department of Livestock, His Majesty's Government of Nepal, the Water and Energy Commission, His Majesty's Government of Nepal, and particularly to Jim Nugent; the Timber Corporation of Nepal; Bilateral Cooperation programs, particularly M. Guntz, P. Rhode (GTZ), Steven Hunt (AusAID), D. Johnston, Fred Pollack (USAID), K. Shuler (SDC), B. Schultz (DANIDA); the King Mahendra Trust for Nature Conservation, with special appreciation to J. P. Rana, M. Joshi, G. I. Thapa, and Arup Rajouria; ICIMOD, particularly to T. S. Papola, S. H. Malik, P. Tuluchan, P. Shengii; WWF Nepal, especially to M. N. Sherpa, U. R. Bhuju, K. K. Shrestha; and IUCN Nepal, with special appreciation to A. Chitrakar, T. B. Shresthra, A. Speczowka, and R. N. Suwal. We would also like to express our gratitude to our peer reviewers, Ms. Susan Shen and Mr. Shelton Davis of the World Bank, and to our advisor, A. Sfeir-Younis. Finally, we are grateful for all the assistance, support, and friendly collaboration of His Majesty's Government of Nepal and the Nepali people, without whose support and participa- tion we would not have been able to produce this report. -49-  References Government of Nepal. 1998. Master Plan for the Forest Sector of Nepal. Ministry of Forests and Soil Conservation. Knowler, D., J. Dixon, and P. Nicholas. Details of the Models, Assumptions, and Calculations. The World Bank. Working Paper on Economic Dimensions. MacKinnon, J., ed. 1997. Protected Areas Systems Review of the Indo-Malayan Realm. Asian Bureau for Conservation Ltd., Canterbury, England. Metz, J. 1991. A Reassessment of the Causes and Severity of Nepal's Environmental Crisis. World Development. Vol. 19, No. 7. -50-  Recent World Bank Technical Papers (continued) No. 403 Welch and Fremond, The Case-by-Case Approach to Privatization: Techniques and Examples No. 404 Stephenson, Donnay, Frolova, Melnick, and Worzala, Improving Women's Health Services in the Russian Federation: Results of a Pilot Project No. 405 Onorato, Fox, and Strongman, World Bank Group Assistance for Minerals Sector Development and Reform in Member Countries No. 406 Milazzo, Subsidies in World Fisheries: A Reexamination No. 407 Wiens and Guadagni, Designing Rules for Demand-Driven Rural Investment Funds: The Latin American Experience No. 408 Donovan and Frank, Soil Fertility Management in Sub-Saharan Africa No. 409 Heggie and Vickers, Commercial Management and Financing of Roads No. 410 Sayeg, Successful Conversion to Unleaded Gasoline in Thailand No. 411 Calvo, Options for Managing and Financing Rural Transport Infrastructure No. 413 Langford, Forster, and Malcolm, Toward a Financially Sustainable Irrigation System: Lessons from the State of Victoria, Australia, 1984-1994 No. 414 Salman and Boisson de Chazournes, International Watercourses: Enhancing Cooperation and Managing Conflict, Proceedings of a World Bank Seminar No. 415 Feitelson and Haddad, Identification of Joint Management Strtctures for Shared Aquifers: A Cooperative Palestinian-Israeli Effort No. 416 Miller and Reidinger, eds., Comprehensive River Basin Development: The Tennessee Valley Authority No. 417 Rutkowski, Welfare and the Labor Market in Poland: Social Policy during Economic Transition No. 418 Okidegbe and Associates, Agriculture Sector Programs: Sourcebook No. 420 Francis and others, Hard Lessons: Primary Schools, Community, and Social Capital in Nigeria No. 421 Gert Jan Bom, Robert Foster, Ebel Dijkstra, and Marja Tummers, Evaporative Air-Conditioning: Applications for Environmentally Friendly Cooling No. 422 Peter Quaak, Harrie Knoef, and Huber Stassen, Energy from Biomass: A Review of Combustion and Gasifica- tion Technologies No. 423 Energy Sector Unit, Europe and Central Asia Region, World Bank, Non-Payment in the Electricity Sector in Eastern Europe and the Former Soviet Union No. 424 Jaffee, ed., Southern African Agribusiness: Gaining through Regional Collaboration No. 425 Mohan, ed., Bibliography of Publications: Africa Region, 1993-98 No. 426 Rushbrook and Pugh, Solid Waste Landfills in Middle- and Lower-Income Countries: A Technical Guide to Planning, Design, and Operation No. 427 Marifio and Kemper, Institutional Frameworks in Successful Water Markets: Brazil, Spain, and Colorado, USA No. 428 C. 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Maria Saleth and Ariel Dinar, Evaluating Water Institutions and Water Sector Performance  THE WORLD BANK 1818 lI Street, N.W Washington, D).C. 20433 USA 'I'clephone: 202-477-1234 Facsimile: 202-477-6391 'I'elcx: MC( 64145 W()RI A)BANK MCI 248423 WORLlI)BANK Cable Address: INTBWAFRAD) WVASH INGTOND)C NVorld Wide W'cb: http://ww-v-.worldhank.org/ IE'-mail: books@wfvorldbank.org ISBN 0-8213-4480-3