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Environmental Economics Research Paper No.4
This report was prepared by consultants
Francis Grey Consulting Economist At Large and Associates for the Department of the Environment, Sport and Territories.
© Commonwealth of Australia, 1996
ISBN 0 642 24863 X
Reviewing the various reports on the issue of forest policy has provided an insight into the process by which decisions are made. This section seeks to summarise the inadequacies that have been identified in the respective assessment frameworks and processes.
There are several assessment frameworks used in Australia for forest decision-making. Most of the reports have only considered assessment frameworks in general terms, without specific reference to real examples. In order to evaluate these assessment frameworks, the report provides a 'checklist' in section 4.4, Table 6. The 'checklist' provides a comprehensive series of questions which any worthwhile assessment framework should be able to answer. The 'checklist' approach facilitates identification of the broad strengths and weaknesses of existing or proposed assessment frameworks
A common theme in all reports (both Australian and international) was an underlying philosophical assumption that a 'technical', non-political choice process was possible, and to some extent desirable. This process was not challenged explicitly in any report, despite the obvious claim that the political arena is the desired place for settling value disputes (indeed it could be argued that this is the raison d'etre of politics). For the moment, however, this discussion accepts the premise that a 'technical' or 'black box' approach is feasible for value choices.
So as to gain an understanding of international experience, the report has sought to review processes suggested by the OECD and the World Bank. These internationally-recommended approaches provide a benchmark for achieving 'world best practice' in this field. The report has also examined the type of system deployed by New Zealand under the auspices of the Resource Management Act (NZ, 1991).
The international reports reflect a worldwide concern over the assessment of environmental values. While it is now recognised that environmental values must be incorporated, it is not known how this should be achieved. The World Bank view is not unusual:
Externalities are thus clearly troublesome, and there is no altogether satisfactory way to deal with them. This is no reason simply to ignore them, however; an attempt should always be made to identify them and, if they appear significant, to measure them. (World Bank, 1992:23)
This accurate, but unhelpful commentary is largely due to a neglect of environmental factors within economic analysis. This was noted by two internationally renowned economists in 1988, with respect to the field of development economics:
Environmental resources appear in this literature about as frequently as rain falls on the Sahara. (Dasgupta and Maler, 1990:102)
They also noted, as recently as 1988, that one of the world's best known texts on development economics (see note below)
… simply has no discussion of environmental resources and their possible bearing on the development processes.' (Das gupta and Maler, 1990:102)
This is symptomatic of neglect within the broad field of economic analysis. The OECD (1992) remarked that conventional cost benefit analysis would not include
a number of environmental effects …because of the lack of market price data or easily accessible direct proxy price data.' (OECD, 1992:49)
Given this neglect the OECD report (1986) on the public management of forests, must be regarded as a landmark publication amongst the reports reviewed in this study.
Overall, given that all economic activity centres on the idea of 'development', the general lack of incorporation of environmental issues is a serious omission. As a result the weaknesses identified in Australian assessment processes are not unusual when compared with 'world best practice' - though this does not make such deficiencies acceptable according to economic theory. Neo-classical economic theory would state quite clearly that on a worldwide basis, as well as locally, such an omission must be regarded as a threat to the economic well-being of society.
Cited in Dasgupta and Maler (1990): Chenery, H., Srinivasan, T., eds, (1988), Handbook of Development Economics, vols 1 & 2, Amsterdam, North Holland.
Australia, with its federal political structure, has many different means by which choices over values are made. Rather than describe this diverse array of assessment frameworks, this section will provide a thumbnail sketch of the key features of assessment frameworks and processes. The review of various reports conducted in the previous section, along with the international examples cited, seem to point to three key characteristics of concern in any assessment:
'Who makes the decisions' is significant because it determines whose values are brought to the process. The economics profession has long argued that institutions tend to be captured by the values of specific groups, and that to expect any public institution to be value-free and working purely in the public interest is naive. From the perspective of assessment processes, it is important that advocates of differing values are given an equal voice in the process of analysis and decision- making.
The RAC Forest and Timber Inquiry report took some interest in the Victorian model which involved the Land Conservation Council in decisions about selection of forest logging coupes. The AHC-CALM model of joint survey work also received some favourable attention, though its joint deliberations were designed to identify values rather than make decisions. That no other systems were singled out for favourable comment, in the various reports reviewed in this study, seems to indicate that other processes may be lacking an adequate contribution from representatives of other values.
It is not unfeasible that an appropriately structured institutional process could make optimising decisions - given that the right information on values was available. The information provided, as outlined by the thirteen reports reviewed in this process, is inadequate for the task of making choices over values. The AHC-CALM model received some favourable comments for its process from the ESD and RAC reports Certainly, its assessment method is systematic and thorough. Its prime weakness is that it does not consider, in its own words, 'social values' (AHC, 1992:29). 'Social values' as defined by the AHC, appear to cover that group of values described by economists as existence value. As a result, it only acknowledges some of the values considered important in a total economic assessment. That it was commended as a model for others suggests that even analysis of 'non-social' values is deficient in existing assessment frameworks and processes.
Other reports such as the Victorian Auditor-General's report (AG, 1993) and the NSW Public Accounts Committee (PAC, 1990) confirm the impression that only poor data is available on values.
Financial values are also a significant part of the analysis. A significant range of reports located deficiencies or made recommendations that pointed to opportunities to improve the gathering of financial data. The deficiencies in this regard extended to the data on both financial values generated by forestry and financial values generated by other activities. The existing assessment framework and processes were not being supplied with the relevant data because the necessary mechanisms such as appropriate accounting systems are not adequate (eg. RAC, 1992:429).
Assessment frameworks must make choices between values. Few technical models were offered on how such choices should be made,outside the political process. The Victorian Auditor-General's report noted that the previous system in that State had used a committee of relevant officials, backed up by a requirement to find options, with a final 'safety valve' being provided by there being recourse to the Minister. No doubt similar methods are used elsewhere, though, what is required is a method that considers all values at the point of decision with appropriate systemic checks and balances.
The AHC-CALM model and the process offered by the RAC Forest and Timber inquiry were the closest Australian examples of technical approaches which are beginning to seek full consideration of all values. The OECD (1986) report is a benchmark in this field. Only the process implied in the RAC report comes close to this analysis. It is assumed that if there were another system, the RAC inquiry would have located it. The existing assessment frameworks, obviously, can be said to rely on the judgements of those who take the decisions and the information that they have been supplied with. There must be serious doubts that these existing frameworks have been properly structured. A assessment framework and process needs to specify who decides, with what value information and by what intervalue comparative techniques.
The significance of non-financial values to the calculation of financial values is considerable. The forest agencies and all the reports reviewed in this study have adopted a compartmentalised approach to pricing. The compartmentalised approach assumes that assessment of choices between values occurred prior to the pricing of timber. If non-financial values are improperly assessed, then the resulting effect is that financial values will also be inappropriately founded. In this sense a compartmentalised approach to pricing is a practical manner of settling commercial pricing issues. In simple terms, if non-financial values are being compromised it is due to the lack of adequate assessment prior to the commercial pricing process.
Pricing of logs should, however, be offered on a normal commercial basis. It is fairly clear from the reports that have been reviewed that operations are not presently proceeding on a commercial basis. Prices of forest timber are being distorted by a range of factors that are, in general terms providing a subsidy to the logging of native timber, whilst other factors are raising the costs of private plantations (see NPAC, 1991). Other factors such as the lack of rational markets for the pricing of water (see Read and Sturgess, 1992) and other services, partly or wholly derived from forests, are raising the relative cost of alternative financial values.
The following distortions in commercial pricing of timber have been identified. The list has been 'cobbled' together from all the reports reviewed in this survey.
1. The lack of marginal cost pricing.
2. The non-existence of effective commercial accounting systems.
3. Long-distance transport subsidies.4. Non-payment of rental for use of public land.
5. Low royalties; ie. low log prices for timber (see note below)
6. Possible cross-subsidisation from community service obligations.
7. No liability for payment of a resource rental tax.
8. No liability for payment of a notional income tax (presumably meaning company tax).
9. No liability for local government rates.
10.No liability for sales tax on vehicles, plant and equipment.
11. Non, or low, payments of interest on borrowed capital.
12.Non-payment of dividends.
13.Low user charges for cost recovery from long-distance transport
14.The lack of commercial discipline due to lack of a corporatised commercial structure;
15. Serious deficiencies in the tax system for plantations;
16.Problems with planning, rating and exporting from plantations;
17. Problems with the small numbers of buyers and sellers of timber;
18. Problems with the purchaser behaviour of large buyers of timber;
19.The dominant market role of state forestry agencies;
20.Failure to properly account for non-financial values in pre-logging operations either by exclusion of areas or by forestry codes of practice.
21.Failure to adequately assess the potential financial contribution from sales of goods and services such as water from the native forest.
22. Failure to separate commercial operations from regulatory functions.
They also felt that the market price was too low and that international prices were not as significant in pricing native forest timber as was considered by the Commission. (PAC, 1990:77) They felt that the native forest timber price should be raised to 'the point of indifference.' (?)(PAC, 1990:77) and that the case for doing so was 'overwhelming' (PAC, 1990,79). This is even more significant when it is considered that 'the Forestry Commission sets these prices...the Commission is clearly a price leader.' (PAC, 1990:97)
The existing assessment framework is in a period of transition. The post-1945 charter of the forest agencies to push for economic development has changed. The capital resources of government and the Australian economy are scarce and need to be deployed for maximum financial benefit or for some clearly identified social 'good'. Changes in social values are also placing pressure on the old system. These two forces, in combination, are leading to greater scrutiny of forest activities, and demanding greater levels of accountability. It is clear that assessment processes are lagging in their response to these issues.
The existing assessment process is vulnerable to 'capture' by entrepreneurs proposing one-o ff developments. This limits government ability to consider a range of project options as proposed by the OECD (1986) and the World Bank (1992) in particular. The existing Australian approach of having a single project option placed in front of decision-makers must be regarded as inferior, if not a structural distortion of the decision-making process.
The lack of commercially-based accounting data for project analysis means that it is not possible to accurately evaluate true project financial worth. This means that many unprofitable activities are slipping through the policy net adding to the economic burden already being borne by Australians. The effect of such methods is to inflate the relative worth of financial values vis a vis non-financial values. It also inflates the relative values of forestry operations vis a vis the alternative activities such as plantations and water production.
The next major flaw in assessment processes is the lack of a complete set of values relating to forestry. Each report examined has mentioned a range of words that seek to describe, in particular, the non-financial values, but there has not been a report which systematically listed what society derives from the forest. It is little wonder then that assessment frameworks barely exist or function if the values are not even identified.
Where non-financial values are considered, they tend to relate only to the assessment of physical characteristics of the forests. All reports acknowledge the need to protect these physical characteristics, for example 'sustainable yield', yet there is evidence that they are not being protected, even at this rudimentary level ((PAC, 1990:55). If physical characteristics are only barely being protected, then it is reasonable to assume that other more abstract and intangible values of the forest are not being taken into account. The Dorrigo Management Area Environmental Impact Statement (FCNSW, 1992:i) does not mention any non-financial values other than soil, birds, animals and recreation. Ecological sustainability and existence values are barely considered at all.
The practice of assessment seems to place too little stress on the need to obtain public review and input into forestry decisions. In an area where clashes over values are common, the need for representation by different values should be considered. As a result the political process is starved of information about social preferences. The OECD (1986) reveals a considerable commitment to public involvement, in particular their example of the 'Inner Valley Road Project'(OECD, 1986:34).
The most serious flaw is that it appears that assessment of non-financial values is simply not occurring. The concentration of reports on discussing aspects of how such analysis could be done, rather than a focus on how it is being done leads to the conclusion that serious analysis of the relative worth of non-financial values is yet to begin. It would seem fair comment that if relatively simple choices between wood and water production are not being evaluated (eg. Read and Sturgess, 1992), then other more complex interactions are also being neglected.
The OECD (1986) report was not without its flaws. Its assessment framework gave little attention to considering the impact of future generations from any valuation assessment process. In economic theory it is impossible to internalise the interests of future generations simply by assessing the preferences of the present generation. Neither market processes or valuation techniques, in the face of irreversibility, are capable of 'looking after' the interest of future generations in any manner that can be relied upon. Fortunately the concept of ecological sustainability goes some way to achieving this goal. The internalisation of the interests of future generations requires explicit discussion.
Most reports steered clear of identifying procedures that would resolve the choices thrown up in the forestry debate. The RAC report (1992) went furthest in this regard but tended to educate by demonstration rather than explicit prescription. The ESD report (1991) had some brief comments, but if the assessment of these different values is to proceed satisfactorily, it is clear that the hard issue of 'assessment frameworks' must be dealt with honestly.
The OECD (1986 and 1992) indicated that other nations are moving towards direct evaluations of non-financial values. Australia's approach would appear to be somewhat slower than average, though of course there are some institutions such as the World Bank that have acknowledged the need for change but are yet to make the practical changes that are required. It was significant that the United States was acknowledged as having greater experience in the area of non-monetary evaluation. The experience was deemed to be due to the 1969 Environmental Policy Act which required quantification in non-monetary terms of all environmental impacts. The OECD concluded that
it would seem that education and more valuation projects are a prerequisite for more effective utilisation of the techniques. A learning process is needed. (OECD, 1992:38).
Valuation techniques, whether monetary or non-monetary, form the backbone of an assessment framework. The same learning process is required for assessment processes as well. Many OECD countries are learning but Australia does not appear to have started.
A major difficulty with evaluating an assessment framework is the sheer scale of the task itself, as anyone who has read an Environmental Impact Statement will testify. The result is a tendency to focus on one or two key angles to the exclusion of other angles. Table 6 seeks to provide a systematic 'framework' for assessing assessment frameworks. A series of questions is provided, that an assessment framework, if it is to be successful, should be able to address. The existing Australian and international assessment practices are evaluated The table has been tested on actual reports, in this case the Victorian Auditor General's report (AG, 1993) as well as an analysis of the Dorrigo Management Area Environmental Impact Statement (FCNSW, 1992). By answering the questions listed in Table 6, it is possible for an impartial economic observer to evaluate the extent to which the 'estimated value' of each option has been adequately calculated.
The native forest is capable of producing three major categories of values. These are:
This report has sought to examine the issue of giving each type of value 'full and due consideration' in policy processes. Three themes have recurred throughout this study.
Table 6. Assessment of the Australian and International assessment frameworks.
|Assessing the assessment framework - Some key questions.||Australian Experience.||International Experience.|
|1. What are the alternative project options to the project being specified?||The RAC considered this a necessary step. The NSW Dorrigo Management Area EIA(FCNSW, 1992) has also listed alternative projects*. This would appear to be unusual, but a welcome beginning.
Overall assessment of Australian approach, in comparison with what could be achieved, and needs to be achieved: poor.
|The view from the World Bank research department summed up NZ, OECD views: 'systematic scrutiny of plausible alternatives is at the heart of the appraisal process … Consideration of alternatives is the single most important feature of proper project analysis.' (World Bank, 1992:18)|
|2. What are the alternative financial values that are compromised, complemented or enhanced by the project?
(List alternative financial options as additional alternative project options.)
|The Read Sturgess report (Read and Sturgess, 1992) indicates by the fact that it was required in the first place, that such questions have not been asked in Victoria for example.
Overall assessment of Australian approach: poor
|Closely related to the answer to the previous question. Identification of alternative projects should throw up alternative financial values where these exist.|
|3. Has an option been prepared that identifies the effects of no project going ahead?
(This should be prepared and included as an alternative project option)
|This would seem to be done often in the Australian context. The question is more about the data presented in such scenarios. (see AG, 1993)||Required by NZ, OECD and World Bank. OECD provides a method of incorporating non-financial data (OECD, 1992, 1986). World Bank offers no such help.|
|4. Has an option been prepared which creates a project expected to go ahead if the anticipated project does not go ahead?
(This is called the opportunity cost option - capital not used in the original project could be diverted to another project to good financial effect. List this project as another option.)
|Never mentioned in the Australian context.
Overall assessment of Australian approach: poor.
|The World Bank heavily emphasises this approach due to its requirement to obtain shadow prices for inputs and outputs. The OECD prefers to talk in less rigorous terminology of alternative projects.|
|5A#. Have the key assumptions been listed?||Could not be determined from information provided. Failure in other areas suggests a likely poor response to this question as well.||The World Bank requires explicit listing. The OECD requires sensitivity analysis. NZ Act is inadequate since it does not specify what 'full' information means.|
|5B. For each assumption:
Has a sensitivity analysis been provided for each assumption?
|NSW EIA procedures that have been sighted by this author give some indication of attempting sensitivity analysis in recent times. The RAC use of this method was excellent, and may prove educative for other institutions. Otherwise poor to improving.||OECD and World Bank analysis particularly emphasised sensitivity analysis and risk analysis for dealing with uncertainty.|
|6A. Have the key objectives been listed with weightings?||The RAC provides a useful first step in this process via multicriteria analysis. Very limited reference to objectives in any report except at the broadest level of maximising benefits. Poorly specified and poorly linked to project analysis in general. The recent NSW EIA process has sought to specify objectives (FCNSW, 1992:3-1). What matters more is the weightings given to each objective.
Australian practice: poor to very poor.
|Both the OECD and World Bank studies deal explicitly with objectives because the issues of weighting given to different variables in the analysis flows directly from objectives.|
|6B. Has each option been tested against the objectives for its performance?||Unlikely to get a systematic test unless RAC-like procedures have been followed. Performance indicators may follow in the path of corporatisation. Overall response: poor.||By establishing shadow prices the OECD and World Bank would also be establishing objectives and implicitly measuring those objectives.|
|7A. Has financial data for each option been prepared including:
What is the rate of return on capital in each project option?
|It is not known by this author whether this is standard procedure. The quality of such assessment is also unknown. It is more likely for large projects, and less likely for smaller ones. Existing deficiencies in Forest Commission accounting systems point to this information not being used very much. In addition were the information to exist other flaws in those accounting systems point to the information not being distributed or used - which is tantamount to not collecting the data in the first place.
Australian experience by indirect evidence would appear to be poor to very poor.
|Standard procedure for the OECD and World Bank. The NZ Act is too general and does not give this level of detail. This may be a problem in the NZ Act unless procedures are adopted to ensure quality assessment.|
|7B. Have all input and output prices used in financial value calculations been estimated at efficient market prices?||Many Australian product markets particularly for public corporations do not have prices equivalent to those that would exist in efficient markets. For instance community service obligations may distort prices away from the optimal level. This will have an impact on project analysis, and needs to be factored in.
Australian performance likely to be poor.
|These publications refer to market prices; ie. prices adjusted for the impact of distortions.|
|7C. What is the net present value of the profit stream from each project option?||As for 7A||As for 7A|
|7D. What is the type and number of direct jobs and wage flows created by each project option?||Ditto.||Ditto.|
|7E. What are the tax flows to the public sector from each project option?||Ditto.||None of the international models mentioned this aspect. This would seem to be a deficiency in these frameworks, unless such issues are incorporated under another heading.|
|7F. Have multiplier effects been calculated for each project?||Ditto||Standard procedure.|
|7G. Have the impacts of foreign capital, offshore profit flows etc been factored into the above analysis?||Ditto||Ditto|
|7H. Has sensitivity analysis been conducted on the key variables?||Ditto||Ditto|
|7I. Has risk been explicitly factored into the assessment bearing in mind that we are seeking the greatest return on investments for the same level of risk?||Ditto||Ditto|
|8A. Have each of the non-financial values of the project been identified and has an estimate of the 'worth' of each value been calculated for each option?||Very poor assessment of the physical characteristics (scientific values) of the forest environment.
Virtually no assessment of the public valuation placed on forests for use values (subjectively felt values). Some EIS's appear to make references to this.
Non-use values have been ignored with the exception of RAC (a subset of subjectively felt values).
It was rare to come across a complete listing of values in any report.
Australian experience: very poor.
|In the World Bank these would have been listed at least. In the OECD 1986 study the values were valued. In the 1992 OECD study direct reference was made to measuring non-use values. Nether provided a comprehensive list of such values but such a level of detail is unrealistic. Instead they emphasised the general principal of valuing all effects. Likewise for the NZ Act.
OECD (1992) states that estimation of values will enable the efficiency status of a project to be established (OECD, 1992:9). This is impossible due to the missing markets theorem; ie. efficiency can only be established when all consumers, including future consumers are present (Dasgupta and Heal, 1979). The valuation techniques may be a good proxy for the preferences of existing consumers, and hence should be carried out for that reason. Due to the 'missing market' that future generations represent, other measures will be required to internalise the preferences of future consumers.
|8B. For each non-financial value was the following data listed:
Were at least two different measurement techniques used?
|This may not be necessary for identifying valuable, 'scientifically' determined characteristics, but will most definitely be required for subjectively felt values. This is because there is no social consensus on the basis of assessment for subjectively felt values, and hence greater care will be required.||As can be seen in Box No 1 below many applications of valuation techniques have not been specifically tested in policy circumstances. Most use of such techniques has been in once-off examples. This is something the OECD and other agencies need to consider further.|
|8C. For each non-financial value was the following data listed:
Was each option rated for its performance on each value?
|Since non-financial values are often not listed comprehensively this requirement cannot be fulfilled.
|Standard procedure according to the OECD (1986). Less likely for the World Bank, it would appear. The NZ Act requires full consideration be given to NFV's without specifying a means.|
|8D. For each non-financial value was the following data listed:
List each non-financial value and the measurement techniques proposed?
|RAC came closest to fulfilling this. Other assessment frameworks have a long way to go.
|In the OECD (1986) this was the preferred approach.|
|9A. Was there public involvement in the assessment of options?
Public involvement means that the public were involved in the actual process of assessing the options.
|RAC, ESD and quite few other reports advocated public involvement. This idea seems to be catching on as this report is being written.
While past performance is poor, improvement is anticipated.
|Standard procedure for OECD.
World Bank seems to appreciate its significance, though word of mouth discussions would suggest that on-ground performance is poor. NZ Act specifically requires public involvement.
|9B. Were public attitudes assessed?
This asks whether the views of the public 'at large', with respect to the options under consideration were assessed.
|Very poor with the exception of the RAC who set an excellent example.||Standard procedure for the OECD Less so for the World Bank. Only mentioned in the NZ Act by implication..|
|9C. List and justify the techniques by which public attitudes were assessed?
(These techniques are identified in Chapter Three)
|Where public involvement has taken place the method has been discussed (ie.. RAC). Otherwise it follows from the previous question that performance has been very poor.||Standard procedure for the OECD.|
|9D. Was there interest group involvement?||In some cases such as RAC the answer is very good. It is improving in other cases but from a very poor base.||Standard procedure for OECD. Similarly it appears to be theoretically important to the World Bank, though there are doubts about the practical results.|
|9E. Were the results of the analysis made publicly available prior to the decision, and public comment invited?||The RAC set an excellent example. Otherwise Australian performance has been very poor.||Standard OECD procedure.|
|10 How was the socially optimal balance between financial and non-financial values determined?||In the Australian reports only one clear example of how this process was conducted was available. That process has been changed subsequently. The RAC report provided some clues on how such a framework should be structured. It needed to be more specific about the institutional dynamics. The recent RAC inquiry on the Coastal Zone produced a report on institutional dynamics that was a promising first step (Davis and Weller, 1993). The IC recommended separation of regulation and commercial activities. The Australian performance has been poor thus far.||Only the OECD model considered the 'dynamics' of such a decision-making process. Other international examples were very short on specifics.
World performance on this issue has been poor. The OECD document marks a step forward.
|11. How have the intergenerational impacts of the different options been calculated and demonstrated, and what was the outcome of this analysis?||There was little explicit attention paid to the need to address intergenerational issues. The RAC and ESD reports represent a high water mark, since the emphasis on ecological sustainability is a means of protecting the interests of future generations. Criticisms that have been made suggest that practical efforts are lagging behind theoretical implications.||The reports were significantly lacking in this area. Even the OECD report was in danger of allowing the values of the present to exclusively determine the allocation of resources. The early timing of this report in 1986 suggests that subsequent theoretical understanding about the impact of irreversibility and 'natural capital' would probably enrich a updated version of this study.|
# Letters are used to denote subsections of a main question.
*This EIA process seems to have begun in earnest only in 1991. The NSW Public Accounts Committee report (PAC, 1990) specifically noted that EIA should have been conducted but were not being conducted for NSW forestry operations. The Dorrigo Management Area EIA is, apparently, a first move to rectify this problem.