Improving Governance and Reducing Corruption in the Forestry Sector

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

Organization

Scale of the problemFundamental causes of the problemCorruption typologiesSearch for solutionsExamples of World Bank initiatives Summary

Scale of Corruption in the Forest Sector

Corruption in the forest sector is globally pervasive

Has many forms: Criminal: illegal logging, smuggling, extortion Legal but corrupt: state capture, institutional

erosion, rent seizingScale is vast – but quantitative estimates

remain elusiveIllegal logging on public lands estimated at

>10bn per annum

Does Corruption Contribute to Deforestation?

Costs of forest corruption include:

Livelihood losses to forest dependent communities

Environmental losses – local and global (climate change and biodiversity loss)

Fiscal losses to the state from lost royaltiesSpread of crime and corruption to other

sectorsUndermining institutions (with growth

implications)Undermining legitimate forest enterprises

World Bank’s Commitment to Forest Law Enforcement and Governance

The 2002 Forest Strategy commits the Bank to collaborate with borrower countries and partners to reduce by half the financial losses from illegal logging by 2013

Since 2001 the Bank has actively engaged in high-profile efforts to halt illegal logging and related crimes in partnership with producer and consumer country governments, NGOs and responsible private companies

Supported illegal logging related action in 32 (out of 51) forestry projects (IBRD, IDA, GEF) for an estimated amount of 311 million USD (about 11% of total project cost), including stand alone projects and forestry components in broader projects

The Bank’s Forests Team in the Agriculture and Rural Development

Department has a FLEG team which coordinates specific FLEG related activities & collaborates with key staff in the Regions and Country Offices

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

1. Demand exceeds Sustainable Supply.2. Sustainable Supply is relatively inelastic (trees

grow slowly).3. Hence, profits from unsustainable logging >

profits from sustainable logging.4. In addition costs of unsustainable logging are

public and benefits private High rents from unsustainable harvesting

(Indonesia: milling capacity ~50m cum, allowable cut 15m cum – recipe for corruption)

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

Typology of Corruption (1)

State Capture: Institutional Erosion and Rent Seizing Philippines, India, Malaysia and Indonesia

bequeathed strong forest institutions Timber boom 50s and 60s-> dismantling of

these institutions Why? Institutions are endogenous: To capture high

rents need to erode institutions that impede rent capture

Typology of Corruption (2)

Grand Corruption and Rent SeekingLegal logging – but contributions paid to gain

access to timber concessionsProblem is widespread from Malaysia to

Australia and beyondOften accompanies land use decisions (cattle

ranching in LAC)

Typology of Corruption

Commercial Scale Illegal Logging: Big business, commercial operators, links to other

crimes (drug, arms and people smuggling)

Corruption Contagion: Logs are bulky and can only be sold with connivance

of a host of institutions (transport, customs, police…….)

More widespread institutional decay Weak institutions -> impede development and growth

Typology of Corruption (cont.)

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

Illegal Logger IndonesiaGets $2.2/m3

Broker illegal log IndonesiaGets $20/m3

Broker legal log MalaysiaGets $160/m3

Buyer legal sawn-timber, Malaysia, pays $710/m3

Buyer, molded timber, US, pays 1000/m3

Typology of Corruption (3)

Petty corruption and extortionVictims are most often subsistence dwellersIn scale relatively small, but significant

poverty and livelihood impactsAdmits of straightforward solutions

Vest clear and non-controversial property rights Community-based forest management; community

woodlots (supply-side intervention)

Supply Chain and Corruption Vulnerabilities

Stage of production Type of vulnerability

Forest estate Policy capture for legal but unsustainable supply of timberBribery of politicians and forest guards for illegal suppliesBribery of officials to evade royalties and timber taxesBribery in forest service for transfers to remote estates with high timber

resources

Transport and export of illegal logsBribery of transporters to carry illegal logs Bribery of customs and transport officials, local policeBribery of bureaucrats for fraudulent permits for laundering illegal logs

Milling and processingBribery of police and bureaucrats when processing illegal lumber

Destination; retail outletsPolicy capture to resist log tracking and anti money laundering

legislation.

Solutions (1)Solutions need to be incentive compatible:

institutions will not impose reforms that undermine their self interest

Search for answers that:Lower the rents from unsustainable logging:

Demand side interventions Commercial (IKEA type model) Responsible public procurement “Green” consumerism

Interventions that make sustainable logging more attractive than unsustainable logging

Payments for Environmental Services (esp. carbon)

Solutions (2)

Search for answers that: Improve the supply of good governance and increase

incentive to utilize legally harvested timber: Put native forests under forest management plans and

certification Development of industrial plantations Clear and equitable forest fiscal systems Institutional reform and strengthening

Reform of forest service, incentive payments, transparency and accountability (global monitoring of forest stock, global log-tracking)

Improving the forest law enforcement and compliance system

Solutions (3) Improve the forest law enforcement and

compliance system

Eliminating Means

Foreclosing Opportunity

Reducing Motive

Crime

--AML to prevent concealment of illegal profits and financing of crime--Investor Due Diligence to manage industrial processing capacity--Asset forfeiture

-- Improving Forest Management-- "Timber Theft Prevention (target hardening)"-- Anti-Corruption

--EU FLEGT aims to reduce markets for illegal wood--World Bank poverty agenda addresses "need"--"Enforcement" (CI) aims to reduce "expected"

profits

Suppression

Detection

Prevention

Police capabilities, investigations, mobile courts, prosecutorial capacity, penalty provisions, surveillance and patrols

Forest monitoring systems, case tracking systems, monitors, transparency

Forest management, deterrence, tenure reform, demarcation, legislative reform, demand reduction, alternative livelihoods

Operational Elements of Forest Law Enforcement and Governance

Prevention

Supply-demand imbalancesQuality of legal and regulatory

frameworks within and outside the forest sector

Institutional structures and incentivesForest monitoring and information

disclosureCapacity building and awareness

Detection

Monitoring and surveillance to determine if and where crime is occurring

Establishing a process to assess institutional weaknesses that create opportunity for timber theft

Collecting evidence and documentation Establishing crime monitoring systems Use of independent forest monitors

Suppression

Last recourse Almost always involves use of force Risks need to be assessed in light of the

probability of success, accountability and transparency of suppression effort, and skills and training available to law enforcers

Empirically, suppression of forest crime in developing countries is very limited and essentially ineffectual, providing very little deterrence to further crimes

Examples of FLEG in Bank’s Portfolio: Prevention

Legal and regulatory reform in forest sector (Cameroon, Gabon, Congo DRC, Madagascar, Bosnia-Herzegovina, Croatia, Georgia, Romania, Argentina, Bolivia, Mexico)

Improving revenue collection, concession systems (Congo Rep., Ghana, Tanzania, Cambodia, Georgia, Russia)

National-level forest management plans and protected-area plans (Ghana, Cambodia, Bolivia)

Demarcation of protected areas (Ghana, Uganda, Lao PDR, Vietnam, Argentina, Brazil, Honduras)

Formalization of land tenure rights (Vietnam, Honduras)

Public awareness activities (Cambodia, Romania)

Examples of FLEG in Bank’s Portfolio: Detection

Forest management information systems (Ghana, Lao PDR, Bosnia-Herzegovina, Georgia, Romania, Russia, India)

Certification systems (Armenia, Russia, Mexico)

Monitoring in field (Uganda, Peru)

Guard houses, field inspection units, equipment for patrols (Lao PDR, Bosnia-Herzegovina, Georgia, Ecuador, Mexico)

World Bank Forestry Portfolio, by Region

Region

Total Number of Projects

Number of FLEG Projects

Total Cost (US millions)

Cost as % of Total Forestry Portfolio

Bank Commitment (US millions)

FLEG Amount (US millions)

FLEG as % of Total Forestry Portfolio

FLEG as % of Total FLEG

AFR 9 5 515.1 19% 289.7 108.9 21% 35%

EAP 8 7 772.9 29% 431.1 40.3 5% 13%

ECA 11 9 396.5 15% 265.6 32.7 8% 11%

LCR 19 13 691.9 26% 328.8 123.1 18% 40%

MNA 3 0 203.5 8% 139.5 0.0 0% 0%

SAR 1 1 127.1 5% 108.2 5.8 5% 2%

                 

Total 51 35 2707.0 100% 1562.9 310.8 11% 100%

Indonesia (1) : Earnings from legal and illegal logging operations

The total annual turnover associated with logging (legal and illegal) is estimated at US$ 6.6 billion. Of this, the contribution of the legal portion of logging is modest with an annual turnover of US$1.5 billion.

The estimate of the associated value-added is US$ 4.25 billion (this includes the value-added to illegal log exports) which forms about 3% of the GDP in 2000. As a point of comparison, this comprises about 17% of the value added contributed by the agricultural sector.

Additional characteristics of the problem are: Informal payments and bribes account for over US$1 billion per annum. Legal logging activities are not protected from bribes and, of the total,

more than 25% originates from legally sanctioned timber! Log smuggling is a highly lucrative activity with about 50% of total value

added being generated from the illegal export of logs.

Indonesia (2) : Promoting Transparency and Rule of Law

Strategy to combat illegal logging rests on two pillars

1. Promoting Transparency. To make accurate and up-to-date forest sector information continuously available to decision makers. This includes:

improving the information management process that generates and archives information on Indonesia’s forest and timber resources

establishing a comprehensive disclosure policy that clearly articulates what information can be publicly disclosed and what is confidential

developing effective disclosure mechanisms that allow multiple stakeholders to access accurate and up-to-date information on timber and forest resources

encouraging an improved decision-making process able to utilize the information.

Indonesia (3): Promoting Transparency and Rule of Law

Strategy to combat illegal logging rests on two pillars

2. Promoting Law Enforcement. Implementing and supporting a comprehensive framework of measures, designed through extensive multi-stakeholder consultations, to prevent, detect and suppress forest crimes and improve law enforcement in Indonesia. This framework includes the following:

support for the establishment of a forest crime case tracking system that will allow multiple stakeholders to monitor and hold the government to account for its law enforcement operations and judicial processes

assistance with the implementation of Indonesia’s anti-money laundering legislation, as it relates to forest crimes

continued support for an interagency forest law enforcement strike force support for participation by the Indonesian government in the Asia FLEG

process.

Solutions (4)

Search for answers that:Generate the demand for good governance

and strengthen the political will:National:

Improve accountability, develop strong multi-stakeholder processes (Philippines, Bolivia)

Identify and “cultivate” champions (Indonesia)

International: Foster “producer” and “consumer” country collaboration at the regional and international levels (FLEG processes)

Solutions (5)

Search for answers that:Galvanize international cooperation and

provide a platform for action:Forest Law Enforcement and Governance

(ministerial) processes (collaborative actions by “producer” and “consumer” countries at the regional and international levels).

FLEG active in EAP, AFR, ECA and LAC

Regional FLEG Processes

FLEG Ministerial Processes have been conducted in Asia (2001), Africa (2003), and the ENA Region (2005), with World Bank support.

Co-organized by both producer and consumer countries, recognizing a shared responsibility to address a common problem.

Components of Regional FLEG Processes

Analytic country-level work to identify issues and options for solutions

Multi-stakeholder technical meetings where experiences within forest law enforcement and governance are shared, and common agendas identified

Inter-governmental negotiations for drafting of a ministerial declaration and action plan

Regional stakeholder meetings as follow-up to ministerial declarations to establish partnerships, share best practices and tackle specific themes (e.g. customs collaboration)

Role of the World Bank in Regional and International FLEG Processes

Using the Bank’s global mandate and reach to support integration and follow-up of regional FLEG ministerial conferences into existing regional structures.

Using the Bank’s convening power to strengthen coordination and collaboration between international forest law enforcement and governance supporters and to engage with private sector actors and importing or intermediary countries in the forest products chain.

Promoting linkages between the FLEG processes and initiatives for forest governance reforms at different levels (e.g. AFP, FLEGT, UNFF, FAO, ITTO).

Strengthening linkages between regional FLEG processes and Bank projects and country dialog.

Achievements of Regional FLEG Processes

Increased awareness of causes and impacts of forest crime Established a shared sense of responsibility among both producer

and consumer countries Provided understanding of the distinct roles of various

stakeholders Created political platform and momentum Helped identify priority actions and facilitated exchange of

experiences and best practices Helped generate data on forest crime as basis for multi-stakeholder

discussions and as means for establishing baselines to monitor progress

Provided a network of information sharing Influenced the incorporation of illegal logging and forest crime into

several regional processes (ASEAN, COMIFAC, OTCA, CCAD)

Going Forward with the Regional FLEG Processes

Expressions of political commitment have value, but this needs to be better exploited.

FLEG processes have been largely isolated from the mainstream of international criminal justice efforts.

Regional discussions of common law enforcement problems have yet to identify or mobilize significant opportunities for multilateral enforcement action.

Regional FLEG processes have to be made a strong force in supporting effective reforms of national level enforcement.

Summary(1) : World Bank’s Role in Forest Law Enforcement and Governance Since 2001 the Bank has:

Acted as coordinator/secretariat for Regional Ministerial processes (S-E Asia 2001, Africa 2003, & Europe and Northern Asia 2005) and provided support for their follow-up

Incorporated illegal logging into the policy dialogue in borrower countries (e.g. Cambodia, Indonesia, Cameroon, Congo DRC)

Supported control of illegal logging related actions in 32 (out of 51) forestry projects (IBRD, IDA, GEF) for an estimated amount of 311 million USD (about 11% of total project cost), including stand alone projects and forestry components in broader projects

Initiated in 2005 a process to mainstream illegal logging related issues into broader governance programs and develop a corporate approach

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

Linking Forestry to Broader Governance and Anti-Corruption Work Public Sector Governance Governance and Anti-Corruption Diagnostics Legal and Regulatory Reform Financing Private Investment Corporate Social Responsibility Anti-Money Laundering/Asset Forfeiture

Systematically integrating forest law enforcement and governance issues in country forestry dialogues in “problem” countries

Targeting knowledge management to achieve synergies with other Bank operations

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

Strengthening Partnerships within the WBG With IFC in the private sector context

Strengthening Partnerships outside the WBG Regional institutions (ASEAN, OTCA, EAC, COMIFAC) Donor agencies

Thank you

www.worldbank.org/flegwww.worldbank.org/forests