The Determination of Risk Adjusted Discount Rates for Private Sector Forestry Investment

In forestry economics a great deal of attention has been givento the choice of discount rate when this activity has been constitutedas part of the public sector investment portfolio. In contrast,little attention has been paid to the discount rate that shouldbe used when afforestation is considered as part of a portfolioof investments in the private sector. There are major difficulties,both practical and methodological, in determining the discountrate that should be applied to private as opposed to publicsector afforestation projects. The central purpose of this paperis thus to derive the appropriate discount rate for privatesector forestry with attention focused primarily on risk adjusteddiscount rates of the type applied in commercial capital budgeting.The relevant risk adjusted rates are then employed to assessthe viability of a 28.5 ha private sector afforestation standbased on Oceanic forestry technology. The afforestation projectis assessed under the differing tax and grant anangements introducedin 1988, available within the Farm Woodland Scheme and the WoodlandGrant Scheme. The analysis finally concludes that the use ofa risk adjusted discount rate leads to forestry, under bothschemes, being characterized as a profitable venture.     

Effect of land prices,transportation costs,and site productivity on timber investment returns for pine plantations in Colombia

The relative importance of land costs, site quality, and forest location are major concerns in forestry investments, but little research has been done to assess the impacts of these or other factors on financial returns. In response to this issue, the effects of land prices, wood transportation costs, site productivity, and discount rates on timber investment returns for pine plantations in the Andean Region in Colombia were estimated. For all the scenarios analyzed, the internal rate of return varied between 6.4 and 15.6%. High site quality with high growth rates were profitable in all scenarios at real discount rates ranging from 8 to 12%, but low site qualities seldom had positive net present values. Less expensive land and locations close to mills had better rates of return. More distant locations, poor quality sites, or areas with high land costs generally did not meet the discount hurdle rates. Site quality, which is the factor most easily manipulated by intensive forest management and improved technology, was substantially more important than land prices and transportation differences in determining timber investment returns.     

Investment Potential of Private Forests in Croatia

This paper presents a comprehensive financial analysis of the investment potential of seven private forest categories in the Republic of Croatia (total study area of 268,072 ha). It covers the period from 2018 to 2048 and includes forest purchase costs, management simulation, timber transport to mills, timber processing and veneer production, and finally the selling of sawmill, veneer and forest products. Data from the Croatian National Forest Inventory and forest habitats map were used as a basis for analyses. Spatial data on private forests, roads and timber process plants at the national level were also integrated into the analyses. For the forest management simulation, the MOSES 3.0 simulator was used, and the QGis 3.4 software was used for spatial analyses of forests, roads and mils. Based on data from several world stock exchanges that cover companies of the forestry sector, a real (inflation-free) discount rates were used. The financial analyses showed which forest categories have positive investment potential and under which conditions. Results pointed out that multi-aged European beech forests have the highest internal rate of return (8.45%) and are the only one which would meet the expectations of a financially rational investor using criteria of a risk-adjusted inflation-free discount rate of 8%.     

Measuring the social performance of forest management

Forests produce several types of benefits to both forest landowners and society.The social benefit of private forestry is equal to private benefit plus positive externalities minus negative externalities.This study developed alternative metrics for the evaluation of the social benefit of forest management.Forest management was assessed in terms of five criteria:economic,socio-cultural,environmental and ecological performance and the resilience of the forest ecosystem.Each criterion was described with three numerical indicators.Alternative performance indices were calculated from the indicator values using methods developed for multi-criteria decision making.It was concluded that indices based on the multiplicative Cobb-Douglas utility function might be the most recommendable when forestry should produce a balanced combination of different ecosystem services.When the indices were used to compare alternative silvicultural systems in terms of their social performance,continuous cover management was ranked better than even-aged management.The performance of even-aged management improved when it aimed at increasing the share of mixed stands and broadleaf species.Maximizing net present value(NPV) with a 1 % discount rate led to better social performance than maximizing NPV with a 4% discount rate.     

森林资产评估中的折现率设定

通过系统分析比较内部收益率、社会基准收益率、行业基准收益率、加权平均资金成本、普通股资金成本、利率的异同后发现:用成本法对森林资产的评估,其折现率应该设定为项目的财务内部收益率;用收益法对森林资产的评估,其折现率应该设定为行业基准收益率.     

Misinterpreting the Internal Rate of Return in Sustainable Forest Management Planning and Economic Analysis

Sustainable forest management planning includes accounting for revenues and costs that accrue throughout time. While debate continues as to the how to account for these cash flows, the most used techniques are net present value, benefit cost ratios, and internal rate of return (irr). Managing forests sustainably depends critically on interpreting the results and management implications of these techniques accurately. It is appealing to equate the irr with a market-derived rate of return given its definition. Unfortunately, its mathematical derivation does not support this interpretation and past use of irr often illustrates this confusion and misinterpretation. The irr only reflects the amount and timing of the net cash flows for a given venture and does not include any social, economic, or other external factors found in market-derived discount rates. Therefore, the irr does not reflect an appropriate rate of return or opportunity cost of capital for sustainable forest management. My purpose is to provide a theoretical argument that can be used to help correct this misinterpretation and stimulate discussions on the economics of sustainable forest management.     

Discount rate and harvest policy: implications for Baltic forestry

The free market economy, to which East European countries are increasingly being exposed, implies that classical budgeting techniques in the form of the Faustmann approach present themselves as the tools of choice for forest investment analysis. One implication is that the choice of a proper discount rate (r) must be made as part of the basis for formulating a harvest policy. The paper discusses this choice in the light of practice as well as theory, and, using Lithuania as a case, examines the potential economic and political impact of softening the current restrictions on forest management. A review of the debate on discounting in forestry is provided. A statistical analysis of the relation between reported r values and internal rates of return (IRR) from numerous studies on forestry investments reveals a strong correlation between r and IRR. Possible explanations are provided. Analysis reveals that application of any positive r will significantly change forestry practice in Lithuania. Setting r=3%, slow growing species are to be replaced by fast growing species, and rotation periods should be substantially shortened. The standing volume of (over-)mature forests is approximately 160 million m³, as compared with the currently harvestable volume of approximately 40 million m³ according to the minimum allowable rotation age. The macroeconomic perspectives of cashing some of the mature forest for the small transition economy are discussed, taking into account the effects of externalities of forests. Consequently we suggest an alternative formulation of the normal forest. Finally, based on these considerations, a real r of 0–2% is suggested for State forestry in Lithuania. A post-tax r of 2% is advocated for private forestry, with potential project specific deviations downward to 0 or upward to 4%. It is stressed that discount rate is viewed as one of the important decision parameters and due regard should be given to non-timber forest outputs, social and institutional settings and other factors.     

Effects of Public Financed Aid on Private Forest Investments: Some Evidence from Finland, 1963–2000

The relationship between private forest investments and public cost sharing (government financial aid to private investment projects) was first analysed with an economic optimization model. In the general case the model predicted that cost-sharing causes substitution between private funding of investments and public aid. However, in some special cases complementarities were not ruled out. Next, the model predictions were tested with a translog cost function specification of forest investment fund shares. Aggregate data from Finland in years 1963–2000 were used. The substitution and own price elasticities of purely private, subsidized individual and subsidized collective investments are derived from maximum likelihood estimates of translog system model, allowing for investment scale effects. Investments supported by public funding behave in a strongly complementary fashion to each other. Some substitution of subsidized private funding for non-subsidized private funding was found. Strong scale effects and forest investment incentives were found among forest owners in response to public investment aid.     

Private Ownership and Public Good Provision in English Woodlands

There is increasing emphasis on multipurpose forestry within UK national and regional forest strategies, with the aim of co-delivering the social, environmental and economic benefits of woodlands. Private woodland ownership is also changing, with an increase in owners without a farming or forestry background. However, there is little substantive evidence relating to the motivations of private woodland owners and, in particular, their ability and willingness to deliver public goods. A qualitative study is adopted, using semi-structured interviews in three areas in England, to address this theoretical gap. Exploratory findings indicate that private woodland owners have a diverse range of objectives, motivations and management regimes which influence the potential for public good delivery. It is shown that some private woodland owners, such as those less motivated by economic return, may be better placed than others to deliver certain public goods; that conflicts can arise between the provision of recreation and nature conservation, especially in smaller woodlands; and that many private woodland owners are sceptical about becoming involved in grant schemes which may help foster public good provision in the private sector.     

Public cost-sharing in private forest investments in Finland 1983–2000

A model of public cost-sharing in private forest investment is proposed to describe the substitution between the private financing of investments and public investment assistance. The substitution depends on the curvature conditions of the forest investment function on forest stock. When the second-order investment effects are close to zero or when they do not exist, the funding substitution will not take place. A simultaneous econometric model for private and public funding employing forest incomes, forest income taxes, interest rates, investment scale and market wood price expectations as exogenous variables is estimated. The model estimation based on Finnish regional data in 1983–2000 rejects the substitution alternative. A 10% increase in private investment funding increases the demand for public funding at the same rate, but a 10% increase in public funds will increase the private funds supply by 2.5%. Significant income effects are found only in the case of private funding. In northern Finland, the scale effects are large for public financial assistance. The effects of the income tax reform on the private supply of funds are positive, especially for the new wood-sales profit taxation, whereas the interest rate and price expectation effects are negative.

A critical view on benefit-cost analyses of silvicultural management options with declining discount rates

The long planning perspective is one of the unique features of forestry. How to value money flows expected in the far distant future is therefore a crucial question. Applying time declining discount rates (DDR) may offer an appropriate alternative to conventional discounting, but few studies have applied DDRs in forest economics. We expect that theoretical assumptions behind welfare analyses based on DDR will be important. Using a dataset from the UK (Davies and Kerr (2015) [Forests 6: 2424–2449]) we investigate the effects of 1) more than marginal contributions from forestry to consumption, 2) the role of the assumed scenarios for return on capital, and 3) ignoring optimization (i.e. adopting predefined management scenarios) on the ranking of different silvicultural strategies. These include various clearfelling options (with replanting, natural regeneration or underplanting) and the transition to continuous cover forestry. Our analysis reveals that changes in these aspects affect the ranking of forest management options more strongly than a pure change in the coefficients of a benefit cost analysis. Decreasing marginality, cautious assumptions about the worst-case return on capital and optimization of silvicultural operations all increase the relative attractiveness of continuous cover forestry. We conclude that applying DDR makes valuation in forestry more demanding and should be applied with appropriate care. In addition, the precise assumptions behind the particular schedule of DDRs should be explicit. Finally, theoretical considerations support the importance of combining optimization of silvicultural management strategies with their economic evaluation.     

The REDD/Carbon Market Offsets Debate: Big Argument,Small Potatoes

Both proponents and opponents of using forest carbon markets to pay for Reductions in Emissions from Deforestation and forest Degradation (REDD) have exaggerated their importance. The resources mobilized by the principal drivers of deforestation—beef, soy, palm oil, and wood products—dwarf all REDD funding, even if one only counts exports of these commodities from tropical forest countries. By far the largest part of that REDD money has come from public funding, not carbon markets, and even that has mostly been “voluntary market” funding, not offsets usable for regulatory compliance. While substantial carbon market growth is projected, the rules of most of those markets do not allow the use of REDD offset credits. It is important for those on both sides to realize that they are talking about an alternative that is very small, compared both to other kinds of REDD funding and to the scale of finance operating to drive deforestation. Far more urgent than continuing the debate about whether forest carbon markets are a solution or a threat, is the question of how to change the behavior of the industries and commodities driving deforestation so as to move them to a zero-deforestation business model.     

Discount Rates in Land-use Planning

It is suggested that discounting procedures employing ratessimilar to the current bank rate are not appropriate in forestplanning, and that much lower discount rates should be used,together with an assessment of the ratio of expected incometo capital investment.     

Remunerating nature conservation in central European forests: scope and limits of the Faustmann–Hartman approach

The elementary method based on Faustmann's analysis and extended by Hartman is used for the design of payment schemes inciting forest owners to manage their assets in a way more conducive to nature conservation. It is not aimed at extending the elementary theory but rather, to elicit its most important empirical implications. It is taken for granted that the conservation benefit of a forest increases linearly with time. Linearity is not only in sufficient agreement with ecological facts but also makes it easy to derive important conditions, in particular the minimal payment inducing owners never to harvest. The theory is applied to a German beech forest model (Fagus sylvatica). It is found that inciting owners to delay cutting cannot be recommended. The instrument should be used for the objective of abandoning cutting altogether which, however, demands that the conservation objective, as expressed in its present value, is granted a very high value by society. In the sequel, various aspects as to the scheme's practicability are discussed, including the need to capitalise annual payments into one single sum, the choice of a discount rate, the allowance for current costs in forestry and the likely approval of payments in the political arena. Although the discussion identifies several obstacles to the practical application of the scheme, there appears to exist no principal reason why a conservation policy based on the Faustmann–Hartman approach should not work in forestry.     

Applying portfolio optimisation to the harvesting decisions of non-industrial private forest owners

The non-industrial private forest owner's optimal harvesting and investment strategies are studied at forest holding level by including individual forest stands in an asset class portfolio. The forest owner can either clearcut mature stands and invest the capital in financial or real asset classes (bank deposits, government bonds, stocks, apartments) or postpone clearcutting and retain capital in standing trees. Forest inventory data from actual forest holdings in Southwest Finland, the simulation–optimisation software MELA, and statistics on timber prices are utilised to compute the return series for forest stands. The numerical results show that the optimal level of clearcutting decreases markedly with initial non-forest wealth, especially at low risk-free rates of interest. It may therefore be rational for non-industrial private forest owners to consider shorter rotation periods than those of investors with diversified portfolios. The correlations between returns from forest stands are high, implying that increasing the variety of stand structures achieved by planting different species is not likely to bring substantial diversification benefits. The favoured investment outlet for harvesting revenues (apartments, government bonds or stocks) is sensitive to the period of historical data used to compute the return series and risk-free rate of interest. The value growth of forest stand can be used to estimate annual returns only for those stands that are readily mature. An alternative method of computing returns on stands in any development phase is proposed, based on net present value of stand adjusted for fluctuations in forest land prices. This method applies if selling forest land is considered an option. If selling is not an option, the ratio of maximised net present value to value at immediate harvest can be used as a ‘maturity index’ for ranking the stands for portfolio optimisation.     

试论高等院校科研电视片的编制

科研电视片是传播新技术、将科研成果转化为现实生产力的有效途径,是科学研究的新手段,是形象化的科研论文。它不仅充实了电化教学内容,而且有利于开展第二课堂教学。科研电视片的制作具有周期长,预见性差、服务对象复杂,任务急等特点.当前高校科研电视片的制作还是一个薄弱环节,应提高认识,多方筹集资金,确保摄制经费来源;同时应理顺关系,做好规划;提高科研电视片的经济,社会效益。     

Spacing in Plantations: A Management Investigation

This paper describes an approach to management decision problemsusing incomplete information. The approach is demonstrated takingthe decision about the spacing to adopt in establishing a plantationas an example. Little critical information about the physicaleffects or the effects on costs of varying initial spacing isavailable in this country. It is shown that limits within whichsuch effects probably lie, can be determined for the main quantities—thevolume of timber produced, its quality, and the cost of production.If the objectives are known it is then possible to determinethe treatment likely to give the best result. In the case of spacing it is found that the spacing giving thebest financial results depends on the precise objective of theenterprise—expressed in this case by the discount rate,and on the prices to be obtained for the resulting produce,as well as on the volume and quality of the out-turn. It isshown that on a range of assumptions about physical outcomeand price ranging from the most optimistic to the most pessimistic,and with rates of discount ranging from 31/2 to 61/2 per cent.on all except extreme combinations, a spacing of 8 feet willlead to a financial result within 5 per cent. of the best. Onthe expectations considered most likely to come about, spacingof 8 feet gives the best financial result. Only on the mostpessimistic assumptions of price and volume production is theadditional expenditure necessary to achieve spacings closerthan 8 feet expected to earn a rate of return greater than 5per cent.     

Blind Alleys and Open Prospects in Forest Economics

Foresters' assertions that forestry deserves a specially lowdiscount rate and generates specially large social benefitsare not substantiated. The argument for a low discount rateis more general, and depends partly on the finiteness of mineraland fuel resources, which also affects the true cost of materials,labour, and land. Timber-growing in Britain is profitable inthese circumstances, particularly as an insurance policy, butshould be expanded only after taking a broad view of unmarketedbenefits and costs. Recalculated costs of resources suggestforms of forestry different from those currently favoured.     

Effects of permanence requirements on afforestation choices for carbon sequestration for Ontario, Canada

This study examines the economic and spatial impacts of afforestation choices for carbon sequestration in Ontario, Canada when the non-permanence of forestry carbon offsets is taken into consideration. We test six scenarios including three long-term projects with red pine, Norway spruce and hybrid poplar plantations and three shorter term hybrid poplar scenarios that produce temporary carbon emission offsets. We convert the break-even costs of sequestering carbon to a permanent carbon offset equivalent and analyze the possible geographical implications of the choices across eastern, southern and central Ontario, Canada.The most financially viable scenarios show a relatively large part of central Ontario with attractive choices at a 4% discount rate but a much smaller area at an 8% rate. The assumption about the future price evolution of temporary carbon offsets is one of the biggest factors that influence the attractiveness of these choices. At the 4% discount rate and the assumption of rising prices of permanent carbon offsets, the scenarios that store carbon for long periods appear to be the least-costly option. Hybrid poplar appears as the best choice in southern Ontario and a mix of conifer species and hybrid poplar in the central and northern parts. When future prices of temporary carbon offsets are assumed to decline, temporary hybrid poplar projects appear to be more attractive in the southern and eastern parts of the province. The variety of alternative scenario choices also depends on the discount rate and future price expectations for temporary carbon offsets. For a relatively narrow deviation of the carbon offset price (±$0.6 t^-1 CO₂), only 4% to 9.2% of the total 5.8 million ha area would have one or more potentially viable alternative scenarios at the 4% discount rate and almost zero alternatives at the 8% rate. Higher discount rates lead to fewer attractive choices, suggesting that landowners would be left with very few options when trying to maximize net returns from plantations.     

美国森林园区私有产权的“公共性”及启示

美国等西方发达国家土地资源以私有制为基调，这几乎成为共识。然而，产权的复杂性决定了并不是仅以“公有”和“私有”就可以完全界定清楚人对物的权属关系。森林及林地资源承载着生态乃至社会文化功能，因而不论私有还是公有均具有明显的公共性特征。对这种公共性如何界定？它与私人权益之间的关系是什么？文中在作者跨国实地调研基础上，以既作为私人庄园又作为国家历史文化地标的米德尔顿庄园为例，分析私有属性类别的美国森林旅游资源的产权结构。研究显示，世界上不存在绝对的公有产权和私有产权，而合理的产权结构安排其价值目标在于公共与私人之间权益的平衡；既不能使公共强权压制处于弱势的私人权益，也不能使私人权益侵吞和破坏公共权益；应通过公共性与私人性、公平与效率相互协调统一的复合产权结构维持经济社会发展的秩序。提出了对于我国农村土地产权改革的3点启示。