Improving fiscal management has been a priority for international reform efforts in the forest sector, in particular through the FLEGT VPAs and the EITI, prompting the question of whether progress has been made.
Good fiscal management is of critical importance if the forest sector is to fulfil its potential to contribute to sustainable development. In recognition of this, fiscal management has been the focus of much attention from the international community as part of reform efforts in the sector.
Two international initiatives in particular have been working to strengthen fiscal management in the forest sector since the early 2000s: the EU’s Forest Law Enforcement, Governance and Trade (FLEGT) Action Plan, and the Extractive Industries Transparency Initiative (EITI).
Through the FLEGT Action Plan, established in 2003, the EU has been working with partner countries in the tropics to tackle illegal logging, with the aim of supporting sustainable forest management and broader development objectives. Central to this has been support for forest governance reforms, including a range of measures aimed at strengthening the management of forest sector revenues. These have included policy and institutional reform, the development of financial management systems, and capacity strengthening for governments and civil society.
At the same time, the EITI has been working to ‘curb corruption, strengthen governance and support inclusive development’ through increased transparency of public finances and expenditures. Established in 2002, it requires the publication of data by both the private sector and governments, in order to improve accountability in the management of natural resource revenues. While the EITI focuses mainly on the oil, gas and mining sectors, a number of countries have decided to extend their reporting to include their forest sectors.
Given the attention that these issues have received over the last two decades, the question arises of whether fiscal management has improved as a result. To explore this, IPE Triple Line and Chatham House undertook and commissioned research in Ghana, Liberia and the Republic of the Congo.
The three countries were selected because of their engagements in these two international initiatives; all three have negotiated FLEGT Voluntary Partnership Agreements (VPAs) with the EU, and in the cases of Liberia and the Congo, they both report on their forest sectors under the EITI. Pragmatic reasons also played a role in this choice: the availability of national experts and access to relevant data.
The research considered two issues:
- Whether the efficiency of forest revenue collection has improved over the last decade, and what factors have contributed to this; and
- To what extent revenues are being disbursed to subnational governments and to forest communities in line with national legislation.
Data availability and usability are still challenging in the three countries, and the size of the research project did not allow for extensive primary data collection. Therefore, this research could only explore certain aspects of these questions. The paper presents initial findings and highlights those areas where further research is needed.
Methodology
The research focused on the fiscal regime connected to timber production, primarily from industrial forest concessions. This is the main source of forest sector revenues for the government in Ghana and the Congo. In Liberia, over the last decade, logging has increasingly taken place on community lands, within the framework of the community forestry legislation (discussed further below), and such production is also included within the research.
Forest revenue frameworks incorporate multiple fees and taxes along the timber value chain. Frameworks vary across countries but, broadly, these charges can be characterized as:
- Area-based charges, calculated according to the forest land area under exploitation, often expressed as a form of ‘ground rent’;
- Volume-based charges, calculated according to the volume of timber under consideration. These can be linked to timber production (for instance stumpage fees), or processing (transport fees, and charges connected with transfer of ownership). Some charges are based on the volume harvested, while others consider the volume of timber that can be commercialized; and
- Timber export levies and taxes, usually also calculated by volume. However, these are worth considering separately from other volume-based charges because the mechanisms for collecting and distributing export charges are markedly different.
Some of the revenues generated through these charges are allocated to the forest sector, while others feed general national and subnational budgets, or are assigned to specific sectoral and non-sectoral use (such as plantation or infrastructure development). In addition, timber concession holders are sometimes required to establish bilateral agreements with local communities or local administrations. These may involve cash payments, ‘in kind’ payments, or both.
This research considered those taxes and fees that accounted for the majority of government revenues and sought to establish the efficiency with which they are being collected – that is, the proportion of revenues collected by the government compared to those that are invoiced. Furthermore, it sought to determine the level of compliance with legal requirements for governments to disburse these revenues to the subnational level, and for companies to provide funds to rural communities through benefit-sharing arrangements. An overview of the main forest sector taxes investigated for this paper is provided in Table 1, and a summary of the disbursement mechanisms is provided in Table 3.
Research was commissioned and undertaken by IPE Triple Line and Chatham House, and took place between September and December 2020. IPE Triple Line commissioned the research for Ghana and undertook most of the research for Liberia. Chatham House undertook some additional analysis for Liberia and commissioned the research for the Congo.
Data for the research were obtained from multiple sources: reports and statistics from government, EITI and civil society organizations. Interviews with both forestry officials and non-governmental organization (NGO) representatives fed into the interpretation of data.
For Ghana, data on export revenues came from the annual reports of the Forestry Commission, which are publicly available, and from the Ministry of Finance. The data on stumpage fees and on payments made under social responsibility agreements (SRAs) were provided on request by the Ministry of Land and Natural Resources, the Forestry Commission and civil society organizations. Data were compiled for the period 2010–19.
For Liberia, data were compiled from the monthly reports of LiberTrace, the national timber legality verification system, for the period 2014–20. Data were also sourced from EITI annual reports, which were available for the financial years 2007/08 up to 2018/19. Data on social agreements and benefit-sharing were provided by the National Union of Community Forestry Development Committee (NUCFDC).
For the Congo, data were compiled for the 10 subnational administrative divisions (departments) where there is an active forest sector. The Ministry of Forest Economy and the subnational forestry offices provided annual reports on request, these covered the period 2010–19. EITI annual reports were also accessed, these were available for the financial years 2015/16 to 2017/18.
Revenue data are provided in US dollars. This is the currency in use in Liberia. For the Congo and Ghana, conversions from the national currency were made using IMF annual market exchange rates.
Approaches to enhancing revenue collection and disbursement under VPAs and the EITI
The EU’s support for strengthening fiscal management in the forest sector has predominantly been through the framework of VPAs, a core element of the FLEGT Action Plan. These are bilateral trade agreements between the EU and timber-producing countries, under which national licensing systems for legal timber are established. These systems are developed through a multi-stakeholder process and include establishing a definition of legal timber. This has brought about policy and legal reforms in partner countries, including many reforms related to the fiscal framework.
Ghana, Liberia and the Congo are at various stages of implementation in regard to these agreements and the associated reform processes.
Ghana began negotiating a VPA with the EU in 2007, which entered into force in 2009. Development of a digital wood-tracking system began the same year and was implemented across the country in 2017, with a revised version introduced in 2022. The system is only accessible to government officials. However, some data are made publicly available through an online portal developed by civil society, and other data are available on request. The country’s definition of legal timber, which underlies the licensing system, includes criteria for the payment of fees and taxes by companies and the implementation of benefit-sharing arrangements between companies and communities.
Negotiations for Liberia’s VPA with the EU started in 2009 and the VPA came into force in 2013. A timber legality verification system – LiberTrace – has been established as part of this process. Initially developed and managed by an independent company, SGS, the management of LiberTrace was handed over to the Forest Development Authority (FDA) in 2019. Monthly reports are published online that include data on the chain of custody and revenues. The country’s definition of legal timber, established as part of the VPA process and reflected in the LiberTrace system, includes criteria for compliance of companies with their fiscal obligations and with benefit-sharing requirements.
VPA negotiations between the Republic of the Congo and the EU commenced in 2008 and the VPA took effect in 2013. While a timber legality verification system has been developed, it has not yet become fully operational. The underlying definition of timber legality includes criteria related to the payment of taxes and fees and for the implementation of benefit-sharing arrangements between companies and communities, both through social contracts (cahier de charges) and local development funds.
Both Liberia and the Congo also report on their forest sectors under the EITI. Liberia began implementing the EITI standard in 2008, with its first report published the following year. It was the first country to include the forest sector in its EITI reporting, and data are now available for the financial years 2007/08 up to 2018/19. The Congo began implementing the EITI standard in 2016 and it has published four reports, most recently for 2019.
