Differences in Silvicultural Investment Under Various Types of Forest Tenure in British Columbia

This paper presents empirical evidence on the relationship between forest tenure and investment in silviculture. Silvicultural activities and expenditures on a large number of recently logged tracts in British Columbia, under four distinct forms of tenure, are assessed using a silvicultural investment model based on the conventional theory of capital. The empirical results indicate that silvicultural investment is correlated with security of tenure, and the level of investment under the most secure form--private land--is more than 67% greater than that under the least secure form--Forest Licences. FoR. Scl. 42(4):442-449. Additional key words: Economic incentives, policy, timber, property rights. N CANADA, WHERE MOST FORESTLAND is held in public ownership by provincial governments, the way rights to timber are allocated to private companies is a central and controversial issue of forest policy. Tenure systems vary among provinces and territories, but all the major timberproducing provinces have developed long-term licensing arrangements which are intended to encourage private companies to develop and manage, as well as to utilize, public ("Crown") forests (Pearse 1990a). Recently, new concerns have been raised about tenure policies. With the end of the original natural timber in sight in many regions, forcing the forest industry to turn to new managed crops, the question is whether tenure arrangements provide licencees with adequate incentives to invest in long-term forest production (Pearse 1993). This concern is heightened in some regions by the decline in timber supplies as the original stock of natural timber is depleted, and regulated harvest rates are adjusted to the longrun sustainable yield--the so-called "falldown" phenomenon. The sustainable yield depends heavily on the amount of silvicultural effort devoted to enhancing forest growth. Thus the concern about future timber supplies leads to concern about the adequacy of private silvicultural effort on public forestlands. The usual presumption is that, other things being equal, the more secure the tenure, the more the tenure holder will invest in future forest production. This view is reflected in the design of long-term management licences in British Columbia and elsewhere (Pearse 1976). Recently, the government of British Columbia set out to convert certain types of licences to a more secure form, explicitly to "create a positive environment for investment in the forest industry" (Ministry of Forests 1987, p. 30). This belief continues to produce advocates for more secure forms of timber rights, not only from within the forest industry but also from public agencies such as the British Columbia Forest Resources Commission But assertions that weakness in the current tenure system impedes silvicultural investment are rarely supported with quantitative evidence. The influence of tenure on silvicultural investment has been a subject of much speculation but very little empirical study. The only significant empirical investigation is a comparison of silvicultural spending under certain forms of tenure in British Columbia based on answers to questionnaires given by officers of forest companies (Luckert 1988, Luckert and Haley 1990). There have also been a number of theoretical and policy studies (Posner 1977, Cotter and Ulen 1988, Pearse 1990a, 1993). However, despite its importance to public policy, the quantitative influence of tenure arrangements on investment behavior has not received neady the attention in forestry that it has received in other sectors-notably agriculture (e.g., Feder et al. 1988). Daowei Zhang is an Assistant Professor in the School of Forestp/, Auburn University, Auburn, Alabama 36849-5418, and Peter H. Pearse is Professor of Forestry at the University of British Columbia, Vancouver, B.C. Canada, V6T lZ4. Acknowledgments: The authors are indebted to Messrs. Henry Benskin, Mike Blackstock, Bruce Bell, Steve Hunt and Ms. MeichingTsoi of the Ministry of Forests in Victoria for their generous assistance in providing data for this study. Helpful comments and suggestions on earlier drafts were provided by Clark S. Binkley, Russell Uhler, and two referees and one associate editor of this journal. Manuscript received November 15, 1994. Accepted November 2, 1995. Copyright ̧ 1996 by the Society of American Foresters 442 Forest Sctence 42(4) 1996 Th•s paper presents the results of an lmt•al attempt to measure, directly, the influence of forest tenure on silvicultural investment in British Columbia. The study differs from other investigations of this question insofar as it is based on econometric analysis of recorded silvicultural expenditures under a variety of tenure forms, utilizing a very large sample of data. The paper begins, in the next section, by describing the theoretical framework and econometric method adopted. This is followed by a discussion of the data used in the study. The remaining sections present empirical findings, conclusions, and discussion of policy implications. Analytical Framework Investors in silviCUlture, like other investors, respond to expectations about future returns. The expectations of a silvicultural investor are affected by the nature of his or her property rights over the forest. For example, ifhis rights extend for a long t•me into the future, like the infinite term associated with freehold ownership, he can expect to capture all the benefits of investment in increased forest growth. Conversely, if his rights are of short duration, as with a 5 yr Timber Sale Licence, he cannot. Forest tenures can blunt incentives to invest in other ways, as well. Volume-based licences do not convey exclusive rights to a defined area of forest even for their term, so licencees cannot benefit from enhanced growth on any particular tract. Other licences provide that licencees must pay for timber they harvest, including enhanced production, thus reducing their expected benefits from silviculture. The primary dimensions of property rights over land and resources have been identified as exclusivity, comprehensiveness, duration, transferability and degree of economic benefit conferred. There is a range of possibilities for each of these dimensions, and each form of tenure incorporates a certain combination of these (Pearse 1990b, Zhang 1994, 1996). For purposes ofthis study we examined silvicultural ctivity under the four most important forms of forest enure in British Columbia, listed in Table 1 with their characteristics most relevant in determining the economic security they afford their holders. 1 Tree Farm Licences combine Crown forestlands with private lands and Timber Licences held by the licencee to form large, geographically defined, sustmned y•eld umts. All categories of land are subject to the same silvicultural regulations. Other private lands, not included in Tree Farm Licences, are subject o different rules, so to avoid distortions resulting from differing regulatory requirements we confined our observations on private lands to those within Tree Farm Licences. Timber Licences are old forms of tenure with varying terms, intended to give the holder time •o remove the original timber according to an approved plan: and then expire. Some are included within Tree Farm Licences; when they expire they become p•rt of the,other Crown lands within the licence. 2 Forest Licences convey a right to harvest a specified volume of timber each year within a broad administrative area. The specific tracts to be harvested are identi.fied from time to time, but the licencee does not have an exclusive right to a defined area for the term of the licence. Forest Licences have shorter terms than Tree Farm Licences, but both are renewable on an "evergreen" basis: that is, the licencee has a right to call for a new licence 'to replace his existing licence when its term is only partly expired (Pearse 1976). All these forms of tenure are subject o similar Silvicultural regulations. In September 1987 these. regulations were changed in important respects, making all licencees and owners responsible for ensuring reforestation by natural or artificial means after logging, and for bearing the cost. Accordingly, to avoid distortions resulting from regulatory change, we confined our observations to areas logged after September 1987. These four forms of forest tenure differ in the various dimensions of property rights noted earlier (Pearse 1990a). However, with respect to the features that determine the security of the holders' rights--the term, renewability, comprehensiveness of resource rights, obligation to share financial returns with the government and the scope for regulatory intervention--private lands are clearly the most beneficial to the holder, and Forest Licences are the least beneficial. Timber Licences lack the "evergreen" renewal provisions of Tree Farm Licences and Forest Licences, but they convey exclusive rights to a defined area, which Table 1. Some characteristics of tenure relevant to economic security of its holder. Form of Tenure Term Renewability Rights conveyed Governmental charges Private land in Tree Forever Not applicable All freehold rights Property taxes based on timber Farm Licences harvested Crown land in Tree Farm 25 yr Replaceable very 10 yr Stumpage Licences Timber Licences Varies Not renewable Royalty on timber harvested 15 yr Replaceable very 5 yr Stumpage on timber harvested Forest Licences Allowable annual harvest for a defined area Original timber within a defined area Allowable annual harvest 1 For a detailed examination of the various forms of forest tenure in British Columbia, see Pearse (1992) and Zhang (1994, 1996). 2 Of the Timber Licences included in this study, the number that are within Tree Farm Licences is not known. However, roughly half the timber harvested under Timber Licences in British Columbia originates on Timber Licences within Tree Farm Licences (Zhang 1994). Forest Sctence 42(4) 1996 443 Forest Llcences do not (Zhang 1994). Thus our four types of tenure can be considered to be listed in Table 1 roughly inorder of declining security of the rights they afford their holders. In another study, we examine differences in certain indicators of forest management performance among these same types of tenure (Zhang and Pearse 1994). The findings indicate that lands classed as "not satisfactorily restocked" occur less frequently, and comprise a smaller proportion of cutover areas, on private lands than on liceneed Crown lands, and that private lands are more often planted, and reforested more quickly than liceneed Crown lands. Forest Licenoes, the least secure tenure examined, showed the poorest performance by these indicators. In contrast to these indicators of the results, or output, of forest management, the present study examines inputs, in the form of silvicultural investment, and its variation among the forms of tenure. The hypothesis for this study is that, ceteris paribus, silvicultural investment differs among tenures having differing characteristics. There are, of course, other factors that will influence the potential investor's behavior in particular circumstances--the natural fertility of the land, its distance from market centers, the value of the species to be grown, and so on. Thus