Understanding timber mafia

The lesson from history of policy in the forest management is clear: state ownership, state control and state intervention have failed in forest conservation

Understanding timber mafia

The deforestation rate in Pakistan is 0.2 per cent to 0.5 per cent annually which is the highest in the world. The country’s forests are fast dwindling posing threats to livelihood of local communities, creating impending shortage of resources, and causing significant threat to environment due to vanishing natural protection against flash floods.

Pakistani state has performed various experiments to meet its policy goal of conservation and optimal exploitation of forests while meeting the needs of local communities. Historically, state has controlled the commercial harvest schedule while paying royalties to locals and has relied on forest contractors for intermediary functions of tree felling and transportation. However, the organisational form has been changing.

The forms of state control include direct control by the Forest Department; Forest Contracting; Forest Development Corporation and Forest Cooperatives.

Forest Department

The historical precedent of the Forest Department is the erstwhile British administration. In 1864, the British took over all forests in India and declared them a state property. The department was given one primary target: supply timber for the northwest railways and construction of cantonment. The imperatives of colonial forest management were essentially strategic, i.e. to meet the critical imperial need for wood for railways and during the world wars, and commercial, i.e. to assure steadily increasing revenue to the state.

Since independence, Pakistani state has continued exploiting local forests especially located in the KPK to meet the local needs of timber. Initially, the Forest Department directly managed the harvesting by employing petty labour contractors for felling and transportation of trees.

By 1960s, the organisational form changed as the state relied on forest contractors for sales as well. The state awarded contracts to those who could bid for standing trees and once they were successful in bidding, they were responsible for felling and marketing of trees. There was no concept of royalty payment to locals.

When the princely states of Swat, Dir and Chitral acceded to Pakistan, the state was forced to pay royalties to locals. The royalty formula allowed 60 per cent of net sale proceeds to owners and right holders in Swat valley, and 80 per cent elsewhere. The royalties were distributed equally among all the male members of the community.

Royalties were initially paid as a "fixed price system" under which the Forest Department used to pay the local concessionaires their royalties as a fixed price per cubic foot of the harvest volume. As timber prices rose sharply, this system did not accommodate rising market prices, and often the fixed price was merely one-fourth of the prevalent market price.

This system was replaced with "net sale system", under which the harvested timber was auctioned at timber markets and sold to the highest bidders. The full percentage was then returned as royalties. However, it meant that the cash resided in government accounts long enough to frustrate the right holders and owners. It was this hand holding of the money that allowed the forest contractors to exploit the local right holders.

Forest Development Corporation and Origin of Timber Mafia

It was realised that to compensate for over-bidding, which was a normal practice, the forest contractors resorted to over-harvesting of forests. To discourage them, the then NWFP government established Forest Development Corporation (FDC) in 1976, which limited the role of contactors to cutting and marketing of trees, while retaining the ownership of timber in state’s hands. However, FDC was soon exploited by ingenious timber traders.

The timber traders devised a complex system of advance purchase of royalty rights from locals, under-cutting of bids, identity concealment and later on enjoying windfall gains when timber was sold at market rates.

The timber traders spotted the huge arbitrage between the official price of timber and its market price. The contractors obtained the logging schedule from the department, contacted royalty owners whose compartment was mature for logging, paid them an upfront cash price higher than the government price, but significantly below market price, and in exchange, obtained royalties through attorneys. Once they owned royalties, these contractors then participated in the bidding for cutting and transportation of trees and were able to under-cut all bids. After they got the contract, they could then harvest the identified compartment, and mostly over-harvested the forest.

Finally, these contractors brought the timber in the market, where Forest Department Corporation sold them at market price. As 60-80 per cent of sale proceeds belonged to concessionaires, the contractors received the cash through their attorneys from the concessionaires. Thus this cash did not reach the right holders, who had already sold their rights to contractors. It is these timber traders, who are infamously and inaccurately called ‘timber mafia’.

Timber "mafia" can be termed an unintended consequence of an ill-designed forest management policy that did neither appreciate prevalent market prices nor respected the property rights of locals.

Published in 1998, an IUCN (International Union for Conservation of Nature and Natural Resources) study announced this verdict: "The FDC, established to replace contractors and introduce scientific forest management, has simply become an agency to award logging contracts to the very contractors it was meant to replace and has failed to invest in forest management". In other words, it strengthened the "mafia".

Forest Cooperatives

Realising that FDC was also exploited by timber traders, the state turned to participatory led management and decided to establish cooperatives. The cooperative societies were set up in Hazara division in 1980, and by 1993, there were 33 operational Forest Cooperatives. They were set up with the explicit purpose to transfer the management and control of forests to locals, however, they were politicised. As the IUCN study concluded: "The cooperatives were dominated by a few major owners, belonging to a single family in some cases. There was virtually no egalitarian participation by small owners and right-holders."

Timber mafia thrived now pigging back on a political system.

By late eighties, it was established that instead of enhancing conservation, these cooperatives had contributed to massive deforestation in the Hazara division. As the 1992 flash floods from Hazara division were arguably attributed to deforestation, it prompted then Prime Minister Nawaz Sharif to announce an immediate ban on logging and all those cooperatives were consequently suspended. Thus an experiment in the name of community participation miserably failed in helping the forest conservation.

The ban is operational to date with exception of couple of temporary relaxations to clear backlog of dead timber or pre-ban harvested timber. As any student of rudimentary economics will suggest, this ban was counter-productive. It led to price hike, encouraging timber traders to strengthen their mafia and led to an increase in the smuggled in-flow of timber.

The government holds illegal timber trading as a major factor in deforestation. True to its leviathan footprint, the government, through draft National Forest Policy 2015, has signaled its intention to set up a ‘Timber Regulatory Authority’ with the grandeur goal of "checking inter-provincial timber movement and trade of timber; international import and export of timber and related forest products".

In contrast, National Environment Policy 2005 recommended to "eliminate all sorts of import duties on timber products…"

The planned Timber Regulatory Authority is unsound as this idea is devoid of an understanding of how timber markets operate.

The government needs to abolish all import duties and import taxation on timber, if it is serious in crushing the so called timber mafia. As IUCN report recommended long time back, opening up of timber market will breach the mafia by lowering their implicit profit margin and will undercut their deals with royalty holders.

The government also needs to ensure that there exists no arbitrage between open market prices and government announced prices of timber. It is this arbitrage that has encouraged the timber traders to exploit both the owners of forests and the forest departments, and ultimately raising the timber prices in urban market thus also raising construction costs.

The lesson from history of policy in the forest management is clear: state ownership, state control, state intervention and even state stewardship have failed in forest conservation. We should consider moving to the other path, one paved with private property rights. Otherwise, the locals will have no incentive to conserve their habitat, and forest resources will be depleted beyond regenerative capacity.

Understanding timber mafia