Economics of the forest management system designed for the KPKKT concession, Terengganu [Malaysia]

1. KPKKT manages 108,059 ha natural dipterocarp forest. Area deductions due to the he mountainous topography and former logging activities leave around 80,000 ha for logging under the current licence agreement covering a period of 25 years (1983-2007). A Safari-park of around 5000 ha was later excluded from the licensed area to be developed for ecotourism. It is unclear whether or not this primary forest can be logged under the current license agreement. This point needs clarification by the State Forestry Department. 2. KPKKT is a subsidiary of Golden Pharos Sdn. Bhd., which, among others, entertains timber retail shops in Europe. Fellow subsidiary companies to KPKKT are Permint Plywood, Pesaka Terengganu and Pesama Timber. These wood working mills rely entirely on the timber supply from KPKKT for the production of sawntimber, rotary veneer and plywood. 3. KPKKT produces annually 145,000 m3 logs from primary forest on a 3200 ha coupe area (45.3 m3/ha coupe). This cutting rate provides for a continuous supply of timber from primary forest until the year 2007. 4. The log prices which KPKKT charges its fellow subsidiaries (325 RM/m3 average price for 5 given timber groups) are 30% lower than the price records given in the MASKAYU trade statistics (455 RM/m3 for the same timber groups). This discount of 130 RM/m3 accounts for an estimated annual loss in revenue of around 19 million RM. 5. The current average royalty rate for KPKKT`s production is 12.80 RM/m3. It covers only 5.6% of the average stumpage value of 227 RM/m3. The new royalty rates to be introduced in 1997 are approximately three times higher than the current rates. They will cover around 15-20% of the average stumpage value calculated for the KPKKT production. 6. The applied economic analysis gives an account of the current situation before the implementation of the sustainable Forest Management System (ex-ante analysis). Under these conditions KPKKT achieves a considerable financial surplus of 22 million RM per year. The total proceeds from timber sales amount to 47 million RM and the total costs to 25 million RM. The benefit-cost-ratio is 1.88 indicating that the financial surplus exceeds the total costs by 88%. 7. The most prominent cost centre is timber harvesting, which makes up for more than half of the total costs (57%), followed by `administration and personnel` (16%) and road construction and maintenance (12%). Silvicultural operations only account for 2% of the total costs. Thus, enhancing silvicultural operations in order to cope with sustainability requirements will not have a significant impact on the economic situation of the company. The recently established silvicultural observation plots in the logged-over forest will reveal the extent of rehabilitation measures to be carried out in addition to the current enrichment planting operations to ensure a fast recovery of the resource. 8. The quantification of the future level of the Annual Allowable Cut can be singled out as the most critical factor of the new Forest Management System. Reducing the current production level to a sustainable production level would hardly affect KPKKT`s favourable economic situation. However it has tremendous bearing on the timber supply and the economic viability of KPKKT`s fellow subsidiary companies. For strategic planning the following alternatives should be considered: 9. Scenario 1 : The currently high production level is maintained until 2007. After that, the forest resource is rather exhausted and has to recover to build up its growing stock. Timber production is only possible at a very low level. The downstream wood working mills are faced with a serious log-shortage which may lead to the closure of mills and the discharge of personnel on large scale. The sustainable harvest level will only be reached in some distant point in time. 10. Scenario 2 : The currently high production level is adjusted in 1998 to the Annual Allowable Cut as documented in the Forest Management Plan. The adjusted production level will extend the end of the first cutting cycle beyond 2007 to such point in time when the logged-over forest has sufficiently recovered so as to allow for the sustainable production level. A serious log-shortage may not occur. The production lines of the wood working mills will have to be restructured in a way that has the least impact from an economic point of view. The closure of mills and the discharge of personnel may be avoidable. The sustainable harvest level can be reached much earlier than in Scenario 1.