Forest management 3rd year

Lecture notes
Forest Management (SFM 552)
B.Sc 3rd Year 2nd Semester
Prepared by:
Bishnu P Devkota
Lecturer
Kathmandu Forestry College
Kathmandu, Nepal
December 2010

ii Lecture notes on Forest Management by Bishnu P Devkota, 2010
Table of Contents
Unit-1: Introduction and background ...................................................................................1
1.1 Forest management objectives .........................................................................................1
1.2 Forest management alternatives and analysis...................................................................2
1.3 Decision making principles and models...........................................................................4
1.4 Different forest management strategies in Nepal.............................................................6
1.5 Role of forest in economic development..........................................................................8
1.5.1 Contribution in national economy .............................................................................8
1.5.2 Role in local economy ...............................................................................................8
1.5.3 Role of forest in livelihood ........................................................................................8
1.6 Forest, society and environment.....................................................................................10
1.6.1 Social benefits of forests..........................................................................................10
1.6.2 Environmental benefits of forest .............................................................................10
Unit-2: Concept and principle of sustainable forest management ....................................11
2.1 Concept and principles of sustainable forest management.............................................11
2.1.1 Concept, definition and principles of sustainable forest management. ...................11
2.1.2 Criteria and indicators of sustainable forest management .......................................15
2.1.3 Various forest certification schemes........................................................................19
2.2 Concept and practice of sustained yield .........................................................................22
2.2.1 Concept, definition of sustained yield .....................................................................22
2.2.2 Pre-Requisites for Sustained Yield ..........................................................................23
2.2.3 Limitations in Nepal conditions...............................................................................23
2.2.4 Yield types ...............................................................................................................24
2.2.5 Management steps for Sustained Yield ...................................................................24
Unit-3: Forest valuation methods .........................................................................................25
3.1 Common valuation techniques .......................................................................................27
3.2 Time value of Money .....................................................................................................29
3.2.1 Interest rate ..............................................................................................................30
3.2.2 Discount rate............................................................................................................30
3.3.3 Inflation adjustment .................................................................................................31
3.3 Decision Making criteria. ...............................................................................................32
3.3.1 Present net worth .....................................................................................................32
3.3.2 Benefit cost ratio......................................................................................................33
3.3.3 Land expectation value ............................................................................................33
3.3.4 Internal rate of return (IRR).....................................................................................34
3.4 Risk and uncertainly evaluation. ....................................................................................35
3.4.1 Risk management.....................................................................................................36
3.4.2 Decision making with uncertainly ...........................................................................38
Unit-4: Rotation......................................................................................................................40
4.1 Concept and types of rotation.........................................................................................40
4.1.1 Concepts definitions ................................................................................................40
4.1.2 Types of Rotations...................................................................................................41
4.1.3 Choice and length of rotation ..................................................................................43
4.2 Rotation determination methods.....................................................................................43
Unit-5: Forest regulation.......................................................................................................47
5.1 Concepts and approaches ...............................................................................................47
5.1.1 The normal forest concept .......................................................................................47
5.1.2 Yield tables and yield regulations............................................................................49

iii Lecture notes on Forest Management by Bishnu P Devkota, 2010
5.2 Regulating plantation forest (even aged forest)..............................................................51
5.2.1 Concepts ..................................................................................................................51
5.2.2 Application ..............................................................................................................52
5.3 Regulating natural forest (uneven aged forest) ..............................................................59
5.4 Allowable cut methods ...................................................................................................66
5.4.1 Area control .............................................................................................................66
5.4.2 Volume control ........................................................................................................68
5.4.3 Combined area and volume control.........................................................................69
Unit-6: Forest policy ..............................................................................................................71
6.1 Policy formulation process.............................................................................................74
6.1.1 Local ........................................................................................................................74
6.1.2 National....................................................................................................................74
Unit-7: Forest resource management plan ..........................................................................77
7.1 Forest resource management plan ..................................................................................77
7.1.1 Concept, definitions, objectives and limitations for forest management plan.........77
7.1.2 Components of forest management plan .................................................................79
7.1.3 Forest management unit...........................................................................................80
7.2 Preparation of forest management plan..........................................................................80
7.2.1 Data Collection........................................................................................................80
7.2.2 Maps and sketches ...................................................................................................81
7.2.3 General format .........................................................................................................81
7.2.4 Contents ...................................................................................................................82
7.2.5 Write up of management plan..................................................................................82
7.2.6 Methods of updating................................................................................................83

1 | Lecture notes on Forest Management by Bishnu P Devkota, 2010
Unit-1: Introduction and background
Definition
 Forest Management is defined as the practical application of the scientific, technical
and economic principles of forestry.
 Forest management is that branch of forestry whose function is the organization of a
forest property for management and maintenance, by ordering in time and places the
various operations necessary for the conservation, protection and improvement of the
forest on the one hand, and the controlled harvesting of the forest on the other.
1.1 Forestmanagementobjectives
 Primary objective of good management is provision of the maximum benefit to the
greatest number of people for all time.
 Forest may be managed primarily for productive purpose, for direct material benefits,
or protective purposes for, indirect benefits. It is depended upon the primary and
secondary objectives of the owners.
General objectives of Forest Management
1. Maintaining and as far as possible, raising the productive capacity of the soil and of
the forest stands consistent with the maximum site potential.
2. Promoting the protective effect of the forest, against soil erosion, avalanches floods
and protection of the physical factors, such as natural scenery, local flora and fauna.
3. Execution of silvicultural operations and regulation of felling in such a way so as to
bring the forest to a condition of as near normality as possible: in simple words,
attainment of a normal forest is one of the principle objects.
4. Satisfaction of rights of the right holder in respect of timber, firewood, grazing, etc. in
particular, and to meet the basic requirement of the local population in general.
5. Providing the maximum possible volume of valuable timber for constructional and
industrial proposes, and other forest produces for meeting the market demands and
securing the highest possible financial results.
Special Objective of Forest Management
Special objects may be laid down for different regions/locations, with different site factors
and forest types, more suited for specific purpose. Some examples are given below:
a. Badly eroded areas and steep hill slopes may be constituted into a protection
management, where the special object will be protection, afforestation, soil and water
conservation; satisfaction of only the minimum social needs of the local population,
ignoring consideration for market supplies and financial returns.
b. In the watershed of municipal water supplies, irrigation and hydroelectric generation
dams. The special objectives being the maintenance of an undisturbed protective
vegetative cover, all other forms of use must be subordinated to it.
c. In the forest areas of natural scenic beauty, woodlands near urban habitation,
recreation often being the dominant object, timber feelings, grazing and even hunting
will have to be entirely stopped. Such forests serve as ‘magnificent playground for
tired mankind seeking peace and spiritual strength’.
d. Mixed miscellaneous open forests, heavily grazed and felled in the past, with low
proportion of valuable timber and industrially important species are clear felled and
converted into plantation of desired species- pure or simple compatible mixture. Such
areas have extensively been constituted into plantation of timber industrial in the inner

2 Lecture notes on Forest Management by Bishnu P Devkota, 2010
terai and terai region with a view to meet increasing demand for industrial raw
material for pulp, match and plywood industries, e.g. Sagarnath plantation.
Objective of forest management in context of Nepal
1. Stabilize the supply of timber, fuel wood, fodder and other forestry products
necessary for general people in their day to day lives.
2. Increase the productivity of forest products to ensure the supply of raw materials to
forest based industries, which contribute to the national economy.
3. Increase income from employment opportunities in the forestry sector for
underprivileged families.
4. Develop national parks, wildlife reserves and protected areas in order to preserve
biological diversity to maintain ecological processes and ecosystems and create
recreational areas.
5. Help maintain land fertility through the conservation of soil and other watershed
resources.
6. Adopt proper land use practices.
1.2 Forestmanagementalternatives and analysis
 There is seldom a single objective of forest management.
 Owners usually have multiple objectives and they often conflict with each other.
Then, the owner must give up some or all of one objective to obtain the other. For e.g.
maximizing the forest’s present net worth and maintaining a continuous wood flow
may conflict. The owner can smooth out wood flow by cutting some stands before or
after the age at which their present net worth is maximum. But doing this causes the
total present net worth to be less than the absolute maximum.
 Some objectives may be mutually exclusive, for e.g. producing timber and
maintaining wilderness on the same land.
 Actual management objectives, whether stated or unstated, are a mixture of several
management objectives. There is no one correct mixture. This depends on the owner’s
objectives and the relative importance placed on them.
 The alternatives of forest management may be viewed as the many actions that a
forest owner may take to achieve his/her objectives. These are the actions that can be
taken in the field that will cause production of one or another, or some mix, of forest
products. The actions an owner takes can include cutting, reforestation and
construction.
 Cutting the forest, or not cutting it, is one of the primary tools for accomplishing
management objectives.
 Cutting can manipulate the forest to obtain desired forest products at the desired point
in time.
 Different kinds of cutting such as clear cutting or shelterwood cutting have different
effects on the residual stand and hence on the products.
 Both the timing and type of cut are management alternatives that must be decided on.
 Reforestation practices are a second major set of alternatives that must be chosen to
obtain management objectives.
 Choices must be made between natural and artificial reforestation, the kind of site
preparation if any, and the species to be regenerated.
 Reforestation practices affect density and species and hence forest production
possibilities.

 Construction is a third major set of alternatives that must be chosen.
 There are many kind of construction and each can affect the amount of an objective
obtained. For e.g. road placement not only affect timber harvest but also affects access
for recreation and hunting, aesthetic values and soil stability.
 Forest management alternatives are also defined by the physical production
possibilities of the forest.
 The physical production possibilities are determined by the basic biology of the forest
being managed. Thus, the alternatives flow from and are defined by different topics of
silviculture, mensuration etc.
 There are various analytical techniques for choosing between alternatives. Some
techniques are general and not unique to forestry whereas some techniques have been
developed to answer particular forestry problems.
 Discounting and present net worth are general techniques applied to forestry problems
whereas land expectation value is special cases of discounting developed for forestry
problems.
 The simple method of discounting is calculating present value of investment.
Discounting,
Where,
Vo = the present value
Vn = the future value in n years
i = interest rate
n = the years in which the payment occurs
 The present net worth criterion is one of the widely used and accepted investment
criteria recognizing the time value of money.
 The PNW is the algebraic sum of the discounted costs and revenues at a specified
interest rate.
Where,
PNW= Present net worth
Rt= the revenue or positive cash flows in year t
Ct= the cost or negative cash flows in year t
t= the year in which the cash flows occurs
i= the interest rate
Analysis: An investment is acceptable if the PNW is positive and is not acceptable if it is
negative.
 Land expectation value is nothing more than a special case of PNW that has certain
restrictive assumptions made on it. These are
− Land value is zero
− The land has no residual stand
− The land will be forested in perpetuity.
− The cash flows from the forest will be the same in perpetuity.
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Where,
Le= the land expectation value
Vo= the present value of a perpetual periodic annuity that will be every n years
n= the number of years between annuity payments
i= the interest rate
Analysis: Invest if land expectation value is greater than market value .
 Analytical techniques provide guidelines for choosing between courses of action.
They tell us what will happen if all assumptions and projections used in the analysis
are fulfilled.
 Analytical results must be considered guidelines and not irrevocable answer because
projections of variable (such as yield) contains errors and not always met and the
analytical models are seldom perfect.
1.3 Decisionmaking principles and models
 Forest management objectives and alternatives together form a decision making
model.
 Decisions making models may have several variants, some may be more complicated
whereas some are less complicated.
 The following diagram represents a general decision making model adapted in forest
management.
Figure 1: A rudimentary decision making model
1. Decision maker
 A decision maker is at the top and is ultimately responsible for deciding which
alternative is chosen.
 A decision makers decides on the basis of available data and their analysis,
consultation with staff members.
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2. Objectives
 In this step, objectives are identified and conflicting objectives resolved.
 Sometimes decision making process often focuses on problems and causes their
resolution.
 Ideally, decision maker has one or more objectives identified and provide
information for listing alternatives.
3. Alternatives
 Alternatives are the different courses of action that managers may take to reach their
objectives.
 In the idealized system the decision makers lists the alternative courses of action they
must take to reach their objectives.
 Each alternative may partially or fully achieve the objectives.
4. Constraints
 These are barriers or constraints to reaching objectives.
 They are what must be given up to reach the objective or what prevent one from
reaching the objective.
 Both physical and economic constrains can be identified.
 Physical constraints may exist in the forest production process that do not allow
reaching some objectives. For e.g. Site quality may determine how much timber can
be grown in an area.
 Economic constraint such as limited availability of fund determines investment in
forestry program or non forestry program.
 The forest managers must choose those alternatives to reach the desired objective
within these constraints.
5. Decision
 Once the objective is identified, alternatives are listed along with constraints on each
alternative.
 Analysis can be made at this point and one of the three decisions can be made:
• Choose an alternative
• Do nothing
• Go back and obtain more data for further analysis
 Choosing an alternative from among those listed means that a course of action has
been defined. The next step is to implement the alternative.
 To do nothing, is to let things continue as they are.
 Finally more information can be sought, it can be done at any of the preceding level.
Objectives can be reformulated, new alternatives set or more data about existing
alternatives obtained and additional information on constraints can be found.
 Seeking more data brings us back to the model at these levels until an exit point is
reached- either a “no” or “alternative” decision.

1.4 Different forest managementstrategies in Nepal
a. Strategies for production and utilization
 Reduction of consumption
 Increase production
 Effective harvesting and distribution
 Improve pasture and livestock management
b. Conservation of ecosystems and genetic resources
 Legal and institutional arrangement
 Public education and extension
c. Social sustainability
 Ad her decentralization policy by entrusting user for protection, management and use
 Provide livelihood to poor and landless people in forestry activities
d. Private involvement in forestry
 Resource base consolidation
 Industrial development
e. Policy implementation
 Direct human resources to priority areas
 Improve policy, legal and institutional framework
 Training to sufficient, motivated and competent manpower
 Prioritize development program and determine observance of the priorities
 Advocate people's participation and of NGOs'.
Forest Management Scenario in Nepal
 Forest management in Nepal has gone through three phases, namely privatization,
nationalization and populism respectively (Hobley and Malla, 1996, MFPS, 1988).
 During the Rana period, there was plenty of forest and they had not felt any thing
about the Forest. Forest was like the private property of Ranas. They could give any
part of forest to which they like. At that time, forest was exploited for supplying the
railway sleeper to India and/or for creating extra land revenue.
 After the democracy in 1951, various legislative measures were enforced to ensure
clear ownership over the forest. The private Forest Nationalization Act, 1957 was a
very controversial step in the history of Forest management in Nepal. Huge tracts of
forest under communal management and private control were brought under state
property. After nationalization, local communities through out the country reacted
negatively believing that their traditional rights of access and use had been curtailed.
 After experiencing the bitter hardship from the nationalization Act, the government
introduced another act, viz. The Forest Act, 1961 which was more focused on the
forest administration.
 Inclusion of different forest management regimes like Panchayat Forest, Panchayat
Protected Forest, Private Forest and religious forest were the major component of this
act.

 At the time de jure manager was only government. People were considered as
destroyer of the forest.
 This system had not succeeded to conserve the forest.
 By the mid 1970’s the government realized that local people had to be involved in the
management of forest and started the community forest management system.
 Master plan for forestry sector (1988) has emphasized the community forestry as first
priority.
 To implement the master plan, the government has promulgated Forest Act, 1993
and Forest Regulation, 1995 which were become the milestone in sustainable forest
management through people’s participation.
 This legislation opens the door to implement community forestry nation wide.
 Community forestry becomes more popular in mid hills of Nepal than other forest
management system.
 Unfortunately, Forest management in Terai has always lacked accountability and
transparency, often sparking controversy.
 Encouraged by the successful experiment of community forestry programme in hills,
government has started community forestry programme in Terai also, but this was not
success like hills.
 Government has now initiated new concept of forest management named
Collaborative Forest Management (CFM) in Terai according to Forest policy 2000 by
involving all stakeholder including local users, local government i.e. VDC &DDC,
NGO’s etc. (DoF,2003)
Current Forest Management Strategies in Nepal
 Based on ownership, Nepal has two category of forest; private and national forest.
 Private forests are nominal in number, and are being sole managed by private sector.
 National forest is managed either by government itself or with people’s participation.
 Government of Nepal has managing its forest through Ministry of Forest and Soil
Conservation (MOFSC) with definite policy, vision and objective.
 Some areas are managed as protected areas where as most of the areas are being
managed in the purpose of producing multiple forest products.
 Production forests are managed by department of forest through District Forest Office
and Range offices.
 Similarly, protected areas are being managed by Department of National Parks and
Wildlife Conservation through National parks, Wildlife reserves and conservation
areas.
 Nepal has adopted community based forest management strategies under the
following category.
• Community forest
• Collaborative forest
• Leasehold forest
• Bufferzone forest
• Religious forest

1.5 Role of forest in economic development
1.5.1 Contribution innational economy
 In developing countries, forest resources are important to the quality of life and
survival of large number of rural poor (World Bank, 2001; Nilsson, 1996).
 In Nepal, rural subsistence economy depends to a significant extent on primary
products from agriculture and forest.
 Subsistence farming is based on a man- cattle- forest relationship (Mahat, 1987).
 Forestry sector’s contribution to the national income has reduced from 14.6% in
1956-61 to 3.6% in 1975-80.
 This has further decreased to 2.8% in FY 2006/07 (CBS, 2007).
 There are two eminent reasons for the dwindling contribution of forestry sector in
national income; growth in non-agriculture sector and inefficient forest management.
 In Nepal, forestry sectors contribution to the GDP has been estimated as sub-sector of
agriculture due to which difficulties has been faced to differentiate the forestry sectors
contribution to the GDP from Agriculture sector.
 By the end of tenth plan, agriculture together with forestry sector has 34.9%
contribution to the GDP of Nepal(GoN, 2007) and 32.1% in FY 2007/08 (MoF, 2008)
 It has been estimated that forestry sector has a contribution of 4.4% to the total GDP
of Nepal during the period of 1990 to 2000 (FAO, 2004)
 Forest products such as small poles and timber are used to make farm instruments and
tools, while leaves and twigs are used as a compost making materials.
 Majority of the people use forest products for cooking, heating and feeding livestock.
 More than 75% of the energy needs come from the forestry sector and particularly in
the mid-hills, 94% of rural households rely on fuelwood as their primary fuel for
cooking and heating (Edmonds, 2002).
1.5.2 Role in local economy
a. Agriculture
 Forest fodder satisfies about 37 % of total fodder needs of livestock in Nepal
 Most of the cattle eat 2.25Kg of dry matter /Day/100Kg Body weight
 About 42 % of the total TDN (Total Digestible Nutrients) requirement is estimated to
be met from the forestry sector (New ERA 1992).
 Total fodder requirement : 6.08 Million ton/Year.
 The annual per capita fuel wood consumption in the Hills is about 708 kg whereas it
is 689 kg in the Terai.
b. Rural enterprises
 Provide raw materials to forest based enterprises such as Kutch and Kattha, resin
tapping, paper, plywood etc.
1.5.3 Role of forest inlivelihood
 A livelihood comprises people, their capabilities and their means of living, including
food, income and assets. Tangible assets are resources and stores, and intangible
assets are claims and access.

 A livelihood is environmentally sustainable when it maintains or enhances the local
and global assets in which livelihoods depend, and has net beneficial effects on other
livelihoods.
 A livelihood is socially sustainable which can cope with and recover from stress and
shocks, and provide for future generations.
 Today, it is understood that forest underpins a wide ranges of goods and services for
human well-being:
 storage and purification of drinking water
 mitigation of natural disasters such as droughts and floods
 storage of carbon and regulation of climate
 provision of food, rainfall, and a vast array of goods for medicinal, cultural
and spiritual purposes.
 It is estimated that 60 million indigenous people are almost wholly dependent on
forests, while 350 million people depend on forests for a high degree for subsistence
and income (World Bank 2004).
 The poor rely on forest goods and ecosystem services for a range of basic needs:
food, shelter, clothing and heating.
What is the role of forest?
 Support current consumption
– subsistence consumption, cash income, agricultural inputs, input to industries,
input to capital formation
– Provide safety nets
– fill gaps in response
to risks
(seasonality)
– safety nets in
response to post
shocks
 Pathway out of poverty
– poverty prevention
vs. poverty
reduction
– poverty traps (low
value added)
– low potential for
economy-wide
impact of industries
Forest goods and services
Provisioning Services
▪ Food, Fiber and Fuel
▪ Genetic Resources
▪ Biochemicals
▪ Fresh Water
Cultural Services
▪ Spiritual and religious
values
▪ Knowledge system
▪ Education and inspiration
▪ Recreation and aesthetic value
Regulating Services
▪ Invasion resistance
▪ Herbivory
▪ Pollination
▪ Seed dispersal
▪ Climate regulation
▪ Pest regulation
▪ Disease regulation
▪ Natural hazard
protection
▪ Erosion regulation
▪ Water purification
Supporting Services
▪ Primary production
▪ Provision of habitat
▪ Nutrient cycling
▪ Soil formation and
retention
▪ Production of
atmospheric oxygen
▪ Water cycling

1.6 Forest, societyand environment
1.6.1 Social benefits of forests
 Contribution to over all economy
 Creation of employment opportunities
 Poverty reduction
 Fuel wood
 Industrial timber and lumber
 Pulp and paper
 Medicines
 Mineral extraction and recreation
1.6.2 Environmental benefits of forest
 Protection of sites and landscapes
 Spiritual and recreation value
 Food webs and energy flow
 Water regulation
 Local and regional climate
 Numerous habitats and niches
 Purify water and air
 Chemical cycling
 Reduce soil erosion
 Store atmospheric carbon
 Provide wildlife habitats

Unit-2: Concept and principle of sustainable forest management
Sustainable development
 The word sustainable development was first used in World Conservation Strategy
report in 1980
 The primary concern of sustainable development is that planning should work with
the resources of a region.
 The concept was made operational only in 1987 by Our Common Future.
 Sustainable Development is defined as “meeting the basic needs of the present
without compromising the ability of the future generations to meet their own need.
Principle of sustainable development
 Living with the environment limit.
 Ensuring a strong healthy environment.
-Meeting the diverse need of all people in existing and future communities
 Achieving a sustainable economy
 Using sound scientific responsibility
 Promoting good governance
2.1 Conceptand principles of sustainable forestmanagement
 Sustainable development concept was elaborated by the World Commission on
Environment and Development in 1987, and endorsed by the United Nations
Conference on Environment and Development (UNCED) in June 1992.
 Since then, it has become the most important issue in the development aspirations of
the 1990s.
 Sustainable forest management has been described as forestry’s contribution to
sustainable development.
 This is development, which is economically viable, environmentally sound and
socially beneficial and which balances present and future needs.
 Sustainable forest management is considered as one of the most important
contributions which the forestry sector can make to the sustainable development
objectives of any nation, particularly those richly endowed with forest (FAO, 2000).
 Sustainable development became a common theme as concerns grew over the
burgeoning world population and increasingly polluted environment.
 Accordingly, it drew attention to protect and conserve the global environment and
emphasized a shift in attitudes from pure utilization towards ecological orientation
(FAO, 2000).
2.1.1 Concept, definitionand principles of sustainable forest management.
Definition of sustainable forest management
 Sustainable forest management is the process of managing forest to achieve one or
more clearly specified objectives of management in relation to the production of a
continuous flow of desired forest products and services without undue reduction of its
inherent values and future productivity and without undue undesirable effects on the
physical and social environment (ITTO, 1998 in ITTO 2005).

Ministerial Conference on the Protection of Forests in Europe (MCPFE), 1993 defines
sustainable forest management as the:
 ‘Stewardship and use of forests and forest lands in such a way, and at a rate, that
maintains their productivity, regeneration capacity, vitality and their potential to fulfill
now and in the future, relevant ecological, economic, and social functions, at local,
national, and global levels, and that does not cause damage to other ecosystems.’
Concept of sustainable forest management
 Forests play critical roles in accounting for most of the terrestrial plant biomass and
in regulating global temperature by sequestering carbon.
 As a public good, they contribute to stable, fertile landscapes for human settlement,
provide numerous timber and non-timber resources and are places of recreation.
 For indigenous peoples they are often places of important spiritual significance.
 However, the natural forests of Asia remain in a state of crisis, threatened by a
complex array of forces that undermine their ability to fulfill vital ecological and
societal functions. (www.fao.org/forestry)
 The concept of sustainable forest management is introduced as a broad conceptual
instrument to assess solutions to forest loss and degradation.
 Sustainable forest management is considered as one of the most important
contributions, which the forestry sector can make to the sustainable development
objectives of any nation, particularly those richly endowed with forest.
 In forestry, sustainability involves the continued existence and use of forests to meet
human physical, economic, and social needs, the desire to preserve the health of forest
ecosystems in perpetuity, and the ethical choice of preserving options for future
generations while meeting the needs of the present. Determining what is sustainable is
a difficult task. A framework of criteria and indicators (visit www.itto.or.jp/c&i) of
forest sustainability can be used to foster discussions on the meaning of sustainability
for a particular time and place.
 Sustainable Forest Management aims to ensure that the goods and services derived
from the forest meet present-day needs while at the same time securing their
continued availability and contribution to long-term development. In its broadest
sense, forest management encompasses the administrative, legal, technical, economic,
social and environmental aspects of the conservation and use of forests. It implies
various degrees of deliberate human intervention, ranging from actions aimed at
safeguarding and maintaining the forest ecosystem and its functions, to favouring
specific socially or economically valuable species or groups of species for the
improved production of goods and services
 Many of the world’s forests and woodlands, however, especially in the tropics and
subtropics, are still not managed in accordance with the Forest Principles adopted at
the United Nations Conference on Environment and Development (UNCED, 1992).
Many developing countries have inadequate funding and human resources for the
preparation, implementation and monitoring of forest management plans, and lack
mechanisms to ensure the participation and involvement of all stakeholders in forest
planning and development. Where forest management plans exist, they are frequently
limited to ensuring sustained production of wood, without due concern for non-wood
products and services or social and environmental values. In addition, many countries
lack appropriate forest legislation, regulation and incentives to promote sustainable
forest management practices. (Ferguson 1997)

 Urgent attention is needed to address the causes of forest loss and degradation. In
order to examine instruments that tackle these causes, a conceptual anchor is needed
to describe what might be considered an ideal state of forest management. The ideal
state provides a frame of reference to gauge improvements in forest management.
“Sustainable forest management” (SFM) is used for this purpose. Since the 1990s,
SFM has been at the forefront of international deliberations on forestry issues and is
now widely embraced by inter-governmental, regional, national and sub-national
conservation and development institutions. At the Second Expert Meeting on
Harmonizing Forest-Related Definitions for Use by Various Stakeholders organized
by the FAO and the IPCC in 2002, several definitions of SFM were presented. Of
these, the definition developed by the Ministerial Conference on the Protection of
Forests in Europe (MCPFE) best captures the multiple functions of forests. The
MCPFE definition, though not formulated specifically with Asian forests in mind,
does embrace the variety of critical forest functions in the region.
 SFM has been the conceptual basis of an international movement to develop criteria
and indicators to assess the state of forests and their management, in which a number
of Asian countries participate. Because of the variety of forest types in Asia described
earlier, it is not possible to present a region-wide specific set of criteria for assessing
forestry practices. However, the concept of SFM can be used loosely to assess new
policies and instruments of forest management and is employed for this purpose.
 Sustainable development became a common theme as concerns grew over the
burgeoning world population and increasingly polluted environment. Accordingly, it
drew attention to protect and conserve the global environment and emphasized a shift
in attitudes from pure utilization towards ecological orientation (FAO, 2000a as cited
by Shrestha and Sharma, 2004).
 Traditional sustained yield, a concept which was brought by a German forester-Georg
Hartig in 1795, focused mainly on the production of commodities, but has proven
inadequate to meet the requirements of the present day society for various products
and services and other non-material benefits and this concept was broadened in 1970s
and consequently revised with a new concept of sustainable forest management. The
traditional and modern concepts of sustainable forest management are presented
below (Adopted from Shrestha and Sharma, 2004).

Conceptual Model of Sustainable Forest Management:
Fig-2: Modern approach of sustainable forest management
Principle of sustainable forest management
Principle: A fundamental truth or law as the basis of reasoning or action. Principles in the
context of sustainable forest management are seen as providing the primary framework for
managing forests in a sustainable fashion (Mendoza et al., 1999).
 It is difficult to explicitly define what sustainable forest management is. However, several
recent international meetings have suggested that the following seven thematic elements
are key components.
(1) Extent of forest resources;
(2) Biological diversity;
(3) Forest health and vitality;
(4) Productive functions of forest resources;
(5) Protective functions of forest resources;
(6) Socio-economic functions;
(7) Legal, policy and institutional framework.
Conservation
Regeneration
Utilization
Sustainable forest
management
Ecological well-being
Social well-being
Economicwell-being
Sustainable forest
management

2.1.2 Criteriaand indicators of sustainable forest management
Criteria
Criteria define the essential elements against which sustainability is assessed, with due
consideration paid to the productive, protective and social roles of forests and forest
ecosystems. Each criterion relates to a key element of sustainability, and may be described by
one or more indicators.
Seven criteria are identified as essential elements of sustainable forest management.
 Criterion 1, Enabling Conditions for Sustainable Forest Management, is concerned
with the general legal, economic and institutional framework without which actions
included under the other criteria will not succeed.
 Criteria 2 and 3 on Forest Resource Security and Forest Ecosystem Health and
Condition, respectively, are concerned with the quantity, security and quality of forest
resources.
 The remaining four criteria deal with the various goods and services provided by the
forest, including Flow of Forest Produce, Biological Diversity, Soil and Water and
Economic, Social, and Cultural Aspects.
 The order of presentation of the criteria represents a logical sequence but does not
indicate priority or relative importance.
 The seven ITTO criteria are shown schematically.

Indicators
 Indicators are parameters which can be measured and correspond to a particular
criterion.
 They measure and help monitor the status and changes of forests in quantitative,
qualitative and descriptive terms that reflect forest values as seen by those who
defined each criterion.
 The indicators presented here have been carefully identified and formulated so that a
change in any one of them would give information that is both necessary and
significant in assessing progress towards sustainable forest management.
 They have also been defined so that they are clear, practical and easy to monitor, and
based as far as possible on available research knowledge and statistics.
 It should, therefore, be possible for countries to provide information on many of them,
although only a few countries will immediately be able to provide information on
them all.
 Countries face a considerable load in reporting to different international organisations.
This load can be eased by ensuring that the nature of the data required is as similar as
possible. Indicators have, therefore, been chosen so as to be compatible with those
being requested for FAO’s Forest Resources Assessment (FRA-2000).
 Wherever possible, quantitative indicators have been suggested but, in some
instances, this is not possible or would prove too expensive. Where this is the case,
qualitative or descriptive indicators are provided.
 It is important, if the indicators are to give an accurate picture of trends, that
comparable methods should be used between one time of assessment and the next;
and that there should be a means of estimating the degree of accuracy of any data
presented.
 Over time, lessons will be learnt about the collection of certain data. Ideally, all
countries should use the same methods of measurement and assessment, but this is
unlikely to be for some time. Countries should, therefore, give a description of the
methods used and an estimate of the accuracy of their figures and any difficulties
encountered in their collection.
Criteria and indicators developed by ITTO (2005)
SN Criteria Indicators
1 Enabling conditions for
sustainable forest management
1. Policy, legal and governance framework
2. Economic framework
3. Institutional framework
4. Planning framework
2 Extent and conditions of forests 1. Extent (area) and percentage of total land under
comprehensive land use plan.
2. Extent (area) of forests committed to production
and protection.
3. Extent (area) and percentage of total land area
under each forest type
4. Percentage of PFE with boundaries physically
demarcated.
5. Changes in forest area
6. Forest condition

3. Forest ecosystem health 1. Extent and nature of forest encroachment,
degradation and disturbance caused by human
and the control procedures applied.
2. Extent and nature of forest degradation and
disturbance due to natural causes and the control
procedures applied.
4 Forest production 1. Resource assessment
2. Planning and control procedures
3. Silvicultural and harvesting guidelines
5 Biological diversity 1. Ecosystem diversity
2. Species diversity
3. Genetic diversity
4. Procedures for biodiversity conservation in
production forests
6 Soil and water protection 1. Extent of protection
2. Protective functions in production forests
7 Economic, social and cultural
aspects
1. Socio economic aspects
2. Cultural aspects
3. Community and indigenous peoples rights and
participation
Criteria and indicators developed by Canadian Council of forest ministries (2000)
1 Conservation of biological
diversity
 Ecosystem diversity
 Species diversity
 Genetic diversity
2 Ecosystem condition and
productivity
 Disturbance and stress
 Ecosystem resilience
 Extent biomass
3. Soil and water conservation  Physical environmental factors
 Policy and protection forest factors
4 Global ecological cycles  Global carbon budget
 Forest land conservation
 Carbon dioxide conservation
 Policy factors
 Hydrological cycles
5 Multiple benefits  Productive capacity
 Competitiveness
 Contribution to economy
 Non timber values
6 Society’s responsibility  Aboriginal and treaty rights
 Participation by aboriginal communities
 Sustainability of forest communities
 Fair and effective decision making
 Informed decision making

Criteria and indicators developed by Indian Institute of Forest Management, Bhopal
(2002)
1 Increase in the extent of forest
cover and tree cover
 Area and type of forest cover under natural and
manmade forests
 Encroachment in forest area
 Forest area diverted for non forestry purposes
 Trees outside forest
2 Maintenance, conservation and
enhancement of biodiversity
 Number of plant species
 Number of animal species
 Ecosystem area (by forest types)
3. Maintenance and enhancement
of ecosystem function and
vitality
 Status of natural regeneration
 Incidence of forest fire
 Incidence of pests
 Incidence of grazing
 Incidence of weeds
 Incidence of drought, floods and other natural
calamities (if any)
4 Conservation and maintenance
of soil and water resources
 Area under watershed treatment
 Duration of stream flow
 Quality of water
 Ground water level
5 Maintenance and enhancement
of forest resources productivity
 Growing stock
 Status of plantation
 Technology for increasing productivity
6 Optimization of forest resource
utilization
 Extraction and consumption of wood
 Extraction and consumption of fuel wood
 Extraction and consumption of non wood
products
 Utilization of forest environmental services
7 Maintenance and enhancement
of social, cultural and spiritual
benefits
 Sacred groves
 No of trees species traditionally/religiously
protected
 Participation of users in joint forest management
meetings
8 Adequacy of policy, legal and
institutional framework
 Offences related to forests
 No of JFM committee and forest area with them
 Financial transparency
 Allocation of funds for forest protection
 Capacity building

2.1.3 Various forest certificationschemes
 1985~1990 – growing concern over the state of the world’s forests, and the
sustainability of extraction of timber and other products
 So the sustainable forest management concept emerged.
 To promote the sustainable forest management identifying the well managed forest,
registration and certification procedures were started.
 So the public is led to believe that products labeled with the logo of sustainable
managed forest are from the environmentally appropriate, socially beneficial and
economically viable source.
 There are questions related to sustainable forest management (SFM) such as, how can
the local people manage forests in a sustainable way?
 How can international population make sure that the products they are buying, is
coming from a forest managed in a sustainable way?
 To answer these questions, NGOs involved in conservation such as, Green Peace,
Worldwide Fund for Nature, Friends of the Earth, etc. thought to establish a
mechanism to encourage sustainable forest management and discourage unsustainable
harvesting.
 Forest Certification is the process by which the performances of on-the-ground
forestry operation are assessed against a predetermined set of standards (Parajuli et al
2003). It is a mechanism for forest monitoring, tracing and labeling timber, wood and
pulp products and non-timber forest products where the quality of management from
environmental, social and economic perspectives is judged against a series of agreed
standards. Forest Certification is intended to improve forest management via market
based initiatives.
 Forest certification intends to decrease negative impacts of forest management. This is
achieved by implementing agreed code of practice known as standards.
Implementation of these codes is verified by an independent or third party institution.
 If forests are sustainably managed, a certificate of responsible forest management is
given to the forest managers. Forest manger can put the logo to identify the product
coming from certified forest. Consumers identify such products from the stamp used
in the product.
 Forest certification refers to two separate process viz. forest management unit
certification (FMU) and chain of custody certification (COC). Forest management
certification is a process which verifies that an area of forest/plantations from where
the wood, fiber and other non timber forest products is extracted in managed to a
defined standard.
 COC certification is a process of tracking forest products from the certified forest to
the point of sale to ensure that product originated from a certified forest.
Forest Certification Systems
There are many forest certification systems in the world.
International/regional systems
- Forest Stewardship Council FSC
- Program for the Endorsement of the Forest Certification (PEFC)
National systems
– European schemes linked to PEFC
– Canadian Standards Association

– Sustainable Forestry Initiative / American Tree Farm System
– Australian Forestry Standards (AFS)
– Finish Forest Certification Scheme (FFCS)
– Developing countries: Brazil (CERFLOR), Malaysia (MTCC)
Forest Stewardship Council
FSC is the dominant system globally. This is an internationally non profit, non
government organization based in Germany, established in 1993 by more than 150
founder members of environmental and human rights groups, timber producer and
manufacturers and wood products buyer, after results of international concerns about
tropical deforestation (FSC 2007). FSC promotes environmentally appropriate, socially
beneficial and economically viable management of the world’s forest. For the process of
certification, it has developed 10 principle and 56 criteria. FSC has two types of
certification. Forest managers or owners who want to prove that their forest operation are
socially beneficial and managed in an environmentally appropriate and economically
viable manner can apply for forest management certification. FSC chain of custody
certification is for companies that manufacture, process or trade in timber or non timber
forest products and want to demonstrate to their customers that they use responsibly
produced raw materials. FSC chain of custody helps companies to strengthen their
sourcing policies and comply with public or private procurement policies where FSC is
the preferred option.
FSC Principles
1. Compliance with Laws and FSC Principles
Forest management must abide by all applicable laws of the country in which they
occur.
2. Tenure and Use Rights and Responsibilities
Rights to the land are clearly defined and clearly established.
3. Indigenous Peoples’ Rights
Indigenous peoples’ rights to own, use, and manage their lands are recognized and
respected.
4. Community Relations and Worker’s Rights
Maintain and/or enhance the long-term social and economic well being of forest
workers and local communities.
5. Benefits from the Forest
Encourage the efficient use of the forest’s resources and services to ensure economic
viability, and environmental and social benefits.
6. Environmental Impact
Conserve biological diversity, water resources, soils, and unique and fragile
ecosystems and landscapes, maintaining the ecological functions and integrity of the
forest.
7. Management Plan
A plan is written, implemented, and kept up to date, including statements of long-term
objectives.
8. Monitoring and Assessment

Monitoring is conducted to assess the condition of the forest, yields of forest products,
chain-of-custody, management activities, and their social and environmental impacts.
9. Maintenance of High Conservation Value Forests
Management activities enhance the attributes of high conservation value forests.
10. Plantations
Plantations should complement the management of, reduce pressures on, and promote
the restoration and conservation of natural forest
The Elements of Forest Certification
Program for the Endorsement of Forest Certification Scheme (PEFC)
PEFC is in Luxemburg formed in June, 1999 as an Pan European Initiatives with
representative scheme from eleven countries. With the rapid development in its working area
globally, its acronym was changed in 2003 from Pan European Forest Certification to
Program for the Endorsement of Forest Certification Scheme. PEFC is an independent, non-
profit, non-governmental organization, which provides a framework for the development and
assessment of independent third party certification of environmentally appropriate, socially
beneficial and economically viable management of forests. It is playing a global platform for
continents, which are part of PEFC council. PEFC provides a logo for wood based products,
allowing to customers and public to make a positive choice for sustainability forest
management and it claims to deliver sustainability, credibility, accountability and
adaptability.

2.2 Conceptand practice of sustainedyield
2.2.1 Concept, definitionof sustained yield
Sustained yield is defined and /or expressedvariously as
 The material that a forest can yield annually or periodically in perpetuity.
 As applied to policy, method or plan of management (sustain yields management), it
implies continuous production with the aim of achieving at the earliest practical time
at the highest practical level an approximate balance between net growth and harvest
by annual or some what longer periods (BCFT).
 The regular, continuous supply of the desired produced to the full capacity of the
forest.(Osmastan)
 The yield of timber or other forest products from a forest which is managed in such
away as to permit the removal of approximately equal volume or quality of timber or
other forest produce annually or periodically in perpetuity.
 Sustained yield may be annual or periodic depending on where a complete series of
age gradations or age mixed together is maintained or only an in complete series.
 Periodic yield is also considered as sustained, provided the period is short.
 Sustained yield is essential where large areas, especially state owned, are concerned;
this ensures continuous yield and safeguards against extinction of forest property,
which is the trust with the present generation-we have a right of use only but not to
lead to its destruction.
 In case of private property, it is not practicable to maintain of complete series of age
gradations such cases the cropped is worked for intermittent yield, which is defined
as: the material or cash return obtained from time to time form a forest not organized
for continuous production.(Glossary).
Concept and Principle of Sustained Yield
 “Yield” signifies the flow of forest products, measured in terms of either volume or
value units, harvested from a forest at a particular time. The yield from the forest
includes all the forest products, the tangible and the intangible, including protective,
amenity, and timber and non- timber products.
 Concept of sustainable yield has been evolved from the basic from the consideration
that the unborn generation may derive from the forest at least as much of the benefits
as the present generation. Sustained yield ensures stability and continuous supply of
raw materials to the industries and to meet social and domestic needs of the people.
 The principle of SY is that forest should be exploited such that annual or periodic
felling does not exceed annual or periodic growth.
 It is an accepted norm in forest management and forms the core of organized forestry.
At the end of 18th century and beginning of the 19th century, the necessity of
Sustained yield (SY) was propounded in Europe for ensuring regular supply of timber
and fire wood.
 Germany is the pioneer country of the sustained yield.
 Considering forestry from the economic point of view, investment in forestry should
yield continuous return in terms of definite class of produce and in greatest possible
quantity within a reasonable time and to the best financial advantage.

 The simplest method for achieving this objective of sustained yield is to maintain a
complete succession of equal areas of crops of all ages from one year old up to the
age of maturity that is complete series of age gradations.
 For example: say we have 10 hectares of land and 10 years rotation .We plant 1
hectare annually and after 10 years cut 1 ha Annually of 10 years old trees. Hence
equal area will be available for felling at maturity (10 years), this is one form of crop
necessary for sustained yield management and for maintaining it perpetuity.
 Such forest provides a conceptual picture of theoretical normal forest. The idea of the
normal forest is a logical corollary to the principle of sustained yield in perpetuity.
2.2.2 Pre-Requisites for Sustained Yield
 To get sustained yield, forest should be “integrated”, it should be healthy, energetic,
and of all ages mixed together in proper proportion or in one word it should be
Normal.
 Only normal forest is able to produce equal production of its material in each year or
periods. The simplest methods of achieving this objective of sustain annual yield is to
maintain a complete succession of age from year one to the age of maturity, having an
equal or equi- productive area. Great effort is necessary to bring the forest in
normality. The following requirement must be fulfilled for sustained yield
management:
 There should be a normal forest having all requirement parameters as;
 A complete series of age gradations – in case of plantation forest, there should be
complete series of age gradations up to rotation age. Any gap of age will interrupted
the sustained yield.
 All periodic block (PB) should occupy equal or equi-productive area –this is the case
for regular shelter wood system. All PB should be of equal or equi-productive areas
otherwise there would be variable amount of yield from different periodic blocks
instead of sustained one.
 All age classes present in balanced proportion –in irregular selection forest, there
should be well mixtures of all age classes of also that in balanced proportion to ensure
the equal amount of volume production in each year at the time of harvesting.
Although there will be no specific area of harvesting, the yield in sustained manner by
clear selection of rotation aged trees distributed over the whole forest area.
 Sustained yield principle is applicable only to production forests.
2.2.3 Limitations inNepal conditions
Sustained yield could not be achieved due to its following limitations:
 Not possible to apply SY principle in the first rotation because density and quality of
crop are generally variable due to past management or mal-distribution of age
classes and their composition in mixture and generally comprised of old growth as
well as degraded site condition.
 Virgin forest with a large proportion of deteriorating trees cannot be suitably worked
under SY principle.
 Forest under afforestation programmed provides various yield until after the end of
first rotation.
 Lack of technical man power
 Inflexible to market conditions

 In hill forests, due to variable demand, different interest groups, lively hood concepts,
geographical location, microclimatic conditions, multiple use concepts etc., it is very
difficult to achieve.
2.2.4 Yield types
Yield: The volume or number of stems that can be removed annually or periodically, or
periodically, or the area over which fellings may pass annually or periodically, consistent
with the attainment of objects of management. Yield can be either final yield or intermediate
yield
Final yield: All the material that counts against the prescribed yield and which is derived
from the main felling in a regular forest. It is the sum of the main crop and the subsidiary
crop figures for the given crop age.
Intermediate yield: All materials from thinning or operations preceding the main felling in a
regular forest, or its cash equivalent.
Normal yield: The yield from a normal forest.
Sustained yield: The material that a forest can yield annually (or periodically) in perpetuity.
Total yield: The standing volume of a crop plus the total volume removed in thinning since
its establishment as a more or less even aged stand; or the sum of the final and intermediate
yields.
2.2.5 Management steps for Sustained Yield
Different forest types required different types of treatments to acquire sustainable outputs
such as:
 In clear felling system-cut equal volume of material from equal area annually.
 In uniform shelter wood system – all the periodic blocks occupy equal or equi-
productive area
 In irregular selection forest – all age classes are present therein and balanced
proportion
 In higher rotation, age class may be formed like-10-20, 20-30, 30-40,40-50,etc
 It is considered that for maintaining sustainable yield “variable yield today to ensure
sustained yield tomorrow”. Continuity of harvest, indefinitely, without impairment of
productivity of soil is the core method to obtain sustainable forest management.

Unit-3: Forest valuation methods
 Valuation is placing a value on something.
 Forest valuation is the placing of a value on forest production. This may include
valuing the resources consumed in that production.
 Economic value is one of many possible ways to define and measure value.
 Although other types of value are often important, economic values are useful to
consider when making economic choices – choices that involve tradeoffs in allocating
resources.
 Traditionally economics has been concerned with direct use values focused on
quantifying and analyzing goods and services that produce tangible benefits.
 Economists however, have broadened their scope in recognition of the growing
appreciation for the indirect use, non-use, existence, bequest and option values of
ecosystems and have developed techniques to extend monetary valuations to
ecosystem services (Chee, 2004).
 Measures of economic value are based on what people want – their preferences. Thus,
the theory of economic valuation is based on individual preferences and choices.
 The concept of economic value is now a well established and useful framework for
identifying various values associated with forests.
 The total economic value of forest consists of its use values and non-use values.
 A forest use values are in turn made up of its direct use values, indirect use values and
option values. Non use values include bequest values and existence value (IUCN,
1998).
Thus, use value is defined as the value derived from the actual use of a good or
service, such as hunting, fishing, bird watching, or hiking. Use values may also
include indirect uses. For example, forest provides direct use values to the people who
visit the area. Other people might enjoy watching a television show about the area and
its wildlife, thus receiving indirect use values. People may also receive indirect use
values from an input that helps to produce something else that people use directly. For
example, forests supply water to the downstream users, who use water for drinking or
irrigation purpose.
Option value is the value that people place on having the option to enjoy something in
the future, although they may not currently use it. Thus, it is a type of use value. For
example, a person may hope to visit the forest area sometime in the future, and thus
would be willing to pay something to preserve the area in order to maintain that
option. On the similar way, forest resources may be underutilised today but may have
a high future value in terms of scientific, educational, commercial and other economic
uses. Environmental regulatory functions of the forest ecosystem may become
increasingly important over time as economic activities develop and spread in the
region (Bann, 1997).
Similarly, bequest value is the value that people place on knowing that future
generations will have the option to enjoy something. Thus, bequest value is measured
by peoples’ willingness to pay to preserve the natural environment for future
generations. For example, a person may be willing to pay to protect the forest area so
that future generations will have the opportunity to enjoy it. Bequest values may be

particularly high among the local populations currently using or inhabiting a forest in
that they would like to pass on to their heirs and future generations their life and
culture that has co-evolved in conjunction with the forest.
Non-use values, also referred to as “passive use” values, are values that are not
associated with actual use, or even the option to use a good or service. Existence
value is the non-use value that people place on simply knowing that something exists,
even if they will never see it or use it.
For example, a person might be willing to pay to protect the forest wilderness area,
even though he or she never expects or even wants to go there, but simply because he
or she values the fact that it exists. Existence value is derived from the pure pleasure
in something’s existence, unrelated to whether the person concerned will ever be able
to benefit directly or indirectly from it. Existence values are difficult to measure as
they involve subjective valuations by individuals unrelated to either their own or
others use, whether current or future. However, several economic studies have shown
the existence value of forests to constitute a significant percentage of total economic
value (Bann, 1997).
 Economic valuation can be defined as the attempt to assign quantitative values to the
goods and services provided by forest.
 Valuation is only one element in the effort to improve the management of forest
ecosystems and their services.
 Economic valuation may help inform management decisions, but only if decision-
makers are aware of the overall objectives and limitations of valuation.
 The main objective of valuation of ecosystem services is to generally indicate the
overall economic efficiency of the various competing uses of functions of a particular

forest ecosystem. That is, the underlying assumption is ecosystem resources should be
allocated to those uses that yield an overall net gain to society, as measured through
valuation in terms of the economic benefit of each use adjusted by its costs (Kumar &
Kumar, 2008).
3.1 Common valuation techniques
 Forest Produce a great variety of goods and services for people. Forests have
value to people and contribute to meeting human needs in a number of ways.
 Contribution of forest occurs through
- Direct use of forest
- Indirect use of forest
- The mere existence of the forests or of options for its future direct or
indirect use.
 The value of forest to human being
- Vary from individual to individual and from group to group.
- They can change rapidly over time as individual situation and perception
change.
 In valuation there are two critical points
- There are no absolute economic values other than in the perception of
individual
- These perceptions tend to be dynamic, changing as circumstances change.
Forest Valuation techniques
1. Using direct market prices for goods and services.
 It involves direct observation of market exchanges (or uses available records of part
market exchanges) to determine the value in exchange of particular goods or service.
 It assumes that the value of the goods and services exchanged in a market is at least
equal to the market exchange rate, although they may be higher.
2. Using indirect market price techniques.
a. Residual or derived price.
 This method estimates the value of particular goods or services from the price of
goods or services established later in the production- distribution process. For eg:- the
value of forest products at the farm gate may be estimated by subtracting the cost of
transporting the products from the farm to a market where products or exchange
values are known.
 It assumes that the value of the good or service at the farm gate is at least equal to the
residual value left after subtracting further production, transportation and distribution
costs from market prices.
b. Surrogate prices
 This method estimates the value of a particular goods or service from the known
values on prices of substitute or comparable conditions for eg:- The economic value
of gathered fuel wood could, in principal, be estimated as equivalent to the cost of the
quantity of a alternative purchased fuel, such as kerosene which would provide the
same cooking or space heat.

c. Opportunity costs
 This method estimates the value of opportunities forgone to provide a
particular good or service.
 It assumes that the value is a teast equal to the value of the best alternative forgone to
obtain the desired good or service. For eg:- if dung is used as fuel, the opportunity
cost could be the decrease in crop yields forgone by using the dung for fuel instead of
as a means of condition soils.
d. Hedonic method
 This method estimates values from known values of other goods and services that are
technically related to the good or services to be valued.
 It assumes that the value of a good and services can be estimated from a technical
relationship. For eg:- Housing values may decline the closer one get to a loud noise
such as airport.
e. Travel Cost
 This method recognizes that some good and services the consumer may have to incur
substratical cost (in time or money), to obtain the particular good or service. For eg: A
recreation experience may involve considerable travel expenses; and gathering free
firewood may require a considerable amount of time. It assumes that the value to the
consumer is at least equal to the travel costs the consumer is willing to incur to obtain
the desired good or service.
 Travel cost method (TCM) is one of the oldest approaches to environmental
valuation, proposed in a letter from Harolad Hotelling to the US Forest Service in the
1930s, first used by Wood and Trice 1958, and popularized by Clawson and Knetsch
1966 (Hanley, et al. 2004). This method involves using travel costs as a proxy for the
price of visiting outdoor recreational sites. A statistical relationship between observed
visits and the cost of visiting is derived and used as a surrogate demand curve from
which consumer's surplus per visit day can be measured (by integrating under this
curve) (Hanley, et al. 2004). This method is based on the assumption that consumers
value the experience of a particular forest site at no less than the cost of getting there,
including all direct transport costs as well as the opportunity cost of time spent
travelling to the site (i.e. foregone earnings). This survey based method has been used
extensively, especially in richer countries, to estimate environmental benefits at
recreational sites (including wildlife reserves, special trekking areas and beaches).
TCM has recently been applied in several developing countries, particularly where
higher incomes and rapidly developing markets have been associated with growing
demand for amenities such as scenic views and recreational areas (EEP, 2003).
3. Using non-market price technique.
a. Contingent valuation
 This method is used to estimate the consumer's willingness to pay for a specified good
or service or to accept compensation for receiving an undesired good or service.
 In practice, it is usually desired from the responses of potential consumers to a
hypothetical exchange situation.
 This method assumes that the consumers expressed willingness to pay in hypothetical
situation is a measure of the value to the consumer in an actual situation.

3.2 Time value of Money
 Time is money, particularly when one is growing trees or investing money, because
both grow with time.
 A forest stand will grow with time and with proper management, add increment each
year for many years.
 Funds in a saving account will draw interest and funds invested in capital should also
be earning their interest.
 Invested funds earn interest and this interest can then be invested to earn its own
interest.
 The amount of money originally invested is called the principal amount, and the
amount of money to which it will grow when the interest is added is called the future
value.
 The term payment indicates either a revenue (money received) or a cost (money paid)
 A dollar invested today will be worth more in the future because it earns interest.
 It follows that a dollar received in the future is worth less than a dollar received today
because it cannot be invested and earn interest.
 The future payment is worth less because an opportunity cost of the interest payments
forgone has been incurred.
 Time value of money is a concept to understand the value of cash flows occurred at
different point in time.
 If we are given the alternatives whether to accept Rs. 100 today or one year from now,
then we certainly accept Rs. 100 today. It is because there is time value to money.
 Every sum of money received earlier has reinvestment opportunity.
 Money received at present is prefered even if we do not have reinvestment
opportunity because money that we receive in future has less purchasing power that
the money that we have at present due to the inflation.
 What happens if there is no inflation still, money received at present is prefered, it is
bacause most of us have a fundamental bahaviour to prefer current consumption to
future consumption. Thus,
i. The reinvestment opportunity or earning power of the money.
ii. The (risk of) inflation.
iii. And individuals’ preference for current consumption to future consumption are
the reasons for the time value of money.
Reasons for time value of money.
1. Uncertainly - if an individual is not certain about future cash receipt, he prefers
receiving cash now.
2. Subjective preference - most people have subjective preference for present.
3. Investment opportunities - most individuals prefer present receipt to future receipt
because of available investment opportunities.
4. Inflation - the purchasing capacity of money may go down in the future due to the
inflation.
Importance of time value of money
1. To make investment decision - ling term assets/ capital budgeting decision - Net
present value.
2. To calculate rate of return - comparing return = Risk free rate + Risk premium.
3. To calculate cost of capital: comparing future return with cost of capital.
4. To maintain risk return trade off.
5. To make financing decisions.
: Helpful for financial managers.

3.2.1 Interest rate
 Interest is the return to the owner of capital.
 It is the return that the owner of the man-made assets receives for investing his
money in those assets interest can also the viewed as the cost of the capital for the
person who is using it.
 Interest is the market price of money.
Components of the interest rate
 The simultaneous solution of the supply and demand functions for money sets the
interest rate.
 The interest rate is the price of money.
 The interest rate is the base price of money that is then modified for other qualitative
component.
 Risk is the first major component that modifies the interest rate. It is the amount of
certainly assigned to an alternatives outcome. An investment whose return is difficult
to predict or is unknown is risky investment. There categories - certainly, risky,
uncertainly.
 Grater an investment's risk, the higher the interest rate.
 Liquidity is a second interest rate component. Liquidity is the ease with which an
investment can be ended.
 Liquidity is important for several reasons.
- A liquid investment allows termination of the investment if the predicted
outcome seems incorrect. It reduces risk.
- It allows changing to an investment with a higher return if one should become
available in the future.
 The less liquid the investment, the larger the interest rate.
 Time preference, a third component, is the degree to which an individual or
organization desire current rather than future consumption.
 Individuals usually have shorter time preferences, organization longer and society the
longest.
 Shorter the time preference, the higher the interest rate and the longer the time
preference, the lower the interest rate.
 Transaction costs are the resources consumed in making loans or exchanging money.
 Larger the loan, the smaller the interest rate because transaction costs are fixed.
 The inflation rate expected also affects the interest rate. Prices including the price of
money rise each year during inflationary times.
 Higher the expected inflation rate, the higher an interest rate the investor desires.
3.2.2 Discount rate
 Discounting is the process of finding the present value of an amount of cash at some
future date, and along with compounding cash forms the basis of time value of money
calculations.
V0 = Vn/(1.0+i)n
Where,
Vn = Future value of a single payment in year n
V0 = Present value of single payment
i = the interest rate
n = the year in which the payment occurs.

 The discounted value of a cash flow is determined by reducing its value by the
appropriate discount rate for each unit of time between the times when the cash flow
is to be valued to the time of the cash flow. Most often the discount rate is expressed
as an annual rate.
3.3.3 Inflation adjustment
 Inflation is important in investment analysis because the dollar provides the
investment returns are different from those that paid for the investment. They are not
comparable because, during inflation, dollars received in later years will not by as
much or dollar received today.
 Inflation effects become more serious the greater the inflation rate. For e.g. in 5 years
a dollar is worth $ 0.86 at 3 percent inflation but only $ 0.54 at 13 percent inflation.
 The seriousness of inflation effect is increased in forestry investments because they
take many years to complete.
 Inflation is a continuous long-term increase in the general level of overall price level
increase. It is not sufficient for just the price of food, or houschgior clothing to
increase.
 The average of all prices must increase. The price increase must also cause a net
increase.
 Increase general prices followed by decreased general prices would not be considered
an inflationary period. The general price level at the end of the period must be higher
than at the beginning.
 The time period needed to consider a period as inflationary is not strictly defined but
is usually understood to be several years.
Measuring price changes
 Price changes are measured by price indices.
 The price index is simply the ratio of the price in a time period to the price in a base
time period.
Algebraically,
PIn = Pn/P0*100
Where,
PIn = the price index in year n
Pn = the price in year n
P0= the price in year zero, the base year.
E.g. The price of sal log/ cft in 1960 was Rs. 95
In 1975, the price rose to NRs. 295.

The 1975 price index is
PI75 = 295/95*100
=310.53
 The price increase shown by the index is interpreted as the percentage increase i.e.
310.53% in the above example between 1960 and 1975.
 This is the percentage increase over the entire time period and not the annual
compound increase.
 The annual compound increase is
= 0.07847
= 7.84%
 Price indices measuring inflation must reflect prices in the whole economy. this is
accomplished by devising a market basket of individual goods, services, and or
commodities that are priced every time period.
 The market basket defines every time period that the index measures. the there major
price indices are the Gross National Product (GNP) deflator, the Consumer's Price
Index (CPI) and the Products Price Index (PPI).
Correcting PNW for inflation
 There are several ways in which cash flows can be corrected for inflation.
 Cash flows are originally stated in year zero or constant dollars, inflated to current
dollars in the year they occur, and are then discounted back to present value using the
market interest rate.
3.3 DecisionMaking criteria.
3.3.1 Present net worth
 The present net worth criterion is one of two widely used and accepted investment
criteria recognizing the time value of money.
 The PNW is the algebraic sum of hte discounted costs and revenues at a specified
interest rate.
In formula form,
PNW
where,
PNW = the present net worth
Rt = the revenues or positive cash flows in year t.
Ct = the costs or negative cash flows in year t.
t = the year in which the cash flow occurs.
i = the interest rate, usually the alternative rate of return or the cost of
capital.
0
.
1
53
.
310
15

 
 t
n
t
t
t
i
C
R


 
 0
.
1
0
.
1
0

 The PNW is interpreted as the present value of the investment's gain or loss at the
specified interest rate.
 An investment is acceptable if the PNW is positive and is not acceptable if it is
negative. This is so because the investment is earning more than the alternative
rate of return when PNW is positive.
 The investment earns less than the alternative rate of return when PNW is
negative. It is better to invest in your alternative with a negative PNW because
you will earn more money.
 Another way of looking at PNW is that all costs are charged interest from the
time they are incurred until the end of the investment and all revenues earn
interest from the time they are received until the end of the investment.
 The algebraic sum of the costs and revenues, with interest is then discounted to
year zero. This is the PNW.
Advantages
i. Net present value method of evaluating the investment proposal recognizes the time
value of money.
ii. It considers all cash flows over the entire life of the project.
iii. It is in consistence with the objective of maximizing the wealth of the firm that leads
to the welfare of the owners of the firm.
Disadvantages
i. It is difficult to use.
ii. It uses cost of capital as discount rate. But cost of capital is quite difficult concept to
understand and measure in practice.
iii. It may not give satisfactory answer when the project being compared involve different
amount of cash outlay.
iv. It may mislead when dealing with alternative projects or limited funds under the
condition of unequal lives.
v. This method emphasis the comparison of NPV and disregards the initial investment
involves. Thus, this method may not give dependable results.
3.3.2 Benefit cost ratio
 It is the ratio of present value of net cash benefit to the present value of net cash
outlay.
 It is calculated by dividing the present value of future cash inflow after tax by present
value of cash outlay.
Bc Ratio = PV of future cash inflows after tax/ PV of initial cash outlay.
Accept or Reject rule
 Accept the project with Bc ratio greater than 1.
 Reject the project if the Bc ratio is less than one.
3.3.3 Land expectation value
 Land expectation value is another decision criterion also known as faustm ann
formula, land rent, soil expectation value.
 Land expectation value is nothing more than a special case of PNW that has certain
restrictive assumptions made about it.
These are;

i. Land value is zero.
ii. the land has no residual stand.
iii. the land will be forested in perpetuity.
iv. the cash flows from the forest will be the same in perpetuity.
Le = Vo×(1.0+i)n ×1.0/(1.0+i)n - 1.0
= Vo×(1.0+i)n /(1.0+i)n - 1.0
where,
Le = the land expectation value
V0 = the present value of a perpetual periodic annuity that will be received every n
years.
n = the number of years between annuity payments.
i = the interest rate.
 The land expectation value is accepted if it si grater than market price and rejected if
it is less than market price.
3.3.4 Internal rate of return (IRR)
 IRR is the rate of return that an investment projects earns.
 It is that rate which gives the project's NPV zero. It is the rate when applied to
discount the future cash inflow makes the PV equal to the initial cash outlay, i.e zero
NPV.
 It is used when the cost of the project and annual cash inflows are given or known but
unknown rate of earnings is to be determined.
 It is a discount rate that makes the PV of future cash inflows of the project equal to
the cost of project.
 IRR has been defined as the maximum rate of interest that could be paid for the
capital employed over the life of an investment without loss on the project.
-Charles T. Horngren.
 The method considered net cash flow not the net income.
 IRR is found out by Trail and Error method and by interpolating between tried rates.
 IRR is the interest rate that equlizes the present value of hte costs and revenues.
 It is the value of i that causes the following equation to be true.
Where,
IRR = the internal rate of return.
Rt = the revenues or positive cash flows in year t.
Ct = the costs or negative cash flows in year t.
t = the year in which the cash flow occurs.
i = the interest rate when the equation is true and is the IRR.
 
 







n
t
t
t
t
n
t
t
i
C
i
R
0
0
0
.
1
0
.
1
0
.
1
0
.
1

Accept, Reject and Ranking of the investment project.
 Accept the investment if the IRR is greater or higher than cost of capital.
 Reject the project with lower IRR than require rate of return.
 Rank the projects form higher to lower IRR.
Merits
1. It considers the time value of money.
2. It takes into account the total cash inflows and outflows.
3. It does not use the concept of the required rate of return/ cost of capital.
4. Provide a rate of return which indicates whether the proposal is profitable or not.
5. It is theoretically a sound method.
Demerits
1. It involves tedious calculation base on trial an error method.
2. It gives multiple rates if the cash flows are non-conventional (investment in last
year) and create confusion.
3. It is generally difficult to understand and use in practice due to complicated
computational problems.
4. Projects selected base on higher IRR may not be profitable one.
5. Single discount rate ignores the varying future interest rate.
3.4 Risk and uncertainly evaluation.
 There are three different conditions under which decisions are made. These are
certainly risk and uncertainly.
 Certainly exists if there is only one outcome for each alternative. The outcome for
each alternative is known; thus choosing the alternative automatically defines the
outcome.
 Risk exists if a probability distribution can be attached to the different states of
nature and hence to the different outcomes.
 The state of nature cannot be predicted for each occurrence but the number of
times each state of nature will occur if the decision is made frequently can be
predicted.
 The probability distributions can come from different sources. They may be based
on historical evidence and records or they may be obtained subjectively by asking
experts for their opinion about the likelihood of states of nature occurring.
 Uncertainly exists if there are no information about the probability distributions of
the states of nature. This means that not even a subjective estimate of the
probabilities can be made by experts.
 Many people believe that uncertainly does not exist under this strict definition.
These people believe that subjective probability distributions can be assigned if
the analyst knows enough about the system to identify alternatives and states of
nature and to predict outcomes for them. They feel it is highly unlikely that all this
information is known but that at a minimum, subjective probabilities are not.

Table: Decision matrix.
Alternatives States of nature
S1 S2 S3
A1 011 012 013
A2 021 022 023
A3 031 032 033
3.4.1 Risk management
 Risk can be defined as the chance that the actual return can be other than
expected return.
 Risk refers to the variability in the returns form an investment. Higher
variability implies higher risk.
Attitudes towards risk
 Risk and return are two important considerations for investment. All investors prefer
higher return to lower return and lower risk to higher risk.
 Based on investor's attitude towards risk, there are three types of investors.
1. Risk averters - investor prefers the investment with less risk to one with more
risk, assuming both investment offer same expected return. Risk aversion is
the attitude of rational investors. A risk avert investor expects to earn higher
rates of returns on investment of higher risk and lower rates on lower risk
investments.
2. Risk neutral - who don not require changes in their required rate of return for
the changes in risk.
3. Risk seekers - who could reduce their required rate of return for increased risk.
Decision Making
 The Riskiness of an investment is the amount of certainly with which the return
on that investment, including recouping the initial investment can be predicted.
 Riskiness, is defined as the variability of the returns from a proposed investment.
 It is measured by either the variance, or the standard deviation of a probability
distribution of the distribution of the returns on that investment.
The variance of an assets return from historical sample return can be calculated.
Where,
2
j
 =Variance of asset j
n= the number of observations (periods) in the sample
rjt = the return on the asset j in period i
j
r

= the expected return on the asset j
2
1
2
1












n
r
r
n
t
j
jt
j


By Standard deviation
 The distribution may be either empirically or subjectively determined. Some
evaluation techniques use simulation based on very limited subjective data.
 The distributions of expected returns for four investments are shown in figure below
 These are normal distributions.
 The investment return is measured on the x axis by present net worth. The high points
of the distribution are the mean and provide the best estimate (the point estimate) of
the investment's return.
 The y axis measures the probability that he indicated investment return will occur.
 The point estimates for investments (A and B) are both Rs. 5000. The investor would
be indifferent between these two investments if risk were not considered.
 The distribution show that investment A is far less risky than investment B.
Investment A will never be less than about Rs. 4000 nor more than about Rs. 6000,
while there is a chance that investment B will return o rupees.
 Ordinary, the investor is assumed be a risk averter and would choose investment A
rather than investment B.
 The investor who was not a risk averter that is, was a gambler of the choose
investment B because of the chance of receiving a return as high as Rs. 10,000.
 The return for investments C and D are different. The point estimate for investment C
is Rs. 4,000, while for D it is Rs. 5,000.
 Investment D would be chosen if risk were ignored. The distributions show that
investment C with lower return is less risky than investment D with the higher return.
The decision is ambiguous because the higher return is for the riskier investment.
2
1
2
1
)
(












n
r
E
r
n
t
j
jt
j
j 

PNW
Probability
Investment C
Investment D
0 5
4 10
Thousands Rupees
Probability
Investment A
Investment B
5
0 10
Thousands Rupees
PNW

 The standard deviation or variance for each distribution could be calculated and used
as quantitative guidelines of each investments riskiness, however they do not provide
a final decision.
 The choice between these investments depends on how much risk the individual
investor is willing to take.
 The distribution or their means and standard deviations can be estimated either
empirically or subjectively.
 Empirical estimation is based on actual observations of past investments. Studies can
be mad and means and variances calculated. However there must be many
investments with similar to those on which the calculations were based.
 Subjective estimate by the managerial personal families with the proposed investment
may be possible if a normal distribution of returns can be assumed. A 'best estimate'
of cash flow is obtained and used as the distribution mean.
 Variability can be estimated by obtaining judgmental estimates of the likelihood of
the cash flow being more or less than the mean.
3.4.2 Decisionmaking withuncertainly
 Decision models for decision making with uncertainly usually require developing
a decision or pay off matrix.
Alternatives States of nature
S1 S2 S3
A1 12 8 2
A2 7 5 5
A3 0 10 15
 In the above table, if alternatives 1 are chosen a less of 12 units will occur for state
of nature S1, a loss of 8 units for S2 and a loss of 2 units for S3.
 The minimax criterion, also called the maximin criterion, takes a pessimistic view
of life and seeks to avoid the most objectionable circumstances. The criterion is
called minimax because it minimizes the chance of the maximum loss. The
criterion is to choose the worst possible outcome under each alternative and to
choose the least objectionable alternative from among these.
 The worst possible outcomes in the decision matrix are: S1 for A1 (loss=12); S1
for A2 (loss=7); and S3 for A3 (loss=15) The criterion instructs you to choose A2
because this is where the possible loss is minimized.
 The minimin criterion, also called the maximax criterion, takes an optimistic view
of life and seeks to obtain the highest payoff from those available.
 The criterion is called minimin because it minimizes the minimum payoff.
 It implicitly assumes only the best possible outcomes will occur and picks the best
among them.
 The criterion is to choose the best possible outcomes for each alternative and then
to choose the alternative with the best among these.
 The criterion is to choose the best possible outcomes for each alternative and then
to choose the alternative with the best among these.

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