Article 5:

(Case Study) Evaluating the Opportunity Costs in Establishing a Nature Reserve

By David H. Newman, University of Georgia and Robert G. Healy, Duke University

For poor countries, any decision to restrict the use of natural resources and thereby possibly forego revenue must be made carefully. If land with potential value for timber production is proposed as a nature reserve, a key question for government officials and local stakeholders will be “What are the trade-offs?” For resource economists, these trade-offs are measured as the opportunity cost, the value foregone from the next best alternative use. If timber harvests are reduced or eliminated for a nature reserve, the foregone net revenue from timber sales represents the opportunity cost. An example from Belize shows how opportunity costs were used to evaluate a proposal to create a protected area, the Bladen Reserve, which was ultimately established by the government.

The Bladen Reserve is located in a basin of the Bladen Branch, a major arm of the Monkey River, in southern Belize, Central America. Its steepness, inaccessibility, and distance from population centers long spared it from major deforestation and heavy hunting pressure, thereby preserving an unusually intact moist-forest ecosystem (Brokaw and Lloyd-Evans 1987). The region contains forests with exceptional tree species richness (Brewer and Webb 2002), and the highest diversity of mammals and amphibians in Belize. Proposals were made throughout the 1980s to set approximately 35,000 ha of the Bladen aside as a nature reserve for wildlife conservation and tourism. The government of Belize, although sympathetic to the idea of creating more nature reserves, expressed concern over the economic trade-offs involved in designating a large reserve at Bladen Branch. What would be the impact on Belize’s timber industry? How much timber revenue would the government lose? Would the economic value from nontimber activities (research, tourism) be sufficient to offset the foregone timber income?

We conducted an economic analysis of the opportunity costs of creating a nature reserve at Bladen. When we visited Belize in 1988, our overall impression was that the region of which the Bladen is a part was poised for dramatic changes in the near future. This has proved to be the case. Southern Belize is a relatively under-developed region that is becoming inundated with colonists practicing subsistence slash-and-burn agriculture in competition with larger landholders who control the better, arable land. Major improvements to highways have made this once-isolated corner of Belize part of the national fabric. Moreover, between 1990 and 2000, the Belizean population grew by 2.7% per year—and unlike many countries, the rural population grew as fast as the urban. Similar scenarios have been played out throughout Central America and the results are generally disastrous for environmental integrity. Farming moves to lower quality, higher elevation lands, which are quickly depleted. Hunting pressure kills much of the wildlife and overall biological diversity becomes degraded.

Forestry Activities in the Region

The primary timber species harvested from the Bladen area are mahogany (Swietenia macrophylla), cedar (Cedrela mexicana), and pine (Pinus caribaea). In addition, some luxury hardwoods are also harvested, including rosewood (Dalbergia stevesonii), bastard rosewood (Swartzia spp.), mayflower (Tabebuia rosea), and granadillo (Platymiscium yucatanum). Secondary hardwoods are also harvested, or have the potential for being harvested, including banak (Virola koschynia), yemeri (Vochysia hondurensis), Santa Maria (Calophyllum braziliense), cotton (Ceiba pentandra), nargusta (Terminalia amazonia), and sapodilla (Manilkara zapota).

Forestry in the Bladen region has significant opportunities, but also significant problems. Throughout the country sawmills are small, use antiquated equipment, and are under-capitalized. Product quality is generally low and there is considerable production waste. However, given the extremely short harvesting season, low volumes per acre, short license duration, and poor infrastructure, it is unlikely that more heavily capitalized and efficient operations could be established.

The timber industries are an important component of the regional economy. Government royalties from timber harvests in southern Belize in 1985–86 were about U.S.$45,000, or 22.5% of those for the entire country, and 14% of the total annual salary income in the region (Arnold et al. 1989). Thus, the timber industry is important in determining the optimal mix of land uses for overall regional development.

Economic Analysis of the Bladen Branch Timber Resource

Our analysis was based on information detailed in the few available studies (Wright et al. 1959; Johnson and Chaffey 1974; Johnson and Woods 1976; King et al. 1986; Brokaw and Lloyd-Evans 1987). The paucity of accurate inventory data of the Bladen watershed partly rests with the perceived inaccessibility of the area for commercial timber operations. Physical accessibility generally relates to the steepness of the slopes, the characteristics of the soil, and whether safe access for workers and equipment currently exists. Economic accessibility is more varied, because if sufficient timber quantities or values exist, most physical limitations can, to some extent, be overcome. Roads can be built and logging systems can be developed that physically allow access to the timber.

Due to the difficult physical accessibility, the effective policy has been that the steep granitic area on the slopes of the Maya Mountains, from which Bladen Branch flows, be maintained in “protection forest.” Only in the alluvial flood plains of the small tributaries and on the Bladen itself was small-scale agriculture or forestry even contemplated (Wright et al. 1959; King et al. 1986).

Stocking of the most valuable hardwood species, based on the 1976 study, is very low. For trees greater than 50 cm in diameter, only 7.5 mahogany stems and 2.9 cedar stems per 100 ha were estimated for the limestone soils and none on the granitic soils. With normal good stocking of merchantable trees considered one tree per ha, this must be considered very low stocking. Indeed, the region has subsequently been shown to have exceptionally low tree densities overall, corresponding to its exceptionally high species richness (Brewer and Webb 2002).

Accessible Timber Area and Volume

Four areas of relatively accessible timber within the upper Bladen Branch watershed were proposed for the reserve. Accessibility is relative however—although these areas may be physically operable, it would be quite expensive to get to them. The accessible timber area is approximately 3000 ha. Using the average volumes taken from Johnson and Woods (1976) for the primary species and allowing for growth since the survey, the standing volume of primary species would be at most 45,000 ft3. The total estimated harvestable volume of currently or potentially utilizable secondary species is 3,857,500 ft3. Allowing for the potential of utilizing other species and for ingrowth, we estimate an expected harvestable volume of 4,500,000 ft3.

Direct Costs and Benefits of Timber Production

The value of the final timber product comes from the sale of lumber and veneer in the wholesale market. Using government-controlled prices as of 1988, the timber had a current lumber-equivalent value of U.S.$10,564,000 (Table A). Because there is relatively little volume in primary or precious species in the area, the Bladen’s timber is not of great importance to the export market.

 


Table A   Approximate revenues and costs associated with selective logging of primary and secondary timber species in the areas proposed for the Bladen Nature Reserve

Estimated extractable volumeU.S.$4,545,000 ft3
Potential revenueaU.S.$10,564,000
Estimated government royaltiesU.S.$354,000
 
Cost estimatesLowHigh
Infrastructure and extraction costsU.S.$7,500,000U.S.$12,240,000
Revenue—CostsbU.S.$3,064,000–U.S.$1,686,000
NPV Revenue—Costs (6% discount rate)U.S.$2,100,000–U.S.$1,500,000
NPV Revenue—Costs (12% discount rate)U.S.$1,500,000–U.S.$1,350,000

a All dollar figures are in U.S. dollars.
bNote: Revenue—Costs and NPV values do not include the costs of government royalties.

 

Only rough estimates of the costs of production can be made. These costs include extraction and milling labor and equipment, road building, additional forest management costs, and capital costs. Arnold et al. (1989), present high and low estimates for logging and milling costs for primary and secondary hardwoods that range between a low of U.S.$0.27/board foot (bf) and a high of U.S.$0.45/bf. Given that much of the timber lies in difficult terrain and is far from existing roads, it is likely that the production costs will be on the high side (see Table A).

We calculated the potential government royalty revenue from the likely-to-be-harvested standing timber to be U.S.$354,000, if all of the timber were harvested. Naturally, this value could increase further if the government raised its royalty rates, which might reduce the total amount of timber harvested.

Comparing the costs and revenues gives an idea of the relative value of the standing timber. Ignoring royalty costs, the total value of the timber net of production costs ranges could be strongly negative or positive. But because costs are likely to be on the high side, net revenues are likely to be low or negative (see Table A). It is difficult to calculate a net present value (NPV) of the timber, as certain costs (road building and equipment costs, primarily) must be in place prior to initiation of timber removals. However, we might optimistically assume that half of the total costs are spread out equally in the first four years and the remaining half over the next six years, and that revenues occur equally over the 10-year harvesting period with all prices and costs constant in real terms. At either a 6% or a 12% discount rate, the NPV does not yield a highly profitable timber venture (see Table A). If we include the royalty costs, they will lower the NPV derived from timber production by at least 10% and possibly much more, depending on the assumed costs. Likewise, given that the high cost scenario gives negative returns, it is unlikely that a significant amount of harvesting would be performed on the currently inaccessible areas, as those would be considered high cost (i.e., low profit) areas.

Thus, it is likely that the only steeper sloped areas that would be logged would be those that contain higher amounts of the primary species. Because the Bladen Branch has relatively low stocking levels of these species, under current price and cost conditions the steep sloped granitic and limestone areas would remain economically submarginal for timber companies and for the government. There would be no economic loss to setting these aside as a nature reserve.

Indirect Costs and Benefits of Timber Production

A number of indirect costs and benefits, either intended or unintended, occur due to timber removal. Clearly, the most immediate effect of logging is physical removal of trees and building of roads and trails to transport the trees out. Given the current forest department policy of strict diameter limit cutting rules, the selective logging itself has relatively light effects on the ultimate composition of the remaining forest. Some feel that this policy will cause the forest to degrade over time as favored species may have difficulties regenerating under forest cover (Arnold et al. 1989). However, more intensive cutting practices may in fact cause additional regeneration problems by favoring low density, nonmarketable, fast-growing species (Johnson and Woods 1976). An additional benefit of the selective logging is that relatively little runoff occurs as a smaller percentage of the ground is left bare. The high quality of Belize’s streams, even though timber harvesting has occurred for over 150 years, is a direct result of these practices (Hartshorn et al. 1984).

The major long-term impact of timber harvesting, especially for an isolated area such as the Bladen, is from road construction. Roads open up an area, allowing access for purposes other than logging. The most serious potential problem for this area would be an influx of hunters and unplanned slash-and-burn farming activity right up to the river. The resulting damage to the exceptional wildlife population in the Bladen from these activities could be dramatic. At the same time, however, improved access could help the Bladen develop as a tourist attraction.

Another concept that should be considered when the development of an irreplaceable asset, such as the Bladen, is considered is its option value. This is a term used in economics to emphasize the idea that, once an irreversible development of asset occurs, the owner (in this case the Belize government) loses the option of developing the area for other uses. Thus, there is a value in delaying any irreversible activity, such as logging, until better, more complete information on all options is available. Because the Bladen is considered one of the least-disturbed large forest areas in Central America, its option value for research, tourism, biodiversity, and wilderness is high. Barring extensive hurricane damage, its timber values will not diminish over time as worldwide supplies of high-quality tropical timbers continue to decline and prices rise. The cost of forgoing these options must be balanced against the benefits from any planned activities for the area that would foreclose these options.

Conclusions

From the analysis we did in 1988, timber harvesting in the Bladen Branch area seemed a marginal operation at best. The government of Belize, in the end, agreed with these results and declared a 44,000 ha portion of the Bladen Branch as an official Nature Reserve in 1990. Note that the area is considerably larger than the 35,000-ha study area, and is consistent with our recommendation that additional areas where granitic mountain terrain makes lumbering unprofitable be added so as to increase wildlife corridors connecting to other Belizean protected areas. The Bladen area has been set aside strictly for research and receives only minimal tourist use. Thus, the Belize government in effect determined that the option value for the Bladen alone was sufficient to justify reserve status. Because this is not an irrevocable act, the government maintains the option of perhaps changing the use of the Bladen sometime in the future.

Since 1988, the price of tropical woods has gone up somewhat, though enormous supplies from Brazil and southeast Asia have dampened pressure on prices (Robbins 2000). Over the same period, tourism in southern Belize has expanded greatly, with interest in nature a primary focus. Discoveries made during the 1990s of Mayan ruins and extensive limestone cave systems in the upland forests of southern Belize have been widely publicized, particularly in National Geographic Magazine. Increased ecotourism presents both incentives to conserve Bladen, but also somewhat increased threats of degradation due to infrastructure development and additional access for hunters. Moreover, there is now much greater appreciation than there was in 1988 of the economic value of intact forests as sinks for atmospheric carbon. Although the current status of Bladen Branch as a nature reserve, open only to scientists, would seem to be a “nonuse” of the area, in fact there is ongoing preservation of a number of valuable options, including some, like carbon sequestration, that had not been considered when the reserve was created.

The power of an economic analysis in evaluating opportunity costs of land use choices is that it can make explicit the costs of various decisions. The implication from this study is that it is not always the case that forests should be harvested for the immediate returns that timber can provide.

Literature Cited

Arnold, J. E. M., F. B. Armitage, W. L. Bender, N. V. L. Brokaw, H. Hilmi, J. R. Palmer, and S. L. Pringle. 1989. Executive Summary of the Draft Belize Tropical Forestry Action Plan. London: Overseas Development Administration (mimeograph).

Brewer, S. W. and M. A. H. Webb. 2002. A seasonal evergreen forest in Belize: Unusually high species richness for northern Central America. Bot. J. Linn. Soc. 138:275–296.

Brokaw, N. V. L. and T. Lloyd-Evans. 1987. The Bladen Branch Wilderness. Manomet, Massachusetts: Manomet Bird Observatory. October.

Hartshorn, G., L. Nicolait, L. Hartshorn, G. Bevier, R. Brightman, J. Cal, A. Cawich, W. Davidson, R. Dubois, C. Dyer, J. Gibson, W. Hawley, J. Leonard, R. Nicolait, D. Weyer, H. White, and C. Wright. 1984. Belize: Country Environmental Profile: A Field Study. Belize City. Robert Nicolait and Associates, Ltd.

Johnson, M. S. and D. R. Chaffey. 1974. An Inventory of the Southern Coastal Plain Pine Forests, Belize. Land Resource Study No. 15. Surrey: Ministry of Overseas Development.

Johnson, M. S. and N. P. Woods. 1976. An Inventory of the Columbia River and Maya Mountains Forest Reserve. Draft mimeograph. Belmopan: Belize Forest Department.

King, R. B., I. C. Baillie, P. G. Bissett, R. J. Grimble, M. S. Johnson, and G. L. Silva. 1986. Land Resource Survey of Toledo District, Belize. London: Overseas Development Administration, Land Resources Development Centre.

Robbins, Christopher S. 2000. Mahogany Matters. Washington, D.C: TRAFFIC North America.

Wright, A. C. S., D. H. Romney, R. H. Arbuckle, and V. E. Vial. 1959. Land in British Honduras: Report of the British Honduras Land Use Survey Team. Colonial Research Publication No. 24. Her Majesty’s Stationery Office, London.