CHALLENGE

Over the past two decades, several countries have reformed their state forest institutions to improve the management, administration and governance of forest resources, and the delivery of products and services from forests in response to changing market and public demand. Reforms have focused on strengthening economically and environmentally sustainable forest management.

In Vietnam, a series of restructuring steps have taken place over the past 15 years. However, progress towards transforming state forest enterprises (SFEs) into commercially viable businesses based on sustainable forest management principles has been slow, incomplete and often stalled. The most recent reform effort included the stipulation of Decree 200 in 2004, which aimed to develop and implement reform plans for SFEs, including specific plans for forest classification, forestland allocation, asset valuation, equitization, business planning, commercial timber processing sector development, and improving social and economic opportunities. Despite this, the reallocation of forestland from SFEs to communities, which was viewed as a core element of reform, has been particularly slow.

SFEs in Vietnam control about 40% of all forestland and are believed to still hold substantial forest estates, including some of the most valuable natural forests. Significant uncertainty exists, however, regarding the extent and quality of these remaining forests. Illegal logging, poor governance and vested interests are complicating the overall picture. Vietnam’s natural forest resources are important for rural development, poverty reduction and upland livelihood security since most of the remaining natural forests are located in upland areas where the poorest ethnic minority populations are concentrated.

APPROACH

This PROFOR-financed activity proposes to develop and support a deeper forest sector policy dialogue in Vietnam. A second objective is to complement the World Bank’s overall dialogue and program on state-owned enterprise reform in Vietnam by adding a specific perspective on forest resources management.

Expected outcomes include increased capacity of key stakeholders, particularly the policy research institute of the Ministry of Agriculture and Rural Development, to carry out performance assessments and scoring of SFEs and to formulate reform needs.

More specifically, the activity is expected to produce:

• Review of the policy framework for SFE reform and the legal aspects of equitization.
• Review of business prospects of two SFEs, concerning forest assets, land use rights certificates, and other data required for good management.
• Methodology and application of forest valuation techniques for two SFEs: The valuation of property uses three basic approaches: (1) the comparable sales approach; (2) the replacement cost approach; and (3) the income approach. Investors will mainly use the income valuation approach. To anticipate what buyers/investors will bid, the government should use the same approach with some sensitivity analyses to bracket the likely valuations of foreign investors. 
• Business plan development, one for each of the pilot SFEs demonstrating how the SFEs can improve their operations over time to become more efficient and profitable.
• Synthesis report, providing key information for understanding the situation relative to SFEs, their commercial value, and the policy environment relative to proposed sector reforms that is summarized in the main report.

In short, implementation activities include: stocktaking; a literature review of legal requirements; development of a scoring methodology and audits; review of land use, livelihoods and social issues; determining commercial prospects of SFEs; and a final synthesis report.

RESULTS

This activity is ongoing, and technical work is underway. Local experts have reviewed the regulatory framework for SFE reform and a stakeholder workshop was conducted in July. The pilot SFEs have been engaged and two technical missions were conducted to ensure readiness and participation. A preliminary analysis of each SFE was conducted, information was collected concerning assets and holdings, and draft commitment letters were drafted to formally engage the SFEs. The final synthesis report is expected by the end of June 2015.

The activity has concluded and all the outputs are being finalized for publication. Findings from the study show that:

There are 139 SFEs with 1.95 million hectares of forest, however, only 30 have commercial potential from plantation. These SFEs will have to be studied further to scale up their success in terms of their location, size, structure, financial structure, land tenure.

Additional measures to speed up reform might include (i) improving forestry and business practices to enhance efficiency and increase profits; (ii) providing incentives for and facilitating the merger of smaller SFEs to produce economies of scale; (iii) securitizing SFEs Land Use Rights Certificates; (iv) allowing for the sale and transfer of SFE Redbooks; (v) streamlining the policy framework and developing outreach programs to investors; (vi) developing practical and realistic approaches for mitigating potential employee layoffs that are expected as a result of the reform; (vii) certifying assets and holdings; and (viii) providing high-quality information to the public and potential investors. Technical assistance will be needed to guide SFEs through the financial reviews and asset valuations, develop business plans, sort through land tenure issues, improve forest and business management, and help resolve employee and labor situations, among others.

The study also finds high foreign investor risk due to shortcomings in individual SFEs and the complexity of the policy framework, posing a challenge for equitization. On the other hand, Vietnam is a favorable market in terms of environmental conditions for rapid tree growth, high prices for wood products, and close proximity and access to Asian markets. Capitalizing on assets in the sector while overcoming weaknesses in individual SFEs and simplifying the regulatory environment will be key to moving forward on reform and ensuring economic growth in the forest sector.

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