The Case of the Georgian Forest Reform:Transition from Centrally Planned to Market Oriented Forest M

The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

Racha Region, Georgia

GLOBAL POLICY BRIEFING

| GLOBAL ENVIRONMENT

The Case of the Georgian Forest Reform Transition from Centrally Planned to Market Oriented Forest Management Ann Inasaridze, June 2013 KEY POINTS • The administrative and economic system that existed in the former Soviet Union was not able to detect consumer preferences and surpluses, eventually leading to unsustainable resource allocation and ineffective natural resources management.

• The Georgian government supported the idea to transfer the forest use rights to private stakeholders for better forest management and utilisation.

• Using the Georgian government reform example in the forest sector as a case study, this policy briefing tries to critically assess the implementation process of this new forest policy and its impacts on Sustainable Forest Management (SFM).

• The new policy refers to the tenure reform in Georgia, which implies transfer of Forest Use Rights to the private sector, while land remains under the state’s ownership. The government cedes responsibility for forest management and retains only forest licensing and control functions.

• In particular, this policy briefing critically evaluates the new policy instrument that was used in Georgia, in order to identify the aspects that hindered SFM. • The outdated National Forest Inventory (NFI), the improperly designed auctions that hindered competition, the poor enforcement capacity of the government and the lack of public participation were among the causes, which were responsible for the failure of the reform.

• The experience in Georgia has shown that the governmental officials preparing the new forest policy, have overlooked several aspects at the initial stage of the reform, which resulted in improper forest resource utilisation.

• This policy briefing recommends that the role of the government through a properly designed policy mechanism, is significant in order to ensure the effective implementation of the main principles of sustainable forest governance, such as transparency, accountability, equity, competition and innovation.

• This policy briefing concludes that a country should first build its policy implementation capacity before relying on market forces for natural resources management.

KEYWORDS Illegal logging, corruption, Sustainable Forest Management, Georgia, centrally planned economy, market oriented economy, tenure, forestry reform, sustainability, natural resources management, forest governance, forest privatisation, rights of investors, threat to biodiversity, transparency and accountability, competitiveness and efficiency, international practices, forest utilisation plans.

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

Table of contents Abstract

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Executive Summary

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Introduction

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1. Inclusion of Private Sector in Forest Management

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1.1 Implementing a new Forest Code in Georgia

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1.2 Forest Policy Reform

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1.3 Benefits of Forest Privatisation

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1.4 Missing Markets and Failure of Public Policy

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2.The Legal Rights and Responsibilities of the Private Sector in Forest Management in Georgia

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2.1 Violation of the Rights of the Investors

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2.2 Threat to Biodiversity

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2.3 Transparency and Accountability

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2.4 Forest Monitoring Capacity

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2.5 Introduction of Third Party Certification

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3. Analysis of the Georgian Forest Reform and Comparison with International Practices

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3.1 Development of the Forest Utilisation Plan

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3.2 Competitiveness and Efficiency

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3.3 The Role of the Government in Forest Governance is still

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Important to Ensure SFM 4. Recommendations

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5. Conclusion

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6. References

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

ABSTRACT Using the Georgian government reform in forest policy as an illustrative example, this policy briefing aims to explore the impact of the new forest policy on sustainable utilisation of forest resources. Since 2004, forest tenure and institutional reforms have been undertaken in Georgia and particularly the transfer of the long-term forest use rights to the private sector, under the necessity to reduce government obligations in managing private forests. While some legislative and institutional changes have already taken place, still more has to be done to improve the functionality of the new policy mechanism and to ensure the implementation of Sustainable Forest Management (SFM) in the country.

There has been little attention devoted to assess the implementation process of the forest reform in Georgia, particularly, what measures have been taken by the government prior to the adoption of this new policy mechanism. This policy briefing will try to explore why the transfer of Forest Management Rights (FMR) to the private sector failed to improve SFM in Georgia, arguing that the inclusion of the private sector in forest management does not necessarily ensure effective forest utilisation. The government is the only body that can ensure the effective implementation of the main principles of effective forest governance, such as transparency, accountability, equity, efficiency, application of a strong regulatory framework, institutional capacity, effective control and monitoring mechanisms.

The Georgian case can serve as a useful example for other countries, aiming to pursue similar reforms, in order to avoid mistakes during the initial process of forest reform. Findings in this report are based on secondary qualitative data, supplemented by in-depth interviews with the Georgian governmental officials and non-governmental representatives, conducted in the Georgian capital, Tbilisi, in March 2013.

EXECUTIVE SUMMARY Unsustainable use of forest resources is one of the most urgent problems in Georgia at present. The State Forest Fund is a highly valuable asset of the country and any problem related to the rational use of forest resources can be seen as a threat to sustainable development.

Despite the importance of the forest resources,

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substantial decline in forest protection and unsustainable resource utilisation have been witnessed in Georgia. The bureaucratic approach in managing forests under the centrally planned economy can be seen as a main contributor to unsustainable forest use in Georgia.

From Government to Governance In developing countries, command and control approach under traditional forestry institutions is becoming outdated as they fail to manage forests in a sustainable way. Georgia gained independence in 1991, after 70 years of socialism and therefore it has undergone a long transition period towards a democratic system and market oriented economy. The transition to a market economy revealed that the forest sector was very weak and inappropriate to develop SFM. The administrative economic system that existed in the former Soviet Union was not able to detect consumer preferences and surpluses of resources, eventually leading to the unsustainable resource allocation. For this reason, the Georgian government realised that it was urgent to prepare a new forest policy that ensures the effective functioning of ecosystem services, provided by the forests and woodlands, while at the same time encourages sustainable production of wood for commercial purposes.

Private Sector in Forest Governance In this regard, the new Georgian Forest Code (FC) has been adopted in 1999, which sets the framework for the reorientation of the forestry sector from central planning to a market oriented system. It underlines that Georgia’s State Department of Forestry will not directly carry out commercial activities and that it will transfer them to private enterprises for the future. In addition, the FC allows multiple forms of forest ownership (state, local community, church and private) to coexist.

The government supported the idea to transfer forest use rights to private stakeholders for better forest management and utilisation, as in general, private ownership of natural resources leads to economically efficient outcomes, better than in a centrally planned economy. According to Adam Smith’s idea, the market economy, based on individual self-interest, would be more effective from the resource allocation perspective.

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

Working towards this direction, the Ministry of Environment of Georgia declared “tenure� reform.

Tenure refers to the allocation of rights to use, manage, control, sell, lease or transfer of natural resources. The large-scale national forestry sector reform was based on the idea that the state should cede responsibility for forest management and transfer it to the private sector.

Tenure reform in Georgia implies transfer only of Forest Use Rights to the private sector, while the land remains still the property of the state.

The Role of the Government The role of the government is significant in order to ensure the effective implementation of the main principles of effective forest governance, such as transparency, accountability, equity, competition and innovation through properly designed policy mechanisms.

Furthermore, the government has to carefully evaluate the ecosystem services of forest fund to make trade-offs between forest commercial benefits and social costs. As Panayotou (1994) suggests, it is not suitable to transfer property rights of resources management, where the utilisation of resources itself creates significant externalities as a result of missing markets. In other words, if we assume that no markets exist for the social and environmental services of forests; most private companies undervalue its ecosystem functions under the improperly defined environmental policy, while operating on their territories. Therefore, it remains the role of the government to implement a national forest policy that addresses the problem of the market failure.

The Main Objective of This Policy Briefing This policy briefing attempts to identify those aspects of the decision making process that hindered the effective multipurpose utilisation of the Georgian forest fund. In particular, it assesses the design of the new policy instrument, in order to identify those aspects that hinder SFM, such as outdated National Forest Inventory (NFI), the improperly designed auctions that hinder competition and efficiency, and the lack of public participation, as well as the poor enforcement capacity.

This policy briefing reviews the outcomes of the qualitative studies conducted by international experts and consultants, assessing the current legislative and institutional changes in the forestry sector in Georgia.

This secondary analysis of existing empirical data is

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complemented by in-depth interviews with Georgian governmental officials, NGO representatives and forest experts.

Overall, the experience in Georgia has shown that the governmental officials who were preparing the new forest policy have overlooked several aspects at the initial stage of the reform, which resulted in improper forest resource utilisation. For this reason, this policy briefing has developed recommendations for other governments, which aim to pursue similar reforms in the forestry sector in the future.

Recommendations 1. Preparing a national forest inventory is a primary requirement in order to determine sustainable forest management priorities, including the classification of selected forest categories as well as of the national allowable cut. Furthermore, the government must obtain the accurate forest data prior to the reform.

2. The government has to guarantee transparent allocation of Forest Use Rights through properly designed auctions that ensure the equity among the participants. Designing competitive auctions with fair procedures and requirements is important for promoting innovation and efficiency in the forest sector.

3. Public participation and stakeholder consultation is an essential part of the decision making process as forests belong to the whole nation and they are closely intertwined with environmental, social and economic issues. Taking into consideration the rights of local people before transferring the Forest Use Rights to the private sector for commercial timber production, will avoid conflict of interests between the new owners of forest resources and the local population.

4. Promote a strong verification, certification and labeling system through knowledge and education prior to relying on a third party certification scheme.

5. The government has to build a strong enforcement and monitoring capacity mechanism, based on proper allocation of human resources, in terms of skills and experience, development of knowledge on technical issues, as well as on financial stability and proper distribution of budgets.

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

INTRODUCTION Georgian Forests are ancient woodlands that have managed to survive the Ice Ages and other natural cataclysms; they are one of the very few virgin forests remaining in the world. Compared to country’s total land (6,949.4 southland hectare), Georgia is considered to be a forest rich country. “Total area of forest land is 2,988,000 ha, from which 2,767,000 is covered by forests. In other words forests cover 40 % of the country’s territory of which 2,528,000 ha are state property and called State Forest Fund (SFF). Only about 600,000 ha or 21% of the SFF is considered to have commercial value for timber production. Former kolkhoz land, covers an area of 540,000 ha (20% of the total forest cover) and is according to the Forest Code classified as the Local Forest Fund (LFF). The rest of the forest land is classified as conservation and recreation forests. Another 24% of the total territory is classified as pasture land, 11% as arable land and 5% as horticulture land” (FLEG2, 2010).

During the Soviet period, the Georgian forests were nationalised. In 1921, the forest territories and forest resources were declared to be state-owned property and were split into two main categories: 1. National Forests, including production forests and 2. Collective Farm Forests (CFF) belonging to the Kolkhoz territories, which refers to the local collective farms within the Soviet Union countries, the same as LFF. In subsequent years, due to the national industrialisation agenda, the pressure on forest production along with the development of the timber processing industry in the country has increased significantly.

Racha Region, Georgia

Racha Region, Georgia

Under the Soviet Union regulation of 1932, the public body (Commissariat of the Forest Industry) responsible for forest utilisation for production purposes (e.g. supply industry with timber) was formed. However, it’s Sovietstyle and centrally managed forest utilisation practices were ineffective as they were not able to avoid conflict of interests. National forests were managed by the state bodies, which undertook both control and management functions. Furthermore, forest activities were financed by the government under the occasional budget constraints. Overall, this environment created fertile conditions for corruption and illegal logging. Related to this concern, “The Georgian government declared largescale national forestry sector reform based on the idea that the state should cede responsibility for forest management and maintenance and retain only forest licensing and control functions.

BOX 1 : Country Profile Georgia has signed environmental international agreements on: Air Pollution, Biodiversity, Climate Change Protocol (Kyoto Protocol), Desertification, Endangered Species, Hazardous Wastes, Law of the Sea, Ozone Layer Protection, Ship Pollution, Wetlands (CIA).

Georgia's main economic activities include the cultivation of agricultural products such as grapes, citrus fruits and hazelnuts; mining of manganese, copper, and gold; and output of a small industrial sector producing alcoholic and nonalcoholic beverages, metals, machinery, and chemicals. The country imports nearly all its necessary supplies of natural gas and oil products. It has a sizeable hydropower capacity that now provides most of its energy needs.

The nation's GDP at purchasing power parity (PPP) exchange rates is at $27.11 billion (2012 est.); GDP (official exchange rate) is $15.93 billion (2012 est.) and GDP - per capita (PPP) is $6,000 (2012 est.)

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

Most of the forests are supposed to be leased on the basis of long-term licenses –from 20 to 50 years. Prior to the lease, part of the state forests were expected to be handed over to local self-governments in order to give rural communities access to forest resources” (CIPDD1, 2009:3). It must be noticed that in the case of Georgia, tenure reform implies transfer of Forest Use Rights to the private sector while land remains under the state’s ownership.

Using the Georgian government reform in the forest sector as a case study, this policy briefing tries to analyse the implementation process of this new forest policy and its impacts on SFM. The effectiveness of the policy instrument is based on debatable arguments related to the ability of market-based instruments to address public issues and their power to transform developing countries and transition economies. On the one hand, the creation of markets and price-based initiatives for natural resources (for timber in the case of Georgia), raise incentives for the new owners to manage natural stocks sustainably for their own economic interests, while at the same time less governmental intervention is needed in natural resource management.

On the other hand, transferring the rights of forest management to private operators, raises concerns in terms of effectiveness and efficiency, particularly when a government has not set up a monitoring system to ensure proper enforcement and adequate market functioning. Relevant literature argues that it is necessary that developing countries build and define their capabilities before relying on market forces (O’connor, 2004), (Anderson, 2001), (Kathuria, 2005), (Caffera, 2011). As the Georgian case illustrates, without strict environmental policy and strong regulatory and institutional capacity, private incentives based on market signals would not be enough in order to develop sustainable forest utilisation strategies.

To address the key issues, as mentioned above, this policy briefing is structured as follows: 1. The first section illustrates the transition process to market oriented economy, along with the inclusion of the private sector in forest management, as a justification to address the limits of the bureaucratic forest planning in Georgia.

2. The second section describes and critically evaluates the process of forest reform and its deficiencies based on

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empirical data.

3. The third section attempts to make comparisons between the case of Georgia and similar international cases. It then argues that a government first has to build its legislative and enforcement capacity before relying on economic instruments to ensure SFM. 4. The final section provides recommendations for the further development of SFM practices in the future.

1. INCLUSION OF THE PRIVATE SECTOR IN FOREST MANAGEMENT 1.1 Implementing a New Forest Code in Georgia The first significant effort towards forestry sector development took place in 1999, when the new Forest Code (FC) was adopted. The FC specified the processes for the reorientation of the forest sector from central planning to a more market oriented system. In particular, the FC underlines that Georgia’s state department of forestry will not directly carry out commercial activities and that it will transfer them to private enterprises. Furthermore, the FC recognises the rights of regional authorities to manage local forests and delineates additional categories of protected areas, including those with regulatory functions, such as soil and watershed protection. In addition, it defines the ecologically sensitive areas -floodplains, steep slopes, sub-alpine forests and areas, where endangered species live. The FC provides the basis for both institutional and policy reforms in the forestry sector, which allows multiple forms of ownership to coexist (i.e. state, local community, church and private) as long as with the longterm lease of forests and the privatisation of timber production rights .

However, despite the adoption of the new FC in Georgia, little has been done in practice, towards moving to a market oriented forest management system. The privatisation and decentralisation of forestry was not an easy process. As the discussion of the second initiative (decentralisation) is out of the scope of this paper, we will focus on evaluating the process of private actor’s involvement in forestry activities in Georgia.

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

Since the adoption of the FC in Georgia, the situation in the forest sector did not see any major changes. Forest farms were managed the same way as during the soviet era; they depended on central government subsidies and were artificially tailored to the market requirements.

Despite the fact that the FC defines new additional forest categories as mentioned above, few efforts were made to prepare a National Forest Inventory (NFI).

The NFI is a database of continuously updated information of a nation’s forest resources, including timber volume and species composition, which is an essential requirement in order to define the forest groups. The unreliable forest data in the country created fertile environment for illegal logging, corruption and overexploitation. Regarding this concern, further changes have been implemented in the forest sector in 2005, when the Georgian Law on Licenses and Permits has been adopted, which defined the rights and responsibilities of the private actors carrying out forestry activities, under the license conditions and according to the forest management plans.

1.2 Forest Policy Reform The main driving force of the forest reforms was an active campaign against illegal logging and corruption that pushed the Georgian government to take measures against those issues. In 2003, after the ‘Rose Revolution’, there was an effort to liberalize the national economy, which resulted in significant institutional and legislative changes. The government also decided to privatize a large part of the national property, in order to boost budgetary revenues and disassociate itself from any management responsibilities. The national forests were among the national property that was decided to be privatized. The Georgian Ministry of Environment, in coordination with the Forestry Department (currently Forest Agency) started establishing the legal and institutional basis for the long term forest resource management privatization; taking into account international practices and experience related to forest tenure arrangements. “Tenure” refers the allocation of rights to use, manage, control, sell, lease or transfer of resources.

Privatization is one of the types of tenure reforms through which the new property rights on forest land and resources are being created. In a more general sense, privatization means transfer of productive assets

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or economic rights from the state to individuals or to the private sector (Pei, 1998). Historically, countries have pursued two types of ownership transfers: a) some countries prefer to transfer ownership on forest land to private entities, while b) others maintain ownership on forest lands but allocate use of rights to private owners for a specific period of time (Pei, 1998) and (FAO, 2011).

The latter is applicable in the Georgian case, where the government intended to transfer forest use rights to the private sector through auctioning, as it did for instance in the case of rights for timber harvesting. The reform is based on the logic that the rights of the land-use and management are separated from the rights of the land ownership.

The purpose of the Georgian government was to enhance the forests ecological, social and economic potential and in particular, to raise the forest sector’s contribution to economic development based on the principles of SFM. In order to achieve these objectives, the Georgian Ministry of Environment with the support of the World Bank, which allocated USD 12m for the forest rehabilitation in Georgia, intended to establish adequate legal and institutional bases for forest management (The World Bank, 2009). Key issues/actions that had to be addressed by the Georgian government prior to the transfer of the forest use rights to the private sector included: • Increase the area covered by forests through afforestation and reforestation.

• Update the National Forest Inventory according to the improved methodology, which is part of the preliminary process in order to define forest categories, before transferring forest units to the private sector for production purposes. The Georgian government had to hold reliable information about the country’s natural resources in order to be able to properly allocate forest units for different purposes and determine the annual allowable forest cut to maintain the natural ability of forests to regenerate.

• Allocate a local forest area for social purposes to avoid overlapping of private and community tenure rights and build capabilities of local authorities.

• Build public support by increasing stakeholder participation and engagement in forest reform processes and raise awareness regarding the economic contribution of forest production, under sustainable forest management.

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

• Develop a national forest standards and certification procedure and exports measuring system. • Strengthen the monitoring institutions and the quality of human resource, including provision of monitoring equipment and staff-training to improve forest law enforcement.

In reality, at the time of the reform, all those initiatives were suspended. The Georgian government declared a large-scale national forestry sector reform without completing the agreed activities (i.e. update of forest inventory, afforestation/reforestation, monitoring capacity, allocation forests for local population). The transfer of the management rights to the private sector was used by the government as a potential solution in order to overcome some of the observed problems, related to the public forestry agencies. The Georgian government only maintained licensing and monitoring functions.

previously operated public organisations, which were subsidised by the public budget. Competition among private forestry owners will promote efficiency in production of forestry goods and services. Furthermore, allocation of the management rights to the private sector will reduce government expenditures allocated for particular forestry operations and will raise revenues through payments of private corporations for forest use.

Engaging the private sector in forest management in general has particular positive effects on forest governance, which will be discussed in the next section.

1.4 Missing Markets and Failure of Public Policy The major concern of the private ownership of forests is that many environmental benefits are public goods and thus have no market price (FAO, 1995). Missing markets is one of the root causes of forest degradation (Dasgupta, 2000) & (Pearce and Moran, 1994), as existing markets fail to assess the total economic value of particular forest services, and private landowners underinvest in environmental forest functions. Hence, it is the role of the government to ensure social and ecological aspects of forest assets are maintained through properly designed policy instruments.

1.3 Benefits of Forest Privatisation In principle, transfer of forest utilisation rights (whether part or full) to private units encourages the creation of long-term economic interests based on market signals related to natural resource exploitation. In general, it refers to the introduction of market forces that significantly determine decisions and particularly production activities. Market forces have a potential to allocate resources more effectively than in the centrally planned economy. The below-cost sale of timber products, which resulted in forest overexploitation, was one of the major problems related with the centrally planned economy. But under the management of the private sector, this problem is usually of a lesser concern, as pricing is derived via more adequate methods.

The main goal of private entities is to achieve efficiency in production activities and gain cost leadership, while operating in a competitive market. Their net benefits (positive cash flow) will define their production efficiency through investing in production processes.

Despite the advantages listed above, concerns related to the long-term transfer of forest management rights to private actors still remain in Georgia. If we assume that the profit maximisation is the primary objective of the private sector, they might not incorporate various important functions of forest services in the forest planning, as a result of missing markets and the failure of the public policy to overcome the problem of market failure.

Another cause of the overexploitation, is the failure of public policies, which directly or indirectly encourage deforestation (Pearce and Warford, 1993). The factors that contribute to the conversion of forest land to other uses such as agricultural expansion, infrastructure development and urban development can be considered as proximate causes of forest clearance. However, government policies, which fail to incorporate environmental and social issues into decision making, can be considered as underlying (indirect) causes of deforestation.

That leads to innovation and efficient forest utilisation.

Furthermore, the introduction of several private enterprises will destabilise the monopoly of the

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

In view of the above, the Georgian government failed to find a balance between economic and environmental interests in the policy making process. This phenomenon is particularly evident in developing countries, where there is an emphasis on economic growth at the expense of environmental degradation and social costs.

As a result, increased harvest levels of commercial timber significantly contributed to the generation of higher revenues for the Georgian budget. However, if the overall costs of increased forest utilisation are considered in the long-term perspective, the social costs will most likely outweigh revenues received from the short-term timber exploitation by the private actors. In addition, the effectiveness of this new approach implemented in Georgia, highly depends on the rights and responsibilities of the private sector, as defined by the forest use license.

2. THE LEGAL RIGHTS AND RESPONSIBILITIES OF THE PRIVATE SECTOR IN FOREST MANAGEMENT IN GEORGIA The transfer of forest use rights to the private sector is regulated by the Law on License and Permits in Georgia (the regulation N 132 of the Government of Georgia, August 11, 2005). The main objective of that regulation was to establish rules and terms for timber production by the private enterprises. In the initial form, the regulation permitted the forest production on the territories, where inventory and management planning were not carried out. Therefore, there was a lack of defined forest categories, an essential component in order to delineate forest groups for social, ecological and economical purposes. It was only in 2009, when amendments have been made to the regulation, which permitted timber production only within the territories where inventory and forest management has been planned, prior to the allocation of forest use rights.

According to Ms. Jordania, a former lawyer at the Georgian Forestry Department, this indicated that preliminary inventorying should not been carried out by the state bodies as it will incur higher costs. Hence, this means, that the private companies will be required to carry out forest arrangement works, including collection of data on the available timber resources and

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identification of the forest services that fall under the forest protection categories (environmentally and socially beneficial forests) within the areas that they operate. The fact that the government had no information about the national forest fund before allocating forest use rights to private enterprises induced a conflict of interests. As Mr Ilia Osepashvili, Forest Officer from the World Wide Fund for Nature WWF-Caucasus Programme Office, declared, having reliable information is important from a conservation perspective in order to provide investors with accurate information and the ability to protect their rights. This will be discussed in the following two paragraphs.

2.1 Violation of the Rights of the Investors Allocation of forest management rights through ‘auctioning’ can be seen as a market mechanism, which forms the price of timber. The World Bank suggests that the idea of auctioning (Karsenty, 2000), where a government has to determine the starting bidding price, while private bidders will determine the optimal price, takes into consideration their capabilities and opportunity costs. However, this is not always the best solution, especially when the government does not have information about the approximate economic value of the forest resources it intends to auction.

In Georgia, the ministry officials responsible for the allocation of forest units to private enterprises were not able to determine the proper price of timber or provide investors with the correct data, in terms of forest quantity and quality, while issuing licenses for forest utilisation. As a response to this concern, the Ministry of Environment of Georgia (MEG) issued licenses based on unreliable forest data. As a result, the Chinese investors (Georgian Wood and Industrial Development Co., Ltd) received 30% - 40% less forest resources than defined by the auction (www.ombudsman.ge). That said, the MEG overestimated the price, and investors paid more than the real value of productive forests standing on their territory.

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

2.2 Threat to Biodiversity The transfer of Forest Use Rights to the private sector based on the improperly defined inventory of forest fund creates negative impacts on biodiversity. SFM in modern terms can be defined as the use of forest resources in a way that maintains their biodiversity, regeneration capacity and the potential to ensure forests’ ecological, economic and social functions in the long-term at the local, national and global level (FAO, 2011).

Under improperly defined forest categories, it is likely to grant access to ecologically sensitive forest units to private entities for commercial use (e.g. for production of timber). In the Georgian case, in 2006 and 2007, licenses were issued for conservation value forests and ecologically sensitive woodlands (Green Alternative, 2008). The risk of forest exploitation at the expense of biodiversity protection is quite high in Georgia, if we assume that it is important to assess biophysical data in order to plan timber cutting activities in a sustainable way. But under the business as usual practice, where private companies concentrate on profit maximisation, they have no incentive to internalise the social and environmental externalities in their activities.

Furthermore, as Mr Macharashvili, Biodiversity Programme Coordinator from the local NGO ‘Green Alternative’ underlined, the fact that the obligation to identify forests with high conservation value, remains the responsibility of the private entities, raises concerns regarding protection and conservation, as the identification must be undertaken by the government prior to the allocation of forest use rights.

2.3 Transparency and Accountability The President of Georgia, M. Saakashvili declared in 2004 that he was struggling to fight corruption. As he stated, “It is impossible to build democracy and reduce corruption unless accountability and transparency is guaranteed”. At that moment, the Order (N.197) of the Minister on the Rules for Carrying out Tenders and Auctions has been issued.

While in principle, auctions are the most transparent way to allocate forest use rights, the whole process of auctioning was quite far from being transparent in the Georgian case.

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The forest auctioning, conducted in 2008, illustrates these arguments, as according to criticism the Georgian Wood and Industrial Development Ltd, had no rivals during the auction. For a fair licence allocation process, all applicants should be incorporated in the process in order to ensure equity and competition. The call for applications regarding the auctions had been announced in newspapers only 4 weeks earlier than the auction date. With such short notice, other interested parties could not make the required business decisions and take part in auctions. It is clear that the process was improperly designed to address corruption and the risk of collusive arrangements was still quite high between the regulated parties and the regulator.

Another aspect that determines the legitimacy and accountability of a policy mechanism is the public’s participation in the decision-making process. The FC of Georgia (Article 35 and 36) states that the long-term forest use rights can be granted to any applicant, after the public hearings have been conducted. Despite these requirements, public participation has been completely overlooked during the process of the forestry reform. In general, when there is limited public involvement in the decision-making process, the population expresses hostility against the new policy, even if a particular policy mechanism may provide benefits for them, as they have no information about their rights and the potential threats of the planned activities. As a result, a conflict was raised between the private company and the community in one of the local districts in Georgia (personal communication, George Namgaladze, Forest Expert at local district, 2013).

Landslip in Georgia

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

In that particular case, the licence for timber extraction was allocated close to the village, where people use forested areas for several social purposes. One rural inhabitant claimed, that granting forest use rights to one person will deteriorate their livelihoods, as they will be deprived of the right to enter the forest (Human Rights, 2008). Regarding this concern in the UK context, the UK government in 1989, before the announcement of its plan to sell 100,000 hectares of the Forest Commission estate, declared that “No woodland would be sold that there were public access rights to unless the same access can be guaranteed�(Adam Smith Institute, 2002).

2.4. Forest Monitoring Capacity Successful implementation of forest reform depends on maintaining an effective mechanism of state control. The creation of the Inspectorate of Environmental Protection (IEP) within the newly established Forest Agency can be seen as positive step in the development of the forest sector.

The Ministry of Environment Forest policy, legislation and administration of forestry activities, provision of subsidies.

Forest Agency Since 2010 Preparation of management plans, monitoring and controlling. However, forest planning is still carried out by the private contractors.

Environment Inspectorate Control of movement of wood along the roads and control of Forest Use Licenses holders.

479 Guards/Rangers One ranger per 5000 ha area of license holders (Insufficient number of rangers for their present tasks).

Despite the fact that the detection of illegal activities through this agency is possible, still this mechanism appeared to be too weak to control the entire territory.

Each forestry worker is held responsible to check thousands of hectares and at the same time, their salaries are quite low, which again creates perfect conditions for corruption. Monitoring is concentrated on planned inspections of the selected entrepreneurs rather than on random monitoring of license holders. Without proactive and systemic monitoring, licence holders might engage in activities such as excessive or non registered harvesting and other breaches (e.g. cutting the most valuable trees, and leaving sick and dried trees on site). As a result of insufficient inspections, non compliance with license conditions is a very common phenomenon in Georgia (Inspectorate of Environmental Protection Hot-line). In this regard, the certification system, based on a third party audit as a safeguard mechanism was initiated to address the deficiencies of a weak governmental monitoring capacity. Initially, in 2007, the memorandum on cooperation between the Georgian forestry department and the FCS was signed.

2.5 Introduction of Third Party Certification The certification system based on market incentives has gained international attention in forest governance (Agrawal, 2008). National sovereignty can be seen as a key barrier for implementing international forest agreements at the moment. As a result, developing countries see stringent environmental regulation as a barrier for their economic development. Developing countries see forests as a source of income and are avoiding engagement in SFM that makes forest utilisation more expensive (Dimitrov, 2005). As a result, excessive harvesting of timber takes place in developing countries that offer tangible economic benefits and are not promoting forest protection and conservation (The Economist, Dec 5, 2009).

State Forest Fund (2,2m) Local Forest Fund (540,000 ha., 20%) Commercial (600,000 ha., 21%)

The chart illustrates the structure of the Georgian Forestry Sector until 2010.

The Forest Stewardship Council (FSC) is an international not for-profit, multi-stakeholder organisation established in 1993 to promote responsible management of the world’s forests.

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

However the certification regime, to some extent bypasses national policy and creates incentives to manage forests in a sustainable way in order to meet consumer demand. The requirement that forest management plans prepared by the forest owners had to be based on international standards, such as criteria defined by the Forest Stewardship Council (FSC) was also indicated in the Georgian Law. The certification regime can be seen as a solution to address the poor government capacity to monitor forest activities. Despite these promises, this approach has not been proven effective, as national standards of certification have not been elaborated. In addition, no specialists in this issue were engaged in the process. As a result, incorporation of FSC principles in the license represented a formality that could not be considered as a driver of SFM. On the contrary, various circumstances had to be taken into account before relying on this approach such as: 1. The capacity and experience of private enterprises to be engaged in the FSC scheme. It was unclear whether private entities were capable at that time to meet those standards.

2. The level of the environmental awareness of timber exporting countries. Engagement in SFM raises production costs and a product’s price. Until timber exporting countries are willing to pay higher prices for a sustainably managed timber, companies will not have any incentive to meet FSC standards. If we consider that the main exporters of the Georgian timber are mostly neighbouring countries with less developed economies and without stringent environmental standards, the consumer pressure to manage sustainably the supply chain of timber production is expected to be weak.

3. Furthermore, reliance on market forces such as certification can be particularly important if there are substantial volumes of wood exported, as costs of such certification are significantly high. This is why there was no progress on certification in the forestry sector in Georgia (FLEG, 2010).

Thus, the ministry’s approach to monitor forest utilization through certified commercial organization of the FSC was flawed from the very beginning. In Georgia, certification of local agencies often operated without certified staff and equipment. The fact that they are hired and paid by the private enterprises rose further opportunities for corruption and created fertile ground for private arrangements.

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As a result, ministry officials decided to simplify the licensing procedure undertaken by the private sector and in 2007, a new amendment to the decision of ‘Government on Approving Provisions of Rules and Conditions for Issuing Licenses for Use of Forest Resources’ was introduced. According to the revised document, the private sector was not required in the future to meet the FSC principles, while conducting forest activities for commercial purposes.

3. ANALYSIS OF THE GEORGIAN FOREST REFORM AND COMPARISON WITH INTERNATIONAL PRACTICES 3.1 Development of the Forest Utilisation Plan When analysing the policy options to be adopted in order to address a particular problem, it is essential to take into consideration the precedents and thus try to avoid the mistakes that have occurred in the past. In Georgia, the government officials had to pay attention to the practices of SFM as implemented in other countries and also consider the recommendations provided by the global financial and environmental institutions. After the careful examination of a particular policy, each government has to assess its potential and its capacity to decide how/if the country is ready for the reform and what procedures must be implemented prior to the adoption of a particular policy instrument.

Various factors have determined the failure of the new policy instrument in Georgia. In general, in the forestry sector it is recognised that SFM should be based on a forest management plan (FMP) for a given territory, and should be prepared according the results of the forest inventory. Reliable data on forests is vital for all levels of forest management, such as, forest classification, demarcation and registration, forest resource utilisation and planning. The fact that the Georgian forest inventory has not been updated since 1982, created a situation where regulators were not able to determine the proper price of timber and could not provide investors with correct forest data. Furthermore, international practices illustrate a hierarchical system for the forest management planning procedure that must be considered by governments, before the allocation of forest use rights to private entities.

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

The forest management planning procedure includes the following steps: 1. National Planning, including strategic planning on national level that includes the program of forest development.

2. Regional Planning, covering strategic plan at the regional level, including principles of SFM and provides the allowable levels of forest utilisation.

3. Forest Management Plan, covering a management plan for forestry districts, it determines annual allowable cuts; it illustrates the principles to ensure the safety of needs of the local population, protection of biodiversity and use of forest resources for commercial purposes.

4. Operation Plan, which illustrates the management plan for each forestry operation e.g. for timber production (must be prepared by a person responsible for forest utilisation).

This hierarchical scheme clearly illustrates the gap between the best practices and the Georgian case. The first two stages, namely planning on national and regional levels should be conducted by the government.

However, in the Georgian case they had not been addressed prior to the allocation of the forest units for commercial purposes. This task was allocated to the private entities to be implemented.

Regarding this concern, the Forest Stewardship Council (FSC) provides an option to be used by those countries without an updated National Forest Inventory, before allocating forest use rights. The government has to appoint groups of independent experts, who will be responsible for preparing the inventory in the particular areas, while the private bodies have to cover the costs for the inventory. This must be done before the government declares the transfer of rights for a particular territory to the private sector. In order to set fair bidding prices, the government should have the proper forest data prior to the allocation of forest use rights. It must be noted that the issuing of new licenses has decreased in Georgia. Insufficient number of bidders indicates a lack of interest from the private sector. One potential reason which makes investors reluctant to invest in the Georgian forestry sector is unreliable quantity and quality of forest resources. The licensees operated in Georgia have expressed their concerns related to lower wood volumes available on their operational territories, compared to the ones suggested in the tendering process (FLEG, 2010).

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3.2 Competitiveness and Efficiency Policies that permit imperfect competition in the forest industry can have significant negative effects on the competitiveness of the sector. Barriers to entry can prevent the most efficient firms from operating. A study conducted by the New Zealand Institute of Economic Research in 1998, indicates that the local forest sector has improved its competitive position since 1980, which can be partly attributed to the devolution of forests to private corporations, as the number of players has significantly increased in the forest industry in New Zealand. It must be noted, that the forestry in New Zealand was dominated by public corporations until 1980, however as a result of the subsequent private sector incorporation, the government now owns less than 7% of the planted forests (Clarke, 1998). Likewise, the transfer of commercial forests to the private sector in order to promote competition and efficiency has been successfully implemented in South Africa, where the state owned a forestry enterprise, which has now been privatised, with its rights transferred to five different bidders. The disaggregation of the company has been implemented in order to promote competition among the different entities.

Furthermore, imperfect competition leads to inefficiencies and the failure to adopt technologies that reduce environmental damage. Through due diligence and pre-selection, the government could choose the most qualified candidates for the bidding, creating an action which promotes competition and development of the forestry sector. At this point, it is important to underline the critical points that need to be considered before granting the forest use rights to private bidders (FSC, 2007).

Firstly, an authorised body has to develop a set of transparent guidelines and indicators to evaluate the potential candidates. E.g. 1. Participants should have proof of financial status; as well as 2. Proof of financial securities for investment and the level of the securities need to be related to the value of the forest lease unit; 3. A track record in forestry operations; 4. Commitment that the applicant is intending to use the resources from an efficient perspective (producing the maximum amount of output per given amount of resources in a sustainable way).

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

In addition, the long-term use rights of resources should provide incentives for private companies to invest in forest activities. However, this is not really happening in Georgia, as companies are still focused on short-term profits, without understanding the long-term economies of SFM. It is unclear if private license holders have forest management experience, however if they want to manage forests sustainably, they should have the necessary experience.

3.3 The Role of the Government in Forest Governance is Still Important to Ensure SFM The case of Georgia clearly illustrates that forestry is an ‘intermediate’ sector that requires a flexible combination of regulations and market mechanisms. It is obvious from this case study that the new market-oriented policy instrument failed to incorporate social, ecological and economic aspects of the forest management as a whole.

If we assume that profit maximisation is the primary objective of the private sector, then it is assumed that private companies will not incorporate various important functions of forest management. Therefore, unless there is an adequate regulatory framework developed in the country prior to the allocation of use rights, all external costs of forest services will be passed to the private sector. It remains the government’s responsibility to define the forest categories and discover biodiversity hotspots.

The reform process illustrates that the government of Georgia was focused on short-term economic revenues, without taking into account its long-term environmental and social consequences.

However, aside from the environmental and social aspects, there are also economic benefits from the proper planning of forest management. If the woodland is recognised as economically profitable, it will attract more investors and enable the government to receive more. In general, the liberalisation of the economy has improved the overall investment through simplifying business climate in Georgia but the environmental policy is still not recognised as a priority.

enforcement capacity reduce the effectiveness of marketable instruments to induce environmental protection in developing countries (Caffera, 2009), (Pattanayak, 2010), (Tao, 2009), (O Connor, 2004), (Anderson, 2001), which was also the case in Georgia.

4. RECOMMENDATIONS This policy briefing has developed initial recommendations for governments seeking to pursue similar reforms in the future. In particular: • Preparing a national forest inventory is a key requirement to determine sustainable forest management priorities, including the classification of selected forest categories and determination of a national allowable cut. Furthermore, the government has to obtain the accurate forest data to avoid disputes between the regulated parties and the regulator.

• The government has to guarantee the transparent allocation of Forest Use Rights through properly designed auctions that ensure the equity among all participants. Designing competitive auctions with fair procedures and requirements is important for promoting innovation and efficiency in the forest sector.

• Ensuring public participation is an essential part of the decision-making process as forests belong to the whole nation and they are closely intertwined with environmental, social and economic issues. Taking into consideration the rights of local people before transferring the Forest Use Rights to the private sector will avoid any disputes between the new owners of forest resources and the local population.

• Promote a strong verification, certification and labelling system through knowledge and education, prior to relying on a third party certification scheme.

• Lastly, the government has to build an effective enforcement and monitoring capacity, considering any technical or economic issues, such as the proper distribution of budgets before relying on markets.

In addition, the transfer of property rights (use rights) does not mean that control and monitoring is not required by the state. Low state monitoring and

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

5. CONCLUSION The aim of this policy briefing was to assess the forest reform process in Georgia which started in 2010 and is still ongoing. In particular, it intended to identify the reasons which have created the gap between desirable and actual policy implementation (Meltsner, 1972). As the Georgian case clearly illustrates, prior to the implementation of a new policy instrument, the government must determine the policy’s feasibility. In Georgia, there has been little focus on assessing the implementation process of forest reform, particularly, what measures should be considered by the government prior to the adoption of a new policy mechanism. A country has to build its policy implementation capacity before relying on market forces (O’Connor, 2004), (Anderson, 2001), (Kathuria, 2005). Furthermore, the case of Georgia highlights that the role of the government is significant in ensuring the effective implementation of the main principles of effective forest governance, such as transparency, accountability, equity, competition and innovation through a properly designed policy mechanism. Early reliance on markets did not meet the initial requirements to ensure proper market functioning and competition among forest industries.

Therefore, the successful shift to market-based instruments requires a long-term process of capacity building, which is an essential component of forest sector development and the protection of sustainability.

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Georgia Mountains

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

6. REFERENCES AND SOURCES (Agrawal, Chhattre, and Hardin, 2008) ‘Changing Governance of World’s Forests’, Science 320: 1460-62.

(Anderson, 2001) Economic Instruments and Clean Water: Why Institutions and Policy Design Matter/,OECD, Paris.

(Caffera, 2011) ‘The Use of Economic Instruments for Pollution Control in Latin America: Lessons for Future Policy Design.’ Environment and Development Economics, 16 (3): 247-273.

(Carter, 2007) The Politics of the Environment: Ideas, Activism, Policy. Second ed. Cambridge: Cambridge University Press. chapter 12.

(CIPDD, 2009) Caucasus Institute for Peace, Democracy and Development (Unpublished paper) (Dasgupta, 2000) Valuing Biodiversity, University of Cambridge and Beijer International Institute of Ecological Economics, Stockholm.

(Dimitrov and Radoslav, 2005) Hostage to Norms: States, Institutions and Global Forest Politics, Global Environmental Politics, Vol. 5, No. 4, Pages 1-24.

(FAO, 2002) Forest and Forest Products/ Country Profile Georgia, United Nations, New York and Geneva. http://www.unece.org/fileadmin/DAM/timber/docs/dp/dp-26.pdf (FAO, 2011) Reforming Forest Tenure/Issues, Principles and Process (FAO, 2011) Decentralization and Devolution in Forestry http://www.fao.org/docrep/x3030e/x3030e0a.htm (Forestry Standards and Practices 2010), Tbilisi, Georgia.

(Goulder and Parry, 2008) Instrument Choice in Environmental Policy/ RFF Discussion Paper.

(Human Rights in Georgia, 2008) One More Georgian Forest Flogged off for Easy Money http://www.humanrights.ge/index.php?a=main&pid=7397&lang=eng (Japaridze, 2010) Review of the Current and Proposal Institutional Changes in Georgia (Final Report) FLEG / World Bank/Tbilisi (Karsenty. 2000) Economic Instruments for Tropical Forests/The Congo Basin case/ Instruments for Sustainable Private Sector Forestry CIFOR, CIRAD, IIED http://pubs.iied.org/pdfs/7557IIED.pdf (Kathuria, 2005) Controlling Water Pollution in Developing and Transition Countries - Lessons from Three Successful Cases. Journal of Environmental Management, 78: 405-426.

(Macxharashvili, 2009) CIPDD/Forestry sector in Georgia, Policy Brief (McAllister, 2010) Dimensions of Enforcement Style: Factoring in Regulatory Autonomy and Capacity. Law & Policy, 32 (1): 61-78.

(O’Connor, 2004) Applying Economic Instruments in Developing Countries: From Theory to Implementation/ OECD (Pattanayak, Wunder and Ferraro, 2010). Show Me the Money: Do Payments Supply Environmental Services in Developing Countries? Review of Environmental Economics and Policy, 4 (2): 254-274.Indonesia/ CSERGE Working paper http://www.cserge.ucl.ac.uk/Illegal_Logging.pdf

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

(Pearce, and Warford, 1993) World Without End, Economics, Environment, and Sustainable Development, Oxford, Oxford University Press.

(Pears and Moran, 1994) The Economic Value of Forest Diversity, Earthscan Publications Limited, London (Pei, 1998) From Reform to Revolution: The Demise of Communism in China and the Soviet Union (Rosander, 2008) Illegal Logging Current Issues and Opportunities for SIDA/SENSA Engagement in Southeast Asia/Copyright-RECOFTC&SIDA Bangkok, Thailand http://www.recoftc.org/site/uploads/content/pdf/Illegal_Logging_03_-_web-no-bleed_52.pdf (Recommendations of The Forest Stewardship Council, 2007) Cited in (Skodvin, T., Gullberg, A. T. and S. Aakre, 2010) ‘Target-group influence and political feasibility: The case of climate policy design in Europe’, Journal of European Public Policy, 17 (6): 854-873.

(The World Bank, 2009) Forest Development Project/Report/Georgia http://web.worldbank.org/external/projects/main?pagePK=104231&piPK=73230&theSitePK=40941&menuPK=22 8424&Projectid=P044800

Internet Sources Adam Smith Institute, 75: Out of the Woods (2002) Sale and leasing of state forests http://www.adamsmith.org/80ideas/idea/75.htm Association Green Alternatives, Environmental Reports 2005-2012 http://www.greenalt.org/?lng=en_ -Does the Georgian Legislation Provide the Protection and Sustainable Use of Biodiversity? /Green Alternative /Policy Brief/ Tbilisi/ July2010 http://www.greenalt.org/webmill/data/file/publications/policy%20brief_biodiversity%20and%20EIA_ENG.pdf -Environment and Development in Georgia, Policy/Legal and Institutional Challenges in Selected Areas/ Tbilisi, 2007 http://www.greenalt.org/webmill/data/file/publications/Environment.pdf -Problems of Forestry Sector of Georgia: Illegal Activities and Legislative Collisions/Green Alternatives/ Tbilisi, 2006 http://www.greenalt.org/webmill/data/file/publications/problem_of_forestry_sector.pdf Biodiversity Hotspots/Conservation International http://www.conservation.org/where/priority_areas/hotspots/Pages/hotspots_main.aspx ENPI FLEG/Improving Forest Law Enforcement and Governance in the European Neighbourhood Policy East Countries and Russia /Regional Bulletin /June 2011 http://www.fleg.org.ua/fileadmin/user_upload/ufs/04.%20Program%20Information/4.02%20Program%20Compo nents/4.02.05%20Public%20Awareness/FLEG_newsletter_4_ENG_.pdf Forests and the Biodiversity Convention Independent Monitoring of the Implementation of the Expanded Program of Work in Georgia/Global Forest Coalition, May 2008 http://globalforestcoalition.org/wp-content/uploads/2010/11/IM-Report-Georgia1.pdf Georgia: New Phase of Forest Reform http://www.illegal-logging.info/item_single.php?it_id=3164&it=news The World Group, 2006 Environment Matters/Combating Illegal Logging and Corruption in the Forestry Sector http://siteresources.worldbank.org/INTENVMAT/64199955-1162240805462/21127309/6Combating.pdf

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The Case of the Georgian Forest Reform: Transition from Centrally Planned to Market Oriented Forest Management

Georgia

List of Interviewees (Jordania , 2013), Former consultant at the Legal Office of the Forest Department, Ministry of Environment, Georgia.

(Kvernadze, 2013), Head of the Department of Sustainable Development , Ministry of Economic and Sustainable Development of Georgia.

(Macharashvili, 2013), Biodiversity Programme Coordinator , NGO- Green Alternative, Georgia.

(Namgaladze,2013), Forest Expert, Former Head of the Forest Office in Ambrolauri Region of Georgia (Osepashvili, 2013), Forest Officer, WWF Caucasus Program

ABOUT THE AUTHOR Ann Inasaridge is a Research Fellow at Gold Mercury International. In the past, Ann has worked at the Ministry of Environmental Protection and Natural Resources of Georgia as a Strategy Planning Specialist, responsible for developing, coordinating and managing the Ministry’s strategy for sustainable development. She has also participated in drafting and developing the Environmental and Resource Management Policy of Georgia. Ann holds an MSc degree from the London School of Economics and Political Science ("LSE").

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