An optimization model to allocate forestry incentives funds in teak plantations of the southern-coastal region of Guatemala Public Deposited

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  • Guatemala is internationally recognized as a country suitable to invest in the forestry industry. The first Guatemalan Forest Incentive Program – PINFOR- was implemented in 1996 to foster local forestry through cost-sharing. However, it lacks both formal land use planning processes and mechanisms to assess economic potential of projects, so it is questionable whether funds have been invested efficiently. Subsidies as a means to stimulate productive activities have been the subject of criticism and controversy, even though they have been effectively applied in other Latin American forestry sectors. Effects of subsidies and the landowner response to assistance have been relevant topics in international research. Little work however is encountered regarding project-level public funding allocation criteria. In the 1970s, Murphy (1976a; 1976b) and Gregersen et al. (1979) developed rational criteria to allocate public funding among projects which combined economic assessments, investment financial need estimation, program budget limitations, ranking-based selections and linear programming. These works provide the basis to develop a pilot, regional-scaled study in the Southern-Coastal region of Guatemala reported here. This study proposes a multi-period mixed integer linear programming model to allocate public funding from the PINFOR program among 101 simulated teak projects within a 15 year future planning horizon. Simulation is performed with stochastic assignment of project size, locally representative silviculture, timber production and land market features, and geographically located through spatial analysis. Economic analysis of project financial performance yields optimal rotation ages of 9 to 14 years at social and private discount rates between 8% and 14%. The model formulation provides an optimal solution to the 15-year funding allocation problem faced by PINFOR that maximizes long-term contribution of projects to social benefits. Model requirements include compliance with program budget limitations and non-economic requirements of forest cover and future employment. Within the pool of projects simulated, between 38 and 88 are evaluated as socially profitable depending on the discounting scenario and the rotation regime, but only between 18 and 46 meet the condition of socially profitable – privately unprofitable. Optimal allocation assigns about 1,200 hectares to future enrollment in the PINFOR program. Financial requirement is estimated as strongly variable and ranges between $0 and $2,603 per hectare. The optimal overall social benefit from the simulated project base ranges between $3.3 and $5.6 million of net present value with a strong allocation of the most socially profitable projects within the first four years. Present value of the subsidy allocation is estimated as of $90,700 for the lower discounting scenario to $306,300 for the higher discounting scenario, and allocation strongly favors the single rotation regime within the region. One of most interesting outcomes of the study is that the optimization model and the Gregersen et al. methodology allocate funding similarly even while they are methodologically different; the general rule is that projects highly socially profitable and requiring little financial assistance are preferred for an earlier allocation.
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