Using net present value method in economic efficiency analysis for forest plantation: Problems and solutions

 much more practically consist of two components: 
applicable (see Nguyen Quang Ha, 2017 for i) Real interest rate, and 
details). ii) Inflation rate. 
3.2. Handling the risks This application of discount rate is not 
 The way to deal with risks in NPV methods appropriate for commercial forest plantation, a 
has been clearly shown in many publications, sector that heavily affected by social, natural 
for example Warren (1982), Hardacer et al and economic factors such as encroachment, 
(2004)... However, in Vietnam, not much fire, diseases By its nature, commercial 
attention has been paid on this issue, both in forest plantation alwaysassociates with non-
theoretical and practical works. diversifiable risks. Discount rate, interpreting as 
 In economic and financial analysis using investor’s expected returns to make them 
NPV method in Vietnam, the only treatment of indifferent in receiving an amount of money 
risks is undertaking sensitivity analysis. In today and in the future, should include 
thesensitivity analysis, NPV is calculated with compensation for non-diversifiable risk. 
allowing changesin some main factors such as Therefore, adding risk premium to discount rate 
input and output prices, productivity, and is the basic way to handle the risk in NPV 
interest rate. The sensitivity analysis shows the method. 
elements for which NPV is most sensitive and Although there has been no risk surveys 
allows the decision makers to examine the undertaken by any Vietnamese agencies so far, 
likely effects of the worst, best, and most likely a very good preference of risk premium can be 
assumptions concerning the outcome of a found in Fernandez et al (2014). Their paper 
project. Clearly, thoseinformation is useful for reports the result of the market risk premium 
assessment of the project feasibility and hence, survey, covering 88 countries, periodically 
sensitivity analysis is necessary. However, it is undertaken every two years. In this report, 
not enough to handle the risk problem in market risk premium used for Vietnam is 
economic and financial assessment in forest reported as 10.3, shown in Table 01. In our 
plantation. The reason is that, while sensitivity point of view, this could be a reliable source to 
analysis allows to compare possible NPVs with use for risk premium component in discount 
that of base case, but with current method of rate identification. 
NPV calculating, the value of base case’s NPV 
is not accurate, resulted from an error in 
 2 For example, discount rate used for forest pricing, in 
interpretation of discount rate. accordant to the Government Decrees 48/2007/ND-CP is 
 Since discount rate has the root of time value average normal borrowing interest rate applied by local 
 branches ofcommercial banks operating in the forest 
 site’s area. 
 JOURNAL OF FORESTRY SCIENCE AND TECHNOLOGY NO. 5 - 2017 173
 Economic & Policies 
 Table 01. Market risk premium (MRP) used for selected countries in 2014 
 Unit: percent 
 Country MRP Country MRP 
 Philippines 8.1 United State 5.4 
 Thailand 8.0 Spain 6.2 
 Indonesia 7.9 Germany 5.4 
 China 8.1 UK 5.1 
 Pakistan 11.1 Italy 5.6 
 Vietnam 10.3 Japan 5.3 
Source: Pablo Fernandez, Javier Aguirreamalloa and Luis Corres (2014) “Market Risk Premium used in 88 
countries in 2014: a survey with 8,228 answers”, IESE Business School, June 20, 2014. 
3.3. Handling inflation Correcting for the above error in handling 
 The interpretation and identification of inflation is straight forward: for discounting 
discount rate as normal interest rate cause future cash flows, if the cash flow is calculated 
another error with regard to handling inflation at fixed price, inflation rate component must be 
in many applied NPV method in practice. excluded from discount rate; for compounding 
Infeasibility analysis offorest plantation past cash flows calculated in actual price, 
projects, it is convenient to use price level at inflation rate should be included. 
present time (that is, the price at the time Another common error related to inflation 
undertaking the analysis) and normal interest handling in NPV method is that, because of 
rate is used both for discounting future cash using actual normal interest rate at the time 
flows and compounding the past cash flow (if undertaking project analysis, because of the 
any). As inflation rate is included in normal fluctuation in inflation rate, the output of NPV 
interest rate, discounting future cash flows at calculation for the same forest plantation 
fixed price is a double exclusion of inflation project would significantly be varied with the 
and clearly, is not correct. With regard to the time at which the analysis job taken place. 
past cash flows (that is, in the case there are Clearly, that NPV output would provide a 
some costs incurred or benefits received before wrong evaluation of economic and financial 
the time undertaking analysis), since those cash efficiency of a long rotation forest plantation 
flows are often calculated by using actual price, project. 
the inclusion of inflation rate in discount rate is In a country with highly unstable in inflation 
appropriate. Nevertheless, the use of a same rate like Vietnam, where in last fifteen years, 
rate for discounting future cash flow at fixed inflation rate hasranged from less than 1% to 
price and compounding past cash flow at actual above 23%, as shown in Table 02, the problem 
price is not consistent and resulted in an becomes much more serious. 
inaccurate time value of money. 
174 JOURNAL OF FORESTRY SCIENCE AND TECHNOLOGY NO. 5 - 2017 
 Economic & Policies 
 Table 02. Real interest rate, Inflation rate in Vietnam, 2001 – 2015 
 Unit: percent 
 Year Real interest rate Inflation rate 
 2001 6.57 -0.43 
 2002 3.93 3.83 
 2003 2.42 3.22 
 2004 0.45 7.76 
 2005 1.67 8.28 
 2006 2.40 7.39 
 2007 1.41 8.30 
 2008 -5.62 23.12 
 2009 3.63 7.05 
 2010 0.95 8.86 
 2011 -3.55 18.68 
 2012 2.29 9.09 
 2013 5.36 6.59 
 2014 4.83 4.09 
 2015 7.32 0.88 
 Average 2.27 7.78 
 Source: World Bank (https://data.worldbank.org/country/vietnam) 
 Our suggestion for solving the problem is, financial efficiency. There is nothing wrong, 
when inclusion of inflation rate in discount rate except for the fact that, if total NPV (that is, the 
is needed (for example, for compounding past scale of the project) is not put in consideration, 
cash flows), the inflation should be calculated it would lead to the phenomenon that, while 
in a long run basis. That is, inflation rate should forest plantations is assessed to be highly 
be computed as the average value of a long financial efficient, the financial status of the 
period, rather than using actual inflation rate at enterprise is not so satisfactory. This is the case 
the time undertaking the project analysis. of most state owned forestry enterprises. 
3.4 The use of NPV per hectare Because of capital constraints, their forest 
 The last matter in using NPV criterion does planting scale is small. Consequently, total 
not relate to calculation technique or procedure revenue and total profits are small, facing huge 
rather, it is about the way we look at NPV difficulties while all NPV assessments give a 
outcome. Since most data for NPV calculation good picture of financial efficiency to forest 
is provided in per hectare norms, it is very plantation. Table 03 below is an illustration of 
common in practice that, NPV per hectare is that inconsistency, the data is withdrawn form a 
computed and considered as the most survey on State Owned Forestry Enterprises 
important, even the only criterion for assessing (SOFE) in Bac Giang province. 
 JOURNAL OF FORESTRY SCIENCE AND TECHNOLOGY NO. 5 - 2017 175
 Economic & Policies 
 Table 03. Performance of four SOFEs in Bac Giang provice, the year 2015 
 Unit: thousand VND 
No Items Luc Nam Luc Ngan Yen The Mai Son Avarage 
 1 Total revenue 3,546.76 8,266.06 14,792.30 2,487.41 7,273.13 
 2 Revenue from forest plantation 2,982.46 8,138.24 14,578.93 2,044.75 6,936.10 
 3 Total costs 3,380.62 7,496.60 14,410.34 2,427.43 6,928.75 
 4 Before tax profits 166.14 769.46 381.96 59.98 344.39 
 5 After tax profits 157.33 662.91 313.81 47.29 295.34 
 6 Total Assets (capital) 27,156.10 10,763.27 10,433.69 11,347.17 14,925.06 
 Of which: Ower’s assets (Equity) 3,275.54 6,906.21 2,368.57 1,901.97 3,613.07 
 7 Planted Forest area 2,610.33 2,949.20 1,997.27 809.40 2,091.55 
 8 Profits/Revenue percentage (%) 4.44 8.02 2.12 1.90 4.06 
 9 Return on Asset –ROA (%) 0.58 6.16 3.01 0.42 1.98 
 10 Return on Equity – ROE (%) 4.80 9.60 13.25 2.49 8.17 
 11 Revenue per hectare 1.14 2.76 7.30 2.53 3.32 
 12 NPV per hectare (at r = 11%) 2,138.00 17,450.00 14,365.00 n/a 11,317.67 
 Source: Pham Thanh Le et al (2016) 
 It is clear from Table 03 that, while NPV per should be put on total project NPV, rather than 
hectare is positive and relatively big magnitude, only NPV per hectare. Also, for the case of 
indicating a good financially feasibility of production unit like enterprises, for which 
forest plantation, all other criteria show a very commercial forest plantation is the main 
weak financial status of the enterprises. sources of annual income, the annual revenue 
 Apart from small scale, the conflict pictures and profits is equally important, not only 
of financial efficiency in forestry state owned discounted value of a specific project, in 
enterprises measured by NPV per hectare and financial feasibility analysis. 
total annual profits are caused also by another IV. CONCLUSION 
factor: not all management costs are fully NPV can be considered as of the most 
accounted in NPV calculation sheet, whereas popular criterion used in economic and 
those costs are of significant amount. financial analysis for forest plantation. 
Management costs in enterprises are relatively However, its terminology and methodology has 
big, because of large and complex forest been misinterpreted both in academic and 
planting sites and complexities in production practical context. Adhoc selection of forest 
organization. planting rotations, ignorance of risk premium, 
 The recommended solution with regard to irrelevant treatment of inflation, and overuse of 
this problem is that, a better data should be NPV per hectare are found to be not trivial. In 
collected for NPV calculation, in particular, our point of view, with those problems in its 
indirect costs need to be fully projected. In application, the method have been failed to 
financial feasibility analysis, more attention provide sound norms for decision making. The 
176 JOURNAL OF FORESTRY SCIENCE AND TECHNOLOGY NO. 5 - 2017 
 Economic & Policies 
negative impacts of misusing the method is https://data.worldbank.org/country/vietnam 
long lasted and exaggerated as the errors are in 5. Lofgren, K.G (1983), The Fraustmann – Ohlin 
 theorem: a history note, History of Political Economy 15 
place in teaching materials and legal 
 (2) pp 261-264 
documents. Correction for those errors, 6. NASC – National Assembly Standing Committee 
therefore, is really needed. Our solutions for (2015). “Monitoring report on implementation of land 
each problem are not complicated, and ready to use policies in state owned agriculture and forestry 
use. We strongly recommend a full awareness enterprises in the 2004-2014 period”. Report 958/BC-
 UBTVQH13 dated 16/10/2015. 
towards the existence of the problems and an 
 7. Nguyen Quang Ha (2017) “Applying Multi-
immediate correction. objective optimization problem in identification of forest 
REFERENCES optimal rotation period”. Vietnam Journal of Agriculture 
 1. Fernandez,P.et al. (2014). Market Risk Premium and Rural Development, No 315-2017, pp104-112 
used in 88 countries in 2014: a survey with 8,228 answer. 8. Nguyen Quang Ha and Duong Thi Thanh Tan 
Working Paper, IESE Business School, University of (2016). “Identification of the forest optimal rotation 
Nevarra, Spain. period”. Journal ofEconomic Studies, Vietnam Academy 
 2. Government of Vietnam (2007). “Decree on the of Social Science, No 7, pp 41-47. 
principles and methods for forest pricing”. Decree 9. Pham Thanh Le (2016). “Research on the 
48/2007-NĐ-CP dated 28/3/2007. performance of State Owned Forest Enterprises in Bac 
 3. Hardacer,J.B.et al (2004). Coping with Risk in Giang Province”. Final Report, Bac Giang Agriculture 
Agriculture. CABI Publishing, pp 234-244. and Forestry University. 
 4. Hoang Lien Son (2016). “Research on the 10. Warren, M.F. (1982). Financial Management for 
integration models based value chain in planted forest Farmers, the basic Techniques of “Money Farming”. 
products”. Final Report, Vietnamese Academy of Forest Third Edition, Stanly Thorns. 
Science. 
 SỬ DỤNG NPV TRONG ĐÁNH GIÁ HIỆU QUẢ KINH TẾ TRỒNG RỪNG: 
 MỘT SỐ BẤT CẬP VÀ HƯỚNG GIẢI QUYẾT 
 Nguyễn Quang Hà 
 Trường Đại học Nông Lâm Bắc Giang 
 TÓM TẮT 
 Bài viết này thảo luận những hạn chế trong nhận thức và ứng dụng phương pháp NPV trong phân tích hiệu quả 
 kinh tế trồng rừng. Xuất phát điểm của bài thảo luận là một thực tế khá phổ biến: trong khi các kết quả đánh giá 
 hiệu quả tài chính dựa trên tiêu chí NPV của các dự án trông rừng rất khả quan, thì hầu hết các doanh nghiệp lâm 
 nghiệp nhà nước và các đơn vị trồng rừng khác lại đang lâm vào tình cảnh tài chính hết sức khó khăn. Tác giả 
 bài báo chỉ ra rằng, lý do của mâu thuẫn đó là các sai sót đáng kể trong ứng dụng phương pháp NPV. Các sai sót 
 đó là: lựa chọn chu kỳ trồng rừng thiếu căn cứ, bỏ qua yếu tố rủi ro, xử lý không hợp lý yếu tố lạm phát, và sử 
 dụng quá mức chỉ tiêu NPV trên một hecta. Do những sai sót đó, phương pháp NPV đã không đưa ra được một 
 tiêu chí đúng cho đánh giá hiệu quả kinh tế và hiệu quả tài chính của trồng rừng. Do các sai sót đó nằm ngay 
 trong các tài liệu giảng dạy và các văn bàn pháp quy, nên các hệ lụy của việc dùng sai phương pháp là lâu dài và 
 ngày càng nghiêm trọng. Dựa vào kết quả phân tích, tác giả đề xuất các giải pháp cho từng vấn đề: phương pháp 
 xác định chu kỳ trồng rừng và xác định NPV một cách đồng thời, đưa phần bù đắp rủi ro vào tỷ lệ chiết khấu, xử 
 lý thống nhất yếu tố lạm phát và loại giá cả sử dụng trong tính toán NPV, và sử dụng tổng hợp các tiêu chí trong 
 đánh giá hiệu quả kinh tế và hiệu quả tài chính. Theo tác giả bài báo, các giải pháp đề xuất là khá đơn giản, có 
 thể sử dụng được ngay, nên vấn đề đáng quan tâm là ở nhận thức về sự tồn tại của các vấn đề và các phản ứng 
 khẩn trương của những người làm việc trong các lĩnh vực liên quan, cả về học thuật và thực tiễn. 
 Từ khóa: Giá trị hiện tại ròng, hiệu quả kinh tế, trồng rừng, tỷ lệ chiết khấu. 
 Received : 06/9/2017 
 Revised : 02/10/2017 
 Accepted : 13/10/2017 
 JOURNAL OF FORESTRY SCIENCE AND TECHNOLOGY NO. 5 - 2017 177