Missing the point and losing the revenue — the national log export policy

Aug 13, 2008 Letters

---

Dear Editor,
The Minister for Forestry, Robert Persaud, was quoted in the national press as saying: “If you don’t have a concession you won’t be given permission to export logs” (“Companies can only export logs from their concessions – Agri. Minister” SN, July 31, 2008/ “No timber exports without concessions – Agriculture Minister” Kaieteur News, July 31, 2008). 

It has been pointed out in the press several times during the last two years that there is no national policy which supports log exports, while the National Development Strategy 2001-2010, the National Forest Policy 1997, the National Forest Plan 2001 and the PPP/C pre-election manifesto 2006 all champion in-country processing.

 So it is not clear why the Administration is so proud of minor, phased changes to the export commission on timber logs; although that variable commission is more preferable as an economic tool than a ban on log exports. 

The variable levy has been recommended by consultants to the Guyana Forestry Commission (GFC) at least since 1996.

At present, only two timbers — crabwood (Carapa guianensis) and locust (Hymenaea courbaril) — have been banned from export in log form since 2000, in order to support local industry, although there is evidence that they are exported as logs under false names, an offence under Customs law. 

Timbers which are protected against felling, because they are ecologically important “keystone” species, such as bulletwood (Manilkara bidentata), are covered by Article 17 (1) in the Forest Regulations, but this protection can be removed by a GFC officer, and there is evidence that this high quality timber is also exported under false names, in addition to being listed previously in the monthly export reports from the Forest Products Marketing Council (FPMC, no reports published since February 2008). 

Other timbers may be protected in a non-statutory manner through the “Code of Practice for Timber Harvesting” November 2002, Section 5.1.6, by listing keystone species as “restricted” in schedule C of the short-term State Forest Permissions.

Article 42 (c) of the Forests Act allows the minister to prohibit or regulate the export of forest produce from State Forests, that is, the forests legally administered by the GFC. 

However, the minister does not have legal power to regulate exports of produce from private lands, including Amerindian titled lands.  The GFC cannot, at present, distinguish reliably between the products from Amerindian lands and products from State Forests, because of the widespread misuse of timber tags, which are traded in the hinterland. 

So the ministerial power is ineffectual.  The GFC is implementing the second phase of a legality-assurance system, financed by the International Tropical Timber Organisation (ITTO), but this phase is focused on technical mechanisms, not on the misuse of tags by the GFC itself, which is a political and governance matter.

However, let us suppose that the GFC reforms and is able to implement a ministerial order (which would need to be published in the Official Gazette) under Article 42 (c) of the Forests Act, to regulate exports by varying the export commission on logs. 

How would that actually affect the incomes of the log exporters?  Using figures in the 1-15 July 2008 issue of the ITTO fortnightly Tropical Timber Market report, and taking as an example our highly rated flooring and furniture timber purpleheart (Peltogyne venosa) and its technical equivalent in South East Asia, merbau (Intsia bijuga) — Declared FOB export price ex-Georgetown = US$195-US$235 per m3.

Current 2 per cent export commission on the declared FOB price = US$3.9-US$4.7 per m3. 12 per cent export commission proposed for year 2011 = US$23.4-US$28.2 per m3 (for comparison, Suriname currently charges 20 per cent export duty on timber logs). Declared CIF import price of merbau in Guangzhou City, China = US$587-US$733 per m3.

So there is a gap of US$400-US$500 per m3 in price for flooring-quality timber logs between leaving Georgetown and arriving in China.  How much of this is due to ocean freight and insurance?  Sure, the cost has risen because of the recent rises in all petroleum fuel costs, but let us assume that it is US$150 per m3.  So the log exporters are making undeclared profits of US$240-US$350, on top of their normal profits over the direct logging costs of around US$90. per m3. 

At the very most, three years ahead, in 2011, the log exporters would have their illegal profits diminished by around ten per cent through the proposed increases in log export commission. 

Does the Administration seriously think that this minor inconvenience is going to affect the booming log exports?  And don’t forget that the biggest log exporter, Barama, enjoys exemption from export commission anyway, except for an unchangeable 2 per cent on greenheart, because of its secret Foreign Direct Investment agreement with the Government.

And note that this July 2008 national log export policy contains a slippery escape clause for companies which simply square logs “for engineering end uses” to ease the stuffing of shipping containers. How is the GFC going to check on the end uses of logs exported to China, India, Taiwan and Vietnam?

Using the export commission as an economic instrument to implement the national and PPP policies mentioned above, the Forestry Minister should be raising the amount of the commission so that the presently undeclared US$240-US$350 is captured legally in Guyana, not banked abroad as illegal earnings through under-invoicing. 

It should be important for this export commission, then, to be used productively.  As proposed by the ITTO technical diagnosis mission in 2002, the export commission should be used to upgrade Guyana’s in-country processing and marketing capacities. 

Such upgrade could be towards the more feasible of the proposals in the GFC’s “Wood processing standards and procedures for sawmills, sawpits, lumberyards and timber depots” (February 2008, still under dispute by the timber industry because of the GFC’s dictatorial approach, unsupported by rational arguments).

However, the profit margin on log exports of fine timbers is so enormous that Guyana should be claiming the greater part as a sovereign part of the economic rent for the use of the public assets of natural forests. 
The GFC Act, revised in 1997, allows the GFC to pocket this money. 

The GFC is clearly not making effective use of its existing revenues of timber royalties and areas’ fees (etc.) to monitor effectively all the allocated forest concessions, including the 52 per cent of long-term allocations which are controlled by Asian-owned companies.  So the National Assembly should amend this revised Act to ensure that the Consolidated Fund gains an appropriate share.

The GFC proposes to levy the variable export commission against declared export prices which “will be verified against GFC average export price, guided by international market prices, to guard against under-invoicing or transfer pricing”. 

In December 2006, the GFC denied that there were any such malpractices, in spite of the repeated exposure in the press of excessive profits being obtained precisely through Customs fraud. 

As the GFC and its subsidiary FPMC have proved unable to control the massive scale of under-invoicing, using the GFC is clearly the wrong approach to setting and monitoring the export commission rates.

Meanwhile, as the log exporters are enjoying untaxed super-profits, the local timber processors are paying VAT on unprocessed logs.  This timber has grown naturally, without human intervention.  Why are naturally-grown logs for domestic processing charged VAT, while agrochemical inputs are free of import duty through Go-INVEST?  That seems inconsistent. And what about the move to restrict log exports to concession holders from 2009? 

The Forestry Ministers seems to be unaware that timber traders are circumventing bans on log exports by taking illegal control of indebted small-scale loggers and “washing” their legally and illegally acquired logs through such front companies.

The two Forestry Ministers, one of them an economist, seem to be unaware of the unprofessional advice on which they are acting in the forest sector.

Janette Bulkan

---

---