log monitoring company

Questionable future for log monitoring company

By Sam Vulum

THE Papua New Guinea National Forest Board is in a bind over the future of SGS, a Swiss company engaged by the former Government to monitor the country’s log exports.

Should it allow the cash-strapped gov ernment give away K 3.3 million to SGS this year to continue its services or cancel the contract and lose savings of about K 79 million.

The former government of Paias Wingti signed a K 5 million contract with SGS in May 1994 to put a stop to a dubi ous practice of transfer pricing as estab lished by the Barnett Inquiry, carried out into the operations of the industry almost 10 years ago.

Barnett’s final report highlighted that transfer pricing was costing the country millions of kina each year in lost revenues from export taxes.

Then Forests Minister Tim Neville for mally launched the SGS work program in July that year, but work did not begin until February 1995 because the government could not find the money to pay the con tractors.

The European Union eventually had to divert K 3 million from the country’s Stabex allocation to pay for the first two years of the program. But this seems to have been a reasonably sound investment.

An extra K 2 million in log export taxes was reportedly collected in the first six months of the company’s monitoring oper ations.

By the end of 1997, SGS had 90 nation al and five expatriate staff checking log shipments from every timber concession in the country, and its contract had been extended to the end of 1999.

Even so, the World Bank was not con vinced of the National Government’s com mitment to maintain this arrangement.

So one of the conditions attached to the Economic Recovery Program loan in 1995 was for the Government to; Provide the Forest Authority with an operating budget equal in real terms to that allocated in 1995, in timely disburse ments; and Provide separate and adequate funding for the existing surveillance contract, or any additional activities required for sur veillance or management of forest resources and approved by the NEC or the Department of Finance and Planning.

The World Bank’s task manager who insisted on the attachment of this and other forestry-related conditions was none other than Pirouz Hamidian-Rad.

When the same gentleman came to attach conditions to the (now-stalled) Social and Economic Development Program loan in 1997, he wanted the Government to agree to secure full fund ing for independent external surveillance of log exports for 1998 and 1999 before the first tranche of the loan would be released.

Despite this, the forest board decided to terminate the contract of SGS by April 1, 1999.

The decision was made against the advise of the National Forest Authority that highlighted that the greatest benefit of the log export monitoring project carried out by SGS since early 1995, was almost undoubtedly its deterrent effort on log export companies from attempting to evade taxes.

The board’s decision, was however overturned by a special Cabinet meeting on March 26 without the presence of the

Forest Minister Peter Arul. The NEC directed the Forest Minister to inform the NFA, that on the basis of retaining SGS for the remainder of 1999 and of imposing a log export levy, the PNGFA should pre cede to seek European Union Stabex fund ing assistance of K 1.5 million for the 1999 as a transitional measure.

The question, however, is what is going to happen after SGS contract expired in 1999.

In a combined commentary published in the Post-Courier newspaper recently, two experts Colin Filer and Colin Hunt attempted to highlight the importance of log monitoring and the services of SGS.

They also offered long-term solutions to the problem.

They said there is a financial incentive for logging companies to under-estimate the volume of logs and there is also a financial incentive to under-report the export price of logs or to sell logs at prices below market value.

“The full worth of these undervalued logs is, however, received by the logging companies when they are sold on to the wholesalers in Japan and South Korea,” they said.

The experts explained that incentives for transfer pricing exist because the log export tax is raised against the FOB export price of logs; the lower the price of logs recorded - and the lower the volumes recorded - the less the tax paid by the log

ging companies.

“Under the latest changes to the forest revenue system introduced at the end of 1998, there is no tax on tax on logs priced lower than Kl3O per cubic metre (except for logs of certain species). The rate of tax

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increases with price above the Kl3O mark.

This system was meant to be an inter im measure only, to allow logging com

panies to survive low log prices.

“Nevertheless, it means that there is now a financial incentive for loggers to sell (or at least record the sale price of) export logs at levels below Kl3O per cubic metre, to escape paying tax.

“There is also an incentive to misrep resent logs of valuable species so that they attract less tax.

“Under the present export tax system, the Government collects, through the export tax, a much smaller proportion of the price of logs than it did in 1996, 1997 and 1998.

“So it is difficult to estimate how much the PNG Government will lose in taxes by abolishing SGS,” they said.

The experts said landowners’ income will also be affected by the abolition of

Sgs.

They said landowners are paid a royal ty per cubic metre of log harvested.

“If the volume of logs is under-report ed by companies, then landowners royal ties will be reduced. Landowners are also paid a Project Development Levy (PDL).

This PDL is based on the export price of logs.

“Any underpricing by loggers will also cause a fall in the value of PDL to landowners,” they said.

They said one solution is for the indus try itself to fund the cost of the SGS oper ation.

“In the short term, introduce a special levy on export logs to pay for the contin uation of surveillance. Treasury should be approached to allow the “earmarked” levy to go straight to SGS funding, rather than into consolidated revenue.

“Over the next few months, consider revamping the revenue system for logs, so that the system divides the revenue fully between all parties. This should include not only a review of all taxes paid by the timber industry, but also of along term mechanisms for funding the log sur veillance operation,” they said. ■