Commission of Inquiry into Aspects of the Forest Industry – Final Report – Volume 1

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    The Final Report of the Commission of Inquiry into Aspects of the Forest Industry - Volume 1

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  • COMMISSION OF INQUIRY INTO ASPECTS OF THE FORESTRY INDUSTRY

    F1NAL REPORT

    • Volume 1

    July 1989

    COMMISSION OF INQUIRY INTO ASPECTS OF THE FOREST INDUSTRY

    TELEX NE. 23290

    The Rt Hon Rabble Namaliu

  • Page 2 of 247

  • Department of Prime Minister PO Box 6605 WAIGANI

    DATE: OUR REF·

    P.0 BOX 2554

    PAPUA NEW GUINEA

    4 July 1989

    My dear Prime Minister,

    YOUR REF.

    TELEPHONE. 25 7099

    I have the honour to present you the final report of the Commission of Inquiry into Aspects of the Forest Industry. The report is in two volumes and should be read in conjunction with the seven interim reports which have previously been presented. The full report therefore consists of:

    Interim Report No 1 Interim Report NO 2 Interim Report No 3 Interim Report No 4 “The Gadaisu Timber Permit Angus (PNG) Pty Ltd” “The Forest Industries Council as The State Marketing Authority “Timber Exploitation in New Ireland

    Interim Report No 5

    Interim Report.No 6 Interim Report No 7 The Final Report

    “Comparison of various Timber Areas

  • Page 3 of 247

  • “Log Marketing” “Current Events”

    With the presentation of this report I have discharged my Commission.

    Commissioner

    COMMISSION OF INQUIRY INTO ASPECTS OF THE FORESTRY INDUSTRY

    FINAL REPORT

    Volume 1

  • Page 4 of 247

  • COMMISSION OF INQUIRY INTO ASPECTS OF THE FORESTRY INDUSTRY

    FINAL REPORT

    CONTENTS VOLUME.! 1. INTRODUCTION 1 Introduction and Terms of Reference 1 Administrative Arrangements 4 Fi nan,:es 5 2. COURSE OF THE INVESTIGATION Expanded Terms of Reference and Extensions of Time 5 Angus Inquiry 6··· New Ireland 8 Interim Reports 9 Marketing 10 Forest Industries Council 11 P,:,l icy 12 Current Events 13 Summary of Interim Reports: 14 Interim Report No.1 14 Interim Report No.2 14 “T he Gadaisu Timber perm it – Angus PNG Pty Ltd”

    Interim Report No.3 16 “The Forest Industries Council as the State Marketing Authority” Interim Report No.4 17 “Timber Exploitation in New Ireland” Uncontrolled damage Corruption Transfer Pricing Destruction of resource Inadequate monitoring Interim Report No.5 20

  • Page 5 of 247

  • Al 1 oc at ion Interference with functions Compliance with Conditions Marketing Logging Practices and Monitoring National and Provincial Government Relations Benefits for the people Protect i on o f the Forest. Resource

    Interim Report No 6

    Interim Report No.7 33

    Introduction Jaha LFA – Manus Island Sebul,:,n Watt – Tabar Island Sir Hugo Berghuser – Superior Tropical Timbers Michael Somare – Lower Sepik LFA Santa Investments – West Gsdaisu Long Term Trading Co – Turama TRP Arawe Timber Area Francis Sia CMOI) and E. Tomon Santa Investments Hearing Gasmata Resources Hearing PHOTOGRAPHIC EVIDENCE 37 REPORT ON TERMS OF REF RENCE 40

    3. DEFINITION OF POLI CY 41 ! Introduction 41 The Cayson Report 42 National Forestry Policy 1974 43 The Forest Estate 43 Working Plans 44 Reafforestation 45 Forest Industries 46 Forest Technology 48 Training 48 Finance 49 Independence and Provincial Government 50 Revised National Forestry Policy 1979 51 Post 1·379 Scene 53 Broad Policy Postulates 57 Assessment of Policy Performance 59

    Postulate 1 Postulate 2

    Customary ownership and 59 National Control Orderly exploitation and protection 59 of forests for future generations

    Customary ownership National control and orderly exploitation

  • Page 6 of 247

  • Policy aims Knowledge of resource Proper plans Project planning Appropriate laws Honest independent leadership Monitoring and enforcement of conditions

    Protection and Expansion of the Forest for Future Generations

    Natural regeneration Reafforestation

    Summary 87 Postulate 3 (Decentralisation) ’30

    (a) Analysis of government functions (b) Consultation (,:)Allocation of staff Cd) Substantive authority ( e) FLmds

    Performance of Decentralisation Policy

    Analysis of government Consultation functions ’35 ’36 (c) Staff

    ’36 Cd) Substantive authority

    38 Ce) Funds

    99 (f) Legislative powers

    102 (g) Joint ventures

    103

    Summary

    Postulate 4 (Fair share for PNG citizens) CA) Timber Rights Purchase and Royalties

  • Page 7 of 247

  • (8) Ownership of Permit CC) Premium arrangement CD) Promotion of Business and Economic Development (E) Local Processing Benefits (F) Employment opportunities Summary Postulate 5 (“Papua New Guinea Ways”)

    10’3

    110

    111 111 114 115

    117 118

    119 120

    SUmmary

    Postulate 6

    I (Control of For ign Investment>

    122

    122

    Strict Controls

    1 ……., ……:i

    Ca) Pre registration with DOF 123 (b) 1979 Guidelines 124

  • Page 8 of 247

  • Cc) NIDA 15 Cd) Central Bank 126

    Ce) Control over acquisition of goods and servi,:es (f) Control over transfer pricing Cg) Monitoring and control of operations Ch) Leadership Code Ci> Criminal Law

    Foreign Dominance

    Compromising PNG’s National Integrity

    Investment in political parties

    Summary Postulate 7 (State participation>

    127 127 128 129 134 136

    138

    140 142

    144

    . -i ) ii) iii ) iv) V.)

    Stettin Bay Lumber Co Kumusi Timber Co Open Bay Timber Co Wewak Timbers (Madang Ulabo Timber Co Ltd

    Timbers)

    14″5 … ‘ ..

  • Page 9 of 247

  • .146 146 147 148

    vi) Woodlark Island Development Corporation and Bougainville Forest Enterprises vii) Kei Besau Kampani ·

    Summary

    Postulate 8 National and Provincial Governments)

    National Benefits Royalti es Company Tax( Import dL1ties Export Duty Foreign revenue earnings Infrastructure

    148 1-ie

    149

    150

    150

    150 151 152 152 153 153

    f ··

  • Page 10 of 247

  • Royalties Derivation grant .Budget allocation Landowner Benefits

    154 154 154 155

    -: A Large scale integrated processing Jant Nam Yang Stettin Bay Lumber co Open Bay Timber Co Vanimo Forest Products Wawoi Guavi Timber co

    159

    Policy Performance Evaluation Processing

    ·Recent Allocations Ania Fullabourne,1e Jant Manus Arawe Nam Yang

    Onshore 163 168•

    Government Plantations

    Bulolo Pine BY own Fa ver l<el” evat B. Small/Medium Onshore Processing with PNG ownership and participation (a) Landowner companies Cb)• Wokabout Somils Cc) Small to medium sawmills

    170

  • Page 11 of 247

  • 173

    #

    Postulate 11 (Increase log exports> Revised – Forestry Policy 1979 . Guidelines of general application

    176 177 178

    0 Export duty of 10 percent FOB

  • Page 12 of 247

  • . um1aary

    Guidelines for Specific Enterprises·

    1. PNG Log E porting Enterprises (FDC’s) 1. Enterprises involved in timber processing 3. foreign L,:,g Export Enterprises (n,:,t pr,:,cessing) 4. Foreign Log export/road construction enterprises

    Summary

    Postulate 12 <Training)

    Postulate 13 (Research) CURRENT NATIONAL FORESTRY POLICY DE FACTO·FORESTRY POLICY d

    193

    194

    ‘194

    195 1’36 197

    2′)3

    21’)4

    205

    206

    207 214

  • Page 13 of 247

  • – …

    6. Onshore processing 7. Papua New Guinea Ways 8. Landowner Benefit 9. Decentralisation

    ·’”‘:t””‘)·-:t “–‘-“- 223 224 225

    VOLUME 2

    4. FUNCTIONS 226 Term of Reference No 5 Preliminary observations

    226 A. Powers and Functions of Nat1onal Executive Council 227 Constitutional Responsibilities 227 Powers and Functions conferred by Acts of F”ar 1 i ament 2:28

    .,!

    B. Powers and Functions of the Minister fo f”orests

    22’3

    Constitutional Functions 22·3

    – inister’s Res ,n.sib-iUties to·N C. Pc,wer s Conferred by Act 5. of F’a.r 1 i ament

  • Page 14 of 247

  • 231

    233

    C Powers and Functions of the Department

    234 of Forests

    Generally

    234 General Responsibilities of the Departmental Head 237 Legislative Powers and Responsibilities

    238

    D. Powers and Functions of Forest Industries Council E Powers and Functions of Provincial Governments

    23’3

    :::40

    Concluding Remarks 243 Schedule 1 – P wprs and Functions of the Minister 245 ;·,:,rests Linder the Forestry A,:t and Regulations

    Schedule 2 – Powers aGd Functions of the Minister 246 · for Forests under the Forest

    SGhedul!!:! 3 – -Pc,wers and ::-L1nctions of” the, Minister’ fc,r Fores.tii und·er· the For.est Industr i 247 s

  • Page 15 of 247

  • Council Act

    Schedule 4 – Powers and Functions of the 248

    Departmental Head under the Forestry Regul at i c,n.

    Schedule 5 – Powers and Functions of Forest 249 Officers and Forest Inspectors. Schedule 6 – Powers and Functions of Forest 251 Industries Council under the FIC Act.

    5 INTERFERENCE WITH WNCTIONS

    Term of Reference No 7 Payment of Improper Benefits FIC and Michae-1 I

    252

    252

    252

    ; .. ·. ,, .

    All,:11:atic,n c,f Waw,:ii Guavj· Timber ‘254

    Permit 255

    Granting of Vudal TRP to Weco Angus and Edward Diro 250 25″1

    Kabil LFA and John Kasaipwalova 258

  • Page 16 of 247

  • Pc,litical interventi,::,n 258

    6 MARKETING

    267

    Outline of Marketing Investigation 267

    General findings on marketing 270

    Transfer Pricing and Related Abuses 273

    Definition of transfer pricing

    Overvaluing Imports 274

    Stettin Bay Lumber Co 274

    Vanimo Forest Products 274

    Wawoi Guavi Timber Co 275

    Shin Asahigawa 276

    I •

    – I

  • Page 17 of 247

  • Concluding Comments on Marketing

    2’3(1

  • Page 18 of 247

  • ,i’ :

    7. FOREST INDUSTRIES DUNCIL AS THE STATE MARKETJNG AGENCY

    294

    Term of Reference No.1″

    (a) Decision to involve rIC in marketing (b) Nature and extent of the operations Cc) Nature and extent of Ministerial involvement. Cd) Role played by Department of Forests Ce) Financial effect en funds of the FIC Term of Reference No 2

    Michael Cowan Miskus Maraleu Wawoi Guavi Timber Company Francis Sia and MOI Pty Ltd E.R Dire, Angus CPNGl Pty Ltd Santa Investments Stettin Bay Lumber Co Laki Sawmills and Amazon Bay Sawmilling and Lumber Co National Forest Products

    Term of Reference No 7 Interference with functions Concluding Comments

    8 GIVING GAINING, RECEIVING AND REQUESTING IMPROPER BENErITS

    Term of Reference No 8

    1• National Ministers and their Staff

    (a) Edward Ramu Diro (bl Paul Torato and Lindsai Lailai (cl Stephen Raka

    2. Other National Politicians (a) F.:,:,y Evara (b) Noel Levi (cl Gerard Sigulogo

    ‘295

  • Page 19 of 247

  • 2″37 299 2″39 301 302

    303

    303 303 304 304 3)4 305 3(15 306 306 306 307 … ‘ ., 307 307 303

    312

    312

    31’5

    315 31::; 317 318

    318 31 ‘:;I 31 ‘3

  • Page 20 of 247

  • ….- j. …. .. ….,., t,,.,……_……

    “‘”‘”…_..’”…….,….,……., ,, • .”‘……,.!

    3. Provincial. Politicians 31’3 Ca) Rob.rt Seeto 320 Cb) .Sampio Gila 321 Cc) Ope Oaeke ·321 (d) Other New Ireland Politicians 321 4. Public Servants 321 (a) Oscar Mamalai 3:?2 (b) Jack MasLl 322 Cc) Dennis Hoivo 322 (d) Other Public Servants 323 s. Lawyers 323 Ca) Miscus Maraleu 323 (bl Sebulon Watt 323 Cc) Gerard Kassman 324 6. Advisors/Agents 326 John Kasaipwalova 326 7. Political Parties 327 . < a) Peopfei Pi6gress Pait;· 327 (b) United Party .328 ( C) Pangu Pati 328 (d) Peoples Action Party

    B. Managers of Landowner Companies and 328

  • Page 21 of 247

  • 329 Community Leaders

    9. Owner/Managers of roreign Timber Companies 330 Ca) Angus CPNG) Pty Ltd

    330 (b) United Timbers Pty Ltd

    330 (c) Shin Asahigawa Pty Ltd

    331 (d) Santa Investments (PNG) Pty Ltd 332 Ce) Gaisho Co CNG) Pty Ltd

    332 (f) Lusco Enterprises Pty Ltd

    333 ( g) Sumi t ,:,m,:,

    333 (hl Bruce Tsang

    :334 (i) Francis Sia and Malaysia o erseas 334 Investments Pty Ltd

    (j) Stettin Bay Lumber Comp ny Pty Ltd 334 Ck) W woi Guavi Timber Company Pty Ltd 334 (1) Open Bay Timber Co

    335 (m) Tonolei Development Corp

    335 (n) Bismark Industries

  • Page 22 of 247

  • 335 Co) Nam Yang Timbers

    Concluelon I Santa Investment and Gasmata Resouzces

    9. ‘COffCLU ING COMMENTS,

    RECOMMENDATIONS

    1. Commissions of Inqulzy 2. Polley 3. Legislation 4. Administration of Forestry 5. Consultative Arrangements 6. National Forest Development Plan 7. National Forest Development Programme 1987-1991 8. Resource Survey 9. Existing OpeLations 10. Monitoring 11. Continous Review and Assessment 12. Controls on Foreign Investment

    336

    337

    39.

    342

    342 349 350 351 353 354 356

    357 357 358 361 364

  • Page 23 of 247

  • 17 Leaders ip Cbde

    37Q

    I

    1. ANCC 2. App.

  • Page 24 of 247

  • 3. DOC 4• DOF 5 DLAD 6. DTI 7. FAO 8. FDC 9• FIC 10. FOB 11. FWP 12. GAISHO NG 13. IR.No 14. KBK 15. LC 16. LFA 17. HEP 18. MOI 19. MTD 20 H3 21. NEC 22. NFDP 23. NIDA 24 NTA 26 NIOD 27. NYDF 28. OBTC 29. S$ 30. SBLC 31. SGS 32. SHA 33. STT 34. TTDC 35. TRP 36. UNCTC 37. USO$ 38. VFP 39. VOL. 40. WGTC

    LIST OF ABBREVIATIONS All Nippon Checkers Corporations Appendix Ojaul Development Corporation Department of Forests Danfu Logging and Agricultural Development Pty Ltd Department of Trade and Industry (United Nations} Food and Agricultural Organsiation Forest Development Corporation Forest Industries Council Free on Board Forest Working Plan Gaisho Company (New Guinea) Pty Ltd Interim Report Number Kei Besau Kampani Letters of Credit Local Forest Area Minimum Export Price Malaysia Overseas Investment (PNG) Pty Ltd Mussau Timber Development Pty Ltd Cubic Metre National Executive Council National Forests Development Progrpmme National Investment and Development Authority Native

  • Page 25 of 247

  • Timber Authority New Ireland Otsuka Developaent Pty Ltd National Youth Development Fund Open Bay Timber Company Pty Ltd Singapore Dollar Stettin Bay Lumber Company Societe De Surveillance State Marketing Authority Superior Tropical Timber Pty Ltd Company Tabar Timber Development Corporation Pty Timber Rights Purchase United Nations Centre on Transnational Co-oporatlon United States Dollar Vanimo Forestry Products Volume Wawoi Guavi Timber Pty Ltd

    CQ.H ISS1..Qli OF IHQ.UIRY INTO ASPECTS O_ ORESTRY INDUSTRY

    FINAL REPORT

    1. I.HTRODUC’U.Qli

    The Commission of Inquiry was established on the 29 April 1987 p:r::imazily to inquire into allegations which had been made concerning the involvement of the Forest Industries Council (FIC) in ma:r::ketinc.; logs on beha:·.! of the State. It had been alleged that members of the .!!’IC executive had exceeded their functions and had interfered· vith the functions of the Minister for Forests and ·the Secretary and Department of Forests (DOF). It was also alleged that improper benefits may have been obtained by some of those involved with the FIC’s marketing activities.

    It was originally intended that the inquiry would be of this limited nature and that it should be complete1 in six months. The original terms of reference were Terms 1 lo 6 and were concerned with defining policy and functions of the Minister, the Secretary and the Department to ascertain whether they had gone off course and whether there was interference between them. The whole question of the involvement of the FIC in marketing Yas to be canvassed and the benefits to the State of that involvement ve e to be assessed, The4e was also to be an inquiry into, the question of improper benefits.· Du:ring the first weeks three mo:re terms of :reference were added.

    “- .- •·• C • -· •· ‘

    Presentation of R@port: The result of the Commission’s inquiries and its findings have been reportej upon already in seven interim reports consisting of e ghteen vr,Lirnes. Those volumes consist of text, schedules of tables and photocopies of key documents set out in appendices. The interim reports are an integral part of the Commission’s report to the Prime Minister. In this Final Report an attempt has been made t o d r a,.,, t og e t b E: r the ma i n f i nd i ngs and to g i v a very brief

  • Page 26 of 247

  • overvie11 of the cou::se of inquiries and a summarised report on each term of reference.

    To gain access to the Commission’s findings on any topic however it will be necessary to refer to the relevant interim report and to at least read the appropriate passages_ of the text and refer to key_tables – especially Ll1e schedules of marketing tables.

    The final terms of reference vere as list”ed belo’w. (The section in the report ‘where each term is dealt with is sho’in in brackets). “1. The process by vhic{i the Forest Industries Councl 1 became involved in the marketing of timber and –

    (al

    when, and by whom a decision ‘Was or

    decisions

    “”ere made to involv

    in market:ing

    ( b)

    the nature and extent of the actual operations; and

    (c) the nature and extent of any Ministerial involvement in marketing operations; and (d) the role ( if any) played by the Department of Forests in the actual marketing operations and resource allocation; and (e) the · financial· effect c-f the mark, t’ing operations on the funds of the Council. (Sect.7 and IR No.3)

    1 •, •

    2. The benefit obtained by Papua Ne’rl Guinea (if any), from the marketing operations of the Council. (Sect.7 and IR No.3)

  • Page 27 of 247

  • 3. Whether any person associated with the Counci 1 or its marketing operations received any direct or indirect benefits, vhether financial or othervise, as a result of the marketing operations of the Council and whether it was proper or improper !cir such benefits to be given or received. {Sect.7 and 8 and IR No.3) 4. What is the existing Government policy relating to Forestry and in particular relating to resoure allocation and conditions of operations, marketing and pricing of timber within the forestry industries in Papua Nev Guinea. (Sect.3) 5. What are the functions of the Department of Forests, the Minister for Forests, and the Forest Industry Council within the Government policy for the forestry industry. (Sect.4) 6. What effect, if any, the involvement of the Forests Industries Council in marketing operations ha.s had on the Government policy and the functions exercised by the Minister for Forests and the Department of Forests. (Sect.7 and IR No.3} 7. Ascertaln vhether and to what extent the functi ,ns of each of the Minister for Forests, the Department of Forests and the Forests Industries Counci 1 under the approved policy for the Forest Industry identified under Term 5 have been interfered vith or encroached upon by another other others of such functionaries or any other person. (Sect.5)

    8. Establish whether any of, or any persons associated vlth, the Minister of Forests or any officer of the Department of Forssts Industries ·Council or any other person has received or attempted or sought to receive any direct. or indirect benefits v.het:her financial or othervise as a res lt- of. or in connect{on vith the allocation or promised or prospective allocation of the right to participate ln any vay in the exploitation of timber resources and establish whether it vas proper or improper for such benefits to be given attempted or offered or received attempted or sought. (Sect.a and all nterim reports)

    ·wz-:-:- . -,····· ……r,_

    9. Ascertain whether any and if so which person or persons associated with the PNG timber industry have been f rus tr<? ting government policy by mi sdescr ibi ng species, quantity, quality or value of log exports or by delibeiately understating income or overstating costs or by manipulating shipping freight charges or by any other similar devices including the practices commonly referred to as transfer pricing. (Sect.6, Sect.a and IR No.6)

  • Page 28 of 247

  • The formal instruments of appointment, statement of case and terms of reference are appended to Interim Report No 1.

    The first few weeks were taken up with establishing the Commlsson’s administrative arrangements.

    The administrative arrangements for setting up the Commission were fully described in Interim Repo:i:t No 1.

    It shows as sole

    how the Commission wai5-‘.,.establi.shed with mysel’f Commissioner, assisted by Mr John Reeve as

    Counsel assisting the Commission, Mr Jack Nouairl a Secretary, Hr David Keta (my associate) as a professional assistant, Mrs Hebou Homoka (and later Mrs Shelia Robert) as steno/Secretary and Messrs Tau Helai and Kerry Agua as drivers. Its office was set up in the ·National Parliament and the finances and major administrativ,e arrangements were to be handled by the Department cf the Prime Minister.

    Those arrangements continued except that Mr Keta took on the task of office Manager after Mrs Robert resigned and Mrs Joyce Peter replaced Hrs Robert as

    Secretary. Secretary.

    Mr Martin Yakopa replaced Mr Nouairl as Late in 1988 the Commission relocated in ne

    National Court House. had the advantage

    At the Courthouse the Commission of using additional secretarial

    assistance and a ditlonal word processors.

    During the last two months Hr Graham Powell joined the Commi ssion 1 s staff as an additional counsel assisting the Commission.

    In the last month Hr Benedick Kilian replaced Hr Keta as my Associate and assistant.

    Finances

    The Commission was greatly assisted by the fact that all its accountancy, bookeeping and financial r arrangements were handled by the administrative section of the Department of the Prime Minister. ·n

  • Page 29 of 247

  • The total cost of the Commission for the two years, and two months, not includ_’lng the cost of the T Commissioner’s personal staff and’,vehicle made available by the National Court is estimated at approximate} K282,763 and made up as follows:

    MAJOR llN ES OF COMMISSION O _JlY..lRX 1987 DESCRIPTION

    K

    AMOUN”I:

    2. 3. 4. 5. 6•

    7• 8• 9• 10.

    TRAVEL AND ACCOMMODATION UTILITIES (Telephone Post Office, Telex etc) MATERIALS AND SUPPLIES TRANSPORT HIRE (IN AND OUT OF PORT MORESBY SPECIAL SERVICES (including consultancy fees) CAPITAL ASSETS (Office equipment) NIL OTHERS (AIR CHARTER) WAGES AND OVERTIME

    5,067 850 7,012 9, 851 ‘ i, 17, 6,51 • ·: 4,333…. 519 2.08Q.

    TOTAL K47,370

  • Page 30 of 247

  • 1988 K ITEM =P=E=S-=C=R.I….._P-=-T.I..=ON=– ,A….,M”””‘O,.,.U….,N.,..,._T

    2 TRAVEL AND ACCOMMODATION 3. UTILITES: (i.e telephones, Telex, Post Offices etc) 4. MATERIALS AND SUPPLIES 5. TRANSPORT HIRE 6. SPECIAL SERVICES ( including consulto.1m.:y fees) TOTAL

    1989 (until June 16) r 2. TRAVEL AND ACCOMMODATION 3. UTILITIES

    T

    4,881 676 4,151 3,718 117,876 131. 302

    392

    COST OF STAFF AND SERVICES PROVIDED BY NATIONAL COURT 188,101 K 470.SU

    2. COURSE OF THE IHVESTIGATIQN

    Expanded terms of reference and extensions of time:

    Immediately upon ommencing the inquiry possession of all FIC files by subpoena. aftervards I subpoenaed all files of Angus PNG

  • Page 31 of 247

  • I :J:ook · Shortly Pty Ltd.

    Even a preliminary look at the FIC files showed evidence of an improper relationship bet’fieen its chairman Miskus Maraleu and Executive Director Michael Cowan with

    Minister Dire and with members of the cimber industry which went outside the Commission’s limited terms of reference. Further studies disclosed· evidence of improper benefits being received by politicians, public servants, landovner company directors and others outside the narrow range of people referred to in Tera of Reference 3. I sought and vas readily granted an amendment to the Terms of Reference to enable these matters to be investigated and terms 7 and 8 vere added on the 14 May 1987.

    Further inqulr ies c:Hsclosed that all trails led to r tJ:ansfer pricing. It was impossible to turn a blind eye to transfer pricing as it soon becaae apparent that it was a major preoccupation of th great majority of the companies being studied. It was the source of ·funds frail which improper benefits were being sought and paid and was a major consideration when assessing the achieveaents of FIC State Marketing and the benefits flovlng to the State from that involvement.

    Reluctantly and vi th deep reservation I sought apd vas granted a further amendment to enable me to -inguir into the far reaching question of transfer pricing. Ter• of Reference 9 was added on the 8 July 1987 and I embarked on a major investigation which has covered all aspects of the timber industi:y and has taken two years and two months to complete.

    · When secJ.. ug the f li:st ex.tenalon of time froa the then Prime Minister, · I ·pointed out lhat ·1t. was not “then possible to make a realistic estimate of the time which

    would be the dark; This was

    required. The Commission would be searching in especially on the question of transfer pi:iclng. because of the difficulty of obtaining firQ

    evidence of the practice when, at that stage, I had no

    idea how to even beg in to seek it out. Although the extension was for a fixed period, the Prime Minister assured me that there vould be no difficulty in obtaining further extensions if good results vere bei g obtained.

    On that assurance, I vas able to plan the methodology of the inquiry and to set in motion several “probes of inquiry” simultaneously in the hope that it would all come together in the end. I directed Mr R eve to concentrate on collecting evidence for the Angus

  • Page 32 of 247

  • Inquiry and set in motion an internal audit of FIC’s books, to be followed by an investigation audit by the Audi tor General. I myself inspected t-.imber operations in New Ireland and, progressively, in other provinces to broaden my knovle ge of the in ust:y and the varying

    conditions under vhich it operated. observe forestry policy “in action”

    My aim was to

    Angus Inquiry:

    The Angus Inquiry centered around the involvement of former Forests Minister ER (Ted) i:ro.

    Owing to Mr Diro’s non co-operative attitude, the Angus Inquiry took far longer than expected but I persevered because it vas crucial to all thet investigations. Eventually that inquiry introduced the Commission to one key group of prominent persons whose improper activities extended over the whole of the industry. These included the former Minister for Forests, the Secretary for Forests a:,d the Chairman “and Executive Director of the FIC. Following up the links from that central group to other persons, and to various “deals” and operations has been a major part of the Commission’s subsequent work.

    “·

    The Angus Inquiry also yielded detailed knowledge oi mere tr,an one type of lrarisfer µricing scheme and shoved the immensity of lhe sums of money invdlved in that pr act ice. It also enabled Counse 1 Assisting to experiment iith, and to evolve, techniques for obtaining evidence of transfer priclng.

    New Ireland

    Having made a general examination of major timber operations in several provinces, having commissioned the study into FIC’s records and ac,:ounts and having vorked out the techniques fo:r investigating transfer pricing, I then set about a detailed study of the industry in Nev Irleand. New Ireland was chosen as it had been subj cted to heavy logging for·a long time and because th s ell af corruption and transfer pricing seemed to be coming most strongly from lhat province. That province was studled in detail because the allocations, the operations and the “behind-the-scenes” manipulations ·.rere all interrelated. I have presented key documents as sche ules to the Commission’s reports to enable successful ftfollov up” action to occur.

    Interim Reports As I knew that the task ahead was a long one ana as the “follow up” action was .L med1ately and urgently required, I have presented a series of detailed interim reports and held a series

  • Page 33 of 247

  • of policy conferences with Ministers and Officers as the “work progtes;sed anc the results became ava i laLl e. As I had only one co.mse1

    assisting me reports and considerably

    the time consuming task handling the ongoing to the length of the

    of preparing confez:ences inquiry. It

    these added did

    however yield significant gains for the government. Many

    ·r-.,..- –

    of the loopholes and irregularities the Commission has uncovered have now already been r ec t i f i e d 1 timber companies have modified their practices and very significant revised taxation assessments have been negotiated with several timber companies as a result of the transfer pricing activities that the Commission has proved, documented and already reported upon.

    There are seven interim reports in all totalling 18 volumes. They must be read in conjunction with this final report as, together, they constitute the Commission’s Report to the Prime Minister.

    Marketing The techniques for uncovering transfer pricing 1were evolved during inv stigatiuns into companies operating ln ·· New Ireland and then a major investigation into the marketing practices of all the major producers in othei: provinces was launched. The background work involved was very time consuming and involved shipment by shipment analysis of each c0mpany’s activities locally and overseas. It involved gaining a detailed knowledge of transfer pricing intermediary companies in Hong Kong 1 Singapore and elsevhere; it involved tracing through the webb of corporate interrelationships between compa11ies operating in PNG and their overseas “parents” and affiliates; and it involved studying the details of log price varlat ions over the last ten years or so on the international market.

    Publ le hear luyz on “marketing” were hen held over several months in Waiganl and were attended daily by the taxation investigator who had previously been mc.,de available to work with the Commission. A great volume of evidence was taken and that has been painstakingly analysed over the many months since those hearings

  • Page 34 of 247

  • finished. As the inquiry into each company was finished. the evidence collected by the Coffimission, and the results of its analysis, formed the basis of· revised tax assessments which have already yielded well over K3 million to the government. ‘ Forest Industries Council When the Auditor General’s report on FIC accounts was available in Augu L 1988 it became possible to continue the investigations and hearings into FIC matters and then to begin the massive task of analysing the evidence for presentation as the Third Interim Repo:ct. This report was presented in November 1988 and was subsequently tabled in the National Parliament.

    The next task was to re-examine- the evidence .and r materials al:ceady collected on New I:celand. When this re-examination was carr led out, new light was thrown on it from the completed FIC investigations and from the ongoing studies into transfer pricing. My knowledge P.f the interi:elationships between New Ireland personal!ties such as Bruce Tsang, F’!’ancis Sia and Miskus Maz:aleu vas greatly extended by being able to link them firmly to the characters involved in F.I.C affairs. The “innocent explanations” offered by some New Ireland companies about their marketing practices were no longer credible in th, light of the wider understanding which the Commlssion then had about inte:cnational marketing, transfer pricing and about the similar activilles of other companie disclosed during the marketing hearings. ·The Commission’s very detafled report on the New Iriiand Timber industry was presented to the Prime Minister in March 1989.

    1,

    After completion of the New Ireland Report the Commission concentrated on completing its analysis and report on marketing, on reporting on some mainland timber companies and on conducting an investigation into some current events. The ::eport on the mainland companies (and a report on Manus Province} were presented as Interim Report No 5 in April 1989.

    Throughout this

    period the Commission

    has

  • Page 35 of 247

  • methodically continued its analysis —

    of the evidenc on

    1 the marketing practices marketing PNG logs and detailed task has been

    of most. companies involved in sawn timber. This long and conducted on a shipment. by

    . ,. . ,. T ‘

    shipment basis and Counsel Assisting the Commission has .been_ass steq by Mr Roe Qf the Office of Taxation. s my fi dings · 011. eac;h ,,co ‘? n.y’s mark t.ing_ ere com·pieecl·. I.· pr.esented them to the P·r ime Minister as volumes 2 to 4 of Interim Report No 6. At the same time the evidence was made available to the Chief Collector of Taxes and he has used it as the basis of reassessment of taxes in som instances. Volume 1 of Interim Report No 6 vas complet just prior to the completion of this flnal report and At contains a complete overview of the findings I have mad,.e, concerning log and sawn timber marketing in PNG together with comments and recommendations.

    Polic;y:

    To define policy as required by Term of Referenc ·:·of involved a full study of “policy in actionw and:., ..thorough study of. documen ary , ources as tt:iere was i,n,p· clear comprehen.sive· L te_ment. of current. policy. The_a, studes disclosed that there was a huge . gap between wh.at vas being done, and allowed to happen, and what had bee formulated as policy in the scattered documents being studied.

    For this reason, throughout the lifetime of this Commission and throughout, all its investigations, I have been observing all practices and occuz:rences, all govez:nment decisions and all instances of acquiesence by government with a view to assessing vhat I have described as “defacto policy”. In this z:epoz:t I have followed the lead given by G L Carson in his 1974 Report when he said that; “policy is a course of action adopted by qovernm nt

    This difficult task of defining National Forestry Policy was required of me by Term of Reference No 4. Hy attempt to report on that question takes up the major part of this final report as it · involved an extensive investigation into all aspects of timber operations £:r.om initial planning (where it occurred), allocation of the resource, logging operations, marketing of the product and, finally, financial disclosure to z:esource owne s and to the PNG government. In the course of my inquir ie,s into de facto policy I inspected timber ‘.>peratlons Ip six p ovinces and conducted a

  • Page 36 of 247

  • series of “closed” semina and public hearings into various aspects of ·curren policy. My definition of National Forestry Policy ·ts dealt with in Section 3.

    Current Events

    … ‘ : /

    j A number of occur:rences and practices have occur:r:e since I complet’ed ·my for·mal investigations.. At firs.’t. I tr led to turn a blind eye to the!’:1 so as not to : be distracted from the preparation of tJds final report anq so, also, as not to become too deeply involved in current cont:roversles.

    . ‘

    1,.:,a I ,

    14

    As the that some

    time current

    extended, events

    however, I came to realise are directly relevant to my

    previous investigations and kno’Wingly present only part

    to ignore them· ‘Would be to of the pictu::e. Also the

    fact that some malpractices have contin ed to occur d(;;spite the very wide public exposure of them in the Commissior.’s public hearings and reports is worthy of

    reporting appointing “stand by”

  • Page 37 of 247

  • as it illustrates the urgent need for an individual or a body to be a permanent or watchdog over the timber industry. T’”lese

    current events are reported in Interim Report No 7.

    SUMMARY OF INTERIM REORT

    Interim Report No 1

    This report details the establishment of the Commission and outlines its early inquiries. It focuses on the gap bet’Ween policy statements and defacto Npolicy in action. On the basis that “policy is a course of action adopted by government “(Carson 1974) I have listed at pp 17-26 my preliminary observations on defacto po1icy. Nothing I have seen or heard since then has inclined ae to change those gene:ral observations. ‘l’hey have in fact been thoroughly con£ irmed by repeated case studies.

    Interim Report No 2 “The Gadaisu Timber Permit – Angu (PNG) Pty Ltd”

    This report examines operations, transfer· pricing Angus (PNG) Pty Ltd.

    in and

    detail the disast·rous

    formation, fa.i lure of

    The main focus of the report is inevitably upon the role played by former Minister for Forests Edward Ram.1 (Ted) Diro who vas deeply involved with the Malaysian Company, Malaysia Overseas Investment Corporation and its principals MA Ang and Tan Sri Ghazali Shafei and then with Angus group of cot””panies based in Singapore. Hr Diro was chairman and 35 percent owner of the Angus subsidiary Angus (PNG) Pty Ltd before he unexpec·tedly became Minister for Forests in 1985.

    IR No 2 describes how, instead of. disclosing his interest in Angus, Forest Minister Diro concealed it beneath a variety of different covers and hoY he: was referred to by the Code name “Andz:elt’” in correspondence within the Angus 9roup of companies. In his capacity as Minister he improperly allocated the. permit over West Gadaisu to Angus {his o,m company) and granted it other favours. Meanwhile Mr Diro had been receiving and continued to receive improper benefits fi:tstly from HOIC and then from Angus (Singapore).

  • Page 38 of 247

  • IR No 2 describes ho-w Angus was be in9 “milked” by its parent company a1i1 how it indulged in .various transfer pricing schemes to fraudulently transfer tax free profits for the benefit of Angus in Singapore. I found also that Mr Diro was party lo, and the main beneficiary of, a scheme to transfer massive prcfits through a New Jersey company and how he personally stood to gain USDJ,292,800 overseas by way of transferred profit and USO 1,774,700 in PNG by way of “legiti1J1ate” dividend.

    Finally IR No 2 describes how Angus failed and how Minister Diro finally turned against it and endeavoured to revoke 1ts permit and how in his last twodays in office, he quite improperly, and in great haste, issued a

    ‘ …….,.:

    permit to Goodvood Pty Ltd over the neighbouring timber area at Sagarai Gadaisu thus committing Port Moresby’s intended reserves of domestic Salin timber to be exported over us in log form.

    The full list of M Diro’s improper benefits is set out in the interim report at pages 43-46 and is also summarised in section 8 of this final Report.

    Interim Report No 3 “The Forest !ndustrles Council as the State Marketing Authority” This interim reporl as presented in November 1988. It deals with most of the aspects relating to the FIC in the Commission’s terms of reference.

    The report shows hov the FIC drifted towards involvement in State marketing over a period of six years after the NEC had “all mention of FIC doing any marketing” deleted. It shows how Michael Cow n and Miskus Maraleu conspired to achieve Cowan’s appointment as Executive Director and FIC’s appointrner.t as the State Marketing Agency fSMA), even though it had no legal basis on ‘Which to operate. Once in control of the SHA Cowan and Maraleu pushed FIC into an expensive marketing programme, placing government fucds and the viability of the FIC at risk.

    Cavan came to in!luence Minister Oiro to such an extent that it constituted an interference in DOF and Ministerial· functions..

    Under Cowan’s management t 1e FIC was very inefficient and, in its first six months, built up an operational loss of USO 40 000 together with contingent liabilities of between USD 500 000 to USD 800,000. Cowan

    -7″”””‘

  • Page 39 of 247

  • lt

    managed to misapply FIC funds to pay off a USO 21 366 bank guarantee and misappropriated at le3st USD 28 892 by telexed transfer to David Toms of Straits (Singapore). The way Cowan and Ma:raleu conspired to assist Wawoi Guavi Timber Co to gain favou:rable operating conditions from Minister Diro behind thl! back of DOF Secretary Mamalai is fully described. Interim Report 3 examines each FIC shipment and each marketing transaction of the FIC.

    Despite all these faults and irregularities. I concluded that FIC involvement in marketing did achieve a substantial reduction in the amount of transfer pricing.

    After FIC marketing ceased, the simple way which DOF set about perfor_ming the SMA role, as an agent rather · than as a trader in logs, is describecl in :..ome-‘ deta.ll and ·· I concluded that this involvement vas more economical and efficient than FIC’s :rather graf.ldiose and loss – making attempts.

    Hy formal answers to the FIC related questions posed in the Commission’s Terms of Referenee , lre set out in Section 7 below.

    Int1rlm Report NO 4 “T1mber Exploitation ln Nev Ireland Province”.

    This interim Report records the findings of the Commission’s inquiry into the New . Ireland timber industry Seventeen operations, involving ten fo:r.eign operato:r s, various traders and twelve larido..,ner companl ·s were investigated. The detailed comments on each operation are recotded as appendices in Volumes 2- 4B of the Report. Volume 1 presents 3n overview of the timber industry in Ne>w Irealnd as it I elates to the te:cms of reference of this Inquiry.

    ‘ ..•.._

    Uncontrolled damage: The main value of Interim Report No -4 for experts and policy makers is to be found in the three volumes of appendices. (Volume four is published in two parts 4A and 4B). They present a great deal of factual raw material which can be used by pe:r:sons more expert than myself in matters of forestry, economics, environment and sociology for the purpose of analysis. Their conclusions may differ from my own to some degree but I am sure that any fair analysis of the Commission’s findings will substantiate my opinion, that the New Ireland timber industry is out of control and has blighted the hopes of landowners and devastated a valuable timber resource for very little gain o the people or government of Papua New Guinea. The report shows up failings in natio.na.. and provincial ministeru and forestry officers which, unfortunately, are of concern nationwide, not just in New Ireland.

  • Page 40 of 247

  • Corruption: A major concern, amply recorded in the appendice and dealt with specifically in Section 15 of Volume 1, is the evidence of blatant corruption at high levels Q; government and the practice of ministers and senior public servants of negligently, and sometimes deliberately, ignoring and contravening the la s of Papua Ne Guinea’s Parliament and the policies of its government.

    Transfer pricing: . Another· major concern illustrated by Interim Repor’.t No 4 is the irrefutable evidence of full-scale transfer pricing and other frauuulcnt marketing practices of: t:Q1! foreign companies controlling the marketing of Ne Ireland logs. These same practices are (on the evidence

    before this Cornmissior. of Inquiry) carried out by almost all timber marketing ::ompanies in the country, In Nev Ireland I found, without exception, that all marketing companies studied were transfer pricing, commonly at the i:ate of about USD10 per m3. (When small producers such as Channel Timbe:r:s and Leyti:ac, which did not conduct overseas marketing themselves, exported logs by selling , to traders such as Gaisho, Shin Asahigawa and Lusco, the transfer pricing was a ranged by the trader,)

    Destruction of resource: Interim Report No 4 concludes by referring to the imminent extinction of New Ireland’s commercial timber resource. The detailed reasons for my claim that the total resource w ll be doomed to destruction at the end of the 1987 – 1991 programme of allo ations are. set out ··. _;, in Schedule 1 to Volume 1 of the interim report. The situation is absolutely critical and if there is to l:> any hope for managing the remaining unallocated resourc, on a sustained yield basis, there should be Il.Q further allocation in New Ireland which vlll allow for log exports.

    Inadequate monitoring: .., In addition I eaphasised that Permit and Dealing coradi tion::. should be moni tared and enforced. Lack of monitoring by the Provincial Forestry Officers has been a major contr ibul ing factor to the present er i ti cal situation. Timber coapanles have been allowed to carry out destructive opez:ations, to log the slopes and to remove undersized trees with virtually no effectiv monitoring system (see Schedule 2 and also IR. No.6) ,f:0:; f ul 1 dis cuss lon of the defects in the moni to:r Ing sys te,m) : I recommended that all existing operations on Ne Irela·,:i.d should now be examine::! most critically and wherever t.h..e

    … ·.·.. :::· 1:t l • :•

  • Page 41 of 247

  • breaches of operating conditions would warrant closing down the operation, then that should be done as soon as possible,

    The situation in Nev Ireland had been alloved to occur because the Ministry of Forests had no clear policy on allocation and preservation of the resource, because the Department of Forests did not prepare an accurate inventory survey and because some of the timber companies involved made substantial payments to national and provincial politicians, and to political parties, to ensure support for their operations and applications.

    The Ministry of Forests sti 11 has no clear policy, the Department’s resource estimates and calculations are still absurdly inaccurate and the same timber· companies which previously bribed politicians are still :receiving political support and, it is alleged, are still offering substantial payments. The most cecent evidence of this wasgiven a few days before I completed this final report when a letter signed by Francis Sia of HOI was tendered which showed that he offered a consultancy fee of KlOOO per month to the current Provincial Secretary ( See IR No,. 7) •

    Interim Report No 5 ”Comparison of Various Timber Areas”

    Interim Report No.5 contains the results of detailed studies of three PNG mainland timber areas. The operations being conducted in these areas are on a la.. rge sea le and they i 11ustr ate im iortant aspects · of PNG forestry policy and its administration. There is als”‘o· a br le£ study of recent events in Manus Province where·, i”t seems that the same problems vhich have led to the devastation of the forests of New Ireland (reported ”in Interim Report No 4) are reoccurring.

    The reports on these operations are set out in appendices to the interim report as follows:

    Appendix 1

    Appendix 2

    Appendix 3 Appendix 4

    Wawoi Guavi Timber Area, Western Province. Vanimo Forests Timber Area, West Sepik Province Kumusi Timber Area, Oro Province. West Coast Manus Timber Area, Manus Province

  • Page 42 of 247

  • Between them, the operations studied in IR No. 5 provide illustrations of most of the malpractices and defects in the system which are occurring and of many aspects ·of “defactott policy which a e described in Section 3 be101J. These matters are reported upon under the headings which have been constantly reoccurring throughout the interim reports:

    Allocation demonstrate

    Two of the effect of

    the lack

    allocation of planning.

    decisions In two of

    the areas the preparatory work was seriously defective in that the timber rights 2re not purchased and permit not issued before the commencement of operations. (Wawoi Guavi and Kumusi)

    The four allocations demonstrate four different approaches as to who should be the concession ho:i.der. Block l; of the Wawoi· Guavi timber area va originaily allocated to a “sham” national company, Wawoi Guavi Timber Co Pty Ltd (WGTC), but by the time Block 2 issued WGTC presented itse1 £ as a wholly owned foreign subsidiary of Straits Engineers Contracting Pte Li:d of Singapore. I believe that WGTC has recently been sold to

    r1 i

    “”1:-·– -….

    ·,.?’•’

    22

    another overseas company which illustrates how the original owner with whom the State negotiated can be changed during the continuance of the permit by internal share transfers within the permit holding company. Van1mo roreet Pxoducts (VFP) always presented itsef as a fully

  • Page 43 of 247

  • foreign owned enterprise, Kumusl Timber Co (KTC) was set up as a Forest Development Corporation with 75 percent national owner5hip (by State and Provincial Government). The allocation of a timber permit to Kel Besau Kampani in Hanus illustrated an allocation to a landowner company and its foreign contractor.

    The recent declaration of .,1aha LFA seems to be an

    illustration of a typical “puppet” seeking to be gran ed timber riqhts ‘ I .the foreign contractor which has

    landowner company for the benefit of arranged ·for its

    incorporation and which “possesses” it. (and see IR No.7)

    Each of the three mainland allocations :resulted in injustice being done to the resource owners. It is too early yet to assess this with i::egard to the two Manus allocations described in this interim report.

    Interference with function

    Serious interference is described in the case of Wawoi Guavi timber area in which a conspiracy between the executive director of the FIC, Michael Cowan, and David Toms of WGTC persuaded Minister Diro to grant favours and bene f icla1 conditions to WGTC, vi thout the knowledge of DOF, to such an· extent. that it was literally enabled ··to settle and type up its own final permit document and it vas Cowan of the FIC who briefed the Minister and obtained his signature. The Acting Secretary DOF was merely given a copy after the event. In Manus the interference with departmental and Ministerial functions

    . ,-‘ ,”

    was caused by Monarch Investments which manipulated local lando..,ners and politicians to bring such pressure on Minister for Environment and Conservation Jim Yer Waim that he approved their environmental plan without waiting to consult with anyone. Similar pressure was being brought to bear on Forest Minister Stack.

    C_Q.ID.PJ._.,i_g_nce with Condition

    WGTC and Kumus 1 botl: have a very bad record of non compliance with operating cond it i ans and this is fully documented in the interim report. WGTC was prepare6 to r accept any number of o erus conditions in order to “land the allocation”. Once safely in5talled it proceeded to. _renegotiate some ·Condit ions and to ignore many of the others. It ‘alas pei:mi tted to continue operating·

  • Page 44 of 247

  • and to negotiate much less onerus conditions in order to gain access to Block 2 and then to fa 11 blatantly behind 1n

    the performance of the new conditions. instance is still not completed regeneration plots not commenced.

    Its and

    sawmil1 f.,1r its trial

    Kumusi went into receivership and was then permitted by the government (which owned substantial equity) to continue to operate for the beneOt of the creditors in flagrant breach of all conditions which had been imposed for the benefit of the resource owners and local community.

    has

    VFP performed still failed

    its conditions to commence

    more responsibly reafforestation,

    but to

    construct a major urban development and to conduct some important feasibility studies.

    I

    The interim report records the transfer pricing activities of WGTC and tha way it has been able to manipulate its complex series of management contracts with related companies to transfer funds. Kumusl marketed through the Japanese trader Sumitomo. Some of Sumitomo’s marketing devices are disclosed in this interim report others are dealt with more fully in Interim Report No.6 Vol.2 App.2. Sumitomo’s practice of undergrading logs is also described.

    VFP has developed creative and successful marketing strategies through its marketing agent Quarter

  • Page 45 of 247

  • I” Enterprises. These are fully described in Interim Rer,ort No.5 but are also dealt with in Interim Report Ne 6 which deals specifically with marketing. The Commission, after exhaustive investigation, found no evidence that ·VFP vas transfer pricing or that it, or its agent, vas involved in any other secret marketing malpractice. Similarly, on the evidence before me, I can find no evidence that either Kumusi or its contractor Ambogo sawmill were involved in transfer pricing. There is evidence howevet: that Sumitomo indulged in large scale undergrading (as buyer), bought at ac unfair price and made excessive profits on resale. It appears to have, in effect, an exclusive buying agree:nent with Xumusi C nov AmlJogo) and has provided finance fur its operations in exchange. This aspect of Sumitomc’s buying practices is further described in IR No 6 and requires further investigation and close monitoring.

    Logging Practices and.Monitoring

    IR No S describes the poor logging practices of VFP and the comparatively satisfactory logging practices of WGTC and its loggin<;,: contractors. Kumusi’s busl:l

    operations vere not inspected performance of all three provincial ,, commented upon unfavourably.

    but the monitoring forestry offices is

    It ls too early to judge the logging operations on Manus Island as they have only just commenced. It is to be noted, however, that Monarch Invetments – the proposed contractor for Jaha Development Pty Ltd, moved its equipment to Manus and commenced operating in defiance of lawful attempts by the Provincial Government and the Secretary for Forests to stop it. This comparative new arrival on the PNG timber scene is showing signs of strenuous activity as it was the proposed log ing contractor behind three of the four LFA’s recently app:coved by the N maliu governme11t – Jaha LFA, Lolo LFA and it intially was the intended contractor for·the Lower Sepik LFA.

    Anothe:c cont:cactor competing for an LFA declaration alongside Jaha is United Timbers, vishing to contract for the Kali Bay Development Corporation. Its logging practices, undergrading techniques and its habit of organising massive amounts of transferred profits through Mitsubishi are fully described in IR No.4 App.4.

    National and Provincial Government Relationships

    The timber operations described in Interim Repozt No 5 illustrate well many of the problems in National/Provincial government relationships which are described in section 3 of this Final Report.

    The Wawoi Guavi operation was Jllshed forward under pressure from Straits (Singapore) even though it had no priority under the National Forestry· Development Programme. It was opposed by the Provincial Government which at one stage briefed a prominent national lawyer to try and reverse the National Government’s firm decision to proceed with the allocation. (The Provincial

  • Page 46 of 247

  • Government was eventually won around by false promises and “generosity”).

    On Hanus the TRP was allocated with full cooperation between the two levels of government but failure to have a National Forestry Development Plan in place resultec in the National Minister finding himself “unable” to resist demands for the d claration of t·ne Jaha LFA which it is claimed will overcommit the Hanus timber resource.· If so ·,: r it could result in the agreed upon Jcint venture veneer mill being starved of resources. The conflict betwe.e·n the National Government and the Manus Provinci J Government resulted in a series of Court actions and, eventually, the enactment by the HPG of its own forestry legislation to try and block the National Minister from over commi tt inq the resource. It has resulted in a LFA declaration being made over an area which is disputep between two rival landowner companies backed by two riv•l foreign companies. This is a situation in which it wi 11 be most difficult for any Prescribed Authority to decide which people represent the true landowners as the matter is in dispute. Since the writing of IR No.5 the Minister has gazetted the Deputy Premier to be the Prescribed Authority. This man is,· obviously, a pol-itician. He is also one of ·the leading members of the Jaha group whi _h is contesting the question of ownership. (See IR No.7) .. ,

    In the Vanimo Timber area the allocation had been well planned and an intergrated project set up with full consultation with, and involvment of the Provincial Government. Despite the fact that a National Government co-ordinatior was appointed to co-ordinate the project, the level of com unication between national and provincial governments had deteriorated as did communication ·,dth the company. The company got into many difficulties and alienated both levels of government, I believe that the major problem was a failure of direct and honest communication.

    The Kurnusi project involved both National and Provincial Government equity as 75 percent of shares were government owned. The other 25 percent were owned by the management company. After Kumusi went into receivership both national and provincial governments stood by Yhile the receiver concentrated only on log exporting with .nc;> further regard for performance of its infrastructure apd other obligations.

    Be.nef its for the PeopJJ:. This section of Interim Report No 5 analyses in detail hoi.r the benefits received by the landowners have been unfairly low in each of the areas studied wh n compared against the benefits being openly and secretly taken by the foreign developer. The method ot calculating royalties places them at about one quarter of the actual value of the standing tree and landowners have been receiving only 25 percent of royalties (recP.ntly raised in some.instances· to 75 percent). ·The share b ing received by landowners is in fact ridiculously low.

    In the wa …oi Guavi Area, on top of royalties,. the landowners received a premium of 48t per cubic m tr which had been stupidily calculated at far too lov. a

    !

  • Page 47 of 247

  • rate. They received little more, a=.- feil infrastructure conditions had been impo ed upon GTC. The Company cheated the National Government of its proper revenue by transfer pricing ilhich has kept it continuously in a loss situation.

    In the Vanimo Area again the benefits had been limited to royalties and the hope of ome increased employment and business opportunities in the local area. Feil infrastructure conditions were imposed on VFP and two major ones which were imposed (reafforestation and urban development), have not been performed because of difficulties in acquiring the necessary land .

    .As far as Kum us i is concern, d it has been a disa.ster for. the local people.·.. Th:r;ough no .fa.ult qf the landovnexs· Kumusi Timber Co went into receive ship and was then permitted to operate on for the benefit of its credito;s. Being a Forest Deve 1 opment Cor peration, and three quarters government-oilned, fev cond itians had been imposed upon it. It was treated as the “peoples” company almost by definition and landowners were expected to gain somehow by its very existence. The fe1w conditions of operation which 1were designed to benefit. local people ( such as the major bridge over the Kumusi River) were left unfulfilled while I receivership) cut out the people’s forest. It paid off the secured creditors and some of the unsecured creditors before facing inevitabl action to have it wound up in recent weeks. The landowners are now making a bid to wrest Kumusi’s co pany house from the creditors in a sperate att pt to gain at least these timber :reJllinder of their former forest resource.

    Whether the Manus people gain si nificantly from the arrangement between the;r landowner/Provincial Government Company and SEAL Pty Ltd will depend upon the vigilance of the former, the honesty of the latter and the profitability of their proposed joint venture veneer mi 11. On the exper ie:nce of other similar ventures I am somewhat pessimistic about the future of the venture as there ls now a doubt about the continuing availability of its resource and because conversicn of the Indonesian log industry into a plywood/veneer industry is lowez: ing the

    demand for veneer. On past t companies and some of PNG’s I leaders have reduced the distribution to shareholders

    expez:ience also, foreign political and business profits available for by simply takinq secret

    profits of £shore or into the i:: pez:sonal or political arty bank accounts

    Protection o{ the forest_ :cesource

    the

    Finally the Fifth Interim Report studie.

    in detail and tc.

  • Page 48 of 247

  • successfully secure the performance of natural forest regeneration obligations on any of the three mainland companies described. It also describer the problems caused by the scarce :,:ind inaccurate available knowledge of our forest resource base and ow this has resulted in such a bitter dispute between national and provincial governments over the Manus resource.

    The concluding comments discuss how the hree mainland operations have failed to boost- the economy of the three underdeveloped provinces concez:ned, have failed to bring substantial benefits to the peoples or governments involved nd how all fou studies again show

    . -:: .. ·· ··

    up the need for the formulation and clear statement cf a

    National Forestry Policy and the National Forestry Development Plan.

    preparation of a

    The report conc}udes by pointing out the shameful gaps in our knowledge of the quantity, quality and regrowth capabilities of our forest resources. The existing knowledge is no a safe basis upon which to plan an ambitious logging expansion programme. I repeat here the concluding comments on the four operations studied in Interim Report No 5 as they are applicable to the nation as a whole:

    “When decision makers are “groping in the dark” in this vay .they should 1·,e taking very caut.iqus steps and making ve.:-y conservative decisions.’ With Nev Ireland as nn example of what has already happened ( see Jnte.r im Report No 4 J and Hanus ;. s an example of what L!:: likely to happen the 1987·-92 National Forest Development Programme nt” eds to be rethought as a matter of ur9ency.

    That Plan aims to more than double the existing • 3,377,000 hectares of already allocated resource by allocating an incredible further area of 3,463,000 hectares by 1992. Almost aJ.l of the timber to be harvested is planned for export as logs. ( Inter lm Report No 4 Vol 1 Schedule 1 Attachment 4)

    The programme needs to be rewritten so that it restricts further· cutting unti 1 ve nave acc:urately. calculated the national forest resource and until ve have planned the optimum rate of cut and the areas where that should t.e occurring. Logging should be restricted ( not expanded) until ve have developed the lavs and the Provincial manpover into an

  • Page 49 of 247

  • effective forestry service capable of controlling the exploitation of our own resources, according to our own carefully thought out plans. The exploitation of this national forestry resource must be organised so as to produce the maximum, “fairly shared” benefit for all citizens, but particularly for the landowners who must become active participators in the benefits and activities vhich should be generated by timber operations. There must be be a National Plan synchronised vi th the va.rious Provincial Plans and it must cater for the total requirements for land usage. It must provide for forest replenishment vhere that is appropriate, forest conservation and environmental protection.

    areas where -those plan tat i ans and

    are other

    appropriate and for fo est agricultural deve1opments

    where these are appropriate.

    These four studies demonstrate some aspects of the fog which is casting its cloud over forestry in this country. It is a mixture of meandering intellectual neg1ect, bureaucratic inefflciency and lack of honest political committment to the visionary ideals of the Constitution. Underneath this fog of inertia the.re are very active foreign companies, in partnership with some very greedy citizens, vhich a.re using many devices to manipulate landowners and politicians f.or one end only. Their aim is to cut down trees and transport them to log ships waiting at the beach and in this activity they are being very successful. Some are·doing i.t vi th sense of responsibility w’hile most are doing it. Jn reckless and descructive haste. Unless our authorities take control, the resource will be destroyed and a great opportunity for this and succeeding generations will begone for ever.”

    Interim R t .. No_ 6. “Log Marketing”

    This interim report is in four volumes consisting of a full dissertation in Volume 1 covering all aspects of

    log marketing in PNG. reports and literature Commission’s detailed

    It includes a survey of the major on the subject and draws upon the shipment analysis of all log

  • Page 50 of 247

  • dealers to set down an authoritative statement about what has been, and what is still, happening in the field of log marketing. There is also a brief survey and some comments on marketing of processed (mainly sawn) timb r.

    Volumes 2 to 4 set out text, schedules and documents relating to the various marketing companies each of which is included in its own separate appendix as follows:-

    1. Shin Asahigawa 2. Sumitomo Forestry 3. Timbersales 4. Nam Yang Timbers 5. Stettin Bay Lumber Co 6• Open Bay Timber Co 7 • Bismark Industries 8 • Lusco Enterprises 9• Tonolei Development Corporation 10. Madang Timbers

    Volume 1 traces the movement of logs from stum:_:> to end buyer in the country of destination and traces the

    movement

    of the

    financial payments from

    end buyer to

    producer

    through

    the

    transfer

    pricing

    middlemen in

    Singapore and Hong Kong. It examines in detail the

    question

    of transfer

    pricing

    and

    other marketing

  • Page 51 of 247

  • malpractices and the measures taken to elimate or reduce these practices.

    7. ‘.• .·,: : ‘

    The conclusions are that almost every company involved in marketing PNG round lags is· involved in serious marketing malpractices which robs the PNG government and the resource owners of very substantial amounts of money. A further conclusion is that the various control systems which have been introduced to control these malpractices are either insufficient or not enforced. The position has improved sinced 1986 but there is still a great deal ta be done to ensure malpractices are eliminated or minimised.

    Volume 1 concludes by discussing the form that future State involvement in log marketing should take.

    Interim Report No 7 “Current Events”

    This interim report deals briefly with some·current matters which recently came to the attention of the Commission. These are:

    Jaha LFA – Manus Province Although this matter was reported in IR No 5 App.4 more recent developments, including the public examination of Minister for Forests Karl Stack are reported in this volume. :_ 1

    Sebulon Watt – Tabar Island Hr Watt appeared at a public hearing in Hay 1989 and was examined on his continuing involvement with illegal timber operations on Tabat Island. This matter was first reported in IR. No.4 Vol.2 App.2.

    Sir Hugo Berghuser – Superior Tropical Timbers Sir Hugo’s attempted involvement in the Rai Coast Timber Area through his co:ipany SupQJior Tropi’cal Timbers (in receivership) is described together with details of proposed transfer pricing scheme.

    Michael Somare – Lo er Sepik LFA Hr Somare’s involvement, as a major shareholder in Sepik River Development Corporation Pty Ltd and as a powerful lobbyist, in obtaining the declaration of an LFA in the Lower Sepik/Angoram area is described. The declared area includes an area which is the subject of an Australian aid funded land utilisation feasibility study. The possibility of a conflict of interest between bis role as Minister for Foreign Affairs and his role a lobbyist fa his pers6nal and his Hpeople’s” inte eit is · 1· raised.

    Santa Investments – West Gadaisu The approval of Santa as contractor in the West Gadaisu Timber Area is discussed. In view of Santa’s record it is suggested thac this decision be reviewed.

  • Page 52 of 247

  • Long Term Trading Co – Turama TRP The unseemly haste in which this timber area was allocated in a matter of onths is detailed. The advertisement was for companies to apply for approval as contractor/developer to the Turama Business Group_as Pe:r:mit Holder.

    The time for submitting detailed proposals was so short that it effectively ruled out all applicants exce-pt Long Term Trading Co which was already prepared. The permit was then granted to LTT (not the Turama Business

    JS

    Group as had been advertised. The accepted proposal varied greatly from the proposal guidelines and was unfavourable to the landowners.

    Arave Timber Area The recent selection and approval of Cakara Alam as developer despite the existence of other good or better proposals and before the selection has been made between two rival landowner companies as permit holder is questioned.

    Francis Sia CHOI) and E Tomon The fact that Francis Sia has recently offered “to bribe” the New Ireland Provincial Secretary by paying him a retainer of KlOOO per month is reported. The SecretaFY says he did not acce t th offer and examination· of his bank accounts support his denial.

    Santa Investments – Public Hearing The results of a public hearing into the documents seized by the police from Santa’s offices are reported. The documents include correspondence and financial records which disclose payment of benefits lo, and requests for, benefits from politicians and ublic servants. Francis, Michael and Simon Sia were examined and also company Secretary Ian Shepherd.

    Gasmata Resources – Public Hearing Hr E.R Diro was examined in a private session to explain his involvement ln a business relationship with Mr Chin Ah Eng of Gasmata· Resources Pty Ltd.. The. relationship involved both of them being shareholders in? a company to which Hr Eng contributed substantial sums of money. At the time Mr Dlro was Minister for Forests nd Hr Eng was involved in the PNG timber industry and seeking pre registration and other approvals from the

    ,. 36 ·

    Forestry Department. I found that impropriety was not proven against Mr Diro but that it was a very unwise relationship for the Minister for Forests to have entered into. The relationship

  • Page 53 of 247

  • came to a sudden end after Mr Diro ceased to be Minister for Forests and after Mr Eng had financial trouble, Had it continued it would eventually have put the Minister into an extreme conflict of interest situation.

    In some of the matters reported in Interim Report No 7, I have recommended that further investigations should be made.

    -,- —

    ,,,., ..

  • Page 54 of 247

  • 37

    PHOTOGRA. .HIC EVIDENCE

    A. Infrastructure Development In many areas it is clear that companius are not honouring their obligations to provide long term benefits by the development of roads, bridges and building construction. In many instances there is no development at all and in other cases it is of a clearly temporary nature.

    Photograph 1-5 Temporary bridges and poor quality roads in the Danfu Area (New Ireland Province). In No 1 the poor construction of the bridge can be seen and in No.3 the entire bridge has been washed away.

    6. Temporary infrastructure development at the Wawoi Guavi site. (Note also the failure to comply with environmental requirements for a 50 metre buffer area around the gully).

    7-9 The operations sit at Napanta Nabui – New Ireland Province (Nationwide – Bruce Tsang) comprises company built bush material structures with no long term benefi .

    10. Temporary building at Bereina. Luabar Logging was illegally operating under a Timber Authority which imposed no infrastructure requirements.

    B. Environmental.J.m12..act. ‘, It is common for even the most basic environmental considerations to be ignored. Ser.iou and often irreversible damage must inevitably result.

    ·r ·…·.

    1

  • Page 55 of 247

  • Temporary bridges at Danfu extension TRP.

    2

  • Page 56 of 247

  • 4

    3

    Danfu TRP 5

    sion

    ‘. -.

  • Page 57 of 247

  • 7

    Bush material Huts at operations site – Napanta Nabui

    6

    Temporary In? frastructure at Wawoi Guavi

  • Page 58 of 247

  • . ‘

    Napanta Nubui – New Ireland Province

    9

    .. :: .

  • Page 59 of 247

  • {‘

    10

    Temporary building at Bereina. Luabar

    Logging

    11

  • Page 60 of 247

  • The high rainfall area at Wawoi Guavi

    ,,,·….

    ‘ 12

    Wawoi Guavi

  • Page 61 of 247

  • 13

    ..

    I 14

    ‘iawo i Guavi

  • Page 62 of 247

  • 15

    16

    Pollution and riverbank damage at Baimuru Sawmill – Gulf r

    17

  • Page 63 of 247

  • 18.

    19.

    Neglected processed timber Vanimo Forest Products.

    .”

  • Page 64 of 247

  • 21

    lllegal Logging· af Bereina – Luabar Logging

    22

    ‘ ,. – ‘

    23

  • Page 65 of 247

  • Danfu Extension TRP

    24

    25

  • Page 66 of 247

  • r Log wastage at Danfu TRP

    26

    Danfl.1 Extension TRP

  • Page 67 of 247

  • 29

    Reafforestation in Bulolo Area

  • Page 68 of 247

  • 30

  • Page 69 of 247

  • 32

    Tree Planting in New Ireland

    31

    Bulolo

  • Page 70 of 247

  • ·

    33

    Bridge constructed by SBLC

    34

    Wharf in West New Britain

  • Page 71 of 247

  • ..

    RE PRT ON TE HS OF REFERENCE

    I now proceed to report upon the Commission’s Terms of Reference in the following order:- Section 3. Definition of Policy (Term of Reference No 4) Section 4. Functions (Term of Reference No 5) Section 5. Interference vith Functions (Term of References No 7i Section 6. Marketing and Transfer Pricing (Term of Reference No. 9) Section 7. The Forest Industries Council as the State Marketing Agency (Terms of Reference _Nos 1,2,3, and 6) Section a .. Improper Be efits (Term of Reference Nos 3 anq 8.)

  • Page 72 of 247

  • I?h _Q_t_Q.Q_:t ..P.h 11-15 In the high rainfall area of Wawoi Guavi the clear impact on river, riverbanks and surrounding areas is evident. (Note: No 12 reveals a clear breach of the environmental requirement for a 50 metre buffer area from all flowing streams)..

    16-17 Pollution of the river by sawdust and damage to the riverbank by failing to remove logs to higher ground is clear at the Baimuru Sawmill in Gulf Province.

    Photograph 13 The shed to the right of this picture is part of a sawmill that was never completed at Wawoi Guavi.

    c. Local Processing

    There is a clear lack of commitment to local processing requirements. In some cases operators incu high wastage by undertaking reasonably extensive saw milling in order to obtain higher export quotas.

    18-20 Stockpile of sawn timber at Vanimo Forest Products showing neglect, high wastage and a lack of commitment to the on-shore industry.

    D. Illegal Operations

    In some instances operators slmply act deliberately outside the law.

    ‘ ‘ ·’, e.h2..tograph 21-22 · These logs were illegally harvested at Bereina (Cental Province) by Luabar Logging under a Timber Authority. They should be used for the on-shore market but vere logged for export.

  • Page 73 of 247

  • E. Bad Logqin.9………E!_xactj_ce .

    Interim Report No 4 Volume 1 contains a number of photographs clearly showing instances of and the effect of bad logging practices in New Ireland.

    23-24 Unncessary widening of hush ramps and road side clearing in Danfu Ext. TRP.

    25-26 Evidence of log wastage by Gaisho (PNG) Pty Ltd at Danfu Ext. TRP.

    27 Use of front end loader without a fork at Danfu Ext ” TRP

    28 Log wastage and beach pollution at Danfu Ext TRP.

    F. The Other Sid

    There are instances where logging companies have. brought long term and worthwile cenefits and have respected their obligation to the environment.

    29-31 Results of reafforestation at Bulolo

    32 Tree planting in New Ireland Province

    33 Permanent bridge constructed by Stettln Bay Lumb r Co in West New Britain.

    34 Wharf’ under construciton in West New Britain by Nam Yang

    ..J

    ·’,I•W· ”,’

    3 • DEFINlTION OF POLICY

    TERM OF REFERENCE N0.4.

    “What is the existing Government policy relating to Forestry and in particular relating to resource allocation and conditions of operations, marketing and pricing of timber within the forestry industries in Papua New Guinea”.

  • Page 74 of 247

  • INTRODUCTION When a Prime Minister wishes to know what the existing government policy relating to Forestry is he would normally ask the Minister for Forests and his departmental Secretary. The fact that the question has to be asked of a Commission of Inquiry indicates that there is something very wrong.

    After a diligent search of the normal documentary sources of policy,_ after holding several policy conferenc s with former Forestry Minister Horik and his senior: offit:ers and after hearing Minister Stack admit that there as as yet no clear statement of forestry pol icy I can unden.,tand the dilemma. There ls in fact no document and no person able Lu state authoritatively what the current National Forestry Policy ls. This fact explains the appearance that the administration of this extremely valuable natural resource appears to be lurching on from one alloc tion to another. and from one decision to the next with no clear sens! of purpose.

    Because of their tralnlnq ln days when forestry was treated as a profession, and formulations of policy accorded pretty we11 with what las actually occur r i_ng, the senlor foresters in the Departmeqt still have a personal sense of what is right and what -is· vrong arid hov it accords. ·i·i”ith existing legislation and procedures. The legislation however dates from the highly centralised pre Independence

    ·:,$ “colonial” period, before the introduction of Provincial government; under which “forestry” was made a “concu1:rent ) subject”, the authority over “which is to be shared betWt”en National and Provincial gove:i::nments. It dates from times when the fores ts iere seen as vast natural areas to be conserved until the money and the will to set up forest indust:i::ies such as sawmills and plyvocd factories, were found and from times when to export timbe as round logs was seen, almost, as a betrayal of a national trust – the r;ale of a national heritage.

    The fact is however that circumstance . have changed since Colonial times and the older foresters’ personal feeling of what is right, and the legislation Rnd procedures upon which their training was based, arf’ no longer appropriate. l The Garson Report· 1973 I The policies appropriate for those colonial times w re formulated by G L Carson in his 1973 report (See App8ndj 1 for a full discussion of the Carson leport)

    When Carson wrote his report the Forestry (Private Dealings) Act had just been enacted. He :.ightly pointed out that it allo,.,ed for private dealings between forest owners and private companies and that it bruke the Minister’ monopolistic control over forest exploitation. He warned that it introduced an alien concept which threatenred to undermine the whole concept of orderly control by the national government to protect the forests for future generations and to ensure wise management.

  • Page 75 of 247

  • Car son advised urgent revision and consolidation o £ Forestry legislation to provide rules for a proper bal nce I bet1Jeen the essential requirement of government control and the legitimate desires of resource owners to be alloved to gain some benefits from their highly demanded timber. Sixteen years later this revision of legislation has still not occurred.

    Carson’s report was immediately followed by the publication of a White Paper “National Forestry Policy” 1974 vhich later received NEC approval as a full statement of all aspects of Forestry policy.

    NATIONAL FORESTRY POLICY 1974

    !. The 1974 Policy set rules appropriate for forestry in that highly centralised system. It focussed on firm national government ·control and the protection of t.he resource in perpetuity. It aimed at the planned, gra(lual and orderly development of timber processing industries. The text did not refer to log exports and it simply 1eft the Forestry (Private Dealings) Act al·:rne, as if it ,..ere ome sort of alien monster which might somehow go away as unexpectedly as it had come.

    As it has never been revoked nor replaced the 197 4 Polley remains the most comprehensive formal statement oi government policy. As such I will quote its polic 1 directions, making a brief comment after each section:

    that:

    To give effect to this policy the Gove.rnment directs

    (A) The forest Estat, .

    The Depaiment will suf f ic·i ent land protective and objectives.

    vurk towards the dedication of to achieve the ·productive,. ancillary national po.1icy

    In additio,. to areas managed by the Department. it will encourage and assist in the establishment and proper maf)agement o[ local authority and private forests. The location of the forest estate will be determined by national needs and may be influenced by

    (a) the requirements of other land use authorities; (b) the requirements of the Oll’ners; (c) the nature of the resource; (d) proximity to markets; and (e) the needs of existing industries. The development and management of the forest estates vill aim toll’ards the land owners participation and sharing in the benefits obtained without losing sight of the primary objective,

  • Page 76 of 247

  • efficiency in management. The Depart•ent vi 11 provide the Government …,i th clear reco mendations on holl’ to establish the’ necessary forest estate to meet present and future needs of the country giving regard to contempo ary social and political pressures. In ma.king ,’”nis resentation lt will recommend ction to be taken in regard to old timber rights purchases and land purchased for forest deve:opment. A continuing assessment of forest resources will be carried out ln order to:

    (a) maintain an up to date record available timber resoure;

    of the

    (b) enable industry to decide the possibilities of development; and (c) plan detailed and orderly utilisation and managemenl of forest areas.

    -, C9ament

    The concept of dedicating a national forest estate did not go ahead nor was progress made in assi ting proper management in private forests.

    L

    An up to date record of the available timber resources has not been kept. The data is years out of date and notoriously inaccurate.

    CB) Working Plans The Department will have working plans prepared for the proper development of each forest estate. These plans will take into consideration: (a} resource management objectives; (b} environmental factors; (c) the marketing potential of the timber resources; (d} efficiency and cost of logging techniques; (eJ costs, standards and location of roads; (f) land use subsequent to .Jogging; (g) reforestation objectives and cost benefits.

    . .. . .

  • Page 77 of 247

  • These plans vill be sufficiently flexible to meet changing· utilisation and marketing patterns, will ensure adequate a ntrol of operations at .all times, nd wlll be the basis 0£ future field activities” by the.· D·epartment.·

    Cownt Such plans were not developed as no forest estates of the type envisaged were established. Nor were plans of this sensible nature dra”‘n up for the project areas which were later allocated for exploitation (such as Stettin Bay, Open Bay, Kapuluk and Vanimo)

    (CJ Reforestation The Department will cooperate vith other land use authorities to develop land use plans over all land the subject of forest industry development to determine those areas to be 11anaged as forest. The basic aim will be to see that the forest resources o,f .PNG ;Jre maintained and expanded to ensu.r · tha_t · the. peimanen t neeqs of th · fo.r.es·t· industry are· met .and the social and ecoromic environment of the people is protected.

    In those areas ,..here there is a deficiency of forest crops it vill undertake afforestation projects designed to satisfy local needs. The Department vill aim to maximise local participation at a11 levels and give particular regard to the involvement of the lando ners.

    Comments Since 1974 there has been an ever decreasing effort put into reafforestation. The plantations which existed then are no rundo n or harvested and there is almost no

    government sponsored Reafforestion obligations

    reafforestation occurring. in timber permits :iave not been

    ‘1 properly performed or enforced. Bay, Open Bay ( nov) and (for discussed below.

    The exceptions are Stettin a while) Jant. These a.r.e

    There has been little effort to formulate comprehen ive and realistic land use plans and little planning of for st management

    (F) Forest Industrie

    The Department, in co-operation vi th other Government agencies, will encourage the

  • Page 78 of 247

  • development of forests industries in accoz·dance with Government investment guidelines. It will encourage the use of locally processed forest products, take an active part in review of tariffs, imports and export regulations and trade agreements, and in other matters that affect the timber industry. It vill within the limits of its resources keep the industry informed of the latest scientific, economic and market developments in regard to forest activities and forest products.· Main aims ill be:

    (a} to increase rapidly as possible production and export of forest products; (b) to diversify •arkets

    the

    (c) to improve the processing of forest so increasing the employement;

    qua 1 i ty and extend the products within the country, export value and local

    (d} introduce suitable quall ty control rules particularly in regard to xport pro ucts; (e) to clc::velop a fully integrated forestry industry of industrial complexes working vithin permanent forest estates; (f} to increase employment, business and training opportunities for local people; (g) to provide o;,portunities for local people to have shares in the industry and where appropriate ownership; (h) to develop facilities of general use to the community – roads, wharves, etc. ( i) to foster the use of local forest produ,:ts, and the development of local market opportunities; (j) to .foster the development of minor forest products Jndustry, especially_ sago, . r.artan, resins, and biochemicals; (k) to develop techiques to Jmprove industry efficiency, especially logging; (1) to ensure that returns to the Government are related to current market and cost criteria.

    couent Since the declaration of this policy to increase the production and export of forest products the export of sawn timber has dropped from 51,000 m3 in 1974 to 2,700 m3 in 1987. Over the same period plywood exports have dro ped from 15,700 m3 to 1700 m3 and the small veneer and chopstick trade has stopped altogether.

    The record of.encouragi g local participation in fer.est industries has been abysmal.

  • Page 79 of 247

  • 48

    (B) Forestry Tech ology •I

    The Department . will maintain sufficient expatri ate staff particular,ly ·professiona.l staff to undertake ess·ent ial . research vork relati.ng to· resource assessment, silvicultuie,resource. ·

    utilisation and marketing and for the training of local officers. The Depart•ent vi11 look for the most economic vay to resolve any research proble• giving consideration to· the faci li ti es available in other deaprtments and authorities (U.P.N.G. and the University of Technology} and to those in Australia and elsewhere.

    co-ent Staff levels devoted to research have been maintained at a high level but the research priorities havll:l b€coae outdated. Research has concentrated on 1974 policy priorities of reafforestation planations and processing wheras forestry practice has shifted to “tree mining” operations and predominant emphasis on log exporting. Rese rch intci Iog tng practic s and reqener tion of natural· forest commenced only recen ly.

    (F) Training

    The training of local personnel is of vital importanc and the Department vill maintain and, 1£ necessaxy, expand its training scheme$ to meet departmental and industry needs. Oppo:r:tu.ni ties for the training of technical and professional staff in conjunction vith other tertiary institutions will receive major attention.

    Comment Training has been been concentrated on the need to develop foresters capable of performing in the forestry scene en.visaged by this policy. The graduates have found that those skills are not in igh demand in the current log export scene and the majority of graduates are failing to

    ._·:

    find employment in the timber industry. Graduates are being turned out at the r te of 10 diploma students per yeaz trom the Bulolo Forestry College and 5 degree stduents per year

    from the University of Technology. of K600, 000 p.a

  • Page 80 of 247

  • This is at a total cost

    (Gl Finance A basic objective vill be to maximise economic returns to the Government. Royalty w1ill be the primary return, but the Deparment will in its cost/benefit considerations give consideration to other forms of benefits and returns.. The Department had introduced a new system of appraising royaltit which is a more objective method than has been possible in the past. Under this system the overall level of royalties will b subject to review every two years to take accLunt of changing circumstances in the timber industry.

    Comment . The government ·has sought to

    maximise returns by

    encouraging a rapid increase in log export duty of 10 percent o: FOB

    expo ts and chariinq an ‘..J! ice. The basis :for

    appraising royalties has not been altered nor subjected to regular review.

    After my most preliminary inquiries it became clear that the 1974 Policy was not being followed – hardly in any respect at all.

    What happened of course vas that it became overwhelwed by the political constitutional and economic events of the next five year:s.

  • Page 81 of 247

  • INDEPENDENCE and PROVINCIAL GOVERNMENT

    I In 1975 PNG gained its independence. It enacted a Constitution ‘*’hich spells out set principles for protecting and rene,.,ing forests (as a National natural resource) for the benefit of future generations ‘*’hile, at the same time, exploiting them now for the benefit of all.

    It guaranteed property rights of the customary own rs of the forest but, at the same time, it required the Nationa 1 government to take f i1. m contr o1 ovel.” t.he exploitation and development of the forests. In 1976 the Constitution was amended to provide for a substantial de ree of decentralisation of government authority to the nE1,1ly established Provincial Governments ilnd Forestry vas m.s. both levels of government. The Forestry Service was promptly divided up d control over field staff·was g!ven to Provincial Governments. I

    Independence introduced completely new factors into the “by.rate.r” of PNG forestry. The already outdated legislation then became positively archaic. Unfortunately, repe,1.ted calls and directions from the NEC to draft nev consolidated Forestry legislation has still not resulted ih a draft bill being submitted to NEC for approval {though several ve:r:e prepared and another is now with the legislative draftsman . The old legislation still sets rule;;; intended to guide and control the actions of Ministers, public servant5, ti’llbe’t operators and landowners.

    •I • -,,

    The laws are not appropriate ‘.:o control the forces

    “which have been unleashed by Independence! I for government revenue, asr;irations

    a driving neSod of provincial

  • Page 82 of 247

  • governments and the arrival of foreign timber companies determineg_ to take advantage of the relaxed ;:ules on log exports.

    REVISED NATIONAL FORESTRY POLICY 1979

    The Revised National Forestry Policy ‘was published ,’i 5 a. White Paper in 1979. Unfortunately it was not a .:1.ll revision and re-statement of policy taking account If Independence, the Constitution and Provincial Government; these momentous happenings were ignored and the revised policy merely dealt with log exports.

    This policy revision was prompted by the need lo increase national income and overse2,s earnings. Like all other departments DOF was directed to come up with proposals for solving this post Independence funds shortage anCi the answer was to graft onto the 1974 Policy (which focussed on conservation and orderly development by me ns of locai processing) a revised policy of encouraginJ the rapid

    increase of log exports.

    Under

    the 1979 Revised Policy,

    guidelines for permitting types of enterprise:

    log

    exports ‘were set fnr f O’.D.:

    (a) PNG {National) Log Export Enter2rises These became known as Forest Developaent cor:pc,.r.ati ‘.1,·.s and were intended to be formed vith government invoJ.vement and assistance. They vere to be allowed to export logs ith fe’w obligations and conditinns i posed. (See discussions on Kumusi Timber Project-IR No 5 App 3)

    … :t· . :.;

    (b) Foreign owned Timber Processing Enterprises These were to be allowed some log export quotas to fund and f

  • Page 83 of 247

  • encourage their processing operations

    (c} Large Foreign Log expo ters (not processing) These were to be given large log export quotas in excha ge for them performing substantial additional activities such as agro/forestry projects, and undertaking a heavy burden oi infrastructure obligations such as construction of maior roads, and bridges, urban development projects, schools and hospitals.

    (d) Log export/road construction enterprises These five year permits were to be granted to companies which have engineering capacity. The limited permit wa to allow them to export a given volume flogs in exchange f r constructing a stated length of hlghvay. . As a result of this policy revision post Iudepen ence Forestry Ministers are now confronted by a lery diffei:ent scene than that which faced the for r colonial administrators and the pre-Independence “Ministerial Members” and “Self government” Forestry Ministers. Unlike the senior professional foresters, the Ministers have not been trained in principles of sound forest manage:ment .:.no they do not necessarily share the foresters’ “fee. ing’) for what is right. What is more Ministers, usually, have n•:,t been raised in traditions.; which incline them to st:ek departmental advice before making important decisions. Up unti 1 the commencement of the Wingti Government in 1985, Forest Ministers tended to take important decisions to the NEC. Since then the tendency has been for the Ministex to make major decisions about llocatii:>n of resources withu}Jt seeking NEC appr;oval. There has also been an · incr·easing

    ,….

    tendency for Ministers to seek their advice from outside the Department of Forests (This vas particularly the case uncer I Ministers Diro and Torato).

    Since the 1979 Policy Revision the new forestry scene which confronts a Minister is far more dynamic and include the following factors:

    Post 1979 Scene

    (a) Log exports have become the dominant aspect of forestry and have risen from 472,500 m3 pa in 1979 to 1,442,200 m3 in 1987. ( b) Local processing has declined in real terms f:r.om 77,300 m3 and 106,700 BDU of woodchii,JS in 1979 to J,5B8 m3 and 65,700 BOU of woodchips in 1987; ( C ) There are no’*’ many foreign timber companies pressing for the right to harvest and export logs. ‘l’he re· ards are so great that they have been able to pay large l:. ums and grant benefits to

  • Page 84 of 247

  • national an provincia: politicians, political parties and landow ers in order to gain approval of, and support for, their operations. (d) Ministers may think that it ls entirely in thelx discretion whether or not to allocate a resource, declare a Local Forest Area, assent to a Dealing or to reverse these deeisions but, in fact, they are far. i ng combinations of Provincial Governments, “stirred up” landowners and foreign timber companies vhich, once aroused, are very difficult to resist; The fact that the legislation, ted,nically, gives the Minister absolute power in many of these areas is

    misleading. pressures.

    He has to take account of landowner If he dpes not also take account, of

    pressure £ om an applicant foreign timber company he is likely to find that the company has stirred up soroe key politicians and landowners to argue the company’s case

    and they will exert very powerful political pressure. Under our system of Government he must also seek and I take account of the advice of the Department of Forests and other relevant government agencies (see discussion on Functions section 4 below).

    Somewhere amidst the interaction between these and other factors the National Forestry Policy has dropped out of sight. I therefore as requested, set about a process of inquiry and analysis in an endeavour to find and define that policy.

    . .. . .

    Having failed to find an appropriate statement of Ndtional forestry policy I listed some requirements for post-Independence national forest management which I believe national policy must address if the resource is to be managed in accordance with the principles set out in the . . . Constitution. The following requirement seemed. to be ” •w • .• almost essential:

    Requirements for Post Independence National Management

    (1) There must be a clear statement of the broad principles of a national forestry policy and it must take into account the respective ro!es of National and Provincial Governments;

    (2) The policy must be backed by appropriate legislation which will enable the government to

  • Page 85 of 247

  • implement the policy and which sets clear guidelines for the exercise of National and Provincial authority.

    .. .. .

    (3) Synchronised National anc Frovincial Forestry Plans must be drawn up and regu:arly discussed by both levels of government on an inter Jepartmental basis and updated. The plans must be cc ,sistent vith National Forestry Policy.

    (4) The plans should be broken dovn into detailed development programmes for implementation within each province over a (say) five year period. The programmes must be in accordance with short medium and long term National and Provincial plans a’ld policies. Planning should extend right down to the planning of each timber project and, ultimately, to the planning of the forest working operational plan.

    ..-

    (5) The policies, plans and progra mes must be based· on accurate estimates. of the quantity, quality and commercial viability of the forest res.ource as· a whole, • I • •, ” ·., ,•• o o • • and of each forest area under consideration.

    (6) Having carefully planned out in this way how the forest resource is to be managed, the National Government must then exercise firm control.

    (7) The control must be aimed at:

    {a) promoting orderly and planned exploitation for the benefit of the current landowners and the wider public. (b) conserving, replenishing and developing the forest resource for the benefit of future generations. This means reducing the damage …..

  • Page 86 of 247

  • ,r,. …

    caused during the perations, ensuring that sustainable yield management is practised I {in areas vhere 1t is intended that forests are to continue) and ensuring that adequate reafforestation is occurring.

    My preliminary inquiries and analysis indicated that none of those requirements for the rational management of PNG’s forestry resources exist. I then set out upon a study of the historical development of forestry policy in an attempt to ansver Term of Reference 4 c111u to define what is PNG’s National Forestry Policy.

    . .. . ..

    It involved studying the major written materials which would normally give a guide to government policy. These included the Constitution, the Forestry and other legislation and official statements of policy.

    Polle Conferencesi uring the course of that study the Commission convened several conferences on policy which ere attended by Ministers and public servants of several key departments. The aim of those conferences was to promote comrnunicat.ion bebo1een the Commission and between the various people ‘,,;ho should be contributing to the development of forestty policy. In this ‘Way the Commissio:1’s endeavour to define existing policy would involve all relevant persons and the benefits of the Commission’s own policy analysis woul6 be passed on immediately to government officials ,.ho had the wider task of formulating PNG’s futur, Forestry policy.

    An outline of the historical development of National _Forestry Polley ls included.as App ndix 1 in t e hope that it may assist thos .whp -a e stlll irivolved i !otm lating- appropr late pollcy. At the cone 1 usion of tl:a t out11 ne I formulated broad statements or postulates of the

    ;_

    (theoretical) principles oi: National Forestry Policies and more detailed implementation strategies ‘which are derived l

  • Page 87 of 247

  • from the documentary sources studied. My aim has not been to formulate what forestry policy should be (as that is outside my terms of reference). Hy aim has been to look at al 1 major documentary sources and to dra’J from them broad policy postulates (ie .,..hat policy …,ould appear to be from reading these major “governmental” statements).

    . .. . .

    I no., reproduce the broad policy postulates here in the text (‘without further reference to the so rces) as a kind of “policy platform” from which to examine the performance in practice of successive National (and provincial) governments. The policy postulates are consistent ‘Ji h, the detailed policy formulation of the 1974 White Paper and the 1979 Revison but I have taken into account also the attainment of Independenc and the introduction of .. Provincial Govern ent. The policy postulat s are. al&o

    consistent with, but

    ‘ fuller

    than, the most recent paper of

    “The Rene.,..able Resources Working·Group published as part of the Government’s Medium Terr;. Development Strategy 1989,-93 Vol 4: Forestry Subsector.

    BROAD POLICY POSTULATES

    1 WHILE RECOGNISING CUSTOMARY CUSTOMARY LAND ALL FORESTS

    GtrNERSHIP iILL BE

    OF FORESTS ON TREATED AS A

    NATIONAL ASSET TO BE CONTROLLED BY THE NATIONAL GOVERNMENT.

  • Page 88 of 247

  • 2. PROMOTE TIil!: ORDERLY EXPLOITATION OF THE FOREST RESOURCE WHILE AT THE SAHE TIME PROTECTING AND EXPANDING IT FOR THE.BENEFIT OF FUTURE G NERATION.S.

    3. DECENTRALISATION OF TkE FORESTRY INDUSTRY TO AN EXTENT I SUFFICIENT TO SATISFY LEGITIMATE DEMANDS FROM THE PROVINCIAL GOVERNMENTS FOR INVOLVEMENT IN DECISIONS AFFECTING THE SOCIETY, ENVIRONMENT AND THE ECONOMY OF THE PROVINCE.

    4. PROMOTE EQUALITY BETWEEN CITIZENS IN THE SHARING OF BENEFITS FROM FORESTRY EXPLOITATION AND STIMULATE THE ACTIVE PARTICIPATION OF PNG CITIZENS IN FORESTRY AND ASSOCIATED ENTERPRISES.

    S. THE GOVERNMENT TO ACTIVELY FIND TECHNIQUES FOR PROMOTING “PAPUA NEW GUINEA WAYS” AND PAPUA NEW GUINEA FORMS OF TRADITIONAL ORGANISATION AND SOCIETY AS AN INTEGRAL PART OF FORESTRY EXPLOITATION •

    • ,. • >

    . 6. STRICT. CONTROLS ON FOREIGN INVESTMENT IN THE TIMBER . INDUSTRY. TO STOP it.’·ATTAINING 0 A ·posI’1’ION OF DOHINAticE. TO THE EXTENT IT WOULD· COMPROMISE PNG’S NATIONAL INTEGRITY.

    7. THE STATE TO BECOME A PARTICIPANT IN MAJOR TI”!BER ENTERPRISES.

    8 TO ENSURE A FAIR RETURN TO LANDOWNERS THE STATE AND PROVINCIAL GOVERNMENTS FROM TIMBER ENTERPRISES.

    9 PROMOTE HEDIUM AND SMALL SCALE FOP.EST PROCESSING AND -i ASSOCIATED INDUSTRIES OWNED BY NATIONALS.

    10. DEVELOP LARGE SCALE PERMANENT FOREST INDUSTRIES INTEGRATED INTO A PERMANENT FOREST ESTATE PROCESSING TIMBER ND CTH R· ;OREST .. PRODU TS AND ·P.ROHOTE ON SHORE PROCESSING GENERALLY.

  • Page 89 of 247

  • –·

    $9

    11 INCREASE FOREIGN EARNINGS AND SUSTAINED ECONOMIC GROWTH BY PROMOTING LO,G EXPORTS.

    12 TRAINING DESIGN TRAINING PROGRAMMES WHICH ARE RESPONSIVE TO MANPOWER NEEDS OF THE GOVERNMENT FORESTRY AND FOREST INDUSTRY SECTORS.

    13 RESEARCH CONDUCT AND COORDINATE RESEARCH DESIGNED TO ACHIEVE NATIONAL FORESTRY POLICY REGARDING MANAGEMENT, UTILISATION AND CONSERVATION OF THE FOREST RESOURCES

    ASSESSMENT OF POLICY PERFORMANCE

    Policy Objectives 1 and 2 are best c9nsidered together.

    POLICI Y POSTULATES

    1. WHILE RECOGNISING CUSTOMARY OWNERSHIP OF FORESTS ON CUSTOMARY LAND ALL FORESTS WILL BE TREATED AS A NATIONAL ASSET TO BE CONTROLLED BY NATIONAL GOVERNMENT.

    2. PROMOTE THE ORDERLY EXPLOITATION OF THE FOREST RESOURCE WHILE AT THE SAHE TIME PROTECTING AND EXPANDING IT FOR THE BENEFIT OF FUTURE GENERATIONS.

    These two policy objectives contain three main concepts which should be fully discussed in the 1 i ght of what ls actually happening in practice. These concepts are:

    i) customary o)lnersh1 , ii) natf ha oni l and orderly exploitation. iii) protection and expansion of thes forest resource. for future generations

  • Page 90 of 247

  • These are really intended to be the basic concepts 1 behind PNG’s forestry policy and they are derived directly from the Constitution itself.

    CUSTOMARY OWNERSHIP

    Determir.ing who are the O’w’ners of land by custom is important when purchasing timber rights, Yhen appointing ay nts to represent the owners, vhen signing certificates of authority certifying that the signatories to Dealings :represent the true lando”Wner s and at a11 other ti mes when the interests of the owners by custom must be considered.

    In this regard there are two main areas of concern.

    Firstly what does “cusfomazy o ners ip” mean?. Rarely,

    ,. …

    if ev_er, ls there a thorough investigation into ..

    the nature

    of customary ownei::snip in a particular area. Is

    it· correct··

    to ·assume {as we now do) that all members o!: a customary land group must agree to, and sign, the purchase document or in some areas should agreement of a land chief be sufficient agreement if made on behalf of his or her people according to custom.

    The Forestry (Private Dealings} Act seeks to avoid this problem by the appointment of Agents certified by th,e Prescribed Authority as i:epresent ing the o’*’ners by custom.. This merely sweeps the problem under thP carpet as, on the evidence before the Commission, Prescribed Authorities ( in the fev areas where one has been appointed) rarely make an independent investigation into customary O’*’nership. The Author_i ty in each ca..se has been the Provincial Secretary and ·:1 .he simply signs •the . Authority ‘When it i.s p.resen. t. ed to hiin •.

    L

  • Page 91 of 247

  • For instance in the case of Tabar (IR No 4 Vol.2 App.2) and Napanta Nubui (IR No1 4 Vol.4A App.7 p. 67-8) the New Ireland Secretary signed documents prepared by the lawyer acting for the foreign timber company in a matter of minutes and without any investigation at all.

    A very z:ecent development has seen the position of Prescribed Authority being politicised by the appointment of a Deputy Premier (who is also a leading member of one of two d lsputing customary landownez: grcups). (See IR No 7).

    Secondly, when an attempt is made to gain the signature of all customary owners it is rarely obtainable as some are away and some refuse to sign. In most cases operations have nevertheless been allowed to commence. This often happens upon the delivery of a “letter of in•—, ” (to allocate) signed by the Hinlstez: or Secretaz:y. Of. the TRP is never· completed and yet Per. l ts have issued and opera io_ns have

    commenced and have been completed. Kumusi Timber Co. IR No.5 App.3, Vol.3 App.6 and SBLC IR No.6 Vol.3

    (For some examples see; Danfu extension IR No. 4 App.5).

    It is obvious that it is ntl policy that the rights of e.lJ.. landowners must be protected. Normal policy is to allow the operation to go ahead if 75 percent cf the owners ag ee. What legal rights the remaining owners who were not consulted, or vhose objections were ignored, may have against the government and/or the company has never been tested in Court.

    ….

    ..

    i I ,.

  • Page 92 of 247

  • ··:?:.,.. – —..,,.–. »: ….,.,

    G2

    NATIONAL CONTROL AND ORDERi,Y EXPLOITATION

    For the national government to control the orderly exploitation of the forest resource effectively, a j in the national interest, requires that at least the :ollo,.ing basic requirements must be met:- (1) clear policy aims (2) accurate knowleuy of the resource (3) proper plans (4) appropriate laws (6) monitoring and enforcement of conditions (5) honest independent leadership.

    ‘ .. . .

    The requirements of contr o1 and orderly expl o”i tati on are so crucial, and so obviously lacking, that they deserve consideration in some detail.

    (1) Pol°ic:y aims Alt”noi.ig ·· there is no. £1111 clear statement· f National Forestry Polic it has often been said that its basic aims must include these first two basic policy objectives now under discussion.

    i) orderly development/expl oi tat ion for immediate benefits to lando,.ners, governments and people; and ii) conservation and replenishment of the resource !or future generations

    (2} Knowledge of the Resource

    One of the first prerequisites is to have lrnovledge about the quan ity and quality of the commercially viable r source, provl.nc1. by··”rpvine .and area by area, so t}:lat areas, or even whole prov i nee:..:;, are not overcut in vays which damage or destroy the resource. The National

  • Page 93 of 247

  • ,,

    government should have an accu.rate, area by a.rea, forest inventory. It should have knowledge of the rate of growth of the major species in these areas so that it can determine how soon a logged over forest will be regenerated. It needs to know exactly what it means by the term “sustainable yield forestry” and be able to apply it to each forest area being considered because it is said that

    “The guiding principle for all forest development shall be sustained yield management”

    –..-..

    (“The Renewable Resources Working Group Paper 198

    …..

    The Commission’s detailed study of New Ireland and its brief study of Manus Province have convinced me beyond doubt that the National Government does not have this basic _kn wleO e o th timber resburce in these two proviqces; On the e·v idence given··at” p bi”ic. hearings· and” pbl icy conf”er n es and lrom my study of files and etatistics made available by DOF I believe that the figures included in the National forest inventory are similarly and gangerously unreliable. To compound this problem, because of years of neglect:.ng research into forestry matters, the Government is shamefully ignorant of the basle grovth character!sties of our ma:ior species. (See lR No 4 Vol 1 Sched land lR No 5 App. 4). Without this basic knowledge it simply is not possible to manage the forests according to sustainable yield principles.

    (c) P;oper PJans

    To ens re.. orde ly. dev lopment. and protec_tion of the future resourc · ir. ac· · I.dan e ·,with· National i:orest;y· Pol.lc·y :requires there to be a NdLlonal Forestry Development Plan which is cnnsistent with the clearly· stated National

    ,.

  • Page 94 of 247

  • Forestry Po1icy. Perhaps because the policy is nowhere clearly Plan. stated, there ls no National Forest Development

    Do ‘#e plan to red ce log exports trom certain provinces, to convert so many hectares of grassland to forest plantrttions? Do we intend {like the Indonesians) to abolish log xports in favour of plywood manufacturing? Is it our plan to work out, on an interdisciplinary basis and in conjunction with Provincial governments, total land use plans for certain areas deciding …,hich forests should be selectively logged and regenerated, vh i ch land should be converted to plantations and which forests ( if any) should be clearfelled for a more suitable· land use, such as an agricultural or cattle project?. Is there a plan to educate landowners about the potential benefits and dangers of a logging operatior1 and to E:repare them to be capable of prbtecting he interests of their environment and their· own •. . social and economic well ·being7 These · c. nd many other quest’ions sf,nuld be ansverable by reference to a continously updated Nat “‘lal Plan.

    To w”or 11p a National Forest:ry Development Plan would force our ofessional foresters, bureaucrats social and physical scientists and politician? to face and xesclve certain very basic issues. As implied by the Const i t-..:.t ion and Organic Law on Provincial Government the process of developing a creative and practical national forestry plan would have involve full co operation with the Provincial Governments and would encourage them to prepare compatible and matching provincial plans. The planning should include short, medi m and long term plans.

    65

    I At present there is only a National Forestry

    Development ·.Pr.ogra-e which m. e’ r. ely-

    .11.s. ts the a:reas. for

    allocation by name,· size and · volume and schedules · the timetable for allocation. Such a schedule for allocation should have come after the long term and more detailed

  • Page 95 of 247

  • medium and short tera plans had been thoroughly thought out and co ordinated. Before deciding upon the programme for allocating resources it is necessary to consider and provide for many social and economic considerations. These include things like the need for ensuring a continuous supply of resource to major towns and long term processing plants, the possible advantages and disadvantages for the road network of the area, whether the customary owners have been prepared for the project and a hundred other considerations. Some of these matters are undoubtedly thought about during the process of compi 1ing ,the programme but there is no predetermined and coherent integrated plan. .. .

    The NFD Prograaae 1987–1991· propose·s to aliocat- ove.r 4.5 million hectares of additional forest land to. pe harvested, mostly for log exports. The bottom line o:f the sum.has been written before the “planning” calculation .

    The planning must take account of the cur:tient constitutional and political situation which consists o a decentralised syste• containing national and provinc al governments. As a aatter of law and practice planning will not work unless the plans have been worked up in conjunct pn with, and taking account of, the legitimate asplra Lons. of Provincial Governments vhich, under the Organic Law .. on Provincial Government, exercise concurrent power , .over Forestry. Few provinces have developed a pro lnci l forestry plan but a11 should be encouraged to do so. ,It should be developed in close co operation with the National

    ,.. ;.;-··.::. . ..

    fo”T·ii·”;. • ‘•

    ,” ‘

    Government and should be in a cordance with national policy

    aims 1Jhich, Constitution.

    in tu,rn, must be in accordance with the

    With compatible and “Constitutional” plans in place at national and provincial levels the Minister’s authority will be immensely strengthened when he tries to resist the strong demands

  • Page 96 of 247

  • which frequently come from “foreign inspired” lando1Jners and individual politicians in the provinces. If demands for an unplanned LFA declaration are made, the National Minister …,ould be able to simply point to the Constitution which directs protection and vise exploitation of the resource and to the carefully prepared plans vhich are t uly based on sustainable yield management and genuine social·and economic considerations.

    He could the refuse tq make such declarations on the .. 9rounds. of “.national interest” and the Courts would. support him if he is challe ged . urider Section ·.a of the Fores try (Private Dealings) Act.

    The example of Manus is a good illustration of hov such a system of genuine national control, exercised in harmony with provincial aspirations, could work {and ho,. at this stage it seems not to have worked). The Manus Provincial Government is one of the few provinces which have a Provincial Forestry Plan (See I.R No. 5 App.4 Sched.1). This plan is compatible with both the Constitution and the scattered expressions of National Forestry Policy. If there Yas a National Forestry Plan the Manus Plan would synchronise well with lt, as it takes careful account of the kno1Jn size, quality and regrovth rate of the resource and the _social, eeonomlc and .envlron ental consequences and possibilities cif ·a. large· scale· logging. op.erat’ion in· t;he Manus island environment. The plan relies upon the establishment of a veneer mill from capital raised from a

    r . ‘.,

    three year, carefully co:-.’=.rolled, :o, y:::g operation and is desiged so as not to exceed the rate of cut which could be sustained continuously. The West Coast Manus TRP area had long been on the National Government’s list of priorities and all aspects of its allocatic:–. to a local landowner company, and of its contracting out the logging and marketing to SEAL Pty LLu, were handled well. At that stage there was close co operation bet,.,een the two governments. What was missing however vas a National Forestry Plan which would have planned to hold in reserve the balance of the island’s resource to ensure that the proposed veneer mill would be assured of a continuous supply of timber, cut at a safe and su::;Ldinable rate. This vould have been for the long term benefit of all resource ovners and of the Province (and therefore of the Nation as a whole).

    . ,. .

    Without such a National Plan, vhen two small landowner gr·oups!· bac ed· by determined and frustrated fo:reig_n timber . . . . . . … . . . . . . . companies, applied 1or t.he· declaration ·ot LFA ‘s over’ th’! balance of Block 1, the National Minister capitulated, saying that he £elt he had no grounds on

  • Page 97 of 247

  • vhich he could refuse. (See I R No.S App 4 and IR No 7).

    ….

    Another example is the unexpected application from the Gulf Province for the huge 187,733 ha. Tu:rama LFA. Thi! pressures from Provincial Government and landowners were S;Q strong that Acting Forest Minlste:r (and Prime Minister) Palas Wingti actually signed the LFA declaration but then, wisely, refrained from gazetting it. Forests Minister Horik then visited the area and, under great pressure, negotiated an agreement wl th the landowners and the Provlncia,l Government that a Permit vould be issued within (3) months • . …

    … . ..

    This was not in accordance with any National Plan and resulted in manpower being diverted in a desperate effort to I commence TRP procedures, sutveys and other essential 1-ork within the arbitz:arily imposed time fz:ame. The Permit “was issued on schedule but the process was, unavoidably, seriously defective.

    This drama occurred during the course of this inquiry and so a summary of the allocation of the Turama Permit is included in Interim Report No 7.

    The 11st of unplanned allocations which were rushed through with very serious consequences is very long. Some of these are reported upon in the various interim reports:

    . ,· ..

    Wawoi Guavi Timber Permit (IR No 5 App.1) Turama Timber Area (IR ,_No.7)

  • Page 98 of 247

  • G_oodYo.?d ‘s permit area· ( IR No.2 Part 2 App.39). . . ‘ •,. .• . – ‘Bruce Tsang’s operations at Kotmahse, oatsi “East Kaut TRP, Kabil area and Napanta Nubul. (all described in IR No.4 Vol.4 App.7) Danfu Extension (IR No.4 Vol.3 App.6)

    When the National Government is so often allocating resources as an unplanned reaction to pressures from the Provincial Govetnments, landowners and/or timber companies, it is inaccurate to describe the process as occurring under firm National Government Control or as orderly development.

    Project Planning

    When a project which has been included in the {non existeqti FQrest De elopment Plan s ready to be advertised a d implemen.te.d t:he··l) xt; i t -1 ·step should be ·to plan ·the project, deciding what benefits should bP achieved, for whom and how to obtain them. This will be a fine balancing act

    -: · ·····

    as the National Government, the Provincial governments and the landowners all have competing claims to share the benefits; depending bn the nature of the area and the needs of the people. The most desirable benefits could, in a particular area, for instance, be to insist on reafforestation or on clear felling for use in agriculture; in other areas it could be more beneficial to insist on local processing, which could be designed so as to provide job and associated business opportunities. Some projects mc:ty be situated in areas vhere it would be sensible to insist on the construction of a section of the national or provincial highway system.

    To plan the project, of course, requires very accurate knowledge of the value of the re .ource and the · cost of extracting it as, without this knowledge, it is not possible to assess the value of the “benefits” which can be extracted fzom the project.while still leaving the company sufficient ·.. · • … profit to encourage 1t ‘to··. take the r:isks·involved.

    To decide upon the desired conditions and how to divide them between the three legitimate claimants requires full consultation between relevant government departments. Thus the Department of Lands must be consulted and be fully and effectively committed to making the necessary land available for such purposes as re-affurestation and urban development, the Department of Works must be fully involved to ensuz:e that any roads, highways and bridges are as compatible as possible with National and Provincial plans and design standards. One consideration which must of course be taken into account is the future road maintenance costs, as the country-side ls presently despoiled in timber areas by deterior ting roads which Provincial

  • Page 99 of 247

  • Governments have no

    ….’I’””’•’

    -. – ··

    70

    funds, and sometimes no desire, to maintain. Quite obviously the package of benefits to be ‘w’ritten into the project plan requir s the tullest possible consultation and co operation with the relevant provincial government.

    The next Lequirement to get a project off the ground is to negotiate “With the successful applicants to obtain the desired conditions and (importantly) to ensure that the applicant is capable of fi:.lfilling them and is not merely making vild promises in order to “vin” the concession. If no applicant measures up to the project requirements the concession should not just be let out to the highest bidder.

    This has frequently been the case and Permits have been issued ..,hich bring in pathetically small returns ·to the landovners and provincial governments merely to get· a project started aHd some 1€vel of revenue ‘flowing. In many cases i·t vould· ave been “better simp y to postpone. the . ,· .. ··allocation, as. many tesoutces have how been exploited• £err· very ·small returns to the lan9ovners or the government. Examples are Wava i Guav i and Kumus i Timber areas (IR No. 5 App.1 and 3 respectively).

    Once the cond itians are agreed upon it is essential that they be incorporatec in binding legal documents (Permit

    Conditions, Dealings and ‘1ther agreements) in bind the concession holder and its contractors.

    ways vhich It is not

    sufficient to merely issue a “letter of intent” which, under the existing legislation, has no binding effect. It is not sufficient to phrase key conditions as merely requiring Q feasability study or to

  • Page 100 of 247

  • vrite-in qualifying clauses sucn as “if it seems desirable to the company”.

    Constitution. It is a serious challenge which needs to be resolved in the Supreme Court as soon dS po ::;l!Jle. {See P.Donigi “The State nd Property Rights in Papua New Guinea” (published in abbreviated form in “The Times’ of PNG July 1988).

    In the middle level of the legislative framework is the Forestry (Private Dealings} Act Ch No.217. This was enacted in 1971 and introduced a serious inconsistency into the law. It granted customary owners the right to make private dealings with non citizens, thus providing for exploitation of the forests, to some extent, outside the National Government’s controlled planning or programming process. The way the Act has since then been administered by successive Ministers and the DOF has resulted in an unnecessary abdication of National authority over allocation. of resources and also an unnecessary withdrawal by the DOF fro the monitoring and supervisory· role of national nd provincial·fotesters. (See full discuss on in IR No 4 Vol.1 p. 35 et seq).

    At the bottom level of the legislative framework there simply is no law to control the exploitation of rattan cane and timber harvested {for export) under Native Timber

    Authorities. There is now a large logs occurring under the authority to Forestry Regulation 17. The intended to allow sale of timber metres for domestic purposes such station or trade store.

    export trade in cane and of NTA’s issued pursua t regulation was clearly not exceeding 40 cub != as building a mission

    Under the specific written (but illegal) authority of

    former Secretar. y of. Forests .Mamala. i, NTA. ‘s

    or multiple NTA’p .

    are being ·issued to· harvest up to 5000 unlimited quantities of rattan cane.

    m3 of logs a d As the Act1 g

    Secretary said on oath “the situation is nov total chaos”..

    The administration of the Forestry Private Dealings Act is no-1 right off coIurse. In Ne-1 Ireland there has been, in effect, a trade in LFA declarations -1ith a corrupt former Premier

  • Page 101 of 247

  • recommending approvals for cash returns and excessive use of LFA allocations. It has contiibuted to the destruction of the New Ireland forests. Elsewhere huge areas have been sought as LFAs (eg the 187,733 ha LFA in Gulf Province and a 400,000 ha LFA application in East Sepik. In other areas LFAs have been declared for the benefit of small local pressure groups at the expense of longer term Provincial and/or national planning (eg, the lower Sepik LFA and the Jaha LFA on Manus Island (IR No 5 App 4 and at p 6 0 above) . Both these current matters are summarised in Interim Report No 7.

    The fact that the legislation is so inappropriate to coP.e with existin situations has led the Secretary and his officers to step outside the la-1 and to. lead others al mg that diverging path towards further la..,lessness. When t.h!? Secretary is advocating procedures which dLe cleazly illegal there is no standard left for junior law enforcers to follow (but there are then precedents to which timber companies can refer when promoting or justifying their own illegal activities).

    A clear illustration of how the “extra legal” system has been working is in the Kabil Timber area in New Irelanq. In that area Bruce Tsang’s company Sakai Management Pty Ltd having made a defective and unsuccessful application for an LFA declaration, proceeded to log the Kabil area until it cut out. He then applied for Timber Authorities to be issued (after the event) to enable his company Sakai Management to b granted· a licence to export ·the logs;, This vas issued, illegally, at the ex ress direction of Secre ary Mamalai “‘ho overruled his own officers who were trying: .to

    enforce lhe la and seize the logs as illegal forest produce (….,hich they undoubtedly …,ere). In the process of Bruce 1 Tsang’s illegal, but officially sanctioned, operation the lando…,ners were cheated, the resource was badly damaged and the moral and legal authority of the government was seriously undermined. (IR No 4 Vol 4A App 7)

    Other examples which illustrate this willingness of the government to not only tolerate illegal operations but also to act outside the lav itself inc 1 ude the many instances where operations were allowed to commence on the basis only of a “letter of intent” signed by the Minister. These include:

    i) Kumusi Timber Area (IR No 5 App 3) where no Permit was ever issued and the operation has now been completed with.· ser lous injustice being caused to landovners. {The government vas a major shareholder in this enterprise). ii) The Danfu Extension TRP where the daisho Company ‘.,iau allo…,ed to operate on the basis of a mere letter of intent despite the fact that the purchase of the timber rights ver not completed and a substantial number of landovners were refusing to sign (IR No 4 Vol 2) iii) Wavoi Guavi Timber Area. The foreign owner Wawoi Guavi Timber Company operated for two years on the sole basis of a letter of intent (IR No 5 App.l)

  • Page 102 of 247

  • I ..

    Stettin Bay Lumber Co Probably the most surprisi g “illegal” operation is that of the SBLC in West New Britain in vhich the National Government holds a 17 percent interest (formerly a 25 per cent interest). This subsidiary of the massive Nissho Iwai Company of Japan has conducted a multi million kina enterprise for seven years on no legal ba_ i,s vhatsoever. It was granted a letter of · 1nte-nt , .and permission to commence operations at Stettin Bay in September 1982 (vhich superseded its earlier permit;s).

    Despite its increasingly desperate endeavours to formalise

    the situation, SBLC

    was not granted a Permit and received no I

    formal documentation until a eventually signed in early 1989.

    Project Agreement was Even now no Perrni t has

    issued and so SBLC has no legal authority to log. Meanwhile this “illegal operation” has exported about 240 000 ro3 of logs and processed about 40 000 ro3 of sawn timber per annum. SBLC is committed to invest K75 million to plant up 22,500 ha of forest plantation and its capital expenditure by 1987 already exceeded K44 million (IR No.6 Vol.3 App.5).

    (5) Honest independent leadership The Commission’s inquiries have disclosed many instances where the National Minister for Forests and/or the Secretary DOF have failed to exercise control of the allocation process on behalf of the nation. This failure occurs whenever the Minister or Secretary is manipulated by an interested party and is tricked into making a decision biased in that party.’s favour. Faiiure of Na.tional Governm ul control also occurs when a M!.niste:r: or Secretary consciously favours a particular party who provides benef1ts to him personally or to his political party. In those cases the Minister is abusing his authority and not exercising control on behalf of the nation. Instances where the Minister and or Secretary have been manipulated by outsider include:

    i) Wawoi Guavi where Toms of Straits Engineering and Cowan of the FIC by passed DOF and manipulated Minister Diro when he was setting the operating conditions on WGTC. (IR No.S App 1). ii) Vudal It occurred in the Vudal allocation here Ward. of Weco, work.ing through Cavan and. Haraleu .· of the FI_C, tr’icked Mr Diro into f h:st evok irig hi,s.

  • Page 103 of 247

  • decision regarding allocation of the Vudal TRP .an then persuaded him to abdicate his decision-making

    role, by appointing FIC chairman Maraleu (who was also consultant to Weco) to decide the issue between W co and a rival comp::rny – Timbersales. The permit, naturally, was allocatcu to Weco. (IR No.3 Vol.! pp.50-52) I consider this to be another indication that National Control over forestry matters wavers frequently.

    iii) Angus A exercised

    further example of control not being on behalf of the Nation occurred when

    Minister Diro made a s r.ies of decisions favouring Angus (PNG) Pty Ltd in which company he secretly held 35 of the equity. (IR No 2)

    (iv) Gasmata Resources where Mr Eng obtained pre

    registration for Secretary Mamalai. his company (IR No.7) by bribing DOF

    (v) ·santa Investment paid more· than XS0,000 for electoral campaign materials for Minister Paul Torato. (IR No.4 Vol 4A p.91).

    Many other instances are mentioned in the various interim reports.

    With regard to Minister Diro’s close busines involvement with Hr Eng of Gasmata Resources at a time whep Eng was seeking various approvals from the Department of Forests I have given Hr Diro the benefit of the doubt a,s there is no conclusive evidence that he made Ministerial decisions favouring Mr Eng which were related to the benefits he vas receiving from Eng personally, for his political party or on behalf of the people. of Central , Province. ( See_ sectlon·sand Interim Report·N .7)

    77

    Whenever the Ministet: or Secretary, wh.:se jobs are to decide and implement government policy, steps off the

  • Page 104 of 247

  • 1

    straight path, for whatever reason, the ‘wider control” over forestry begins to waver.

    “government When vested

    inter ests take control of the deeision maker by trickery1 flattery, bribery or campaign contributions the Government of PNG begins to lose control over forestry.

    {6) Monitoring and Enforcement of Conditions

    Let us assume that the well planned project, approved in accordance with the carefully conceived forward planning, has commenced to operate ln accorcance with the leg lly binding conditions of the permit and/or agreement. To ensure that the National government’s control over the exploitation is effective it is necessary that the operation· be. carefully and trictly monitored. Monitoring •ust include supervision and enforcement of obligations regarding such matters as infrastructure, logging practices, environmental protection, social and economic development, feasability studies, marketing, and the the payment of aJ.1 royalties, duties, levies and taxes. It is also necessary to monitor compliance with approved forest working plDns and conditions, about local processing levels and approved levels of cut. Without exception, the supervision of these conditions, in every one of the many projects studied, has been found to be very serioQsly inadequate.

    This serious inadequacy is due to a variety of factors:

    (a) Monitoring staff:

    i) Decentralisation of the field services and iemoval from National control has proved to be an

    78

    organisational the Minister

    nightmare. Having no and Secretary cannot I

    central authority direct, control,

    administer or discipline provincial (seep 50-51 belo..,);

    monitoring staff

  • Page 105 of 247

  • ii) Staff numbers are totally inadequate. The National Forest Development Programme approved by the NEC in August 1988 accepted that the monitoring service r/as 107 officers beJ.o.., required strength despite the fact that the rate of resource allocation was rising rapidly. ( See IR No. ·1 Vol. 1 Sched. 1)

    iii) Lack of funds and transport. The shortages witnessed by the Commission ..,ere drastically severe and in some provinces had almost brought all monitoring to a stop. In Oro Province for instance Ambogo Sawmills Pty Ltd was openly supplement 1ng the Forestry Office funds and ma·intalnlng its vehicle so that it could carry out the essential functions req ired for Ambogo’s own operations (IR No.5 App. 3). In Namatanai the te 1ephone vas disconnected for non payment of account and in some other offices the forest inspectors ‘Were largely dependent on the major timber company fo transportation to and from the logging operation.

    iv) Inexperienced officers: Most of the officers doing the field work are young and have little practical experience in logging operations. They do not have the con£ iclern:e or ‘w’ill to stand up to the companies’ tough logging bosses. Having never seen an excel 1ent and responsible logging opera t 1on they seem hardly able to even see the recklessly caused damage surrounding t em; let alone to rectify it.

    79

    v) Lack of support: When clear breaches of conditlons I were reported to headquarters there were m riy i_nstances ,..here· the yo,mg . _off leer’s correct rec·ommendations : were ·· qverruled by .. the. Hlnlater· . or· Secretary who then directed the continuation of the operation, the issue of the permit, the recommendation of the export licence or refused to direct seizure of illegally cut logs. This lack of firm support from the top has undermined the morale of national and provincial Forestry Services.

    Examples of this lack of support include: (1) Angus PNG Pty Ltd IR No,2 where Minister Diro directed the issue of a permit against sound deparmental opposition; (11) Kabil Area IR No.4 Vol.4A pp 28 where Minister Diro overruled his Acting Secretary and directed that recommenation should (wrongly) be r given· for··the issue ··of ·an’ export 1.icens·toS kai · Management; (iii) Danfu Extension IR No.4 Vol.3 App.6 pp.17-23 where Minister Waka (under pressure from Sir Julius Chan and landowners) overruled advice of DOF and the State Solicitor and issued a letter of intend before the TRP had been completed. It resulted in Court action.

    (vi) Lack of committment: Many officers demonstrated a serious lack of committmP.nt to their work. Very few seem to have a sens of belonging to a professional forestry service ,and their personal appearance, work attendance and efficiency levels were low.

    L

  • Page 106 of 247

  • ‘. II

    One has only to read the history of unfulfilled conditions, unsupervised logging and loading t operations, unpaid royalties, undetected transfer pricing, broken promises and severe environmental damage set out in the Commission’s Interim Reports to realise that the monitoring system is not working and that existing controls exercised by provincial officers, or directly by national officers, are very veak and, in some cases, almost non existent.

    (Al1 aspects of the monitoring system are exhaustively discussed in IR No.6 Vol.l).

    (b) Perait Conditions not adequate

    1) Conditi ns to protect the environment are not project·specific.··They are far too general a they ar expressed, usually, as standard conditions to – be included in all permits. (This situation hds improv.ed in recent months as the Minister for Environment and Conservation has at last begun to require Permit holders to submit detailed environmental plans pursuant to the Environmental Planning Act. This has begun to happen since the matter was discussed at policy conferences organised by the Commission. The conditions on environmental protection vritten into timber permits and agreements however still need to be tightened up and made compatible vith these Environmental Plans. Alternatively (and preferably) the conditions in the Environmental Plan should be deemed to be conditions of the Permit. ossibly all Forest In pectors ·could be given dele·gated a.uthor. ity under the Environmental Planning Act in addition to their powers under Forestry Legislation.

    ,1;..•

    ii) Forest Working Plans are not yet required to be I sufficiently specific although, again, this situation has improved since the Commission’s policy conferences dealing with logging practices and monitoring. Some of the practices recommended by the FAO Research team, a member of which attended the conferences, have been written into the Vanimo Forest Products’ Forest Working

  • Page 107 of 247

  • Plan (FWP). More typically ho-wever the FWP ls a sterile and unhelpful document ‘;l’hich, if submitted as required, often fails to gain DOF approval. Almost universally, however, operations have been all owed to continue despite the fact that the FWP has not been given approva1. The cease York order imposed upon Vanimo Forests Products (partly) for failing to present a FWP in the form required by the Permit, which occurred during my visit to th Vanimo Timber Area, is probably the· only case so far where DOF exercised this potentially useful form of control over a timber operation. There are many examples vhere operations continued with no approved FWP.

    One of the fe-w companies that regularly updates it FWP and submits it every three months as required, is the Stettin Bay Lumber Company. (Perhaps this ls because it is about the only legal document which shows it is operating with government approval, as neither Permit nor Project Agreement had been signed. (IR N0.6 Vol.3 App.5)

    At this stage 1t has not been decided vhat logging procedures should be insisted upon. There is disagreement whether the condi ions recommended by the FAD Research team are practical arid economically viable. The team says that there should be a one hundred percent inventory of all bole sized trees in a cutting coup and that the vhole loggi,.ng

    f . L

    set-up should be ;,re marked Gi1 the ground by an appropriately trainee professional l,.orester. Luyging roads I and snig tracks shc..:ld be mapped and marked with plastic tapes as a guide to the bulldozer drivers and their width pre determined. Tho: FAO team reccmmends that all loading ramps should be simi:arly marked and that thei should be of minimum size and number. It recommends that trees to be cut should be marked witr. an arrow indicat.ln the direction of fall, so as to cause the least possible damage to residual trees and to facilitate the task of snigging the logs O’}t without causing further damage. The FAO team further recommends that residuals to be saved should also be marked appropriately and that, after logging is completed, the coup should be immediately luspected by an officer to estimate the damage which has been caused, and this should be costed out at the company’s expense. (See IR No.5 App.2 pp.24 et seq and Schedule 4 for a discussion of the FAO research on whiFh these recommendations are based).

    I feel that the question of what pre logging, logging and post logging standards should be applied must be decided as a matter of priority. To help obtain the data upon .hlch that decision should be based a requirement should be written into new agreements that suitable experiments must be carr led out, under strlet gover naent supervision. Reputable companies conducting existing operations could probably be encouraged to assist also.

    Whatever standards are to be set there should be a post logging assessment of damage

  • Page 108 of 247

  • immediately after logging i_s completed in each cutting coup and before cutting commences in the next coup. The Forest inspector should be able to simply note the daaage and calculate the mone.tary damage compensation to a pre set scale. The damage assessment

    ! ‘L

    ”:

    should then be delivered to the Company’s bank where the sum would be automatically dra•,m aqainst a replenishable I performance guarantee which the company should be obliged to establish with its bank.

    To introduce any of these remedial measures will require the companies to be far better organised, with coups clearly marked, and Forest Inspectors to be far more closely involved in operations in a meaningful way than at present. But this should be a minimum requirement of any controlled and well ordered system.

    PROTECTION AND EXPANSION OF THE FOREST RESOURCE FOR FUTURE GENERATIONS

    The inability of the National Government to protect the exi ting natural resource by administering firm control over the allocation process, according to p:roper plans and by carefully monitoring and controlling the harvesting operations to prevent overcutting and unnecessary damage to residual trees, has been described above. It is also illustrated throughout the various interim reports.

    Another way to protect the rights of future generations is to energetically pursue a policy of stimulating natural regeneration after logging has been completed and to promote and enforce an enlightened policy of reafforestation. It is quite obvious from my inql·1iries that this policy also has been sadly neglected.

    Natural Regeneration

    An FAO research team has been conducting very useful experiments on improved logging practices and forestry management. Field research plots “1ere recently set up in the Wawoi Guavi and Vanimo Timber }.reas and their methods and results are reported upon in IR No.5 App.1 and 2.

    Except for this research, being carried out by an outside body, there is really no sign that government policy takes the process of stimulating natural regeneration very seriously. Standard

  • Page 109 of 247

  • conditions requiring good silvicultural practices are written into the conditions of most operations and the conditions often mention technical words relevant to this silvicultural practice (such as “enrichment planting” and “in line planting” but nothing is expected to be 1one and nothing is done. Occasionally a forest inspector, confronted by a very bare and rosion-prone,. aband ned loading ramp may direct that suitable species should be planted to cover it. It .ls very doubtful if this is ever done or, if so, ihether the young trees would havE’ any after-care. I have seen no sign in thf; inspection r ports that such directions are ever follo”Wed up by the forestry officer nor that breach of such silvicultural practic conditions should be used as the basis for formal directions to an operating company.

    Reafforestation

    The main examples where reafforestation ls being carr led out systematically and on a large scale are at Stettin Bay Lumber Company, Open Bay Timber Company and to some extent Jant . Pty Ltd. . These are large companies .’!Ii th substantial processing coaml ttments. SBLC · has · planted approximately 3 700 ha and plans, eventually, to plant 22,500 ha. (See IR No.6 Vol.3 App.5 for a full report on : I

    ,:·” – —·, .·

    SBLC’s plantation programme. This is the largest reafforestation project. Open Bay has planted 2100 ha and I is on schedule with the requirements of its permit. It is obliged to plant 14,000 ha. The current planting schedule is 900 ha p.a. Jant has planted 3720 ha. and is frustrated from further plantings because of the government’s inability to make land available. This reafforestation is being carried out by Gogol Reafforestation Co Pty Ltd which ls a joint venture involving Jant (51% and the State (49%).

    ” I

    I examined Jant’s plantations briefly and was disappointed that the nursery was an amateurish affair which looked neglected and almost empty. Management compla lned that its planting programme had come to a halt because the government had not been able to ma,;e State land availabl for development as plantations. I was also disappointed that Jant had made no progress

  • Page 110 of 247

  • stimulating local agr.o? forestry projects except that one local landowner (and former Jant employee) had been helped to plant a small plantation underplanted with cocoa. The potential for promoting the development of such plots with Jant undertaking to harvest the timber and process it through the chip mill at a later date seems g0od but neither Je1nt,, a forestry extension unit or the local landowners a:re generating much enthusiasm for agrc forestry projects.

    SBLC’s reafforestation scheme is described in IR No 6 Vol 3. Although it is the best in PNG the visiting World Bank team confirmed my vie that it could be lh.J:Kh better and more scientifically progressive if the company’s heart was really in it as a long term project on secure title land. (IR N0.6 Vol.6 App.5).

    Open Bay T.imber Company’s reafforestation· project ‘llas not inspected.

    The other timber operations are sometimes bound by conditions requiring reafforestation but in the majority of I cases these have not been carried out. Often the reason is the Government’s inability to make suitable land available. Vanimo Forest falls into this category (See IR No.5 App.2) as does Tonolei Development Corporation (See IR No.6 App.9) Other than the three companies mentioned no other company is carrying out any significant reafforestation programme.

    The National Government’s own plantations were handed over to Provincial Government control after Independence and they rapidly began to run down. Provincial Governments are reluctant to spend money or manpower to maintain plantations and are not taking this matter seriously.

    The 1979 Polley was to impose a reafforestation levy on companies instead of obliging them to carry out the process itself. If the· government ls collecting this levy -it certainly ls ·not being sed in reafforest tion. (At public hearing in the last days of the Commission Forests Minister Stack indicated that in recent months the levy ls being collected).

    Not only is there little reafforestation occurring on the ground (none at all in New Ireland for instance except for Leytrac’s small balsa plantings and a small Nev Zealand aid pilot plot – (both described in IR No.4) only but there is no clear policy position on reafforestation. If, fo·r instance, it is now intended for the government to establish and maintain the plantations where are the plans, what sil have been chosen, vhat species, methods, staff and funds will be used? It is not clear whether plantations should be

    established on lo_gged over .

    land to build up a.replacement

    forest in that rea or whether other land with easy access to a sultable deep water loading point should be chosen.

  • Page 111 of 247

  • 1 L

    , I . ….J

    I

    ‘;.’he feasabilll,t studies and planning for a government or private sponsored plantation/processing operation have not been prepared.

    Proper logging practices, unde:i:: firm supervision and control, followed by appropriate post logging assessment and after care to promote natural regeneration, would go a long vay to preserve existing natural forests for ruture use and enjoyment by later generations.

    f The establishment of integrated plantation/log export/local processing ventures would also take the pressure off the natural forests and, vould be more economical in the long run. They could be planned in such a way as to bring greater benefits for the people and government uf Papua Nev Guinea. 1

    The avallal::>le · evidence indicates that not roµch attention,’ effort or funding is being given to the· policy principle of protecting and expanding the forest reso trce for the benefit of future generations.

    SUMMARY At the conclusion of this discussion on the first two principles of policy it is worth restating them as I believe they really are the basic principles which should underlie the national forestry policy.

    1. While recognising customary ownership of forests o.n customary land, all forests will be treated as a national asset to be controlled by the Nation l Government.

    ;’.·· .1

    :•’

    88

  • Page 112 of 247

  • 2. Promote the orderly exploitation of the forest resource while at the same time protecting and expanding it for the benefit of future generation.

    It should be a cause of major concern that the findings of this Commission show that these basic principles are not being observed in practice. My findings on these two policy principles can be summarised as follows :

    1. There is no clear national forestry policy – not only no coherent statement of it but no overall pollcy;

    2. There is no National Forestry Development Plan (long, medium or short term).

    3. There i very little effective project planning:

    4. The accurate knowledge of the quantity, quali,ty., accessibility, commercial viability, and growth rate characteristics of our Forests does not exist. To base

    allocation programmes

    on the

    “knovledge” ‘tie

    have, in

    the planning vacuum disaster..

    which

    exist:s,

    is to

    invite

    5. The Forestry legislation is ouluated and quite inadequate to provide a control mechanism to govern forestry in post-Independence Papua New Guinea.

    6. Such legislation as exists is frequently ignored and contravened by Ministers and Secretaries t ; Forests and, of course, also by the lower ranks and th timber operators themselves. This is part y du -to· its inadequateness and its inappropriateness

  • Page 113 of 247

  • ·:r;– “•

    89

    7. Though the policy is based on recognition of the rights of customary owners of the forest resource, in I many instances ,,,,e take little care to determine who the owners are and whether all, or all the customary leaders, agree to the purchase and or planned allocation of timber rights. The benefits to those owners after the operation commences are almost lvays unjustly low.

    8. Since the understaffed national forestry service was “decentralised” there has been no effective forestry service. The monitoring and control of field operations is consequently very inadequate and it is getting worse as the rate of allocation increases with no corresponding increase in staff.

    9. As a result of these various defects in policy, planning and’implementation, what has been happening-to . . . the nat 1 ona1 forest resource cannot be deser l bed as orderly development.

    10. In view of the huge increase in log exports, the lack of control over logging operations and the insufficiency of reafforestation and national regeneration practices it cannot be said, either, that the forests are being effectively protected and expanded for the benefit of future generations.

    71

    These obvious requirements for exercising national control over forestry, so as to ensure orderly exploitation for the benefit of present and future generations, are easily stated. My inquiries however have uncovered so many practical instances where some, and sometimes all, of these requirements are missing that I have concluded that there is little effective national control over what is occurring. There is no clear policy, no accurate knowledge of the resource and no proper planning. In these circumstances how can national control possibly be exercised effectively? The next requirement for exercising effective control is the ability to enforce the government’s will as a matter of law.

    (d) Appropriate Laws Armed with clear policies, accurate knowledge and firm plans, the Minister would then require appropriate· le islation to enable him to keep order in the tiMb L industry and to enable him to enforce the policies and implement the plans. Once again, however, this weapon, also, is lacking-and se;iously lacking.

    Since 1974 the need to revise and consolidate the Forestry Legislation has been recognised as an urgent nece slty but, despite sp cific directions from the NEC and annual “budget time

  • Page 114 of 247

  • promises” from the DOF, the pre independence legislation is still in force. As mentioned above, the situation has been seriously worsened since Independence and the enactment of the Constitution and provincial government legislation.

    At the top end of the legislative framework the Yhole basis of the National Minister’s power to restrain unauthorised exploitation of the forest res6urce· by its customary owners has been challenged as an interference with their property rights in contravention oi Section 53 of the

    /

    POLICY POSTULATE

    3 DECENTRALISATION OF THE FORESTRY INDUSTRY TO AN EXTENT SUFFICIENT TO SATISFY THE LEGITIMATE DEMANDS FROM THE PROVINCIAL GOVERNMENTS FOR INVOLVEMENT IN DECISIONS AFFECTING THE SOCIETY, ENVIRONMENT AND THE ECONOMY OF THE PROVINCE.

    Legitimate Rights of Provincial Governments

    There is no question that Provincial Governments have a legitimate right to be involved in forestry policy making and implementation.

    They have responsibilities for the economic and social well being of the province and for provincial planning. The decision whether to allocate a large forest project, and on what terms and to whom,. wi 11 have major repercussion 0,1· the economy, environment, social cond.’.tions, road network and (because of royalties and derivation grant) provincial revenue. It will also directly affect provincial expenditure as it will increase the workload of the provincial forestry office and its demand for funds and transport. It could also have a substantial indirect affect on future road maintenance costs as a forestry project will create roads, whether desired by the Provincial Government or not, and unless they are important “National roads”, their up-keep will be the responsibility of the Provincial Government. A forestry project will also create other demands on provincial government services in the fields of ielfare, law and order and business development.

  • Page 115 of 247

  • L_

    The Recognition of Provincial Govgrnment Rights

    The need for provincial involvement was recognised and provided for by Constitutional Amendment No 1 of 1976 which provided for the establishment of the system of provincial governments and by the Organic Law on Provincial Government under which Forestry was declared to be a concurrent subject matter with authority being shared between National and Provincial governments.

    After the decentralisation of Forestry was provided for in this way under Constitutional Laws the next steps to convert this ringing pronou cement into an effective policy of decentralisation, and to implement l t in practice as regards forestry, should have been to make provisions for:

    (a) Analysis of Government Functions:

    It was nece·ssai::y

    to list and analyse all governn.-ent .

    functions involved in forestry. Such a list would include such functions as:

    1) compile and update an accurate inventory of forest :resources;

    ii) i 11)

    formulate and update national forestT.y policy. prepare long, medium and short term national forestry plans for the management of Forest resources in accordance with the national forestry policy.

    iv) prepare long, aedlum and short term provincial plans for management of forest resources in accordance vith the national forestry policy and conslstent wlth the National forest development plan;

    .

  • Page 116 of 247

  • v) Carry out research into the characteristics o:t Lhe major forest species, ( including such things as rates of growth, suitaJility for processing), forest management, logging techniques, aforestation, agxo-forestry, integrated land use techniques, social and econo1r.ic factors relevant to forestry, marketing of forest products and various types of processing. vi) Training at all levels from professional degree courses to short inservlce courses on specific skills and village extension work; vii) Allocation: Community awareness campaigns, purchasing timber rights, prep ring project guidelines so as to ensure appropriate benefits are obtained by State, provincial government ,nd resource owners, evaluating applicants for concessions allocating concessions, negotiating conditions of permits and project agreements; viii) Monitoring ciperations: i specting logging practices, directing improvements, checking species identification measurements and gzades, inspecting road works ani construction of infrastructure, monitoring compliance with conditions, checking log returns, royalty payments, loading operations, issuing permits, stopping illegal operations, assessing da ages and hearing lando ner complaints.

    i X)

    Marketing: checking FOB details, exercising State

    prices and shipping Purch se Option and

    arranging overseas log sales. x) Communications: Liase and co operat.e ‘*’ith all other relevant National government departments and agencies. includ.lng Lands, Environm nt, Works, Bureau of Water Resources, liase vith prov’inc:lal governments on all aspects of planning and allocation and monitoring of forest resources.

    I L

    This list is by no means comprehensive but wheP. it is I compiled in sufficient detail, it becomes apparent that any process of dividing the functions bet een national and provincial governments must be done ith extreme sensitivity as each function requires a contribution from both levels of government and both national and provincial governments have an interest in the performance of each function. Fo instance compilation of national resource inventories and research into forest species may be considered primarily a function of the National government but provincial government staff and provincial resources will be used in the process. If the function is not carr icd out, or ls carried out badly, the forests and people of the provinces will

  • Page 117 of 247

  • suffer. Similarly monitoring of timber operations may be considered to be primarily a provincial government function bul Lhey …. 111 be monltorlng conditions imposed by the National gov rnm nt and the recommendations of the f eld staff vlll (usually) be implemented by an order given by the National Minister.

    Granting a permit to exploit a major forest resource may well be done by a decision of the Nqtional Hiniste:r but the major social, economic an environme11tal effects will be felt in the province and many of the government actior:s “‘h i ch w i 11 f lo’w fr om the pr o j e c t ·w i 11 be r e q LI l r e d o £ the provincial government.

    It follows as a matter of inescapable logic and from pract i ca 1 ne c e s s i ty that, i f author i ty over .: or e str y l s t o be exercised concurrently, and therefore shar d between National and provincial governments, there must be the utmost degree of shared lanning and co-operation between them.

    (b) Consultation : A first step therefore to decentralisation wbuld be to

    implement ‘r/ork out

    a policy devices

    of for

    consultation

    between the t…,o levels of

    government. One

    obvious ‘way interlocking

    to achieve this planning programmes.

    would Th.is

    be to introduce ‘would encourage

    national and provincial officers to woi:k together on the National Forest Development Plan and the

  • Page 118 of 247

  • various Provincial Forest Development Plans so that all voices are heard and all aspirations and requirements are taken into account. Nothing else makes sense.

    Cc) Reallocation of Staff The reallocation of staff needs to be done in a way ‘1 which enables the National Policy and the National and Provincial Plans to be implemented by a unified an1 professional forestry service under a central command structure but responsive to the requirements of both National and · Provincial” governments. I·t needs · to· be a forestry service with adequate opportunities for promotion and suitable postings and which gives a sense of job satisfaction to its officers.

    Bureaucratic decision making at provincial level ne ds to be handled by experienced senior professionals with access to higher promotion and improved job opportunities within the province or elsewhere. Decision making at National Headquarters needs to be carried ,’)ut by officers with extensive field service. They need also the satisfaction of knoving that there is aulhority to ensure that decisions are carried out. They will need, however, to be trained in the arts of discussion and co operation and there must be a formalised structure to ensure that they axe responsive to political direction not only from the N_otio.nal Minister but also from Provincial and/or reg:onal politicians.

    (d) Substantive Authority: I If decentralisation is to be meaningful then one would expect to find that power of decision over some substantive matters would be devolved or delegated to the provincial or regional level vhere Provincial Government can participate effectively in the decision making. The participation in the decision making process can be a mixture of full and effective consultation together with final power over some matters.

    (e) Funds: It goes without saying that decentralisation cannot occur effectively unless sufficient funds are made available to Provincial Governm nts to enable them to exercise the powers and carry out the functions given to them.

    PERFORMANCE OF DECENTRALISATION POLICY

    Once again the actual performance of this so policy of decentralisation has been so poor that

    called one is

    forced to question whether decentralisation is National Government Policy at all.

    in fact

  • Page 119 of 247

  • I• t -i (a) Analysis of Government Functions : No detailed and sensitive analysis of governmental functions in the field of forestry has been carried out with a view to recreating the governmental system to accomodate the legitimate requirements of Provincial governments. Nor has the Forestry legislation been revised with this requirement of decentralisation in mind. The administrative system limps on, somehow, vith legislation which places all po’wer in the National Minister who, for practic;:al reasons, is obliged to d legaie multiplicity of powers to Fd estry Inspectors (Jtost of ‘ifhom are in the Provinces and are no longer under his control).

    L : 96 (b) Consultation formalised and informal attempts to formulate inter linking provincial and national forestry plans have come to nothing through the inability of the officers, and their respective political masters, to co operate. I

  • Page 120 of 247

  • Consequently there is still no National Forestry I Development Plan (and this is partly because the planners at the centre no longer have access to reliable information from the provinces Yhere such plans must be implemented).

    There are also fev effective Rrovincial forestry development plans. Tbis is partly because such plans cannot re.ally be prepared unless thE: National Government is co ordinated ‘*’ithin its ovn departments and, through the Mlnister and ·secreta.ry for Forests, can put for’*’ard to prov! ncial planners ;h.: :t·) t· proposes should be done.

    The fact that this intf.,rlocking forestry (and ‘wider integrated land use planning) is not occurring is partly explained by an inability to cooperate but it also explains the lack of cooperation. Until the formal planning starts there is nothing to co operate about and fev opportunities to do it.

    (c;) Staff: Far from carrying out a careful rearrangement of staff to ensure the survival of a unified professional service vlth high morale and efficient officers sensibly posted throughout the country in strategic places, the method of earra gement was arbitrary_and unb llevably si plistic. As if a mad u che aok d the carcass of the Nation l Forestry Service vith his chopper, all staff who happened to be an posting Yithin a province ‘at the time of the

    ! :

    r!: ,…. ! r- r

    97

    butchering ve:r e simply chopped off the carcass and became the Provincial Forestry Service for that Province. All those at that moment posted at headquarters or in t:raining/re earch institutions were left on the carcass and became the truncated National Forestry service. Two of the five regional officers became provincial office:rs and the remaining three were posted to national headguarte:rs. The result has been diasastrous.

    At national level there are administrators, decision makers, experienced monitoring experts and planners but they are merely the trunk vithout arms and legs. There is no one obliged to feed them information or to carry out theii: orders or to implement their decisions.

  • Page 121 of 247

  • The Provincial Services are run by the compai:ati’vely junior and inexperienced o;ficers vhohappened to be on the

    s·pot j:it th!2 time the system changed. from their profess’ior.ia1’· peer group

    They are nqw cut off and their 1iries of

    promotion. Their career oppo:r.-tunities, professionalism and morale have been seriously impai:red.

    For the first couple of years the previous “old boy” network continued to operate and there was a (diminishing} residue of respectful cooperation between former collegues in the defunct national forest service. Thus a senior H2adguarters man could request, and usually ue given, I I information, help and obedience from his former junior officer; even though the junior may now be the Provincial Assistant Secretary for Forests responsible, through the Provincial Secretary, to the Provincial Government. As these “network” ties have gradually weakened, and the provin.clal staff has com unde1 aore press.ure from the .provincial go.v rnm.en ·s,.·the’• sys fem has . be<:=ome. ,1.ncreasi:ngly· unworkable.

    [1 r 98

    During the last year three Regional Off ices have been re-established to look after the national interest in monito ing apd nspections. . .

    r-,• I I ‘

    ;- ‘I

    l. (d) Substantive Authority: About the only substantive paver of decision delegated to the provinces has been the power to issue Native Timber Authorities. Legally this is a very minor power liaited to issuing authority for non natives to acquire up to 40 m3 of forest produce from customary ovners for domestic use.

    With the encouragement of the Secretary DOF this power has been misused to enable the provincial Assistant Secretary of Forests to issue aultiple timber authorities to allow timber companies to harvest thousands of cubic metres of timber and to export them. This was being done without any control by the Minister for Forests, and subject to no supervision to ensure that fair benefits flov to the land o n rs or to th P bvincial – o tnment …

  • Page 122 of 247

  • Timber Authorities are still being· issued by Provincial · Forestry Officers to permit the purchase and export of large volumes of rattan cane. This is occurring outside any government guidelines and the situation is now, as previously stated, chaotic.

    Another po’w’er delegated to the provincial forester is the power to issue export perili ts. The PFO’s have not knovn the reason for these permi ls and have been issuing them automatically if the export licence has been issued. (See IR6 Vol.l p.186 for a discussion of hov the power to issue export permits could become a neaningful control mechanism).

    ,: I- ,r..:

    I r r,””

    99

    Attempts to participate in the exercise of substantive authority by becoming meaningfully involved in the process of planning and consultation have failed because that process is not occurring on any sustained and rational basis.

    (e) Funds :

    i The main source of funding available to the provinces for carrying out their forestry functions is by way of

    ,…… l ” ,-

  • Page 123 of 247

  • I• • •

    budget allocation.

    Budget allocation: · Some provinces are treated as having full financlal “responsibility” and tend to receive ·the major part of their budget allocation in a lump sum to distribute as they choose in accordance with provincial priorities. The amount o! the lump sum is calculated by reference, mainly, to the amount wh·ich vas spent· on the present “provincial function ” by the Nation i Go ernment, “be.fofe ·the esta’bl:isl’lm nt of proVinci.ai government. Having received its lump sum in this way it 1-s then up to these “financially responsible” provincial governments to decide how much to allocate for forestry expenditure as opposed to the other calls on their funds.

    Provinces which do not have full financial responsibility are, for funding purposes, treated as if they were national government departments and their funds are allocated division by division, item by item. The amount vhich the National Government vill allocate to a provincial government Forestry Division is calculated, in the main, by reference to the amount previously spent on “forestry” in that province before the introduction of provincial goveinmen . The way the l ision will spend it allocation .is··also dete mine bi h . fe _by item al o tion=.

    r I i· l; r L: If there has been a uo tantial increase in forestry in the province since the establishment of provincial

  • Page 124 of 247

  • r gove:nment the base figure will probably have been adjusted r : as a result of negotiations betveen the provincial and nati nal government bureaucrats.

    100

    r Royalties: t Under the Organic Lav on Provin ial Government a province is also entitled to receive one hundred per cent of the royalties paid on harvested timber less . the National Government’s cost of collecting them. The National

    I I i

    .. . ,. .

    Government has been charging 25 per cent of the royalty for this service vh ich 1s exhorbi tant and “unconst 1 tut i onal “. As 25 percent was being given to the landowners provincial governments have usually been receiving only 50 per cent of royalties. (Currently the landowners are receiving 75 per cent and the provincial _governments only 25 percent of ioyal_ties .·. The. State is ·allowing its share to e paid to the’ landowners 1r.· arl att.empt to giv’e• th’em: a fairer ‘sh’are of th returns from timber op ratlons.

    Derivation Grant: Provinces are entitled to a grant calculated upon the value of the exports produced in their province. For forestry this amounts to 1.25 percent and is taken from the State’s export duty collection of 10 percent of FOB price.

    Unfortunately for the “forestry” provinces however, the derivation granl ls reduced by the total value of all royalties paid in the province. In the past this rule has been applied in a way vhich actually produced a negative affect for, if royalties exceeded the derivation grant it

  • Page 125 of 247

  • not only cut ..out, but fµrther deductions to the province’s .budge ent1.tl.e er1t ·· ·s d to·· e· ma e to off.se ·.I.ts “royalty· windfall”. The negative effect has now been removed and the effect of receiving royalties which e ceed the amount of the

    101

    calculated derivation grant entitlement is merely to cut out the derivation grant completely.

    Grant by vay of a National Forestry Programme: The r- only way for a provincial Government under this system to j obtain a prompt increase in its allocation to allo11 it to I promote provincial forestry is to persuade the national government to lnclude its desired project in a National Forestry Programme and obtain NEC approval for it. Thus in the early 1980s small provincial forestry programmes vere included as part of. Primary Industry Sectoral Programmes. The experience has been that such funds are easily diverted by ·National or Provincial politicians to “non project” purposes. This happened to Simbu reafforeastation funds in 1981 and 1982 so in 1983 the project funding vas stopped.

    Up until 19·87 DOF did not submit its ovn National Forest1:Y Programme and so ·no extra boost up for .Forestry ·,. · · .. occurred· through that n1ea.ns·. prior to ·thctt ·date. When tfie Natidnal Forestry Development Programme 1987-1991 vas given NEC approval it set out on the one hand a timetable for an accelerated programme of allocation of forest resources. On the other hand it included a list of requirements for staff and funds to enable the programme to be carried out. The programme vas approved “subject to funds ava1lab11ity”. Although the timetalbe for allocation has been approved and implemented the staff increases have not been funded. As a result the monitoring capability vill inevitably deteriorate even further.

    The process of communication and negotiation on funding between provincial and national government is, like the communciation on planning, not functioning vell. For the

    .f i. nanci l y ·,,r.. s. p n.;°l.b . “.’

    r.ayince a lu. p- SU is hand’ed

    down after discussions betwe n the Finance sections of both levels of government. The process, of sub dividing that

    i I . I,

  • Page 126 of 247

  • i. I

    otal bet.,.e.::n various provincial divisic:-.5 dnll projects is left entirely to the provincial budgetary process. In the financially dependant provinces the inter government 1. discussions occur bet.,.een the t’*’o finance sections and then the amounts are allocated to each provincial division.

    102

    There appears to be joint planning and funds

    no satisfactory process 1whereby can be discussed hurizontally

    between the various divisions in the province and within the National Government nor a process 1whereby the vertical inter-government planning and funding negotiations can occur.

    This -weakness was recognised in 1988 when a National Provincial Relations working group ‘was established to try

    and improve

    National/Provincial communications

    on ·such

    matters. It is said to be making some progress.

    The performance by ·successive n-atiorral govern:inertts 1n· . I implementing the policy of .decentralising the forestry functions is very unimpressive on vital matters regarding division of functions, consultation, staffing, transfer of paver and pruvitiion of adequate funds.

    The perform nce of the provincial government in exercising the 9owers they actually do have, and in administering such functions as they have been given, is also very unimpressive.

  • Page 127 of 247

  • .,W

    (£) Legislative Power “Forestry” is listed in the Organic Lav on Provincial Government as a concurrent subject matter. It folloYs, therefore, that provincial_ governments have the power to riact legisla ior!’ on .any.aspect ,..hlch is .no alie9-dy cove.red by national legislation. Potentially this ls an effective

    103

    I paver ,.hich has been “decentralised”, particularly as the National legislation is so inadequate and leaves so many gaps vhich could be filled by provincial legislation.

    This potentiall}. effecti,re poJJer has been ignored by Provincial Gover:.ments right up until noli ..,hen the Manus Provincial Government has ju:;t enacted a la.., to try and strengthen its policies on forest management by enshrining it in legislation. (See discussion in !R No 5 App 4).

    (g} Joint Ventures: Another vay for a provincial government to promote the decentralisation of the forestry function could be for provincial governments to become partners in major projects operating as a joint venture involving the foreign timber company and the provincial <;j,)vernment and perhaps also· a lando”wner company: For this to amuur1t to decentralisation, the joint V nture· agreement IJO’Jld need to ensure that. the provi cial governme t-gairiJd- n effec rve·m asure of oritr l anda’ fair st.are of reasonable profits.

    The fe’w attempts by provincial governments to participate in the process of forestry by way of involvement in joint venture operations h ve also, so far, been a costly failure:

    Participation in Kumusi (IR No 5 App 3) and Ulabo as Forest Development Corporations failed to give the provincial governments effective control in the operation or shares of its profits. In fact substantial losses were incurred ‘With very few benefits for the landovners, provincial government or people. Participation in Stettin Bay Luape Co.mpany w.a.s . .by. .t.h Nation. al Governme t. When a chance va of fer e-c , tp ·, take up· more equity the. Nati onai Government refused and the ·chance was not offered to the Provincial Government. The State plso took 20 per cent

    ii.,. F. r

  • Page 128 of 247

  • 104

    . , C I i l;’1 : I

    . ,·

    -· – ‘.’

    equity in Open Bay Timber Company. The huge losses made by this company are deal”‘.: vith on page 104 below ( and IR6). The State also had eguity in Ulabo Timber Co. and We’illak Timbers (see below p.105). The latest joint venture attempt is in Manus Province ‘Jhere the Provincial Government is a major shareholder in the landovner company Kei Besau Kampani which, in turn, proposes to enter a joint venture arrangement with SEAL to operate a veneer mi11. ( IR No. 5 App.4 and IR No 7).

    Provincial Forestry Offices The lack of funding, lack of staff organisation, effe tiveness and morale and, generally, the lack of government commitment to meaningful decentralisation of forestry matters vas very evident from the state of the various Provincial Forestry Offices which I visited. The Commission saw ·offices vith no telephone, no adequate trans ort,·no overtime funds, and no funds for field work .

  • Page 129 of 247

  • The five Provincial Forestry Offices whose performance the Commission examined in some detail present a very dismal picture of the dtcentralisation process in action:

    Central Province Central Province forestry offleers have been quite unable to supervise and control nearby operations where gross illegalities have been occurring. Under thei:r very noses the Av.1c:1,:t.on Bay Sawmills operation continued for years as an illegal operation based on improperly issued timber authorities. It failed to start up its savmill and merely harvested logs for export inside, and probably outside, 1 ts concession area. It bui 1t up a deep sense of resentment and divided the community. The community leaders have now “impounded” the Sawmill and guipment as .Secrn:;:l y!’. for a claim for _un aid · ” ommissfoh” on log sales which was promised in writing but not paid.

    ,— ‘I I

    rI , 105 r The Goodwood operation ls woefully behind in its permit r conditions and is reported to be breaching its conditions .I egard_i g enyironment and _loqginq ractice_s. It ,is nov over one yeai.latc construct(ng i a·s wailf a d as continued. to operate with apparent impunity. (Action to cancel the permit is nov under consideration). :. The three forestry officers located at Kuplano to oversee operations of Goodwood and HacDui did not even have a bicycle between them to travel to operating sites.

    MacDul. This company purchased the ANG savmi 11 at Kapari and related facilities at Kupiano. It was originally allowed to cut logs for its sawmil on T.A’s issued by Central Province Forestry Office. The company had a completely inadequate capital base and pressed for log exports to produce funds. It was then allowed to stock pile logs for export unt i 1 it pers_uaded the Secretary l:o grant p’erin ss ion to· e·xport. The Shi pnient of expoz.:t log_s. ended.· -up· being a disaster.

    Luabar Logging Pty Ltd was able to illegally harvest . j and·exploit teak from Brown River, in close proximity to· the Forestry Base there, through an outlet at Bootless Bay, 20 minutes drive from the Central Forestry Office. It was also able to commence another illegal operation under the guise of building a road to the Iva Inika timber area until it was interrupted by the Commission’s own inquiries. On inspection by the Commission it was found that about 5000 – 6000 m3 of illegal logs were awaiting shipment. (Some of the logs were then seized and sold by the State for the benefit of the landowners. Others have been allowed to lie in the bush or at bush ram11s and not as DOF c.::iuld not extract them).

  • Page 130 of 247

  • I

    ·: ..

    r The practice of issuing Timber Authorities ill gally to

    106

    allow short term “hit and run” timber r. rampant at Central Forestry Office. I : Commission the delegation to issue

    and cane operations is After exposure by the such Authorities was

    r.;:

    ,…., l r I i

    withd:ra’Wn from the tvo senior officers (by revoking their appointment as Forest Inspectors).

    At the the Brown River Station the Commission found 16 staff stationed though there is little work for them there since the plantations had been handed back to cu tomary ownership. They stayed because there is accommodation there but, because there is no transport, many of them are

    seriously underemployed. attend at the town office.

    Some use private transport to

    One of the middle level officers Dennis Hoivo was found to have ,…rongly accepted Kl, 00 cash from Angus (PNG) for “setvicei rehder d” when he was supposed to have b en i – erseeing the ioading”oi a ixport lo h{p ent. I , I The Provincial Forestry Officer Mlsi Henao was found to have paid royalty moneys into and out of his own private bank account and to have retained funds in that account in cases where entitlement to royalties was “disputed”. Such a practice constitutes an invitation to misuse funds

  • Page 131 of 247

  • but in the period studied, Mr Henao had not yielded to that r temptation. Oro Provincial Forest Office: This office was desperately starved for funds and had no access to permanent transport. Morale was very low and the off ice was almost inactive. The loading operations at Oro Bay were dominated br Sumit?mo, had not been .inspect d for two _years and

    ‘I : !:

    107

    provincial forestry funds hac on tvo occasions been supplemented by A bogo Savmills. (IR No 5 App 3). Since my inspection the office has burnec down with the loss of all :records. r i West New Britain: This office was visited only briefly and it was noted that the administrative organisation within the province was inappropriate, as the head forester was out of touch with his District Foresters, had no easy access to transport and did not report directly to the Secretary of the Province but through a non specialist Distr let Manager with no forestry experience. At Dami Station (only five miles from SBLC’s mill) there was a general air of lethargy and neglect with officers sitting around doing nothing because “no transport”.

    Nev Ireland: The For stry Office there was led by Mr . Jack M.asu w.ho I have found a tdr too clos.ely involved·wi. th

    .. . .

    . . . . . ” .. – ‘ . some·of the timber operators

    and

    .. gainl

    . g b neflts

    . . . .. from them.

    He tece ived a regular supply ,of beer by the carton fr om Bruce Tsang and as obviously a heavy drinker with little committment to his vork. It is perhaps not surprising that his committment is weak as he was for several years the top forester res ous ible to Preaier Robert Seeto’s Cabinet and somehov managed to survive in a situation vhere cronies like Seeto, Gila and Watt (as unoff lela1 Cabl net Adviser) were planning to formalise an existing practice of selling political favours to timber companies by developing it into a full scale extortion racket, using Watt’s Company, Niubils

  • Page 132 of 247

  • Cunsultancy, as a •front•. (see IR No. 7).

    Far too many staff vere posted at Headquarters and in other “no vork’.’ locations ipstead of be!ng posted to vhere the a_ction is.

    ,? ‘

    1 !’

    I, I. 108 r i Western Provine : The inspection of this office showed ‘ that attendance •,1as poor, and efficiency low. It had no access to vehicle transport and no funds for flying. The Assistant Secretary and another officer vere investigated for possible misuse of royalty funds and the junior field l L officer has been charged. One officer is placed full time at the WGTC project vhich is almost the province’s only project,. He had recently arrived and was still keen. One ‘wonders ho’W long this ‘Will last though as he is isolated a’Way from his fellov officers in a very vet environment vhere he is dependent on the company for all his basic needs company house, company transport, food purchased at company store and companionship of company employees. The only recreational facility is the company mess. It would be extremely difficult for him to form and express a strong critical vie”W of the company’s operations in these circumstances.

    West Sepik: The Vanimo Forestry Office was a ten years old, “temporary” bush materials building “With thatched roof. As the headquarters of a forestry division administering a major project it vas an absolute disgrace. It can only be a matter of time before it burns do’wn with all the records, as has already happened at Popondetta.

    The Provincial Forestry Office has only one vehicle and finds it difficult to gain access to the Pool Car. Very little effective monitoring of VFP’s operation ‘was being carried out by the Provincal Foresters. More vas being done by the National Project Team vhich should hovever have been doing other tasks. Despite the existence of a National Government Project Coordinator, horizontal communication betveen provincial depart_ments. and vertical coamunica,tion vith National Govern ent Departments seemed to·be poor. (See IR No 5 app 2)

    .,….. — —–_….., ·- .. ‘ ..

    ,…… I ‘ i

  • Page 133 of 247

  • 109 r I. SUMMARY

    Thete is then ve;y flitia i n- h d.e. ce.ntral.isation is an active eleaent of national Forestry Policy. Despite the provisions in the Constitutional Laws which first raised the issue the Forestry Legislation does not pl:.’.omote or even recognise decentralisation. There -is no integrated national and provincial planning which effectively involves the provinces in planning the exploitation of the resource. National Forestry Development Programmes involve a degree of consultation but that process is frequently by passed when “outsiders” interfere vith the process or when National Ministers respond unexpectedly to pressures, promises and payments and allocate resources outside the scope of the current prograame. Sta£ f has been reorganised in a way which creates confusion and stagnation. There ls no meaningful lnvolvement of provincial governments in a dynam_lc process· of ·developlrig ·a··.natl·onal. f’?rest resour e., No meaningful f lnal power•·of decision· making· has· been devolved or delegated to provincial ·governments (except ·delegation over timber authorities) and the funds being expended on provincial forestry are inadequate to provide the manpower, transport and facilities required to carry out their tasks. T e potentially effective power to legislate on Forestry matters, which was granted under the Organic Lav on Provincial Government, has been used only by the Hanus Provincial Government. ( Though the East Sepik legislation on land mobilisation will have an effect on forestry seep 121 below and IR No.7)

    .

    ri. ‘

    EQ.tICY POSTULATE

    110

    ,.._ 4

    .– ! i

    PROMOTE THE ACTIVE PARTICIPATION OF PNG CITIZENS IN FORESTRY AND ASSOCIATED ENTERPRISES AND ENSURE THEY RECEIVE A FAIR SHARE OF THE BENEFITS

  • Page 134 of 247

  • It has been accepted that foreign enterprises and

    foreign capital ill be required in order to exploit PNG’s forests but it is clearly accepted (if not stated) policy ,- that, after the foreigners have received a fair return for their money and effort, the b nefits flowing from forestry exploitation should flo to Papua Nev Guineans. The landovners in particular are not to be left as idle spectators while their forests are felled. They must be

    enabled to participate in activities. They must also of

    forestry and course receive a

    associated fair share

    of the proceeds from the sale of their logs. Papua Nev . Guinean participation and sharing can occur at the level. of the landowners and their clan groups, incorporated landowner companies, Village and Provincial Government Development Co:i:porations, Provincial Governments and the National Government.

    Various methods have been devised to stimulate this type of Papua Nev Guinean involvement and benefit sharing.

    A. Timber Rights Purchase and Royalties B. Ownership of the permit or price sharing arrangement C. Premium arrangement D. Promotion of business and economic development E. Local pr.ocessing benefits F. Employment opportunities

    .. .,..•.,

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  • Page 135 of 247

  • -,

    111

    A. Timber Right5 Purchase and Rovalties The purchase by the State or the Timber Rights and the subsequent distribution of royalty

  • Page 136 of 247

  • payments is of course a benefit to customary landonwers. As discussed elsewhere hnwever this benefit is far below the true value of the resource. (See IR No.5 p.35). In 1987, out of total royalties amounting to KS,597,015 only Kl,399,253 was paid to landowners.

    B. Ownership of the Perait Various ways have been tried to give Papua New Guineans equity in the corporate vehicle which holds the Timber Permit. The idea is to give them some control of operations and marketing “from the inside” and a share of the profits.

    Ca) Forest Development Corporation: Ths concept was put forvard in the Revised National Forestry Policy 1979. The t’wo main examples are Kumusi Timber Company and Ulabo Timber Company where the Provincial and National Governments became the major shareholders. In fact the foreign manager retained full control and no profit vas made for distribution to shareholders. In the Kumusi Area the governments and landownexs suffered severe losses (see IR No 5 App. 3)

    (b) Large active National Company: Sevexal attempts have be n made to form companies vith at least 75% of the shares held by Papua New Guinea citizens or organisations. The intention was (or the company to be actively involved in the control of the operation.

    …,.

    112 I !

    Two examples studied by the Commission were Angus (PNG) i Pty Ltd and Wavoi Guavi Timber Company. Both were in fact foreign ovned but put up a sham “national” front (See IR No 2 and IR No 5 App 1) • In neither case did Papua New Guineans gain control or a share of any profits.

    Two other examples of smaller companies, which were not studied in detail by the Commission, are Tonolei Development Corporation and Bougainville Forest Enterprises Pty Ltd. Tonolei appears genuinely to be owned by land owning groups and it has very recently sought to buy out its contractor • It should now be In a position of genuine control and its Papua New Guinea landowner groups should be well placed to receive the profits by way of dividend distribution. (See IR6 App9)

    Bougainville Forest Products is managed by Groomes and sells through S mi omo. Aspects· of its marketing are reported upon in IR No.6 Vol 2B App 6 but nothing else has been studied.

    (c) “Inactive” Landowner Coapanies:

    Many small companies have landowners being involved

    been established with as the shareholders.

  • Page 137 of 247

  • Sometimes these landowning groups

    companies genuinely sometimes they comprise

    represent or include

    “outsiders” whose claims to be consiueL d as landowners are often hotly contested.

    The great majority of these “landovner” companies are organised and incorporated by the foreign timber company which proposes to carry out the logging and marketing as contractor pursuant to a logging and marketing agreement which, theoretically, shou’ld be approved by the Department of Forests.

    .:.’·.. £ ., •. …..&Ii&

    ‘ I ‘

    ,…… ‘ l 1 113

    rl. ,-

    It is common for the foreign contractor to provide its ov’n lawyer, consultant and accountant, and sometimes its secretary, to ensure that the landowner company applies for the Permit, LFA Declaration, Assent to Dealing or approval of the Legging and Marketing Agreement. If it takes too long to gain approval for these formalities the contractor frequently commences work ( illegally) and orchestrates the landowner company to support and protect its illegal operation until the formalities are completed. In all except three cases studied by the Commission, the landowner company vas a mere puppet created to enable the foreign timber company to gain access to the resource. Such landowner companies do not participate in the operation at all. The exceptions are the Djaul Development Corporation from New Ireland which made a genuine attempt to control the operations of its “contractor”, Gaisho Co (NG) Pty Ltd, DDC has recently stazted in business itself (IR No 4 Vol 2). Another possible· exception is Tasukolak Pty Ltd from New Ii:eland ._.·hic·h, after tarting off as ·”puppet” from the beginning, is now showing some signs of an independent business life of its own (IR No 4 Vol 3). Most recently the Kei Besau Kampani was incorporated to hold the West Coast Manus Permit and (eventually) to be a joint venture partner wlth its contractor SEAL Pty Ltd. KBK is partly owned by landowner groups and partly by the Provincial Government (IR No 5 App 4)

    Whether the so called landowner companies receive fair benefits from the timber operations will depend upon:

    i) the Logging and Marketing agree•ent provides for a fair division of the FOB price. There are ma y example where the agreemen is unfai an this.is artly attributable fa the fa t that neither Provincial nor National Forestry

  • Page 138 of 247

  • nI .J

    – ….., •• _1{_

    I·; !

    r-

    1

    officers have adequately checked the agreements and because many operations have been allowed to commence despite the fact that logging and marketing agreements were not approved by the Secretary DOF.

    114

    ,.._ ‘ The unfairness is sometimes due to the fact that the lawyer/consultant advising the landowner company is also acting for, and owes his first allegiance to, the foreign contractor.

    11) Whether the Contractor is disclosing the true price for the logs. All but one company studied by the Commisson has obviously been transfer pricing itself or the company through which it does its mar.utlaq has – been transfer pr icing or using other means to pay an unfairly low FOB price in PNG. (See sections 6 and 8 of this report and IR No 6) If the Landowners’ share is calcula ed pon an unfairly low FOB price then the landowner company-‘s share of – the benefit will· also be unfairly lov even if the agreement provides for a fair division.

    iii) the Contractor ls cheating in other ways. The companies who cheated by way of taking improper deductions, under measuring, undergrading, misdescriptlon of species, forgery and fraud are listed in Section 8 of this report.

    c. Premium Arrangement

    In the case of the Wawoi Guavi Timber A ea an attempt to benefit the landowners by payment of a premuim of 48t per cubic metre, instead of equity ownership and substantial infrastructure conditions,· backfired. They e_nded _up being very poorly treated because the premium was wrongly calculated (IR No S App.1)

    … :.L r- ‘! ..’ r.

  • Page 139 of 247

  • I I i :.

    115

    Even when landowner companies do receive and retain a

    r- share of the FOB price , ! I I proceeds are passed on themselves. It is most

    it does not always follow that the for the benefit of the landowners common for the landowner company to

    i spend a large proportion of their proceeds on administrative and management expenses such as management salaries, Directors fees and expenses, trips, purchase of desirable items such as 4 wheel drive trucks, PMVs, outboard motors and on rent of office space and luxury goods.

    Landowner companies which spent virtually all their receipts from log sales in these ways include Ahia Development (Gulf), Brothers Logging, Noatsi, New Ireland Industries, Danfu Logging and Agz:iculture Development and Hamirum Timbers {IR No 4 and Appendices)

    In summaz:y. it can be fairly said that very little. cash benefit ·has been gair,ed by Papua· Nev Guinea landowners or companies from equity involvement in the concession holding companies. The only companies which have paid dividends seem to be Tasukolak and possibly Djaul Development has paid cash benefits to members.

    Cash benefits have been received by way of Timber rights purchase, royalties and sharing of FOB price arrangements but the benefits have been unfairly low.

    (D) Proaotlon of Business and Economic Pevelopaent

    Many attempts have been 11ade to use the capital and energy of a timber =ompany to promote business development and to ensure that Papua New Guineans ( par.ticular ly the landowners) are glYen fiist chance to take’ a4vantage of the existence of a major timber project in the province.

    (‘”

    116

  • Page 140 of 247

  • r

    r- I ·: I •

    r. ‘f ‘

    It is also quite common for a condition of the permit to oblige the company to e tablish or assist in the e tablishment of an agricultural, cattle, agro- forestry or reafforestation scheme intended to be of benefit to the local lando ners.

    In every case s:udied, the results of such schemes have been, failure or disappointment. Quite elaborate provisions to promote business, and economic and social development were written into the Vanimo project agreement and a National Project team was set up to co ordinate it. In my opinion it has failed to achieve this purpose. Similar clauses were written into the Wawoi Guavi Block 1 agreement but not fulfilled (For discuss}on of these operations see IR No 5 App 1 and 2).

    No other project seems to be providing significant benefits from ·this ‘l.ype of approach. Mostly the wider social and ·ecomomic development prefects never got’ started. Sometimes this was because land was not made available by the National Government for the particular project (Vanimo Forests Products and Jant reafforestation projects). Sometimes it failed because no firm binding condition was imposed on the compnny but merely an obligation to conduct feasabilit) studies (Wawoi Guavi IR No App 1, Bismark Industries IR No.6 App.7).

    Samet imes it has failed because the company was half hearted about it or because the company simply failed to perform the condition and it was allowed to continue operating by the government vith no remedial action being taken.

    ,? I l.

    117 r? I <E). Local Processing BenefUA.:

    One way, of attempting.to prov de benefits to the local

    · · veople h· s bee to .encc:iu.ra e •.

    tl1.e . stab·i.. ls.hme.nt. of ·local

    processing such aa a Sawmill, Chipmill, Veneer Hill or Charcoal Pyrolysis Plant.

  • Page 141 of 247

  • . •:·(

    The records show many instances where, in breach of conditions, such operations have never commenced (eg Wawoi Guavi, New Ireland Otsuka, Goodwood, Open Bay) or commenced very late. The only significant local processing now .occurring in association with a log export operation, ls at Stettin Bay, Open Bay, Vanimo and until recently, Kumusi,. These operations produce job opportunities for some PNG citizens but very little by way of spin off industrial and business development. such opportunities as arise to service the compa les are usually taken up by foreign firms. The most successful has been the local vehicle hire ·. cont’racts let by VFP but” e’ven “that car.eful-ly’ plan.r:i.ed project has falled to st·imulate sig·n1 f i’cant· bus·iness development for PNG citizens in Vanimo: The Jant chlpmill ·project was intended to stimulate agro-forestry projects but has failed to do this.

    -. ‘

    Some small scale sawmilling operations such as MacDui, Baimuru and Hadang Timbers have provided employment and some spin off benefits.

    Some Permit holders have been required to set up Agricultural and Community trust funds. Where this has been done (such as by Gaisho and DLAD in Nev Ireland) few obvious lasting benefits seem to have resulted. (See IR No 4).

    1

  • Page 142 of 247

  • ! l II .’,

    r: I ‘ .J rI. I ‘ 1.F..l Employment Opportunities

    •’•

    118

    Every logging operation naturally provides some employment opportunities for citizens. Whether significant opportunities for the skilled and managerial positions are offered will depend upon the outlook of the foreign company, whether it is operating on a long term basis and whether the Department of Labour and Employment is enforcing the labour laws effectively.

    For the short t rm “hlt and run” operators like MOI, Bruce Tsang’s Companies, United Timbers, Luabar Logging and Santa Investments there is little incentive to conduct in? service training and seek to localise the operation. My observations of the longer term operators indicates that they also prefer to employ expatriate Asians or Europeans in the skilled and managerial jobs, even when skilled Papua New Guineans are available. For instance Wawoi Guavi’s contractors brought a full team of Asians with them into PNG and I received in camera complaints from middle level PNG employees of Japanese companies that they were not being offered training for, or P.xperience in, higher level management jobs.

    On all my forest inspections I was struck by the number of Asians employed in semi skilled jobs for which many PNG citizens are trained and experienced, such as bulldozer operators, jinker drivers and chain saw operators. It was a frequent cause ot complaint at logging campp (for example at Tabar Island (IR No 4 Vol 2 App 2 ) and at Luabar Logging camp at Iva Inaka in Central P:rovince where PNG operators vere sitting i le watchi?g less competent AsJans doipg the jobs. It is.quite clear that the Labour laws are ot being

    ,……. ,’, I f .: n r-

    .:

    119

  • Page 143 of 247

  • ,. II

    properly enforced and chat the co operation between Forestry

    Officers and Labour Department officers is poor. It is only since the Commission started drawing attention to these I I facts that DOF has begun to be consulted on approval of Training and Localisation Plans for timber operations. l The usual explanation given by the foreign timber companies for this practice is that Asians are more productive and less trouble. They are content to spend long periods in difficult conditions without their families, receiving little more than pocket money. The balance of their pay is frequently paid in their home countries on a tax free basis. (See Wawoi Guavi IR No 5 App 1)

    One most unfortunate result of allowing this situation to continue is that better trained graduates from our training institutions are unable to find employment because f:he Asians are preferred and skilled forest workers and equipment operators a·re being denied em’ployment.

    SUMMARY

    Policy Principle No 4 ls to promote active participation by PNG citizens in forestry and associated enterprises and to ensure they receive a fair share of the benefits. Hy inquiries quite definitely show that such participation ls not happening on any significant scale. The inqui:r ies also indicate that landoYners and landowne:r

    companies a:re from forestry. and they a:re

    not receiving a fair share of the benefits Success stories are of modest success only rare, isolated instances. Thus Djaul

    Development (now) shows moderate success as does Tasukolak, but l t ls hard to find other successful b _slness enterprises.

    ,-.. ! . t j [ ‘

    ,’!.

    120

    .fa.r toQ . low… . {Benefits fr-. om. in.. fr. a.structu. re conditions’ are

  • Page 144 of 247

  • ,-. . !

    .. discussed.at page 153-.’,n.-· ,. . ..

    POLICY POS1ULATI

    5. THB GOVERNMENT TO ACTIVELY FIND TECHNIQUES FOR PROMOTING •PAPUA NEW GUINBA WAYS• AND PAPUA HEW GUINEA FORMS OF TRADITIONAL ORGANISATION AND SOCIBTY AS AN INTEGRAL PART OF FORESTRY EXPLOITATION

    I saw no sign at all that the National Government has implemented measures to carry out this stated policy principle in the f leld of forestry. The nearest that the government has approached. to the vast subject of tradltonal forms of social organisation is that, in TRP procedures, . some trouble is-taken to asc·ertai’n the’ _landowning _groups·. to·’ whom the TRP money, and latei:.”the royalties, should be ·paid. No sign of developing new forms of legal entities has emerged The use of existing legislation regarding registration of customary land groups has not been encouraged and, in fact, this whole vital area of developing appropriate legislation to handle PNG’ s land ownership and use problems has been shamefully neglected by successive governments since the 1970s.

    I believe however that a consultant retained by the National Government . to examine the question of registering customary land in priority areas recently presented his

    … :k! f

    n f report. It included drafting instructions for “Framelio.rk

    121

    l t ,– ‘

    Legislation” for a National Customary Land Registration Act. Instructions for a Model Provincial Government Law, which would neatly tie in with the National Act, were also

    lapse.

    The only instance of creative legal and social thinking in the realm of land and forestry which was brought to my attention vas in a lengthy submission from the East Sepik Provincial Government. In that province plans were well advanced to devcluve an area of about 90 000 ha. in

  • Page 145 of 247

  • the Wewak Angoram area for integrated land usage based on customary land owning groups registered under the East Sepik Customary Land Regestriation Act.

    The Provincial Government had. engaged consultants and enacted _appropriate nd utilisat_ion. legislatiol).. Funding had been promised by an Aid agreement between the PNG and Australian governments whereby the latter promised K550,000 to fund a feasability study. The land to be studied vas identified and the landowners were interested in co operating in a scheme of planned land development involving sustained yield forestry on appropr late portions and agr lculture or forest plantations on other portions of the land. The Consultants have almost completed the study and are understood to be recommending a mix of rubber plantation and forest plantations with only limited involvement in agricultural cash crops owing to the nature of the soil. It is reported however that the scheme is under threat from a group of “landowners” who are involved with a foreign contractor vish i ng to exploit the resource by the usual overcutting logging tech111ques, The landovners formed a . . . company, the Sepik River Development Corporation Pty Ltd and applied for an LFA to be declared over portion of the land being studied by the Australian funde research team. From

    DOF files and on evidence befor the Commission the company is strongly backed by the Foreign Minister Hr H T Somare, who is its major shareholder. The Acting Minister for Forests Hr John Giheno declared the LFA after the documentaticn had been prepared in great haste on Ministerial direction. Far from promoting “Papua New Guinea ways” and PNG forms of traditional organisation the National Government appears to be undermining the only exper lment along these lines which is occurring. (Further details of this situation are provided in IR No.7)

    SUMMARY

    The government is not apparantly seeking techniques for promoting PNG ways and forms of social organisation. One exception to this negative statement could be the hiring of a consultant to draft interlocking national and provincial government customary land registr tion Bills if this -initiative comes to atything.

    POLICY POSTULATE

    6. STRICT CONTROLS ON FOREIGN INVESTMENT IN THE TIMBER INDUSTRY TO STOP IT ATTAINING A POSITION OF DOMINANCE TO THB EXTENT THAT IT WOULD COMPROMISE PNG’S NATIONAL INTEGRITY

    This policy principle is derived directly from National goal and Directive Principle No. 3 of Lhe ConsJtJtutJon.

    r I.

    ,. I

  • Page 146 of 247

  • !

    ,….. ” ,_

    : ‘,’

    §TRICT CONTROLS

    Various strategies have been adopted to try and impose the controls necessary to put this principle into practice. None have been effective. The strategies include:

    (a) Pre-registration with DOF; (b) The 1979 Guidelines; (c) NIDA; Cd) Central Bank Guidelines; (e) Control over acquisition of goods and services; (f) Control over Transfer Pricing; (g) Monitoring and Control of operations; (h) Leadership Code; Ci) The Criminal Lav.

    (3) Pre regi·stration vith DOF: Al.l foreign wis-hing·.to ngage in th PNG timber industry are

    companies required to

    p:re ·register vitfl the_’ Department ·of·Forests. ·As· pi1rt-·of·· t’hat process the applicant company must provide details and evidence of its financial re::,ources and experience in the timber industry. The aim of pre registration is to ensure that unsuitable foreign companies are not alloved lu negotiate with landovners and to put pressure on the Minister for Forests in the hope of gaining approved access to timber by avoiding proper scrutiny.

    A pre-registration committee vas set up to recommend on these matters to the Secretary vho had paver of final decision on pre registration. It used to be the practice to check in the applicant company’s home country through the relevant Embassy and to check with the United Nations

    Comm. is. sio. n ..for Transnati.onal Corporations.

    In recent years

    the S e Che Ck S w.e r e. a·i SC Ont i’ U e d

    ,…

  • Page 147 of 247

  • From my inquir.ies it is obvious that some very

    inappropriate companies registration altogether.

    hav managed An example of

    to ignore pre? this is Malaysia

    Overseas Investment (PNG) Pty Ltd (MOI) (see IR No 4 App 1). Other very unsuitable companies posed, falsely, as national companies and avoided the requirement that way. These

    include Angus (PNG) Ltd in its first

    (IR No.2) and Wawoi Guavi Timber Co Pty operation (IR No 5 App 1). Gasmata

    Resources Pty Ltd was at first rejected for pre registration but, after its principal Chin Ah Eng made gifts to Secretary Mamalai and his Yife, MI Hamalai simply directed pre? registration without reference back to the Pre-registration Cl’)mmittee. (See IR No.7) Gasmata, Wa’woi Guavi and Angus ‘were all inexperienced and under capitalised. MOI was desperately undercapitalised. These factors should have meant denial of pre egi traiion. In each case the operation got into ex’treme flnanci·a1· dl!°fi’culties ‘and. it resulte’d · in the resource being harvr;sted for little or no benefit to the landowners except r oya1 i tes (and even roya 1ty _payment has often been delayed). Gasmata’s company Hadang Timbers has recently gone into receivership ‘with royalties of approximately K200,000 unpaid. (Santa Investments ‘was forced to pay substantial royalty arrears from its operation in Gulf Province as a condition of being considered as contractor for the Gadaisu TRP area).

    b) The 1979 Guidelines: One of the purposes of this policy was to issue guidelines for forei n companies involved in the export of round logs. A basis of the policy was to direct foreign !nve tment capital into the capital intensive sector of the

  • Page 148 of 247

  • timber industry a a·; lu:-ea 0S r.equir ng high tev ls. of techn’ical

    ‘ ‘i ‘

    t … .: ‘

    ,. I i ..; r )

    125

    skill. Foreign investment vas to be directed to firms involvec in large scale local processing or to logging firms

    ) . .carrying Ollt . major· . road an- d.

    -br.i.d. ge .. mak lng tas s 01:

    rI:

    pex forai-ng some oth r major .·a’biigations :r;eq i ing a higti degree of skill (such as a large agriculture project).

    It i quite clear that this enforced except for SBLC, and, jant medium sized savmills referred to at

    policy has and the fev pages 174-176

    not been small to belov as

    the major involvement of foreign timber companies and their overseas capital ls in simple log exporting ventures. (See App.land pages 176 – 205 of this report. See also IR.No.6 Vol.l for further discussion of the 1979 Policy).

    (c) National Investaent and Developaent Authority (NIDA) NIDA vas establi&h!!d to screen potential investors to ensure that they functioned only in appropriate sectors of . . : . . ” .. . I the. ect,nomy.; All foreign timber companies w·ere there.fore obliged to acquire NIDA -approval and should have been subjected to strict NIDA tests before commencing operating. Thus al1 foreign companies merely involved in log exports should have

  • Page 149 of 247

  • been refused NIDA approval because of the 1979 Forestry Policy.

    NIDA checks have been applied very veakly and, in most cases, NIDA approval followed automatically upon DOF certification.

    Many foreign firms simply avoided the NIDA requirements altogether and vere allowed to operate regardless. Examples are:

    i ) Bruce Tsang’s companies Nationwide Consultants ,( IR

    Sakai Hanagement No 4 Vol 4A)

    and

    ii) PNG Pty Ltd (IR No 2)

    iii) Guavi Timber Co. (IR NO 5 App 1) I all of hich companies avoided NIDA by falsely posing as National companies and iv) …,hich simply operated without NIDA r registration relating to timber though it applied I (IR No 4 Vol 2 App 1)

    To gain NIDA approval requires giving full details of the enterprise and its financing. None of these companies could have passed this test. (See IR. No.6 Vol.1 for full discussion)

    126

    ( c}

    all

    Central Bank Guidelines The Central Bank requires a debt equity ratio of 3:1 on foreign inve tment as a means of stopping

    undercapitalised foreign enterprises commencing and to prevent excessive domestic bor.roYings by such enterprises.

    This· m thod of controlling foreign lnvestmenl however has not been firmly applied and almost all foreign timber companies operate at vell above that ratio. Even Stettin Bay Lumber Co needed to make a nev share issue in 1988 to correct the balance. Companies clearly operating well belay this debt equity ratio include MDI, Sakai, Angus, Kumusi, WGTC, Gasmata and (We’wak/Madang Timbers). As many of these companies tend to lease all their logging equipment at high rates it means their financial position is chronically poor and their operations suffer as a

  • Page 150 of 247

  • result. (see IR No.6 Vol.1) assessing.

    In assuring debt equity ratios a misleading impression ls also given if operating. Equipment is treated as a revenue item.(because it is leased) rather than a cap tal item requiring porro ing.

    ‘1 ·

    t I t.: r 127 Ce) ContI.Q..l Over Acguisition of Goods and Serv : Foreign Timber Companies are permitted to acquire goods and services from related corporations overseas. The Central Bank authorises remittance out of PNG or allo1i11s retention of funds off shore to pay for these goods and i services. There is no check made to see if the goods and services 1i11ere actually supplied, and if so, vhether the price paid equalled or exceeded their value. This provides an excellent opportunity for transfer pricing and many r- examples were studied by the Commission:

    i) Shin Asahigawa’s management fees (IR No 6 App 6) ii) WGTC barging fees (IR No 5 App 1) iii l Kumus i – Fletcher’s Management fees ( IR No 5 App 3) iv) Stettin Bay Lumber Co – Management charges (IR No 6 Vol 5 App 5)

    In general knowledge

    terms . there also seems .to be a lack of of marketing fees properly payable to

    overseas sales agents vhich vary from 6 of FOB price to 20c per m3.

    (£) Control Over Transfer Pricing The various devices which have been used to transfer price by under-stating the true value of log exports have been referred to throughout the interim reports and Section 8 of this report. Until the FIC became involved in log marketing in mid 1986 this practice “was alloved to go on unchecked and it has meant that PNG has lost a very substantial portion of the benefits it vas entitled to receive from foreign investment in the timber industry. This aspect is discused in great detail in IR No.6

  • Page 151 of 247

  • r I (g) Monitoring and Control of Ogerations

    128

    Control of the logging operations by DOF is intended to be a m9jor w appn for cont oilin. g . the. w’ ay foreign inves;ment r is used ·1n the timber. i dustry.· ·Monitor ng. i intended. to. I ensure that the companies perform their obligations, protect the forest and the environment and treat the landowners i fairly. The shaaeful weaknesses in our system of monitoring operations has been fully discussed above at pp 77-83 and in IR No.6. These veaknesses have allowed logging companies, most of which are foreign owned or dominated, to exploit the resource at cheap cost regardless of damage to the residual resource.

    The vay the foreign timber companies have created and/or “taken possessio ” of landowner companies and then used them to apply extreme _pressure on Provindlal and ·I N tio.nal politici n·s, Mini t rs· and publl.c ·seivants·.·is. further described at pages 81 and 85 of thii vol me nd in the various interim reports (particularly ( IR No 4 Vol 1 “pp.9-18 vhlch deals ‘Jlth New Ireland). The pressure has been: mounted by paying bene £its and bribes, orchestrating local constituency pressure groups, commencing operations illegally and loading log ships illegally. The result has been that, in many instances, the foreign inspired landovner agitation and support forces DOF to allocate an area outside the approved programme, influences the selection process and. succeeds in obtaining more favourable operating conditions. The foreign timber coml:”)anies also make contributions directly to politicians and Ministers in order to gain apl:)roval’ for, or to by pass apl:)roval of, unfair agreements

    •I

    r’ J I

  • Page 152 of 247

  • with the landowners. Having gathered widespread support by these methods, the foreign timber companies free themselves

    129

    ,….,

    from government

    controls

    and can commence

    operations

    ” ·l ,’

    illegally

    and,

    ‘.ihen

    convenient,

    discontinue them

    : j arbitrarily.

    (h) Leadership Code: “Quality of Leadership

    1. The success of a nation, ve believe, depends ultimately on its people and its leaders. No amount of careful planning in governmental institutions or scientific disciplines will achieve liberation and fulfilment of the citizens of our country unless the leaders – those vho hold official positions of pover authority or influence – have bold vision vork hard and are resolutely dedicated to the service of their people”.

    C.P.C Report Ch 3 P.1

  • Page 153 of 247

  • .j…

    There was no doubt in the minds of the authors of the CPC Report and of the Constitution of Papua NetJ Guinea that the proper administration of the government and the interests of all people would be openly challenged by foreign business interests. The Committee members foresa’il that this vould come in many forms, but most notably by attempts to manipulate, corrupt and compromise the nation’s leaders.

    The CPC Reports states:

    “48. We are only too well aware of the experience elsewhere, especially on developing countries, where foreign corporations have dictated the nature and pace of development within the country through indirect control of the economy. There is no more effective way for foreigners to contrl our resources than to silence our leaders by enticing them into partnerships or the ac’ce.ptance of shareholdings Jn their businesses. Ou_r leaders must . ve ‘-belle,;e,. resist this temptation’ if they are going to be true spokesmen and representatives of the ordinary people”.

    130 I J I ;

    In the light of the current state of the forest

    ,…..,

    industry

    statements like

    this

    assume

    an almost

    prophetic

    ‘ qualily.

    The same

    may be

    said

    of the

  • Page 154 of 247

  • follo….,ing

    recommendation:

    “53. For similar reasons to those which underline our recommendati0n that leaders should not hold shares in foreign controlled companies or be partners in foreign controlled firms we recommend that leaders should not accept any loan other than a normal bank loan, hold any office or accept any benefit or advantage from a company or firm vhich is effectively controlled by foreign citizens. We do not believe that our leaders should be obligated to foreign citizens or enterprises in this vay, as such an obligation is likely to ·undermine their independence as leaders .

    And similarly:-

    “55. We vie.v with concern the growing practice, particularly among ovez:seas businessmen, of giving or attempting· t.o give fav·ours, “gestures of appreciation” i,nd other forms. o-f. gi_tts to 011 leapers in ·d.ec’)sion making positions, in ·order to obtain from these leaders ·favourable consideration Jn their business dealings 1th the Government

    I have quoted extensively from the recommendations of the C.P.C Report because it must be stressed that nobody can claim that the kinds of practices currently corrupting the forest industry were not foreseen and forevarned from the very outset.

    When I read these passages I can readily re construct the conversations and events surrounding Hr Chin Ah Eng’s proposed business venture with the vife of Secretary Mamalai and his gifts to Mi: and Hrs Mamalai in Singapore. His proposals for an extensive b11siness venture with Minister ·01ro · 1n· the Kem·.p Welsh ·i.ire.a··of Centtal Province ·seem all the more ominous in the l’ig.ht of these ‘warnings·. The same can be said of Minister Diros’ involvement Yith the Angus Group ‘

    I : I,’! I .1

    r”l I ‘ 1 …..

    i:.. ,n.

  • Page 155 of 247

  • and his covert 35% shareholding in Angus PNG and of Minister

    131

    lI .’

    I ‘

    ;1 ‘ I : I .’

    Torato’s dealings with Santa Investments and Bruce Tsang. The requests by Diro, Seeto, Sigulogo, Torato, Ope Oeaka, Roy Evara, Samson Gila and Stephen Raka for contributions fL om San la I nvestmerits, Bruce: Tsang and Mo i for election activities and other purpos ere the very kinds of actions that the authors of the CPC Report envisaged would lead to the control of the nation’s resources being taken away from the proper authorities. There is no question that they were right. (These matters are all described in IR No.7)

    It cannot be said that these most alarming developments vere not foreseen and it equally cannot be said that noLhing was able to curb or deter them.

    The Leadei::ship Code in Division 111.2 of the Constitution is a irect response to the recommendations of the- CPC Report and. the clear – eed to ensure that leaders act . .·· · · · ..r.espon-sbili ty and in b’.e··nat i.on ‘s interest..

    , … The Leadership Code applies to the persons 1 isted in section 26 which include all Members of Parliament,.

    p:rovincial Departmental persons.

    premiers, consitutional Heads, ministerial staff

    office and other

    holders, specified

    The responsibilites of office are onerous and are generally reflected in the wording of Section 27 (1) which reads:

  • Page 156 of 247

  • ,•.

    “27 (1) A person to vhom this Division applies has a duty to conduct himself in such a way, both in his public or official life andhis private life, and in his associations with other persons, as not- (a} to place himself io a position in which he has or cou.ld have . s ··cohflict ., of -{nterests or·. might be, compromised’· vhen · a·!sc:harg”in.g · his publ i-c or· off ic.1a1 duties; or (b) to demean his office or pos tion, or

    i I !

    132

    (c) to allow his public or official integrity, or his personal integrity, to be called into question; or (d) to endanger or diminish respect for and confidence in the integrity of government in Papua New Guinean. •j ‘1 Tt,e Organic La.., on the: Duties and Responsibilites of Leadership gives more than adequate effect to the Constitutional provisions of Division 111.2. The Organic Lav further prescibes the Responsibilities of Leadership and makes provision for investigations and enforcement by the 0mbudsman Commission. Leaders are obliged to submit comprehensive annual Statements divulging shareholdings, directershps and a range of other financial and commercial information.

    Most particularly the acceptance of bribes or loans is prescribed s misconduct in office.

    • I’ • ,.

    Under Section 28 of the Constitution a leader· f.ound guilty of misconduct .. in·· office can be .dismissed from.·offi’ee or may be dealt with in any other manner recommended by the Independent Tribunal.

    It is my opinion that the provisions of the Constitution and the Organic Lav are an adequate response to the clear need to regulate and investigate the actions of leaders. Some changes may be appropriate and I shall mention these later.

    What is of greatest concern is the very clear indication that these provisions are not being enforced to the extent that is clearly varranted. It is patently obvious from the findings of this Commission of Inquiry that these provisions are not being used effectively to control . or· dete’r. the· i’mpr ope-r .” fnfl’t.ieace.s ·b·eing brought’. to . bear . OFl

  • Page 157 of 247

  • o r National.· M n-lste. s· .aid Members.. of P rliam.ent, Provincial Premiers, Minisl rs and P blic Servants. I note

    r n .’iI

    ! ; Ii’

    133

    the statement by Hr Sebulon Watt to this Inquh:y vhen he informed me that the intention of Kr Seeto, Hr Gila and himself. to e-xtozt bribes_ n gi t -fro C(?mpanles associated vith . th . forestry industr:/” was. ·- ·ttvated . by- th.e ·known· ease by vhich such payaents could be induced or extorted in this industry compared with any other industry. Notwithstanding this clear common knowledge, there has been no effective investigation or regulation of leaders associated vlth forest exploitation.

    It is aost ala:raing that the Oabudsman Commission ls · faced by such huge backlogs and that many leaders against whom there ls clear p:roo1: of most serious misconduct have not yet been dealt with. In the meantime they continue to operate in the public arena. In the context of my flndi gs Mr Diro and Mr Slgulogo fall into this category. Others

    such as Messrs Seeto, T9rato, Raka, e.scape for reasons outlined bel..ov.•.

    Oeaka, Evara and Gila

    Apart from the apparan operational constraints on the Ombudsman Commission there are also some fundamental problems associated with the enforceaent of the Leadership Code. :•”·

    ,–

    The Code applies to a group of people that is clearly too narrow. It is also possible to avoid its provisions when one ceases to become a leader either by

  • Page 158 of 247

  • resignation or by other prior removal from office. As a result people like. Robert Seeto and Roy Evara and others 1isted above can no longer be brought to account for their actions while they were leaders as they have ceased to be covered by the Code.

    In these circumstances I offer my personal support to some of the recommendations ma.de by the General Constitutional Commission in 198 .

    [

    i i ‘ ,…… t. ..

    I

    rI. I ‘ I•

    ,-. ‘i 1

    :,,.•

    The Commission recommended that the Leadership Code should apply to an extended list of people including all provincial assembly members. It also stressed the need to be able to

  • Page 159 of 247

  • investigate and proceed against a Leader who had va Qled his office for one reason or another. Another vorthy recommendation concerned preventing any· leader found guilty of misconduct in the office from holding any other public office for at least 5 years.

    134

    Above all, the Commission recommended that the Ombudsman Commission be given sufficient resources to ensure that all investigations and prosecutions be completed within a six month period from the date that the case was referred to it.

    I support these proposals which are urgently needed.

    ,: ‘

    Criainal Lay

    -r My findings in relation to the offering and receipt of improper benefits in the form of bribes or by activities such as transfer pricing make it clear that the criminal law has neither prevented nor deterred wrong doers.

    There can be no doubt that lht! timber industry, by its ver.y nature, is conducive to acts of a eriminal nature and to acts contrary to law and proper government administration. The fact that the system of permit and licence allocation requires the exercise of individual discretion makes it prove to attempts to pervert the proper administration of the industry. Mor.eov L, the sums of money involved and the potential for large profits, particularly where illegal transfer pricing activities are practised, promotes actions from indfviduals in both· iQdustiy nd government to offer improper payments and to openly seek them. The lack of effective mqnitoring and contr.ol

    r !.. ” r I.:

    I

    Lhroughout the industry encourages less scrupulous operators

  • Page 160 of 247

  • 135

    to embark on improper and er iminal ventures in order to maximise returns. This is done with little fear that they will be held to account for their actions.

    The CPC Report predicted that unscrupulous fo eign operators would continue to gain access to the nation’s resources and it was right. The Report also anticipated that the nation’s leaders would be compromised and become Yilling participants in the improper exploitation of Papua Nev Guinea resources and there can be no doubt that it has

    .·..

    ,….

    happened . Minister Stack has admitted that he has great

    difficulty in effectively monitoring operators due to staff shortages, inadequate training and an inability to

    discipline forest officers. made to remedy this.

    No serious attempt has been

    In these circµmstances the Criminal Law must have a crucial role to play in·regulating improper conduct and in – deterring such practices. In practice it does not.

    There can be no doubt that many of the nation’s leaders and the vast majority of the population will assess the effectiveness of this Commission of Inquiry by the number of prosecution that are successfully under taken and by the panishments given to the vrongdoers. It is unfortunate that this ls the case as the criminal law does not appear to be appropriate or effective as it now stands.

    Recent media reports indicate that Robert Seeto, Francis Sia and Michael Sia are not likely to be prosecuted.

    I do not intend to deal with this matter in depth. I recommend that the whole- area of criminal lia ilit.y. for official corruption be carefully considered. The Lav Refore Commission may be the appropriate body to do this.

    II”””,. I I

  • Page 161 of 247

  • ‘I

    136

    The following matteLs appear to be of major importance:

    It must be a criminal offence for any politician or public s rvant to seek or receive payments or benefits in return for any action taken that is related to any performance of an official or public function regardless of whether that person has the ultimate or the sole decision making power over it.

    2. Equally it must be an offence to offer or pay any such payment or benefit.

    3. The latJ must recognise that people can be compromi ed by payments made to -their spouses or children.

    – Any attempt to compromise a Private citizen ( ie someboay who is not a politican or public servant) and to induce him to act contrary to his legal respons i b i l 1 t i e s should also fall within the scope of the criminal la’w. In this Yay corruption should not be restricted to a 1imited vie’*’ of “official” corruption.

    ,–

    FOREIGN DOMINANCE

    Because of the failure of these various strategies for controlling foreign investment it is apparant that it has obtained a position of dominance in the timber industry: This ·can be· seen .b·y the vay sqme of the. foreign timber co’mpanies ·are able to gain access to timber areas despite la’w’ and PNG policy. Some have I

    •r

    137

    sought to gain timber concessions on the strength of their own mt rits but for many others the words used in IR No 4 at p.85 are quite applicable, especially to the hit and run specialists like Bruce Tsang, Santa Investments, MOI and United Timbers:

  • Page 162 of 247

  • ..· . r ‘

    r-

    “It would be fair to say, of some, that they are now roaming the countryside with the self? assurance of robbcL-barons; bribing politicians and leaders, creating social disharmony and ignoring laws and policy in order to gain access to, rip out, and export the last remnants of the province’s valuable timber.

    These companies are fooling the landowners and i making use of corrupt, gullible or unthinking politicians, lawyers and leaders. It down-grades Papua New Guinea’s sovereign status that such rapacious foreign exploitation has been a·11oved to cont in•ie, vith such devastat inq results to the physical and social environment, and with so few positive benefits to weigh against the irreplaceable loss which has been occurring. It is doubly outrageous that these foreign companies, having got the logs so cheaply for themselves, but at such high cost to the people and to the environment, have then transferred of£shore, secret and illegal extra funds, at a rate of about USD 10 per cubic metre at the expense of the r- landowners and the PNG government”. 1

    !-:·

    138

    ,…….

    COMPROHI SING PNG’ S NATIONAL IN’fEGRITY

    The capacity of National and Provincial Po:iticians and Forest officer: to control foreign investment a j to monitor the forestry industry has been quite inadequate. It seems, oiten, that the foreign companies are controlling the landovners and the politicians. In many vays the foreign investment vhich most compromises our national integrity is – control or influence over our leaders. For instance: .i) Santa Investments has invested heavily in Premier Seeto, Provincial Minister Gila and National Mlnlster Torato. ( IR No 4 and p IMP B of this Volume} ii) B uce Tsang invested heavily in Seeto and invested in Tor to’.s executive officer Lindsay Laila! (IR -NO 4 Vol 4A P.69 and 91)

  • Page 163 of 247

  • iii) Gasmata Resources invested in Secretary Hamalai and Hiniste Dlro (See Section 8 and IR No.7) iv) HOI invested in National member (and former Minister GeT.ard Sigulogo) See IR No 4 Vol 2 App 1) vl Angus invested in Minister Diro (IR No 2)

    At a lover leve1 it is commonplace, in fact almost standard practice, for timber companies to invest in the leaders of landovner companles and communities to gain support for their applications and activities.

    Working through landovner companies and local and provincial leaders the companies obtained favourable results in many instances. Some examples can be listed:

    ( i) Such pressure on Minister Waka persuaded him to grant a “1etter of intent” ov r the Danfu Exension

    [l. [ ·.:

    Ir.)

    139

    ;:}:

    .– ! I :

    ,…. f I

    Permit in New Ireland actually referring to the pressure by saying.

    “I am desirous of avoiding continous pressures on this matter from Directors of Tasukolak, their consultant company, Gaisho and Sir Julius Chan by issuing this Permit quickly”

  • Page 164 of 247

  • •f’· 0ii

    (IR No 4 Vol 3 App 6 p 18

    He later said in a Minute to Secretary Mamalai –

    Secretary, should ve have any problem lu this pi::oject I knov the politicians of the area including Sir Julius Chan are equally to be blamed”.

    (IR No.4 Vol.3 App.6 p.21).

    i i,l Bruce Tsang’s preS”Sure on Minister Diro (assisted

    . ,. . .

    .by. Johh Kasa pw,alov. q… a. _nd Miskl).s .

    Ma. ra. leu) gain.ed. h- im

    ,approval in Kabil (for vhich KSOOO was paid to Angus) and Noatsi (IR No 4 App 4)

    r;I .

    ill) Sir Tore Lokoloko’s “Angus-inspired” pressure on Minister Torato gained favours for Angus (IR No 2) and he altered his decision to withdraw its permit.

    iv) Pressures from Turama landowners and provincial leaders on Ministers Hcrik and Palas Wingti almost gained an unplanned LFA for exploitation by Long Term Trading Co. and eventually gained it a Timber Permit in near record time. ( See IR No. 7)

    v) In Manus Province, pressures mounted by Monarch · Investments, vork-.ing t·hz;,ough. ;Jaha Developin.ent, pushep . – . Forests J.finister. s·tack to declare LFA arid Minfster Waim to approve an environmental plan. (IR No 5 App 4) I •

    r-

  • Page 165 of 247

  • , ‘ ‘

    140

    vi) In West Gadaisu “Santa-inspired” landovnei::

    ,:::)

    pressure pei::suaded Acting Minister Genia the area) to approve an agreement Investme:nts. (see IR No.7)

    ( the MP foi:: for Santa

    vii) Under extreme pressure from rival lando-wner companies, orchestrated by rival foreign timber companies (Santa and Nationwide), Minster Stack approved two dealings in the one Local Forest Area at Napanta Nubui (contrary to legal advice and with disturbing consequences. – IR No 4 Schedule 5 p 5}

    viii) Minister Stack is currently under extreme pressure from landovners of the Bonua Margarida permit area in Central Province and from the Arave area of West Nev Britain. I I Investment·in Politlcal·Partie :

    One of the major causes of worry is the degree of foreign investment being put into PNG political parties. The Commission did not set out to probe this matter, in the belief that political parties’ source of funding was well outside its terms of reference. It was not possible however to turn a blind eye when, in the course of my investigations into the activities of timber companies, I crossed the trail of payments to, or requests for payments from political parties. It is quite obvious that foreign timber companies are prepared to pay large sums of money to political parties, or to individual politicians, in order to gain specific favours or merely to compromise and “hold” them in the hope of gaining benefits in the future.

    r.-,. ·, ,,

    141

    The size and con£ ident tone of the requests made by Mess:rs Diro, Sigulogo and Seeto for payments to be made by Santa Investments and MOI, and the size of the payments

  • Page 166 of 247

  • . ‘ actually m de by those political parties, is the timber industry

    companies to various politicians and evidence that foreigners involved in are using their funds to seriously

    compromise PNG’s national integrity.

    The CPC Report made very clear recommendations and sounded very clear warnings in this context. At page 17 of Chapter 6 the following recommendations are made:

    fit.

    “105. A contribution to the funds of, or the conferring of a benefit upon, a registered political party or political association by a non-c! ti2en, or by any company, firm or other body lihlch is effecUvely controlled by non-citizens shall be prohibited. ( ‘Contribution’ includes money to establish a political party or association) 106. In viev· of the need to ensure that national po itical p,rti s have sufficient funds to continue to function effectively vithout relying on don tions and other ‘ ,· ‘ • . ‘benefits. gi Ven to ‘ tt.Jem by.. f orei gner•S ·( OOI porations • and. indivlduals}, the government should immediately explore ways of fairly distributing finance among such parties from , central fund made up of monies derived from – (a) a specific tax or taxes (or levy), for example on all companies which pay income tax; and (b) donations from foreigners”

    These recommendations were adopted, to some extent, by section 129 of the Constitution. This section permits an Organic Lav to require all political parties to register with the Electoral Commission their assets and income and the sources of them. It is provided in section 129 (1) (b) ( c) that the Organic Law may prohibit “non-

  • Page 167 of 247

  • citizens from membership of, and from contributing to the funds of any

    such pa:r·ty or·· oigan.is·ation” •·. ..

    …:.:.

    1 j 142 – f:1

    ..’ r- ! .-, :

    No organic Law haa ever been enacted in respect of these matters. . _ SUMMARY-

    The various controls listed in this section are too weak or too poorly enforced to implement Policy Principle No 6.

    The controls are not “strictly enforced• and foreign investaent haA achieved a “position of dominance” which has enabled foreign “investors” to exploit the weaknesses in PNG’s legilstion, policy and administration and thereby gain dominance in the tlraber industry. In some instances this has been done by tricking Ministers and Departmental Heads, in other instances it has been done by compromising them by gifts and thereby gaining th.eir support. In other instances it has been done by encouraging the PNG leader to become a -willing partner iri their enterprise- vi.th the p.romis.e· of a .. shaie in the profit.

    It ls for these reasons that I say that foreign investment does compromise PNG’s “national integrity”. For a National Minister or political party to receive payments from a foreign timber company in exchange for “business favours” ls only one step away from receiving such payments directly from a foreign government (or its agency) in return for “polJtical favours”. In this context it is not surpr Ising that the payment by General Murdanl to Forest Minister (and later Foreign Minister) Diro got confused with a timber related benefit during the Commission’s public hearings . , The two types of payment are closely related.

    It is for these reasons that it is a matter of very

    serious concern to see that current Foreign Minister Somare ls involved as a major shareholder with foreign investors in a timber company and why that atter should e investigated. (The next page is 144)

  • Page 168 of 247

  • r- I I I J’ n .. J._,,1

    . ‘(

    ,,.. .::..

    144

    r,i ! I !

    r

    ( See 121-122 above and IR No.7}. also that it· is of concern to

    It ls for these reasons see Hr Eng of Gasmata

    I Resources compromising DOF S-ecretary Hamalai, ar:z:anging a ,business partn.er-ship fo·r ·h{s· vife·· . nd. th ri nte:c lng _ In.to a 1- business venture vith Forestry Minister Diro aimed at l helping the people of his electcrata. ‘ It is also cf concern to be the recipient of further continuing evidence of the cur:rent malpractices involving foreign investment and of timber companies even as I write this final report. (These current allegations which require further investigation are listed in IR No.7)

    POLICY POSTULATB

    7 THE STlTB TO BECOHB 1. PARTICIPANT IN MAJOR TIMBER ENTERPRISES

  • Page 169 of 247

  • .. .-. The:z:e must have been two. main reasons at least behind this policy:

    .(a) By becoming part ovner the State will gain a position on the company’s Board of Directors. This will give its representative access to all reports placed before the board and should permit an informed involvement in the company’s decision making process. From this positlon the State’s representatl ve should have an effective say about logging and marketing practices. It should be harder for a company to engage in transfer pricing or destructive logging practices whiie the State representative sits on the Board.

    (b) As a shareholder the State vould be able to receive its fair share of any dividends payable should I the company declare a profit.

    nl ., r I

    -·- — …..::….. t- -….:…t…. _. _ _: ,. . : .!,, . …&J ..

    145

    Following this policy the State took up equity in several major enterprises.

    1 ) Stettin Bay_Lumber Co. The State invested KlSO, 000 in SBLC which bought it 25 per cent of the equity and gained it one director on the Board. The directox is a public sexvant from the Department of Finance. In 1987 SBLC issued f xther shares to improve its debt equity position but the State did not take up the shares offered to it. These vere taken up by the other owner, Nissho Iwai of Japan (the mother company} and the State’s share dxopped to 17 pex cent.

    ..,

    Considering minimal profits

    the size of its for the Stat so

    turnover SBLC has made far. This is shown by

    SBLC’s tax situation.

    SBLC paid company tax in the years 1974, 1979-1982, 1984 and 1987 but the total company

  • Page 170 of 247

  • tax payment was very small, In the 18 years between 1969 – 1987 (inclusive} the t:otal company tax paid amounted to only Kl.338 million. This should be compared with my findings on SBLC’s transfex pricing which, in the two years 1986 and 1987 alone, amounted tc well over two million kina. Clearly the profits are not £loving to the State but to Nissho Ivai – the major shareholder.

    SBLC did declare dividends between 1980 1984 (inclusive) totalling K3.4 million and the State’s 25 percent share of these dividends amounted to K850 000. The amount was not paid as cash dividend however but as bonus share issues.· This as raic d the par valu of the State’s equity in SBLC to Kl million.

    ‘•,’

    I t • r There is no sign that the State Director is an active

    1-46

    I • I ,

    ,….., ! i I ‘ ‘

    r t. I

    participator at Board meetings or that he gains access to secret” information. It would be very easy to keep information from such an outsider (especially as many IL:,k)UL ts are ‘Written in Japanese l and of course there is nothing to stop “sensitive” decisions being .taken outside the board meetings.

    In fact the Commission’s detailed study of SBLC’s marketing practices disclose that it consistently indulged 1 in transfer pricing from its first shipments and that practice was still continuing right up until 1988. (It probably still is).

    ii) Kumusi Timber Co

  • Page 171 of 247

  • The State, together with the Oro Provincial Government, took up 75 percen of the equity in Kumusi. and each obtained one director on the Board.. Within three years Kumusi vas in

    I•• • •

    ..·receiver.ship owing . O..er.. K. 3.

    m_illion in.

    de.bts. . Betveen .them

    the State and Provincial governments ploughed into the iling company a further K900,000 (by ‘Way of foregoing export duty and royalty payments) which was never recovered. KTC has no’W ceased operations and there is no chance the governments vill recover their original equity or the later advances. KTC never declared a profit. (IR No 5 App 3 p 4- 6)

    There is no sign that the govc:tnment presence on the Board influenced KTC’s decisions before it vas taken over by the receivers. If there vas any degree of government control the sudden and disastrous collapse of the company seems to indicate it cannot have been very successful.

    ·1ii) -Open· Bay- T’imber · Co.’ P_ty ,Lt.p . . ., The government · tdok· up _20· percent equity ln ·open Bay.

    ,. – i

    ,- 1 I.:

    .1:.. ……..

    .I ‘

    I l:

    147

  • Page 172 of 247

  • It has made profits only in some recent ye3rs. It has accumulated massive losses however and there is no chance that it ilill declare a dividend for many years to come. (See IR No.6 App.6).

    It is in a hopeless financial position, its performance of its operating obligations ilas disgraceful and it vas a systematic transfer p:dces for the benefit of its Japanese parent company.

    Clearly any degree of Government participation was a complete failure.

    control or

    -,·,•. ,…….,

    . ,. iv) Wevak Timbe s {later Madang Timbers) At one stage a controlling interest in this company was purchased by the Inveslmt!ut Corporation of PNG from ·its previous owner Mr E Fitzgerald. rt proved to be an u-nprof.itabl investment and, after the Secretary of the Departmerit of· For.ests, Osca·r. Mamalai, made, t·he -· necessary introductions to Chin Ah Eng of Gasmata Resources, it vas sold to Gasmata at a lov pr ice. It ls said that, n order to finalise the sale of the agreed number of shares, the Investment Corporation was forced to purchase the balance of Fitzgerald’s shares, at a very high price (b•:tt this has not been checked thoroughly). When Wewak/Hadang Timbers vent into rece.ivership in early 1989 Hr Eng had already departed PNG leaving many debts. It ls said that the Investment Corporation is n0v liable for debts outstanding at the time of the sale to Gasmata amounting to K 300,000 (See section 8 and IR No,78).

  • Page 173 of 247

  • Ma. da. ng Ti.m. bers cur. · oyalties. ·,. –

    rent.ly owes about K200 000 in unpaid

    r–: ‘ ‘I .! 148

    ‘ ‘

    i ·1 i ,! ‘

    i. I ”

    Gnce again the Gcvernment ‘s participation in a major timber enterprise proved to be absolutely unprofitable and gained t no degree of control over the operation whatsover.

    v) Ulabo Timber Co Pty Ltd This ls another FDC in which the Provinci l Government took up substantial equity. The operation vas not studied in detail by the Commission but DOF records indicatt’ that it has not been suc.: u:.; ful, paying no dividends to its shareholders. The Provincial Government has confirmed this. One reasons may be the exclussive marketing arrangement that its Manager Grooms appears tc have with Sumitomo Forestry Company. (See IR 6 App.2).

    vi) Woodlark Island D velopment Corporation and Bougainville Forest Enterprises are two more small companies in-which Milne Bay Provincial Government and the North Solomons· Provincial Government respectively took up equity. They have not been studied by the Co.amission regarding this aspect. It is understood WIDC has not made substantial dividend returns to its

    shareholders, and sells Enterp:r ises.

    is controlled by its logging contractor through the transfer pricer Lusco BFE is managed by Groomes and through is

    Manager appeax:s to have exclusive marketing arrange1nents vith the trader Sumitomo Forestry. ( See IR No.6 App.2).

    vii Kel Besau Kampani (West Coast Mansu (KBK} The latest instance of government involvement in a timber enterprise conce ns the Manus Provincial Government’s.pait owne ship of the “landowner” company KBK which was ·awarded the West Coast Manus. imber Permit. It is said that the aim of the Provincial Government’s involvement

  • Page 174 of 247

  • is to• ensure that proper

    149

    agreements and arx:angements are set up and that the r contractor, SEAL Pty Ltd, honours the ta:rms of the L,ogg 1 ng . al)d Market in9 agre. e . ent. . if.ter three yeaf S of conducting an ex·port.. loggi g ·.opera. ion SEAL · will be· obliged to construct a veneer mill to be run as a joint venture with KBK. The aim is for the Provincial Government to then progressively hand over its share of the equity in KBK to local ownership.

    So f.ar the Provincial Government I s heavy involvement has resulted in the achievement of a st:cong set of conditions being agreed to by SEAL which include a substantial perfo:cmance guarantee and realistic environw2ntal, marketing and logging conditions. Whether the venture roves p:rofitable in the long run to the Provincial Government (and the landowners) vill depend on hether SEAL honours its committment to const:ruct and operate the. venee:t mill and vhecher that . joint venfure ‘proves to’ be ‘pro”£ itable. . ..

    To this stage the Provincial Government’s involvement has definitely given it a controlling say in the affairs of KBK but it is too early to say whether it vlll be similarly ln.tluentlal in the conduct of SEAL’s logging operation and later in the operation of the veneer mill. (See IR No 5 App 4 for a discussion of Manus timber affairs and see above at p 120-121 for a Case Study of the application of National Forestrr Policy in relation to Hanus – and see follov up in IR No.7). i

    SUMMARY

    The State did seek equity in a few timber enterprises but it is hard to see many benefits. from its having done so.

    … l • ..J!ilLI. • lj r r.

    150

  • Page 175 of 247

  • ,. [ I” ·

    .–

    t

    II

    8. TO EHSURB A FAIR RETURN TO LANDOWNERS AND THB NATIONAL AND PROVINCIAL GOVERNMENTS

    The question of ensuring a ·fair return from timbe:r ente:rp:rises for landowners and neighbouring people has already been discussed in :relation to Policy Postulate No 4. at pages 110 and follo ing. The question of ensuring a fal:r . return for National and provincial governments has been touched upon during the discussion on planning and orderly development of the resource as that is one of the major aims to be considered during the planning process.

    I shall now list the major means whereby the National Government seeks to gain revenue and other benef fts from ·. timbe enterpzises:

    National Benefit ·Royalties: The National government was, until 31 December 1987· retaining 25 percent of the royalites paid by timber operators. As previously discussed this was probably excessive and contrary to the provisions of the Organic Law on Provincial Government (Page 100) Since then the Government has paid 75 per cent to landowners and only 25 per cent to Provinicial Governments. This too appears to be ! unconstitutional, Under the Forestry (Private Dealings) Act there is no requirement to pay royalties to government but this is sometimes provided for as a condition of assenting to a Dealing.

    In 1987 the total royalties paic amounted to KS,597,015 of ilhich the National Government is said to have retained Kl,399,253. (Landowners also received K1,399,253 and the) (Provincial Governments received K2,798,507.

    Company Tax: Company tax is levied on the p.rofits of all companies according to the normal pcinciples of income tax law. The rate currently applicable is 30 percent plus 15 percent witholding tax. The tax is levied on the income which is disclosed in PNG and normal deductions are allowable including deduct1ons for seven years from the date the loss was incurred.

    One of the most startling results of this Inquiry is the extent of the transfer pricing fraud which has enabled many, many companies to disclose losses in PNG while at

  • Page 176 of 247

  • the same time building up transferred sums in overseas tax havens at the rate of about USO 8 to USD 10 per m3. (The details a e set out in IR No 6 and elsewhere throughout the Commission’s reports). The practice has resulted in massive tax evasion and has very seriously eroded the benefl t the National Government expected, and was entitled to receive by way of company tax and dividend witholding tax. The size cf the loss can be gauged by the fact Lhdl 13 companies and 4 individuals have paid or agreed to pay ove:r K3 million in avoided tax. Further a3sessments of over K6 mi11 ion have issued concerning 6 companies and 4 individuals and another eight companies are under investigation. A list of the companies which I have found were transfer pricing in substantial amounts ls set out in t:ctlons 6 and 8 (and see IR. No.6).

    Gr;oup Tax: This tax is meant to be deducted by a company from the wages of· its employees at the time the wage is paid and remitted mo thly to the Taxatior Office.

    I have found numerous instances where timber companies have paid a substan ial part of their expatriate employees’ wages overseas and failed to disclose the payments or deduct group tax. Again the size of the problem can be gauged from the fact that, on the strength of evidence collected by the Commission group tax of K747,568 h2s been collected from, 1984 or agreed to by, four companies. More are under investigation concerning group tax avoidance.

    Iaport duties: Like all other enterprises, timber companies are obliged to import a great deal of equipment, machinery and other items. In the process they pay import duty which is therefore a benefit rec ived indirectly from forestry by the National Government.

    Export Duty: The.duty on the export of logs is 10 of FOB pr ce.. Thr.ough a bureaucratic error this duty, from . May 1984 .uritil June 19 7… w s. b.eing calcu_lat_ed: on the· in.imtlJll. expor.t pr ice rather than on FOB pr ice. The MEP has a1ro.ost always been well below FOB price and this has resulted in considerable loss to the PNG government ( and to Provincial Governments whose derviation grants are calculated clS a percentage of export duty paid}. The errot in the the system was pointed out by this Com;ni ssion and immediately corrected. This error has cost hundreds of thousands of. kina In lost revenue in some years..

    A greater loss has been caused by transfer pricing and other methods of understat ! ng the disclosed FOB pr ice. I·n New Ireland for Instance I have calculated that the avezage amount of transferred pr ice has been about USD 10 per m3 and that prices actually paid by th end buyers ere about ·20. percent higher . than.” the··dlsclo.sed FOB price Had the. duty been paid· on the true . pr ice it Yould · have led to a significant increase in PNGs revenue.

    .., In regard to export duty the present requirement is that the amount shou,ld be paid before the ship departs. A fairer procedure might be to let the ship depart first but to insist that each company gives its bank an irrevocable direction to

  • Page 177 of 247

  • pay export duty out o! the pro·ceeds of the letter of credit as a first charge.

    Foreign Revenue Earnings: One of the benefits which flow from any export operation is that it will contribute foreign earnings to the overseas balance of payments (assuming the company exports more produce than 1 t imports as equipment dUU materials etc). The common practices of understating the value of exports and overstating the value of imports has drastically worsened PNG’s balance of payments situation. (IR No.6 Vol.1)

    Infrastrycture constructed by timber enterprises: If the condltions of a permit or J:II.oject agreement have· been ..,ell · thought out, and if they are fulfilled by the Company, then a timber enterprise may bring major benefits to the National Government (and to provincial government and people). Thus 1£ a company constructs many kilometres of necessary roads and bridges as part of its infrastructure conditions it vill be a major benefit lu the government which otherwise would have responsibility to construct the roads. Companies which did this to an acceptable level include SBLC and Open Bay Tiaber Co which are both constructing roads which will form part of the Kimbe – Rabaul Road; Vanimo Forests Products has built a road whl h will eventually link Vanimo to Altape and therefore to Wewak; Jant has upgraded the Gogol to Madang Road and Leytrac has constructed many kilometres of road as part of the New Ireland South West Coast Road; Ulabo Tiaber Company constructed· a· road which will form pa;t· of a proposed Alotau – Port Moresby Road. (Roads which were constructed by Angus (Santa) at Gadaisu and by Ulabo at

    154

    Sagaral should have been aligned so as to link into this major road. DOF planners however did not write this condition into th ir permits and the roads they have constructed have been aligned purely for accessability to timber and are unsu.:.tably allym:d for use as a national highway).

    On New

    Ireland

    Danfu

    Logging and

    Agriculture

    Development

    has

    constructed a

    road which

    links several

  • Page 178 of 247

  • villages to Namatanai.

    The Naa Yang permit included major road construction conditions but these were not fulfilled.

    As well as reading, conditions requiring construction of other “governmental” projects have been written into some permits. Thus VFP vas obliged to construct a major u1:ban

    .. .develop-ment ·in Va lmo

    – townsttip

    (but has not done so) Vanimo

    .. and Nam “Yang Vere ·alto ··ob_licg’ed to build ·substantial ·vh rfs’ and have done so. New Ireland Otsuka’s wharf building obligation was, however, dishonoured.

    Provincial Government Benefits: -‘ Royalties: In a slailar way to the National government provincial gove:rnments also stand to gain by rece3 vi.ng royalties from timber enterprises. As previously stated, their entitlement under the 0Lganic Law on Provincial Government is 100 per cent of royalties less costs and the love:r payments they are currently receiving are in breach of those p:rovisions. On 1987 K2,798,507 was paid to p:rovincial governments as royalties.

    Derlvat on G aot; Theoretically a p:rovincial government s r ve ue may be _boos. d.· – Y ;.a··fc>’ es·t ; proje_ t if t logs_ ar exported out of the province. In those circumstances the Provincial government ls ent1 t led to :rece lve 1. 25 of the

    155

    total FOB value of the logs. This ls deducted £:com the National Gove:cnment’s 10 export duty. The current practice ):tovevex. is or. the amount: of any royalties received 1:r:i the province. ( by landovna’rs nd by p1iovincla·l .. 90Yern.ments )··t· . be. deducted from the derivation grant other.vise payable under the “l.25” formula. In the past, if royalties exceeded the amount of the derivation grant this has sometlaes led to additional monies being deducted· from other funds due to the pi:ovlnce. That practice has nov been stopped and if royalties are in excess of the derivation grant that merely results in the cancellation of the derivation grant.

    Budget Allocation: The principles and p:cocedures fo:r: allocating funds from the National Gove:r:nment to the provinces has been previously described at pages 99-102. The amount of the general untied grant, or of the “tied” divisional allo9ation, is largely deterained by reference to forestry expendit re prior to the establish ent £ ··p:c:ovlnc iai gov0e r’nme nt . . .Tlie1:’·e iu:e· hov’ever Timited ,way.s whereby a

  • Page 179 of 247

  • province which .nas subsequently’ experieiiced a substantial increase in forestry activities may gain an increased allocation. This could be treated .. a.s. 1.an

    . .. .

    additional return to provincial governments.

    Landowner Benefits:

    ·,’ ..’o .r

    • _I I

    ‘I

    This subject has been exhaustively dealt vlth at pages 110-120 above.

    SUMMARY

    Thet:e is no doubt that the National Government ….gains some benefits from forestry in the form of various foims of taxes and duties. It may also gain by vay of increa,,e in foreign exchange earning and by being the benef lciaxy, of infrastructure such as roads and bridges, It is an

    : ·’.

    •,•,

    1S6

    unfortunate fact, however, that on many of these items, the govetnment is being ·cheated by companies which indulge in transfer pricing 1 and which fail to perform the infrastructure conditions of their permit.

    Provincial governments do not seem to gain a great deal from most timber enterprises as their

  • Page 180 of 247

  • royalties have been undercut and the derivation grant is cut back in proportion to royalties received. Their involvement in joint venture timber enterprises has been singularly unsuccessful.

    As previously described the landowners appear to receive the smallest, most unfair share of all.

    . ,. . ..

    The lack of effective joint planning and consul tat ion between national and pr1Jvinclal governments described earlier explains .to a large degree why e £ f ect 1 ve steps are not being .taken to ensure that provincial gove:rnme.nts, ···national· ·government ilnd·. lan,downers ar.e all getting .a .fa’ir retur.n from timber enterprises. Through the various gaps and defects in the governments system for controlling the timber industry the lion’s share of the profits are being shipped overseas. Only the left-overs are available for distribution in Papua New Guinea. (IR No.6 Vol.1)

    Al present not enough is belng done to ensure a fa.1:r return for all these potentlal beneficiaries. Thelandowners are usually unfairly treated but sometimes the National and L Provincial Governments also do very badly froa the timber project.

    Jr,••

    ·….

    157

    POLICY POSTULATE

    9 PROMOTE MEDIUM, AND SMALL SCALE FOREST PROCESSING AND ASSOCIATED

  • Page 181 of 247

  • INDUSTRIES OWNED BY NATIONALS

    The Commission did not attempt a specific $tudy of this policy.

    The sort of things envisaged by this policy would include:

    (a) Agro Forestry plots where village groups would be encouraged to plant up appropriate stands of timber and underplant with (say) hybrid cocoa. This is actually being attempted from the Hadang Forest Office where an officer has the task of planting up trial village plots as demonstration· models with the eventual aim that the timber will be harvested and proces ed through the Jant chipmill. There is ver·y 11 ttle response from the people and 11 ttle pr.ogress so far.

    (b) Charcoal Production: This type of project was originally written Into the Wawoi Guavi Timber Permit !or Block No 1 – to establish a charcoal/pyrolysis plant but it was not proceeded vilh CIR No 5 App.1)

    (c) Other uses of waste products: One would hope that off cuts from sawmills, deckings in the bush, reject logs could be put to some use by a small local enterprise. For instance reject logs could be fed into a small forest mill or wokabout sawmill. Local carvers or furniture makers could be using some of the prime species as the rav material for their business. These sorts of enterprises just do not seem to be o era ing and are not bein acti el.y enc. quraged by government. · One of the complaints against Vanimo Forest Products was that it refused permission for the local

    “··

    ·’l·o::·

    158

    townspeople to collect trimmings from the waste pile at its sawmill whlch’could be used for cladding on low cost houses in nea;t;iy villages and sett.lement .. VFP .i sisted on bux;ning . t.his ·. “wa·ste” .. timber hl h· ‘·had.- s ch·- p te.!)tlal. value.·.· ·.(By contrast Fitzgerald’s small sawmill in Madang made this type of timber available free of charge).

    (d) Involvement in production For a short period SBLC employed two local contractors using a forest sawmill and a wokabout sawmll to cut flitches in order · to boost the prc-,duction of lts sawmill. Potentially .this could be a useful sort of associated business enterprise. It ls not being actively promoted by government nor written into the teT.ms of permits and project agreements. Beechwood Pty Ltd, however, is

  • Page 182 of 247

  • utilising small village sawmills as “t,1′.’ea.fcdovn” mills to feed its sawmill near Mt Hagen (See P 174 below)

    · · ‘.!’here are general ohll’ga.tio”ns·· vritten··1,nto some agreements to promote loca.I business enterpriser;… The example of Vanimo Forest Products is discussed in IR No S ·App 2. That company encouraged the f ormatl on of a plant hire· firm, some PHV businesses, a chainsaw group.. village grass cutting groups and a security f i:cm to service the requirements of the company. That ls probably the most sustained effort made along these lines and was supported by a National Government Project team.

    1/f ••••

    The security firm and the chain saw group were sacked for non performance but there is some success with the vehicle hiring groups. –

    ,·· t

    SUMMARY The overall im1 pression I gained was that very little attempt is being made to utilise the p0tential created by the existence of a timber operat1on so as to actively stimulate the development of small and medium size PNG enterprises.

    POLICY POSTULATE

    10 PROHC:ION OF ONSHORE PROCESSING

    (A) DEVELOP PERMANENT FOREST ESTATES SUPPORTING LARGE SCALE INTEGRATED ONSHORE PROCESSING FACILITIES

  • Page 183 of 247

  • . ,. . . (B) ENCOURAGE SMALL AND MEDIUM. SCALE ONSHORE PR9CES.SING AND REPROCESSING INDUSTRIES WITH HIGH .DEGREE 0 ,OW SHIP AND PAR ICIPATION · y PNG. CI’.I’IZENS

    Onshore processing and reprocessing has been stated to be a major aim of PNG Forestry policy since well before the 197-4 White Paper on National Forestry Policy. In early years processing was limited to fo eign owned, small scale sawmi 11 ing for the domestic and export market and to the Bulolo pine plywood industry based on the Wau/Bulolo government planted pine plantations.

    The 1974 Policy reflected the first “self governing” Government’s “Eight Point Plan” philosophy of national ownership of, and participation in, small and medium scale processing, vhich would benefit village dnvelopment and

    e. ncourage self. . ‘ hel·p:.··.s..cheJ..Q”es •. . ·. The·. poli y· main. co”ncentration however ·was ·o ·”laigf: inte”gra·ted operations

    . I :•:·’·

    producing sa’W’n timber, ven(:er and/or plywood and ‘woodchips “as the best method of stimulating onshore processing” (“National Fores try 1 Poli cy 1974” )

    A LARGE SCALE INTEGRATED PROCESSING.

    This aspect was vell thought out and formulated. It was realised that sa’W’ milling and plywood manufacturing are wasteful processes ‘W’hich require large volumes of logs but have, at the most, a 50 percent recovery rate. To gain the maximum benefit from the trees cut it is preferable to encourage a large integrated processing facility to be established in each forest area. It was envisaged that there could be several smaller sa’W’mills and plywood or veneer factories operating nearby (preferably with.a high degree of national o’W’nership and participation) – possiply geared in vith v llage run plantations .and agro forestry pl ts. Th se .would be centred around a large industrial

    ..·compl.ex . lnvolving .. a. sa.vm. .i 11 and or·.

    pl,, y ·.

    or venee.r mi11

    inte rated vith other processing facilities which would uti 1 ise the vaste. Ideally the facility would produce, amongst its various products, a product like medium density fibre board, the production of which would use up virtually all the waste from the sawmill, veneer mill or plywood mill and which would supply a domestic as vell as an export market. Another possibility would be

  • Page 184 of 247

  • to integrate a chlpmlll into the industrial complex tu produce chips for export or possibly, eventually, to feed a local paper mlll.

    The policy required that these forest estates be “permanent”. This was to be achieved by progressively establishing forest plantations which would supplement and eventually replace the natural forests as the source of ·supply ·fo·r the· mills-… In ,·tQe ea_rly days, of· _course, the· • Ill • • supply would ·come. from. the natural forests. until the plantations Yere mature enough to harvest.

    Jant Pty Ltd: In fulfilment of this policy Jant vas encouraged to establish a chipmill in the Gogol forest near Madang. It had an obligation to plant up forest plantations and to encourage the establishment cf vi:lage lantations and agro forestry plots so that the local people could benefit from the existence of the c0mpany which would clear fell their forests. Jant was given no log export quota. All its sawmill quality logs were expected to be sold to the adjacent sawmill run by Hadang Ti•bers (formerly Wewak Timbers) and the rest would be chipped to supply its parent company the giant Honshu Paper Company of Japan.

    . .. . .

    Nam Yang Timbers (PNG) Pty Ltd was established in West New Britain in 1981 with a similar obligation to establish plantationu and a chipmill. While waiting for the plantations to mature Nam Yang was to log ·the natural fo est and it. was. permitted to export log for the first years ·· pending· completion-·a-nd· commission of .its chipmill, -due in 1983.

    Stettin Bay Lumber Coapany was encouraged to build a large sa rnill in West New Britain and to plant up extensive forest plantations to supply it. The long term plan was to

    extend into other forms of processing such as fibre board and/or chipmill and feasability

    veneer, ply, studies f,or

    these projects were to be carried out. Meanwhile SBLC was granted a quota to export logs to help finance these processing facilities. (IR No 6 Vol 3 App 5) •.

    SBLC was also obliged to carry out extensive road and bridge building operations to provide a benefit for the wider community. i”

  • Page 185 of 247

  • Open Bay Timber Company was encouraged to commence operations in East New Britain and was similarly obliged to build a sawmill and establish plantations. It wcw given roadlng obligations to link in with SBLC’s road construction so as to form part of the proposed Rabaul – Kimbe highvay linking the provincial capitals of the tvo provinces.

  • Page 186 of 247

  • t ,. • •

    Vanlmo Forest Products The attempt to establish a similar integrated processing complex in the Vanimo Forests Timber Area eventually resulted in Vanimo Forest Products being granted an (interim) five year permit to establish a sawmi 11 and conduct f easibi 11 ty studies £or further processing facilities. The company undertook an obligation to promote local business development and associated industries as well as to establish trial forest plantations. The aim was to, eventually, replace the natural forest· by. plantations as tpe source of supply for the savmi 11 . and associated .processing . faci.fi ties. .To this end VFP. was ···obliged ·to e·stablish .. a·-sma1.l trial foi;est plantation-·with-a view.to extending the plantation when the long term permit was granted. To promote the wider social and economiq development aspects of this onshore processing policy a Project Co ordinator was established as head of a National Project Unit.

    VFP was also obliged to carry out a large scale urban development project to provide housing for approximately 200 of its employees in Vanlmo township. Meanwhile the company was granted rights to export approximatly 200,000 m3 of logs p.a. (IR No 5 App 2)

    Jawol Guayl Tiabex Company: A similar atteapt to set up an ·1-nteg:r.:afed processing··: f.aci°li-,ty. in Western. Pr.ovi.nce va$ commenced when WGTC was permitted to start operating in th.e Upper Bamu region. rhe r:onditions oz:lglnally imposed o_n

    163

    WGTC included the establlshement of a cha.rcoal-pyrolysls plant and various other agricultural, cattle and croc dil_e/f 1-she.r ies projec.t . . T e- co1:ldi:tions ve::ce hast.i ly and badly thought out ·( for ‘”::ce·a n-s· fully .discu25sed 1’n·:1R- No 5 App 1)

  • Page 187 of 247

  • POLICY PBRFORKAllCB EVALUATION – ONSHORE PROCESSING

    None of these projects has fully achieved the stated policy objectives of establishing a permanent forest estate supporting large scale integrated onshore processing facilities.

    Since the widening of forestry policy in 1979 to promote log exports the focus of all these operati ns shifted to this aspect (See Appendix 2 and IR No 6 Vol. 1)• . Ha• . co.mp.le..ted its .. .. :. ‘ .. . six month.s ·. ., . … schedule but ·the chip11ill never operateg and -the ‘p.lan ati-ons were never established. Its per.mlt. w.as· ca celled in.1_1985 after it had been operating for some four years entirely as a log export operation. It has since been granted a new permit (see below at page 169).

    Vani110 Forest Product:3 has car:r led out a log xport operation. The trial plantations have not been estaqlish d (mainly because the government has not made land availabl l Its feasabllity studies for further processing indicate t at a chipmill is feasible but it has made no headway in studies into further processing such as veneer, plywood and f lbre board and the chipmill, promised by 1988, has not yet. been constructed.

    • ! ,i,

    9 •• ..,, • •’

    VFP did establish its required sawmill within the prescribed time period. It produces the required volumes. For this it is granted an additional log export quota and a 50% discount on export duty payable on log exports. It h s very low recovery rate which does r.ot indicate a commitment to efficient sawmilling. The fa=t that it has made no progress on studies like further i;::rocessing, reprocessing, natural regeneration and :reafforestation indicates its lack of interest.

    Wavoi Guavl Ti•ber Co managed to avoid most of the conditions imposed on its operation in Block land commenced operating in Block 2 as a straight out log exporting enterprise with an obligation to operate a sawmill, Completion of the sawmill is now moxe then two years overdue (IR No 5 App 1)

  • Page 188 of 247

  • Madang Timbers always had a log xp rt quota to ope:r te alongside · its sawmill· op(‘ration. It· was expected· to process poor quality logs through Jant’s chipmill. Increasingly it has tended to utilise its own reject logs to process in its old and inefficient sawmill instead of buying from Jant. (It also operates a small chipmill), Consequently Jant’s market for its sawmill quality logs is drying up. Madang Timbers ls now in very serious financial dificulties (See IR No.7) and a :receiver has been appointed.

    Jant With Madang Timbers drastically reducing its· demand for Jant’s savmlll logs (from 15000 a3 to 750 m3) these valuable logs are all being “throvn avayn into the chipmill. Jant has continuosly called fo;c: a peradt to export logs and to export an increased number of flitches. Until recently this: has always been :refused.. H a-nvhile modern technology has enabled its parent company to convert to using recycled paper to replace 70 percent of its timber

    ..

    input requirements. T0 make Jant’s position even less secure it had been promised the South Naru resource and had completed its feasibility studies there before it discovered that the government had purchased the timber rights for an incredibly short period of only five years. Jant ‘Was not granted the permit as promised because the TRP had already expired.

    Recently Jant has ceased replanting the plantations it has cut out because the various government leases granted to Jant will expire before the end of the next rotation period. Most recently Jant has been granted an export quota, ‘lit’hich enables it to export a po.rtion of the annual harvest from the plantation. The export logs are thin poles and the effect is that these plantation plots ‘Will probably be clear felled. As the government ls alloving Jant to run out of resources it appears likely that Jant ‘will depart PNG in th near future, leavin.g the government o,.ned pLrntation l nd, and the locally o._ned · nearby natural forest, clear· felled. Virtually none of the vider aims of the integrated processing policy have been fulfilled.

    Stettin a_q. qg_L_S& This company has gone further than any other to fulfill the government’s stated po)J.cy. It has established extensive plantations and the species are selected so as to be usable in plyvood and veneer processing. It has established a :;awmill which has al•.ays processed below the required rate. It has conducted feas1b111ty studies into further types of processing. It nevertheless ls predominantly and primarily a log exporting enterprise exporting over 200,000 m3 p.a.

    The sawmill is inefficient and ls processing mainly reject logs and the: vasteage is consequently v_ery tiJ:gh; It achieves a recovery rate of only 30 percent: and the huge – pile of scrap off cuts used as corduroy on SB C’s roads are

  • Page 189 of 247

  • ,, ‘

    included in the calculations as p ocessed timber. It exports sawn timber to Au5tralia and New Zealend but 70 per cent of its produce ,is sold domestically.

    The degree of the Government’s commitment to this ype of operation must be questioned as it allowed SBLC to commence and operate for seven years with no legal perm, or project agreement and without giving it secure title to the plantations it was esbllshing at a cost of K 75 aillion. During this period SBLC continuously fought to put its operation on a legal footing but COQld not budge the government. It is a sign of how profitable the log export market must be that SBLC was prepared t carry on investing at such a high rate when the government was qnable or unwilling to give it any security whatsoever. (From its log export operation SBLC was, I have found, making a massive illegal profit by transfer pricing (See IR No 6 Vol 3 Ap 5} •

    SBLC has :recently been granted r lghts over the very large Ania Fullerbourne Timber Area. It appears that the government has failed to push strongly for its integrated processing policy as SBLC has actually been allowed tc teduce existing levels of sawn timber production in the short term and has not been obliged to commence the vicler, more integrated, processing wh1ch would reduce its uneconomically high :rate of wasteage and which would provide local employment and increased foreign earned revenue in the process. SBLC now operates under a signed project agreement but still has not been issued a permit.

    The Managing Director of SBLC pr.oduced to the Commission the results of feasibility studies already carried out ·by the Gompanj through 1 t·s par nt. NlssJic, I al’s, research facilities in Japan vhich show that tiabers available to the company in the natu:ral fore!’.ts and planted

    — ‘, ‘!’” .. •,

    in its plantations are suitable for Veneer, .5 ingle ply and zephyr board product ion, SBLC is, I believ?, w i 11ing to commit itself to the very sort of integrated processing on a permanent forest estate required by government policy. The Government however has not required this wider processing of SBLC nor granted the long term security of title required to make the heavy investment practicable.

    Open Bay Timber Company was ln disgraceful breach of its conditions (See IR 6). It now claims to be on schedule with the light burden of reafforestation required of it to date. This year

  • Page 190 of 247

  • however the burden increases and it will be required from now on to plant at a very high rate of 1100 ha per annum (compared with 750 ha required of SBLC). It still has six more years before it is obliged to construct its chipmill and, in the meantime, it is enjoying the benefits of a log export company. As Jant has apparantly persuaded the DOF that its chipmill operation is not really profitaple enough to·pursue, despite its assured market to its powerful paren , one wonders whether the Open Bay Chipmill will eve be built or, if built, whether it will remain unused like the Nam Yang chipmlll.

    In retrospect it seems that the 1979 decision to allow large scale processing enterprises to export a limited volume of logs to stimulate cash flow and thus support th.e processing operation has come to dominate the entire operation, If a company is allowed to export a high volume of logs then it faces a problem of what to do with the hlgh volume of rejects which were not up to export standard .. I! there is a sawmill available the obvious thing is to sa;v them. In the absence of a chipmill or fibre board plant the only other o tion is to burn them. Most of the logs being fed into ·the Vaniino, Stettin Bay and Open· B y mtl·ls ar therefore rejects with twists, hollows and other defect&. .; For this reason the wasteage is high and the quality ls low.

    ”,!,”‘-···T

    •:; :.,·.

    In addition, as the companies are looking to log exports for easy and greater profits the savmills tend to be outdated and poorly run.

    The result of these factors is that the companies are really log exporters who carry out onshore ptocessing and (sometimes) reafforestation rather reluctantly or avoid this obligation altogether. This trend· has apparently been continued in recent allocations. • A further result ls that the goo..:! qual 1 ty logs are being processed in foreign countries supporting processing industr!es and prov!ding employment. Only the logs vhlch these foreign count:r ies do not vant and reject are being used to feed local processing facilities. I,

    With this bad start and a lack of redandancy processing, obligations to utilise vasteage local processing ls at a gieat competitive disadvantage. Another compa y ttiat·vas in open and disgraceful breach of its infrastructure conditions while it concentrated on 109 exports was Nev Ireland Otsuha Development (See Ir4).

  • Page 191 of 247

  • Recent Allocations:

    Ania [ullerbouxne TRP 1rea: The project agreement signed vith SBLC has a reduced sawmllllng condition, massive log exports and no specific requirements to commence further types of processing.

    il.D.t,: Instead of being given secure title to enable l1: to replant the logged plantations and to plant up new areas Jant has instead been given a limited right to harvest and export logs from he:planta ions. This seem$ tp in ic • recognition by the government that the Jant chipmill venture is doomed.

    ” ·-

    ?.·

    Manus As previously described the National Government seems to be no longer supporting the Provincial Government backed proposal by Kei Besau Kampani which aims at esblishing a veneer mill in three years time.

    Arave The permit for the Arave timber area in West Nev Britain has been allocated to a landovner company (despite strong opposition from a rival “landowner company” claiming to represent the true customary ovners l. It is said to include a condition requiring 25 of the volume of logs exported to be processed through a sawmill within five years. There ls an Intention to carry out downstream processing later on by way of moulding and possibly a veneer mill. It is said also that reafforestation has not been decided upon and is awaiting finalisation of the logging and marketing agreement.

    By adding a savmlll condition onto a predomlriantly log exporting operation it will again result in reje.ct log-s being used and a high wasteage rate vlth no secondary processing planned which will use the waste.

    Nam Yang Tlabers has again been issued a timber pe mit at Kapuluk. This time it vill be predominantly a log exporting operation but with a condition attached to process 30,000 m3 input through a saw11i l l by the end of year :2. There i to be no requirement to reafforest but reafforestation levy of Kl per cubic metre ls to be charg d. It is intended that this will be paid into a reafforestatian trust account and used for that purpose. (In addition there will be a Kl per a3 land use levy). There is no pol icy on whether reafforestation should be carried out in the v.lcinity of the project or elsewhere’ in the country and no policy whether it should be done by government or pr 1vate enterprise. The maximum perJ1i tte<;l

  • Page 192 of 247

  • · .

    level of export is m3 a sum of K200

    200 000 m3 p.a and at the rate of Kl per 000 will be raised for reafforestation.

    SBLC claims it spends K3334 per hectare on reafforestation and, at that rate, the sum raised from Nam Yang vould fund onl:r- aboul 30 hectares of reafforestation per annum. It still leaves the other problems, of vhere the plantation is to be planted, by vhom and for vhose benefit, to be solved. The present Minister has a partly thought out idea of involving unemployed youth in planting programmes but, at this stage, it hardly amounts to a reafforestation policy.

    The future of the Nam Yang’s still standing, virgin chlpmill has not yet been decided but the indications a:r.e that it vill never operate unless the market for chips improves.

    Governaent Planations

    The ·sad

    story

    ·of the fading

    interest ‘in local

    processing

    is also

    illustrated by

    tht.: failure of the

    government

    established plantations at

    Bulolo, Bro-·n Rivet

    and Kerevat which, potentially, could have been the basic resource of integrated processing industries on permanent forest estates.

  • Page 193 of 247

  • Bulolo Pine Plantations

    The ear 1 iest example of onshore processing based in a permanent plantation estate vas at Bulolo where the natural pine forest and the government plantations were used tp provide the resource for a plywood factory which built up a sizeable export trade.. Of recent yea:rs the operation has been run by PNG Forest Products Pty Ltd but has been running down. The ope’rat1on is now based entlr ly on ·’the plantations but they are not being properly maintained and the product ls deterioratlng. Exports fell <.’ff to nothln,g

    and the operation now limps along selling its rather inferior quality plywood on the domestic market. The equipment is outmoded, poorly maintained and inefficient by modern processing standards.

    Brown Rlve:r Plantations These government teak plantations were declared to be customary land after court proceedings in 1982. Whatever potential for exploiting this long term and substantial government investment, and using it as the basis for an onshore processing industry, was lost at that stage. Since then the plantation (and its customary owners) have been the victim of one raiding party after another. It was first “raided” by Rod PattersoR and his Luabar Logging company which operated on Timber Authorities for the landowner company Varagadi Resources Development Pty Ltd. The T.A. allowed export of up to 20 000 m3, the T.A. was revoked by the Secretary DOF as being contrary to policy. which banned export .of teak logs and as being illegal .. It was reissued at the i:Hrection of Minister ‘l’orato.· Unde:z: Minister Hor: ik an attempt to stop loading of the teak at Bootless Bay was unsuccessful because Sir Julius Chan (as MinisteI for Trade and Industry) granted an export license contrary to DOF recornmendationl. Luabar ther fo:z:e had somewhow gained dispensation to export teak “thinnings in log form by way of wrongly issued Timber Authoxity. Patterson•soperation severely damaged the plantation because he took the best trees as thinnings instead of leaving them to mature.

    After that operation vas stopped the plantations were “ra1dt.·u” by Austpac Timbers (PNG) Pty Ltd whic:h tried to export the teak illegally as “tvo sided fll chesw until its ship ent vas stopped at Lae and the logs were off loaded as illegal forest prod ce.

    Most· recently the plantations are being harvested by PNG Enterprises whose manager is Pat:r ick Tay ( fo:rme:r ly of the FIC dnd of Wawl Guavi Timber) who ls also selling it off as flltches for processing overseas.

    The lack of true commitment to a pol icy· of promoting onshore processing can be shown quite dramatically by reference to the official table published in the DOF Annual Report 1987. ( £ igure 1)

    It is shown even more dramatically, in more detail and with absolute accuracy by the Commission’s own calculations regarding log exports and all types of procesed timber products exports (Figure 2)

  • Page 194 of 247

  • Kerevat Plantation

    The Ke:z::evt government ;,lantation was. establis.hed in the 1950’s and consists of 1800 ha. of teak, hamarere and balsa. Its orginal purpose was to supply Rabaul’s sawn timber requirements. Further extension vas not possible becaase land could not be acquired. After the introduction of provincial government the manageaent and control . of the plantation vas handed to the East Nev Br 1taln Provincial Government. There ls confusion vhethe:c it is still owned by t1’e National Government or not. (Similar confusion existed over ownership of the Bulolo Pine Plantation but was recently resolved by the National Government f lrmly asserting ownership).

    Proper subcultural practices are not be.en followed and the plantation is now somewhat “nm dovn”. The balsa is regularly. harvested: for ·benefit of Teproy Timbers ·· for export. Its iDarketing is unchecked and abuses have been

    .;.,.

    reported to the Cammi :,;s ion. (‘;’his matter was not investigated because of con$tralnts of time and staff.

    B. ENCOURAGEMENT OF SMALL AND MEDIUM SCALE ON SHORE

    PROCESSING DEGREE OF CITIZENS.

    AND REPROCESSING INDUSTRIES WITH PNG OWNERSHIP AND PARTICIP TION

    A HIGH BY PNG

    There are few small and medium scale processing and reprocessing industries and, far from being actively encouraged, it is not everi easy to obtain statistics on these facilities from DOF.

    Other than citizens being involved as employees in the timber processing industry, there is little Eign of national ownership in the industry. The exceptions to this are as follows.

    (a) Landowner CompanlP.s becoming ·involved in.local· processing

  • Page 195 of 247

  • Examples include Djaul Oevelcpaent Corporation ana Tasukolak Pty Ltd in New Ireland which have both very -recently purchased logging equipment and small second and sawmills (IR No 4 Vol 2). Kel Besau Xaapani. Pty Ltd in Hanus Isldnd ls pxoposing to be a joinl; venture partner in a veneer mill with SEAL Pty Ltd (IR No 5 App 4). There is also Laaa Sawmills at Ialibu, Southern Highlands which has a small and fading resource and handles about 10 – 15 000 m3 p.a

    (b) Wokabout Sawaills:

    Many small local groups are now pu:cchasing vokabout sawmills and· en!3eavou:i inq to produce sawn timber for village and local consumption.

    These mills are fairly portable and are capable of sawing about one cubic metre of timber per day. They a:re now being produced in Lae and sell fo1 about KSOOO each.

    The DOF does not seem to have any policy about wokabout sawmills yet, in the belief that their input · is small and the equipment used in conjunct ion with them is not very damaging to the environment. Should they begin to prol 1ferate however this sl tuation will have to be

    reconsidered. At outside the law, officially issued

    present many of them are being used unless they are operating pursuant to Timber Authorities or unless they are

    selling produce only to “natives” vithin the meaning of the Forestry Act.

    (c) Saall to aedlum local savallls operated by individuals or saall companies or business groups.

    These include:

    1) Laaa Pty Ltd at Ialibu Southern Highlands vhlch established a sawmill vlth Nev Zealand Aid Fund assistance. It is owned by local landowners and processes an Input of approximately 10 000 mJ per year for domestic sales ii) Beechwood Pty Ltd This company claims to be substantially national O’lined and conducts . a savmill with an input capacity of approxlaately -10 000 – 15 000 m3 per annua for domestic sales. A large proportion of its timber ls delivered to village owned break down mills by Beechwood for processing into flitches or baulk which is then trucked to the aaln mill for processing as sawn tiaber. :The· concept has worked ‘!ell,. to· the satisfactions of all parties. It vas initiated by the Department of Coaaerce ( not Forests) and is

  • Page 196 of 247

  • – ..

    ,T ·.·..·,

    now a genuine self perpetuating nationally owned project which seems to be very much in line with the phil9sophy behln the “self help”, “rural development”, “small scale”, “appropriate technology” aspects of the 1974 National Forestry Polley.

    iii) Nakaal Coapany Pty Ltd after the collapse of the New Ireland Industries joint venture project involving Gaisho and the Landowner Company Nakmai the Landowner company appears to be in possession of the large, but for aany ye rs unused, Panamana Sawmill. Recently Groome (PNGi Pty Ltd leased the mill from Nakmai for K3000 per month and moved in its own sawmilling equipment. It is trucking in logs from elsewhere (as Gaisho cut out Nakmai LFA, previously) and feeding them to the mill at an input rate_ of about 12 000 m3 per annum. The . landovner company is involved _only as- lessor of the mill.

    (iv) McDui is owned by automatic and naturalised citizens.

    There have been a fev foraer examples of involvement in sawmills which have now ceased:

    national … ‘

    ‘ ,, I. i) A£ter the war DOF sponsored sawmills at Lae and Kerevat to saw tlabe:r for poi:;twar :reconstructlion and to train local savaillers

    ii) On Buka Island between 1960 and the mid 1970s a small nationally owned •111 known as the Hikalan .Sawmill· op rat_ed,· processing about. 200 m3 yeaz:, It wa·s self started and not promoted or supported by government.

    •,’,

  • Page 197 of 247

  • 111) Notako Buslnes Group, North Solomons which operated p small forest mill

    SUHHARY As can readily be seen from the above list (which is a pretty full cover if not necessarilly all inclusive) there has been no widespread and substantial involvement of natlu11c1ls as owners in the sawmill indust:ry producing for either the domestic or the export markets. There seems to have been no involvement in other forms of processing other than sawmills (The situation of small reprocessing industries such as furniture making, wood carving etc. has not been examined but is known to be occuring infrequently cilld on a small scale).

    What has been achieved by nationals has not been as a result of Forestry follcy administered by the Minister for Forests and. the DOF . The larger and more :successfu:l, ventures. (Lama and Beechwood) were promoted by New Zealand Government aid and the Department of Commerce. The other ventures seem to have commenced with no official involvement.

    POLICY POSTULATE

    11 INCREASE FOREIGN RARNINGS ARD SUSTAINED ECONOMIC GROWTH BY PROMOTING LOG EXPORTS.

    Until 1962 annual log exports had never exceeded 6 000 cubic metres. In that year they jumped from 4 800 m3 to 35,400 m3 ana· then climbed consistently to peak at 655,200 m3 in 1973/74 v’hen. the.re· was a fal’ling off and .then a gradual rise t·o 472 500 in 1979. During that same peri there was a fairly consistent increase in sawn tlm.bet

    exports from 9 000 m3 in 1962 to 62,600 m3 in 1979. After the Revised National Forestry Policy was published in 1979 the change in prod111ction patterns and export figures has been most dramatic. Log exports rose continous ly to reach 1,442,200 m3 in 1987 with plans to double the total again by 1991. Sawn timber has dropped from 62,600 m3 in 1979 to 2,700 m3 in 1988.

    Revised Forestry Polley 1979 – guidelines:

    . ,. I.

  • Page 198 of 247

  • The 1979 revision opened the door to increased log exports. No longer frowned upon, log exports were to be encouraged so as to boost PNG’s foreign revenue earnings and to promote sustained economic growth in the timber industry and generally. It was not intended however to be a wide open encouragement to export logs. Guidelines were set by the 1979 policy 1evision which were aimed at maintaining a balance between log expor.fs and local proc( sslng .al”l;d to .. ·. ensure -that· foreign inv l$- 1.’ent was dli;ecteq to’Wards· t-ht:; high_· tech.nology end of the timber industry and that national enterprises gained the ma in benefit from the comparatively simpler process of harvesting logs for export. Fox:eignen, who wished to benefit from large scale log exports would have to px:ovide substantial additional benefits for the people by also establishing large scale agricultural or reafforestation projects or large scale integrated processing facilities. They would have to promote local training, business development and empltyment opportunities as well as paying export duty at 10 percent of FOB price, royalties and taxes. The measures to ensure that th!, happened were spelled out in guidelines in the 1979 policy revision.

    . . . .• ..

    The Revised National Forestry Policy 19·19 is a clumsy document which seems to have been thrown together in a hurry and then published before the wording had been finalised. I It is reproduced in full as a schedule to Appendix 2 of this Report. There are 16 guidelines of general application which· were meant to control the allocation 9£ log export quotas and then further guidelines applicable to four specific types of enterprise which were to be allowed to export logs. (These guidelines a1e fully discussed in IR No.6 Vol.1)

    The rationale behind the guidelint:-!s displays a :;ound knowledge of the timber industry and the danger of allowing log exports to predominate over on shore process Ing. The guidelines were carefully formulated so that, if th y were followed, most of the dangers of being ove.twhelmed by_ log exports could be avoided.

    When

    these guidel_ines are listed, howev r, l t pecoiaes . .

    quite clear that the great majority of them have not been consistently applied and that allocation of export guot.as have been made well outside the guid lines:

    Guidelines of Gene;al Application

    A. Strict national govermaent coatxol over allocation of concessions and granting of ex1;,ort entl tlements.

  • Page 199 of 247

  • As previously discussed National Control has been weakly administered and has not been based upon proper planning or accurate knowledge of the resoui::ce. It has wavered under the influence of powerful lobby groups and has lurched from one allocation to the next. ‘l’he only control

    :1

    of exports has been lmporllon of maximum loq export good as in Permits and Reading agreements and the ability of the operators to extract logs to the generous maximum levels allowed.

    B National government will specify guidelines for allocating concession fairly between various areas and provinces.

    No guidelines have been publisheu and there is no National Forest Development Plan.

    C. Monitor log export prices and :aarket projections and fix total log export quotas.

    . ..

    . ..

    The DOF and the F!C have kept record.s of disclosed export prices. -In the last two yearr.. DOF Maiketing Section . has b.egun a ser ou study bf international ma2ket . .prices in an endeavour ··to contro’l ·Transfer Pr”ii.:,ing. : Total log exi;or·t·· quotas have not been fixed ,on a national basis. The emphasis has been to seek to maximise log export quotas 1th scant regard to sustained yield forestry principles on a project, Provincial or National basis.

    D. There will be a State Harketin•J Agent to sell some logs directly

    A condition ls to be inserted in each nev or re:.ewed Perait that up to 25 of the export allowance must be available for sale by or at the direction of the State Marketing Agent.

    The enterprise vill receive no less than the contract .. · r1ce l0 es s · easonabl,e .· f;a ling _- char ei;;_ d .Jnark tlr.g · commission.

    Eventually, after 7 years delay, the FIC took on this role as SMA. It did so without waiting for final NEC a ppr oval. It exe:r c i sed the State’s 25 percent option and conducted log sales on 15 shipments between mid 1986 and March 1987. In the process

  • Page 200 of 247

  • it made a substantial loss and its operations Yere· flawed by inefficiency and illegality. Nevertheless it had the ef feet of substantially reducing transfer pricing and increasing the FOB price paid to PNG producers (IR NO 3).

    Since the cessation of FIC markating the DOF has exercised the State Option by acting as an agent rather than buying the logs. ( See IR No 3).

    E Restrict foreign investment to aore capl tal lntenslve projects (involving woodchip and reaffor.estatlon etc,) andgive pr ference to PNG enterprises when allocating log export quotas for the less capi:.al inte.nslve projects ‘

    the

    Foreign investment has been allowed into all aspects o{ timber industry anp not merely into the capital

    intensive projects. Preference vas given to two 1 rge Nationally owned Forest Development Corporations. These Yere Kumusi Timber Co. (see IR No S App 3) and Ulabo TImber Co. Neither has been successful and Kuausi was disaster (going into receivership within three years of commencement, vith debts exceeding K3 million). Ulabo has limped 01 but is not successful.

    Angus PNG Pty Ltd and Wavol Guavi Timber Company received their original Permits in the fraudulent gulse ot being national companies. (IR No 2 and IR No 5 App 1) anc;} ·there ha be!eri” minlina1: ‘nat·ional. 1-nvolvernent in -Other timber enterprises.

    ·I

    There has been no effective export quota system and in the absence of such .a system preference to local enterprises has been irrelevant.

    F Log export entltleaents vi11 not be issued to operations being financed by a log buyer as part of a sole rights purchase agreement.

    My ingur ies have disclosed many instances where PNG producers are in fact selling predomindntly and sometimes entirely to a uyer which has provided finance to the producer.

    Some examples are:-

  • Page 201 of 247

  • Gaisho (NG) was financing Fangalava Plantations and ac·ting as sole buyer for Fangalawa ‘s produce trom.Ugar:i,a.

    ‘ I’

    . ‘ Sumitomo pro ide contractors and enjoyed sole buying rights Mitsubishi provided finance for United Timbers and enjoyed sole buying rights. Three (possibly four) large Japanese Companies financed Galsho (Japan) and Gaisho Japan financed Gaisho (NG). Betveen them the J panese financers and the parent coapany (Gaisho Japan) controlled all aspects of Gaisho (NG} marketing. Te financiers were the main buyers Nissho Iwa i finances Stettin Bay Lumber Co ( 75 ownership increased later to 83} and acts as sole buyer with very fev exceptions.

    182

    These arrangements have greatly facill tated transfer pr icing and o’ther .unfair marketing practices vhich I have r.eport d upon. in detail 1 iR tf .6. Financial links with ..buyer”s has become aore ‘the rule. th.an·.th e.).Ccept l_on.

    G Forest Hanage•ent controls·- (a) fir• control of volWRe of log exports; Cb) approved forest manageaent plan to be the base for government control; (c) standard enviroruaent protection clauses to be included ln peraits and agree•ents

    (a) I have found little evidence that individual operations are exceeding the Ir total log export quota. In fact quotas are so high that they are usually under producing. There ls 11ttle evidence that producers vhich fail to harvest their prescribed minimum cut are being penalised as prov:ided for in their· P,er.D)it .conai t1ons: rfrere are ·not” ()veta11 contro1 · ce;,1 lings·.-on log export volumes. ‘lle present ala ls to inci:;,, ase levels of xports at a •assive unc ntrolled rate. ‘(b) Hy comments on approved Forest working Plans as a control mechanlsa are already r:ecorded at page 81. These FWPs have not been sufficiently detailed, rarely approved and almost never enforced. :.( (c) Standard environmental protection clauses have been included in permits and agreeaents but, not: ,peing project specific, they are inadequate to protect the_ environment (see page.SO). Compliance with these general provisions is not generally enforced. “, I I ·’

  • Page 202 of 247

  • ,r • • t •

    H. Department of Forest and the Forest Industries Council to expand market promotion overseas

    There has been very little market promotion overseas though it has been recommended by various commissioned consultants as a major aspect of policy to gain higher prices for both logs and processed timber. Market promotion requires a high degree of professionalism. (It is discussed in detail ln IR NO 6 Vol.1).

    I. The general rule ls that the enterprise must construct the infrastructure it requires. This ls negotiable and in some cases the government aight assist by constructing facllities and charging for their use of doing so in return for a share of the equity.

    .. . .

    This guideline seems .to have been followed in lmo t ····all .cases.· Much o.£ .the-,.inf!=astructur is,:howevei:·; .di igned.· only to last for the duration of the (short term) project.

    J. The government may negotiate the purchase of equity at par in potentially profitable enterprises.

    The government has in fact purchased equity 1.n SBLC, Open Bay, Kumusl, Ulabo and, through the Investment Corporation, 1 t previously held a controlling interest in Hadang Timbers. F.r om these investments the government h s received a

  • Page 203 of 247

  • bonus share issue in SBLC.(raising its equity to K 1 million) which may one day make it a profitable investment. It has made a loss of K900 000 in addltion to its original investment in Kumusi and made no profit from ··the·othei eht rpris s; t ·d1d no gain n eff ctiye say in corporate deci io.ns by- irtJ — f board rep sentation ln any of these enterprlses. ., ,

    ( ‘.

    K To assist the development of PNG enterprises associated with timber op rations conditions are imposed on large operations harvesting in excess of 40 000 m3 per year over 10 year permit or longer.

    Such enterprises must:-

    (a} adhere to a local business development programme to involve local enterprises such as tree felling, log extraction and supply of materials. (b) employ a business development officer to assist, and liaise with the Government on business development.

    This guideline has been generally ignored. Lip ervice was paid to it in a few agreements. Only in the case · of Vanimo Forest Products have detailed provi ions been imposed upon a.·compa. ny ·ta promote local business developme.nL · The compa·ny was not regulred ·:ta-. appoint ··a· Bus i:ness Develorm1:.nt· Officer but that position wa$ created in the National Government Project team. It was never filled. (IR No 5 App 2) •

    The development of some local businesses has occurred in conjunction with the Vanimo project but on a minor scale only. It ls generally not occurring in relation to oth r large or small projects.

    L All conditions or revised conditions of agreement and permits vill be enforced fully.

  • Page 204 of 247

  • The enforcement of conditions has been notoriously weak as recorded in ..this report and the various interim reports •.

    The common expetlence has been that large enterprises have been allowed to blatantly avoid the conditions of their per mits and project agreements with impunl ty. In the last resort the State has rarely been prepared to face the oss or revenue and political and landowner pressure involved in forcing an operator to close down. For example:

    Wawoi Guavi Timber Co avoided almost all conditions on Block 1 and has still not completed the saw mill or car led out the natural regeneration trials required in Block 2. (IR No 5 App 1)

    . .. . ”

    Open Bay Timber Co performed those infrastructure conditions which benefltted its operation such as the roads, bridges and township. Under its project agreement it failed to rebuild the Junused) sawmill which -burn@d down but, i n tead,, reinitted the insurance money .to its pa:rent comP,any; ··’it t.otally· failed .t:o·.,.bµild its .p;omis d veneer.· t:Jlill,· wood hJp mill and kiln drier and for the last 16 years, lt has entirely operated as a log export company. ( It has commenced ?:eafforestation in a small way and its m.,jor reafforestation obligation becomes due this year)

    Vaniao Forest Products has still not commenced its major urban development project or its minor reafforestation project (IR No 5 App 2)

    .., …..

    Kuaus 1 Timber Co was allowed receivership for over six years without its infrastructure conditions (IR No 5 App

    to continue 1 n fulfilling any of 3l

    :.,

    186

    New Ireland Otsuka held out fo’! three years in open defiance of the ·government, refusing to fulfill lts infrastructure obli ations. It enjoyed the benefits of unfettered log exports for five years before the goveznment fin lly closed it down. (IR No 6 Vol.4 App.6 Sched.2).

  • Page 205 of 247

  • Nam Yang Timbers did build its chipmill but avoided its other major obligations. Having completed the aill it refused to operate it on the (probably true) basis that it would not be profitable. It continued on as a log expo ter for several years before being closed covn. (It has just been granted another permit in the same area).

    Jant continues to clear-fell. huge ar as of natural forest to feed its chipmill but has not been able to fulfill 1 ts reafforestation conditions because land has not ,been made available to it. . .. . As . we’ll·. as .. fa.il r. to enfo:q:e 19aj or infrastr,!lctu:te.- con4itions the Commissonis reports detail numerous instances where other conditions are serio1.1sly ln breach; such as conditions regarding logging practices, environme,1tal protection, forest working plans, arrangments regarding letters of credit and marketing conditions. Not one enterprise investigated by the Commission has a satisfactory record of performing the conditions of its operation. These breaches are almost always tolerated by DOF and Forestry Ministers. Only Nam Yang, New Ireland Otsuka and Angus h ve been forced to closedown arid this occurred only after years of operating contrary to pezmlt and project a9reement conditions and only vhen the enterprise was in such financial difficulty that its continued operation had becoae impossible. •.. . … : ..

    M Training and localisation:

    (a) Each negotiated timber concession will include a requirement that it vill adhere to an approved training and localisation programme. (b) A “training Grants Scheme” is d’iscussed for possible future implementation.

    . .. .,

    This guideline has not resulted in strict insistance on detailed training programmes being subm:.tted, approved and enforced by Forestry Inspectors. DOF has not given high priority to training and localisation and has been generally content if the Department of Labour and Employment guidelines were being met. Thus although VFP had a speciflc obligation to carry out

  • Page 206 of 247

  • an approved scheme of training and localisation as part of its project agreement it satisfied, this obligation· by simply submitting a series· of . o:rgani ·ation cha.rts to t:he Department of Lab_ou·r · and .. Employment indicati”ng;·. · n··:relation· to ·ea:ch estab1·ishme.r1t position, the year in which a national employee would ucgin to work alongside the incumbent expatriate and then the year in which it is proposed to localise.

    ….

    As far as training is concerned VFP merely promised to send employees on training courses vhen available. Neither DOF nor the Department of Labour and Employment have systematically followed up to enforce this localisation pi:og:ramme. A study of the file shovs several applicatlone to extend localisation deadlines have been made by VFP. Despite this VFP has done more to localise than other companies. (IR No. 5 App. 2).

    In this vay our logging supervisors postions and the .P iuiinig. sectl..on .ha · b en. fo lis d. . .

    The training grants scheme proposed in the 1979 Policy Revision has not been implemented.

  • Page 207 of 247

  • N Measures to protect log export revenues

    (a) Strict control of volume of log exports by setting national priorities for the allocation of timber permits and log export quotas. (b} “mlni•um guidelines prices” vill be imposed; (c) Marketing agreements and arrangements for sale of logs to be subject to government approval; (d} Encourage domestic sales of processed tiaber but not by iaposing tariffs or iaport quotas which vould raise prices.

    . ,· .. .

    (a) Contro.l accprd’lng to ‘National P:r io:r1ties:

    The· 1979

    .. ·Revi_sed· ·Forestry “·Po’licy·:··s,tated Deve·lopment Plan would be dra.wn provincial governments and with

    that· a· National Forest·ry. · up in consultation with their approval and this

    would set the national priorities.

    In fact a Plan was submitted with the NEC submiss.i,oo and vas approved at the same time as the Revised Polley.. lt had not however been formulated in consultation vith the provincial governments. Subsequent attempts to gain Provincial input and approval for a national plan came to nothing.

    National priorities for the allocation of tiaber permits have been set by producing and updating a National Forestry Development Programme which lists proposed areas f.c.> alio ation··. and ··se. . ;.a. .. tlae-ta.bie. At lea t. . 1.n re. cent. years, the rationale behind· the prograame seems to be that every forest area vith a coamercial potential should •

    • 189

    checked out, surveyed, purchased and prepared for allocation at the earliest date which constraints of staff and funding will permit. The political direction has been to apply the accelerator pedal rather than the brakes and the current “boast” is that the level of log exports can be doubled before 1991.

    Although an intention to contain harvesting within levels that will allow sustained yield forestry is often expressed, my inquiries show that there is no clear consensus in DOF as to vhat

  • Page 208 of 247

  • sustained yield forestry means and that there is insufficient knowledge of the national

    resource (or the resource of any be implemented effectively {See Schedule to IR No 4 Vol 1)

    one area) to enable it to IR No 5 App 4 and the

    t I’ • ,t

    l. (b) Minimum Expo;t guidelines: These have been imposed .but fa;_ froJD coptrolling price .fixing pr ctlces, the publi heq ···HEP i”gures· have ..be,.en·… : reat enc;o·?ra.gm nt to tt:a11sfe;. pric ng as the figures ar disco.unted and out of date. The KEP is commonly about 15 percent below true market prlee. (See IR No 6). It was for several years used as the max;aum pi:ice producers felt obliged to disclose in PNG and the aaount actually received above MEP was transferred offshore.

  • Page 209 of 247

  • The position has improved since State Ka;,:::ket:h g involvement through DOF and FIC and with the altered syst of ship by ship export licences (see IR No.6 Vol.l).

    .,,…..

    (c) Approval of Hazketing Agreeaents: Various methods have been used to try and subject marketing agreements and arrangaents to government approval (and see IR No.6 Vol.l):

    . . • ‘ I…, …

    • !•

    190

    i} The terms of Permits and Project Agreements provide for arms length sales, fair market prices and specific directions to open the letter of credl t in favour of the permit holder (not the contractor). Similar requirments are commonly included also in logging and marketing agreements between permit holder and contractors and these agreements require approval of the Secretary ( DOF)• Until very recently these conditions regarding marketing have been almost uni vei::sally ignored. ii} The establishment of a State Marketing Agent (SHA), coupled with a equlrement for timber enterprises to offer it 25 percent of produce and for the SHA to arrange sale at its option· ls ,.. another. method of gaining marketing information and con_trol over.marketing . . . .

    . .. . ..

    .iii} One·,·effective·.-control mechanism .available ,·to fhe .· government is its p wer to refuse to grant an export licence to allow a log shipment to depart. This power: is excercised by the Minister for Trade and Industry pursuant to the Exports (control an Valuation} Act Ch.108. If the Secretary -DOF bel!eves that a shipment ls underpr iced he .c:axa recommend to the Minister that he refuse to is ue the export licence. Since U,e system of lssu.i,ng individual licences for each shipment Va!:5 introduced this has become an effective weapon, especially when used during the past year by the DOF Marketing Section (see IR No 3 and No 6 )•

  • Page 210 of 247

  • .. • ‘ 1,

    I _.

    ‘ ; ‘

    ..•

    191

    Additional y the Minister for Forests has power to grant or vithold export permits which are als’ o issued on an · fndlvidu ·l: . shlpm nt ba. .is-·and . . tii1.”.s… l. s.·. en.t..’ire. ly . wl. thlri..his. own jur isdlction. It could be used to control marketing agreements between shippers and their buyers and to enforce other conditions (IR No.6 Vol.1)

    Theoretically therefore DOF now has powers which can be

    effectively agreements. used to good

    used to approve or: disappi:ove marketing For a short period from mid -· 1987 this was effect.

  • Page 211 of 247

  • However, shortage of staff, facilities

    and incentives are now reducing OOF’s effectiveness, as predicted in Interim Report No 3.

    (d) Encouragement of Domestic Sales of Processed Timber: This has for many yeai:s been stated policy of government. The sad truth however is that it just has not happened. It ·was the. . aim that 1og exports wotld:,.not .be allow.ecl. fr.om area.$. close to major domestic market.s such as Por·t Moresby, Rapa.ul and Lae. Nevertheless ANG Timbers which as sawmil ing near P’ort Moresby was sta.rved of resources and its poten ial concession area was allocated to G odwood Pty Ltd in reqqrd quick time (IR Ho.2 pp.2 App•.’39) Goodwood is now over one year behind in constructing its Sawmill and Por Moresby is now very short of sawn timber. Heauwhile Goodwood has _sp nt the last two and half years exporting Port Mor qy’s intended sawn timber supply ove seas as round logs. ……, MacDui Development, which took o”er the ANG Timbe.rs sawml 11 has struggled to obtain a resource in reasonable proximity to sustain the mill and is unable to meet the domestic demand levels of the Port Moresby market.

    ,, .

    S0meth r1y similar happened in Rabaul when the Vudal az:ea was allocated to Weco instead of being used as the resource area for Nohga sawmill.

    Both these decisions were made by Forests Minister Dire in “irregular” circumstances. The Goodwood allocation was “given consideration” and then “pushed through” in a matter of 21 days after receipt of a one page proposal. This was on the last day before Hr Diro’s sudden and unexpected departure from the Forest:ry portfolio and has never been satisfactorily explained. It seems the signature was put on the permit document one day after H Dire had been removed from the Forestry portfolio. The permit was actually issued before the cancellation of ANG Timber’s permit over the same area.

    • t. . .

  • Page 212 of 247

  • The allocation to Weco was made after Mr Di o had been persua d to change his mirid at the instigation of Mr .Ward .. ·of we·co:. Ward vorked thr ugh Covan ·oJ; the :FIC to lnflue11cs (and’probably to trick) Ministe Diro. Under this Influence Mr Diro revoked his previous decision to g ant the concession to Timbersales, which required the timber to supply its sawmill, and appointed FIC chairman Maro.leu to make an “objective” decision between Weco and Timbersales.

    Maraleu, who was paid adviser favour and the resource was

    to Weco, deeided ln Weco’s then allocated to Weco by

    Minister Torato to be largely exported as round logs.

    Recent allocations have demonstrated some degree of committment to local processing but it is still being treated as a secondary aspect of prlmarlly log export operations. Thus the recent Permit issued over the large Arawe concessl on provides that a 50 000 m3 ( one shift)

    c. pacity sav l.ll.

    ,m’.u t ··.b.e

    end of the second year of the operations. This sho-ws some concern for onshore processing but the processing conditions

    ·

    (yet to be finalised) will inevitably mean that the reject logs will be directed to the sawmill and the best logs will be exported. No ,attempt was maGe to include further processing to use up reject logs and waste.

    Even the new allocation to SBLC at Ania· Fullerbour ne adopts this approach and SBLC’s committment to onshore processing is not exploited by, the new agreement. Under the agreement SBLC ls actually permitted to reduce the volume it ls presently processing du.ring the first few years. Similarly it has not been required to introduce the further processing (such as a medium density fibre board mill) which I believe, on the evidence of its general manager, SBLC is ready to commence. (IR No.6 Vol.3 App.5}

    O. Increase log export taxes to 10 percent of FOB. price for all non-processing log export operations

    … •·. ···This pol·icy ·was implemented ..· In large.pu,c..: sing log··expo·:r.t operations a discount

  • Page 213 of 247

  • on export uty has been allowed f the minimum processing requirement is met. This applies to Stettin Bay Lumber Co and Vanlmo Forest Products Pty Ltd and ls a major incentive for them to meet their minimum processing requirement.

    On the other hand Wawoi Guavi’s conditions iapose a log export quota reduction penalty for not fulfilling the processing requirement. T}1is has had no effect because WGTC’s export quota was raised well beyond its capacity to produce. Consequently its failure to construct the required sawmill has resulted only in a temporary reduction, on paper, of its inflated export quota.

    L.. ·· ·· ·As·p eviou;;ly mentlnn· ·, ..a. pu eaucratlc e:r1·or cost he • I ‘ ‘” • •• • • • g vernment hurn ‘reds·. of tho.i1s.arids of kina ·when the duty was levied on MEP rather than on FOB price as stipulated.

    • tn,..,

    SUMMARY The 1979 Policy was intended to control log exports so as to protect the domestic sawn timber market and to ensure that PNG producers and the Government received the best possible price for those logs which are to be exported.

  • Page 214 of 247

  • t ,. •

    The national control has been too· weak, and has been subjected to too many improper influences, to effectively protect the supplies to ou:c major domestic markets. It has also been unable to effectively stimulate the integrated processing enterp.r ises which vould reduce waste and encourage efficient onsho.re processing and which would ensu:re an adequate supply of sawn timber for domestic and expo:rt purposes. The concept of setting a “1klinimu11 export price” has been alloved to become the main mechanism setting the :cate of tr:ansf e:c .pr lei ng. The pol icy of subjec:;ting . ·. · · marke.ting agreements- to…-. g_c;,ve:cnnent.. approval at :var io·us stages has not been applied effectiv ly.

    GUIDELINES FOR SPECIFIC ENTERPRISES

  • Page 215 of 247

  • The four types of operation ·which are given special attention are set out in the White Paper under the following headings:

    1. Proposals and operation of Enterprises.

    Guidelines for the Fo:cmatlon and Papua Nev Guinea Log Exporting

    2. Guidelines fot Enterprises involved In Tltnbe1:: Prdc s.sin.g··· · ·’…·.·….. .

    .·’

    ·,:,,

    3. Guidelines for F relgn Enterprises involved in Large Log Exporting operations and not processing within PNG;

    4. Guidelines for Foreign Enterprises involved in limited log export/road construction ontracts;

    1. PROPOSALS AND GUIDELINES FOR THE OPERATION OF PAPUA NEW GUINEA ENTERPRISES.

    INFORMATION AND LOG EXPORTING

    These enterprises came to be knc.1wn as Forest Development Corporations. The intention behind the proposals was· to assist the actual landowners t fully participate and share in the benefits of the timber? operation occuring on their land. They” were to receive government ass iSt;ince in their formation and vere ·to· be

  • Page 216 of 247

  • · ,. · ‘ .. granted. “r 1 g h0 t s· · to baive’st·’. arid export· iogs :free of nrost: cf£’ the ·oner us condltlons which .wez:e to be imposed upon “outsiders”. The guidelines for these are:

    ( 1)

    Ass1st vi th finance and advice the PNG owned log exporting enterprises.

    formation of (Dept. of

    Commerce (Business Development) and Forests to act jointly).

    Dept. of

    ( 2)

    To spread the benef 1 t aore widely, share-holdl,n9 in PNG log export enterprises vill be held by one or a combination of the following groups- •’ ‘ National Government Provincial Government People of the Forest Area.

    ( 3) PNG Log export ente:r:pr ise to be managed tor the first 10 years by an approved cont:r:act aanager. ( 4 l ·PNG_ Log expo; . e’!terpr lse. to be. freed from •no:n profit. a.ble. “- .inf. .r . st.ructu. r. oblig-a.tio. ns.· . . (S) Early profits to be used to :r:epay loans.

    (6) (a) Fallo’*’ up land use plan (agriculture or reafforestation) to be dra’wn up L1..:fore logging operation is approved and submitted with the log export pr©posal. But funding will be by national government and it will be managed separately from the log enterprise.

    (b) A land use planning group to be set up within Department of Primary Injustry to· evaluate and monitor the entire fullo up land use project. • (c) Land for it must be acquired prior to coamencement of logging.

    Only two Forest Development Corporations were established and neither was successful, Ulabo Timber Company Pty Ltd and Kumusi Tillber Company Pty Ltd. Ulabo is not profitable because the resource granted to it was insufficient. Kumusi Timber Company Pty Ltd failed because of management problems, insufficient resource and because of poor planning an inaccessibility of the -resources (See I.R. N.o. 5 .app. 3). Several .others vere planned but never ·· · eventuated; Subsequently._ s_ome companies. s9ught to ·g.aiti some.? preference in allocation of permit and less onerous conditions by posing as national companies (one of these was Angus PNG Pty Ltd, (IR. No.2) and others “”ere Wawoi Guavi Timber Co (IR No.5 app.l} and Bruce Tsang’s Companies (IR No.4

  • Page 217 of 247

  • app.4). In fact they did not fall within the scope of this policy guideline.

    After the failure with Kumusi and Uiabo this policy seems to have been abandoned.

    2. IMVESTHEMT GUIDELINES FOR ENTERPRISES INVOLVED IN TIMBER PROCESSING

    The White paper proposed the following guidelines fox these ent”ergr ises::..·. ..

    …,z

    1. Firms seeking to invest in timber processing vill be assessed on the following criteria: (a) experience ith similar processing; (bl recor of profitable and efficient processing activities; (c) experience in forest products marketing; (d) financial capacity 2. Measures to encourage timber processing: (a) alloy more log exports if enterprise has poor access to domestic market for processed product or an inferior resources composition; (b) taxation incentive (set out in some detail); (c) possible reduction in royalties payable; (d) non application of proposed 10 export tax if processing commitment ls fulfilled; (e) assistance in technical and managerial training of PNG employees; (f} release from reafforestation requirement ( g) fa 11 ure to meet pz:ocess i ng comm!tm nts may result in – loss of export tax rebate;_ reduction of log export quota ,cancellation of permit and recovery of damages; ‘.·

    3. Foreign enterprises may be allowed to combine log export and processing within the following guidelines:

    (a) at least 30 of log harvest must be processed (higher for enterprises with good access to a domestic market or a good resource); (b) processing schedules and lanned expansion t be negotiated at the outset; (c) no log exports near a duru stlc market if forest resources there are limited or in other places if forest resource is too limited to sustain a long run commercial log export operation.

    Marketing guidelines for processing enterprises vill be the same as for large log exporters set out in Part 4.

  • Page 218 of 247

  • r· I

    198

    So far there have been very fev coapanies attracted by the opportunity to coamence a large on-shore processing facility. H.ostly lt . has .been a case of companies being . attracted to. co mence. a la.:r.ge. i g-. x o ti g. enterpr,ise ..and . then. bel g obliged .by the. o rn ent .. to·, ·r:e.lucta tiy,. undertake a degree of local processing as part of the price of their log export quota. Jant Pty Ltd in the Gogol Forest near Kadang is the only significant exception as it was attracted to commence chipmllling to supply its pa:cent company in Japan, the Honhsu Pulp and .Paper group. Unt i 1 very recently it was not given a log export quota at all.

    Vaniao Forests Products was attracted under this policy guideline and did establish a saY11ill vlth a 30 000 m3 input capacity. It was also granted a log export quota f 200 000 a3 per annum and ls rewarded for fulfilling its sawn timber quota by applicaton of the expor.t duty rebate and bonus log quota rules. With the ala of these incentives it meets its ·. pro essing obl:lgatl·on in an ineffi le t. and. v stet l· way p t., its main interest, most certainly,.ls.on· the log export side (IR No.5 App.2)•

    .It is showing only reluctant interest in pursuing; feasibility studies into further processing.

    Stettin Bay Lumber Co commenced its present oper tion in 1982 in accordance with this guideline. Like VFP it:, shows only reluctant interest in further processing an . reprocessing. Unlike VFP it has established extensive plantations. (See IR No 6 App 5 and p 165 of this repo t). : ‘ I . ‘ • .1 Wavpi Guavi Timber Co and Open Bay Timber Co have.so. far managed to avoid their processing conditions enti ly or almost enth:ely ( IR No 5 App 1 and IR No 6 Vol 4 App ,6i)

  • Page 219 of 247

  • ‘;

    -. . .. ” ,·

    Hore recent allocations appear to be following the· 30 percent of log export processing formula (Arawe and Ania Fulle:rbourne).

    Other companies which formerly processed timber as the most significant aspect of their enterprise have, since 1974, substantially reduced the processing side in favour of increased log exports. The category includes Ambogo Sawmills, and Wewak/Madang Sawmill Company Pty Ltd.

    The drop in the total volume of sawn timber being produced continued to fall from 21000 m3 in 1982 to 4000 m) in 1987. The figures are a compelling statement about the failure of this aspect of government_policy.

    3. THE GUIDELINES FOR FOREIGN ENTERPRISES INVOLVED IM LARGE LOG EXPORT OPERATIONS AND NOT PROCESSING WITHI}l PAPUA NEW GUINEA • … w ” .. The }979 White Paper pro ided the following guidelines for large foreign log exporting enterprises;

    (11 The basic premise is that such a concession should only be granted for operations which are combined with substantial additional activities such as agro-forcstry projects or reafforestation which require large amounts of capital or advanced technology.

    There are so many exceptions to this rule that it cannot be put forward anymore as Government policy. In most cases such conditions have either not been imposed, or have been imposed with “escape clauses” or merely as a feasibility study requirement. In other cases firm conditions to conduct such additional activities have simply been avoided. Many examples a:re dealt with in the . varibus· inter i::epcn::t -•.· ‘T!i,ey.·include Wawoi ·Guavi Tim.be-i::’ ., Co, VFP, Kumusi, A.ngus, Goodwood ·and all the New Ireland companies ( except DLAD which purchased soae plantations to

    satisfy its obligation to an agricultu al project). SBLC is virtually the only company actually per forming reasonably under this guidelinei {2) The foreign enterprise must prove that it has enough experience, expertise, capital and marketing skill to handle all aspects of the proposed venture.

    SBLC has satisfied this guideline ‘With capital and skills in both the logging, sawmilling and reafforestation aspects. VFP has capital and skills required for its operations.

    Riabunan Hi jau undoubtedly has the capital and skills required for an integrated diverse operation and SEAL, recently approved as contractor on Manus Island, ,has the capital and skills required for the proposed Veneer Mill..

  • Page 220 of 247

  • A . long 11.st could be- made of companies ‘Who lacJ1.ed · ··caplt.al · and/or sk.ills ·-?l d .it would. int:l1;1de WGTc·, .· Apgus, Goodyood, OBTC and many others.

    (3) Such large scale of log export operations will be restricted to forest areas vhlch:

    {a) have a large resource vhic:h vlll subsist until a reafforestation plantatlon is ready for harvesting or until other follow up development ls able to sustain economic activity; and

    (b) vhere the forest mix ls unsuitable for processing, (this limitation ls difficult tc understand nd, apparantly, not followed) and

    (c) where the forest is not domestic market for processed Moresby, Lae, and Kavieng.

    required timber

    for a (such

    nearby as Port

    Guidelines (a) and (b) appear to be giveL no attention ·whatsoever. lt?ough·: ..soltl’t”:? .,at ention has bE::e.n given -to protecting domestic. sawri . timber. supplies, there are,

    201

    however, serious breaches regarding Port Moresby’s needs and Rabaul’s needs (Goodvood and Wee allocations respectively – see pages 191-192 above) · 4. . The·. large foreign :j g· expo;te (not proces ing}. must. undertake an activity which: (a) integrates well with a logging operation; and (b} will sustain economic activity in the timber area

  • Page 221 of 247

  • on a permanent basis; and (c} together with logging r qulres a total investment of at least KS million; and (dJ 1s included as a priority or open activity in the National Investment Priorities Schedule; and (eJ otherwise conforms to the policies of the National Government and the provincial government concerned.

    The only large foreign exporters which are not processing are Wawoi Guavi Timber Co, Goodvood and Open Bay Timber Co. The first two were to process sawn timber but all are behind in comi.–.letion of their sawmill. OBT built its mill which burned down, avoided its other pr’ocesslng obligations and” h’as promise’d ···co· b”uild a cpipm·i r in :the. . ., . future. None of them. is Jlndertaking any ·activity ·which complies with this guideline. All other foreign companies · exporting logs are doing so on contract to a, so called, “national landowner company”. By this means they avoid the guideline, as their· puppet company, rather than themselves, becomes the exporter. None of these landowner companies qre conducting the activities required under this guideline. ‘

    5. Fa11 ure to satisfactor 1 ly perform the associated projects vi thin the given timetable may result in -the? imposition of monetary damages as vell as curtailment of their permit.

    I . . -. .. .• :.r—:o

    The experience has been that foreign log exporters have always failed to atisfactorily perform the associated projects to the extent that they have been imposed. I know of no case -where monetary damages have been imposed or a permit was curtailed for fa11u:re to undertake this type of required activity.

    6. For all othez matters large foreign loq exporters will be subjected to the same conditions as are imposed on processing enterprises under Part 3 of the White Paper particularly regarding infrastructure, equity, PNG associated enterprise, and training and localisation.

  • Page 222 of 247

  • The guideline has been discussed already.

    7. Joint Ventures between a PNG and a foreign log exporter foreign company would hold a such a venture

    log exporting enterprise .may be approved. The minority shareholding ln·

    …. .,.

    .S-uch joint vent re·:occurred in·Nakmai :and Danfu·(lR ·No.· 4 Vol. 2 App.6). Despite being.the minority shareholder the foreign partner (Gaisho) excercised complete control of the operation and the transfer pricing. Other companies such as Wavoi Guavi Timber and Angus (PNG) were “sham” national companies which were in fact majority foreign owned.

    When the large log export operations which have actually been established are measured against these guidelines the observer could be excused for believing that the guidelines were prepared for a different country. It became apparent during the course of thiB inquiry that virtually none of these guidelines are being consistently followed.

    .. .,

    4 THE GUIDELINES FOR FOREIGN ENTERPRISES INVOLVED IR LIMITED LOG EXPOR,_T/ROAD CONSTRVCTION CONTRACTS

    The 1979 White Paper provided the following guidelines for log export/road construction enterprises:-

  • Page 223 of 247

  • ,.. ” (1) A log export permit may be granted to an enterprise in exchange for t constructing a priority road, ( 2) It must be capable of building the road to the required standard and within the given-timetable. ( 3) Applications will be decided on a tender system and the enterprise requir lng the least volume of log exports will be considered the lowest tenderer. But the contract may be allocated without putting to tender to an existing timber enterprise already vorking in the area. ( 4) The proposed road must be a clear pr ior·i ty road which would not normally be constructed as part of an existing timber operation or vithin · the·? regui ed time period or at ess cost under a normal road construction ontract. ( 5) The ·farest resource must be capable of ustaining the· amount. o .logging requi;ed.. : (6) The term of t·he timber permit will normally be less than S years. (7) Export tax on logs will be 10% of F.O.B price and normal royalties will be paid. (8) No infrastructure or other associated conditions ,will normally be imposed. (9) All standard tiaber permit conditions will apply.

    As a general rule enterprises which have been operating as log exporters and road constructors have completed tt).e assigned roadlng, probably because certification to that effect is a condition precedent for granting the log export licence. It seems to work fairly well•

    …. . .. ,• .. .. .

  • Page 224 of 247

  • ..’

    • 204

    SUMMARY

    The decision to encourage log exports had not been intended to result in the mad rush to get logs to the sea which has, increasingly, occurred. There was meant to be strict control over allocations to protect local processing, the domestic market and the future of the forest resource. The controls proved inadequate and the political wi 11 and

    bureaucratic sufficient, position of

    efficiency and organisation were not Foreign investment has been allowed to gain a nearly absolute dominance and some of the

    foreign timber companies have bribed, bought and tricked their way into an unholy partnership with whichever landowners, leaders, public se:cvants and politicians were necessary for theiz: immediate aim of getting access, to, and marketing, logs.

    • I’

    There .has.been virtually no government sponsored – ket ..·. promothms,· insuffio.ient….r search anq v.ery little· emphasf.s.· has .been put on protecting the environment, the forests or the true economic and human needs of the landowners. Little benefit has flown to the landowners and even the governme t has been grossly underpaid by virtue of the wholesale and f:raudulent transfe.I pr icing which has occurred. This has cheated the government out of company and export duty to a stagge:rlng extent.

    In general the timbez companies have perfor11ed reasonably only the conditions which benefitted their own

    operations. townships Conditions

    Thus in many instances roads, bridges, and wharf facilities have been completed. regarding agricultural projects, reafforestation,

    local.business development and onshore processing have bee

  • Page 225 of 247

  • performed :rat’her t:el-..µ. ct..·an’.t. ly,. –

    long behind ·1$che.dule, . or

    avoided altogether. Companies like Janl and SBLC (and in recent times OBTC), vhose operations are based on long term processing, have ten ed to be more responsible in performing their obligations under project agreements.

    POLICY POSTULATE 12 DESIGN TRAINING PROGRAMMES WHICH ARE RESPONSIVE TO MANPOWER NEEDS OF THE GOVERNMENT FORESTRY AND FOREST INDUSTRIES SECTORS.

    There have been three levels 0£ training in forestry; the four year degree course at the University of Technology, the three year diploma course at the Forestry College and various types of technical and inservice training at the Timber Institute Training College.

    . .. . …

    The per f orma.nce has been seriously marred thrpugh ·lack ·of. manpower plahni’rig; · The syllabuses· have beeh ba ed ·on preparing graduates to .flt lnto the forestry scP.ne described in the 1974 policy document. This means they graduate with skills required for plantation management, reafforestation, research and various types of processing and reprocessing techniques.

    Many have found it hard to get a job vhich concentrates almost exclusiv2ly export and vhlch prefers to import personnel.

    in an industry on logging for Asian skilled

    POLICY POSTULATE 13 CONDUCT AND COORDINATE RESEARCH DESIGNED TO ACHIEVE NATIONAL FORESTRY POLICY REGARDING MANAGEMENT, UTILISATION AND CONSERVATION OF THE FORESTS RESOURCES

    Research has been well funded and staffed in comparison vith DOF’s total budget and staff position. Thus about 20 percent of DOF budget vas allocated for research in 1987 and about 50 perent of total s aff.

    Research prior 1ties however h;;.ve not been clear nor suff le iently related to overal 1 for L::..;try policy and requirements. A major reason for this is that expressed policy itself has wavered and ls not·closely related to actual forestry activities.

  • Page 226 of 247

  • • I’ • >

    From the 1950s to 1985 the priority research emphasis ·was·assoclated witll -plantation pr.ojects in the mis.taken.· · belief that the stated po icy o! promoting integrated processing operations on permanent forest estates would be implemented in fact. Had this occurred then research into forestry plantation species and management technique would have been appropriate. In fact however, as has been clearly shown, the de facto policy has been to encourage a assi ve increase in felling for export as logs. The research which was desperately needed to counter the destructive effects of this programme was research into sustainable yield management techniques, logging practices, natural regeneration of forests and post logging care and t:reatment. This approach was not adopted unt11 1985. The consequence ls that forestry research has not really ··be. n ,des”iiilje ‘to achie”ve the. national·. fo:re tl!y policy because of. the -di ff icul ty of 0 l nde nt 0 i 0 f yi ng that policy and holding it in place.

  • Page 227 of 247

  • ·–1 I

  • Page 228 of 247

  • Page 229 of 247

  • If” o JI, •

    The failure to formulate and follow a clear statement of policy has 1 obviously thrown forestry education and research into confusion. It has had a similar effect upon forestry officers whose job is to enforce po:icy and it must sirnilaLly have confused timber operators – particularly those who acuall:t wanted to “follow the rules”. For those who were determined to act outside the rules anyway, policy unceLta!nty is the ideal environment in which to operate.

    CURRENT NATIONAL FORESTRY POLICY

    After studying all available policy documents, legislation and consltutional laws and after two years· of studying forestry in acticn I remain at i losE as to how to deflne.·the – urtent policy.· It is easier by fa1: to.say· what

    It is M.t. the 1974 Policy Even though it ls still technically in place.

    It ls D.Q.t. the principles required by the Constitution. l say thla because the:ce is no appa1rent ala to preserve_ the forest resource for the benefit of futur generations; it is not being controlled effectively in the national inte:t:est; there is no emphasis on PNG ays and PNG forms of economic and social organisation and no effective meaning is beb1g given to the professed aim of decentralisation of political and economic structuxes.

    -. . .. . .

    :. ·.t

    ,;;·, ,

    ,:I.I

  • Page 230 of 247

  • It is Ilfil. the 1979 Revised Policy. It follovs that policy to the extent of encouraging an increase in log exports but none of the guidelines, ‘*1h:ch ‘w’e re designed to protect the country from the abuses 1a·:-.:ch could f lo·.- frorr.. that course of action, are being follo..,ed.

    Having failed forestry policy,

    to find a clear. statement of I postulated thirteen broad

    existing policy

    principles from a study of a variety of documentary sour s.

    .’ ,,

    The thirteen broad policy principles which I postulated, and against which I analysed the current defacto situation, as disclosed from the. Commission’s inquiries, were dravn from policy documents such as the Constitution, the legislation, the 1974 Policy and 1979 Revision, . NEC decisons (such as those approving the· FIC as the State Marketing Agent and approv.fng the 1987-1991 National F’orest Deve.l opment Programme)·._and _various se1=to.r a;I. plans and policy.· statements included in budget papers hich have recelved NEC approval.

    Tvo years of detailed investigations have convinced me that none of those thirteen broad policy principles, or postulates, are reflected meaningfully in practice. With the exception of the eleventh postulate, that vhich aias·at lncreaslng the level of log exports, the governaent shows little or no sign of genuinely trying to base its actions on those postulates. With regard to log exports the government is certainly encouraging them but it ls not applying the principles of restraint and control deaanded by the 1979 Policy Revision.

    When postulating the tnirteen b1. oad policy pr1nc1ples taken from various “official” documentary sources I limited myself to sources I which had a suff le lent degree of “authority”.

    I have deliberately omitted detailed ·reference to various draft policy statements which

  • Page 231 of 247

  • have been prepared in the Department of Fo:cests but which have received neither r Ministerial no:c NEC endo:csement •

    There have however been reports on policy by consultants which have recommended revised policy and even subaitted outlines of draft new forestry legislation. There have also been a series of draft revised policic prepared within DOF which never received Ministerial approval.

    The main wo k by Consultants was done by Michael Gane of FAO and· Rich rd Campbell in 1985. The first phase of · ·· .. ·. their -,iork. ·produced ‘a po- icy stateml’!n.t and an outlin·e ·for ·aa-· new ·Forestry act and in May and. June 1985. The second phase involved the preparation of a draft Forest:r;y Act in 1986 based upon the f h:st phase report as amended by DOF. The work of Gane and Campbell was published by FAO, Rome in 1987.

    I am aware that drafting instructions to establish a Timber Industries Board were prepared by the Wingti government just before it was ousted fro• power by the last vote of no confidence.

    In June 1988 a committee in DOF worked upon and published a new dz aft pol icy which appears· to have drawn upon some of the policy seminars organised by this

    ·c·dmais ion ·fo p.art·. ··.o-(. .

    1 .ts ..

    .. inspiration…

    ·It . vas . hot

    subaitted to NEC and did not receive ministerial approval.

    -,

    Y·”· … . ,f – ·.··.

    Under the new Minister fuL Forests, Mr Karl Stack, drafting instructions for a new Forestry Act were prepared and submitted to NEC for approval. Approval was given on 12 October 1988 for a Forest Bill to be drafted for presentation to the November session of the National Parliament.

    The problem is that the question of forestry policy has still notbeen resolved. The drafting instructions merely draw heavily on· Campbell’s 1987 draft F rest:ry Act as 1 ts basis. They follow exactly the same format but portions have been deleted, especially sections which imposed checks and balances on the powers of the National Minister.

  • Page 232 of 247

  • . ..

    The provincial governments complain that they were not c1r.lcquately consulted during policy formulation and not· at:: all during preparation of _the. drafting instructions.· A .. .. . speci.al· .Prem.ier’s.C.ounci. l ..Consultatio.n Meeti. ng on the . 17 an. d. .

    18 October 1988 expressed.·this concetrr a d·set up a Wotking · Commtttee which met twice and then reported in January 1989. (Report of the Premiers Council Working Committee on

    Proposed Forestry Legislation January 1989). very critical of the lack of consultation

    The report is and of the

    drafting instructions. Industry also offered severe

    criticism of the drafting instruction consultation and forced the Government

    and the lack .of to agree· to ,a

    “breathing period” to allov discussion and comment from industry. The Bill ls not yet prepared.

    Drafting Instructions for Forestry Bill oct 1988

    The Drafti.Tlg Instrµct.lo_ns approved by NEC _on 12 October -iis8 a e f r .. • i_·i.i<°:vhicH,- .. ouid abQii h .tti · cur.re.q,-: legislation and the system of acquisition by Timber Rights Pu:rchase. This form of acquisition and ‘lhc existing LF,A

    procedures are replaced by a contractual arrangement entered into between th, State and a landowner company. In this way the landowners would :retain legal title to the land but .. would centrac:t to p rml t. ,. t ai; “to..acquire. exc.lus l ve

  • Page 233 of 247

  • right to fell and re11ove their timber “i::esoui::ce. It ls difficult to see how this ai::rangement can be given. simple legal effect as it assumes that the representative landowner company can lawfully acquire or claim rights to ownership of the land. To facilitate this the instructions specify that only 1s, of residents are required to approve it.

    Allocation of operating I ights shall be by permit, licence or giant. These are issued by the Minister. While a tender procedure ls envisaged it shall be possible for the Minister to waive the necessity for this. Some requirements are stated to be mandatory while others shall be optional. The optional requirements include the submission of a sats l factory Environmental Plan and proposals £or. ons.hore p1:o_cesslng fac1ll·ties and.· tbe. p.;r:oposed vol_u_me. of – g, exports. I vould. consider these to oe . properly mandatory requirements in all cases. . ! .. . The existing system of pre-registration is, n,ot formalised and information concerning the experience. p d financial capacity of a proposed operator ls not require .

    The role of Provincial Governments ls acknowledged with some functions given to them exclusively and some stated to be concurrent. They can also assume some responsibilities· of the National Government by delegation. The National Government is to take control of Provincial Forest Officers and may irect and discipline them.

    i”•

    While some clear emphasis ls given to reforestation the principles of sustained yield management are not recognised. But a Forest Research Insti tut.e shall be established to collect’ ‘relevant data: nd.·t;wenty·· percent .’of land !=-ha _l:. be retained ·by the state for i:·efo· st.ation· -nd · ag:ro:._forest projects.

    Royalties shall be fixed at lO_percent of FOB or market value and shall be paid to landowners. Provincial Governments shall receive a levy of Kl per cubic metre paid into a Follow-Up Land Use Fund. Levies knovn as the Forest Development Fund and the Forest Industry Fund shall be used to fund reforestation and the proposed Forest Industries Office respectively

    The Forest Industries Office is given a broad range of responsbillties including the r< search and developemnt of

    marketing and promqtion,· control over ag.ro:-forestry . pto:Jec. s, he …is_s•J. n 9.f

  • Page 234 of 247

  • reforestat o and export and. import

    per mits and the inspect ion an:d grading ·of f o,:-est .”pro,Jµct·s. This off ice shall be responsible to the Sec:r.eta:ry of the pepartment of Forests,

    The drafting instructions leave many delicate and key questions undetermined and it would be premature for. me to describe the proposed Bill as representing the forestry policy of the National government in any vay.

    I Wo;ld Bank Report

    A specialist World Bank team has recently completed the second o.f two fact finding visits investigating the forestry industry with a viev to providing long term f inancia} and technical assistance towards its development. Wit the approval of the Prime Minister I gave that team the b netJt of the Commission’s findings on certain matters.

    From my ‘di’Scussions with members of that World Bank team I. m a are that it 1 riow epa in9 report wich vill outline · a:reas of : · p<>lf’ y. · ·:r for:m and ate . pol.icy· recommendations – even to the extent of providing an outline of drafting instructions for the type of consolidated Forestry Bill which would support the policy the Bank proposes that PNG should adopt.

    In these circumstances I have been content to liait my report strictly to the fact finding emphasis of the Comission’s terms of reference; Although discussions were held with both Prime Minister Wingti and, subsequently, with Prime Minister Namaliu about the desirability of extending my terms of reference to request me to ma e recommendations on Forestry Policy this was never done. This may be just as well because a “Judicial Inquiry”, conducted by a Judge with no technical expertise in Fore try, is probably not ‘the most a’pptopr late oody to··make recomineiidatlons on F_’oz:es t_ry Pol1.c.y.’ ….

    This then· is a factual repo:ct. lam asked tu define · what “the existing Government policy relating to forestry ls”· – particularly “relating tD resource allocation, conditions of operations, marketing and pricing of timber”. The only meaningful approach to thi question is to define “defacto policy”•

  • Page 235 of 247

  • ._

    .. . 4111,,…··.-· ..• : .

    1 Resource Arlocation

    (a) The policy is to retain pover over resource allocat:on firmly in the hands of the National Minister .for Fores ts and he exerc1ses th is pover in ‘.his absolute discretion vith no requirement r)r accepted practice of referring important allocations to NEC.

    Although consultations Jith provincial governments may occur prior to allocation, they have no power of veto and little influence over the national minister if he has decided to allocate and feels he .ts supported by vocal landovner groups, backed up by a foreign timber company which ls ready to start operating.

    ,..,,.,..,

    . .. . •’

    There is no clear statement of national forestry policy and no National -Forestry Development Plan, ..,•orked up in conjunction ·with. provincial

  • Page 236 of 247

  • governments, ..,hich sets . the . principles for· deciding ··-upon resouri:e ·ailocation.-· . ‘l’he·

    Minister’s di Lction unfettered.

    ls, th!:!refor.e, left dange ously

    There is a National Forestry Development Programme which sets out a schedule of areas for allocation and a timetable of “deadlines” which DOF is expected to achieve to keep the allocations on target.

    The NFDP has not been prepared so as to implement cle3r national policies and prioritle (because these are not known) nor has it’ been des.lgned with meaningful participation by the provincial governments. (b) The Defactn Policy behind the National Forest _Development .Prograa is to a l.ocate as aany resource areas as can be i pijr d. or allocatlo w thln the 1,£e of the plan.

    (c} The overriding policy consideration increase natlonal revenue and foreign need overrides normal restraJnts availability.

    is the need to earnings. Ttds such as staf I

    ·.·:

    Staff have been moved from other important tasks so as to boost the strength of those officers planning and preparing for further allocations. It. hao long been known that there is a desper:ate shortage of staff and funds for monitoring logging operations and fo= supervising the performance of permit conditions. The knowledge however has not forced a slo’w down in the rate of allocation. In the most recent budget, in fact, the monitoring section’s budget has actually been reduced by almost 50 p Lccnt.

    ·- I I

    There 15 full knowledge of the fact that he conditions of existing per i ts and iJroject agreements a.re not being eijforced and that, as a cofisequence, substantial damage is ···.belng- caus·ed . to ..·the·…f_or_ests ancl . t]Je : environ.men and.- subs.tantlal

  • Page 237 of 247

  • f lnancial loss is being caused to government (through lost revenue) and to landovners. Nevertheless;

    ( d)

    (e}

    (f)

    . .< 9.) the defacto policy is to double the rate of allocation and to allo ate aore than four •illJon further hectares of forest by 1991. The vast bult of this tiaber is to be exported as round logs. Realising that the basic data available on the quantity and qual! ty of the remaining resource Js ·very inaccurate and overly optimistic the defacto policy is to allocate and to take the risk that it aay result in overcuttJng. Though there Js an often stated ·policy of sustainable yield aanageaent, that ls in fact D.Q.t the basis of allocation and peraJt conditions. When th.ere !s !> ppa ent conflict betW’een. the national ·· interest Jn .preserving.·t.he resource and an Jndi v.Jdual · or group’ ·1nterest. in. exploiting for· i••edJate cash reward the policy is to favour the JndJvJdua1 or group right.

    I •

    v.

  • Page 238 of 247

  • (h} The defacto policy is to · zespond promptly and positively to pressure from local landowner companies for allocation of new areas by vay of LFA or TRP even though the area’ is not scheduled for allocation in the NFDP – especially if the application is supported by the provincial government, Premier or prominent Ministers. If provincial government opinion is against the allocation which the Minister plans to make it tends to be overruled.

    r,:,-,.,

    2 conditions

    (a) Actual Conditions:

    It is policy and practice to w:rite conditions into permits requiring;

    i ) Construction of some infrastructure such as and b:r; idges and, for larger projects, facilities, a to nship and (possibly) a procesaing plant:

    roads wharf major

    . ,.

    .. . . ·’. . . .

    11) The current tendency is to impose a condition to process 25 per cent of the allowable export quota through a sawmill though several years of straight log exporting a:re allowed before the condition takes effect.

  • Page 239 of 247

  • iii) It has been policy to sometimes impose conditions to assist in the development of an agriculture or similar project and/or promote local busln ss · development. iv) There has frequently been some requirement to stimulate natural regeneration in the forests oI to plant up aforestation plantations. v) There has always been a policy to include general conditions · relating to protection of the envitonment but rarely specific conditions. In recent •onths it appeats to be the policy of the Minister for Environment and Conservation to insist upon the submission and approval of an Enyironmen aJ Yla before.the operat!on commenc s

    . . . ..

    a ,. •,

    Vi) There has al ays been a policy to conditions requiring the permit holder fair market price by arms length sales.

    include to seek

    vii) There have al1,ways been conditions requiring good logging methods and follow up silvilcutural care.

    viii For larger projects it is common to require the permit holder (or contractor) to conduct feasibility studies into various desirable practices such as further processing, alternative energy sources and associated industries and activities such as agro-forestry and crocodile farms.

    (b) Enforcement of Conditions

    Enforcement of conditlons has been notoriously r/eak. Although stated policy ls to enforce all conditions strictly this is so patently not done that the policy should be restated:

    (1) Tolerate breache of conditions if there ls a chance of ,.keeplng the operation going. . Cance:!.? permits only s-a·last resouice a d meanwhll seek to accoJ1J11odate the. operator and renegotiate onerous conditions in order to J11aintain expert duty and to safeguard the local job opportunities provided by the operation.

    {j) Do not under•ine investor confidence by taking too hard a line on the export of illegal produce. Try and prevent illegal logging before Jt occurs, but, J f J t happens, grant the export 11cence and tr.y and secure the proper payaent of export duty and royalties later.

    Reafforestation conditions have been generally avoided to such an extent that the policy should no be stated as; (t} Do not seek to force Jogging enterprises to reafforest except those vhich are undertaJdng a long ter• processing co.11•ittaent ·.(such as Jant, SBLC, and OBTC). courage their

  • Page 240 of 247

  • reafforestation programme .bY granting the. right to rnrport aassive volumes.ot·lbg rintfJ he plantat!ons mature.

    }, .’

    A most recent trend should possibly be added as de facto policy

    (1) “substitute a reafforestation levy of Kl per mJ for a requirement to establish reafforestation plantations”

    Whether the reafforestation fund ‘will actually be used for that purpose or merely be treated as a boost up for general revenue is not yet clear. DOF claims that it has established an authorised Reafforestation Trust Fund, which seems a good idea.

    r, ……

    Natural regeneration conditions, good silvicultural practices and good logging technique conditions have never been enforced. The conditions themselves are ‘worded in a deliberately vague and hard-to-enforce sort of way and the DOF has still not decided what detailed logging reguiremerits are appropriate dnd practi al to include in a set· of ttict t co ditlons. Coniequently a fair state ent· of . . . . . . . . .. . . xisting defacto policy would be:

    (m} Tolerate damaging and unplanned logging practices in the interest of securing the benefits 111’1 ch flov to government and 1andovners fro• the

  • Page 241 of 247

  • operation. Exert vhatever influence is practicable to discourage logging vithin 50 •etres of actual f loving vatercourses and on excessive slopes. 3 Marketing and pricing practices; It is patently obvious, and has a1 ways been knovn to Governments, that. the foreign companies which control

    the marketing contractors or

    of PNG logs as pe:rmi t holders, log traders are blatantly ignoring the

    applicable marketing conditions. Letteis of Credit are .always and openly. made· ut in favour of -the· foreig contractor··even whe·n ·the PNG perm!t holcler is- regulr.ed to be the beneficiary of the letter of credit.

    Operators have been allowed to sell at exactly Minimum Export Price even thoush that is known to be well belov true market value.

    Most PNG producers are selling to companies who are then reselling to at a substantially higher price, differential being retained out disclosed here.

    parent or related the “true” buyers with this price of PNG and not

    ·,•:

    . .. . .

    Almost all foreign timber companies involved in logging and marketing have disclosed substantial losses for tax purposes and yet keep operating at a loss! The defacto policy should be stated as: (n) Be realistic as regards marketing and accept.the inevitable that foreign companies will transfer a proportion of th !r profits off shor tax free and that· J.t Js difficult to detect and

  • Page 242 of 247

  • difficult to stop. Tol-erate· this practice .in order to gain ·thf;!.· benefits of export duty and royalty payments and a degree of foreig11 cu-rrency earnings. Accept the effect on the natl onal economy of lost fore1gn currency earnings, lost revenue Jn the form of royalties income tax and export duty and the oss to landovner coapanies of their fair share of profits.

    During the last two years there· has been more government involvement in marketing in an endeavour to reduce the extent of transfer pricinq. This has been attempted through excercise of the State Pu:rchase Os;,t! on and the activities of first FIC and now the DOF as State Marketing Agent. As a result the government has acquired more knowledge of the true market prices. Since the requirement to obtain an export licence (and. an export per mlt) for ea.ch shipment. w.as introduced the go_vern.ment also .. oow· h s a ·. st,rong · .· ·· eap.on… to : ont:rol.. ar:ttet:. pi:lc.e· by · . ‘ refusing to issue the · licence if the shipment is unde:rpriced.

    L

    Nevertheless, third country invoicing is still permitted, as are sales to parent and related companies and back to back letters of Cre it. Companies which have been proved guilty of large sca:e transfer pr:::ing before this Commission of Inquiry {and ho are in all probability still doing it) have recently been granted new permits and approvals to operate as contractors for (defenceless) landovner compan 1es. A recent variation to de facto policy should therefore be added:

    (o) Seek to reduce transfer pricing by involvement of government in the SHA and follow up proven breaches through rigid enforcement of taxation law by the Office of Taxation. Be prepared to accept that taxation assessments and penalties must be negotiated dovnvards to a realist.ic level which vill allow the guilty company to keep operating and generating ore revenue .

  • Page 243 of 247

  • lo:,,

    ..·.4 .Fbxeign Investment·.. . Because £ the way foreign investment and foreign timber companies have been alloved to dominate the tiu,ber industry the defacto policy appears to be:

    (p} Encourage foreign invest•e·nt in all aspects of the ti11ber industry ensuring that royalties, export duty and i.aport dut,ies are paid in full. Tolerate a degree of tra11sfer pricing as an inevitable consequence of this foreign involvement but seek to mini•ise it by competitive involve•ent in the .market and the enforce.ent: of the taxat1 on la,•s. Strike a balance hovever so as not to stop production oz frighten off foreign investors.

    (q) As far as is practicable in the circumstances, seek to persuade the foreign coapanies to pz·ovide a reasonable level of training and e•plo}’Jllent for PNG ci ti:zens but not to such an t xtent as vi 11 ser}busly ·Jnterfete vith the profitdb lity of the forei·gn’enterpr:ise; – .

    1i ,•,

    221

    S Rgsource Survey

    My inquiries have disclosed so many instanc:es where resource surveys vere many yea:rs out of date (some dating back to the 1960s), were based on inadequate· sampllng and have been proved to be wildly inaccurate (by as much as one hundred percent) that I can put 1i ttle or no value on the available data as a basis for the fine tuned planning required to estimate the value of a res.:>urce (as the basis for negotiati6ns) or to work out the maximum cut which will permit sustainable yield forest management in any particular. forest area.

    Conducting accurate resource surveys L; an expensive business requiring aerial survey and

  • Page 244 of 247

  • arduous ground pat ols

    by skilled technical staff. is not being att mpted. I., I •• “‘

    This type · of accurate survey

    The work being done is usually carried out, o sponsored or financed, by the foreign company seeklng access to the resource and the results are heavily biased tow rds what that company wishes DOF to believe. Numerous examples are quoted in the interim reports wbere operations commenced with D..Q. knowledge of the resource {except that gained hen the bulldozer was making snigging tr cks) or where the resource data was completely wrong.

    Knowing full well the inaccuracy and lack of resource data, the government bas nevertheless been willing, in fact eager, to allocate the resource. rt seems au if the defacto policy ls almost:

    Cr)” If there -..ts: .no .resource- knowledge about an area propo ed. f r·-.aJ.location· then c_ut -.1 t dovn and find· out. ·

    Perhaps more attention would be paid to resource data if the forests were being c.llocated to companies investing in a long term integrated pi.ocessing venture, as. detailed knowledge of the available timbers would be required, and not just the volume but the maj0:r species as well. A company like SBLC most definitely would have acquired this information for itself before investing heavily in its proposed K75 million reafforestation scheme.

    It may well be different for pur log export operations and for such enterprises the defactc policy statement could probably be expressed;

    (s) For log exporting enterprises the policy is to accept fairly .rough estimates of the extent and value of the rei;ource as th enterprise· vill not involve heavy .financial i,1vestment and if. the resource cuts ut sooner than anticipated the company can seex the allocation of another resource.

    Such a triai·a d eitot policy 6ul ot be po sible if

    …….

    sustainable yield forest -management was truly government’s aim.

    6 Onshore Processing

    the

  • Page 245 of 247

  • The disastrous declin in onshore processing shown above and discussed in detail in IR No 6 uts the lie to the 1974 Policy statement directing that all efforts would be made to increase the· production and export of processeC.:

    timber products. almost nothing.

    Since that date they have dropped off to

    It is probably however still the defacto alley to:

    (t) Encouia-ge . ·lazge ·-. scaie inte.grat.ed processing on per a ent forest estates.

    onshore·

    I say this because the government has persevered with SBLC and OBTC for many years. Failure to grant SBLC the

    firm legal base long overdue

    it, requires and failure to enforce OBTC’s ‘ permit conditions probably reflects

    inefficiency rather than lack of committment to the concept. Failure to provide Jant with the required land for plantations and the required further resource however seems to indicate lack of committment to that particular project.

    The most recent trend ls to require a fixed le··,e,l of sawmilling to be carried out by log exporting companies to provide sawn timber for the domestic and overseas market. The way this ls being required however ensures that the company will export its prime logs and saw only those rejected for export as defective .

    This will result in a poor quality pro1uct and a w stefµl s,wmill as all defects will have to be cul out of .. ·. the ,logs. · In PNG s..uch ,mqls rarely .haye; better then. a·.30.· perc:;ent recovery ratio 1iihlch’ means 70 pe:rcent of the sav logs are wasted. The government is not taking st:renuous steps to insist on further processing to take up this lev l of waste (such as requiring construction of a medium density fibre board plant). For this reason an additional aspu;L of onshore processing defacto policy could be expressed:

    (uJ Encourage onshore savm11111zq by log export enterprises for doaestic and nverseas markets but tolerate a second rate product and a high va te ge rate.

    7. “Papua Nev Guinea Jays”

  • Page 246 of 247

  • In 1974 there was a hope (perhaps an intention) t.hat -landowner g·roups, woul · pe-· eJ1a.1?le to bene f 1 t· f::r:om t Imber operat ions usln’g traa1tione,l: forms of soc ia.1 organisation.

    ….

    I

    The facL Lh t a few groups, who are involved in the timber industry in a minor way, are organised as registered business groups, ,rather than as more formal companies incorporated under the Companies Act, ls about the only small stet> in this general direction. The landowner group in the current illegal Tabar operation which is acting as a “front” fo:r: Put..:ific Rim Pty Ltd is, fat instance,· a registered business group.

    If there is any policy on the quf:stlon of developing PNG forms of social and economic organisation I would say that the government would probably be opposed to it as a suitable vehicle for engaging in the timber industry in any sort of substantive way. A traditional group would be an acceptable basis for a grass cutting operation around VFP’s compound for instance but no attempt has been made to recognise such groups as the entity to· hold a permit or enter 1nto.a log ing and maiketing agreement. .. .. . . ..

    8 Landowner benefits

    There is a definite policy that landowners should receive benefits from the timber operation which is exploiting their own timber resource. It is not government policy however that they should receive the true value of the standing tree. Royalties are fixed at an absurdly low rate and landowners receive only a portion of that low amount (ranging from 25 to 75 percent).

    Landowner companies stand to do better out of a deal if they are the permit holder or approved party to a LFA dealing. Government’s performance in ensu ing that the ·randowner c6mp_anes’·at.e .not ·,cheated by £ 1:elgn c ntra_ct·ors . has been poor· nd· my ing’ui-r les have shovn· that··time after time they have been signed up to very unfair agreements hi

  • Page 247 of 247

  • 225

    local lawyers acting for all parties and in acute cooflict of interest situations. DOF has either approved those agreements, desplte the lr unfairness, or refused approval but al loved the· operatt:on to co1111ience anyway.

    The defacto policy could be expressed:

    . (v) Ensur that local landowners receive benefits to satisfy · their lov aspirations. Any benefits above that might be obtainable should flov to the provincial government on behalf of the

    sufficient level of level vhlch national or people.

    9 Decentralisation

    This aspect was discussed in detail in the text above as regards functions, staff, consultation, powers and funds. The overwhelming conclusion based on my inquiries ls that:-

    There is no effective policy or strategy vhlch comes to grips vith· de·ce-ntra11sation ·- ‘No policy expres es the ay, or even the need, tq find a proper balanie between national and provincfa1 legitimate 1ntezests in resource allocat1 on, revenue collect 1on, planning and supervisory and inspection functions.