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REVIEW OF THEFOREST REVENUE SYSTEMIN PAPUA NEW GUINEAShare of the returns from logging (per cent).10090 to 958096 to 016090 to 014020Do landownersreceive enough ?0Does theGovernment collectenough ?-20-40GovernmentLandownerOperatorDo loggers receivetoo much ?FINAL REPORT OF THE FOREST REVENUE REVIEW TEAMCOMMISSIONED BY THE GOVERNMENT OF PAPUA NEW GUINEA13 MARCH 2002
2001 FOREST REVENUE REVIEWAcknowledgementsThe Review Team received valuable help and assistance from numerous organizations and individuals inPapua New Guinea. Working facilities were provided at the PNG Forest Authority (Managing DirectorMr Thomas Nen) at its Headquarters in Port Moresby and staff both at HQ and in the Regions andProvinces assisted with data capture and team travel.The Papua New Guinea Forest Industries Association (President Mr Stanis Bai) provided an invaluablegateway to consultations with the industry at large and assisted with team travel.SGS PNG Ltd. (General Manager Mr Bruce Telfer) patiently answered our many queries about theoperation of the log export monitoring arrangements.We would like to thank all those who attended our workshop for presentation of the preliminary resultsand also the following individuals: Ms Felecia Dobunaba, OBE. and Mr Paul Barker (Department of thePrime Minister & National Executive Council), Ms Colette O’Driscoll (Internal Revenue Commission),Dr Benno Boeha (National Research Institute), Ms Peter McCrea (Department of National Planning &Monitoring), Mr Dick McCarthy & Mr Bob Tate (Papua New Guinea Forest Industries Association),Mr Philip Tiong (Vanimo Forest Products Ltd.), Mr Andrew Bond (World Bank), and Mr Ivan Lu(Rimbunan Hijau Ltd.). Numerous other persons assisted us, and we apologize for not being able to namethem all.None of the above-named organizations or individuals are responsible for any errors or omissions thatmight remain in the Review. Such residual matters are subject to the disclaimer below.DisclaimerThis Review was commissioned by the Government of Papua New Guinea and funded by theGovernment itself and by the Australian Agency for International Development. The Review Team hasmade every effort to ensure the accuracy of their data and to perform analyses and interpretation to thebest of their ability but cannot guarantee a perfect result, nor be responsible for the results of applying itsrecommendations. The Team delivered the report to the Government for use as it sees fit, and itsresponsibility ended at that point.PAGE II
2001 FOREST REVENUE REVIEWTABLE OF CONTENTSACRONYMSXEXECUTIVE SUMMARY11PART 1INTRODUCTION13NATIONAL ECONOMY1.1.1 Demography13131.1.2Growth131.1.3Sectoral lation & Interest Rates151.1.7Exchange Rate151.1.8Government Finance and Taxation151.11.21.31.4THE FORESTRY SECTOR1.2.1 Resource Characteristics16161.2.2Commission of Inquiry171.2.3New Forest Act and Policy171.2.4Market Variations in the Last Decade18CURRENT STATUS OF THE FOREST REVENUE SYSTEM1.3.1 Summary18181.3.2Log Export Tax191.3.3Landowners’ Revenue191.3.4Other Government Revenue201.3.5Policy Support for Domestic Processing and Revenue Implications20METHODOLOGY ADOPTED BY THIS STUDY21ANALYSIS OF MARKETS, TRADE AND INDUSTRY232.1PRODUCTION AND EXPORTS232.2PAPUA NEW GUINEA’S FOREST PRODUCTS EXPORTS262.3MARKET OUTLOOK FOR PNG LOGS AND PROCESSED FOREST PRODUCTS2.3.1 The Certainties of Wood Demand30302.3.2The Uncertainties of Wood Demand312.3.3The Certainties of Wood Supply312.3.4The Uncertainties of Wood Supply34PART 22.4CONCLUSIONS AND IMPLICATIONS FOR PAPUA NEW GUINEA35PAGE III
2001 FOREST REVENUE REVIEWPART 3TRANSFER PRICING363.1ADMINISTRATION363.2TRANSFER PRICING INVESTIGATION3.2.1 Types of Transfer Pricing and Information Sources38383.2.2Volumetric Information403.2.3Species and Grades433.2.4Pricing Information443.2.5Freight & Insurance473.2.6Taun & Calophyllum Example493.2.7China, Hong Kong, & Korea52PART 4FINANCIAL MODELLING544.1LOG PRODUCTION COSTS544.2OUTLINE OF PROCESSING OPTIONS4.2.1 Financial Models for Processing57574.2.2Sensitivity Analysis on Base Case Financial Models694.2.3Government Revenue Foregone Through Processing of Logs70International Competitiveness Issues Relating to Processing in PNG714.3PART 5RESOURCE RENT745.1INTRODUCTION745.2THE FOREST REVENUE SYSTEM AND RESOURCE RENT755.3THE RESOURCE RENT ON LOG EXPORTS (IN THE ABSENCE OF TRANSFER PRICING)765.4ARE LOG EXPORT DUTIES TOO HIGH?825.5THE RESOURCE RENT ON PROCESSED LOGS84AN ECONOMIC COST-BENEFIT ASSESSMENT OF PROCESSING876.1INTRODUCTION876.2THE BENEFITS OF PROCESSING876.3THE COSTS OF PROCESSING916.4WEIGHING UP THE BENEFITS AND COSTS OF PROCESSING EXPORT LOGS93THE DISTRIBUTION OF RESOURCE RENT997.1AN APPROPRIATE DISTRIBUTION997.2THOUGHTS ON IMPROVED MECHANISMS FOR DISTRIBUTING THE RESOURCE RENT1027.3OTHER ISSUES105ESTIMATED ECONOMIC VALUE OF THE FOREST ESTATE107PART 6PART 7PART 8PAGE IV
2001 FOREST REVENUE REVIEW8.1THE RATIONALE FOR AN ECONOMIC VALUATION OF FORESTS1078.2FOCUS: NATURAL FOREST LOGGING1088.3A FIRST STEP TOWARD ECONOMIC VALUATION1098.4THE ROLE OF FOREST TAXATION8.4.1 Forest Asset Depletion1091108.4.2Landowner Costs1108.4.3Sub-optimal Selection of Logging Over Alternatives1118.4.4Flow-on or Multiplier Effects1118.5ESTIMATING THE FULL RANGE OF FOREST VALUES112AN INDUSTRY PERFORMANCE BOND1179.1DESCRIPTION1179.2RATIONALE117KEY FINDINGS, CONCLUSIONS AND RECOMMENDATIONS119STRUCTURE119KEY FINDINGS ON THE ECONOMIC VALUE OF THE FOREST ESTATEModel Findings119120KEY FINDINGS ON FOREST INDUSTRY10.3.1 Export Logs12212210.3.2 Processing12210.3.3 Market Outlook12210.3.4 International Competitiveness122KEY FINDINGS ON TRANSFER PRICING10.4.1 Japan12312310.4.2 China and Hong Kong12310.4.3 Common Evidence12410.5KEY FINDINGS ON RESOURCE RENT12410.6CONCLUSIONS10.6.1 Conclusions on the Economic Valuation of the Forest12612610.6.2 Conclusions on the Forest Industry12610.6.3 Conclusions on Transfer Pricing12710.6.4 Conclusions on Resource Rent127RECOMMENDATIONS AND DISCUSSION10.7.1 Recommendations for further study of the economic value of forests from theperspectives of landowners and the nation131PART 9PART 1010.110.210.2.110.310.410.7131PAGE V
2001 FOREST REVENUE REVIEW10.7.2 Recommendations for the study and piloting of financial and operationalmechanisms for enhancing the efficiency of forest allocation and preventingmalfeasance13210.7.3 Recommendations for forest revenue policies that promote beneficial changes inthe forest sector in response to changing market forces, emerging markets, thecondition of PNG’s forests, and uncertainties13310.8RECOMMENDATIONS FOR INDUSTRY10.8.1 Recommendations on Transfer Pricing13413410.8.2 Recommendations on the Industry Performance Bond13510.8.3 Recommendations for Short Term Action on Resource Rent Issues13510.8.4 A Model System for the Longer Term13610.8.5 Tax Rates and Thresholds13610.8.6 The Revenue Base13710.8.7 Administration13710.8.8 Implementation137ANNEX A DATA ON THE FOREST SECTOR138ANNEX B THE PERFORMANCE OF ALTERNATIVE LOG EXPORT REVENUE SYSTEMS145ANNEX C COST BENEFIT METHODOLOGY163C.1OVERVIEW OF THE METHODOLOGY163C.2INPUT-OUTPUT MULTIPLIERS164C.3DATA168ANNEX D MISCELLANEOUS DATA169ANNEX E TERMS OF REFERENCE171ANNEX F REVIEW TEAM MEMBERS176REFERENCES177BOXESBox 6.1Existing Tax Incentives for Downstream Processing89Box 6.2An Economic Profile of Selected Timber Processing Operations89Box 7.1The Extent of Competition in the Forest Industry100Box 7.2Criteria Used to Assess Royalty Systems104PAGE VI
2001 FOREST REVENUE REVIEWFIGURESFigure 3.1Log Exports from Papua New Guinea to Japan (SGS vs. JLIA Figures)41Figure 3.2Log Exports from PNG to China and China Log Imports from PNG41Figure 3.3FOB Prices for PNG Logs (1996-1999)44Figure 3.4CIF Prices for Logs Imported into Japan from South Seas45Figure 3.5Japan CIF and PNG FOB Prices for Taun and Calophyllum Logs46Figure 3.6Differences Between cif Japan and fob PNG Prices for Taun/Calophyllum Logs47Figure 3.7Evolution of Log Freight Costs to Japan (annual average)48Figure 3.8Cif Prices for Tropical Logs Imported by Korea53Figure 5.1Papua New Guinea Log Export Volumes and Average Prices76Figure 5.2The Actual Level of Resource Rent From Log Exports (in the absence of transfer pricing)78Figure 5.3The Estimated Past Distribution of Resource Rent (in the absence of transfer pricing)79Figure 5.4The Share of Log Exports Accounted for by Low Grade Logs81Figure 5.5The Current Level of Costs and Revenue82Figure 5.6The Actual and Potential Level of the Log Harvest83Figure 5.7Purchase of New Heavy Equipment by the Logging Industry84Figure 6.1Net Benefits of Processing for a Typical Year95Figure 6.2Export Duty Foregone on ‘Exportable’ Logs Processed95Figure 6.3Landowner Premium Foregone on Processed ‘Exportable’ Logs98Figure 10.1 Annual Net Returns to Natural Forest Logging in Papua New Guinea (2001)121Figure 10.2 The Past Distribution of Rent had the Preferred System Applied128Figure 10.3 The Actual and Proposed Level of Charges Under Different Prices129Figure 10.4 The Hypothetical Level of Resource Rent From Log Exports (assuming transfer pricing)130Figure 10.5 The Hypothetical Past Distribution of Resource Rent (assuming transfer pricing)131Figure B.1 Resource Rent Under the Current Revenue System and Variable US Prices148Figure B.2 Resource Rent Under the Current Revenue System and a Variable Kina149Figure B.3 Resource Rent Under the Current Revenue System and Variable Logging Costs150Figure B.4 Resource Rent Under a US -based Revenue System and Variable US Prices152Figure B.5 Resource Rent Under a US -based Revenue System and a Variable Kina154Figure B.6 Resource Rent Under a US -based Revenue System and Variable Logging Costs156Figure B.7 Resource Rent Under a More Efficient and Equitable Revenue System andVariable US Prices158PAGE VII
2001 FOREST REVENUE REVIEWFigure B.8 Resource Rent Under a More Efficient and Equitable Revenue System and aVariable Kina160Figure B.9 Resource Rent Under a More Efficient and Equitable Revenue System andVariable Logging Costs162TABLESTable 2.1Tropical Timber Production 1995 – 2000 (mill. m³)23Table 2.2Total Exports of Selected Tropical Timber Products 1995 - 2000 (mill. m³)23Table 2.3Main Tropical Log Producers - 200024Table 2.4Main Tropical Log Exporters - 200024Table 2.5Main Tropical Sawn Timber Exporters - 200024Table 2.6Main Tropical Plywood Exporters - 200025Table 2.7Main Tropical Log Importers - 200025Table 2.8Main Tropical Sawn Timber Importers - 200025Table 2.9Main Tropical Plywood Importers - 200026Table 2.10 Evolution of PNG Logs and Sawn Timber Exports (‘000m³)26Table 2.11 Main Importers of PNG Logs (1,000 m³)26Table 2.12 Log Exports by Company - 6 Largest; 1997 & 2000 (Volumes in m³; Values in US )27Table 2.13 Main Importers by Market of PNG Logs (2000)28Table 2.14 Largest Importers of PNG Logs (2000)29Table 2.15 Main Species of Exported Logs in PNG 1997 and 2000 (‘000 m³)29Table 2.16 Predicted Production of Natural Forest Large Diameter Logs from Asia –Pacific Countries (million m3)31Table 2.17 Predicted Contribution of Plantation Wood to Regional and World Industrial WoodSupply33Table 2.18 Predicted Production of Plantation Forest Large Diameter Logs from Asia –Pacific Countries (million m3)33Table 3.1Volume Differences in SGS PNG Export and Chinese Import Figures42Table 3.2Hong Kong Log Imports (m3)433Table 3.3Re-exports of Logs by Hong Kong (m )43Table 3.4Prices and Costs for Taun and Calophyllum Logs Exported from PNG to Japan(average Jan-July 2001)49Table 3.5Volume and Average FOB Price by Market50Table 3.6Average Log CIF Price in Japan (Custom Clearance)51Table 3.7Wholesale Prices of Logs – Nagoya, Japan51Table 3.8Cif Log Price Information – China and Hong Kong52PAGE VIII
2001 FOREST REVENUE REVIEWTable 4.1Summary of Average Logging Costs by Cost Categories54Table 4.2Forest Industry Logging Costing Model55Table 4.3Calculation on Indicative Average Profitability Under Current Log Export Tax System 57Table 4.4Financial Model 1 – A Portable Relocatable Eco-Mill (based on a Lewis Mill)60Table 4.5Financial Model 2 – A Small Commercial Mill (based on a Wood-Mizer Mill)61Table 4.6Financial Model 3 – A Medium to Large Sawmill Based on Higher Value Species62Table 4.7Financial Model 4 – An Integrated Small Sawmill/Joinery Operation63Table 4.8Financial Model 5 – A Large Export Orientated Veneer Mill65Table 4.9Financial Model 6 – A Large Export Plywood Mill66Table 4.10 Financial Model 7 – A Medium Density Fibreboard Mill68Table 4.11 Sensitivity Analysis – Impact on Financial Viability by Changing Key Variables69Table 4.12 Estimate of Revenue Foregone By Government for Each PNG National Employee Position Created in Processing70Table 5.1The Affordable Level of Export Duty on Timber Processing Operations86Table 6.1Benefits and Costs of Processing for a Typical Year94Table 6.2Export Duty Under Different Scenarios96Table 7.1Comparison of Estimated Log Exports106Table 8.1Model Definitions – Rent, Financial and Economic Returns114Table 8.2Base Case Model – Natural Forest Logging in PNG, Assumptions and Sources115Table 8.3Base Case Model – Economic Derivations, Assumptions and Sources116Table 10.1 Breakdown of Landowner Costs and Follow-On Benefits121PAGE IX
2001 FOREST REVENUE REVIEWACRONYMSAPECAsia-Pacific Economic CouncilAPTAdditional Profits TaxASEANAssociation of South-East Asian NationsBoPNGBank of Papua New GuineaCAFChinese Academy of ForestrycifCost, Insurance and FreightDTIDepartment of Trade & IndustryfobFree on boardFIRRFinancial Internal Rate of ReturnFMAForest Management AgreementGDPGross domestic productIMFInternational Monetary FundIRCInternal Revenue CommissionISOITTOInternational Tropical Timber OrganizationJLIAJapan Lumber Importers AssociationLFAMDFMedium Density FibreboardMLHMixed Light HardwoodsNFANational Forest AuthorityNFSNational Forest ServiceNTFPNon-Timber Forest ProductsPDBProject Development BenefitPDLProject Development LevyPNGFAPapua New Guinea Forest AuthoritySGSSociété Générale de SurveillanceSPOState Purchase OptionTATimber AuthorityTEVTotal Economic ValueTSATimber Supply AgreementVATValue Added TaxWWFWorld Wildlife FundPAGE X
2001 FOREST REVENUE REVIEWEXECUTIVE SUMMARYPapua New Guinea is engaged in review of the forest revenue system as part of a broader reform of theforestry sector. This sector experienced good trading conditions in the middle of the last decade, but isnow adversely affected by a combination of low export prices and reduced volumes, resource exhaustionin certain provinces, poor growth rates in the two main industries using Papua New Guinea logs (saw andply-milling), the impact of illegal logging in Indonesia, and the prospect of certification.Government obtains its revenue from the forestry sector primarily through a tax on log exports, receivingvery little in the form of corporate income tax. There is also a reforestation levy and miscellaneous Stateincome in the form of various fees. The core of the Review Team’s analysis was to determine themagnitude of the resource rent over time, its distribution among beneficiaries, and to propose anequitable and efficient system for allocating the rent in the future.Landowners also rely on log exports for royalty and premium income, royalties being fixed nationwide atK10 per cubic metre log exported and premia being the amounts developers agree to pay that are specificto each project. Wages for logging and processing, where this occurs, are commonly not landownerbenefits, as many staff may be immigrants from other regions.A model was developed that suggested a total average cost of efficient logging will be about US 70 percubic metre in the future, with wide local variations due to terrain and other factors, of which 39 wouldbe the logging production cost, and 12 depreciation of logging equipment. Landowners incurred costs ofover 6 per cubic metre, comprising about 2.10 for a compensation payment being an alternative assetof equal value to the productivity loss in the initial cut of the virgin forest, 3.25 for the costs ofenvironmental disturbance to cropping, non-timber forest products collection etc., and over 1 for thecosts of reforestation and subsequent land management. In the preferred system of the model, 9 percubic metre remains for logger’s normal profit. For an fob (free on board) export price of 90 per cubicmetre this would allow the Government (including provincial governments) and the landowners tocapture 70% of the difference between the fob price and the cost of logging, and the loggers themselvesto capture the other 30% of the same difference. Historically, the loggers earned a much higher excessprofit from the resource rent until 1996, when the Government took over this position.Conclusions from applying the model rest on the assumption that there is no transfer pricing. As theBarnett Commission (1989) found this was a common practice, the Government took steps to combat it.It now employs an independent agency (Société Générale de Surveillance (SGS)) to monitor exports butthis agency’s mandate ends with approval of the export shipment. The Review Team conducted aninvestigation into log export pricing from Papua New Guinea to Japan, Korea, and China. It found someunexplained and substantial discrepancies between the declared fob prices plus freight and insurance andthe destination cif (cost, insurance and freight) prices that warrant further investigation.Several processing options including different sizes of sawmill, some secondary processing, plywood,medium density fibreboard, and a pulp mill were studied in a standard costing format. It was found thatthe exemption from export duty of these products imposed costs on the country that substantiallyoutweighed benefits generated by processing. Indeed, the profitability of most types of processing was inany case very low or even negative at current international price levels. This was especially true of largescale operations and those dependent on one type of product i.e. the integrated sawmill with secondaryprocessing scored higher than the large secondary mills.This first attempt to assess the true economic value of the forest estate should be supplemented bytargeted empirical studies, an examination of logging case histories, and a study of how, if at all, there areflow-on benefits to landowners from export tax receipts. The level of log export duties should be reducedin the current commercial environment, and a suitable benchmark would be the US level that prevailedin 1995. Logs harvested from plantations created by the exporter should be exempt. Landowner royaltiesPAGE 11
2001 FOREST REVENUE REVIEWneed to be raised to compensate for the loss of revenue due to the reduction in the US value of theroyalty.The model system should allow loggers to recover the full cost of efficient operations and provideenough revenue to fund the Papua New Guinea Forest Authority. In the first instance, landowners shouldreceive the equivalent of 6 per cubic metre and consideration should be given to having the ProjectDevelopment Benefit neutral with respect to changes in the kina. Thresholds for the application of exportduty should also apply. Government and the landowners should secure 70% of the resource rent, and theprinciples underlying these considerations should be universal enough to apply to non-timber forestproducts too.At present there is insufficient actuarial evidence of the risk of default to propose any changes in thesystem of performance bonds for forest operators now used.PAGE 12
2001 FOREST REVENUE REVIEWPART 1INTRODUCTIONPapua New Guinea is engaged in a review process of the forest revenue system. The review is part of abroader reform of the forestry sector and includes amendments to the Forestry Act to improvegovernance and accountability, an Independent Review of timber harvesting applications in processduring the current moratorium on granting of new co
2001 FOREST REVENUE REVIEW PAGE V 8.1 THE RATIONALE FOR AN ECONOMIC VALUATION OF FORESTS 107 8.2 FOCUS: NATURAL FOREST LOGGING 108 8.3 A FIRST STEP TOWARD ECONOMIC VALUATION 109 8.4 THE ROLE OF FOREST TAXATION 109 8.4.1 Forest Asset Depletion 110 8.4.2 Landowner Costs 110 8.4.3 Sub-optimal Selection of Logging Over Alternatives 111
(A) boreal forest º temperate forest º tropical rain forest º tundra (B) boreal forest º temperate forest º tundra º tropical rain forest (C) tundra º boreal forest º temperate forest º tropical rain forest (D) tundra º boreal forest º tropical rain forest º temperate forest 22. Based on the
D. Mixed Evergreen/Deciduous Forest 38 1. Salt Dome Hardwood Forest * 38 2. Coastal Live Oak-Hackberry Forest * 39 3. Barrier Island Live Oak Forest * 39 4. Shortleaf Pine/Oak-Hickory Forest * 39 5. Mixed Hardwood-Loblolly Forest * 40 7. Slash Pine/Post Oak Forest * 40 8. Live Oak-Pine-Magnolia Forest * 40 9. Spruce Pine-Hardwood Flatwood * 41
reduce its forest road costs and still improve public safely on forest roads, reduce the impact of forest roads on the environment, and improve the ability of the Forest Service to fully maintain the national forest road system. For example, although the Forest Service already does some cost sharing, it could .
Temperate deciduous forest Taiga, (coniferous forest) Arctic tundra (polar grasslands) Tropical savanna, thorn forest Tropical scrub forest Tropical deciduous forest Tropical rain forest, tropical evergreen forest Desert Ice Mountains (complex zonation) Semidesert, arid grassland Tropic of Capricorn Equator Tropic of Cancer
The case for using forest biomass . 6. 7. 10. 11. Ontario's forest biomass advantage. 12. Leadership in the green economy . Spotlight: Integrating biomass in Resolute Forest Products' Northwestern Ontario operations . Sustainable forest policy framework . Spotlight: Forest biomass and the Managed Forest carbon cycle .
Submit questions to communityforest@fs.fed.us U.S. Forest Service Community Forest and Open Space Conservation Program Frequently Asked Questions (September 2013) General What is meant by the term "Community Forest"? The CFP rule defines Community Forest as "Forest land owned in fee-simple by an eligible entity that
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worts, lichens, mosses, algae and fungi also occur. CLIMATE : The abrupt variations in the altitude (elevations) have created diverse climatic conditions. The climate is warm and humid during summer and monsoon season (June Oct.) and moderately cold during winter (Dec. Feb.) at lower elevations. The winter months become more severe as one goes up. Places like Lachen, Lachung and Dzongri areas .
