AN OVERVIEW OF ASIAN COMPANIES: PAPUA NEW GUINEA
Foreign owned logging companies have dominated control of the forest resources in Papua New Guinea (PNG) for many years. They have long been widely criticised in the country for their negative environmental, social and economic impacts and irregular financial dealings. Pacific countries, like Papua New Guinea, are said to be losing half their potential national income through unmonitored logging exports. Papua New Guinea's losses are said to be equivalent to the US$ 241 million. (Asian Timber, September 1994)
In 1989, a two year government-appointed commission of inquiry into the operations of logging
companies, headed by Judge Thomas Barnett, reported large scale corruption and illegal activities.
This was one of the most thorough investigations into the forestry industry ever undertaken anywhere
in the world, and the findings were damning. The inquiry has international as well as national
significance because its findings are likely to reflect events in other countries with similar forestry
industry structures, e.g. a largely foreign controlled forestry industry and the weak capacity of the
appropriate government departments to monitor or control industry activities. The 7 interim reports and
two-volume final report described an industry riddled with corruption, routinely carrying out illegal
activities which cost the government and the people of PNG millions of dollars in direct income and
foreign exchange, the final report stating "The situation which is described in these reports is that of a
forestry industry out of control" (Commission of Inquiry into Aspects of the Forest Industry Final
Report p.375 cited in Callister, 1992). Not one company investigated by the commission was
satisfactorily fulfilling the conditions of its operation and Barnett found that all but one of the
companies studied during the inquiry used transfer pricing or other means to achieve unfairly low FOB
prices for PNG logs. (Commission of Inquiry into Aspects of the Forest Industry Final Report Vol.1
p.7 cited in APAG, 1990; Callister, 1992).
IMPLICATIONS OF THE BARNETT INQUIRY INTO ILLEGAL PRACTICES At least 12 methods of transfer pricing were uncovered by the Barnett Inquiry, including species
misidentification, under-grading, under-measurement and third country invoicing (Callister, 1992).
The Barnett Inquiry also revealed widespread bribery of politicians at both the national and provincial
levels and subversion of traditional local forms of representation (APAG, 1990; Callister, 1992).
Facts uncovered by the investigations led to the dismissal of one MP and the resignation of Ted Diro,
who was Deputy Prime Minister at the time of his resignation. Both were found guilty of charges under
the Leadership Code. An extract from Interim Report No. 4, which covered findings from the
Province of New Ireland (which along with New Britain was the most extensively logged of all the
Papua New Guinea provinces) summarises the processes which underlay the PNG forestry sector:
"It would be fair to say, of some of the companies, that they are now roam the countryside with the
self-assurance of robber barons; bribing politicians and leaders, creating social disharmony and
ignoring laws 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 making use of corrupt, gullible and unthinking
politicians It downgrades Papua New Guinea's sovereign statusthat such rapacious foreign exploitation
has been allowed to continue with such devastatingeffects to the social and physical environment, and
with so few positive benefits.
It is doubly outrageous that these foreign companies have then transferred secret and illegal funds
offshore.at the expense of the landowners and the PNG Government." (Commission of Inquiry Interim
Report No 4 Vol 1, "New Ireland", p.85 cited in APAG, 1990)
Despite the thorough nature of the Barnett investigations, the illegal practices exposed by the Inquiry
appear to be entrenched in the forestry industry as many of the problems remain, and indeed some
observers believe that the situation has deteriorated still further (Solness, 1995). In 1993, the then
Forests Minister Tim Neville committed himself to overhauling the forest industry and ridding it of
corruption, he received death threats as a result. His cabinet colleague John Nilkare also publicised the
rampant problems associated with foreign owned companies trying to gain access to forest resources
through bribery. According to Nilkare, logging was out of control and causing a trail of environmental
and social disruption. He said that landowners were being duped into handing over their forests for a
few quick bucks by foreign companies who were making millions of kina by exporting a rapidly
increasing number of logs back to their own countries for processing. (Hiambohn, 1993.)
A former Papua New Guinea ambassador to the US and Mexico, Margaret Taylor, stated in 1996:
"We are at the whims, I believe, of transnational Asian logging companies, specifically from Malaysia,
that do not have long term interests in Papua New Guinea".
Taylor highlighted the critical problem of lack of resources on the ground, and the fact that, no matter
what a national forest policy might state on paper, without the personnel and resources in the field the
forest authority could do nothing to monitor or control the activities of logging companies (Fraser,
1996). This echoes Barnett's findings of seven years earlier, when staff shortages, lack of equipment,
lack of transport, remote locations, low morale, lack of power to control provincial forestry staff and
poor inter-agency liaison and co-operation were all identified as contributing towards poor
enforcement of operating controls.
As well as the environmental impacts, the social dislocation at a local level and the over-arching
political influence associated with logging in Papua New Guinea, the increased health risks that come
with deforestation should not be underestimated (Jenkins, 1991). These arise from ecological changes
which lead to increased prevalence of viral diseases, increased malaria and long-term deprivation of
traditional nutritional resources available from forest areas when gardening and agro-forestry patterns
are destroyed by large scale logging (Jenkins, 1991). The costs to a nation in dealing with such
problems are immense and need to be put into the equation when assessing any likely returns from
foreign logging companies entering a country's forestry sector.
The 1994 report on the Melanesian Forestry Sector by Professor R C Duncan demonstrates that the
return for the government and the landowners from logging is nowhere near its potential due to the
dominant influence of foreign logging companies in negotiations, contracts and forestry policy, as well
as the widespread illegal practice of transfer pricing. Duncan's report examined the forestry industry in
Papua New Guinea, the Solomon Islands and Vanuatu, in particular focusing on the revenues lost
through transfer pricing and contracts which permit overseas companies, mostly Asian, to export
windfall profits out of these countries (Duncan, 1994).
The timber industry in Papua New Guinea has great influence over the political process and exerts this
influence by attempting to reduce tax and royalty payments whenever possible. During a speech in
Sarawak in April 1996 for the PNG Prime Minister, the head of the Malaysian company Rimbunan
Hijau, which is one of the largest operators in Papua New Guinea, specifically referred to levies as
being so high that larger timber firms were considering scaling down or stopping their operations. He
spoke of the many opportunities available in Latin America and Africa, presumably where companies
could negotiate more favourable terms (Tiong Hiew King, 1996).
A recent controversial development has been the appointment to the board of the National Forest
Authority of Francis Tiong, head of the Rimbunan Hijau operations in Papua New Guinea, due to his
position as president of the Forest Industries Association. To many critics this is a clear conflict of
interest. In Papua New Guinea, over 90% of forests are owned by the traditional landholders under
customary tenure. As a result of the recent announcement of Rimbunan Hijau's representation on the
board, the Papua New Guinea Forest Owners Association has threatened to stop all logging operations
in the country if landowners are not represented on the National Forest Authority Board (Post Courier,
1997).
The majority of PNG's logging operations are controlled by foreign logging companies, often through
local front companies, and documentation is often scarce or out of date. The following case studies of
two companies' operations in PNG have relevance to the situation in Latin America as WTK Realty is
acquiring concession areas in Brazil and Turama Forest Industries is linked to operations in Guyana.
WTK REALTY WTK Realty is a Malaysian company with operations in Papua New Guinea. According to local
reports its operations on its 287,000 hectare concession at Vanimo, Sandaun Province (West Sepik),
have created environmental and social problems. As a result, local landowners want the company's
licence to be revoked.
In 1995 the Vanimo TRP Landowners Association demanded that the Minister of Forests undertake an
urgent review of the Project Agreement signed between the State and WTK, "before PNG's forests and
natural environment is completely destroyed under the dictatorship of the foreign contractor company
WTK Realty." (Vanimo TRP Landowners Association, 1995, p2)
Some of the alleged failures by WTK of the implementation of the agreement with the PNG
Government, taken from a letter from the Vanimo TRP Landowners Association to the Minister for
Forests, are:
In addition to poor relations with local people and environmental damage, questions have also been
raised over the legality of WTK's buyout of the company which previously owned the concession area.
It has come to light that the shares in Bunnings Forest Products Pty Ltd were transferred to WTK
Realty Pty Ltd on February 1st 1990, one day before approval was given from the relevant Ministerial
Office on the 2nd February of the same year (Anon.,1990). There were numerous irregularities in
WTK's take-over of Bunnings which resulted in the Acting State Solicitor concluding on the 28th
August 1990 that:
Given these serious allegations about the operations of WTK within the Vanimo concession area, the
landowners association recommended that:
"We the people of Vanimo Timber Rights Purchase Project Area have witnessed a monopoly within
the multi-million timber operation by the so-called multi-million foreign company by not complying
with the Agreement laid down. We therefore recommend that Clause 35, Termination, should be
applied to the contracting company WTK Realty as it has clearly failed to comply with the Agreement
and the conditions in the timber permit."
TURAMA FOREST INDUSTRIES An official inspection of Turama Forest Industries' logging operations in Gulf Province in May 1991
revealed a number of breaches of the terms of their concession licence, non-compliance with forestry
regulations and environmental degradation, including: acute problems of erosion; abandoned logs;
creeks blocked by debris from the operation; failure to construct the sawmill required under the terms
of their concession agreement; a lack of proper control of operations due to inexperienced non-
citizens being employed to hold managerial and supervisory jobs; 80% of logs inspected were
undergraded (Pilo, 1991).
Following this inspection, the operations of Turama Forest Industries were suspended by the
Department of Forests. Substantial losses were made by Turama Forest Industries in its first two years
of operation. This, together with downgrading of logs, raised suspicions within Papua New Guinea of
transfer pricing, whereby it was believed that losses were deliberately incurred, with profits being
transferred to offshore companies to avoid the payment of taxes to the Papua New Guinea government
(Anon, 1992).
At the time of the above operations, Turama Forest Industries and associated companies were owned
by the UK based Inchcape plc. In February 1993 these companies were acquired by Primegroup
Holdings Ltd, registered in the British Virgin Islands. All staff, including the chief executive officer,
continued with the new owners under the same terms and conditions (Inchcape Press Release 25/2/93).
Since 1993 Turama / Primegroup operations continue to attract criticism.
A permit to log a large new concession area in Gulf Province was allocated to Primegroup without
tendering in 1995. Critics claim that the issuance of this permit was in contravention of the Forestry
Act and a preliminary report by the Ombudsman Commission is allegedly critical of the allocation
process (Brunton, 1996). Recent rumours suggest that Primegroup is owned by, or is in the process of
being taken over by, Rimbunan Hijau.