Papua New Guinea the Forestry Sector

RepodNo. 8031-PNG PapuaNew Guinea The ForestrySector: A TropicalForestry Action PlanReview

Public Disclosure Authorized - 1, 1990 AgricultureOperations Division CountryDepartment V AsiaRegional Office FOR OFFICIALUSE ONLY Public Disclosure Authorized Public Disclosure Authorized

Docmen of the WorldBak

Thisdocument has a restricteddistribution and may be used by recipients

Public Disclosure Authorized onlyin theperformance of their official duties. Its contents may not otherwise bedisclosed without World Bank authorization. CURRENCYEQUIVALENTS

Annual Averages

1981 K 1.00 = US$1.49 1982 1.36 1983 1.20 1984 1.12 1985 1.00 1986 1.03 1987 1.10 1988 1.15 August 1989 1.15

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development Bank AIDAB - Australian International Development Assistance Bureau m3 - Cubic meters CSIRO Australian Commonwealth Scientific and Industrial Research Organization DAL - Department of Agriculture and Livestock dbh - Diameter at Breast Height DEC - Department of Environment and Conservation DFP - Department of Finance and Planning DLPP - Department of Lands and Physical Planning DOF - Department of Forests FAO - Food and Agriculture Organization of the United Nations FIA - Forest Industries Association of PNG FIC - Forest Industries Council FRI - Forest Research Institute GOPNG - Government of Papua New Guinea LMP - Land Mobilization Prog-am (or Project) mai - Mean Annual Increment MEP - Minimum Export Price NEC - National Executive Council NFDP - National Forestry Development Progrum NPEP - National Public Expenditure Program PIP - Public Investment Program PNGRIS - PNG Resources Information System SPO - State Purchasing Option TA - Timber Authority TFAP - Tropical Forestry Action Plan UNDP - United Nations Development P:ogramme UNITECH - PNG University of Technology _ ,1 AL

PAPUA NEW GUINEA

THE FORESTRY SECTOR: A TROPICAL FORESTRY ACTION PLAN REVIEW

Table of Contents

Page No.

PREFACE ...... *... iv EXECUTIVE SUMAiARY . . v

I. INTRODUCTION ...... 1

II. FORESTRY AND THE PNG ECONOMY . ... 5

A. The Papua New Guinea Economy: Directions and Policy Imperatives .. 5 B. Forestry in the Economy ...... 6 L. The National Forestry Development Program ...... 11 D. The Institutional Framework .. 13

III. THE FOREST RESOURCE AND SUSTAINABLE MANAGEMENT ...... 15

A. The Natural Forest Resource of PNG . . 15 B. The Sustainable Management of the Resource . .5...... i C. Plantations ... . 22 D. Resource Assessments The Need . . . 27

IV. MAXIMIZING RETURNS TO THE FORESTRY SECTOR ...... 29

A. Government Revenues, Royalty Policy and Rents . . 29 B. Methods of Sale of Wood ... 35 C. Log Exports and the Transfer Pricing Issue ... 36 D. Forest Industries Development ...... 42

V. CONSERVATION AND LAND USE STRATEGY . . 51

A. Environmental Controls in Logging . . 51 B. Land Registration, Negotiation and Compensation ...... 52 C. Landowner Assistance and Education ...... #. 52 D. National Land Use Planning Issues ...... 53 E. The Need for a Conservation Strategy ...... 55 F. World Heritage Possibilities and Sustainable Yield ...... 56 G. A Suggested Role for Non-Government Organizations...... 57

This documenthas a restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contents may not otherwisebe disclosedwithout WorldBank authorization. - ii -

VI. MANAGING THE FORESTRESOURCE...... 59

A. The Present Problem ...... 59 B. Major Constraints to Management ...... 61 The Policy and Legal Frameworka...... 61 Management Personnelr..o. * * 4 ...... ne. . 63 Intergovernmental Relations...... 64 Landowner-Government Relations...... 66 C. A Strategy for More Effective Forest Management 8...... A N3w Act for Forestry in PNG. . ... 68 Institutional Requirementsu ...... 69 A New Forest Service...... 71 Re3earch and Development ...... 73 Human Resources Development...... 75

VII. AN ACTION PROGRAO G .. R . AM...... 77

A. Major Progrem Componenm...... 77 GovernmentPolicy Statement. 77 New Legislationg....n .. .. 78 Resources and SustainableYield . .78 Conservationand Land Use...... 79 Institutionaland Human Resource Development. . 81 Short Term InstitutionalSupport Measures. 83 Further Studies ...... 85 B. Implementingthe Action Program ... .86 InterimManagement Structure ...... 86...... External Assistance--TheCase for a Twi .. .87 Phasing of Implementation ...... 88 C. Implications for Donors ...... 89

ANNEXES

1. Internationaland Coastal Freight Rates for PNG 2. Major Timber SpeciesExported from PNG - 1988 3. Log Export Data: PNG and Major S.E. Asian Suppliers 4. Calculationof Transfer Prices Using Ex Log Pond Japan Prices 5. A Proposed ForestryActt Discussionand Drafting Instructions 6. SuggestedAreas for Conservation/Preservation 7. Terms of Reference and TFAP Mission Members 8. Major Forms of Timber Sale Agreement in PNG 9. Summary of the Minister'sDrafting Instructionsfor a New Forestry Act 10. SuggestedProject Proposals

BIBLIOGRAPHY - iii

LIST OF TABLES

Pare No.

1. Country Data - Papua New Guines...... 4 2. Forestry in the PNG Economy, 1988 ...... 7 3. PIG Value of Exports by Type of Product ...... 8 4. Japanese Imports of Logs from SE Asia and Pacific Islands, 1965-88 ...... 0...... 9 5. PNG: Volume of Major Exports by Type of Product, 1981-88 ... 9 6. Destination of PNG Forest Product Exports, 1984-88 ...... 10 7. National Forestry Development Programt Logging Concessions, 1987-91 ...... 12 8. NFDP and Original Programs...... 12 9. Planting Targets by Year ...... 13 10. PNG Forested Area, 1985 ...... 0...... 15 11. PNG Natural Forest Area and Grow ing Stock ...... 15..*is 12. Plantation Areas, 1979, 1985, 1988 ...... 23 13. Age Classes of Plantations, 1986 ...... 8 6...... 24 14. Mean Annual Increment Data, Major Plantation Species ...... 24 15. Plantation Development Strategy, 1986-2000 ...... 27 16. Sources of PNG Government Forestry Revenue ...... 30 17. PNG Log Export Volumes, Values, Prices ...... 36 18. FOB Log Prices, Sabah, Sarawak and PNG, 1985-89...... 38 19. Estimated Losses from Transfer Pricing, 1985-87, 39 20. Estimated Losses from Transfer Pricing, 1982-85 39 21. Estimated Losses from Transfer Pricing, 1985-88 40 22. Processed Forest Produce Exports, 195 1-88 43 23. Management Personnel vs Operations, 1972173-87 64

Chart 1: Organization of Dep&rtment of Forests ...... 14

Cinart 2: Forest Service Proposed Structure ...... 72

Map - iv -

PAPtA NEW GUINEA

THE FORESTRY SECTOR: A TROPICAL FORESTRYACTION PLAN REVIEW

Preface

1. The Tropical ForestryAction Plan is an internation.zcoordinating mechanism for halting the destructionof tropical forests and promoting their sustainableuse for the economic and social benefit of people. There are compellingreasons for TFAP support for action in Papua New Guinea. First, of PNG's total land area of some 46 million ha., about 36 million ha (772) is forested and the economywill have to depend upon the developmentof forestry and its other renewableresources for sustainedeconomic activity in future.

2. A secontdreason for TFAP support goes beyond the country's own economic interests. PNG's forests are well known for their outstandingbiodiversity. The country'sunusual geology,with spectacularmountain landformson the main island and volcanic features on the smaller islands,has produced a rich diversity of Malay and Gonwanaland flora and fauna. There are more than 11,000 species of flora, including 2,000 ferns alone, while the lowland rain forests comprise more than 1,200 tree species. Many species of flora and fauna are unique to PNG, and some of these are now threatened.

3. Finally, TFAP support is especiallyappropriate because forest sector management in PNG is in a state of disarray. Despite the importanceof the sector, the country does not now have the means to assess the full extent of its forest resource or its sustainableyield, to control existing logging operations,to reap the full benefits from the present level of proe Lction,or to determinefuture policies for conservationand industrialdevelopment. Yet the officialmedium term developmentstrategy provides for even heavier logging in the future, with few measures suggestedfor improvedmonitoring and supervision,and for seeminglyflawed policies to promote local processing.

4. Recognizingboth the importanceof the forest resource and the gravity of the managementproblem it faces, the Government of Papua New Guinea (GOPNG)requested the TFAP to review the forest sector and propose an Action Program for the future. In response,in May 1989, the TFAP mounted an inter- agency mission to PNG under the leadershipof the World Bank, with participation of the Asian DevelopmentBank, Food and AgricultureOrganization, United Nations DevelopmentProgramme, the InternationalInstitute of Environmentand Development,the InternationalUnion of Conservationand Nature, and the bilateral developmentassistance agencies of Australia,New Zealand and the Federal Republic of Germany. The mission actively involved governmentand non-governmentorganizations in its work and was able to benefit greatly from the work of a judicial Commission of Inquiry which was drafting its final report during the mission'svisit to PNG. The Prime Minister of PNG has since appointeda task force to report directly to him on the implementationof recommendationson forestry arising from the Commission of Inquiry and the TFAP Review. v

PAPUANEW GUINEA

THE FORESTRYSECTOR: A TROPICALFORESTRY ACTION PLUN REVIEW

Executive Summary

1. This report provides the TFAP's assessment of the status of PNG forest sector and a proposed Action Program for considerationby Government and TFAP member agencies. The report concentrateson six problem areas that warrant the most urgent attention:

Maior Problem Areas and Priorities for Action

(i) Resource Assessment

2. PNG lacks adequate informationon the growth, yield or even the extent of its forest resourre. Thus, while the Constitutionof PNG accepts the concept of achievinga sustainedyield management syatem, there is not the data base to assess at what level this should be set. The urgent requirement, therefore, is to quickly obtain sufficientinformation on the resource to allow reasonableprescriptions for sustainablemanagement to be drawn up, with adequate cross referencingto other major land use plans and options included.

3. Proposed Actions. Ultimately PNG will require a complete inventory of its forest resource. However, importantdecisions on resource use and related policies are required well before a full inventorycould be completed. Therefore, the followingactions are suggested:

(a) A Rapid Resource Appraisal. The report advocatesthat a preliminary resource assessment should be undertakenand completed in 12 months. It would utilize an existing geographicalinformation system data base, logging and DOF records, field measurement,and possibly some remote sensing imagery, to estimate regeneration. This will require externally funded contracts for updating and amending the data bases and for a long term consultancyin resource estimuation.

(b) A Re-inventoryof the Resource. The report outlines a four to five year program of activity to complete an inventory. It would rely for stratificationand some baselinemapping on output from the rapid resource appraisal,and would thereforebe scheduledto commence after that output becomes available. External funding of such an undertaking will be necessary.

(ii) Managing the Resource

4. A major breakdown in effectivemanagement of the forest resourcehas occurred due to the lack of an effectivedecision-making framework to link the Central and ProvincialGovernment and landholdersin PNG. It is essential that landholdersbe adequatelycompensated and involved in forestry activi:y: it is neither practical, nor appropriate,to locate forestry activity only on alienatedland in PNG. The TFAP Review,identified some major constraintsto the effectivemanagement of PNG's forest resources: - vi -

(a) Some 982 of land in PNG is owned under custom law by clans. There are serious issues of land tenure and rights which need to be addressed: the adequacy of compensationand continuity of such payments; effective registrationof tenure; assistancein the area of enhancing landowners'capabilities to negotiateand participate effectivelyin land use decisionmaking.

(b) The very rapid increasesin output of logs (from 910,000 m3in 179 to 2,000,000m- in 1987, and projected in GOPNG plans to reaches 6,000,000m 3 by 1990) have not been matched by increasesin the capacity of the central and provincial governmentforest agencies to monitor and superviseoperations.

(c) Serious environmentalconsequences have already occurred in some areas of PNG as a result of uncontrolledlogging programs, and more can be expected if no steps are taken to improve control.

(d) The problem is more than simply one of staffing levels or funding, although these are clearly important. Essentially,the system of forestry administrationin PNG has not evolved successfullyfollowing the devolutionof central governmentpowers to provinces.

(e) At the provincial level, a lack of qualifiedpersonnel and equipment is prevalent. Provincialofficers, and to a large extent the governmentsthey work for, are placed in the position of having to apply policy set at a differentlevel of government (the nationa, government),and serious problems of lack of coordination, misunderstandingand in many cases direct resentmentare present.

(f) At the national level, the Departmentof Forests is operating on a standard line structure,even though the field activity that is usually the object of such a structureis now for the most part in Provincialhands.

Some of the worst exploitivepractices have occurredwhen landownershave been allowed to deal directlywith logging operators. On the other hand, when Governmenthas been involved,implementation has often been slow and there has been insufficientconsultation with landowners. In these cases, environmental damage has also occurred through lack of adequate planning and supervision.

5. Proposed Actions. The problemsnoted abovf,are sufficientlyserious to wazrant a completelynew approach to forest administrationin PNG. The report advocatesa new structurewith five major compoLentst

(a) A National Forestry Board that would formulatenational forestry policies and plans, and advise the Minister on all major policy and project developments.

(b) The Board would be servicedby specializedStanding Committees,in such areas as conservation,land use, research,marketing and economics. These Committeeswould have a funding base determinedby levies on forest operations,to ensure adequate coverage of their responsibilities. They would have power to employ and co-opt assistance as required. - vii -

(c) Four Regional Forestry Boards would administer forest development plans, issue timber licensesat the provincial level, and provide the link to landholdersthrough provincialgovernment and non-government organizationsmembership. The regionalboards were seen as a compromisebetween centralizedcontrol of forestry,which is politicallyunacceptable in PNG, and settingup 19 provincialboards, which would be an administrativelyunwieldy and probably unfeasibie solution.

(d) A new Forest Service,which would service the national and regional boards. Existing provincial forestryofficers would be transferred to the service, thus restoringa career structure,improved morale and effectivecommunication of informatior.and instructions. The Servicewould be required to deal directlywith regionalboards, thus allowing provinces a measure of control over Forest Service operations.

(e) A new financial frameworkthat will create a number of special purpose funds and accountswith guaranteed sources of income *rrom related operations.

6. The first step in implementirgsuch a reform will be to enact new legislation. The judicial Commissionof Inquiry identifiedinadequacies in the existing legislationas a major cause of over-exploitationand malfeasance in the forestry sector. GOPNG has accepted that existing legislationis inadequate,and at the time of the TFAP mission had dzafted instructionsfor a ne-wAct to go to Parliament. TFAP supportsthe intentionof GOPNG to produce new legislationquickly, and has offered a number of suggestedchanges includingthe proposed new structura,which are discussedat length in this report.

7. The report also suggests that the donor communitycan assist in the process of re-structuringand improvingsupervision and monitoringby providing:

(a) a minor input to assist with forest policy and legislation;

(b) a coordinatinginput to assist with structuringdonors' contributions during the reorganizationphase;

(c) external experts to join togetherwith national forestry staff in monitoring and management task forces to reorganize harvesting and indigenous forest management, and supervision of logging operations. Involvementof landownersin the management process would be an important element of this activity.

(iii) Maximizina Returns from Losaing

8. PNG is presently sustainingserious losses to revenue from poor control over logging and marketingactivities, and an inadequate resource policy base. Whatever the level of sustainable yield that is determined for PNG, the country needs to reap the maximum benefits,in terms of foreign exchange and government revenues,from the annual cut. This does not happen - viii -

now. his review confirmed that extensivetransfer pricing of exported logs has occurred, and measures adopted in the past to raise export log prices (such as the minimum export price system) have not worked. Nor are some of the new measures being propoaed to raise the export tax level likely to be effective. Equally serious is the fact that losses occur further back in the marketing c in, due to low efficiency in logging (related to the field monitoring and supetvision problem referred to earlier) and to unnecessarily large losses from degrade of logs due to exposure to thi elements,mis- identificationof species,poor log yard and loading control, and other problems of an essentiallysupervisory nature. The report also argues in favor of a royalty system which can capture the full rental for higher valued species (whichwill not occur under presentlyproposed legislation),combined with an export tax system based on FOB prices, to take account of variability in average selling prices over time. Further, the report suggests the practice of including indirect levies (such as obligationsto constructroads, bridges, schools, etc.) in logging contractsmay be inefficient.

9. Proposed Actions. Some of the marketing problems identifiedwill be included under the terms of references for the monitoring task force referred to below. In addition, the followingare suggested%

(a) GOPNG should consider a comprehensivereview of its royalty, export tax and other revenuemeasures as applied to the log export trade.

(b) the State PurchasingOption (a GOPNG acquisitionscheme which allows it to sell up to 25Z of an exporter'slog shipment if it can improve upon the exporter'sprico, and to retain the difference)should be extended so that a greater impact on private sector marketing is possible. The SPO should also be made more autonomousand covmercial,and be given sufficient financialpowers to become self- funding.

(c) external assistance will be required to bring in a competent marketing firm (on a profit-share contract basis) to raise the level of activity and profitability of the SPO. Funding for equipment and training will also be required.

(iv) Industrial Develooment Prospects

10. The forest processing sector in PNG is presently internationally uncompetitive. GOPNG has adopted the policy of encouragingthe domestic processing of an increasedproportion of its forest products. The report endorses this policy as an obviousmeans of increasingthe benefits of forest resourcemanagement to the nation. However, there has been a dramatic decline in local processing since the export of logs was liberalizedin 1979, and the report concludes that the savmillingand veneer manufacturingsectors in PNG are uncompetitiveinternationally. High costs, low productivityand the diverse nature of the resource are the main reasons for this. The future direction of industrialdevelopment, and the appropriateincentives framework for encouragingsuch development,therefore need careful study.

11. The key issue at present is how to encourageviable processing industries. GOPNG has already imposed a ban on the export ef logs o.1some premium species, and has announcednew measures to protect t1hedomestic - ix -

market. The Government is also consideringintroducing a complete ban on log exports for all new concessionsand, in time, for the whole sector. Given the real constraintson successfulindustrial development, the report contends that such a ban would not achieve its objectivesand could lead to a serious misallocationof resources. The report argues in favor of supply guarantees, standardized grading and training enhancement, and certain taxation measures, to encourage domestic processing. The report cautions against the adoption of further trade protectionmeasures to favor domesticprocessing.

12. Proposed Actions. The report cattions against hasty and possibly imprudentactions to stimulateindustrial development, and suggests the follovings

(i) A careful review of the costs and benefits of introducinga log export ban at this stage. The report suggests a number of alternative measures that could be combined into a suitable incentivespackage for promoting industry.

(ii) Three major industry feasibilitystudies to determinethe viability of (a) an efficiently-scaledintegrated sawmill/board manufacturing plant; (b) woodchipping;and (c) a pulp mill.

(v) Conservationand Land Use

13. Serious environmental problems as a result oZ uncontrolledlogging activity have occurred in PNG. Wider issues of environmentalmanagement in the forested areas of PNG are also of concern. Many of the specific environmentalproblems which have arisen from logging operationsin PNG will be better managed under the new legislationand administrativestructure proposed in the report. Similarly, some of the critical land use and tenure issues will also be addressed. However, conservationand land use are much broader subjects that need to be tackled on a cross-sectoralbasis. It is thereforenecessary to devise an action program that goee beyond forest policy and management.

14. This review will deal with the critical land issue by cross referencinginto some current activities in the land tenure area in PNG, and by suggestingsome specific inputs in the area of landownertraining, assessment of the feasibilityof establishmentof a land use research council, and assessment of mechanisms for titling and compensation.

15. Proposed Actions. This report proposes actions to address conservationand land use issues:

(a) A World Heritage Proposal to take in a large part of the upland terrain and some island and coastal areas;

(b) An early endeavor to formulatea national conservationstrategy, with wide participationof comunuity,government and lndustry interests;

(d) A program to improve ecologicalsurvey and monitoring; (e) A program to provide training to local leaders in negotiation skills and land use management; and (f) Funds to support the activities of NGOsengaged in forestry and conservation activities.

(g) A feasibility study for establishment of a land use research council. 16. The most ambitious of these proposals is for a World Heritage listing. The proposal is that GOPNGmight offer a composite package, consisting of a World Heritage declaration over a significant area of its forests, together with an undertaking to manage its other forest resources at a sustainable rate of exploitation. In return, major donors might compensate the country for the revenues lost through adopting a lower production target until PNG's own expanding mineral revenues take up the slack. (vi) Institutional and Human Resource Deve'opment 17. At present, PNG does not possess the appropriate institutional structure, nor an adequate, trained cadre of managers, to design or implement forest management policies. Ultimately, whether or not PNG succeeds in reaping the maximumbenefits from its forests, while maintaining the resource for future generations, will depend upon how fast the country can build up its capacity to manage the resource. The report concludes that PNG's present capacity is quite inadequate to provide even minimm supervision of present activities, let alone tackle the complex tasks thE.t lie ahead. 18. Proposed Actions. The report concludes that strengthening its mAnagement capacity will be the most important single challenge facing the sector, whichwill requIre considerable external assistance. The report suggests the outline of an organiz^tion structure for effective umnagement, but no structure will be effective unless it can be staffed with qualified people. The Action Program therefore proposes three areas for urgent attentions (a) The detailed design and implementation of the proposed new structure of national and regional boards and a single forestry service. (b) The design of a major human resource development program, comprising a phased staffing plan, an indicative training program for national staff, and a complementary strategy for securing external assistance to fill posts for which qualified nationals are not available. This is a major, long term task, which PNGmight seek external assistance to belp plan, but which will require indigenous capacity to implement on an ongoing basis. (c) Short-term institutional support in the form of contract technical inputs while indigenousmanagement capacity is being strengthened, in the key areas of forest management, the monitoring of logging and marketing. In each case, the report suggests that external expertise will be needed to supplement national staff to bringabout urgently- needed improvements. - zi -

Imnlementina the Proaram 19. Even though the TFAP Review has tried to limitthe proposed Action Program to only essential items, it still amounts to a very challenging set of policy and structural changes. The report therefore suggests three mechanisms for managingthe process of changes (a) the establishment of a special, interim policy/planning structure within GOPNG;(b) external assistance to support this interim structure; and (c) a careful phasing of implementation. 20. The report suggests a two-tiered structure should be adopted as an interim mechanism for managing the Action Program: (a) A high level Steering Committee, reporting directly to the Minister, that could perform some of the intended functions of the National Board, pending the Board's establishment. It is possible that these functions could be performed by the task force recently set up by the Prime Minister. (b) A small Planning Group within the Department of Forests, composed of senior officials, which would be responsible for preparing and overseeing the implementation of the program. 21. To assist the planning group, the report suggests that GOPNGshould seek external assistance for a small, expert team of planners for a minimum of two years. It is suggested that since the task of restructuring and strengthening the forest sector will be a long process, the best solution would be to seek a 'twinning8 relationship with a suitable external technical agency, which could not only field the planning team but also provide advisory support to GOPNGover an extended period. 22. The report has suggested that the program mightbe divided into ten principal tasks, with the initial implementation split into three phases over the next two years: Phase I - The mission suggested three actions to be implemented before the end of 1989, all of which are now under preparation: 1. Issue a GOPNGpolicy statement, in response to the TFAPReview, as a basis for the proposed donor meeting; 2. Set up steering committee and planning group in the Department of Forestry as an interim structures 3. Mobilize external assistance for (a) a planning support team in DOF to help manage the process of change and (b) if necessary, for the final drafting of the new Forests Act. Phase II - to be implemented before the end of 1990: 4. Enact the Forests Act; 5. Set up the new organizational structure; 6. Mobilize short term assistance/outside contracting to strengthen forest management, monitoring of logging and marketing services; 7. Undertake rapid resource appraisal; 8. Launch review of human resource development needs. - xii -

Phase III - to be implementedbefore the end of 1991:

9. Commence forest re-inventory. 10. Undertake studiesof (a) revenuepolicy and (b) viability of industrialdevelopment alternatives.

Implicationsfor Donors

23. There is a need for substantialand prolonged assistancefrom the donor comunity, in both fineancialand more importantlytechnical assistance. The Action Program offers the donor communitya challengingopportunity to help conserve PNG's unique environmentand biologicaldiversity. The report offers three unusual suggestionsfor the role of donors:

(a) Support for a Worlc Heritage/SustainableYield Declaration. Donor support for such a declarationwould be a pathbreakinginitiative in the environmentalfield, and would call for new mechanisms for donor coordination. One major advantageof this proposal would be that it might mobilize support from bilateraldonors and environmentalNGOs that are not now actively engaged in PNG.

(b) A TwinningArrangement for InstitutionalSupport. TVe proposal to find a twin agency to provide GOPNG with technical support over an extended period of time would require a bilateral aid agency to make a long term commitmentto the PNG forestry sector, but with the prospect of making a major impact on its performance and on the sustainabledevelopment of the economy as a whole.

5C) The Role for the World Bank. The Governmenthas requestedthe Bank to act as lead' agency in the forestry sector,not only in mounting the TPAP review,but also thereafterin helping to coordinatedonors in supportingthe implementationof the Action Program. The Bank takes this assignment seriously,and will make resourcesavailable over the next several years to provide support to the Government. - xiii -

BROAD FORESTRY1 SECTOR STATISTICS

w!'. Forested Area

1.000 ha

Total land area PNG 46.200 Natural broadleaved forest 35,623 Natural coniferous forest 520 Plantations 36

TOTAL 36.179

Operations

1979 1988

Log output (m3) 910,000 2,000,000 Volume exported (m3) 473,000 1,341,000 Value of exports (Millions Kina) 20.76 91.19 Cumulative plantation area (ha) 23,850 35,900

Numbers employed in sector 5,000 (est) Forest management personnel 567 445 I. INTRODUCTION

1.1 The Tropical ForestryAction Plan (TFAP) is an international coordinatingmechanism for halting the destructionof tropical forests, and promotingtheir sustainableuse for the economic and social benefit of people. The TFAk seeks to achieve these goals by bringing together national and internationalagencies to produce systematicand coordinatedplans for forest use and developmentin countrieswhich have requested TIAP assistance. At present, a large number of governmentand non-governmentorganizations have joined the original sponsorsof the TFAP--FAO,UNDP, The World Bank and the World Resources Institute--inpromoting and planning the TFAP program.

1.2 In general, according to the TFAP, the consequencesof not reducing rates of deforestation,will be severe;by 2000 AD:

(a) half of the populationof the developingworld will be short of fuelwood;

(b) forest dwellerswill continue to be displaced, and their cultures destroyed;

(d) furtherwidespread degradationof watersheds,with consequent land and food losses, and natural disasters,will occur;

(e) large quantitiesof potentiallyvaluable timber will be lost, reducing economic benefit fron.its utilization.

1.3 PNG faces these problems,albeit in some cases to lesser degrees than in more heavily populatedcountries. The final item in the list - the economic consequencesof loss of forests - may in fact be potentiallymore significantfor PNG than for other countries,given the high ratio of forest cover per capita, and the extent to which PNG may have to depend on the resource for sustainableeconomic activity in the future.

1.4 A second compellingreason for TFAP involvementin PNG is the great ecologicaland biodiversityvalue of the PNG resource. Some 85? of the total area of PNG remains under forest,at the present time. These forests are well known for their outstandingbiodiversity. PNG is at the leading edge of subductionof the ancient Gondwanalandtectonic plate, which has craated spectacularmountain land forms and volcanic featuresboth on the main island and on the smaller islands. The main island of PNG is the largest and highest tropical island in the world, and it exhibits most kinds of environment(apart from desert) and vegetationtypes. The geology has produced a rich diversityof Malay and Gondwanalandflora and fauna. PNG has the world's largest and smallestparrots, the largest doves, the largest lizard, some of the smallest frogs, and the largest butterflies,moths, and stick insects. It has the tallesttropical trees, the largest rhododendron flowers and exceptionallyrich mangrove and sea grass flora. In general, the PNG flora comprise more than 11,000 species, including2,000 ferns. The - 2 -

lowland rain forestshave more than 1,200 tree species. Rare and threatened species--especiallyamong the fern and orchid families--arenumerous.

1.5 A third, and more immediatereason for TFAP involvementin PNG comes from the findings of a judicial Commission of Inquiry into Aspects of the Forestry Industry. (referredto henceforth in this report as the Commiss.on of Inquiry) which has been releasingreports from its investigationsfor almost a year. This Inquiry, under the chairmanshipof Mr. Justice Barnett of the Supreme Court of 1'NG,hai reportedwidespread malfeasancein the sector, and has concluded that the forestry sector is out of control, leading to widespread environmentaland social damage and a lack of 'roper economic returns to either the State or landowners.

1.6 The Government of Papua New Guinea (GOPNG) recognizes the importance of its rich forest resource. In 1988, GOPNGrequested the TFAP to review the forestry sector. Ir response,in May 1989 the TFAP mounted an inter-agency mission to PNG under the leadershipof the World Bank. This mission actively involved governmentand non-governmentagencies in PNG at the national, provincial and local levels. The followingexternal agencies also participated:

(a) the Asian DevelopmentBank.

(b) the Australi&n InternationalDevelopment Assistance Bureau.

,c) the InternationalUnion for the Conservationof Nature.

(d) the InternationalInstitute for Environmentand Development.

Se) the Food and AgricultureOrganization of the United Nations.

(f) the United Nations DevelopmentPrograme.

(g) the New Zealand Ministry of External Relations and Trade.

(h) the technicalcooperation agency (GTZ) of the Government of the Federal Republic of Germany.

1.7 The principal objectivesof the review were to:

(a) examine the role of forestry in land use and the economy of PNG, particularlywith respect to the TFAP priority areas of: land use; industrial development;fuelwood/energy; conservation of tropical ecosystems;institutions.

(b) to devise an action program to coordinateGovernment and donor agency inputs around a program of reform and restructuringof the sector.

Annex 7 to this report contains expanded terms of reference,and lists the participantsin the TFAP Mission. - 3 -

1.8 Duriag the Mission, the followingmajor issues were identifieds

(a) the serious environmentalconsequences of the rapidly expanding logging program, and the inadequacyof existing legislationand institutionalstructures to manage it;

(b) insufficient involvement of either landowners or Provincial Governments in forest land use decisions and management;

(d) insufficientconsideration of the policy options for industrial developmentin the forestry sector;

(e) a serious lack of resourcesdata sufficientto allow effective sustainablemanagement planning;

(f) a lack of a coherent conservationpolicy. Tablel: COUNTRYDATA - PAPUANOW GUINEA

Area Population Doneit 461,700eq km 8.c *ilIIon(1986) 7.6 per sq km (1986) PopulationChsracteritticu He&Ith Crudebirth rate (per1,000) /a 37.0 Populationper physician 1 11,700 Crudedeath rate(per 1,000) 7i 18.0 Population per hospital lih (1986) 247 Life Expectancy at Birth (year) (1982) 51.0 Infant Mortality Rate (per - 1,000 liv. births) (1080) 72.0 Acces to Safe Water (X of Population) Energy ConsumptionPer Capita Most (KGCoal Equivalent) 1978 Recent Total 20 1R 1970 149 Urban so 66 Rural 19 10 19S0 279 Nutrition La Educatton Per Capita Supply of: Adult literacy rate (1980) (M) 82.0 Calories (per day) 2,146 Primary school nroll _mnt (1985(X) 64.4 Proteins (Gramsper day) 40 Lower secondary enrol Im_nt (1986) (U) 14.5

ON?Per Capita In 1908: US8896 Cross Domestic Product in 1988 /o Annual Rate of Growth (X.1981 prices) USSMin X 1981-86 1986-87 1987-88 /a CDP at market prices 8,481.9 .00.0 2.9 5.0 8.2Qross Domestic Investment 867.3 26.1 -8.3 6.6 16.7 Grovsnational savings 506.6 14.6 Current account balance -861.7 -10.4 Exports of goods, NFS 1,547.4 44.7 4.9 6.9 8.7 Imports of goods, NfS 1,798.4 61.9 -1.6 -8.6 8.8 Output and Employment Overall Labor Force Value Added Labor Force 1984 1986 1980 (Forml Sector) USSUin X Min X '000 X Agricult-ure 898.5 85.6 1.28 85.0 48.4 24.9 Industry 684.7 27.1 0.05 8.6 84.8 17.7 Services 940.8 87.8 0.17 11.4 111.4 67.4 Total 2,524.2 100.0 1.60 100.0 194.2 100.0

GovernmentFinance Central Qovornment K eIn X ofr Po LOST 1988 1 i985 1887 1988 /j CurrentReceipts 822 880 81.1 29.9 29.4 Current Expenditure 762 799 81.0 27.7 26.4 Current Surplus 80 00 0.1 2.2 8.0 Capital Expenditure 97 105 2.6 8.5 8.6 Overall Balance -87 -15 -2.5 -1.8 -0.6

I Moat resnt estimate. Source: World Bank, 1989 II. FORESTRY AND THE PNG ECONOMY

A. The Papua New Guinea Economy: Directionsand Policy Imperatives

2.1 The World Bank has recently publisheda report on the opportunities and challengesfor accelerateddevelopment in Papua New Guinea (World Bank (1989)). This brief review draws largelyupon that report, as well as an earlier economic report published in 1988, and a recent analysis of prospects for the aevelopmentof the agriculturesector (World Bank (1988)).

2.2 Table 1 reproducesbasic country data for Papua New Guinea.

2.3 In general, Papua New Guinea has a good record of financial management over recent years. Less successhas been achieved in.the area of structuraladjustment and investmentin growth and employmentcreation - and these observationswill be borne out in specificexamples in the forestry sector throughoutthis report.

2.4 From the viewpoint of future policy options, a significantfactor in PNG is the future of the mineral sector.

2.5 While the recent closure of the Bougainvillecopper and gold mine has caused a sharp drop in export earnings in the short terra,it is possible that future developmentsin the mineral sectorwill add significantlyto the nation's financial strength,by the middle of the 19908. However, as is often the case, mining in PNG is an enclave activity: most investmentexpenditure is on imported capital goods, and forward linkages to the rest of the economy are also weak. In particular,the employmentgenerating capacity of the mineral sector is small. Moreover, revenue flows from mining will be essentiallytemporary in nature; at some point commerciallyextractable reserveswill decline.

2.6 Thus the impact of the mineral's sector on the rest of the economy is uncertain. It will be determinedvery largelyby the effectivenesswith which increased financial flows from mining are invested in the remainderof the economy. The Government of PNG will need to look increasinglyto opportunitiesfor investmentin sectors of the economy that are both more sustainableand more strongly linked into the economy, than is the mining sector.

2.7 Thus, while a mineral boom will provide opportunitiesfor accelerated developmentin PNG, these will only be sustainedif effectiveinvestment of the mineral revenues elsewhere in the economy takes place. This will call for a coherent overall strategy,and adoption of appropriatepolicies. Whatever is proposed for forestry in PNG must take these general imperativesinto account. Also, some key constraintsin the economy must be borne in mind:

(-) shortage of skilled labor

(b) limited capacity of public institutions

(d) the wide disparity in regional incomes, due to natural and historical developmentfactors.

2.8 The 1989 Bank study puts forward a policy agenda, to achieve developmentover the medium term, in light of these major constraints. First: effectivemanagement of mineral resource development,primarily through the promotion of policies to enhance community relationsand income distribution, and review of sector and fiscal policies that may inhibit explorationand development. Seconds continuing strong support for agricultureand other renewableresources and developmentof rural infrastructuret in particular, constructionof rural roads is a priority. Thirds human resource development via an emphasis on primary education,restructuring educational institutions and improAinghealth care. Fourth: increasedinvestment in the non-mineral sector,which implies izprovedproject preparationand implementation capacity;more efficient land mobilization;streamlining regulations and institutionsdealing with foreign investmentand developmentof small business; and improvedmacroeconomic policies, especiallyin the areas of wage and exchange rate flexibility.

2.9 Underlying all these objectivesis the urgent need in PNG for institutionbuilding in the public sector, improvedmanagement of resources and acceleratedhuman resource development. Without strong improvementin these areas, little of a sustainablenature will be achieved in the developmentprogram.

2.10 Developmentof agriculture,while an obvious priority, is unlikely to continue to be able to absorb 5 out of 7 entrants into the labor force, as it currentlydoes. PNG must thereforelook to its other major non-mineral resourcesfor development: fisheriesand forests. These sectorswill also have importantregional implications,in those areas of the countrywhere agriculturaldevelopment prospects are limited. Ultimately,PNG will also have to consider developmentof industry and servicesbeyond their presently vestigial levelas forestry,in particular,is often seen as a suitable vehicle for traf.sformationfrom a solely resource oriented to a value added sector, given that certain types of forest processing can be technically efficientat relatively small scale and low capital intensity.

2.11 Many of the larger themes raised above will resonate through the specific forestry sector discussionwhich follows. In particular,frequent referencewill be made to the need to reorganizeand develop the capacity of institutionsto effectivelymanage the forest resource,in the PNG real world of communal ownership of land and a system of governmentbased on devolution of many responsibilitiesto ProvincialGovernments.

B. Forestry in the Economy

2.12 Table 2 gives the basic forestry economic statisticsfor PNG. In 1988, PNG earned about US$111 million from forest product output, of which US$94 million was for logs. This amounted to about 8.5Z of the total value of exports from PNG. The share of forestry in total exports is varied (but about no particular trend over the current decade (Table 3)), whereas the share of agricultureand fish products has generallydeclined. The value of all exports has increased in real terms by 651 over the 1981-88 period and in the case of forestry unit values have moved up, but a large part of the export gain has been due to volume increases: from 743,000m 3 in 1981, to 1.3 million m3 in 1988 (see Table 5). Volumes of logs exported from PNG began to rise significantlyafter 1979, when a new Forestry Act which was more lioeral than its predecessor-wth regard to log exportswas promulgated.

Table 2: FORESTRY IN THE PNG ECONOMY IN 1988 ($US m)

PNG Forestry PNG Forestry GOPNG Forestry GDP share exports share resources share

Sm Z Sm Z $m Z

3,461.9 159.2 4.' 1,312 111.3 8.5 680.4 21.9 3.2

2.13 Papua New Guinea remainsa relativelyinsignificant supplier of export logs to major North East Asian markets, but its share of that market has increaseddramatically, due to the combinationof rising export~ from PNG, and declining log exports from previous major supplies such as Indonesia and the Philippines. Table 4 shows imports of logs from the region by Japan since 1965. As shown in Table 6, Japan, Korea and Taiwan import more than 90 percent of PNG log exports.

2.14 PNG imports relativelyinsignifIcant amount. processedwood products (which attract an import tax of 30 per cent ad valorem): the figure has varied between K1-K2 million in recent years. Imports of paper and paperboardhave become significant,however, and recently exceeded K 20 million p.a.

2.15 Employment in the industrialforestry Sector of PNG has fluctuated between 4,900 and 5,500 since 1979. Of this figure, some 2,200 people are reckoned to be employed in sawnillingwhile most of the balance work in logging. This overall employmentlevel is extremelylow for a sector of this size. The predominanceof logging as well as the relativelycapital-intensive nature of wood processing in the sector, and the until now minor role played by the much more labor intensiveplantation forestry and agro-forestry,have made PNG forestry a poor generatorof employment. In this, however, the existing structureof the industry is more a reflectionof certain economic fundamentals(high wages in the organized labor sector, high infrastructure and local freight rates, etc.) than any indicationof the low labor absorptive capacity of the sector. The scope that PNG forestry offers for additional employment c early cannot be discussedseparately from the wider economic policies which have shaped the industry'sstructure as well as determined its sheer size. - 8 -

Table 3: PNG VALUE OF EXPORTS BY TYPE OF PRODUCT. 1981-88 La (In Millions of US$. F.O.B.)

1981 1982 1983 1984 1985 1986 1987 1988 Est.

Mineral 447.0 409.6 447.4 365.5 490.1 580.6 780.3 924.4

Copper 200.2 166.5 193.0 151.5 164.3 160.6 289.1 395.8 Gold 236.6 232.0 240.9 205.0 318.8 413.0 479.7 515.6 Silver 10.6 10.2 13.4 8.9 7.0 7.0 11.5 12.9

Non-Mineral 366.0 331.2 354.1 528.4 4CU.7 428.0 418.9 387.8

Agricultural 260.0 236.2 276.9 425.8 330.2 341.5 284.8 268.7 Cocoa 51.8 43.2 49.7 75.0 62.4 57.9 62.4 58.0 Coffee 109.4 106.1 113.5 123.8 117.5 214.7 142.7 125.0 Tea 10.7 9.1 12.5 19.2 11.6 7.7 7.1 9.0 Copra 30.0 17.4 28.5 54.9 3;.4 10.3 16.8 19.2 Copra Oil 18.6 16.5 23.6 44.1 23.7 10.7 16.0 21.3 Palm Oil 21.1 29.5 28.5 84.7 61.5 29.1 37.3 51.4 Rubber 5.1 2.0 2.6 2.6 4.0 3.1 2.8 5.0 Other /c 13.4 12.5 18.1 21.5 16.1 8.0 0.0 9.6

Forest Products 65.2 83.7 66.3 91.4 67.3 78.4 122.0 111.3 Logs 46.8 67.3 52.5 78.2 58.4 71.4 116.2 99.3 Other id 18.4 16.4 13.8 13.2 8.9 7.1 7.4/b 8.4lb

Fish Products 40.7 11.3 10.9 11.2 12.2 8.1 12.1 11.4 Tuna 29.7 1.9 0.3 0.6 5.1 - - - Other /e 11.0 9.4 10.6 10.6 7.1 8.1 12.1 11.4

MAJOR PRODUCTS 813.0 740.8 801.5 893.9 899.9 1.008.8 1.199.2 1.312.2

Other Exports /f 28.7 33.8 40.9 25.6 18.0 44.4 30.3 53.4

TOTAL EXPORTS 841.7 774.6 842.4 919.9 917.9 1.053.0 1.229.2 1.385.4

Forest Products aS X of Total Exports 7.7 10.8 '.9 9.9 7.3 7.4 9.9 8.0 Logs as 2 of Total Exports 5.6 8.7 6.2 8.5 6.4 6.8 9.5 7.1 la Based on customs data. lb Small discrepancies exist between DTI and Department of Forest data. Here, the latter are used. /c Includes a very small amount of manufactured agro-based goods. /d Includes sawntimber, plywood and woodchips le Includes prawns, barramundi and crayfish. If Includes re-exports.

Sources: Department of Trade and Industry Department of Forests Table 4: JAPANESE IMPORTS OF LOGS FROM SE ASIA AND PACIFIC ISLANDS, 1965-88 (1,000 m 3)

1965 1970 1975 1980 1985 1968 (est)

Philippines 5,632 7,542 2,853 1,073 559 8 Malaysia 3,471 6,019 6,659 8,580 11,402 10,637 Indonesia 99 ^.391 7,298 8,639 202 - Solomon Is 18 202 168 2_9 318 191 PNG. 62 339 304 438 734 819

Sourcest Japan Lumber Journals, Jan 1980 - April 1989. Timber Digest, Dec. 1988, PNG Dept. Forests.

;

!H Table 5: PNG: VOLUME OF MAJOR EXPORTS BY TYPE OF PRODUCT, 1981-88 (Thousand Tonnes) La

1981 1982 1983 1984 1985 1986 1987 1988 Est. Ib

Copper 164.0 172.2 181.1 163.3 168.7 178.7 211.5 222.0

Gold (Tonnes) 17.6 19.1 ;9.1 19.4 32.0 36.5 34.5 37.3

Coffee 46.4 41.2 52.5 49.4 40.6 53.1 64.3 77.4

Cocoa 27.8 28.6 26.3 34.1 30.9 30.9 34.7 43.2

Copra 102.9 74.8 78.7 93.5 103.5 91.9 85.5 113.1

Copra Oil 30.1 42.7 36.0 40.7 41.4 40.7 40.1 41.0

Fish Products 31.2 3.9 2.8 2.9 13.2 1.7 1.4 1.9

Palm Oil 34.1 88.9 77.9 129.9 123.8 122.3 123.4 160.7

Tea 7.0 6.1 6.8 7.3 6.6 5.7 5.7 7.0

Rubber 4.5 2.2 2.7 3.4 5.4 5.0 3.7 5.5

Logs (000 m3) 743.0 1,063.0 1,019.0 1,278.0 1,158.0 1,299.0 1,450.0 1,289.0 /c

la Unless otherwise indicated. lb Prelimin;ry figures. /c Preliminary figures of DTI and DOF show a small discrepancy. Here, the latter are used.

Sourcess Department of Trade and Industry. Department of Forests. Table t: DESTINATIONOF PNO FOREST PRIIUJCT EXPOMS, 1994-88

1984 1965 1906 1967 1906 Volu_e Value Volu Value Volume Volve Volu_e Value Volme Volvo (000 c ) (K el) (000 cov) (Ku 1i) (000 co a) (K el) (000 com) (Ke*i) (000NO ) ( ml1)

Total lam ugpogte 1288.9 70.8 l156.8 58.4 1814.0 70.8 1442.0 1OC.S 1209.0 91.2

of which sbare at

Japan 49.0 49.0 60.1 69.4 66.6 S6.4 60.1 J0.9 6". 60.4 Korea 44.8 44.4 86.8 U.6 87.1 86.9 88.0 $1.9 81.9 29.0 Talan 6.8 5.0 8.8 8.2 8.6 2.9 8.8 2.6 2.8 2.6 OOhre 0.9 1.0 0.8 0.6 8.5 4.8 8.6 4.6 1.7 7.4

(100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0)

Total * antiinr eumorts 17.6 8.8 14.8 8.0 7.6 1.6 8.6 1a 2.7 0.7 of whichahare of

Australia 40.6 54.0 52.0 52.0 42.8 42.6 52.6 66.8 44.8 89.8 NewZealand 28.4 26.5 25.6 27.9 45.1 45.4 86.7 39.6 81.4 34.9 Japan 2J.8 10.0 20.9 17.4 5.4 1.6 9.7 8.2 24.8 25.6 Othre 1.7 8.5 2.6 0.7 7.2 10.4 0.7 0.7 - _ (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0)

Total woodehlipxports 102. /a 1 61.81.0 /I 65.7 /a 67.l La

Japan 100.0 91.7 75.2 66.3 76.0 Taiwan - 6.8 24.8 22.5 24.0 Others - - 11.2 _

(100.0) (100.0) (100.0) (100.0) (100.0)

la Unit: air dry tonne. - 11 -

C. The National Forestry DevelormentProaram

2.16 In September1988 the Departmentof Forests publishedThe Forestry Subsectorin the Medlum Term DevelovmentStrateav. 1989-93. Key policy objectives put forward in that document ares

(a) the guiding principleof managementwill be sustainedyield;

(b) resource replacementand regenerationwill be provided by a balance of natural forest management and forestryplantation development;

; (c) forest developmentwill be achieved by an equitabledistribution of benefits from economic developmentthroughout the country and to provide basic needs of the people;

(d) a National Forest DevelopmentPlan will provide direction for orderly and rational forest development;

(e) integratedland use planning will form the bas!.sof forestry sector planning;

(f) increasedattention will be paid to small scale forest based development to promote participationby customary forest owners;

(g) on-shore processingwill be a major requisitefor all future forest development;

(h) promotion of participationand involvementof PNG nationals including small-scaledindustries;

(i) trengtheningof a central marketing authorityin associationwith the State Purchase Option;

(J) mandate is given to improve forest research to provide essential support to the operationalaspects of the management and utilisation of forest resourcesso that they are conservedand maintained to provide a sustainedsupply of timber and other forest produce; and

(k) forest training and educationwill be a priority to provide the moti- vation and skills necessary for the forestry and forest industry sectors.

2.17 The developmentstrategy provides guidelines and a list of priorities which need addressingover the 1989-93 period to ensure implementationof these policies. The developmentstrategy also revised logging levels in the 1987 National Forest DevelopmentProgram (NFDP)upward to a level that the Department of Forests felt they could adequatelyhandle. The revisedNFDP is included in Table 7: - 12 -

Table 7s NATIONAL FORESTRY DEVELOPHENTPROGRAM: LOGGING CONCESSIONS, 1987-91 No. and Area (1,000 ha)

1987 1988 1989 1990 1991 Description No. Area No. Area No. Area No. Area No. Area

New investment projects 5 11 828 14 1,625 14 841 16 321+

Renegotiated ongoing projects - 2 580 1 290 - - - -

Defunct projects reviewed - 5 125 - - - - -

Back-up areas 3 5 57 8 102 6 57 2 -+

Total 8 23 1.590 23 2.017 20 898 18 321+

+ Project areas not yet measured.

Source: Department of Forests.

2.18 A comparison between the revised NFDP and the original program is given in Table 8:

Table 8: NPDP AND ORIGINAL PROGRAMS Annual Volumes (millions m 3 )

1987 1988 1989 1990 1991

NFDP review 3.0 4.2 5.4 6.0 6.0

Original ProKram Total harvest 2.7 2.9 3.0 3.0 3.0 Log export 1.8 1.8 1.6 1.3 1.0 + Timber export 0.1 0.2 0.3 0.4 0.5 + Timber domestic 0.34 0.36 0.40 0.44 0.50

+ Sawn Timber Conversion Factor 5O0.

Source: Department of Forests.

The revised program has major implications for government and landowner revenues, Department of Forests monitoring manpower and budgets. - 13 -

2.19 The NFDP review does not specify the tacticalplans for indigenous forest management or reforestation. However, the 1987 Annual Report indicates a proposed reforestationprogram as detailed in Table 9:

Table 9: PLANTING TARGETS BY YEAR Area (ha)

Year Target (halyr) Target (ha)

1987 3,400 33,900 1988 3,400 1989 3,400 1990 3,400 48,200 1995 73,500 2000 100,000

Source: Departmentof Forests 1987 Annual Report

D. The InstitutionalFramework

2.20 Since Independence,in 1975, there has been a continuous devolution of central governmentpowers to the Provinces,and forestryhas been no exceptionto this process. The result is that the central Department of Forests is now a residual of an original line departmentconceived when control over forestrywas a national governmentmatter. Chart 1 outlines the upper structureof the Departmentof Forests (DOF). The Departmentnow has 164 management personnel (includingthose involved in research and training). The 19 provincial governmentshave a total of 281 managementpersonnel, organized in varying ways, and a further 600 employees.

2.21 In 1989, the budgetary allocationto the national and provincial forestry agencies totalled K 6.4 million. Governmentrevenues in the same year from forest operationstotalled K 22.7 million. - 14 - Chart 1: ORGANIZATIONOF DEPARTMENTOF FORESTS

ii I 4I -~~~~~~~~~~~ 00~~~~~~ 0~~~~~~~~

!. - 15 -

III. THE FOREST RESOURCE AND SUSTAINABLEMANAGEMENT

3.1 The total land area of Papua New Guinea is 46.2 million ha. In 1985, it was estimated that the forestedarea was 36.2 million ha. Table 11 simmarizesthe categoriesof forest:

Table 10: PNG FORESTED AREA, 1985

Forest Type 1.000 ha

1. Natural forest - Broadleaved 35,623 - Coniferous 520

Total Natural Forest 36,143

2. Forest plantation 35

Total Closed Forest Area 36.179

A. The Natural Forest Resource of PNG

3.2 FAO has collecteda large amount of informationon the natural forest resource of PNG, and the bibliographyattached to this report lists the relevant publications. FAO (1987) estimatesthe operable (or commercial)forest area and total growing stock in PNG forests as follows:

Table 11: PNG NATURAL FOREST AREA AND GROWING STOCK

1980 1985 1990

Broadleavedforest area (1,000 ha) - operable 14,035 15,000 15,000 - inoperable 21,696 20,623 20,583

Growing stock /a (millionsm 3) - heavy hardwoods 417 443 439 - other species 975 1,036 1,025

/a 23Z of the growing stock is >50 cm diameter at breast height.

3.3 In the same publication,FAO estimatedthat net annual deforestation in the natural forests averaged 22,000 ha p.a. over 1981-85. Logging operations covered some 70,000 ha p.a. over the same period. Often, in PNG, - 16 -

various forms of agriculturefollow logging (due to enhanced access). The potential role of logg'ngas an agent in deforestation,if not a direct cause, must therefore be borne in mind. The average volume achieved from commercial harvestingoperations was 30 m3 per ha.

3.4 The estimatesof utilizableforest are based on interpretationof aerial photographstaken by the Australianmilitary during the Second World War, w:th some further photographyin the 19609. These images were not intended for use in inventorywork, and their accuracy is questionable. In any event, environmental,socio-demographic and agriculturalparameters have altered significantlyin subsequentdecades.

3.5 During the 1960s and 1970s the DOF did carry out extensive reconnaissanceground surveys in proposed timber rights purchase areas to gauge speciesmix, piece size and indicativeyields by way of transect plots with a view to assessingthe value of the resource for royalty purposes. However, the yields derived have been subject to significantchanges since the time of surveys due to review of environmentalissues, marketability of species,harvesting technology, economics of operatingand landowner aspirations. Moreover, inventoryprior to logging has usually been done at less than 1Z sampling intensity,which is inadequate.

3.6 There is considerabledoubt as to how much of the PNG natural forest is accessibleto commerciallogging, and as to what the zonditionof the forest is. As long ago as 1970, when the common estimate of commercially utilizableforest was 19.4 million ha, McIntosh and Granger argued that the area of forestry in accessibleareas of 100,000 ha or more, which was consideredthe minimum area necessary to justify commercialinvestment in logging,was only 2.6 million ha.

3.7 White (1974) presented some data to show that in one major forest area near Madang, only 25? of the forest area was carrying forest of appropriatesize and species characteristicsto be classifiedas commercial, and some part of this area was inaccessibleto commercialoperations. None of it, however, was immune to shiftingcultivation, and a detailed study of one part of the area showed that some 36t of the area was man-inducedregrowth cr grassland,and the remainderwas disturbedin some way. 'Whiteemphasizes that such figures should not be generalizedto the whole resource. However, the figures do serve to shed considerabledoubt on any current estimatesof commerciallyaccessible volume in the PNG natural forests.

B. The SustainableHanagement of the Resource

3.8 Rainforestis the predominantfeature of the PNG environmentin the zone between 0-1,500m altitude. These lowland forests have a large component of specieswhich, ecologically,are secondaryin nature: they are light demanders,which reach large sizes and live for long periods. The processes controllingrainforest dynamics are such that the further the disturbance pattern associatedwith forest management (e.g. timber harvesting)differs form the natural disturbancepattern, the greater the floristicand structural differencesbetween unlogged and regenerating stands. The normal pattern of disturbancein nature is the death and toppling of large trees. Any silvicultural system which drasticallyreduces basal area and speciescomposition - 17 -

will require considerableinputs to maintain forest cover, and even then output of other forest products more dependent on biodiversityare likely to be lost.

3.9 PNG thereforehas a range of options in its na.ural forests, from minimum disturbancesystems through to clearfellingand cor-qrsionto other land uses. If White's analysis cited earlier is any guide, she minimum disturbanceoption may be beneath the level of activity already practiced in the more populous areas, let alone that necessary in commerciallogging.

3.10 Allowable cut, defined very broadly, calls for prescriptionswhich do not remove more volume than the resource is capable of regenerating. The objective of this form of managementis basically to retain a given area under forest, and to practice some form of steady state of growth and output from that resource. The range of possibilitieswithin this option is wide and complex. At one extreme is selectivelogging with the objectivesof retaining quality trees below a certain size limit for subsequentlogging, and of allowing natural regenerationto replacewhat is taken. Then there are a range of heavier logging options associatedwith timber stand improvement and/or enrichmentplanting, to produce a mosaic of larger remainingtrees and an improved composition (from the point of view of wood values) of regrowth. At the other extreme is localizedclearfelling and replanting. Allowable cut prescriptions,especially when defined in volume of log output terms, are highly fluids they can be affected by changes in market demand (especiallyin the mix of species required),by the methods of logging and roading employed (since the condition of the regrowthand remainingoriginal trees is the major factor) and by the silviculturaltechniques employed. Setting allowable cut targets too high, in a given set of circumstances,will obviouslycontinuously reduce the size and quality of regrowth and residual Ftands to the point where it becomes an uneconomicproposition to retain what is left. Setting targets too low, on the other hand, undervaluesthe forest stand (and thereforemakes conversionoptions appear more economicallyattractive) and, in the case where a significantproportion of the existing stand was overmature,actually physically reduces the vclume that comes from the stand.

3.11 Sustainableyield in tropical rainforesthas attained the reputation of being difficult to achieve--especiallyin an environmentwhere population pressure is intensifyingtraditional shift and burn agriculturalpractices, and is also increasingthe general demand for permanent farming land (recently roaded and logged foiests representa convenientbasis for such expansion). Moreover, the economics of sustainableyield management of forests is frequentlyquestioned. Leslie (1977) suummarizesthe conventionalviews

"Even the most ardent supporterof natural forest systems could not dcny that all the effort in tropical forestry has yielded very few reliable and reproduciblemethods for natural regenerationof moist trt'picalforests"

3.12 However, in PNG there are both political and economic reasons for retentionof a large proportion of forest cover. - 18 -

3.13 Turning first to the political factors virtually all forested land in PNG is owned by clan groups under custom law, rather than by the state. This can expose resourcesto serious over exploitation,because forests can be committed to loggingwithout any technicalor environmentalsupervision of what is done-and this has occurred in PPG, as will be discussed later in this report. On the other hand, it offers the opportunityfor traditional landholdersto resist pressures for logging in favor of retainingthe resource for future generations,where state forestrybureaucrats might encounter problems in resistingpowerful political pressures for exploitation. However, it is important that landholders be offered adequate alternatives. if this opportunityis to be realized.

3.14 Whether because of the latter factor or some other reason, the Constitutionof PNG contains a strong statementon the necessityto retain forests:

'4. Natural Resourcesand the Environment. We declare our fourth goal to be for Papua New Guinea's natural resourcesto be conservedand used for the collectivebenefit of all and to be replenishedfor the benefit of future generations.

3.15 The Forestry SubsectorMedium Term DevelopmentStrategy 1989-1993 does not refer directly to the Constitutionbut describescertain 'imperatives' (p5). These are similar to those raised in a 1986 FAO review (Campbell and Gane 1986) which sources them to the Constitution. FAO in that document was in no doubt that the sustai-edyield objectivewas at the time of writing not being met, in that the rate of timber cutting 'greatlyexceeds the rate at which it is being replaced so that PNG's forest capital is being depleted. This clearly contravenesthe fourth aim of the Constitution...'

3.16 The Medium Term DevelopmentStrategy makes liberal referenceto the sustainedyield objectives

"(a) The guiding principle for all forest developmentshall be sustained yield management. The productivityof forest areas which are harvested must be maintained and, where possible, increased.

(b) The responsibilityto ensure that the country's forest resourcesare replaced and managed rests with the Governmentbut with the under- standing that those involved in the utilizationmust contribute to the cost of replacement.

(c) Resource replacementand regenerationwill be pursued by adopting a careful balance between management options includingintensive plantation forestry and natural regenerationmanagement. Perpetuationof the country'shigh value indigenous specieswill play a key part in the managementprogram.'

3.17 It iR clear that the Foresiu Department sees plantation forestry as a major contributorto sustainableyield: The Strategiescomponent of the same docAment prescribesthat 101 of cut-over area should be converted to plantation forest (to be funded from a K 2/m3 levy on exported natural forest logs.) - 19 -

3.18 In effect, this objectivecalls for the ultimate establishmentof some 600,000ha of plantation in PNG, and the cumulativecost of such a program, at current plantationestablishment and tending costs, would be in the order of R 900 million - a very substantialinvestment indeed.

3.19 On the other hand, the Department of Finance and Planning indicated to the TFAP Mission an interest in divestmentof the small existing plantation estate, as opposed to a large increase in governmentinvolvement in this area.

3.20 A plantationprogram should be determinedon the basis of economic and environmentalcriteria: an analysis of markets for the specific output intended;calculation of the costs and benefits of planting;an appraisal of the environmentalconsequences. Plantationsshould not be regarded as a necessary endeavor to allow attainmentof some predeterminedphysical output level for forestry as a whole, nor as a substitutefor sustainablemanagement of natural forests. Sustainedyield management of natural forests and plantation forestry are not particularlyclosely related: they produce very differentproducts; they require quite differentinvestment schedules; and they have very differentenvironmental and social impacts. On any given area of existing forest, sustainablemanagement of tho.natural resource is either the best alternative,or it is not. Alternativesto it on that area may or may not logicallyinclude plantationforestry.

3.21 To return now to the economic argument for sustainedyield: it can be argued that the objective of national policy in the forestry sector should not be sustainabilityper se, but optimal resourceusage. In an open economy, not exploitingstanding forest involves the country in an opportunityloss - the more so in a case (such as PNG) where the volume of logs placed on the internationalmarket is unlikely to have any major price effect, within the supply limits that apply. The magnitude of this loss will depend, inter alia, on the market value of the resource,the cost of managing it (rangingfrom minimum cost 'mining'operations, through controlledharvesting, to plantation options),and the effect of such management on the subsequentgrowth of the resource.

3.22 It is not possible,given currentknowledge, to determinewhere this optimal point of resource usage might be: that would require a study of the economics of management of forests in the various locations,and of the comparativeeconomics of other forms of land use in each place. Such an analysiswould also need to account for the high probabilitythat the social profitabilityof natural forest managementwill change over time.

3.23 The best that can be done at this stage is to speculateon how such an analysis might turn out:

(a) Most land occupiedby forest in PNG will probablynever be converted to productionof non-forest crops, due to problems of access and the level of managerial skills and financial resourcescurrently available, as well as adverse topographicand edaphic factors in much of the area. In short, on much of the area in question forestry may be the only logical alternative,given management and investment constraints,and the inherent environmentalcost of exposing forested land with no imediate conversionalternative. Much traditional - 20 -

agriculturalpractice in PNG is environmentallysympathetic, and investment in improvementof this land use would be probably cost effective. (b) Tropical forest output is readily disposablethrough a known system (albeitone which is in need of improvement,as discussed later). By contrast,non-forest crops demand greater inputs and skills in marketing, and are by nature higher risk investmentsdue to the high initial costs of establishment.

(c) The unvalued benefits of biodiversity,non-wood fcrest products and retentionof the basic environmentalrole of forest cover in the traditionalagriculture of PNG (a landuse that will need to support a large proportionof the population for some considerabletime yet), will almost certainlygreatly exceed any unvalued benefits generated in conversion options.

3.24 These observationssuggest that a conservativeapproach to conversion of forest is rational,given present knowledge. Clearly, there are areas of PNG where natural forest should be, and will be, convertedeither to forest plantations,or non-forest crops. There is a requirement,however, that this be done only after a comprehensiveanalysis of all the forestry alternatives- -frcunsustainable yield management based on natural regeneration,through the range of timber stand improvement and enrichmentplanting options, to the conversion options. Much of the tree crop and other major agriculturaldeve- lopmentswhich have occurred to date in PNG have been done on areas where either degraded forest, or no forest, existed--sothe need for such comprehen- sive analysiswas limited in the past.

3.25 Although as argued above, area targetsmay be more rational than physical output limits so far as sustainedyield management is concerned,the more traditionalapproach is volume based, and, ultimately,volume estimates will be required for planning.

3.26 In the PNG case, the first major difficulty in arriving at a physical estimate of sustainableyield is the paucity of resourcesdata: this matter was raised in paras. 3.6 and 3.7, and is discussedfurther in paras. 3.53 to 3.61 below.

3.27 Even if the physical and biologicaldata were available,there are other factors involved in the calculationof sustainableyield. The actual distributionof log sizes by species is a critical factor, because smaller logs, whilst permissibleto log in the prescription,are much less valuable than larger logs, per unit volume: the higher the proportionof smaller logs (above minimum logging diameter)the less commerciallyattractive the logging area. Slope, terrain,waterways and other natural variations also impact upon commercial viability of logging. The form of logging used (especiallythe degree of damage done to the residual stand which is the basis of sustained yield), and the market for logs, also directly influencethe area of forest which is commerciallyloggable. Stocker (1988)has pointed out that in PNG, control over loggingwill be the major silviculturalmechanism in the natural forests. The treatmentof a residual stand after logging i8 also a critical factor. - 4 . -

3.28 Obviously,markets, price-sizegradients, the acceptabilityof certain species, loggingmethods and efficiency,and the treatmentof the residual stand all change over time, and the allowablecut from the forest will change accordingly.

3.29 The magnitude of the data problem in arriving at such a figure can be simply illustrated: on the field trip, the TFAP Mission frequentlyencoun- tered opinion that as little as 302 of concessionareas may actually be loggable,due to topographicand associatedfactors. Moreover,while official estimates of commercial standingvolume range in the area of 50-60 m3ha, actual turnoff of logs from operationsis actually more in the order of 20-30 m 3ha.

3.30 The TFAP mission originallyprovided, on request from GOPNG, an estimate of allowablecut from the PNG resources. This estimate was based on present harvesting and utilizationtechnology, and some crude estimatesof increment in the resource,net utilizationarea, and the cutting cycle recovery to produce a high valued crop on second entry. The conservative figure produced with this process was an allowablecut of 3.6 million n3 p.a. The mission pointed out that the planning figure then in use by GOPNG--6 million m3 p.a.--was also within feasible bounds on the basis of what little is known about the resource.

3.31 Since the TFAP mission was completed,GOPNG has commenced the process of revising and refining the allowablecut figure, although clearly it will not be possible to greatly increasethe precision of allowablecut estimates until new resource estimatesare available (see Section D of this chapter, and Projects 1 and 2 in Annex 10 to this report).

'.32 In the meantime, GOPNG has undertaken to continue to review its allowablecut figures, and to take a conservativeapproach to determinationof this figure, to accommodatepotential conservation area requirementsand propose other options. It must be emphasizedthat the allowablecut figures under discussionare based on current managementand utilizationpractices. Significantinputs to improve these are suggestedin the Action Program found in this review. These aspects, and the revenue implicationsfor PIG of doing so, whilst still adhering to the principleof sustainablemanagement of the resource, are considerable. At present, the TFAP mission suggests that the conservativefigure of 3.6 million m3 p.a. allowablecut should be applied until more definitiveestimates can be prepared.

3.33 The TFAP mission visited several logged over sites of varying ages in the field in PNG, and some experimentalenrichment planting and timber stand improvementareas as well. Basically,there is no formal applicationof the sustainedmanagement system in the commercialforestry operationsof PNG--i.e. no planning based on an inventoryand on selectionof species for second and subsequentcycle harvests. Rather, forests which have been selectivelylogged for more valued specieshave been left to recoverwithout silvicultureor management input. Such forests do recover but relativelyfew of the valuable specieswhich tend to appear later in the regenerationcycle were seen in the sites visited, and diversity appears to be lost. It may be that more of these specieswould return naturally after sufficienttimet this is a matter for - 4 . -

systematicresearch, and also for considerationby forest managers who vill need to know how much time must elapse for secondary species to return in appreciablevolumes.

3.34 The basic conclusionfrom the foregoingobservations is that, despite the difficultiesinherent in sustainedyield management, it does seem to represent the best option for most of the PNG resource. A major effort will be needed to implementthis form of managementin the commercialresource in PNG.

C. Plantations

3.35 In paras. 3.17 to 3.20 above, aspects of PNG planting policy were discussed,and it was argued that the role of plantationsshould not be to obtain some predeterminednational sustainableyield, but to maximize economic and environmentalobjectives.

3.36 Reforestationin PNG has been a sporadic activity,varying considerably from year to year with availabilityof funds, land and supervisory personnel. In the past decade, governmentplantation areas have remained static, at around 25,000 ha. Privateplanting has moved from virtually nothing at the beginningof the decade, to about 10,600 ha now. It should be noted that the statisticson private plantings include only larger scale planting: smallholdersplots are not assessed.

3.37 The plantationscene in PNG is still dominatedby the 11,000 ha of governmentowned coniferousplantings at Wau and Bulolo in Morobe province (principallyfor use in the plywood mill there). There are 4,200 ha of government Pinus and Eucalvntus species planted at Laipegu and Norikori in the Eastern Highlands, and the bulk of remaining government plantings are in Central, Western Highlands, Madang and East New Britain provinces. There are now some 4,000 ha of private plantationsin Madang, and a further 6,500 ha in East and West New Britain. Table 12 below summarizesplantation areas by Province since 1979. Table 12: PLANTATIONAREASs 1979, 1985, 1988 (ha)

Province 1979 1985 1988 Govt Pvt Total Govt Pvt Total Govt Pvt Total

Central 1,963 1,963 2,080 2,080 2,103 2,103 Northern 36 36 47 47 47 47 Morobe 11,994 11,994 10,886 10,886 11,196 11,196 S Highlands ''.9 119 133 133 216 216 W Highlands 1,740 1,740 1,793 3 1,793 2,039 3 2,042 Enga 152 152 108 108 108 108 Simbu 11 11 11 67 78 11 67 78 E Highlands 3,979 3,979 4,520 88 4,608 4,741 88 4,829 Madang 504 504 1,450 3,618 5,068 2,001 3,918 5,919 E Sepik 123 123 123 123 123 123 EN Britain 2,563 2,563 2,103 107 2,210 2,120 2,122 4,242 WN Britain 666 666 126 2,503 2,629 126 4,426 4,552 Milne Bay 399 399 N Ireland 3 3 42 42

Total 23,850 23,850 23,383 6,386 29,769 25,272 10,624 35,896

3.38 About 33Z of plantationarea in 1988 was comprisedof exotic species--principallyPinus and Eucaplytus--andthe remainderwas indigenous speciess the local Eucalypt (E. dedluDta)known as Knmarere;Araucarias (Klinkii and Hoop pines); and some rainforestspecies such as Terminaliaand Octomeles.

3.39 It is probable that the pilantationfigures given above are over- estimates: losses due to fire and other factors have not been accurately assessed in PNG.

3.40 Table 13 below details the age classes of the plantation resource in PNG: I - 24 -

Table 13: AGE CLASSES OF PLANTATIONS,1986 1,000 ha

Age Conifers Hardwoods Total Years tPinus Other Sub-Tot Eucs Fast Hwds Teak Other Sub-Tot

0-5 1.3 0.2 1.5 3.9 1.0 0.2 5.1 6.6 6-10 3.2 1.1 4.3 4.2 1.1 0.3 0.1 5.7 10.0 11-20 2.5 3.8 6.3 1.0 0.5 1.6 0.1 3.2 9.5 21-40 3.7 3.7 0.4 0.1 1.0 1.5 5.2

Total 7.0 8.8 15.8 9.5 2.7 3.1 0.2 15.5 31.3

Sourcet Resource DevelopmentDivision, Department of Forests

3.41 It can seen from this table that most coniferousplantation in PNG is older than 10 years. whereas most hardwood plantations--especiallythe fast- growing eucalyptsand others--areless than 10 vears old.

3.42 Table 14 below summarizesresults from research into growth and yield as has been carried out in PNG:

Table 14s MEAN ANNUAL INCREMENTDATA, MAJOR PLANTATION SPECIES

Species MA, m3ha/yr

Pinus spp 10-15 (P.caribaea Araucaria 10-15 (Hoop and Klinkii) Eucalyptus dealupta 25-30 (Kamarere) Eucalyptus robusta 8-10 Terminaliabrassii 25-28 Octomeles sumatrana 30-35 (Erima) Tectona grandis 5-10 (Teak) Ochroma laRopus 25-35 (Balsa)

Source: Forestry Department,various documents - 25 -

3.43 To date, the principalmotivation for governmentplanting has been to maintain supply in areas where few alternativesare available:the obvious examples being the plymill at Bulolo, and in the Highlands Province.

3.44 Most private planting in PNG has been done by firms primarily concernedwith loggingnatural forests, and it is reasonableto suggest their major motive has been the requirementto plant which was included in their logging contracts. An exceptionto this is the JANT company, a Japanese owned woodchippingoperation in Madang Province,which are planting E. dealupta on a 10 year rotation to supply its existing plant. Whilst the density of E. deglupta is at the lower end of the acceptablescale, JANT considersthat it representsa better pulp furnish than mixed tropicalhardwoods, which are the current supply. The other companiesinvolved in planting do so with varying degrees of willingness,but all seem to have an open mind on the prospects of the hardwood being grown to produce chips, and ply and timber in longer rotations (20 to 25 years to achieve a minimum diameter at breast height of 50-60 cm).

3.45 Both the governmentplanting program, and private plantation investment, have to date been severely constrainedby one major problem in PNG: the availabilityof land. A particular case in point is the program undertakenby GOPNGat Ulabo, Kerivat, Hadang and Kaut, with the assistanceof the New Zealandbilateral aid agency. These plantationshave had major setbacksdue to fire and other factors,and it appears that misunderstandingsbetween the government and landholderson the nature of the lease agreementor of the terms and conditions for payment and compensationhave been major problems. A review of this project by the New Zealand governmentwas under way at the time of the TFAP Mission and will identify the nature of difficultiesencountered. In general, leasing land for plantationpurposes from customary landownersin PNG has been fraughtwith difficulties:

(a) in some custom laws, planting a tree on land is regarded as a claim upon it, and in this context the idea of a lease is not clearly understood;it is difficultfor landownersto comprehendthat ownership of trees and land can be separate;

(b) even when conceptualdifficulties have been overcome in lease negotiations,there have been what appear to be excessivedelays in processing leases (and thereby, lease payments), leading to renewed landownerdissatisfaction.

3.46 These major problems (which in fact representa set of individual negotiatingdifficulties in obtainingcustomary land for plantationpurposes in PNG) have become so severe that in some areas landownerswho have been involved in the process are actively discouragingneighboring landowner groups from entering into negotiationsto lease land for plantation.

3.47 Given these difficulties,it is hardly surprisingthat the bulk of private planting in PNG has so far taken place on governmentland--purchased, for the most part, from landholdersprior to Independencein 1974. Presently, there remain some 10,000 ha of such governmentland immediatelyavailable for plantation in East New Britain, an- a similar amount exists in West New Britain. Also, in these provinceb,about 90,000 ha of governmentland currently earmarkedfor agriculturaldevelopment exists. 3.48 In the short term, therefore,considerable areas exist on government owned land which could be planted to forest species or used for the development of tree crops. Much of this land offers exceptionalplantation potential: the topographyis flat to undulating;the soils are volcanic, deep and highly fertile; the climate is basicallytropical, with rainfall distrivu- ted evenly through the year; the latitudesare above the cyclone belt; and, in the New Britain provinces, infrastructureis basically good. It is not possible at this stage to comment accuratelyon the degree to which forest plantationswould need to compete for land with other crops, in areas such as New Britain. According to the World Bank AgriculturalAssessment Review (World Bank 1988), there are currently some 19,500 ha of oil palm on West New Britain. Oil palm outputs (i.e. palm oil and palm kernel) are projected to grow by 121Z from 1988 to 1995. Even if this occurred,it would seem from observationthat considerableland--especially the more undulating land which would be more suitable for forest plantationsthan for the export tree crops- -would still be available for forestry,if investmentsin it could be justified. According to the AgriculturalAssessment Review, oil palm currentlygenerates a net present value of K 3,123 per ha at 121 discount.

3.49 Whether or not forest plantationscould generate comparable returns would depend largely on the purpose to which the output is used. Madang alreadyhas a ;oodchippingoperation, and there would appear to be no tschnicalreason why more such plants--perhapsintegrated with sawing or ply operationsto utilize larger sized material--couldnot be created. If this were done, then the returns to the whole growing/processingoperation may well be quite high. The outcome of industry feasibilitystudies, as suggestedin paras. 7.45 to 7.49 of this report,will be importantelements in analyzing this option further.

3.50 There are technicaldifficulties in the existingplantation program:

(a) The costs of plantationwere estimatedby some of the private companies involved to be between K 1,000 and K 2,000 per ha, exclu- sive of road constructionand clearing costs. These cost levels seem excessive. The governmentestimates its reforestationcosts at K 1,000 - K 1,500/ha,inclusive of site preparationand roading. This would seem a more reasonablefigure.

(b) There is a shortage of expertisefor reforestationat the project management and technicallevels. Many of these positions in the private sector are filled by expatriatesmainly from Japan and the Philippines.

(c) Even on government lands, fire from surroundingsubsistence farmers is a major hazard for plantations,given its widespread use as a land clearing agent. Except for the major plantation area at Bulolo, the TFAP Mission saw little evidence of fire equipment,detection facilities and emergencyprocedures in place.

(d) The level of research into plantationforestry is inadequate in PNG. In particular,many permanent growth and yield plots appear to have been lost or abandoned,and relativelylittle is known about growth - 27 -

rates. What is known suggests that growth in plantations in PNG- -especially in the hardwoods--is lower than might be expected from such sites. Virtually no selection or tree improvement has been done, and investmentin this area would undoubtedlyproduce early and significantimprovements in plantationperformance.

3.51 Table 15 below reproducesthe GOPNG Departmentof Forests plantation developmentstrategy:

Table 15: PLANTATIONDEVELOPMENT STRATEGY, 1986-2000 Annual Planting Targets (1,000ha)

Year Conifer Hardwood Total

1986 15.8 15.5 31.3 1988 15.9 20.1 35.9 1990 18.6 29.6 48.2 1995 21.5 52.0 73.5 2000 25.0 75.0 100.0

3.52 It is evident that, to achieve this level of planting, or anything close to it, will require solution of the major technicalproblems noted above, and also substantialprogress with resolvingthe basic land availabi- lity problem identifiedearlier.

D. ResourceAssessment: the Need

3.53 The first estimate of commerciallyaccessible volumes in PNG was made in 1946. The criteria used for these estimatesis not known. It is probable that they assumed large blocks of continuousforest suitable for large-scale logging operations.

3.54 Since 1946, some re-estimationhas been done, but this has not included measurementof incrementin logged areas, nor volumes of trees left out of harvesting. Relativelylittle is known in PNG about the regenerative capacity of the natural forests, in terms of log size and species composition. There is also little known about the rate of deforestationprior to and subsequentto logging operations,due to natural causes and man.

3.55 The relationshipsbetween forests and man are especiallyimportant in PNG, given the heavy reliance of traditionalfarming on forest cover, and the rapid rates of increase of populationin the country. Informationon populationconcentrations is availablefrom PNGRISs the Papua New Guinea Resources InformationSystem. This is a microcomputerbased geographical informationsystem developed in the Departmentof Agricultureand Livestock, by the AustralianCSIRO. The rate of developmentand demand for land and the expansionof urban areas and the projecteddevelopment of estate crops can be identifiedwith the PNGRIS system. These data have not been used to moderate the estimates of operable forest but should be clearly utilized in any future - 28 -

resource assessment.PNGR.S holds considerabledata on forest disturbance/ usage and parameters for commercialand subsistencecrop species. It needs to be developedto provide advice on alternativeland uses.

3.56 Air-photo cover dates from the 1940s onwards and many areas need to be covered once more, in particular,the urban centers, agriculturaldevelopment sites and forestswhich have been or are currentlybeing logged. Ultimately,a total photo cover of the country is needed and would benefit both the public and private sectors.

3.57 Clear definitionsof the forest types will be needed and as a first level those areas containing commercialvolume must be identified. Also those forestswhich are immature or logged over, but are potentiallycommercial, must be included. The size of these units needs to be specifiedsince small blocks of commercial forest can be assigned to small production industries servingdomestic markets.

3.58 A considerable amount of information on the forest resource is available. This data exists in particular in the CSIRO records, Departmentof Forests archives ard records. Resource inventorymethods have changed little since the 1940s and re-examination of all this data, combined with resource information available in PNGRIS, might establish a useful data base, together with new forest mapping, for a national forest inventory.

3.59 There is a definite need to improve resource inventory methods and to base these inventorieson appropriatestratification of the resource. Such stratificationrequires adequate and suitablemapping procedures. A national forest inventory should include an estimateof the biomass as well as the commercialvolume available. Resource inventoriesfor management purposes need to include stand table data from at least the 20 cm diameter class and upwards, and also informationon the silviculturalcondition of the stand.

3.60 It is necessary to monitor the growth and developmentof forest stands followinglogging to provide data for the management of these stands. The developmentof growth models is essentialfor estimating the effects of alternativesilvicultural treatments and monitoring stand developmentfor management purposes. Whilst permanent sample plots can be established throughoutthe country in logged forests there are problems of relocation, maintenanceand remeasurement. As a first level of continuous forest inventorya limited countrywide distributionof plots, on sites which represent the range of potentialproductivity, is needed.

3.61 To estimate volume from inventorydata there is a need for tree volume models and it will be necessary to group tree species accordingto their forznor stem taper in order to reduce the number of these tree volume models to w^anageableproportions. - 29 -

IV. MAXIMIZINGRETURNS TO THE FORESTRYSECTOR

4.1 An important factor in sustainable forest management is the degree to which forestry rewards both the nation as a whole, and the owners of the resource. There are five basic issues involved in this:

(a) Whether existing forest pricing policies correctlyvalue the resource,ensuring that owners receive an equitable share, that users receive the appropriatesignals en efficiencyof utilization,and that resourcemanagers can spend sufficienton management to maximize output under sustainableyield.

(b) Whether payments to landholdersare correctlydistributed through time to ensure a stable and satisfactoryrelationship between governmentsand owners of the resource.

(c) Whether the means by which logs are sold are efficient.and achieve the economic, social and environmentalobjectives of GOPNG.

*d) Whether the market for output is efficientand allocatesan equitable share of the final value of products made from the forest to PNG.

(e) Whether further gains to national income can be made by altering the form in which the product is sold from PNG, from less processed to more processed.

It will be argued below that GOPNG is justifiedin pursuing two objectives in the forest revenues areas

si) the general per unit revenue level should rise; and

(ii) the efficiencyof revenue collectionneeds considerable improvement.

A. GovernmentRevenues. Royalty Policy and Rents

4.2 GOPNG revenues from forestry since 1985 are summarizedin Table 16. Until the early 19709, expenditureon PNG forestry always substantially exceeded the revenue generated. Following the rapid increase in international prices for tropical hardwoods, the growingvolume of PNG log exports (especially after 1979), the introductionof log export taxes and an upward revision of royalty rates in 1981, the revenuegenerated by the forest sector began to grow substantially. While the Departmentof Forests expenditurein the last three years remained largelyunchanged at around K 5 million p.a., the combined proceeds of royaltiesand export taxes reached K 12.3 million in 1986, K 15.9 million in 1987 and K 19.0 million in 1988. Even after deducting the landowners'share of royalties (75 percent of the total royalties) included in the above totals, forestry in PNG has clearly become 'self-financing'. Furthermore,additional resources are mobilized by the Governmentnot only in cash but in kind as timber permit holders are contractually obliged to undertake various social infrastructuredevelopments in their areas, thus relievingthe Government of the correspondingbudgetary provisions. As a - 30 -

broad estimate,such Indirectbudgetary support averaged between K 3 and K 6 per m3 of exported logs in 1988. Given the total 1988 log exports of about 1.3 million m3, the Government received an indirect additionalbudget support of about K 4 to K 8 million. The total forest tax revenue broadly defined of about K 25 million in 1988 amounted to approximately4.5 per cent of the total tax revenue of the country. After excludingthe in-kind social infrastructure levies and the share of royalties paid to landowners, the 1988 total of about K 12 million represented about 2.5 per cent of the tax revenue total or about 6 per cent of taxes on international trade.

Table16: SOURCESOF PNG GOVER9Y#NTFORESTRY REVENUE (K million)

Source of revenue 1985 1986 1987 1988

Royalty 5.1 5.3 /a 5.2 6.7

Log export tax 5.8 7.0 10.5 12.0

Other lb - 0.2 0.3

Total 11.9 12.3 15.9 19.0 la The figure in DOP ComDendiumof Statistics1986 differs from that given in the DOF Annual Report Statistics1987. Here the former is used. lb Profits of the state purchase option.

4.3 Under the proposed changes in the structureand levels of forestry charges contained in draft forestry legislation,discussed later in this report (and assuming no log export restrictionsand unchanged log prices), revenuewould be likely to increase to about K 50 million by 1992. Assuming further that the country reached what this report regards as a sustainable level of log output of 3.6 million m3 in 1996, the revenue would reach around K 110 million at current prices. This would amount to approximately 10 per cent of the projected total tax revenue total.

4.4 The existing pattern of taxes in PNG forestry has three main components.i.e., royalties,export taxes and indirectcharges. The corporate tax has until now played a relativelyunimportant role.

4.5 Royalties are payable for true log volume and structuredaround a basic rate with species premia and a pattern of allowances reflecting various factors affectingthe cost of production. The current basic rate of K 5.41/m3 has remained unchanged since 1981. Prior to that, the rate was K 3.181m3 from 1973 to 1976 and K 3.95 m3 from 1976 to 1981. Premia on higher value species range from K 1.4013m on, e.g., Intsia, Palaauium,or Red Planchonella,to K 9.0/m3 on New Guinea rosewood (Pterocarousindicus). The royalty allowances, graduatedand subtractedfrom the basic rate to yield the effective royalty, attempt to compensate for variationsin the access to the market, climate, - 31 -

stand quality, haulage distance,total resourcevolume and topographylsoils. They range from zero in the most favorableconditions to a total of K 3.85 per m3 in the most adverse conditions.

4.6 The royalty payments are collected from log producersby the national governmentwhich then remits 75 per cent of the total to the resource owners and 25 percent to Provincial governments. This 7525 division of royalty supersededa 50s25:25 division to ProvincialGovernment, landholders and National Government respectivelyin 1986.

4.7 The 1981 Royalty Appraisal Guidelines stipulatethas royaltiesapply only to logs from the natural forest suitable for sawn timber and veneer production (but not for chipping only). There is no formalizedmethod for royalty calculationon plantationgrown forests.

4.8 The Minister's Drafting Instructionsfor a new Forestry Act (see para. 6.18 and Annex 9) propose to replace the present system by one which: (a) makes royaltiesa function (10 percent) of FOB price; and (b) gives all of the royalty income to landownersinstead of the current 75 percent while compensatingProvincial governmentthrough an additionallevy.

4.9 Export taxes are payable to the national government. The export tax has been levied in recent years at 10 percent of the FOB value of exported logs. Following the adoption of the minimum export prices (MEP) system in 1982 (see para. 4.46), the MEP often became in practice (thoughnot in theory) the basis of the export tax calculation. With the reduced importanceof MEP after 1986 (resultingfrom the introductionof the State Purchase Option on exportable logs), the link between export tax and MEP has weakened, and the export tax, both in theory and practice,has been levied on actual FOB price. The Minister'sDrafting Instructionspropose to increase the rate of tax to 15 percent of the FOB prices of logs while exemptingprocessed wood exports from the tax.

4.10 Indirect taxes comprisevarious obligationsplaced on logging companies by the Government in the course of timber permit negotiations. As noted in para. 4.2 such obligationstypically relate to items of social infrastructure(roads and bridges of certain specification,community facilities,etc.) not requiredby the company for the strict purpose of logging. No systematicapproach to specifyingthe extent of such obligations exists and, instead,a rough estimationprevails, based on the authorities' past experience of dealingwith companiesand applied on a case-by-casebasis. More recently,in new timber permit negotiationsthe Departmentof Forests has attempted to estimate each applicantcompany's future profitabilityand then to use the social infrastructureobligation as a balancing item to secure for the Government the maximum amount of resource rents.

4.11 A nominal fee of K 0.215/m3 of logs is payable by logging companies to support the Forest IndustriesCouncil (see paras. 4.79 to 4.80 for discussion of FIC).

4.12 Finally, although companiesoperating (and incorporated)in PNG are subject to a 36.5 percent corporatetax, until 1986 no logging company is said (Jackson (1986)) to have paid any tax on declared profits or declared any profits. - 32 -

4.13 Ideally, resource charges should extract the full amount of economic rent - that is, the differencebetween the market value of the resource and its costs of productionand sale, adjusted for normal profits, under competitive conditions. This concept has a vital role to play in reforestationand the larger issue of sustainableproduction which underliesmuch of the argument in this report. If a resource pricing policy drives project returns below the opportunitycost of capital over the medium term, the extraction firms will make no long term commitmentto forest operations. If, on the other hand, the policy appropriatestoo little rent, then the resourcewill be undervalued: utilizationwill then be too rapid, or incomplete,in an environment generallytolerant of inefficiency. Obviously,under such conditions, returns to the owner of the resourcewill be lower than desirable.

4.14 Two observationson existing resourcepricing in PNG are of relevance at this juncture. First, rates of royalty have remained unchanged for the past eight years, while log prices on the internationalmarket have fluctuated extensively. Second, royaltypremiums on some species in PNG seem unrelated to the price differentialsthese species attract in the market. For example, Intsia commands a price differenceover average grade PNG logs of K 60/O3 in the market, but the royaltypremium for this species is only K 1.40Im3. Since the cost of productiondoes not vary greatly among differentspecies, the existing system encourages'creaming' of the mote valuable species as well as resulting in a loss of revenue for the resource owners. The proposal in the Minister'sDrafting Instructionsto make royaltiesa function of FOB price partly recognizesthe above weakness without, however, overcomingit. To use a simplifiednumerical example: if Intsia sells for K 120/m3 and other species command a price of K 58/m3 and if the loggingcost is K 50/m3, a royalty of 10 percentwill leave the logging firm with a profit of K 58/m3 on Intsia and K 2.20/mr on other species.

4.15 The log export tax, in PNG as in most other log exporting countries, is also related to the FOB price, and suffers froA the same defect of mnderpricing('undertaxing') the relativelymore valuable species. In general, taxing a heterogeneousresource in proportionto the market prices will typicallyleave the higher grades underpriced(undertaxed) unless the cost of their productionis well above that of the lower grades: this has generallynot been the case in PNG.

4.16 The Minister'sDrafting Instructions'proposal to make royalties proportionalto FOB prices appears to have been motivatedmore by a desire to safeguard the landowners'share of resource rents during a period of rising log prices, than by efficiencyconsiderations. Linking royaltiesto FOB prices is a double-edgedsword and the administrativesimplicity of the proposed revision carrieswith it a potentialpolitical risk of exposing resource owners to the consequencesof market instability,from which they are at present shielded. In efficiencyterms, making both royaltiesand export taxes a function of the same variable (FOB prices) effectivelyreduces two taxation instrumentsto one and lowers the system's flexibility. A structure which uses royaltiesto target price differentialsamong resource grades Clog species) and uses FOB price-relatedexport tax to incorporatevariability of average prices over time is clearly superior. - 33 -

4.17 There is considerablevariability in the efficiencyof log producers in PNG, because of differencesin the scale of operations,the quality of forests, logging conditionsand the quality of firms' management. This presents the Governmentvith the problem of decidingwhich group of figms to take as a referencepoint for tax purposes. If the taxation policy is geared towards the least-costgroup of producers,efficient rates of taxationwill result in all of the higher-costfirms going out of business. Setting the tax rates with an eye on the 'average'firm, on the other hand, will give part of the pure profit to the more efficient among the concessionaires.

4.18 The existing system of levies recognizesthe problem to a degree and attempts to cope with it through royalty rate allowances. However, the structureof allowancesappears to be insufficientlyrelated to underlying economic factors. Differencesin productioncosts on account of physical and locational (ratherthan management-quality)factors are substantiallygreater in PNG than the maximum combined allowance of K 3.85/I3. Even if a good part of productioncost differentialsis due to the varying quality of the firms' management, existing royalty rate allowancesin themselvesseem insufficient to compensatefor other sources of cost variability. As a result, the current tax structurefavors companiesoperating in more favorablelocations (unless the cost advantagesto such companiesare fully offset through the imposition of additionalcharges for social infrastructure).

4.19 These Indirect levies on logging companieshave been increasingly resorted to by tte Government both as a means of compensating for incomplete appropriation oi pure profits as well as a mechanism for providing infrastructural .Acilities in remote parts of the country and, through it, facilitating the process of timber tights purchase from landowners. The system of preparing a de facto re-run of the company's profitability estimates at the time of timber permit negotiation and using the results to gauge the firm's ability to bear additionalcost of social infrastructureis understandablebut not necessarilyefficient. First, the forest companies' performanceas general contractorsis untested. While, in a majority of cases, there may be no alternativecivil work contractors(or the cost of their mobilizationwould be out of proportionto the value of the contract), the automatic selectionof timber companies for non-forestrytasks is questionable. In the worst case, the taxation regime may unwittinglycompound the problem of inefficientrent appropriationin loggingby the support it gives to inefficientbuilding of, say, schools or bridges. Also, the use of an indirect infrastructurelevy obscures the financialconditions under which different firms operate since it is difficult to clearly relate different infrastructurepackages to the value of the forest resource rents.

4.20 As will be apparent from discussionin para. 4.18 above, the effectivenessof the taxation system in force in PNs is further compromisedby the inconsistencyof conditionsapplied to logging ccntractorsunder the different types of logging agreementin force in PNG at present.

4.21 In summary, the process of regulatingaccess to the country's forest resources combines elements of national taxation policy applicableto all operators at the same level (e.g. export tax), with those which, though applying to all operators,may apply at differentrates (e.g. social infrastructureobligations) to, finally, those which are specific to the - 34 -

nature of the agreementsused and which in some cases, as will be argued below, may not even be known with precision by national or provincial forest authorities. When reconsideringroyalty and taxation systems in forestry, some general principlesmust be kept in mind:

(a) it is not only the levels of royalty and tax systemswhich determine the level of revenue flowing to owners of the resource: the method of sale is also important. The amount of merchantabletimber removed from a forest will, in large measure, be determinedby whether a logging contractorhas paid for all timber measured as merchantable, or only actual volumes removed;

(b) a royalty system based on specific allowancesfor regional or site disabilitieswill, by definition,be difficult to administerand to keep up to date;

(c) especiallyin the case where a wide range of species and log qualitiesexists, careful attentionto, and monitoring of, pricing differentialsis needed to ensure that the right signals (as defined in the managementplan and objectives)for that forest are passed on to the logging conzractor.

4.22 If the existing system for administrativelysetting forest charges is inadequate,one alternativemight be to resort to an auction system for sale of the resource. Under truly competitiveconditions, a resources auction system would extract the maximum economic rent. However, two major difficultieswould apply in the specificcase of selling the PNG forest resources.

4.23 First, the well-known heterogeneityof PNG forest resourcesand the range of topographieson which commercialforests are found considerably increase the cost of obtaining accurate informationabout the resource. With the object of bidding (i.e. the forest) being a rather 'imperfectcommodity', many potentialbidders might be discouragedby the high cost of data gathering and evaluation. The cost could be reduced substantiallyonly if potential bidders, resource owners and the Governmentcould agree on a single independentsurveylinventory firm whose resultswould be accepted by all or most parties.

4.24 In PNG the question of confidencealso extends to the question of ownershipof forest land. In existing circumstances,where the ownershipof resourcesin PNG has been a frequent cause of serious dispute in forestry ao in other sectors it is doubtful that companieswould be willing to pay in advance for the right to harvest the forest in the absence of government ownershipof land and a guaranteeof continuityof operations.

4.25 The second difficulty in auctioningthe resource is the complexityof managing tropical forests to maximize the value of the residual stand. In some cases, in PNG as elsewhere,certain forested areas are going to be converted to agricultureor other uses, and in such circumstances(i.e. for the purpose of a forest clearing operation)an auctionmay be effective in maximizing returns to the resource owners. Where sustainableyield operations are intended,however, there will frequentlybe a conflict between the - 35 -

interestsof the resource owner, who will wish to maximize long-term resource rente, and logging companies seekingto maximize short term rents. A demanding supervisoryor environmentalauditing procedurewould be needed in such a case, to ensure that the residual stand after logging was sufficiently viable. To sum up: whether or not an auctioning system will maximize forest resource rents, its implementationalone will not ensure sustainabilityof natural forest operations.

B. Methods of Sale of Wood

4.26 Annex 8 to this report outlines the major mechanisms by which logging rights are issued in PNG and provides information on allocations made under four types of agreements:

(a) Timber Rights Purchase. Permits or licensesare issued by GOPNGto a forestry development company, to grant cutting rights over a project area, which can be on land held under lease by Government, or on customary land under a timber rights purchase area. They are granted subject to compliance with approved working plans and environmental conditions, and compliance with these is the responsibilityof the permit holder.

(b) Declared Local Forest Areas. LFAs are issued under the Forestry (PrivateDealings) Act. on approval of the Minister. The basic purpose of the LFA is to allow landholdersto negotiate directlywith logging companies to sell their resource,without the need to extensivelyinvolve central or provincial forestry agencies.

(c) Timber Authority. TAs are granted to allow landownersto harvest timber for their own use. They generallydo not exceed 5,000 m3 per annum.

(d) Freehold Property Operations. There is no formal Government approval required for commerciallogging on freehold property.

4.27 There are major problems associatedwith both the major forms of agreement: TRPs and LFAs. In the case of the former, compliancewith working plans and environmentalconditions has often been poor, and the resources available to forestry agencies to enforce these (see discussionfrom para. 6.2 on) are inadequate. There is also some confusionevident as to what the actual level of resourcescommitted under TRPs in PNG is. This is because annual allowable cuts stipulatedin the TRP are rarely adhered to by companies operatingTRPs. So far as landownersare concerned (see the example quoted in para. 6.32) TRPs have gained the reputationof being bureaucraticallycumber- some in PNG. It is clear that under such circumstances,revenues from log sales are unlikely to be maximized, and payments to landholdersmay be seriously delayed.

4.28 It is widely agreed in PNG that LFAs have createdmajor environmental damage, through the lack of supervisioninherent in the process of direct landowner--contractoragreement. The situationin New Ireland (see para. 6.4) has come about largely as a result of LFAs being issued with too few controls. - 36 -

C. Loa ExDorts and the Transfer Pricing Issue

4.29 At present, log exports dominate the revenue situationfor PNG forests, so the condition of thlelog market is crucial to overall forestry returns to PNG:

Table 17: PNG LOG EXPORT VIOLUMES,VALUES, PRICES

YEARS VOLUME VALUE PERIOD PRICES K/m3 Period 1,000 m3 1,000 Kina Average Minimum Maximum

1951-55 28.6 582.6 20.22 ll.U4 29.17 1956-60 17.5 329.2 18.81 20.58 26.47 1961-65 185.6 2,977.1 16.04 13.88 20.38 1966-70 982.4 11,903.4 12.12 11.41 12.75 1971-75 2,242.7 35,765.1 15.95 10.79 19-07 1976-80 2,411.3 83,627.9 34.68 20.35 48.59 1981-85 5,267.5 253,547.8 48.13 42.09 54.73 1986-88 4,096.6 266,909.4 65.15 53.47 68.02

Source: Compendium of Statistics1986.

4.30 Key points include:

(a) Log exports were minor in volume and value during the 1951-70period, m%Aerate in 1971-80 and have increasedrapidly since 1980.

(b) Peak log exportswere achieved in 1987 with 1.4 million m3 by volume and K 105 million in value.

(d) Although increasesin price have generallyoccurred since the late 19709 this is not always the trend. During the 1950s to the mid 19708 prices were depressedand generallydeclined.

4.31 Annex 3 containsmore detailedvolume and price data for log exports from PNG. Among other things, these data show a lack of any consistent relationshipbetween log export supply and prices, over monthly, quarterlyor yearly periods. This suggests that the high variabilityin volumes entering the market has more to do with productionfactors than market conditions.

4.32 As is evident from data presented in Table 6, North East Asian purchasers- in particularJapan - dominate the market for PNG log exports. Although that table shows the Japanese share has been reduced from a peak of 80? in the late 1970s to about 60? now, the influenceof Japan remains very strong. In fact, informationgathered from the Commissionof Inquiry suggests that 80 of PNG log exports may still be contractedby Japanese interests, albeit indirectly in some cases. - 37 -

4.33 Such market concentrationraises the p-ospect of collusionand transfer pricing, particularlygiven the close-knit and complex inter-agency relationshipsthat characterizethe Japanese log market.

4.34 Ia fact, there is now a great deal of concern in PNG about the matter of transfer pricing and the bibliographyto this report lists a selectionof the voluminous literatureon this subject. The issue has been a primary concern of the Commissionof Inquiry. The Commissionhas identifiedthe followingmechanisms by which transfer pricing is practiced:

(a) misdeclarationof species;

(b) downgradingof log grades;

(d) under-valuinglog prices;

(e) over-valuationof externalmanagement, machinery, lease and consultancycosts;

(f) mistallyingof ship loading (sinkers,lost logs, rejects, etc.);

(g) overstated freight rates;

(h) overstatedclaims for damages;

(i) nil profit accounting;

(j) third country invoicing (doubleinvoicing);

(k) complex distributionnetworks (importers'subsidiaries); and

(1) collusionby importers.

An extreme case of transfer pricingwas revealed on New Ireland'where a Commission of Inquiry member intercepted a log export ship loading logs which were not documentedat all. As a result (primarily)of the Commissionof Inquiry'sefforts, several of the overseas log importingcompanies or marketing agents in PNG are negotiatingwith the Taxation Department for back- payment of taxes which have been revealed for the period 1985-87.

4.35 From the policy viewpoint, two questionsare of fundamental importance in relation to transfer pricing:

(a) How significantis it, in terms of losses to PNG?

(b) How difficultwould it be to control?

4.36 Table 18 below provides some representativelog export prices from Sabah, Sarawak and PNG: Table 18s: FOB LOG PRICES, SABAH, SARAWAX AND PNG, 1985-89 (US$/m3)

Sabah Sarawak PRG Super Low High Standard High Standard Low quality quality quality quality quality quality quality quality

1985 94 90 79 76 74 54 45 43 1986 112 102 95 91 88 62 57 49 1987 184 158 113 136 130 92 81 60 1988 159 137 110 123 119 88 78 51 1989 160 140 108 126 120 88 78 51

Source: Japan Lumber JournalsJanuary 1988 - March 1989.

4.37 Without further analysis it would not be appropriateto infer a great deal from teS absolute price differenceswhich this table exhibits: PNG timbers are different,in species and quality, from Malaysian logs, and there are also transportingcost differences.

4.38 The figures do serve to dispel one argument encounteredfrequently in PNG: that PNG FOB prices have improved relative to major log supplierssince the introductionin 1985-1986 of improvedmarket monitoringmeasures. Relative improvementsin FOB prices over the 1985-89 period in PNG have, if anything, been slightly below those for Sabah and Sarawak over the same period. If, therefore,FOB prices in PNG at the beginning of the 1985-1989 period were already relativelylow - due to transfer pricing - then this would remain the case now.

4.39 The Commissionof Inquiry estimates that, for the period 1985-87, one transfer pricing technique detected (double invoicing mainly -:hrough Hong Kong) accounted for about US$10 per O3. Considering this as a minimum, and assuming that transfer pricing in some way waa exercisedover the whole PNG log export industry,the total loss of exports in 1987 would have been in excess of $14 million (see Table 19). Table 19: ESTIMATEDLOSSES FROM TRANSFER PRICINi, 1985-87 (BASED ON COMMISIONOF INQUIRY ESTIMATES)

Year Log export Transfer price Lost overseas earnings 1,00 ma3 US$/m US$1,000

1985 1,158 10 11,583

1986 1,314 10 13,138

1987 1,442 10 14,422

The loss of revenue to the PNG Government is about 1OX (exportduty) of this. Waisime (1987) studied the dimensionsand implicationsof transfer pricing on PNG's log export trade. Waisime had access to a broad data base within PNG, Japan and to trade journals for competingcountries. Waisime assumed that PNG (Mix) logs compared directlywith Low Quality Brand (LQB) from Sabah (NB: PNG logs of average grade were consideredbetter than Sabah, Sarawak and Indonesia LQB).

4.40 Accounting for the differencesin freight and scaling "outturno Waisime estimatedtransfer pricing losses as given in Table 20.

Table 20: ESTIM&TEDLOSSES FROM TRANSFER PRICING, 1982-85 (BASED ON WAISIME)

Year Export volume Transfer price Lost overseas earning 1,000 m3 US8/m3 USS million

1982 1,063 19-34 20.2 - 36.2

1983 1,019 20-49 20.4 - 49 9

1984 1,284 18-68 23.1 - 87.3

1985 1,158 14-24 16.2 - 27.8

Despite the flaws in Waisime's assumptionsthat the Sabah (LQB) and PNG (Mix) fluctuate in unison there is reason to question the differentialbetween the price expected for PNG logs and prices achieved. Part of the differencein price could be the preferenceof the end users for Sabah logs rather than PNG (e.g. continuityof supply,majority market share, consistentspecies mix, etc.). 4.41 An alternativemethod to estimate the level of transfer pricing is to derive notional FOB prices for PNG logs by deductingmargins and costs from wholesale prices for PNG ex log pond in Japan, and comparing these to actual FOB prices achieved. The data and assumptionsarea in this exercise are described in Annex 4. Table 21 below gives results from these calculations.

Table 21: ESTIMATEDLOSSES FROM TRANSFER PRICING, 1985-88 (EX JAPAN WHOLESALEPRICE BASIS)

Year Export volume Transfer price Lost overseas earning m3 US$/m3 USS million

1985 1.063 20 21.3

1986 1,019 11 11.2

1987 1,284 23 29.5

1988 1,158 22 25.5

4.42 While the estimatesof losses vary consideraAly,transfer pricing has clearly been, and apparently remains, a significantdrain on the resourcesof PNG. Thus the need for measures to correct it is quite clear.

4.43 Transfer pricing does not take place evenly across the gamut of exporters: there are many independentPNG log shipperswho depend upon marketing agents for sale of their logs in the purchasingcountry. These shippers do not benefit from transfer pricing. Introductionof a uniform export tax or similarmeasure, calculatedon the basis of average transfer pricing losses, would therefore impact differentiallyon the profitabilityand viability of exporters in PNG, and independentswould encountermore problems than those linked to agencies in purchaser countries.

4.44 The basic problem is that quantifyingtransfer pricing is, by nature, an uncertain business: essential data are hardly likely to be willinglymade available. Detectionand enforcementwill thereforebe time and resource consuming.

4.45 Other options have been tried in PNG: a minimum export price scheme, set to capture at least some proportionof rental losses; and btate purchasing.

4.46 The Minimum Export Pricing System was introducedin 1982, as a means of settingminimum prices for logs, grouped into various species and grading categories. The MEP is reviewedmonthly by a committeeof representatives from the Department of Forests, the Forest IndustriesCouncil, and the Depart- ment of Trade and Industry. 4.47 In practice,the MEP has not achieved any significanteffect on under-pricing,which was its primary objective. Instead of operatingas a minimum or floor price, it has tended to be regarded as the maximum price. It merely reflects recent offer prices, because the system hcs no access to quality market intelligencedata. Moreover,the MEP in itself offers no remedy to the problem of misdeclarationof species, and other practiceslisted in para. 4.34 above. Finally, GOPNG has now introduceda State Purchasing Option and it is obvious that, with this measure in force, the MEP is now superfluous.

4.48 The State PurchasingOption was introducedin 1986, with the objective of allowing GOPNG to participatein the marketing of PNG timber, and thus to gain an appreciationof the market realities. The option allows GOPNG to acquire up to 252 of a timber concessionaire'sexport volume on a first refusal basis, and then to on-sell that acquisitionin the market. 4.49 Originally the SPO was administeredby the Forest IndustriesCouncil, a body set up under an Act passed in 1979 with the objectivesof bringing private sector and governmentrepresentatives together to promote and develop forest processing (see paras. 4.79 to 4.80 for further discussionof the FIC). The FIC has suffered from basic inflictsof interest,in that strong support by the log export sector did not engender diligent attention to policing the sector'smarketing practices. In 1987, the Forests Department took over the State PurchasingOption.

4.50 In theory, the concept of the SPO is appealing: it provides the governmentwith direct market intelligence,which can be used to monitor proceeds from sale in the private sector; and it avoids the dangers of total acquisitionand sale of logs by the state: a model which has not generally worked well in Asia, and for which the precedent in PNG--in the fishing industry--provedto be a costly error.

4.51 In practice,the SPO has suffered from a lack of resourcesand commitment in its operationto date. The SPO may have succeeded,since 1987, in maintainingthe relativitybetween PNG and Malaysian log prices, but in effect this has really only amounted to allowing the pre-existinglevels of transfer pricing practices to continue in PNG. As currentlyauthorized, the SPO cannot operate on exports from Timber AuthorityArea or Local Forest Area licences (see para. 4.26), only from Timber Rights Purchase areas. The current SPO operationworks out of a small unit within the Forests Department: there is no capacity to man the office on a 24 hour basis; no computer recordingand monitoring facility;no ability to offer significantservices to shippers;and very little capacity to research and develop interestingnew market possibilitiesfor PNG logs, such as India and Hong Kong. There has been some indicationthat some log shipping interestsinimical to the SPO have manipulated species, grades and even shipping schedulesto bring the SPO into disrepute in purchasing countries. Another complaintmade by smaller log exporters is that the SPO was not operatingin differentmarket areas, and that the impact on their credibility(in having to withdraw shipmentsoffered for sale, to supply to SPO) was not worth the (marginal)improvements in price obtained. 4.52 Despite these difficulties,the SP0 could be made effective in PNG, given increasedpolitical and administrativesupport. It offers a relatively simple means of improvingthe Government'sknowledge of the market, an: of renderingtransfer pricing more transparent. Severalmeasures are needed to bring this potential to fruition:

(a) the SP0 needs to be re-structuredalong commercial,self-financing lines, rather than as an undifferentiatedadjunct to an administrativeorganization;

(b) the SPO should be given a clear incentiveto diversifyand improve markets;

(c) the percentage acquisitionfrom concessionairesunder the scheme should be expandablebeyond 25Z, so that the private sector's incentive to outperformthe SPO becomes, and remains, strong; and

(d) as an initial acceleratorto the SPO's performance,an association with an internationalmarketing firm (preferablyto be contractedon a profit-sharing,rather than a fee-for-servicebasis), would be advantageous.

D. Forest IndustriesDevelopment

4.53 At the time of the TFAP mission'svisit to PNG, considerableinterest was being exhibited in the developmentof the forest processing sector. Yet the recent history of forest industriesin PNG is a rapid decline. This report will argue that the first requirementin encouragingappropriate industry developmentis the implementationof sound policies.

4.54 Table 22 below summarizesthe historicalpattern of forest product export developmentsin PNG. Annex 3 contains details of forest product outputs, exports and export destinations. - 43 -

Table 22: PROCESSEDFOREST PRODUCE EWPORTS, 1951-88 Volume (000 S), Value (000 K), Price K/m8

limbeo Pli/Veneer Wood Chip Other Yeare Vol Vol Prc Vol Val Prc Vol Vol Prc Vol Val Pre

1951-S6 28.8 1,187 50 20.5 8,014 147 - -

1956-60 48.1 2,878 55 60.0 10,480 174 - -

1961-65 61.6 8,298 64 48.9 9,498 194 - -

1906-70 76.1 5,256 70 65.6 12,842 189 - -

1971-75 168.1 4,426 86 77.0 14,267 188 264.8 4,584 17 1.8 98 76

1976-80 246.9 28,676 117 46.8 14,551 814 872.0 25,098 29 26.5 5,298 116

1981-86 97.7 16,1 170 26.8 11,882 431 826.1 28,574 86 10.0 2,296 280

198e-88 18.8 8,128 285 0.2 189 695 298.0 17,974 60 0.9 248 276

Sourcee: Compendiumof Statistics 1956, Timber D1gate 1986-68, Departmnt of Foreate

4.55 Table 22 clearly demonstratesthe downturn in output from the PNG saumilling sector after 1979, when legislationpreventing export of raw material was liberalizedin PNG.

4.56 The current domestic market consumes about 150,000m 3 p.a. of locally produced timber, and 18,000 m3 p.a. of plywood. Total sawmillingoperations in PNG have a combined log import capacity of 500,000m3 p.a.t i.e., about a third of the current annual log harvest. The number of sawmills in operation is currently about 50. Of these, 20 have a log input capacity of more than 20,000 m3 per annum, and these large mills account for 60Z of total sawmill log input in PNG. Currently, 'opan,Australia and New Zealand take a third each of the exports of sawn tiuaberfrom PNG. There are also a number of joinery factories, mainly owned by building companies, in PNG. There are seven furnituremanufacturers (of commercialscale).

4.57 A joint Government-private sector plywood mill (Papua New Guinea Forest Products) produces about 15,000 m3 of plywood per annum, based on the Araucaria spp. resource in the Lae-Bulolo area. PNGFP aimed to sell most of its ply and veneer production in the export market, but this declined in the face of increased Indonesianexports, and the mill has ceased productionof veneer, and sells all of its plywood on the domestic market, which is protected. - 44 -

4.58 Woodchips are manufacturedfrom rainforestmaterial by JANT, a Japanese company based in Madang. In 1977 the m11 was producing193,900 m3 p.a.: this has declined to about 100,000m 3 at present. A second woodchip plant, constructedby Nam Yang Timbers at Kapuluk in West New Britian about 10 years ago, has never operated. Japan presently takes about 762 of woodchips exports from PNG; Taiwan takes the remainder.

4.59 Rattan is the only other forest productwhich is exported from PNG and that is only in experimentalquantities to the Philippinesat present. The export of unprocessed sandalwood was banned in the early 19809, and a plant manufacturing chopsticks was burnt down in 1983, and has not been rebuilt. 4.60 At present the forest industriesof PNG employ about 5.000 people, with an annual wage payout in the order of K 15 million per annum.

4.61 In Hay 1989, in an attempt to reverse the decline of the processing industry,the Minister for Forests announcedthe followingproposals:

(a) A total ban be placed on the importsof sawn timber and mouldings.

(b) The present five year quota system be maintained to control the imports of plywood.

(c) Import duties on furniture be increased from 30Z to 50? with a view to placing a total ban pending a survey to determine the capacity of the furniture industry to meet local demand.

(d) Companies involved in the import of componentsfor pre-fabricated houses must buy at least 502 of their requirementslocally.

(e) That it be made mandatory for all new buildingsto be built of at least 40? of local materials.

(f) Tax exemptionsbe allowed on equipmentand other materials for downstream processing.

(g) Amend the merchant shippingact to enable coastal transportationof products by barge.

(h) Tax holiday for 10 years for those companies processing a minimum of 502 of their annual log harvest.

(i) Allow variable export duty on exports so that companiesthat process more timber pay less duty and vice versa.

(j) Appoint marketing agents to assist the industry to sell sawn timber and other processedproducts.

(k) Upgrade practicaltraining to develop the industry'smanpower.

(1) Establish an export oriented timber processing complex with the assistance of reputableoverseas companiesas an incentive. - 45 -

(m) Resolve the current status of the Forest IndustriesCouncil (see paras. 4.79 to 4.80) and the Forest IndustriesAssociation In order to have an effectiveautonomous organization to promote and develop the PNG timber industry.

4.62 It is not clear at this point to what extent these proposalsare being implemented. Their intention,however, is clear enough: protectionof significantsections of the domestic forest product markets for local suppliers,and stimulationof processed exports.

4.63 The most comprehensivemeasure suggestedis that of log export bans, and this is addressed first. In the Minister'sDrafting Instructionsfor the new Forestry Act (see Annex 9), considerablepowers are foreshadowedto allow the Minister to make a determinationof the level of log output that can be exported in unprocessedform from PNG. At the time of the TFAP mission, serious considerationwas also being given to imposing a log export ban, and a ban on export of some premium species is already in force. In assessing the merits of such a policy, considerationneeds to be given to two matters. First, the conditionsapplying in the existing domestic processingsector are important;specifically, the question arises of whether a guaranteedlog supply will overcomewhatever constraintson its competitivenesspresently exist. Second, the general economic argumentspertaining to such policies are relevant.

4.64 There is little doubt that, as presently structured,the PUG processing sector is uncompetitiveinternationally. Some reasons for this are strictly cost related:

(a) High labor costs, and low labor productivity. General labor costs in Papua New Guinea are higher than for most forestry exportingnations of SoutheastAsia, at the currentvalue of the currency. Most processors contactedbelieved the productivityof that labor to be below the equivalentin Indonesiaand Malaysia.

(b) High energy costs. No systematicdata on energy costs in forest processingwere collected. However, World Bank data suggest that diesel costs are higher in PNG than in Australia or New Zealand, and are unsubsidized. While high, therefore,they may be at the appropriateeconomic level. The same applies to electricalpower in PNG. To become competitive,the industry will need to be able to absorb these cost levels.

(c) High internal and external freight costs. Annex 1 details some recent freight rates for PNG. A calculationincluded in the Annex shows that the total cost of shipping and handling sawn timber from a mill in Western Province to a major port in Australia would be US$143.55 per m3. This is a very high transportcost indeed.

4.65 Some reasons for lack of competitivenessin the PNG industry are more related to policy and market factors (and are thereforemore debatable): - 46 -

(a) A lack of com=unication between Government and industry on policy matters, created in part by a lack of continuity in Government policies and senior staff in forestry agencies.

(b) A lack of knowledge of overseasmarkets and requirements. An example of this is that producers in PNG seem unaware of quarantine regulations in Australiat while some PNG timbers are known to be resistantto a certain borer, they are still excluded from entry to Australia because there has been no attempt to have them exempted.

(c) A lack of trained personnel. 4.66 There are a range of other factors that affect the competitivenessof the PNG processing sector, as presently structured. The relevant question, however, is: Is it likely that the inefficienciesand impedimentsto competitivenessnoted above would disappear,under a log export ban? What would occur if the industry suddenlybecame the recipientof large volumes of logs (presumablyat highly subsidizedprices, since only a small proportionof log supply is taken up by domestic producers at current export fob prices)?

4.67 If the primary objectiveof a log export ban is the stimulationof local processing,and thereby value added and national income, then the experiencesof Indonesiaand the Philippinesare relevant. In Indonesia, it has been estimated that the cost to the Indonesianeconomy of the export ban imposed there has been somewherebetween US$2 billion and $4 billion, between 1980-85. A similarcalculation fur the Philippinessuggests that the loss of revenue from banning log exports there has been in the order of US$140 million per annum in recent years.

4.68 The general case against imposing log export restrictionsto promote wood-based industrializationis, briefly:

(a) A log export ban isolates the local processing industry from the world prices of the raw material (logs)and typically imposes a revenue loss on resource owners (whethertraditional owners, as in PNG, or the State as in most of South East Asia). If local industry can compete in the market for the final product only because it pays less than the full (worldmarket) price for the raw material, the government is merely redistributingincome from resource owners to the local resource-processingindustry. If, in the interest of macroeconomicefficiency the raw material, though banned from exports, is to be priced at the full world market cost, the rationale itself for the ban disappearsas log producerswould gain no advantage by exporting logs rather than selling them locally. If, finally, the local processing industry is willing to buy less than the entire 'without-processing'quantity of logs (while paying world market prices for them) the resource owners are once again involved in a real or opportunityloss resultingfrom reduced access to the more profitable foreign market.

(b) If the objective of a log export ban is to slow down the rate of forest extraction, the same objective is better achieved (in the sense of imposing a smaller cost on the resource owners or society) - 47 -

not through an extort ban but a productionban (e.g., reducing the rate at which forest is made availablefor logging). Under certain conditions (e.g., a likelihoodof increasesin future log prices, or a significantrate of resource depletion through unpriced practices such as slash-and-burnagriculture, etc.) a logging ban (but not a log export ban) may be the economicallyoptimal way of managing the resource.

(c) Variants of the same policy (most notably, in PNG, a ban on export of selected - usually high-value- log species) suffer from the same fun; atal drawbacks. Indeed, the real or opportunityloss to the res; .rceowner will tend to be higher the higher is the world market val%ieof the banned species.

(d) The argument that a log export ban will increaseexport revenue, value added or employment (over the levels prevailingunder no log export ban) is not a particularlystrong one. Increasingthe cost of the final product over its 'raw material equivalent"is not necessarilysynonymous with increasingthe value added. Moreover, value added (by use of more labor and equipment)can easily become value lost (if the raw material is used less effectivelyby local producers than by competing foreign users). In such circumstances also, the private (let alone social) cost of additional employment generationwill tend to be high while remaininghidden from the policy makers and the public.

4.69 The policy of log export restrictionsin its various forms is inferior to that of removing the (de facto) price incentive in favor of logging brought about by an inappropriatetaxation regime. A policy which effectivelygives, or promises to give, too large a share of the resource rent to log producers, contributesto the reluctanceof such producers to engage in log processing. Adopting a log export ban as a means of ensuring that no log producer makes excessiveprofit would representnot only an admission of fiscal impotencebut a case of mismatch between a policy objectiveand a tool. The recent practice of allowing log producers to export a 'supplementary quota' of logs related to the volume of logs locally processed is an indica- tion of the far greater profitabilityof log exports. One inefficientpolicy (excessivelyprofitable log exports) combinedwith another inefficient practice (unprofitableprocessing) usually add up to two inefficienciesrather than one cancellingout the resource allocationdistortions caused by the other.

4.70 In addition to carrying a substantialprivate and social cost, the policy of log export restrictions,conceived as an instrumentof industrialization,has the drawback of obscuringits true cost and, in PNG, placing the entire risk of possible loss of income on resource owners.

4.71 An example of the ctsts which could be involved can be calculated from selling prices and processing costs collectedby the mission in PNG. The example chosen was Pencil Cedar (genusPalaguim), which is a high grade timber from PNG: - 48 -

Value of log if exported K 125/m3 Conversionrate (2) 33 . Value (fob) of sawn output K 375Imx i Cost of processing K 60 + Cost of treatment 20 + Cost of drying 50 • Cost of fumigation 5

Total sawn cost K 510/m3 Sawn selling price K 410/m3

The total loss on a log input basis, from processingdomestically, would be in the order of K 33 per m3. Along the same lines, the Forest Industries Associationof PNG has produced an analysis of the likely economic impacts of GOPNG foreshadowedpolicies to promote domestic processing in PNG. FIA argues that the proposed legislation(referred to elsewherein this report as the Minister'sDrafting Instructions)would offer a direct raw material subsidy of K 14 per m3 to domesticprocedures, compared to royaltiesand taxes paid by log exporters. FIA also provides a series of case studies of the opportunity costs of processingin PNG, based on actual company figures. These figures show an opportunitycost of K 42 per m3, on a log input basis, of processing general sawn material in PNG for export to Australia. The losses from processinghigh valued Kwila in PNG, as opposed to exporting it in log form to Japan, are shown as K 84 per m3 on a log input basis. In the case of Rosewood (anotherhigh value species),the opportunitycost on a sawn basis was K 184 per O3. This needs to be compared to the total cost of sawing (about K 60 per 3 in ), of which some K 15 per m is the on-shore component (principallylabor) and the remainderis the cost of imports (machineryand equipment,imported materials, fuels and expatriatelabor). The TFAP Mission was not able to assess the representativenessof these figures,nor to estimate what positive multiplier effects might result from more processing. Taken at their face value, the figures given do at least suggestthat considerablecaution needs to be exercisedbefore advocatingfurther interventionin the sector.

4.72 The nature and occurrenceof the resource in PNG makes it extremely difficult for any individualoperation to supply significantvolumes of the major market species (see Annex 2 for a listing of these). There are some exceptionsto this (Taun,Malas and Erima on East New Britain; Calophyllumon Manus Island; and Kwila in West Sepik),but the fact remains that specific timbers are in general spread widely and thinly over the forests. This is in strong contrast to the relativelyhomogeneous dipterocarp forests of the large South East Asia key producers.

4.73 The recent frameworkguiding timber processingin PNG is that embodied in the 1979 Revised National Forest Policy (GOPNG,1988). Its essential feature is a relative absence of physical processingtargets. The requirementthat all foreign enterprisesengaged in log exports must process at least 30 per cent of their total log harvest may have a market-related rationale,in that most log exporterswould, on their own, produce sawvwood - 49 -

out of low grade or damaged logs, (if perhaps not quite to the level of 30 per cent). The policy paper deemphasizesthe creation of additionalprocessing. noting the cost to both the Government (revenueforegone) and the private sector (low or negative returns to investment)of earlier approaches.

4.74 Whilst the policy has been in part responsiblefor the decline in exports of processedwood throughout the 19808, this should not be considered as an 'anti-processing'bias. Indeed, the 1979 policy contains a number of positive incentivesdesigned to stimulatelocal processing. The lesson of decliningwood product exports in the 1980s is not that more assertive policies (at any cost) are needed but rather that unless certain key economic signals such as wage rates in the organized labor sector, local freight rates and the exchange rate of the kina vis-a-vis that of PNG's main competitorsare altered, assertivepolicies will fail because of being socially or financially unprofitable. Mere ability to secure foreign orders for PNG processed output without calculatinathe economic cost to the country of such sales counts for little.

4.75 In addition to log export bans, the package of industrymeasures proposed by the Minister is a compositeof incentives,import quotas and tariffs. The issue of trade protection for domestic processors requires some discussion,because demands for various forest products may increase fairly rapidly in PNG, due to the expansionof the mining sector. As outlined above, all processing sectors currently receiveprotection in PNG, either by direct trade restrictions,as for the plywood industry,or indirectlythrough user groups (i.e. house construction)for the sawmill industry. Given the current lack of competitivenessof the processing sector, it is likely that a rapid expansion in domestic demand (particularlyfrom new sectorswhich may not be addressed in current protection policies)will raise pressure for tariff and non-tariff protectionof the domestic sector.

4.76 Similar argumentsto those raised against the log export ban will apply to such trade protections such measures insulate the sector from competitionand, in general, do not lead to the creation of an efficient, competitiveindustry. Moreover, compared to direct subsidiesor fiscal incentives,trade protection is less transparentand tends very quickly to becime institutionalizedat high levels.

4.77 There are instancesof profitableexport-oriented wood processing in PNG. An excellentexample is that of Teperoi Timber Co of Rabaul, processing plantation-grownbalsa into sawnwood and panels and exportingall of its production. Admittedly small and somewhat specialized,the example neverthe- less demonstratesthat enterprise in forest processing can succeed in the present policy environment. Such enterpriseswill be market-drivenand will owe their success to identifyingspecial requirementsof the foreignmarket, or a unique feature of local raw material (ratherthan attempting to compete against the bulk of, say, Indonesianplywood in the world market). Gaining acceptancefor PNG processed products cannot, unfortunately,be achievedby decree.

4.78 Provided the right approach is taken, the potential of local processing to enhance the value of local resources is unquestionable. The objective of the policy must be to promote processingwithout indirectly - 50 -

misallocatingresources or redistributimgincomes beyond politically acceptable limits. Examples of appropriatepolicies are (a) guarantees of log supplies (if necessary, through the state purchase option but in any case at world market prices), to firms investingin local processing; (b) adoption of grading rules for PNG sawnwood and trainingof governmentstaff in the principles of export grading; (c) export tax reductionson processedoutput, broadly in proportion to the extra unit export revenue generatedby the processed item over that generatedby unprocessedraw material. Export tax rebates significantlyhigher than that would, once again, subsidize the industry at the cost of the country'staxpayers (in PNG, mostly other industries);and (d) exemptionsfrom corporate tax at rates depending on the importanceof creating additionalemployment in the timber processing subsector relative to other sectors of the economy.

4.79 A large part of the policy burden for forest industries in recent years in PNIGhas been borne by the Forest IndustriesCouncil. The Act establishingthis Council was passed in 1979, with the prime function of the Council being to promote and develop the forest products industry. The Council has specific responsibilitiesto monitor the Minimum Export Price Scheme. The Council is composed of Ministerialappointees - six from registeredforest products operators,and four others. The Council is funded by a levy of R 0.215 per m3 of log harvested.

4.80 It is generallyagreed that the PNG Forest IndustriesCouncil has failed, and significantmalpractice within the Council has been alleged. According to the Minister's Drafting Instructionsfor the new Act, the FIC will be abolished, and this is an appropriatedecision: the TFAP Mission found little support or reason for retainingthe Council.

4.81 There is also a Forest IndustriesAssociation of PNG: this is a non- profit organization comprised of holders of timber permits and bona fide manufacturers. It currently represents 80 of PNG forest industries This would seem to be an appropriatebody to representthe interestsof the private sector in forestrymatters.

4.82 At this juncture, effectiveindustry policy must be allowed to evolve, thr^ugh effective communicationbetween industry, resource owners and governments. Two elementswill be particularlyimportant in this. The first is greater access, by both governmentand industry investors (or potential investors)to informationon the feasibilityof various industry proposals in PNG.

4.83 Some specific action will be required to ensure that appropriate action on feasibilitystudies is undertaken,and some proposals are included in the Action Plan for this report (see paras. 7.45 to 7.49).

4.84 The second importantfactor in developmentof industry policy is the creation of a forum where effectiveinteraction between industry and Government can occur. This can best be done via the implementationof a Forest IndustriesStanding Committee,under the Board structureproposed for forestry in para. 6.41 of this report. - 51 -

V. CONSERVATIONAND LAND USE STRATEGY

5.1 Any attempt to conserve or to promote sustainable management of natural forest will depend on the interest and will of the landowners, which is likely to be modified by the extent to which benefits can be gained from the forest. In the absence of an adequate return, or where there is perceived to be inadequate consultation,landowners currently seek redress in destructiveaction or adopt alternativeland uses. The need for land registrationand the developmentof mechanisms for negotiationbetween landownersand the state or developmentagent is therefore given a prominent role in this section.

5.2 Adequate land use planning is based on the availabilityof appropriateinformation. This is discussedin para. 3.55, but here the concept of developingappropriate institutional structures to provide ; informationfor the landowneras well as for governmentalinter-sectoral planning capacity is addressed. i 5.3 A conservationstrategy which reflects the interestsof the landowner and the state, as well as providing for environmentalstability and protection of the unique and diverse speciesand ecosystemspresent in Papua New Guinea, is urgently needed. Such a strategymust take account of the communal ownershipof the land and will need to be based on improved educationand legislation.

5.4 An important idea which emerged during the visit of the TPAP mission to PNG is a major World Heritage declarationover significantforested areas in the upland and possibly some of the coastal areas as well. This issue and some further broad environmentalmeasures are discussedbelow.

5.5 An immediateenvironmental issue of importancein PNG is the lack of effective controls over logging operations;it will be necessary for legislationand institutionalarrangements in PNG to take sufficientaccount of this matter.

5.6 This sectionconcludes with a brief analysis of the role of NGOs. The recommendationsimply inputs from the private and NGO sectors.

A. EnvironmentalControls in Loagini

5.7 A major immediateenvironmental priority in PNG is to improve the design and implementationof safeguardsin logging operations. Part 6 of this report will describe legislative,structural and financialchanges for forestry admiristrationin PNG which will achieve these objectives. Briefly, the relevant proposals included are:

(a) a replenishablesecurity guaranteeof K 100,000 to be iodged by a logging contractor;

(b) environmentalaudit proceduresto comprises

(i) a sampling system to assess logging impacts (withoutnotice); - 52 -

(ii) a tallying procedureto quantify performance,and to determine penalties to be deducted from the security guarantee;

(iii) assessmentof required rehabilitationworks (to also come from the guarantee);and

(iv) an arbitrationprocedure for disputes,and a parliamentary reportingrequirement.

It is also suggestedin the proposed Drafting Instruction(S119(d)) that areas within logging concessions,which should not be logged for catchmentor topographicreasons, should be designatedas ProtectionForest areas. Such areas would permit continued traditionaluse, and could conceivablybe leased from landownersusing the Follow up Land Use Fund.

5.8 Beyond a certain level of non-compliance,the proposed Act calls for the cost of audit to also be met from the guarantee. Local forest officers would participatein the audit process.

5.9 Enactment of these procedureswill provide a basis for reasonable control over environmentalstandards in logging operations. Because of the nature and responsibilitiesof the proposed boards structurefor administrationof forestry, it will be a relativelysimple matter for environmentalexpertise, from the appropriateareas of Government,academic institutionsand non governmentagencies, to be co-opted to this task.

B. Land ReRistration.Negotiation and Compensation

5.10 The key to successfulnegotiation of rights and interests is legal identificationof landowners,and registrationof their interestsunder custom law. The Land MobilizationProgram, with assistancefrom the IBRD-AIDABLand MobilizationProject (see para.6.34)is focussed on this objective. However, some augmentationof this effort may be necessary to allow significant progress with the forestry and conservationinitiatives proposed in this review.

5.11 Even if satisfactoryregistration of interesthas been carried out, it is still essential that adequate financialcompensation be paid to landownersfor use of their land. One-off leases or royalty payments tend to be disruptive,and will need to be replaced by more regular payment systems.

C. LandownerAssistance and Education

5.12 Experiencehas shown that landowners frequentlylack the necessary informationand skills to negotiatecontracts and agreementseffectively in their own interests. Project 5 in the listing given in Annex 10 addresses this problem.

5.13 The Prime Minister'sDepartment is suggestedas the agency to provide this training in this case, given its experiencein literacyand primary health campaignswhich have a similar reach. The strategy envisagedin this case is to deve±op an organizationbased (initially)on internationalfunding, to provide such awarenesstraining, which will allow an integrationof government,NGO and landownerexpertise. - iI -

D. National Land Use Planning Issues

5.14 This report will discuss some of the more obvious conflicts of interest over land use which have arisen, largely as a result of ineffective involvementof landholdersin decision-making(see paras. 6.31 to 6.34). There have also been conflictsbetween line Ministries on land use, such as the case at Open Bay where the Departmentsof Forests, and of Agriculture and Livestock,have taken steps to implementdiffering proposals in essentially the same area of land.

5.15 GOPNG accepts that effectiveland use planning will be based on cross-sectoralcommunication, and at the national level will need to involve economic and line Ministries,and the Departmentof Environmentand Conserva- tion. The Governmentduring 1988 began taking steps to improve the linkages necessary for multi-sectoralpolicy, planning and implementationthroughout its functions. This is a major undertakingand began with the conveningof a number of working groups during August 1988. Of direct relevance is the formation of the RenewableResources Working Group, with a remit to look at issues of mutual concern to the 'economic'ministriest Agricultureand Live- stock, Fisheries,Mining and Energy, and Forestry,and to establishcloser links with the 'service'Ministriest Finance and Planning,Lands and Physical Planning,Works and Environmentand Conservation.

5.16 The RenewableResources Working Group is to be reconvenedunder the auspices of the Economic Issues Executive Sub-committeewhich provides a bureaucraticshadow to the ExecutiveCommittee on Economic Issues (ECEI).This includes the Ministersholding 'economic'portfolios and is responsiblefor overseeing economicmatters includingthe rer.ewableresources sector. The Working Group and its sub-groupshave a substantiallist of topics to address, includingthe preparationof a sustainableyield forestrymanagement policy and the strengtheningof research services and the sector'sdata collection, analytical and disseminationcapacity.

5.17 This implies developinga cross-sectoralinformation base and research function and Barker (1988)writes that *the idea of an umbrella AgriculturalResearch Council has been proposed to effectivelyintegrate the activities of the differentbodies involved in agriculturalresearch. This Council could also be extended to forestry to make it an overall Land Use Research Council." It would be appropriatefor the Departmentsof Forestry (however restructured),Environment and Lands and Physical Planning to utilize a common data base. A research council of the type suggestedby Barker would need the capability to refine and develop existing geographicalinformation systems, and would use such informationto advise landownersof this option. The council would also be in a position to make inputs into environmentaland land legislationand planning. Given this extensivebrief, the proposal needs careful study before any decision is taken.

5.18 In January 1989, a Resource Management Committee (comprising representativesfrom the departmentsof Lands and Physical Planning,Finance and Planning and Personnel)was convened with the function of advising the ECEI on land use policy and other pertinentmatters. Within the RHC a National Land Management Committeehas been establishedand it is intended to establish ProvincialLand Management Committeesin the Provincee. The NLMC is chaired by the Department of Lands and Physical Planning. 5.19 Formation of a board system of management for the forestry sector- -and particularlythe operationof the proposed Land Use and Resource Standing Committees under the Board--shouldprovide an effectivemeans of allowing forest sector planners to communicateeffectively with wider land use planning interestsin PNG.

5.20 The Melanesian EnvironmentFoundation has suggestedthat a useful first step in the process of bringing together interestedparties to discuss strategy and specific sites would be to hold a conferenceon these issues. The objectiveof such a meeting could be:

(a) to consider, and if possible agree upon, a designationof preservation and conservationsites, with a view to putting recommendations to Government;and

(b) to consider the criteria and issues involved in environmentalimpact assessmentand monitoring,with a view to forming a more permanent representativebody to advise Government and private organizationson standardsand implementation. This body could also be expanded to deal with the question of integrationof environmentalplanning into land use decision-making. Submissionswould be invited from the relevant line Departmentsof the National Government,the Prime Minister'sDepartment (specificallyfor input from the Resources ManagementCommittee), NGOs and landholdergroups, and Provincial Governments.

5.21 The Instituteof National Affairs in PNG is a non-profit think tank with extensive connectionsinto Government.private industry,NGOs and community groups, and with strong experience in the organizationof national level conferencesand workshops. It may thereforebe an appropriatebody to design and organize a conference.

5.22 Considerablepreparation may be required to produce a useful result from a national environmentconference. Firstly, specific conservationand preservationarea proposalsneed to come forward,with adequatemapping and survey backing. Secondly, investigationand coordinationof interest groups, to ensure comprehensivecoverage, will be needed. Obviously,the primary objective of the process must be to produce at least some areas of consensus, since this can be the only basis for a coherent strategy.

5.23 In the meantime, certain actions could be taken in the area of rehabilitationof existing conservationinfrastructure in PNG. For example, in the field the TFAP mission found that:

(a) infrastructurewas in very poor condition in the McAdam National Park, and illegal settlementhad occurred in this area;

(b) facilities in the Siwi-UtameWildlife ManagementArea were badly neglected, and the number of visitors to the area has been falling.

5.24 Resourcesunder the direct management of the Department of Environmentand Conservationappear to be in better condition than those controlledby Provincialagencies, where fundingproblems seem severe. 5.25 Annex 6 contains detailed suggestionsas to areas that should be includedunder protection of various categoriesin PNG. With further preparation,these could from the basis of a comprehensiveconservation package for PNG.

E. The Need for a ConservationStrategy

5.26 The Constitutionof PNG calls for all necessary steps to be taken to give adequate protectionto valued birds, fish, insects, plants and trees. An environmentand conservationpolicy was endorsed by Government at the time of Independence. The existing Forestry Act incorporatesstatements recognizing conservationand environmentalconcerns, and Acts establishingthe brief of the Department of Environmentand Conservationalso deal with these issues: the EnvironmentalAct of 1985 requires all forestryprojects to identify the ecologicaland social implicationof a proposed development. Pollution control and water quality are dealt with under the EnvironmentalContainment Act of 1978 and the Water Resource Act of 1981. The specific protection for sites and land forms comes under regulationsof the Conservationof Areas Act 1978, whilst the National Parks Act of 1976 establisheda National Parks Boa.rd,to administerand acquire lands for National Park purposes. Utiliza- tion and control of wildlife come under the Fauna Protection and Control Act 1966, the CrocodileTrade (protection)Act 1966, and certain customs regulations.

5.27 A basis of legislationand regulationstherefore exists for conservation management in PNG. What appears to be lacking is a coherent, integrated strategy for conservationin the country. Developmentof such a strategy requires two major inputss

(a) developmentof adequate land use mapping and analysis capacity to allow meaningful identificationof priority conservationareas;

(b) establishmentof some mechanism,or forum, to bring together the main interest groups: government,non-government organizations concerned with land use, conservationand socio-economicissues, landowner groups or their representatives,and others.

5.28 There is a considerableliterature on ecological topics for PNG, but items are widely scattered through (mainlyforeign) journals. Few attempts at comprehensiveecological documentationhave been made. In 1985, UNEP undertook an environmentalstudy of PNG, and recommendedestablishment of a comprehensivedata bank, environmentalsurveys and monitoring. A start has been made on this within the Science faculty of the University of Papua New Guinea, but there is no inclusionof a survey of forest ecosystems in the process at present. The Department of Environmenthas created a program to map animal species in the forests.

5.29 Not surprisingly,in view of the foregoing,it is possible to identify a number of areas of particularenvironmental and ecological significancein PNG. Annex 6 to this report contains a listing and a brief descriptionof these areas, and suggestionsas to what form of preservation might be considered for them. - lI-

F. World Heritage Possibilitiesand SustainableYield

5.30 As will be apparent from observationsmade in the introductionto this report, PNG possesses significantgeographic and ecological resources, many of them within existing forest areas. This raises two importantissues:

(a) serious considerationneeds to be given to the conservationstatus of some of the ecologicalassets of PNG; and,

(b) sustainableyield managementhas strong implicationsfor preservation of importantecological and bio-diversityvalues in the lowland forests of PNG.

5.31 Some of the areas identifiedin Annex 6 are of potentialWorld Heritage status:

(a) in Morobe Province, the summit area of Mt. Bangeba, the terraces of the Huon peninsular and broad areas to the coast;

(b) in the Madang, Eastern Highlands and Chimbu Provinces,the Bismarck Falls area, from the Ramu to the summit regions of Mt. Otto and Mt. Wilhelm, and includingthe GahavisukuProvincial Park northeast of Goroka;

(d) in Milne Bay Province, the LouisiadeNational Marine and Terrestrial Park;

(e) in Central, Oro and Milne Bay Provinces,the Owen Stanley Ranges; and

(f) in West Sepik and East Sepik Provinces, the ToricelliRange area.

It would be a significantand dramatic statementof PNG's commitment to environmentfor areas such as these to be declared under World Heritage.

5.32 Whilst World Heritage listing and other forms of preservationor conservation are principally aimed at protection of areas of significant interest, the potentialbenefits of preservationin the tourism industry should be borne in mind. In this case, PNG may be able to benefit from the very large growth in tourism to nearby Australia,where the industryhas been growing at 20Z per annum, and now representssome 6Z of GDP. Obviously, the mere declaration of areas under the World Heritage listingwill not automaticallybring tourists--butit is instructiveto note that the three major tourist destinations in Australia (Ayers Rock, the 3reat Barrier Reef and Kakadu National Park) are all on the World Heritage List. The latter two sites are considerablycloser to PNG than to major Australian cities (where the tourist trade is strongly and positively influencedby the initial draw of tourists to these sites). It may be, therefore,that tourists could be attracted to Austrialianand PNG sites in some form of package that would boost demand in both countries. 5.33 It may be possible for GOPNG to add in a guaranteeto maintain sustainablelogging levels over the lowland resource,to strengthenits environmental approach. This guaranteecould be based on the sustainableyield figure generatedby a rapid resource appraisal,allowing for the 'natural' landownerclearing rate of about 20,000 ha pa in PNG, and some conversionto commercial agriculture in designated areas.

5.34 Such a guarantee may involve GOPNGin considerable short term losses to revenue: it will be recalled that in para. 3.30 of this report, an allowable cut figure of 3.6 million m3 pa (considerablybelow the figure of 6 million m3 pa given in the Forest DevelopmentPlan) was given. If the actual sustainablevolume figure--determinedfrom the rapid resourcesappraisal procedure described in para. 7.10 of this report--revealsthat allowablecut is closer to the figure suggestedby the TFAP Mission, then on current revenue formulae GOPNG could expect to forgo some K 10 million per annum, if it adjusted logging targets down to sustainablelevels. If revenue collection systems and levels are altered in accordancewith suggestionsin this report, the revenue foregonemay be closer to K 20 million p.a. It has been argued in this report that, in the medium to long term, it will be in PNG's economic and environmentalinterest to practice sustainablemanagement of its forest resource. However, in the short term present GOPNG developmentplans could be seriouslydisrupted by such a reduction.

5.35 GOPNG may be able to obtain external assistanceto help compensate for such losses, and a proposal along these lines is put forward in paras 7.16 to 7.17 of the Action Program.

G. A SugRestedRole for Non-GovernmentOrganizations

5.36 There are a number of non-governmentorganizations involved in land use, environmentand socio-economicissues. Essentially,both levels of government in PNG must take the lead in formulating and implementing effective land use and conservationpolicy. However, NGOs will be the essentiallinkage between governmentsand affected interestgroups, and should thereforebe supportedand made part of the decision process.

5.37 Some NGOs identifiedby the TFAP mission are describedbelow.

5.38 The TFAP Mission learned of the activities of the Adzera people of the upper Markham Valley, who have formed a land group with the intentionof developing communal agro-forestryprojects to reclaim kunai grasslands.

5.39 On a similar line, the TFAP Mission saw activitiesof the Wau Ecology Institute,which has been working with women's groups and village organizations on training, extensionand research in environmentalmatters. WEI receives some assistance in the form of equipmentthrough the Japanese developmentassistance agency, but would be capable of expanding its program with some further technicaland financialassistance.

5.40 Perhaps the major network in the countrywith potentialto assist with environnentalpreservation and reclamationis the National Youth Movement,which has more than 5,000 groups backed by a provincialand national structure. The Department of Forests proposes to employ these groups on a large scale in plantationand managementwork, and the TFAP Mission saw activities in timber stand improvementand enrichmentplanting in West New Britain by such groups. The work of the groups could logicallybe expanded to erosion control and land reclamationwork, in lidisonwith village based groups.

5.41 The Melanesian Council of Churches has an existing role in environmentthrough organizationof tree plantings and environmental workshops. It presently receivesassistance from a United Kingdom volunteer group.

5.42 The Papua New Guinea Bird Society is running a large number of ornithologicalstudies, and clearly has considerablecapability in the survey and monitoring area.

5.43 The MelanesianEnvironment Foundation appears capable of forming an effective environmentalnetwork, in combinationwith the National Information Service (formerlyattached to the Prime Minister'sOffice) and the Melanesian Council of Churches.

5.44 These and other NGOs could effectivelyutilize some external support in mounting pilot programs in their areas of expertise. These could then be used in further developmentof environmentalstandards and data, and alternative land use systems in PNG. Three specificproposals were receivedby the TFAP Missions one to support the general activitiesof the Wau Ecology Insti- tute; the second to support an agro-forestryproject to be undertakenby the Gau Land Group, formed by the Adzera people; the third, to fund training of conservationextension workers.

I VI. MANAGINGTHE FOREST RESOURCE

A. The Present Problem

6.1 Once PNG considersthe difficultquestions of what should be done with the forest resource,how maximum benefits from so doing can be made to accrue to PNG, and how landownerscan be effectivelyand equitably involved in this process, there remains the fundamentalquestion of how the resource can be effectivelymanaged.

6.2 It requiresno furtherverification to establishthat the supervision and management of forestry operationsin the natural forests of PNG is at present totally inadequate. All major participantsin the process, from the incumbentMinister and Secretaryof Forests, through National and Provincial administrations,a wide range of commentators,and landownersgroups, acknowl- edge that the Nationel asd Provincialforest institutionsare unable to adequately supervise and control current logging operations,let alone invest time and resourcesin regenerationwork, environmentalstandards and the range of responsibilitiesinherent in sustainablemanagement of the natural resource. The Premiers Council Working Committeeon Proposed Forestry Legislationhas stated:

"It is a poor indictmenton the national and provincial forestry departments and forestry industry in PNG that no system of sustainedyield is being worked.'

6.3 CommissionerBarnett, who chairs the current Commission of Inquiry iato the forestry sector,has criticizedthe apparent intentionin PNG to:

'expandthe log exporting industry in the full knowledge that the administrativecapacity to superviseand control the operations are already failing badly...'

6.4 Elsewhere in the Commission of Inquiry output, Dr. Simon Saule, now Director of the PNG Forest Research Institutespecifically comments on the situation in New Ireland Province:

"...theGovernment's policy was only good on paper and was never adhered to by developers.... In almost all cases these problems arose because of the Government'slack of proper planning, management and monitoring, resultingfrom lack of properly trained manpower...' and, on the same situation:

"It is obvious that in the long term, the landownershave lost their forests and with them their independenceand very often their dignity. They have lost these things for very little in return.'

6.5 The planning and monitoring of logging operationsis a particularly importantaspect of past management,having implicationsfor utilization (and thereforepresent revenues), future yields, and environmentalfactors. - 60 -

6.6 The FAO Forest Management and Research Project (PNG/841003)based at Lae has published a number of analyses of logging in PNG, includingstudies of logging in the various lowland forests and, most recently, in Western Province. It is not possible to reproducethe results of these extensive studies here.

6.7 In general terms, the studies show that through the applicationof proper planning and set ups, and utilizationof standard technologyand equipment,considerable improvements in loggingyield and minimizationof residual stand damage would be possible in PNG. Road and skid trial widths and densitiescould be reduced, areas of log landings could also be reduced, and, dependingon the market into which specific operators sell, more trees of marketable size per hectare could efficientlybe removed. With proper logging equipment,and enforcementof rules on directionalfelling, the conditionof residual stands could be improvedmarkedly. The project identifiesinitial inventory and post harvesting inventory,as priority requirementsfor effectivecontrol of logging operations.

6.8 In addition to the poor utilization,sub-optimal regrowth and environmentaldamage caused by poorly designed and inadequatelysupervised logging operationsin the forest, the lack of supervisoryand monitoring capacity causes losses to revenue after felling. One such area--transfer pricing--hasalready been discussed in paras. 4.29 to 4.44 above. Other areas includes

(a) Degrades The losses due to bowing, stain, and splittingwhen logs are exposed too long, due to delays in the logging/transportprocess.

(b) Docking and Scaling: Log values can be improvedby docking logs to remove malformations(bow, buttressing,twists, etc.). Log transportersprefer longer lengths,and importerswill use malformationsto downgradelogs--strong control is thereforeneeded to assure that adequate docking is done.

(c) Species Identifications Since logs are sold in species groups determinedby end use values, a common practicewhere supervisionis inadequateis to misidentify logs into lower value groups.

(d) Log TallVing. Log Yard Documentation: Log tallying can be manipulated by repeat numbering, omitting logs from the tally, or rejeCting logs which are in fact merchantable. Once logs have been piled into large stacks, it is difficultto identifythese practices, even for experiencedlog inspectors.

te) Shipload Tallyingt Because loading is an intensiveoperation, mistakes in recording log numbers are frequent,and reconciliation between log yard stack and shipped volume is problematic. Without adequate staffing to handle this matter, unscrupulousoperators can and do abuse the system at this point.

(f) Loss of Logs: Some logs will always be lost to fire, rafting and pontoon breakagesand so on, but there are proven techniquesfor minimizing these. - 61 -

6.9 The TFAPHission made an informal estimate of what gainsmight be possible by addressing the above sources of losses, and those in the harvesting process. in PNG. This estimate is based on experience and observation, rather than on any attempt at empirical analysis: - non-compliance vith working plans and permit conditions in logging 102 volume

- yield improvement (assuming better control would result in one additional log/ha being removed) 10-152 volume

- degrade 5-10 volume

- docking and scaling 5-102 value

- species identification 0-32 value - log tallying and yard documentation 0-3S volume

- shipload tallying 0-31 volume

- loss of logs 0-3Z volume 6.10 Potentially, therefore, a revenue increase of 40S mightbe possible through implementation of improved supervision and monitoring. At some point, it may become uneconomic to pursue further increases in value, due to the marginal costs of doing so. However, it is most unlikely this point has been reached in PNG. On average, each government forestry field officer monitors timber exports of more than K 2 million per year. This intensity of work, in addition to morale and training problems inherent in the system, make it highly likely that large losses presently occur in the system. B. Maior Constraints to Management 6.11 There are two major constraints on effective management of the forestry sector in PNG. The first is a lack of a clear policy on forest management and conservation, and the deficiencies in the underlying legislation. A key issue in this problem is the means by which landholders should be involved in the policy making process and in wider environmental issues. 6.12 The second constraint concerns the capacity of forest management agencies to carry out policies and to enforce the law. Obviously, no amount of good intent on the part of national or provincial government policymakers in the area of forestry priorities and plAnning will produce good management, unless the policies are workable, and the agencies charged with their implementation are capable of doing so. The Policy and Legal Framwork 6.13 There is some confusion about the status of forest policies in PNG at present. Responsibility for policy making is vested with the Department of Forests and the Ministry;working papers are prepared for discussion, but there is no formal process for consultation laid down. The TFAPmission encountered frequent complaints about policy in PNGs - 62 -

(a) the Department of Forests is unclear on current policy;

(b) Policy is made at one level (NationalGovernment) but implementedat another (ProvincialGovernment);

Ic) implementationof forest management in the field bears no resemblance to official policy; and

(d) resourcesto administerthe policy are grossly inadequate.

6.14 There are a number of policy documents,all with some degree of currency,in PNG at present.

6.15 The 1979 policy, which in its updated version still appears to function as the basic guidelines,has failed in PNG because:

(a) the pressure from landownersand developmentcompanies for log exports has proven impossibleto control under existing legislation and resources;

(b) the devolutionof powers from a centralizedto a provincial system has proven difficult;

(.) there has been a bottleneckin the area of securing land for reforestation.

6.16 The current forestry legislationin PNG is comprisedof the Forestry Act, Chapter No. 216, the Forestry (PrivateDealings) Act Chapter No. 217, and the Forest IndustriesCouncil Act No. 49, 1979. Timber Rights Purchases and Permits (see para 4.26 and Annex 8) are issued under the Forestry Act; and declarationof Local Forest Areas is done under the Forestry (Private Dealings)Act.

6.17 It is relevant,at this point, to take up an argument commonly voiced in PNG, to the effect that policy formulationshould precede legislation. Whatever the merits of this argument in general,new legislationis urgent in PNG, and a great many of the disputes between the central forest administration and provincial governmentswhich are at the center of many of the sector'sproblems could be resolvedwith introductionof a new Act. The Com- mission of Inquiry findings support this view (pp. 25-26):

'The (ad-hoc)policy is to tolerate the continuedexistence of Forestry Legislationwhich is dangerouslyout of date. The ForestryAct itself imposes a permit system which derives from colonial times and, with its full emphasis on central control by the Minister and his department,completely fails to come to grips with the realitiesof provincial government. On the other hand that Act co-existswith the Forestry (PrivateDealings) Act which provides for an alternative system which by-passesnational departmentalcontrol and allows for private exploitation with no size limits and few other controls imposed. This Act is now being exploitedby alliancesof Provincial governmentswith foreign businessmen - 63 -

and local landowners with the result that the national department appears to be in real danger of becoming redundant. Recent policy has been to increasinglyuse this Act by declaring ever larger Local Forest Areas with little thought for forestryplanning, the national interest or the true interest of local landowners."

In 1979 (White Paper National Forest Policy) the governmenteven then held the view (p. 54):

Existing fortstry legislationis in many respects obsolete, technicallyinadequate or inappropriateto deal effectively with the allocationand managementof forest resources in an IndependentPapua New Guinea: A revised National Forest Act to replace the:

- The Forestry Act (Amalgamated)1973 - The Forestry (PrivateDealings) Act 1971

will be presentedto Parliamentin 1979-80.0

However, no new legislationhas so far been enacted.

6.18 At th time of the TFAP Mission, new legislationwas again being considered,and the incumbentMinister provided the Mission with the Drafting Instructionsfor a new Forestry Act. The main features of the Minister's Drafting Instructionsare sumnarizedin Annex 9 to this report. Briefly, the draft aims to (a) rationalizethe mechanismsunder which timber is sold in PNG, (b) improve the financingarrangements for forest management. (c) impose stricter conditionsand better monitoringfor environmentalcontrol, and (d) maintain and improve the flow of revenues to governmentand landholders from forestry.

Management Personnel

6.19 It is common (and usually reasonable)to attributemanagement deficienciesto a lack of trained personnel. In the case of forestry in PNG, there is little difficultyis documentingthis problem. Table 23 below shows the number of managementpersonnel available to forestry, from 1972-73 to 1987. - 64 -

Table 28: MANAGEENTPERSONIEL VS OPERATIONS 1972/73-199?

_1972,7 1979 1985 1987 Decription Nat /a Prv /b Tot Not Prv Tot Nat Pre Tot Not Prv Tot

Ad ln 62 52 25 25 25 21 46 26 21 47 Operation 44 844 45 849 894 84 237 271 82 28 260 Research 180 160 98 7 105 68 24 87 es 24 37 Train 99 99 43 48 83 J8 48 48

Total 675 675 211 866 s67 160 282 442 164 281 445

Log as 698,600 909,900 1,517,600 2,000,000 Exportm3 424,700 472,600 1,158,300 1,442,200 ExportK 6,659,100 20,765,100 58,879,800 106,462,600 Reforestha Eat 950 2,686 Eat 986 2,700

/a A NationalForest Department. /b ProvincialForestry Agencies.

Source:Department of Forests- VariousCoqpendia and AnnualReports.

6.20 It is obvious from these data thats

(a) administrativelevels have remained static while the need for TRP negotiations,project proposal evaluationand project negotiationhas increasedby at least 200Z;

(b) operationsmonitoring and regulationlevels have decreasedby 22? while logging operationshave increased185?, log exports 240?, log export value 1,764?, and reforestation184Z;

(c) training personnel and studentshave decreasedby 57? while the need for trained personnel has increasedto the same levels as outlined in (b); and

(d) research personnelhave decreasedby 522.

6.21 At present, the monitoringof forest operationsis largely the respor.sibilityof Provincialgovernments in PNG. In meetings between the TPAP Mission and P;ovincialforest officers,most said that they were rarely given the resourcesto monitor adequately.

IntergovernmentalRelations

6.22 Perhaps the most basic problem affectingforest managementin PNG is the nature of the relationshipbetween the Central Governmentand the Provincess a matter which, of course,has effects well beyond the forestry sector. - 65 -

6.23 The four Provincialadministrations consulted by the mission were particularlycritical of the operationof the Forestry (PrivateDealings) Act that by-passed their role and directly involveddiscussions with landownerson the part of the national government. Discussionswith a group of Provincial Forest Ofiicers (assembledat Lae) described concern about lack of clear guidelinesand the role of the national governmentin dealingwith landowner groups, often contrary to provincialgovernment policy.

6.24 The most tangible demonstrationof the problems between the two levels of governmentis the Manus case. There, the national governmentissued allocationsto landownercompanies against the provincialgovernment's policy and wishes and apparentlyagainst a resource allocationframework that the National Departmentof Forestry itself helped establishfor the province. The Manus ProvincialGovernment is seeking redress against the Minister through the National Court. With respect to the general question of provincial- national governmentrelationship, the Interim Report of the Commissionof Inquiry stated (p. 23):

'There is no effectivepolicy that comes to grips with decentralization. No policy finds a way that expresses a way to find a proper balance between national and provincial legitimateinterest in resource allocation,revenue collectionand supervisoryand inspectionfunctions.'

6.25 It should be noted that in this Manus case the Minister was bound to comply with the Forestry (PrivateDealings) Act. The major factor was therefore not so much that the Province'swishes were circumventedbut that legislation contradicttryto orderly planning thwarted the Province'swell consideredapproach.

6.26 Regan (I.N.A,1988, p. B29) describesthe legal position in relation to national ard provincialgovernment relations. He describes (p. B34) the nature of 'forestry"as a concurrentlegislative subject as envisagedby the Organic Law on ProvincialGovernment, the intentionbeing that the legitimate interestsof provincialgovernments are taken into account in the national laws. This process was to ensure that national laws do not cover matters of provincialinterest which should be left to provinciallaw. The Premiers Council Forestry Working Conmitteehave agreed that insufficiertconsultation accompanieddrafting of the new instructions. They saw the proposed legislation as unconstitutional.

6.27 It seems that t e Organic Law on provincialgovernment clearly recognizes the role of the national governmentto legislate in the national interest. The Constitutionis quite clear on sustainedyield resourcemanagement and biophysicalconservation (4th goal and related directiveprinciples). This implicationof 'nationalinterest' needs to be clearly spelled -ut in any legislativeredrafting to assist ptt-'incialgovernments in establishingtheir relationshipon concurrentforestry issues.

6.28 There is a need for provincialgovernments to be more closely involved in the planning and implementationof forestryprojects if they are to have any hope of planning rationallyfor provincialdevelopment. The Province dystem is here to stay, and there is a clear and growing trend - 66 -

towards acceptanceof its long-termexistence. However, in the field, the TFAP Mission noted the very variable forest management capacitiesof the provincial governments. The quality of forestry administrationvaries from very good to poor, dependingon the province. Any rationalizationof forestry administrationwill need to recognizethip variabilityin ability.

6.29 It was noted that the provinces themselveswere organizing into regional groupings (Islands,Highlands, Madang, Central). This report will base recommendationsfor structuraladjustments in forestry administrationon these groupings using them as the basis for Regional Forestry Boards.

6.30 A point which needs mention is the participationby provincial governments (as well as landownergroups) in corporate arrangements with logging extraction firms. These joint venture arrangements, with the company holding the Timber Permit, present an obvious potential conflict of interest. A provincial governmentaspiring to be the source of sustainedyield forestry management policies is in a potentiallydifficult situationin the event of financialmanagement pressures in its joint venture, such pressurescould encourage short cuts and relaxationof environmentalstandards. Any model of forestry administrationshould include structuralchecks and balances to maintain a healthy place for the evolutionand enactmentof wise forest management policy.

Landowner - GovernmentRelations

6.31 Some 98? of PNG is under clan ownership. This representsa major challengeto forest managementin PNG. Traditionalperceptions of land ownership in PNG regard lease, sale or alienationas temporarytransfers of rights by the original owners, but typically,international investors do not accept this view. Accordingly,difficulties arise when landholderssxpect continuousnegotiation and involvementin decisionmaking.

6.32 Plantation projects (cash crop and forestry)have often failed in PNG, as a result of such misunderstandingst a case in point is describedin para. 3.45. Natural forest exploitationhas also failed: clearly, the New Ireland case referred to in para 6.4 representsa failure of the system to deliver the expected benefits to landowners. The TFAP mission encountered frequent accounts in the field of gardeningactivities moving into logged areas, even where these had been replantedwith the intentionof sustainable yield managements this indicatesa lack of continuing agreementbetween landholdersand forestry agencies as to the dispositionof land and the lack of satisfactorycontinuous income and/or comparationto landowners. Multiple uses of forested land to combine forestry and traditionalagriculture are possible. Another type of problem encounteredby the TFAP mission was at Vanimo, where landownersexpressed very strong opinions on lack of consultation with them on the drawing up of an agreementbetween Vanimo Timbers and the Department of Forests, for exploitationof a large concession. In reaction, landownershave utilized the Private Dealings Act to allocate an adjacent area of forest to another internationalcompany. There is considerable concern in the area that this agreementhas insufficientenvironmental safeguards,and that highly destructivelogging will result.

! - 67 -

6.33 This case illustratesa certain irony in relation to the Forestry (PrivateDealings) Act in PNG. On the one hand, some landholdersperceive it as a means of circumventing the procedures of Timber Rights Purchase, which they believe (as in the Vanimo case) give them insufficient control over disposition of their resource. Other landholders,such as many in New Ireland now, will recognizethe inherent dangers in the Act, as it has been applied. They will be joined in this opinion by some Provincial Governments (as in Manus case, para. 6.24). The National Government can be placed in the invidiousposition of either vetoing a Private Dealings agreement (at risk of litigationfrom landholders,since a veto must be defensibleunder the terms of the Act) or agreeing to it, against its own better judgement and at risk of antagonizingProvincial Governments (and, as the Manus case shows, still not necessarilyavoiding legal challenge).

6.34 Clearly, these sorts of problems are symptomaticof larger landholdingand land use issues in PNG. This review has dealt with aspects of these issues in Chapter 5 above. Two of central importanceares

(a) Alienated Land. The Department of Lands and Physical Planning under the Land MobilizationProgram, is currentlyinvolved in registration of leases on alienatedland. However, there remains a considerable backlog even on these lands, which representonly about 6,000 sq km, of the total 460,000 sq km of PNG. On current trends, registration of rural land under customaryownership is a long way off. In the meantime. custon>ary owners are employing less formal means to mobilize land. The real meaning of sale under such initiatives is unclear, and conflictshave arisen, especiallywhere foreign investorshave become involved. In many cases--inperi-urban areas and places where immigrantinflux has been high--mediationby clan elders is breaking down, and this will place further strains on the system.

(b) Custom Land Tenure. The Departmentof Lands and Physical Planning supports in principle the introductionof customary land registration on a Provincialbasis. DLL;Pis also pursuing leaselleaseback and tenure conversionarrangements. There is an initiativein progress in East Sepik, where ProvincialActs have been formulatedto allow custom tenure to be recognizedand to preserve the traditionalview of land by landholders,whilst allowing land to be mobilized. The East Sepik Land Registration Program is being supportedunder the Land Mobilization Program. A further two Provinces are expected to enact customary land registrationunder LMP support. DLPP in consultationwith the Provinceshas establishedan institutional frameworkthrough ProvincialLand Management Committees to assist Provinceswith administrationand finances. A draft national framework legislationfor customaryland registrationwas drawn up under a UNDP-World Bank consultancy undertaken in 1988.

GOPNG and the Bank, through the LMP, will continue to initiate action on issues, according to GOPNG priorities. This will include forestry land use issues, but some specific actions for forestry are also included in the Action Program. A strategy to involve landholderseffectively in the management of forests, and other land resources,is still some way off in PN¢. The major - 68 -

proposals put forward below must be seen as interim solutions: they will give landholdersa larger role than at present in the early phases of forestry decisions,and equip them better to contributeto these decisions. They will improve the effectivenessof monitoringand supervisionof forest operations, so that, at least, the landowners'resources will not be destroyedby unacceptablelogging practices. But, until wider programs presently underway in PNG to bring registrationof commercialland and commercialleasing practices into harmony with communal perceptionsare more advanced,the participationof landholdersin decision-makingwill remain a problem. In PNG at present, any system to involve landholderseffectively must resolve two problems:

(a) the perimetersof a given clan or group of clans' land must be accuratelydefined;

(b) the division of income from utilizationamongst clan members must be clearly understoodand agreed to.

C. A Strategy for More Effective Forest Management

6.35 There is an obvious and urgent need to strengthenmanagement and administrationof the forestry sector. This report proposes four measures to bring this about:

(a) rapid passage of a new ForestryAct;

(b) a major restructuringof the institutionalframework;

(d) human resourcesdevelopment.

A New Act for Forestry in PNG

6.36 In para. 6.18 above, mention was made of the Minister'sDrafting Instructionsfor a new ForestryAct.

6.37 The approach taken in this report has been to adapt these instructions, to give priority to the following:

(a) the National/Provincialgcvernment relations problem must be solved;

(b) new structuresmust be able to cope with the anticipatedpace of development (which is clearlybeyond present administrative capacities),and the concomitantproblem of malfeasance,as detailed in the Comiissiortof Inquiry reports. In parti'ular,forestry institutionsmust have access to sufficientresources to plan and monitor effectively--preferably via a linkage of funding for planning and monitoringcapacity to scale of operations;

(c) a continuityof responsibilityin a professionalforest service is essential,to solve coordinationand severe morale problems in the ranks of existingnational and provincialagencies; - 69 -

(d) landownersmust be effectivelyand efficientlyinvolved in major forestry land use decisions;

(e) the timber industrymust be given effectiverepresentation in decisionmakingin the sector;and

(f) environmentalcontrols over forestry operations,and conservation managementwithin the forests must be properly managed and effective.

6.38 Annex 5 to this report provides a detailed des-r±ptionand listing of the proposed drafting instructionsfor a new ForestryAct.

Institutional Requirements

6.39 There is a major requirementfor restructuringthe institutional frameworkfor forest management in PNG, to allow a new Act to have effect. The central proposal in this report, tf 'z^hievethis objective, is to build the necessary checks and balances into a system of Forestry Boards; one national, and four regional. The Boards would be servicedby a reconstituted Forest Service,which would operate at all levels under a single line arrangement. This system will allow for strong decentralizationand representation of Provincial governments,who will in turn representlandowner interests,and through the Regional Boards will controlmanagement planning and operational monitoring. However, by going to a regional structure,the arrangementgoes some way to providing a check on Provincialgovernments who are also participantsin joint ventures to log with landholders. Also, it avoids the obvious coordinatiorproblem that would be inherent in 19 Provincialboards. The system will prescribe strong planning requirementsand environmental protectionmeasures, and provide a means for these to be made operational: this will include a system of replenishablesecurity guaranteeto be furnished by logging operators,and drawn upon by agencies in the event of non- compliancewith management and environmentalconditions. There will be financial arrangementsto enable adequate funding of monitoring and research operations.

6.*O The first step in producinga board structurewould be legislation. The procedure adopted here has been to amend the Minister's Drafting Instructionsto include establishmentof the board structure,and e Forest Service. Annex 5 to this report contains a detailed descriptionand presentationof the proposed Act.

6.41 The essential elements of the proposals incorporatedinto the proposed Act ares

(a) A National Forestry Board. This would be composed of memberships from the Forest Service (see below), ProvincialPremiers nominees, industry,academic and wider communityinterests. The Board would have the powers of a corporation,to allow it to deal in land transactions,contracts and other business. Its functionswould be to provide recommendationsto the Minister on national forest policy, legislationand all matters related to timber cutting permits, royalties, levies, and export taxes. The Board would administer - 70 -

funds collected by levy for the purposes of research,management and monitoring of environmentalstandards, and allocate these to regional boards (see below) as necessary.

(b) Standing Committees. The Board would be providedwith specialist advice and analysis by a series of Standing Committees,comprised of Board members, Forest Service staff, co-opted officers from elsewhere in GOPNG and, if necessary,hired staff. Committeesvculd have delegatedpowers to operate effectivelyin these areas, includingthe operationof funds. Standingcommittees are suggestedfor the followingareas: conservationand environmental;forest industries; marketing and economics;land use and resources; silvicultureand research.

(c) Regional Forestry Boards. Four regional forestry boards,based on existing regional groupingsof provinces (i.e. Madang, Islands, Highlands and Southern)would be established. These would be the major vehicles for representationin forest management of provincial interestsand. through ProvincialGovernments, the interestsof landholders. The Provinces,the Forest Service, industry and nongovernmentorganizat.ons would nominate membership for the regional boards. The regionalboards would provide recommendations to the National Forestry Board on policy legislation,forest developmentplans, the granting of licenses au-'investment proposals. The regional boards would be responsiblefor environmentalstandards in logging, and for provision of extension and busines! advice to landowners.

(d) A Forest Servicewould be established,to incorporatethe existing central Department of Forests and provincial forestry agencies into a single line structure. The servicewill provide inputs for the Standing Committees of the National Forestry board, and also for the regional boards (includingthe services of a regional forester,to operate at regional board level). This Service is discussed in paras. 6.43 to 6.45 below.

(e) FinancialMeasures. A series of levy funds, scaled to operationsin PNG forests,will finance the development,management and other expenses incurred by the forest management agencies. This will ensure that adequate fund6 for management,monitoring and other essential tasks will be available.

6.42 These funds are described at greater length in Annex 5. They include: a forest developmentfund, to fund plantation activity but with a first call to fund silvicultural and other rearch important for sustained yield; a forest industry fund; a follow up land use fund to research use of logged areas, and to pay leases for ProtectionForests (this fund to be administeredby Regional Forestry Boards); a planning and monitoring fund, which will be a first call on royaltiesto fund essentialmonitoring activities;and a timber marketing account,which will fund the activities for the Standing Committee on Marketing and Economics. - X -

A New Forest Service 6.43 The Board structurediscussed above will depend upon the creation of an effective Forest Service, organizedso as to be able to directly serve the Standing Committees,and the Regional Boards. To achieve this, the Forest Servicewill need a line structure,to include field operationspresently carried out in provincial agencies. Responsibilitiesfor servicingthe Boards will need to be reflected in the divisionalstructure for the new service, since a major part of the workload of the Standing Committeeswill be undertaken by the Forest Service.

6.44 A basic Forest Service structureis presented in Chart 2. This proposed structurehas the followingobjectives:

(a) to allow direct servicing of the Standing Committees by the line structure;

(b) to incorporate field operations and regional Board tasks under a single agency; and

(c) to create divisionsable to handle the specific institutionaltasks identified in this report as necessary for developmentof a forestry program in PNG.

The basic requirementsof each Division of the service are outlined below:

- Resources and Investment. This Division would be responsiblefor inventoryand resourcesassessment work, includingthe operation of highly mobile teams carrying out pre-logging surveys. The Division would have major responsibilitiesin identifyingpotential logging areas. and in liasing with other government agencies on landuse planning issues. It would be the major contributor to the work of the Standing Committeeon landuse and resources.

- Management and Conservation. This Division would have primary responsibilityfor the monitoring and supervisionof field operations: logging silvicultureand management. Major environmental responsibilitieswould be devolved upon this Division, in that it woltd be in charge of monitoring the environmentalstandards for logging and other operationsset forth in the new Act. This Division would be the principal employer of field foresters,and would be the key liaison point for regional foresters (appointedto work te the regional Boards, but employedby the Forest Service). The Division would be the major contributorto the work of the Standing Committee on Environmentand Conservation.

- Marketing and Plantations. This somewhat -nusual grouping of responsibilitiesshould help ensure that plantationsare undertaken on the basis of economic criteria - especially those relating to market demand for the products to be gzown. The Division would be the location of the State PurchasingOption, albeit it that this body should be largely autonomous. The Divisionwould also supervisethe kNebrs NATIONALFORESTRY BOMRD Coptictdbappointed by Chniran and Director, ForestryService-

r T ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r | ~~~~~~StandingCom_ittonof the Board 1 "

Lnnd use Conservation Maroketing Si1wicultural z and r4sours Envit-on_nt Economics and R nsarch 0

GOPNrA FAS Resources FAS Mbnn8enat FAS Marketing FAS R n nrch | FAS Policy Personnel Fe and Investment and Conservation and Plantation and Training a nd Planning Mona n re FORETSrtc Reource Environmento I se e Purchoning FRIJRso rc| | Policy | SERVCE Inv ntory Monitoring Option | eD velopment | B

|Investnnt Silviculturnl LOS gr dingp*nd| Training | |Ntionn I a nalysisand operations classificatio proorm s | forest:lon |{ |survey |Regional |Plnft tion || Regional | forectore | rogrnam for et plan L * |Ldvisory group

L mbern *ppointed by Prowtc;la REGIONALBO^RDS - 73 -

field aspects of grading and classification,and would thereforebe a significantemployer of field staff. The Division would work to the Standing Committee on Marketing and Economics. - Research and Training. This Division would be responsiblefor FRI, and for overseeingthe training program for the Service.

- Policy and Planning. This Division would be the location for a task force on policy development. It would also be responsiblefor the preparationof national forestry plans for submissionto the Forestry Board, and for coordinationof regional planning activitiesunder this objective.

6.45 It is obvious that a great deal more thoughtneeds to be given to the design and implementationof a new Forest Service, especially to the human resource developmentand staffing aspects. Some provision is made below for initiatingthis process in PNG. As a basic guideline,it is suggestedhere that an effectiverestructuring of the forestry sector in PNG will probably require the addition of at least 100 diplomates from the Bulolo College, and 50 graduates from the Departmentof Forestry at UNITECH, to existing staff numbers.

6.46 One major decision to be faced is the institutionalnature of the Forest Service. According to some sources in GOPNG a corporate entity operating under similar arrangementson the Coffee Industry Corporationand the proposed Cocoa IndustryCorporation would be the most acceptable from the viewpoint of the provinces. However, where, as in this case, strong public good and environmentalobligations also apply, establishmentof a corporate entity requires careful consideration.

Research and Development

6.47 The lack of research personnel is of particularsignificance. Relatively little is known about the PNG natural forest resource,especially in the areas of growth and yield, regenerationand bio-diversity. Competent management for sustainableyield will clearly be impossible,if the basic biological,environmental and management research is not done.

6.48 GOPNG has recognizedthis problem, and, with the aid of the Japanese bilateral assistance fund has constructeda Forest Research Institute at Lae. The TFAP Mission discussedthe intended research program with the newly appointed Director of FRI, and also with FAO personn-1 engaged in a support project on forest management research based at Lae.

6.49 At this stage, it is difficultto assess the likely progress that FRI will be able to make with the research program, given its newness. For this reason, the followingpriority areas for research are suggested:

(a) Tree Breeding. Virtuallynothing has been done in this important area in PNG. (Clonalimprovement techniques, directed at improving growing stock for natural forest augmentation,plantation material and, possibly for village forestry as well, would yield very great benefits in PNG. - 74 -

(b) Techniques of SustainableYield Magagement. Investigationof the applicabilityof the Malaysian SelectionManagement System, or alternatives,is essentialin PNG. This will require the establishmentand monitoring of permanent research plots by FRI, and technical research on the various alternatives: variable length rotations; silviculturalinterventions, including enrichment or row planting:methods based on the existing swidden agriculture,or taungya system. The Department of Forestry of the PNG University of Technology at Lae has been involved in research in these areas. A research proposal,based on using the facilitiesof FRI and UNITECH has been prepared by the Head of Departmentof Forestry of UNITECH. This proposes a study of disturbedand undisturbedforest, with a view to determiningthe consequencesof differentrelations in the rainforest. The study would take place at three research sites in PNG, and would work closely with village groups and Provincial Governments. A joint research project of this nature could provide useful coordinationstimulus to research in PNG forestry.

(c) Improved Harve zing. The FAO project at Lae has already studied logging in PNG, and some findings from those studies are discussed in paras. 6.6 and 6.7. Clearly, a great deal more work on appropriate loggingmethods needs to be done in specific locations in PNG.

(d) Land Rehabilitation. Reforestationof Kunai (Imperataspp) grassland in PNG has not p.:ovedparticularly successful. FRI, UNITECH and the Australian CommonwealthScientific and IndustrialResearch Organization(CSIRO) have prepared a joint proposal entitled "RegenerationTechniques and NutritionalRequirements of Reforestationin Kunail. This report is available from UNITECH. It might serve as a basis for a fundable project in this area.

(e) Forest Products and Processina. As suggestedin paras. 4.82 to 4.83, close investigationof the feasibilityof forest processing in PNG is an importantobjective for decidingmajor policy issues on processing. An essentialinput into such feasibilitystudies will be technical studies of wood propertiesand processing. Some of this work--possiblymost of it--couldbe contractedout to existing laboratoriesand test centers overseas,but it may be necessary to establish some local capacity in this area.

(f) Agroforestry. The TFAP Mission encounteredsome interestingNGO work in agroforestry,and it may be useful for the official research agencies to make contact with these groups and assist in technical developmentof agroforestry.

(g) A primary objectiveof the renewableresources working group (para. 5.16) of the GOPNG is to strengthenresearch services and improve fundingmechanisms on a cross-sectoralbasis. There is interest in establishinga research council to identify and promote scientificresearch and cooperationbetween sectors and to establish an appropriaterenewable resource data base and informationaystem. There is a particularneed for research support in the fields of land use-planning, enviromental protection, and land-use systems such as - 75 -

agro-forestry,all of which require cross-sectoraiinputs and a holistic approach. A feasibilitystudy towards establishingsuch a council, supportedby a research institutewould be an essential preliminarystep.

(h) The National Herbariumhas been transferredto the FRI at Lae, and a proposal has been received to establisha data bank and produce a commercial guide to timber trees which will provide informationon species, distribution,management. and timber propertiesin a format accessible to forest developerswho are not trained scientists. In order to achieve this objective training of FRI staff will be essentialand will in turn provide for substantialinstitutional strengtheningtowards resource assessment,data handling capacity, taxonomicand management research and planning within the Ministry of Forests.

Human Resources Detvelopment

6.50 If administrativeand operationalnumbers employed in the central and provincial forestry agencies had kept pace with forestry production since 1974, there would now be 1,134 managementpersonnel employed in these areas in PNGs in fact, th- 3 were 315 in 1987 and of these, only 30-40 would be capable of operatingat a senior technicallevel. It is not suggestedhere that staff numbers should have kept pace with production--but't is unlikely that such a dramatic decline as evidenced in these figures is acceptable. It is arguable that research and training staff should have increased proportionallyto the size of operationsin PNG, especially given the vestigial nature of the research establishment,and the apparent intentionof GOPNG ti increase logging operations significantlyin the near future. If research and training staff had increasedin proportion to output since 1974, there would now be 809 officers employed in these areas. In fact, in 1987 there were only 130 positions filled in these areas.

6.51 Papua New Guinea will not gain the full potential from sustainable management of its natural forests, and its plantationprogram, unless the capacity to manage, monitor and carry out research is substantiallyimproved. In particular,the followingitems are heavily dependenton an adequate,well trained professionalwork forces utilizationand regenerationstandards; adequatemonitoring of log volume classification,measuring and tallying; improvingthe market performanceof FNG output; and improvingthe growth and yield characteristicsof natural and planted forests.

6.52 It is most unlikely that PNG could produce a sufficientnumber of graduates,diplomates and retrainedprofessionals to bring numbers anywhere near the levels referred to in para. 6.50 above. Presently, the Bulolo and UNITECH institutionsgraduate fewer than 20 professionalsper year. In any event, oro rata staffing on this basis may not be necessary under the new structureand arrangementsproposed in this report: this is a matter for further analysis, and a means to achieve this is discussedin the Action Program (Chapter 7) below. However, it is likely that additional staff members will be required. A manpower planning exercise is needed, to determinethe actual numbers of professional,technical and research staff - 76 -

needed in PNG, to review the capabilityof existing institutionsto produce these professionals,and to consider the best means of upgrading in-service traitring.

6.53 At the Forestry College at Bulolo, and the Department of Forestry at the University of Technologyat Lae, the TYAP Mission found that a major difficultywas in actually finding sufficientstudents to fill courses. A shortage of secoadaryschool students (especiallywith adequate science and mathematicstraining) is the major cause, and it is exacerbatedby the poor performanceof, and morale in, the forestiy agencies of PNG. The first priority must therefore be to ensure that the maximum number of students which can be trained at these institutions are enrolled.

6.54 The second priority must be zetraining of existing staff. Some of the task force activities proposed in the Action Program will be natural vehicles for in-service retraining of forestry personnel in specialized areas such as monitoring and marketing. It may also be necessary to set up special in-service courses in other areas.

6.55 Extension of knowledge in PNG--especiallyin the research area--may be done, initially,through post graduate training of selected officers at suitable overseas locations. A priority task for the human resource development review proposed in the Action Programwl'l be to identify suitable trainees, and institutions. - 77 -

VII. AN ACTION PROG'W(

7.1 It would be possible to identify a great number of specific project actions to achieve profitableand sustainedmanagement of the forest resource and responsiblemanagement of the environment. Given PNG's limited capacity, this chapter sets out to identify only the most urgent and essential actions needed to address the critical problems identifiedthroughout this report. This implies some prioritizationof proposals,including some schedulingof recommendations. All the tasks identified below have high priority--the implication being that many additional tasks which could be inferred from the foregoing analysis have a lower priority.

7.2 The Chapter is divided into three sections. The first sets out the major componentsof the proposed program and project proposals for these componentsare given in Annex 10; the second suggests how GOPNG might organize its effort to implement the program; and the third spells out some of the implications for support from the donor community. In setting out the program, some estimation of inputs and costs is attempted, although it is likely these would be reassessedduring project preparation. At this stage, it is more important to identify a manageable set of tasks, to specify clearly the prioritiesfor actions, and to provide a logical sequencingfor implementation.

A. Maior Program ComDonents

Government Policy Statement

7.3 This report has provided a wide range of proposals for changes in policies, legislativeamendment, institutional reforms and other actions. The general thrust of the strategyoutlined herein is broadly accepted by GOPNGas co-participant in the review. However, GOPNGclearly needs an opportunity to review the propoaals in more detail and to decide on the precise set of actions to be taken and on the appropriatesequencing. The first and most importantstep will thereforebe for GOPNG to prepare a policy statement in response to this report which could serve as the basis for all future action and as a useful input into the proposedmeeting of donors.

7.4 It is suggestedthat the policy statementshould, as a minimumt

(a) set out GOPNG's policy on sustainedyield, which can be defined on tti basis of existing knowledge;

(b) serve as the vehicle for a possible World Heritage Declaration;

(d) outline the main componentsof GOPNG's proposed Action Plan, consistentwith its own medium-termdevelopment program. - 78 -

New Legislation 7.5 The report has stressed the urgency to finalize the drafting and passage of an effectivenew ForestryAct. GOPNG has now sufficientmaterial, includingthe 1988 Minister's Drafting Instructionsand the proposed amendmentsannexed to this report, to move ahead quickly. Speedy enactment would establishthe new structurerequired for the forestry sector, and will set a firm basis for subsequentdetailed policy developmentwithin the various Standing Committees of the Board.

7.6 GOPNG may require the servicesof an experiencedforest policy and legislationexpert for about two months to complete this task. This would be a minor technicalassistance item (about $35,000) and should be readily availablewithin existing cooperationagreements.

Resources and SustalnableYield

7.7 As discussed earlier in this report, use of a volume based sustuinableyield targst is problematic,if retentionof a certain proportion of natural forest cover is an objective. This report has argued that retentionof a significantproportion of existing forest cover is probably the best option, economically,environmentally and for cultural and sociological reasons as well, for PNG at present.

7.8 An urgent requirementis to estimate the volume, yield and type characteristicsof the PNG natural resource,and to assess the social and economic impacts of mobilizing the resource. No matter what forest utilizationpolicy is followed,better informationon the nature, commercial accessibilityand yield capabilitiesof the resourcewill be essentialto long term planning.

7.9 The work plan under this heading would be divided into two phases: The first would be a rapid appraisalof resources, sufficientto allow a reaconableestimate of forest type distribution,growth and yield in the natural forests, and to define workable mechanisms to adequately compensate and involve landholders. The second would be a complete definition and re- inventoryof the accessiblenatural forest resource.

(i) Rapid Resource Avpraisal

7.10 A reasonableestimate of current resourcesand rates of deforestation should be possible to produce in 12 months. The task would involve:

(a) reconciliationand coordinationof differing resource databasesand interpretationsin the Policy Planning Division and the Resources/ InvestmentDivision of the present Departmentof Forests;

(b) use of PNGRIS (and possibly remote sensingupdating) to obtain basic forest type maps, estimatesof deforestationrates, etc.;

(c) use of FRI resourcesto establishpermanent sample plots in areas logged at various times in the past, to estimate regrowth,yield and species distributionafter logging. Au*aeatationof these data with logging records where available; - 79 -

(d) use of demographicand sociologicaldata, and field studies, to establishworkable mechanismsfor involvinglandowners in resource use.

7.11 A project proposal (ProjectI) is given for this project in Annex 10.

(ii) Inventors

7.12 A four to five year program nf activitywould be required to carry out an inventory of the commerciallyaccessible forest resource. This would entail:

(a) forest resourcemapping (aerialphotography; stratification; interpretation,cartography);

(b) inventory (national,resource and managementinventories; development of growth, yield, managementmodels); and

7.13 This program of activitieswould logicallycommence after sufficient data from the rapid resource appraisalbecome availableto allow baseline mapping and stratificationto occur. A complete re-inventoryas outlined above would cost in the order of K 4-5 million: see Project 2, Annex 10.

Conservation and Land Use

7.14 As noced in paras. 5.7 to 5.9 of this report, many of the specific environmentalproblems which have ai-isenin loggingprojects in PNG will be better managed uader the altered legislationand structuresuggested in this Action Program. Similarly,some of the critical land use and land tenure issues are addressed in those major revisions. However, conservationand. land use are cross-sectoralsubjects: forest policy and managementcan be seen as part of the solution of major problems in these areas, but other things also need to be done. Six subcomponentsare suggestedfor the action programs

(i) A World Heritage Proposal

7.15 In Chapter V of this report, the concept of a compositeWold Heritage/sustainedyield proposalwas discussed,and the potential cost to revenuewas estimated at between K 10 million and K 20 million per annum. This estimate could change, if the rapid resource appraisalproduces a sustainedyield figure differentfrom that estimatedin this report. However, it is likely that some cost would be involved,if GOPNG were to commit itself to a sustainablerate of exploitation.

7.16 The proposal, therefore,would be for GOPNG to commit itself to a sustainablerate of exploitation. In return,major donors could agree to underwriterevenue losses caused by adjustmentto sustainedyield output, to a limit of, say, US$15 million p.a., for a period of five years, at which point significantmineral revenues should obviate the necessity for such revenue support. The loss of revenuewould be assessed on the basis of the difference - 80 -

between calculatedsustainable output, and the planned figure of 6 million m3tannum given in the National ForestryDevelopment Plan. The preparationof a compositeproposal would involve considerableliaison with landownergroups and provincialgovernments. Some external input to assist with preparationof a proposal may be required.

7.17 However. it might be possible to draw up an agreementwith donors in advance of a specific estimate of sustainableyield, so long as GOPNG and donors agree to the limits of support to be provided in advance.

A maximum US$15 million p.a. for a maximum of five years: US$75,000,000

(ii) National ConservationStrategy

7.18 The main input requiredat this point for developmentof a national conservationstrategy would be a conferenceto bring together relevant interestsgroups to consider designationof sites, and environmental monitoringand control. No formal budget for this has been considered. A contract figure of K 150,000 should be sufficientto cnver the preliminary research and to meet the costs of the conference: see Project 3, Annex 10.

(iii) Rehabilitationof Existing Parks

7.19 Major rehabilitationwork in existing parks is necessary. However, not all areas were seen by the TFAP Mission, and no estimate can be given at this point of what the full extent of rehabilitationmay be, or what such work may cost: see Project 4, Annex 10.

(iv) LandownersExtension Training in Land Use Management

7.20 A draft outline for a program to train local area leaders in raising awareness of land use managementissues in PNG was provided to the TFAP Mission by an officer of the Prime Minister'sDepartment. This outline proposes campsite training for leaders in the issues involved,and then use of these people as discussionleaders in wider village programs of educationand extension. It suggests appointmentof two external advisers--anduse of NGOs both to promote the program and participatein itt see Project 5, Annex 10.

(v) Improved EcologicalSurvey and Monitoring

7.21 A monitoringprogram, to be effectivein PNG, will need to achieve the following:

(a) establish a comprehensiveecological data base, compatiblewith existing UNEP/UPNG and Departmentof Environmentsystems;

(b) develop a regionalpriority system for data collectionand monitoring;

7.12 At this atage, only a basic estimate of the cost of such a program (additionalto what is done now in PNG) has been mades see Project 6, Annex 10.

(vi) Suiport of NGOs/PilotPr-iects

7.23 Three NGO activities could form a basis for engaging forestry and conservationoriented NGOs in the task for which they are best suited: forming a bridge between the interests,aspirations and skills of local communal groups, and the field operationsof governmentsand industry:

(a) The Wau Ecology Institute Is effective in its local area in environmentalextension work, and in specific agroforestryand other experiments. The Institute seeks funding and has presented a program to expand its operationsover the next three years, through appointmentand overseas training of a botanist, an environmentalist and a zoologist: see Project 7, Annex 10.

(b) The National Youth Movement is already engaged in forestrywork, and could be utilized to work on other environmentalwork, given some additionalfunding. No specificproject or budget proposal has been prepared at this stage, although provision for such a project has been made in the Action Program: see Project 8, Annex 10.

(c) The Gau Land Groul representssome 20,000 Adzera people in the upper Markham Valley. As a result of some adverse environmentalchanges in their area, the Group has proposed an agroforestryproject--largely based on fruit trees--to restore and reclaim land. Funding is required for a 54 month program to allow this project to proceed: see Project 9, Annex 10.

Cvii) A Land Use Research Council

7.24 As discussedunder Part D of Chapter V of this -eview, there is a prima facie case for establishmentof a land use planning council. A project to investigatethe possibilityof such a body is suggestedand would cost in the vicinity of US$60,000, but no project outline is available at this stage.

Institutional and Human Resource Development

7.25 Ultimately,whether or not PNG succeeds in reaping the maximum benefits from its forests,while maintainingthe resource for future generations, will depend upon how fast the country can build up its capacity to manage the resource. The TFAP community stands ready to help PNG in this huge task, but any external assistancecan only supplement,and not substitutefor, indigenouscommitment and capacity.

7.26 This review has concludedthat the present capacity in PNG is quite inadequateto provide even minimum supervisionof present forest exploitation, let alone tackle the many complex tesks that lie ahead. There is little -oom to doubt, therefore,that the most importantsingle challenge facing the sector is to strengthenits mafnagementcapacity. This report has propo.ed the general outline of a structurewhich, in tne longer term, could enable PNG to - 82 -

manage its forest resourcereffectively. The Action Programwill have to implementthese proposalsby (a) firming up and implementingthe new organizationalstructure; and (b) institutinga major, long-termprogram for human resource development. These two tasks are clearly interrelated,since the capacity to staff the new organizationalstructure will depend upon progress made in human resourcedevelopment.

(i) OrganizationalRestructuring

7.27 The first task will be to design and implementthe proposed structure of national and regional boards and their standing conmmittees and to define the structure and functionsof the new Forest Service. It is obvious that a great deal more thoughtneeds to be given to t!..design and implementationof the new Service, especiallyto its staffingneeds and the relationshipbetween the proposed national line management,the regionalboards and the provincial authorities. Another special requirementwill be to draw up terms of reference for the operation of the State PurchasingOption so as to ensure its financialviability and independence. It is likely that a short term consultant will be required to assist in the detaiileddesign and eat:-yimplementation of the proposed new structure.

(ii) Human Resource Develo2mentProaram

7.28 The effectivenessof the proposed new structurewill depend critic- ally on the capacity to staff it adequatelywith qualifiedstaff. As a basic guideline, the report suggeststhat an effective restructuringof the forestry sector in PNG will probably require the addition of at least 100 diplomates from the Bulolo Collage and 50 graduatesfrom the Department of Forestry at UNITECH. Yet the present Forestry Departmentand provincial divisionsare already seriouslyunderstaffed and underfunded,smd it is unrealisticto expect that the new Forest Service could quickly recruit or effectivelyabsorb anything like these numbers.

7.29 Once the structureof the new organizationhas Deen agreed, therefore, it will be necessary to undertake a major HRD program. The first stEp will be to assess the human resourcebalready available in PNG, to assess the capacity to upgrade skills through in-servicetraining, and to review the capacity of local training institutionsto pruvids both Government and private employerswith the trained staff they need. The second step would be to draw up a medium term HID program, comprisinga phased staffing plan, an indicative training program (both local and overseas) for national staff, and a complementary strategy for seeking expatriatestaff through technicalassistance to fill posts for which qualifiednational staff will not be available. A suggestedproject outline is given as Project 10, Annex 10.

7.30 This is a major task for which PNG may wish to seek external assistance. An importantobjective would be to create the capacitywithin the Forestry Department to undertake its own staff developmentplanning and coordination of technicalassistance on an ongoing basis. - 83 -

Short-Tern Institutional Support Measures

7.31 While the importance of strengthening, PNG's indigenous management capacity has been stressed,it should also be recognized that such Institu- tional developmentis a long term process, that has inevitably to be geered to the developmentof human resourcesir the country as a whole. For this reason, although it is urgent to make an early start, it is unrealisticto expect PNG to have an effective indigenousmanagement capacity in place before the end of the century. In the meantime, there is an urgent need to supplement the present limited capacity,through whatever means work, while the long-termHRD program outlined above is implemented. PNG simply cannot afford to neglect the management of its forests any longer. And the world conmunity has a very obvious interest in joiningwith the Government of PNG to help conserve both the forest resource and the biologicaldiversity it supports.

7.32 The only feasible short term solution is to mount a major cocperative effort between GOPNG and donor agencies, so that sufficientexpertise, field resourcesand equipmentcan be quicklymobilized and effecti'elydeployed. The report therefore suggests ad hoc mechanisms.that could be supportedwith external assistance,to help strengthenmanagement capacity in three crucial areas, pending the developmentof an effective long-termcapacity in the new Forest Service. The three areas are forest management,supervision of logging and marketing. A fourth need--to provide general planning and coordination support to GOPNG to help it prepare and implementthe whole Action Program--is discussed in the final section.

si) Forest Management Task Force

7.33 This group wou'd be responsiblefor

- assistingwith the preparationof Forest Management Plans for each operationalarea, r. specifiedunder the new Act;

- determiningand supervisingsilvicultural and regenerationwork necessary, and liaisingwith the research instituteon this matter;

- in cooperationwith the Monitoring Task Force, monitoring logging operations to ensure that environmentalstandards and silvicultural/ regenerationtreatments a.i offered;

- in service training of nationals in management;and

- undertakinga study of the system of concessionmanagement and logging contract design in PNG, with a view to determiningwhether more economicallyefficient means of selling the resource can be designed.

(ii) Task Force to Monitor Leine#

7.34 This group would be responsiblefor:

- design and implementationof appropriategrading, scaling and utilization standards; - 84 -

- supervisionof loggingplans and operationsespecially road, tra'l and log Jump layouts;

- implementationof appropriatechecking and tallying procedures In log yards and during ship loading procedures;and

- in service trainin3 of nationals in harvesting design and monitoring.

7.35 Each of these task forces should comprise 1-2 externally recruited experts, supportedby 2-3 professionalcounterparts from within the restructured Forest Service. Fundingwill be needed for vehicles and equipment to allow GOPRG to effectivelysupervise the large number of logging operations concerned; for training of 20 additionalfor2stry students per year to restc-e GOPNG field capacity, and for specialpurpose research projects through FRI.

7.36 An initial estimate of the external inrits required to fund a project to establishthese task forces is given in Project 11, Annex 10.

(iii) State Purchasing Option

7.37 For reasons outlined in paras. 4.48 to 4.52, it is proposed to build on, and further strengthen,the functioningof the State Purchasing Option system through:

(a) advisory support to be given to the Standing Committee on Marketing and Economics (SCME) to be set up as part of the reorganizedForest Service:

(b) greater degree of commercialorientation, under overall supervision by SCME, given to the SPO marketing arm.

7.38 The advisory support, to last for a minimum of 12 months but in any case not to be shorter than the time required to operationalizethe reorganized SPO, will aim at giving SCMEthe initial sound technical foundations in relevant areas of the legislativeproposal. Services of a suitably qualified foreign marketing expert or firm will be required.

7.39 The strengtheningof the SPO arm will comprise: (i) removing it from the day-to-dayoperations of FD to attune it better to market practices; (ii) funding end equipment supportwhich would allow it to gather, interpret, and more efficientlyrespond to market data; and (iii) initial contractingout of the SPO marketing operationsto an experiencedoutside (and probably foreign) firm under a formula linking the firm's fee to the degree of its measurable success in increasing log export pr5ces above those obtained by individualmembers of the industry;and (iv) a training program associating, in a well definedway, local staff with that of the marketing contractor.

7.40 A time schedule and a suitable structureof renewal and cancellation clauseswill be agreed for the initial duration of the marketing contract and subsequenttransfer of SPO marketing responsibilitiesto local staff. It is envisaged that the duration of the initial contractwill be approximatelytwo years. The contractorwill be sought from independentfirms with demonstrated - 85 -

internationa1 experience in log trade. The suitabilityof potential contractorswill be evaluated by SCME and the donor agency. A project proposal (Project12) is given in Annex 10.

7.41 The budget assumes that salaries and other marketing expenses of the contractwould be financed directly from the proceeds of log exports under the agreed profit-sharingformula.

Further Studies

(i) Revenue Policies

7.42 In SectionA of Chapter IV, potential or existing flaws in the revenue system were discussed. A systematicreview of the forest revenue system is in order. This will allow the implicationsof new arrangements proposed in the annexed Drafting Instructionsto be explored and will also ensure that no consistent undervaluationof the resource (with the obvious conseq.-ncesfor revenue and for deforestation)persist in future.

7.43 While the report has proposed that the action program should focus on the most urgent tasks, a number of importantstudies that need not be done immediatelyare worthy of mcntion:

7.44 At this stage, no project proposal has been prepared for this input.

(ii) Forest Industry DevelopmentStudies

7.45 This report has argued that:

(a) log export bans may not (and probablywill not) encourage the type of efficientprocessing sector GOPNG wishes to locate;

(b) plantation decisionsmust be made on economic grounds, rather than on the basis of physical targets. One such economic criterion (frequent.yoverlooked or de-emphasizedin evaluation of plantation investments)is the viability of the project in terms of provisionof a raw material which can be used profitably;this may involve a domestic processing facility.

7.46 At this point, three major feasibilitystudies should be carried out prior to any major decisionson log export bans, or on major plantatior locations:

(a) an efficiency-scaledintegrated sawmill/manufactured board plant to be located on a site which minimizes internal freight costs and raw material variabilityproblems;

(b) a chipping operationto be based on plantation resources (probablyin East New Britain);

7.47 The basic purpose of the first studywould be to realistically evaluate the potential for investmentsof the type which, presumably,GOPNG hopes to encourage through a log export ban.

7.48 The purpose of the second and third studieswould be to determinethe viability of projects which, by their nature, would absorb a large portion of the investablecapital, and achieve a large part of the value added objectives of GOPNG for the forestry sector.

7.49 On.lyan overall estimate of the cost of such studies has been made at this stage. Such studieswould need to be funded by donor agencies,and should be awarded on a contract basis to .rivatefirms skilled in such evaluations. A contract price of K 150,'JOOfor each study is suggested (see Project 13, Annex 10).

(iii) Research and Trainina

7.50 Some additional training of forestersand specialpurpose research is already foreseen under the Management and Monitoring Task Force proposed above. The forestry training facilitiesat Bulolo and Lae and the research instituteare well equipped and of sufficientphysical capacity to train the forestersand field staff PNG and carry out the research required. Some assistancemay be needed at Bulolo in the area of curriculum developmentand staff training,but, this would require further examination.

7.51 In the research area, this report has identifiedsome priority subjects (see para. 6.49). It is difficultat this early stage to determine what further assistancewill be needed at the Forest Research Institute, beyond that being provided by the Japanese assistanceagency in the form of contract research staff, and by FAO in any extensionof its current management research project there.

7.52 Specific assistance for the tree guide (see para. 6.49(h) should be considered.

B. Imlementing the Action Program

7.53 Even though the TYAP review has tried to limit the Action Program to only essential items, it still constitutesa very challengingset of policy and structuralchanges. The decision to proceedwith these, and the difficult task of detailed preparationard implementation,will be largely the responsibilityof GOPNG and, in particular,the Forests Department. Since the capacity to manage this process of change in PNG is limited, a well-designed strategy for implementingthe Programwill be necessary. Three elements of a strategy for doing this are proposed belows (a) the establishmentof a special mechanismwithin GOPNG; (b) external assistance to help manage the process; and (c) a careful phasing of implementation.

Interim Management Structure

7.54 Ultimately the proposed new structurewill provide the capacity required to manage the sector. In the meantime, until such structureis fully operational,the Action Program (includingthe settingup of the new - 87 -

structure)will have to be planned and implementedby the existing agencies, notably the Department of Forests. To help manage the process of change, it is suggestedthat a two-tieredmechanism be adopted as an interim solutions

(a) A high level steering committeeto perform some of the intended Ministerialadvisory functionsof the Board, and to liaise on policy matters with the task force which has been set up within GOPNG to advise the Prime Minister on implementationof the recommendationsof the TFAP and the findings from the Barnett Commission of Inquiry. This Committeewould be composed of the Secretary and selectedFirst Assistant Secretariesfrom the Department of Forests, and co-opted officers from other areas of GOPNG as necessary. A priority task for the committeewould be to identifypossible appointees for the Board and Standing Committees. Anotherwould be to liaise extensivelywith provincial governmentson the matter of settingup the regionalBoard structure.

(b) A small planning group or task force within the Departmentof Forests, which would be composed of senior department officials,and which would be chargedwith the principal responsibilityfor preparing and overseeingthe implementationof the Action Program. under the authorityof the steering committee. It will be particularly important during this planning process that the activities proposed for implementation be coordinated with the external inputs proposed for the sector. A small task force, comprising the head of the planning group, a representativeof the coordinatingdonor agency, and a representativefrom the Department of Finance and Planning,may be reLcuiredto achieve tnis.

External Assistance--theCase for a 'Twin 7.55 It is suggestedthat GOPNG should seek external assistancefor a small, expert team of planners to work with the proposed planning group in the Department of Forests in preparing the Action Program. The team might consist of a program coordinator,a forest economistand a forest institutions specialist and should be recruitedas soon as possible. This should not be seen as a short term consultancy,because the process of institutional restructuringand policy reform will take time. It is suggestedthat the team should be recruitedfor a minimum of two years, with a possible extension for some or all of the team to a maximum of three years.

7.56 However, as indicatedearlier, the task of strengtheningthe management of the PNG fores. sector will be a long process, involvinga continuing evolutionof policies and organizationalstructure, improvement of operationalp :oceduresand human resource development,and there would be a strong argument for establishinga "twinning'arrangement with a suitable external technical agency,which could maintain continuityof support to GOPNG in managing this process over au extended period of time.

7.57 This kind of arrangementhas worked well in other countrieswhen the right choice of agency was made. In the case of PNG, the best option might be to seek a twinning arrangementwith a mature overseas forestry departmentthrt has experience in tropical forestry. Ideally, the "twin' would provide all of the following services,with funding from one or more donor agencies: - 88 -

(a) provision of the planning support team proposed in para. 7.55;

(b) provision of short term consultanciesin specializedareas as required;

(c) continuingadvice and assistancein policy review, institutional changes, program design, and sector management problems through periodic consultations;and

(d) assistancewith trainingof PNG nati'rnals,both in PNG and in the twin agency.

7.58 The primary relationshipbetween the Porest Service and a suitable twin would not be intended to preclude other sources of technicalassistance; on the contrary, the continuityof advice available to GOPNG through this mechanism could only facilitatethe identificationand effectiveuse of external assistancemore generally. A project proposal (Project14) is given in Annex 10.

Phasing of Implementation

7.59 It is difficult to set prioritieswithin the Action Program, since all the actions proposed have a high priority. However, it is possible to suggest a phased implementationprogram, which assesses how much GOPNG might be reasonablyexpected to accomplish in implementingthe program, before and after it zeceives external assistance. For simpliklty,the program is divided into three phases, but of course a more sophisticatedschedule of implementation will be required once detailed planning is undertakenby GOPNG.

Phase I - to be implementedbefore the end of 1989:

(a) set up steering committeeand planning groups in the Departmentof Forests as an interim structure;

(b) issue a policy statementin response to the TFAP report; and

(i) for a planning supportteam in the Department of Forests, if possible as part of a long-termtwinning agreement;and

(ii) if necessary, for the final drafting of the new Forests Act.

Phase II - to be implementedbefore the end of 1990:

(a) enact the new Forests Act;

(b) set up the new institutionalstructure;

(c) mobilize short term institutionalsupport for the forest management and logging task forces and for the State PurchasingOption;

(d) undertake rapid resource appraisal;and - 89 -

(e) launch review of human resource developmentneeds.

Phase III - to be completedbefore the end of 1991s

(a) commence forest inventory;

(b) undertake review of revenue policy (which GOPNGhas indicated it would like to undertake earlier);

C. Implicationsfor Donors

7.60 As indicatedthroughout this report, GOPNG will need substantialand prolonged assistance from the donor community,in both financialterms and more importantlytechnical assistance. The report has also stressed that the Action Program outlined in the report offers the donor communitya challenging opportunityto be associatedwith and supportthe conservationof PNG's unique environmentand biologicaldiversity. The next step will be to hold a donors' meeting, which GOPNG hWs agreed to host in PNG in early 1990.

7.61 The report has identifieda wide range of assistance that will be needed, and in some cases has suggestedthe scale of inputs and the likely magnitude of cost. It is expected that GOPNG will present a formal set of project proposalsat the donors'meeting. In the meantime, there are three unusual features of the external assistanceneeded to support the Action Program that warrant immediate attention:

(a) Sup-ort for a World Heritage/SustainableYield Declaration. Donor support for such a declarationwould be a pathbreakinginitiative in the environmentalfield, and would call for new mechanisms for donor coordination. One major advantage of this proposalwould be that it might mobilize support from bilateraldonors and environmentalNGC that are not now actively engaged in PNG.

(b) A Twinning Arrangementfor institutionalSup-ort. The proposal to find a twin agency to provide GOPNG with technical support over an extended period of time would require a bilateralaid agency to make a long term commitmentto the PNG forestry sector,but with the prospect of making a major impact on its performanceand on the sustainabledevelopment of the economy as a whole.

(c) Donor Coordination. Excellentcooperation was achieved among Government and TFAP members in conductingthe review. It would clearly be desirableto continue this level of cooperationin the future as GOPNG looks to the donor communityto help in further elaboratingand implementingthe Action P:ogram. GOPNG has requested the World Bank to act as "lead' agency in the forestry sector, not only in mounting the TFAP review, but also thereafter in helping to coordinatedonor inputs in support of the Action Program. The Bank has indicated that it is prepared to undertake this role. ANNEX 1 Table 1

INTERNATIONAL AND COASTAL FREIGHT RATES FOR PNG

OVERSEAS FREIGHT RATES

EX MAJOR PNG PORTS

Destination Rate (US$) Coments

USA (West Coast) 3,OOO/Container Container rates 125/m3 (Break Bulk) negotiable to both East and West coasts.

EUROPE 1,650/Container

HONG KONG 1,OOO/Container & SINGAPORE 55/m3 (Break Bulk)

NEW ZEALAND 701m3 (Break Bulk) 975/Container Minimum Rate

BRISBANE, SYDNEY 1,100/Container } MELBOURNE Add USD3.55/m3 for quarantine, CAIRNS 850/Container } inspection, etc....

TAIWAN (Keelung) 950/Container Shipped via Hong Kong

JAPAN & 1,000/Container KOREA 80.65/m3 (Break Bulk)

Notes - General rates based on 20 ton (FCL) container - Rates equal the basic minimum charge for shipment for leais than 500 m3 by one shipper. - Add wharfage and handling costs at US$1l0m3 (timber stowed). - For shipment of 500 m3 or more revert to 'open' rates which are negotiable. -91 - I Table 2

PNG COASTAL FREIGHT 4TES

(Area) Nearest Major Freight Cost (by Province) Port CUS$/m3 )

Gulf & Weste-n Port Moresby 50

Milne Bay Port Moresby 52

Northern Port Moreaby 35 Lae 31 Rabaul 44 Madang 40

Kiata la (North Solomons) All Ports 54

Madang Lae 31

Xime (West New Britain) Rabaul 36

Vanimo (West Sepik) Lae 38

Rabaul Lae 40

La Denotes negotiated flat rate.

As an example, if a sawmill situated in the Western Province of PNG wishes to export sawn timber to Australia, the freight cost to Brisbane, Sydney, or Melbourne will be in the vicinity of US$143.55/m3 . This figure pqr cubic metre is made up as followst

Freight cost to Port Moresby US$50.00 Handling and loading into container US$10.00 Wharfage and container handling charges US$10.00 Freight costs ex Port Moresby US$65.00 Quarantine, inspection & handling fee I destination US$3.55 Fumigationcosts US$5.00 - 92 - ANNEX 2

MAJOR TIMBER SPECIESEXPORTED FROM PNG - 1988

Average volume For Price Trade Name BotanicalName (1) (US$ m3

TAUN PONETIA 21.24 95.50 KALOPILUM CALOPHYLLUM 6.57 97.00 MALAS HOMALIUM 6.21 56.00 TERmINALIA TERMIRALIA 5.08 82.00 PENCIL CEDAR PALAQUIUM 4.20 1Z4.50 SIMPOL DILLENIA 3.74 58.00 KwILA INTSIA 3.50 154.50 )MIRSAWA ANISCPTERA 3.42 97.50 RED CANARIUH CANARIUK 3.09 67.00 ERIMA OCTOMELES 2.98 58.00 AMBEROI PTEROCY14BIUM 2.89 56.,00 LIGHT CELTIS CELTIS 2.86 5'.00 WATERGUM SYZYGrwU 2.17 .59.00 BASSWOOD ENDOSPERMUM 2.02 69.00 KAMARERE EUCALYPTUS 1.66 63.00 NYATHOK BURCKELLA 1.55 78.50 WALNUT DRACONTOMELON 1.52 94.00 RED PLANCHONELLA PLANCHONELLA 1.34 121.00 HIXED RED ---- 1.24 50.00 PINK SATINWOOD BUCHNAkNIA 1.05 57.00

Source: Forest IndustriesCouncil of PNG.

Note: Total Volume Exported in 1988 vas approximately1.16 million m3. - 93 - AtNL8 3 Page 2.

LOG EXPORTDATA: PNG AMD MAJOR S.E. ASIAN SUPPLIERS

Table 1: MARKETING PNG FOREST PkODUCE LOG EQUIVALENT 1,000 M3

Export Domestic Harvested Ply/ Years Log LUL. sr Ven Chip Other Total Total Total

1951-55 28.8 79.3 41.0 - - 149.1 325.2 474.3 1956-60 17.5 143.7 120.0 - - 281.2 368.5 649.7 1961-65 185.6 171.7 97.8 - - 455.1 692.1 1,147.2 1966-70 982.4 250.3 131.0 - - 1,363.7 1,078.2 2,441.9 1971-75 2,242.7 562.0 155.6 264.3 1.3 3,225.9 1,047.0 4,272.9 1976-80 2,411.3 819.7 92.6 872.8 28.5 4,224.9 772.3 4,997.2 1981-85 5,267.5 325.7 52.6 826.1 10.0 6,481.9 1,256.5 7,738.4 *86-88 4,096.6 44.3 0.4 298.8 0.9 4,441.0 1,286.0 5,727.0

Assume CF 100Z 302 502 1001 1001 NA NA NA

Source: Compedium of Statistics1985; Timber Digests 1986-88

Table 2: PMG LOG EXPORT VOLUMES,VALUES, PRICE

Years Volume Value Period (1,000 m3) (K 1,000) Average Minimum Maximum

1951-55 28.8 582.6 20.22 11.04 29.17 1956-60 17.5 329.2 18.81 20.58 26.47 1961-65 185.6 2,977.1 16.04 13.88 20.38 1966-70 982.4 11,903.4 12.12 11.41 12.75 1971-75 2,242.7 35,765.1 15.95 10.79 19.07 1976-80 2,4-.. 3 83,627.9 34.68 20.35 48.59 1981-85 5,267.5 253,547.8 48.13 42.09 54.73 1986-88 4,096.6 266,909.4 65.15 53.47 68.02

Source: Compendiumof Statistics1986. - 94 - ATE2X 3 Page 2

Table 3. PRO LOG EXPORT VOLUMES/PRICES ANUMALIMONTHLY ANALYSIS (1980-88)

Volume Price Total Maximum Minimum Ave. Minimum Maximum Year 1,000 m 3 1,000 m3 Mth 1,000 m 3 Mth K/m3 KRm3 Mth K/m3 Mth

1980 641.9 75.6 July 44.8 Aug 49 58 Apr 39 Dec 1981 749.0 84.7 Nov 34.1 Sept 42 46 Apr 40 Aug 1982 1,063.0 134.9 Dec 58.1 Apr 47 50 Oct 42 Jan 1983 1,019.2 122.0 Oct 51.0 Feb 43 48 Jan 40 July 1984 1,283.9 134.7 Dec 87.9 Oct 55 66 July 45 Jan 1985 1,158.3 12".8 Sept 72.7 Feb 50 58 Feb 41 Oct 1986 1,313.8 160.9 Nov 85.1 Apr 54 62 Dec 51 Jan 1987 1,442.2 158.6 Oct 78.2 Apr 73 90 Nov 59 June 1988 1,340.6 145.6 Oct 64.5 Aug 68 74 Jan 65 Oct

Sources: FIC Newsletters, Compendia of Statistics, Dept. of Forests.

Table 4s LOG EXPORT VOLUMES BY PROVINCE

1986 1987 1988 Province 1,000 m 3 1,000 m3 1,000 m3

U. New Britain 344.5 26.2 298.0 20.7 245.5 18.5 E. New Britain 199.5 15.2 187.9 13.0 160.2 12.1 N. Ireland 281.9 21.5 296.9 20.5 344.3 25.9 N. Solomons 117.5 8.9 .09.0 7.6 915.4 7.2 Subtotal 943.4 71.8 891.8 61.8 845.4 63.7

Northern 44.4 3.4 85.4 5.9 54.5 4.1 Mline Bay 83.8 6.3 90.2 6.3 84.7 6.4 W. Sepik 96.8 7.4 120.1 8.3 107.9 8.1 Central 16.1 1.2 65.2 4.5 55.5 4.2 Hadang 13.1 1.0 63.0 4.4 20.6 1.5 Gulf 27.7 2.1 2.6 0.2 - - Morobe 2.0 0.2 2.7 0.2 42.7 3.2 Western 86.4 6.6 121.2 8.4 116.4 8.8

Source Timber Digests 1986-88, Department of Forests. - 95 - ANNEX J Page 3

Table 5: PNG LOG EXPORT MARKET DESTINATIONS Volumes (1,000 m3)

Jaan S. Korea Taiwan Other Total Year Vol 2 Vol Z Vol 2 Vol 2 Vol Z

1978 345.9 77.7 76.7 17.2 18.8 4.2 3.7 0.9 445.1 100.0 1979 336.0 71.1 97.4 20.6 34.1 7.2 5.0 1.1 472.5 100.0 1985 695.5 60.1 420.0 36.3 37.9 3.3 3.9 0.3 1,158.3 100.0 1986 732.7 55.8 488.2 37.2 42.8 3.3 50.1 3.7 1,313.8 100.0 1987 866.6 60.1 476.5 33.0 47.9 3.3 51.2 3.6 1,442.2 100.0 1988 819.2 61.2 410.6 30.7 36.6 2.7 73.0 5.4 1,339.4 100.0

Sourcess Compedia of Statistic 1978, 79 & 86, Timber Digest 1986-88, Department of Forests.

Table :s SSL La IMPORTS TO JAPAN Volumes (1,000 m3)

Year Period PPines Malaysia Indonesia Solomons PNG Other Total 19.. Vol S Vol S Vol S Vol Vol IVol 2 Vol 2

66-70 36,376 47 28,445 37 10,544 14 664 1 629 1 247 - 76,896 100 71-75 23,472 21 35,916 33 47,140 43 1,092 1 2,104 2 591 - 110,315 100 76-80 7,089 7 49,624 47 46,323 44 1,048 1 1,866 1 7 - 105,957 100 81-85 4,945 7 50,358 72 10,368 15 1,450 2 2,843 4 110 - 70,074 100 86-88 334 1 33,757 90 - - 632 2 2,543 7 49 - 37,315 100

La 'SSL' is South Seas Logs: the term used in Japan to describe SE Asia end the Pacific region.

Source: Japan Lumber Journal, April 1989. - 96 - ANNEX 3 Page 4

Table 7s SABAH, SARAWAK LOG EXPORT DESTINATIONS,1987-88 (1,000 m3)

Sabah Saravak 1987 1988 1987 1988 Destination Vol X Vol X Vol 2 Vol S

Japan 7,109 70.1 5,549 67.3 5,941 45.9 5,570 45.3 Korea 1,427 14.1 1,229 14.9 1,954 15.1 1,953 15.9 Taiwan 716 7.1 503 6.1 3,046 23.5 3,087 25.1 Hong Kong 101 1.0 126 1.5 477 3.7 482 3.9 China 266 2.6 223 2.7 549 4.2 438 3.6 India/Pak 504 5.0 507 6.2 506 3.9 560 4.5 Others 12 0.1 111 1.3 480 3.7 204 1.7

Total 10,135 100.0 8,248 100.0 12,953 100.0 12,294 100.0

Table 8: PHILIPPINESSHIPPER, FOB PRICES, 1982-86 (US$lm3)

Suver High Quality Logs High Quality Logs Year Ave. Max. Min. Ave. Max. Min.

1982 152 170 120 139 160 105 1983 128 ~ 43 116 111 125 99 1984 149 183 130 122 161 98 1984 134 145 125 98 108 90 *1986 124 130 115 102 107 95

* Jan. - Aug. 1986

Sources: Japan Lumber Journals. - 97 - ANNEX 3 Page 5 Table 9t SABAH SHIPPER (FOB) PRICES, 1982-89 (US$/m3)

Hgh Quality Standard Qualitv Low Quality Year Ave. Max. Min. Ave. Max. Min. Ave. Max. Min.

1982 111 127 96 104 112 93 99 105 89 1983 101 118 89 Si 115 85 91 106 80 1984 118 145 98 116 143 95 104 135 82 1985 94 108 84 90 103 82 79 96 68 1986 112 161 95 103 143 91 95 130 85 1987 184 245 135 158 220 113 113 150 82 1088 159 175 135 155 115 110 130 90 *1989 160 170 150 140 150 130 108 120 100

* Jan. - March 1989

Source: Japan Lumber Journals.

Table 10: SARAWAK SHIPPER (FOB) PRICES, 1982-89 (US$1m3)

High Quality Lozs StandardQuality Logs Year Ave. Max. Min. Ave. Max. Min.

1982 103 113 89 99 106 83 1983 90 108 80 86 105 75 1984 103 133 81 100 130 78 1985 76 95 70 74 92 67 1986 91 125 81 88 120 79 1987 136 180 103 130 170 101 1988 123 140 105 119 135 100 *1989 126 130 122 120 125 115

* Jan. - March 1989.

Source: Japan Lumber Journals. - 98 - ANNEX 3 Page 6

Table 11: INDONESIANSHIPPER (FOB) PRICES, 1982-84 (US$1m3)

Super Quality Brand Quality Brand Low Quality Brand Year Ave. Max. Min. Wve. Max. Min. Ave. Max. Min.

1982 117 125 104 109 120 99 104 110 94 1983 105 120 89 100 115 84 94 110 79 1984 124 155 105 121 152 102 118 150 100

Source: Japan Lumber Journals.

Table 12: PNG SHIPPER (FOB) PRICES, 1985-89 (US$1m3)

High Quality StandardQuality Low QualitZ Year Ave. Max. Min. Ave. Max. Min. Ave. Max Kin.

1985 54 64 40 45 57 36 43 53 32 1986 62 88 55 57 85 48 49 71 40 1987 92 120 75 81 110 65 60 90 30 1988 88 95 77 78 85 68 51 60 44 1989 88 90 85 78 80 75 51 55 46

Sources Japan Lumber Journals. _ 99 - ANNEX 3 Page 7

Table 13: CHANGES IN FOB PRICES - PNG, SARAWAK AND SABAH 1985 - 89 (USSrm3)

Sabah Sarawak PNG Year SQB QB LQB HQ STQ HQ STQ LQ USS 2US$ x US$ z USS 1 US$ S US$ z US$ x USX x

1985 94 90 79 76 74 54 45 27 43 1986 112 19 102 13 95 20 91 20 88 19 62 15 57 27 49 14 1987 184 96 158 76 113 43 136 79 130 76 92 70 81 80 60 40 1988 159 69 137 52 110 39 123 62 119 61 88 63 78 73 51 19 1989 160 70 140 56 108 37 126 66 120 52 88 63 78 73 51 19

Source: Japan Lumber Journals, Jan. 1985 - Mar. 1989.

Table 14: WHOLESALERSSELLING PRICES OF SSL - JAPAN 1982-88 (USS/m3)

Philliouine Sabah Sarawak Indonesia PNG YrLaUan) 'seraya) (serayaT 11rUantIE ()=Y- Year Param Ply Lum Ply Lum Ply Lum Ply Lum Ply Lum

1982 Ave. 140 - 141 - 131 - 137 - 112 - Max. 147 - 148 - 135 - 140 - 116 - Min. 135 - 135 - 126 - 133 - 109 - 183 Ave. 125 181 131 176 122 - 131 196 98 113 Max. 150 193 148 188 138 - 148 213 109 125 Min. 122 165 120 162 109 - 120 180 88 99 1984 Ave. 149 192 148 192 138 - 149 213 116 - Max. 186 216 184 216 170 - 186 235 144 - Min. 115 174 115 177 109 - 105 192 95 - 1985 Ave. 118 188 119 191 111 - 117 213 94 121 Max. 139 215 140 215 128 - 126 227 103 133 Min. 107 172 108 176 100 - 110 196 87 104

1986 Ave. 132 211 132 222 125 - - - 101 125 Max. 162 236 167 249 160 - - - 129 144 Min. 116 198 114 206 114 - - - 88 106 12;j7 Ave. 162 245 197 324 185 - - - 147 178 Max. 172 263 269 443 242 - - - 189 226 Min. 152 228 142 247 138 - - - 112 143 1988 Ave. - - 195 407 179 - - - 140 185 Max. - - 234 411 205 - - - 161 202 Min. - - 262 336 150 - - - 121 167

Source: Japan Lumber Journals,January 1982 - December 1988. - 100 - ANNEX4 Page 1

CALCULATIONOF TRANSFERPRICES USING EX LOG POND JAPAN PRICES

1. Transfer prices can be calculated on the basis of residual FOB equivalentsusing wholesale sellingprices of PNG logs ex log pond Japan as the base and deducting the margins and costs. This will be comparedwith the actual FOB achieved by PNG to Japan, outturn" adjusted to the Japanese equivalent. The differencebetween the residual FOB and actual FOB (adjusted) will give an indicationof the level of transfer pricing. The data used were:

(a) Wholesale selling prices of PNG logs, ex log pond Japan, (Japan Lumber Journal) convertedfrom Yen/Koku to US$1m3 using 3.6 Koku per cubic metre and the prevailingYen/US$ exclwnge rate.

(b) Assumed end use of PNG logs in Japan of 302 lumber 70? plywood.

(d) Costs of stevedoring,re-scaling, sorting, fumigation,etc. US$6/m3 (personalmarket research Japan 1987, verified Ashenden 1983).

Ce) Assumed importermargin 5Z.

(f) Freight rates as reported by the Japan Lumber Journal.

(g) Residual FOB PNG from (a)-(f)

Ch) Actual FOB for log exports from PNG to Japan as reported by the Department of Forests.

(i) Annual data was used to minimize the distortionscaused by the differencesin short term trends between FOB and wholesale prices.

The results are detailed in the followingtables - 1 . - ANNEX 4 Page 2

RESIDUAL VS ACTUAL FOB OF PNG LOGS JAPANESE MAR)ET 1985-88

1985 1986 1987 1988 Description US$/m3 US$1m3 US$1m3 US$1m3

Wholesale Price Plywood (0.7) 94 101 147 140 Lumber (0.3) 121 125 178 185 Average (0.3) 102 108 156 154 Wholesale Margin -5 -5 -7 -7 Importer Margin -5 -5 -7 -7 Stevedore, etc. -6 -6 -6 -6 Shipping Freight -23 -22 -27 -32 Residual FOB PNG 73 70 109 102 Actual FOB (PNG-Japan) 50 56 82 76 Outturn Adjust (0.95Z) 53 59 86 80

Difference 20 11 23 22

2. It can be concluded that from this basic residual exercise that:

(a) transfer pricing in the order of US$10-20/r3 could be commonly practiced for logs to the Japanese market.

(b) this exercise does not account for shipping freight savings achievable by time chartering vessels - a common practice by most major marketing agents and importers which can save a further US$3-5/m3 .

(c) the level of transfer pricing does not appear to be reducing as comonly concluded by the industry. ANNE 5 Page 1 of 44

A PROPOSED FORESTRY ACT: DISCUSSION AND DRAFTING INSTRUCTIONS

1. Discussion

National Forestry Board

1. The National Forestry board is envisaged as being the forum for bringing together all key elements of the sector to participate in policy and priority determination and provide checks and balances in the disposal of forest resources.

2. The Board is recommended to be a corporation. This is to enable:

(a) land transactions, including leasing (a current problem area)

(b) entering int of major contract arrangements (in areas such as monitoring).

These elements are prescribed in Section 10 of the amended Drafting Instructions.

3. The membership and functions of the Board as described below are prescribed in Sections 11 and 12 of the amended Drafting Instructionst

(a) Departmental Head (Chairman)

(b) members nominated by the Premiers Council

(d) three members from tertiary institutions representing environmental science, law and forestry education

(e) one member elected by the staff of the Pap,aa New Guinea Forest 3 Service

4. The functions of the National Board would be:

(a) to provide recommendations to the Minister for the adoption of (and updates for) a National Forest Policy.

(b) to submit a National Forest Development Plan (and amendments from time to time) to the Minister for consideration of adoption by GOPNG.

(c) to provide recomendations to the Minister, from time to time, on legislation to ensure the legislative framework is appropriate to contemporary circumstances.

(d) to submit to the Minister recommendations for proclamation of national, protection and commercial forests. A h5 Page 2 o, 44

(e) to submit to the Minister recommendations (which he must have regard to in making a decision) on the granting of timber permits and timber licenses and Forest Management Agreements.

(f) to evaluate investment proposals following tendering of access to timber allocation rights and make recommendations thereon to the Minister.

(g) to submit to the Minister recommendations on royalties, levies and taxes on forest products.

(h) to reccmmend to the Minister Forest Development Plans for approval and Regional forest Development Plans for approval.

(j) to monitor the export of timber and timber products and make recommendations on relevant policy to the Minister.

(k) to be responsible for disbursement of the Forest Development Fund to Regional forest Boards and the administration of the Forest Industry Fund.

(1) to be responsible for national standards in monitoring and environmental planning and audit of forestry operations including the submission of the national Forestry Environmental Audit.

(m) to be responsible for setting directions in research in forestry science, utilization and marketing.

5. The Act should allow for the establishment of Standing CL'uittees comprised of one or more Board Members. The Committees should have delegated powers to operate effectively in their areas of responsibility including the operation of funds, entering into of contracts and employment of staff. The following Standing Committees are suggested:

(a) Conservation and Environment to include nomination of Minister of Environment and Conservation and Forest Service specialist(s) and non-government conservation interests. The Committee is to prepare policies on flora, fauna, catchment and cultural resources management. To oversee input into and the operation of the National Forest Development Plan regarding environmental planning and impact issues. Initiate research into areas of concern.

(b) Forest Industries prepares policies on forest industry matters, conducts research into utilization and quality control. Undertakes promotion, provides policy on industry training and safety. Responsible for policies on minor forest industries and extension services to industry, land owners.

(c) Marketing and Economics prepares policy on marketing, organizes market intelligence and monitoring. Oversees operation of State Purchase Option. Monitors market manipulation practices. Responsible for operation of marketing trust fund with access to the account for approved activities. ANNEX 5 Page 3 of 44

(d) Land Use and Resources include specialistnominations of Ministers of Land and Physical Planning,Agriculture and Livestock,and Forest Service. Responsiblefor investigation,research and extension into agro forestry. Responsiblefor intra-governmentcoordination in land use planning. Responsiblefor land use assessmentand forest inventory.

(e) Silvicultureand Research responsiblefor recommendationon research priorities, liaisonwith tertiary institutions,policy and practices on silvicultureand reforestation. Chairman to be the Director of the Forest Research Institute. Main funding from the Forest DevelopmentFund.

(f) Other permanent or ad-hoc Committeesas the Board sees (training? provincial relations?)

Regional Forestry Boards

6. The Regional Forestry Boards should be based on the existing regional groupings (Madang, Islands, Highlands, Southern). The provisions are detailed in Section 13 and 14 of the Drafting Instructions. (a) Members

To be approved by NEC and gazetted

(i) two nominationsof each provincialgovernment from which a Chairman will be elected.

(ii) Regional Inspector of the Papua New Guines Forest Service

(iii) a nominationfrom the timber industry

(iv) a nominationfrom a non government organization baving an interest in environmentand conservation

(b) The functions t-fthe Regional Boards would be:

(i) to provide recommendationsto the National Forestry Board (NFB) on policy, legislation,forest proclamationsand protectior forest proclamations,Yorest ManagementAgreements and Forest Development Plans.

(ii) to provide recommendations to the NFB on the granting of Timber Permits and Timber Licenses includingcomment on investment proposals.

(iii) to submit a Regional Forest DevelopmentPlan (amendmentsfrom time to time) within the overall frameworkof the Naticnal Forest DevelopmentPlan to the NMB for approval.

(iv) to be responsiblefor the standardsof monitoringand environmentalmatters for forestry operations. - 105 - ANNEX5 Page 4 of 44

(v) to be responsiblefor the administrationof the net Forest DevelopmentFund (minus the research deduction) includingthe setting of priorities and monitoring standards.

(vi) to be responsiblefor the administrationof the Follow-upLand Use Fund includingsetting of prioritiesand monitoring standards.

(vii) to be responsiblefor the provision of extension services to landownerson:

- business management - agro forestry - silviculture - reforestation

(ix) to advise on the small scale forest industriesdirection staffingpriorities to areas of greatestneed.

tx) to liaise with provincialgovernments in the establishmentof incorporatedLandowner Companies.

(xi) to liaise with provincialgovernments on all matters relatingto the administrationof the Forestry Act.

(xii) to be responsiblefor the administratioLof the Monitoring Fund.

(xiii) to provide a mechanism of appeal by aggrieved landownersin their relationshipwith logging operations,royalty payments or with provincial governments.

In developinga Regional Forest DevelopmentPlan, the Regional Forestry Board shall have regard to:

(i) requirementsof the Naticnal Forestry Board

(ii) Forest DevelopmentPlans (which in any case must be statutorily compliedwith, see Item 5.6).

(iii) ProvincialForest Policy.

The Regional Forest DevelopmentPlan will form the blueprint for forestry developmentin the provinces of the region and will be updated from time to time when furtherForest DevelopmentPlans become available or new or changed ProvincialForest Policies are submitted for the Board's attention.

The Boara and the PNG Forest Servicewill assist, to the greatest practicableextent, any provincialgovernment in the preparationof a Provincial Forest Policy. ANNEX 5 Page 5 of 44

(d) Anneal

The functionsof a Regional Forestry Board should provide a mechanism whereby aggrieved landownerscan appeal in disputes between landowners on one hand and logging companies, provincial governments and forest service officers on the other. It should be seen as a conciliationmechanism based on good faith of the parties. vailure to conciliate should leave open the avenue of formal redress in equity or other relevant law. Any appeal proves should preclude any Board members with a conflict of interest sitting in judgement.

The Forest Service

7. FollowingIndependence in PNG, responsibilityfor the field component of the original Fcrestry Departmentwas handed to Provincialgovernments. Whatever may have been the merits of this move, in practice it has lead to problems of a coordinationand capability noted at variolie points in this report.

8. The establishmentof a unified Forest Service, offering opportunities for career, advancement,professional development and peer interactionis essential to restoremorale and capability in forest management in PNG. Also, it will allow the proposed board system to operate, through the coordinated, provision of technical servicesat all levels of forestry administration.

9. At this stage, a changeoverto a Forest Service should be done with as little alterationof the existing (line) structureof the National Forests Department as possible, beyond the (obvious)addition of Provincialpersonnel into the mainstream,and the creation of senior forestersat the regional level, to work dire;tly to regional boards. The measures necessarv to enact a Forest Service are described under Section 15-26 of the amended Drafting Instructions.

FinancialAdministration

10. The success of the structureproposed above will be largely dependant on the establishmentof the recommendedfinancial framework. The T?AP Mission sought the views of the Departmentof Finance and Planning on fiscal devolutionas suggested,and was assured that it presentedno major problem. PNG in fact has considerableexperience with statutoryauthorities in the agriculturesector which have such managerial authoritiesover funding.

11. A creative approachhas to be considered for the key elements of the reforms. That is, use of specialpurpose rinds and accounts with guaranteed sources of revenue from re7ated operations. Part VIII of the amended Drafting Instrttctions(Annex V) describesthe recommendedfinancial framework. In brief this is:

(a) Forest DevelopmentFund (Sections107-112)

This is as envisaged in the Minister's Drafting Instructionsexcept that first call on the Fund should be research into silvicultue, reforestation,agro forestry and tree breeding. Achievement of sustainedyield will rely on these provisions. _~~~~~~~~NE 50 M 3 Page 6 of 44

An added recomendation is the use of the Fund for payment of lease rental for classified production forests. The Fund (minus research priorities) will be administered by Regional Forestry Boards.

(b) ForestrX Industry Fund (Sections 113-116)

This Fund is as envisaged in the Minister's Drafting Instructions. It will be administered by the Standing Committee on Forest Industries.

This Fund is as envisaged 3s -½ Minister's Draft4"g Instructions. An added dimension is the ubse of the Fund for lease payments for Protection Forests.

The Fund will be administered by Regional Forestry Boards.

(d) Planning and Monitoring FuW4 (Sections 121-123)

This Fund is considered eosential to any chance of success in addressing the outsta.d14ig monitoring and environmental impact problems noted in this report. The Fund also provides the mechanism to ensure proper planning is undertaken (report Section 5.6).

The most unusual element ot t!sethis proposal is the first call on royalties. This is considere4 perfectly reasonable as it is in the landowners interest to have fiu;xcial return maximized and the environment protected. Proper p. *.nuing and monitoring could well ensure a levei of return that cou.i more pay for itself when compared with existing operations.

(e) Timber Marketint Account (Sections 134-_29)

This account is the mechanism to allow the Standing Committee on Marketing and Economics to function (report Section 12(f)). The Committee must be able to operate in a business like way with flexibility and creativity.

The Proposed Forestry Act

12. The key concepts in the Minister's drafting instrutions which have been built upon for this proposal ares

(a) Timber rights allocations - being the link between timber owners (landowners) and the commercial forestry sector

(b) Forest Manasement Agreement - being the link between timber owners (landowners) and the commercial forestry sector

(d) State Purchase Option - being a useful marketing tool ANN-X1 Page 7 of 44

13. The additional key concepts that are recommended ares

(a) A National and Reaional Forestry Boards - for checks and balances and involvement of key sector participants Including provincial government

(b) Standing Committees - to focus attention on specific specialist elements of the forestry sector but retaining an umbrella overview (Natior-al Forestry board)

(c) A Forest Service - as a single entity. married into the Board structure and dovetailedinto Provincial Government by formal agreements

(d) ReilenishableSecurity Guarantees- as the main mechanism for industry compliance rather than penalties

(e) Monitoring- as a more strictlyprescribed function

(f) FinancialArrangements - thnt guaranteea capacity to perform critical basic functions

(i) research into silvicultureand reforestation

('i) industry promotion

(iii) planning and monitoring

(iv) marketing

14. Descriptionand Comment on Main Provisions (S - the numbered Sections)

(a) Preamble

The Act needs to be put in the perspectiveof the national interest, particularly in view of the implicationson concurrent functions under the Organic Law on ProvincialGovernment. It is suggested that the best way to establishnational interest is by referenceto the Constitution.

(b) Administration(S3)

The "forestryauthorities, are describedbeing the Minister, Boards (and Standing Committees)Department and officers and provincial governments.

Inevitably there will be disputas and a resolutionprocess should be described. The EducationAct seems a useful model. - 109 -

Page 8 of 44

The structureof managed forestry should be based on a hierarchy of statutoryplans. The Forestry Department Plan should be the cornerstoneof planning with a statutoryobligation for coumliance. The courts are thus on avenue for injunctions against non planned operations.

(d) National Forestry Board (Sl6-l)

This is the mechanism for

l) main checks and balances against malfeasance

(ii) participation of provincial government in policy development and decision making

(iii) bringing the disparate elements of the forestry sector into a co-ordinated framework (industry, land use, research, environment, etc.)

The Board should be a corporation sole in view of:

(i) contractual capability (for monitoring and marketing)

(ii) leasing capability (essential for reforestation)

Ciii) flexibilityin marketing activity

The suggesteddiversity of the membership is an importantelement in the checks and balances and bringing in outside skills.

(e) Standing Committees (S12)

These ate the working groups of the Board. They facilitatekey inputs by senior Departmentofficers and contributionsby industry and other Governmentagencies. Membership is envisagedby Ministerialappointment. They are seen as very importantelements of the Act,

Certain Starding Committees have a considerable financial role and some would have permanent specialiststaff. Delegation to enable them to carry out functions is thus critical along with provision of financial management flexibility and capability. The importance of these Comnittees is evident in the listing and functions of the Board (para. 4.88).

(f) Regional Boards (S13-14)

These are the province's point of main participation. There can be no practicalbasis for 19 Forestry Departments. It is thus considered sensible to group the field function into Regional groupings. The suggested membership and functionsdelegate strong powers to the provinces. - 110 - ANx 5 Page 9 of 44

The functionsof Regional Boards is oriented towards provincial participationin national deliberationsand oversightof operations and expenditure.

(g) Forest Service (S1S-24)

The establishmentof a single Forest Service from the existing national and provincialdepartments is essential. No useful purpose can be gained by proceedingwith the legislation by ignoring this provision.

An important underpinning of the Forest Servicelprovincial government relationship is Memorandum of Agreement between the parties (S23-24).

(h) Forest Research Institute (S25-26)

These provisionsare taken directly from the Minister's Drafting Instructions. Its provisionsare sensible and the role crucial if any headway is to be made on sustained yield and reforestation. The tie in to the relevant Standing Committee and financial arrangements are of fundamental importance.

ti) Renorts (S27)

An annual report from the National Forestry Board is an important accountability requirement. ! (J) ProvincialGovernment (S29)

The role of provincial goverrment is crucial, particularly in providing the link between the owners of the resource and the administration of government. A link between the province's social and economic planning is also considered important and this should provide an obligatory link in the national forestry planning framework.

(k) Forest Classification (S35-37)

The classificationsystem should allow not only recognitionof governmentland set aside for forestry (nationalforest) but classificationsand powers to make the other crucial land use functionswork. That is reforestationand environmentalprotection. A rental and leasing frameworkis essentialto make these classificationswork.

(1) Forest ManagementAgreements (S38-48)

These provisions are a lift out of the previous drafting instructions. As previouslymentioned they are consideredone of the key points of the legislation.

The role of Boards and provincialgovernment in the Agreement process has been worked in. - 111 - ANNEX5 Page 10 of 44

(m) Forest DevelopmentPlan (S49)

This need is emphasizedeven more than in the Minister's Drafting Instructions. It is consideredan essentialstage in forest management,and shouldbe obligatory (as should compliance). The provisions should i-clude stronger environmentalprotection elements. The Plan's direct!.jsand standardsshould be underpinnedby the replenishablesecurity guarantee.

(n) National Forestrv DevelopmentAreas (S50-52)

Extraced from the Minister's Drafting Instructions. A sound component of the Act's structure.

(a) Disposition of Timber Rights (S53-79)

The earlier instructionsform the basis for these sections. Strengtheningis suggestedin:

-security guaranteesmandatory

-mandatory Forest Development Plans and Working Plans

-role of Boards in the granting process

-environmentalplanning.

(p) SecurityGuarantees (S80-83)

Calling on a replenishablesecurity guarantee is seen as the most suitable complianceenforcement process, rather than penalties.

(q) Susoonsion (S84-87)

Straight forward provisionson operationsuspension and appeal process

(r) StAte Purchase Ovtion (S88-91)

This provision is importantin establishinga reasonableprice for timber exports. The process should be prescribed in legislation.

(8) Monitoring (S92-102)

This Section seeks to strengthenthis neglectedbut crucial component of forest management. The provisionsof Forest Development Plan'ForestWorking Plans are seen as the basis for monitoring and the Security Guaranteeas the enforcementmechanism. The monitoring is seen as an audit function subject to public reportingincluding tabling before Parliament. - 112 - ANN S Page 11 of 44

(t) Finance

This part provides the tools to undertakethe key functions. The royaltyprovisions (S103-106)are extracts from the Minister's Drafting Instructions. The other financialarrangements ares

(i) Forest DevelopmentFund (S107-106)for silviculturalresearch and reforestation.

(ii) Forest Industry Fund (S113-116)the previous Forest Industry Office financialprovisions adopted to the Board framework.

(iii) Follow UD Land Use Fund (S117-120)as previously envisagedby expanded to provide rental.

(iv) Planning and Monitoring Fund (S121-123)essential for proper planning and operationalmonitoring.

(v) Timber MarketingAccount (S124-126)a tool for the operationof the State Purchase Option.

Cu) Log Exports (S130-134)

This Section carries over from the earlier Drafting Instructions.

*v) Recovery of Money (S135-138)

?'achineryprovisions for money recovery and processing.

(w) Forest Protection (S139-145)

(z) Offenses etc (S146-154)

As previously described.

(y) Rexulations(S156-157)

These provisions are as previouslydescribed. It is considered premature to prepare detailed Drafting Instructionsfor Regulations. The legislationshould be finalizedfirst.

2. Drafting Instructions

The Act will include a preamble describingthe intent of the Act being providing for:

- management of forests for productionof timber and the economicwell being of the nation;

- management of forests for the replenishmentof natural resources for the benefit of future generations(ref. fourth National Goal for the Constitution); - 113 - ANNEX S Page 12 of 44

- protection of the nation's valued birds, animals, insects, plants and trees (ref third directiveprinciple of the fourth National Goal);

in the national interest in the meaning of Section 29 of the Organic L.awon Provincial Government.

PART I - PRELIMINARY

Sections in this part will deal with the necessity of compliancewith the Constitutionand other relevantLegislations of Papua New Guinea.

1. Interpretation

Unless the contrary intentionappears:

"Act" means the Fcrestry Act;

"agro forestry"means a system of land utilizationwhere timber production is combined with food productionon the same site;

*burning permit" means a permit issued pursuant to the Regulations to light and maintain a fire;

'conservationpurposes' means the intent to conserve sites of biological, physical, archaeological,economic, cultural or social importance;

"Department"means the Papua New Guinea Forest Service;

"DepartmentalHead' means the person appointedto be in charge of the Department;

'EnvironmentPlant ... ;

"F.O.B."means Free on Board being the value of timber loaded at the point of transportation;

'Forestry Inventory* means a measurement of standing merchantable timber using a satisfactory valid method of sampling;

'Forest Service' means the Department;

"ForestryDevelopments' means a project of timber exploitationincluding forest inventory, road and bridging infrastructure;

'ForestryPlanning Unit' means personswith recognizedskills and qualificationsin aspects of forestrydevelopment organized together for planning forestry developments;

'logged over inventory'means a forest inventoryfollowing the harvesting of timber;

'Minister'means the Minister responsiblefor the administrationof this Act; - 114 - ANNEX 5 Page 13 of 44

'PremiersCouncil' means the Council establishedunder Section 82 of the Organic Law on ProvincialGovernments;

'ProjectAgreement' means a contractualagreement between the Minister and an incorporatedbody wishing to undertakea forestry developmentwhereby timber rights are granted in return for commitmentsdescribed in that agreement;

'ProvincialGovernment' means provincial governmentgranted under Section 6 of the Organic Law on ProvincialGovernment;

'Reforestation'means the re-establishmentof a merchantablespecies of trees on land that was previouslyunder forest cover;

'Region'means a grouping of ProvincialGovernments recognized by the Premiers Council for the purposes of this Act such groupingsshall not exceed a total of four;

'Regulation'means a regulationenacted under this Act;

"tertiaryinstitution' means an institutionof education granting a degree or diploma;

'timber'means merchantablewood harvested from a forest;

'timber industry" means an industry having timber as its primary source of raw material.

PART II GENERAL ADMINISTRATION

DIVISION 1 - ADMINISTRATIONOF THE ACT

2. Administration

Vest the administrationof the Act in the manner and the extent set out in the Act in the followingforestry authorities:

(a) the Minister;

(b) the National Forestry Board;

(d) Regional Forestry Boards;

(e) Standing Committees of the National Forestry Board;

(f) Officers of the Papua New Guinea Forest Service; and

(g) Provincial Governments. - 115 - ANNEX 5 Page 14 of 44

3. Disputes

Set a dispute resolutionprocess between any tvo or more of the forestry authorities (e.g. Section 6 EducationAct).

DIVISION 2 - APPROVEDPLANS FOR FORESTRYDEVELOPMENT

4. National Forestry DevelopmentPlan

Allow for the submissionof a National Forestry DevelopmentPlan by the National Forestry Board for approval by the Head of State. The Plan will detail how the timber resourcesof the nations forests are to be managed and how the environmentalintegrity of those forests are to be ensured in accord with the Constitution.

5. Rexional Forestry DevelopmentPlan

Allow for the adoption of Regional Forestry DevelopmentPlans by the Minister on the advice of the National Forestry Board. The Plans to be prepared by Regional Forestry Boards and to show the proposed management of timber resources in a Region.

6. Forest DevelopmentPlan

Allow for the adoption by the Minister of a Forest DevelopmentPlan for a National Forest DevelopmentArea prepared in accord with Section 50.

7. Adoption and Amendment of Approved Plans

Provide for gazettal of adopted plans. Provide also for an amendment process, being the same as the adoption process.

8. Developmentin Accordancewith Approved Plans

Provide for an order of precedencebetween approved plans in the event of inconsistencybetween plans. The Forest DevelopmentPlan to override National Forestry DevelopmentPlans which, in turn, overridesRegional Forestry DevelopmentPlans.

Provide that, notwithstanding anything in this or any other Act, no forestry developmentsshall be undertaken in an area subject to a Forestry DevelopmentPlan unless those developmentsare in accord with that Plan. - 116 - ANNEX 5 Page 15 of 44

DIVISION 3 - NATIONAL FORESTRY BOARD

9. Establishmentof the Board

(a) a Papua New Guinea National Forestry Board is hereby established;

(b) make provision for the Board:

(i) to be a corporationwith perpetual succession;

(ii) to have a seal, recognizedby law;

(iii) to acquire hold and dispose of property includingthe power to enter to a lease for any period not exceeding50 years with any incorporatedbody for forestry reforestationor conservation purposes;

(iv) to sue or be sued.

(i) DepartmentalHead (Chairman);

(ii) four members nominated by the Premiers Council, being one from each Region;

(iii) two members representinginterests of the timber industry;

(iv) three members from tertiary institutionsrepresenting environmentalscience, law and forestry education;

(v) one member elected by the staff of the Papua New Guinea Forest Service.

(d) provision for membership nomination in the event of failure of mentioned organizationsto submit nominations. Disqualification provisions and appointmenttermination. Tenure provisions,say 6 years staggeredwith half the Board expiring after first 3 thence 6 year terms. Provide for appointedalternates includingexercise of powers and functions;

(e) provide for meetings (tim-lng,7 days notice, quorum of 6 and records of meetings);

10. Functions and Powers of the National Forestry Board

(a) to provide recommendationsto the Minister (and update from time to time) for a National Forest Policy which will describe in detail how the intent of the Act will be achf.evedthrough the administrationof the Act; - 11, ANNEX5 Page 16 of 44

(b) to submit a National Forest DevelopmentPlan (and amendments from time to time) to the Minister for considerationof adoption by the Read of State;

(c) to provide recommendationsto the Minister, from time to time, wit.h an aim to allow the Minister to recommendlegislative amendments to ensure legislationis in keeping with contemporaryforest management circumstances;

(d) to submit to the Minister recommendationsfor proclamationsof National Forests;

(e) to submit to the Minister recommendations(which he must have regard to in making a decision)on the granting of Timber Permits and Timber Licenses and Forest ManagementAgreements;

(f) to ev6luate investmentproposals followingtendering of access to timber allocationrights and make recommendationsthereon to the Minister;

(g) to recommendto the Minister Regional Forest DevelopmentPlans for adoption;

(h) to recommend to the Minister Forest DevelopmcntPlans for adoption;

(i) to monitor the export of timber or timber products and relevant policy recommendationsthereon to the Minister;

(j) to be responsiblefor the administrationof the Forest Development Fund and prescribeddisbursement to Regional Forestry Boards (see Sections 107 - 112);

(k) to be responsiblefor the administrationof the Forest Industry Fund (see Sections 113 - 116);

(1) to be responsiblefor the administrationof the Planning and Monitoring Fund, notwithstandingany delegationsin this Act;

(m) to be responsiblefor the administrationof the Timber Marketing Account, notwithstandingany delegationsin this Act;

(n) to be responsiblefor standardsof monitoring and environmental impact mitigation in operationsauthorized by this Act;

(o) to be responsiblefor submissionof an annual environmentalaudit report to Parliament (see Section 101);

(p) to be responsiblefor an annual report on the operationof the Forestry Act for submissionto the Minister;

(q) to be responsiblefor the establishmentof priorities in research in forestry science, timber utilizationand marketing; 118 ANNEX S Page 17 of 44

(r) to be able to delegate in writing under its seal any of their functions (exceptthis power of delegation)to Standing Committees (see Section 12) or a person;

(s) to be able to hire staff beyond the PNG Forest Service establishment on a needs basis from thet

(i) Forest DevelopmentFund;

(ii) Planning and Mon.toring Fund;

(iii) Forest Industry Fund;

(iv) Timber Marketing Account.

(t) to be able to enter into a lease pursuant to Section 1O(b)(iii)for forestry, reforestationand/or conservationpurposes and allow a marked map or marked aerial photographto be sufficientboundary definitionfor purposes of such a lease;

11. Standing Committees

(a) provide for the establishment of Standing Committees comprised of one or more Board members, persons (includingthe Chairman)nominated by the Minister on the advice of the National Forestry Board and include appropriateofficers of the Papua New Guinea Forest Serwice. The provision of Sections relating to appointmentand terminationas described in Section 10(d);

(b) provide for powers to enable operation includinghiring of staff and entering into contracts;

(c) provide for Standing Committeesdescribed in Sections 12(d) - 12(h) including further Committees,either permanent or ad-hoc as the Minister or the Board sees fit;

(d) Standing Committee on Conservation and the Environment To include a nomination of the Minister of Environment and Conservation and non- governmentconservation interests. The Committee'sfunctions prescribed ass

(i) prepare policies on flora, fauna, catcbmentand cultural resourcesmanagement for the administrationof the Act;

(ii) to oversee input into, and the operationof the National Forest DevelopmentPlan on environmentalplanning and impact matters;

(iii) initiate research and investigationsinto matters of concern; 119 ANNEX5 Page 18 of 44

(e) Standing Committee oa Forest Industries Functionsprescribed as:

(i) prepare policies on forest industrymatters;

(ii) implements research into utilizationand forest product quality control: (iii) undertakes timber promotionprogravmes;

(iv) prepares policy on industrytraining and safety;

(v) prepares policy on minor forest industries;

(vi) responsiblefor the provisioi of extension services to industry, ProvincialGovernment and landowners;

(vii) responsibletc the Board for the administrationof the Forest Industry Fund.

(f) StandinA Committee on Marketing aud Economics - Functionsprescribed as:

*i) prepare policy on marketing of forest products on domestic and internationalmarkets;

(ii) organizesmarket and intelligenceat a national and internationallevel on marketsupply. demand, price, freight rates, end use and any other factors influencingmarket dynamics;

(iii) oversees the operation of the State Purchase Option;

(iv) to offer parcels of logs gained from the State Purchase Option for sale to national or internationalpurchasers;

(v) to arrange ix: ship charter as part of any marketing activity undertaken by the Standing Committee;

(vi) to offer on a fee for service basis marketing services;

(vii) the power to seize logs for non compliance with Timber Permit License or Timber Authoritymarketing obligationsand market those logs on behalf of the State;

(viii) to monitor export procedures and documentation and recommend changes to the Minister through the National Forestry board for Government consideration;

(ix) liaise with internationalorganizations associated with the Timber trade;

(x) monitors market manipulationpractices and provides remedial recommendations; 1 ANNEX 5 Page 19 of 44

'xi) responsiblefor operationof the Timber MarketingAccount with access to the account for marketing, administrative,research and monitoring programmes.

(g) Standing Committee on Land Use and Resources

To includenominations of the Ninistexsof Lands and Agriculture. Functionsprescribed ass

(i) prepare policies land use planing, land allocation and forest inventory:

(ii) undertakes research into and provides extensionservices to Regional Forestry Boards, ProvincialGovernments and landowners on agro forestry practices;

(iii) responsiblefor intra-governmentco-ordination of land use planning;

(iv) responsiblefor land use capability assessmentand forest inventory;

(h) Standing Committeeon Silvicultureand Research Chairman to be the Director of the Forest Research Institute. Functions are:

Ci) responsiblefor recommendationson setting researchpriorities;

(ii) responsiblefor co-ordinationand liaisonwith tertiary institutionson forest research matters, includingjoint ventures and projects;

(iii) responsiblefor policy preparationon silviculturepractices and reforestation;

(iv) responsiblefor the administrationof the component of the Forest DevelopmentFund described in Section 107;

DIVISION 4 - REGIONAL FORESTRY BOARDS

12. Establishmentof the Boards

(a) memberships

(i) 2 nominationsof each provincialGovernment from which a Chairman will be elected;

(ii) Regional Inspectorof the Papua New Guinea Forest Service

(iii) a nomination from the timber industry; 1 . A 5 Page 20 of 44

(iV) a nomination from a non-governmentorganization having an interest in conservationand the environment;

(b) same provisions as Section 10(b) above.

13. Functions of a Regional Forestry Board For a prescribed region:

(a) to provide advice to the National Forestry Board on the matters (list in de*ail) described in Sections ll(a)(b)(c)(d)(e)and (f);

(b) to submit to the National Forestry Board a Regional Forest DevelopmentPlan (and amendmentsfrom time to time) for approval and submissionto the Minister for adoption;

(d) to be responsiblefor the administrationof that portion of the Forest DevelopmentFund allocatedby the National Forestry Board;

(e) to be responsiblefor the administrationof the Follow-upLand Use Fund as allocatedby the National Forestry Board;

(f) to be responsiblefor the granting of Timber Authorities;

(g) to be responsiblefor the provision of extension services to Provincial Gover.nents and landowners, where relevant on:

(i) business management;

(ii) agro forestry;

(iii) silviculture;

(iv) reforestation;

(v) small scale forest industries.

(h) to advise the DepartmentalHead of the Papua New Guinea Forest Service on the determinationof staff priorities and trainingneeds;

(i) to liaise with and assist the ProvincialGovernments in the establisbmentof incorporatedLandowners Companies;

(j) to liaise with and seek the views of ProvincialGovernments on all relevantmatters on the administrationof the Forestry Act;

(k) to be responsiblefor the administrationof the Planning and Monitoring Fund; and

(1) to provide a mechanism of appeal by aggrieved landownersin their relationship with logging operations, payment of royalties or with Provincial Government. ANNEX 5 Page 21 of 44

DIVISION 5 - PAPUA NEW GUINEA FOREST SERVICE

14. Establish a Papua New Guinea Forest Service under the admiristration of a DepartmentalHead.

15. The purposes and functionsof the Papua New Guinea Forest Services, under the directionof the National Forestry Board and where so directed, under the directionof Regiona. Forestry Boards, are to:

(a) administer this Act and z-her legislationpertaining to forests;

(b) formulatepolicy proposals ard implementapproved policies affecting forestry development,including management and marketing of forest products includingimplementatio. Jf the State Purchase Option;

(c) provide training services to requiredmanpower at the Forestry Ccilege Bulolo and Timber IndustryTraining College in Lae;

(d) provide advisory and technical servicesto Re&tonal Forestry Boards, Government,provincial Governments, and proceosors and consumersof forest products;

(e) undertake scientificresearch into land use for foresL.y development, and botanical and ecologicalinvestigations;

(f) maintain a watching brief over policies and plans of international bodies dealingwith the forestry industry;

(g) superviseNational Forestry DevelopmentAreas includingreforestati.ri projects;

(h) collect all levies, includingthe Follow-upLand Use Fund;

(i) issue forest product export licenses;

(j) be responsiblefor forest product inspectionand grading; and

(k) responsiblefor the pre-registrationof timber operationsand registrationtimber export and exporters and minor forest products operators.

16. The Minister and the DepartmentalHead and the Chairman of a Regional Forestry Board to have the powers of Forest Officers and Forest Inspectors.

17. The National Forestry Board may appoint an officer or any other suitable person to be a Forest Inspector.

18. The National Forestry Board may appoint an officer or any other suitable person to be a Log Grader.

19. Forest Officers shall have the power of Forest Inspectors. - 123 - ANN 5 Page 22 of 44

20. Notices of appointmentsof Forest Officers and Inspectorsand Log Graders to be published in the National Gazette.

21. The Departmental Head and a Provincial Governmentmay enter into a Memorandum of Agreement including defining the day to day operations of staff of the Forest Service within a Province. The Memorandum of Agreement shall include but not be limited to:

(a) application of the Act;

(b) administrativeand reportingarrangements;

(d) a process by wh'ch policies and prioritiesof the National Forestry Board, Regional Forestry Board and Forest Service can be implemented;

(e) a process by which the policies and priorities as defined in a Provincial Forest Policy can be accommodated;and

(f) an agreement on the applicationof the following Sections of the Organic Law on Provincial Government:

- Section 26 - Section 27 - Section 29 - Section 49 - Section 50

22. An agreemententered into as described in Section 23 will need to be ratifiedby the Regional Forestry Board, the National Forestry Board and the Minister in which case it will be binding on all parties and only amendedwith the concurrenceof all parties.

23. In the absence of an agreementthe administrationof the Act in a P-ovincial Government area will be the Forest Service as directed and advised by the National Forestry Board and Regional Forestry Board. In the absence of directionfrom a Regional Forestry Board the directionof the National Forestry Board shall prevail.

DIVISION 6 - FOREST RESEARCH INSTITUTE

2. There is established within the Department a Forest Research Institute, under the direction of a director to be appointedbe the Minister.

25. The purposes and functionsof the Forest Research Institute are to:

(a) investigatenatural and artificial reforestationmethods for various species;

(b) study the potential for agro forestry: - 124 - AMDII 5 Page 23 of 44

(d) study the control of forest insects and diseaseg

(e) develop systems for protectingwatersheds and controllingsoil erosion;

(f) maintain referencecollections of plants and insects;

(g) undertake research contractswith other countries;

(h) investigatetimber utilizationof PNG species;

(i) submit an annual report to the DepartmentalHead on the Institute's activities;and

(j) such other matters are referred to the Institute.

DIVISION 7 - REPORTS

26. The National Forestry Board shall submit a report annually to the Minister with respect to the followiAgmatters:

(a) rates of forest harvestingby species;

(b) rates of log exports and domestic processing;

(d) areas confirmedto be naturally regeneratedand regenerationyields;

(e) relationshipbetween timber harvesting and regeneration,by Province;

(f) areas planted with forest crop and plantationyields;

(g) the activitiesof the Forest Industry Office;

(h) receipts into the Forest DevelopmentFund, Forest Industry Fund and Follow-up Land Use Fund and expenditures from the Fund and a balance sheet for the Funds;

(i) proposed industrial developments; (j) special activities,programs and policies of the Department;

(k) areas dedicatedfor forestry and agro forestry;

(1) volumes of timber exported and processed; and

(m) activities of the Forest Research Institute and the results of forest research undertakenby the Department. - 125 - ANNM 5 Page 24 of 44

27. The Report shall be submittedto Parliament.

DIVISION 7 - PROVINCIALGOVERNMZNTS

28. Functions

The functions of a Provincial Governments in relation to the Act are tot

(a) provide majority membership and chairmanship of Regional Forestry;

(b) provide 4 members of the National Forestry Board;

(c) prepare Provincial Forest Policies as a basis for Regional Forest Development Plans and any Memorandum of Agreement as defined in Section 23;

'd) to provide input and advice to the Regional Forestry Board on its full range of functions;

Se) enter into a Memorandum of Agreementwith the Departmental Head as described in Section 23;

(f) to provide the primary focus for liaisonwith landowner groups in the formation of incorporated landowner Companies and any consultation and negotiation required with customary landowners in this Act;

(g) to provide the primary focus for liaison with Landowner Companies in the preparation of Forest Management Agreements;

(h) to assist in the preparation of Forest DevelopmentPlans; and

(i) to provide comment and advice on any amendment to a Forest Development Plan.

PART III - FOREST CLASSIFICATION

DTVISION1 - NATIONALFORESTS

29. The Minister of Forests, acting on advice, may dedicate Government land as a National Forest and notice of dedicationto be published in the National Gazette.

30. Prohibitionagainst dispositionsunder the Land Act in National Forests,without the approval of the Minister. - 126 - ANNEX 5 Page 25 of 44

DIVISION 2 - PRODUCTIONFOREST

31. Where the National Forestry Board has leased land (Section 10(b)(iii) and 11(t)) for forestry or reforestationpurposes the Minister may, acting on the advice of the National Forestry Board dedicate that area as a Production Forest. Such dedicationto lapse in the event of the lease lapsing.

32. Prohibitionagainst dispositionsunder the Land Act without approval of the Minister.

33. Lease payments to incorporatedbodies representinglandowners to be annual rental in lieu of royalty on eventual timber harvest, a net royalty instead of an annual rental at the time of harvest (being total royaltyminus productioncost) or a combinationof both.

DIVISION 3 - PROTECTIONFOREST

34. Where the National Forestry Board has leased land for conservation purposes the Minister may, acting on the advice of the National Forestry Board dedicate that as a Protection Forest. Such dedicationto lapse in the event of the lease lapsing.

35. Prohibitionagainst dispositionsunder the band Act without approval of the Minister.

36. Lease payments to incorporatedbodies representinglandowneLs to be an annual rent or once off payment for duration of lease.

PART IV - AGREEMENTFOR FOREST RESOURCEDEVELOPMENT

DIVISION 1 - FOREST MANAGEMENTAGREEMENTS

37. The State through the Minister may enter into a Forest Management Agreement with a Landowner Company who owns the forest area identified for forest development.

38. The Forest Management Agreementauthorizes the State and persons claiming under it exclusiveright to fell, cut, remove and dispose of all forest produce in the forest area.

39. The State and persons claiming under it may for the purpose of felling, cutting, removing and disposingof the timbert

(a) enter on the land;

(b) build and use such road and bridges as are necessary for purpose; and

(c) build infrastructureas required in any ProjectAgreement and/or Timber Peamit or Timber License. - 127 - ANNEX5 Page 26 of 44

40. A person shall not by a purchase or other dealing with the owners of the land, acquire any interest in the timber,either standing or felled after the Forest Management Agreement for the forest area had been executed and signed for the LandownerCompany and the State.

41. The Forest ManagementAgreement is void and of no effect unless the followingrequirements are satisfiedin the Agreements

(a) there must be a term with which the Agreement is in effect;

(b) the estimatedvolume or other measure of quantity of merchantable timber in the area covered by the Agreement;

(d) proof that most (at least 75X) if not all landownerswho are resident on the land at the time of signing supports the Landowner Company to enter into the Forest ManagementAgreement.

42. Unless otherwisedirected by the National Forestry Board a Forest ManagementAgreement should be prepared by or in conjunctionwith the relevant Provincial Governmentand submittedto the Regional Forestry Board for its comment and advice. The Agreement and the regionalForestry Board's comment and advice shall be forwardedto the National Forestry Board which will make recommendationsto the Minister on the entering into the Agreement.

43. The State should consult the landownersthrough the Landowner Company and the Provincial Governmentconcerned of its intentionsin allocatingor issuance of Timber Permit over the forest area covered by the Forest Management Agreement.

44. All Forest ManagementAgreements shall provide that a specifiedarea of the logged-overland (at least 202) shall be dedicatedby the landownersto the State for forestry or agro forestrypurposes. The term of dedication shall be at least 25 years. For administrativepurposes, the area included in a Forest Management Agreementmay be divided into separate blocks where two or more groups of landownersenter into it. The land to be dedicated for forestry or agro forestry shall be identifiedseparately for each block. As an option, reforestationareas could be identifiedafter the Forest Management Agreement is entered into, as logging progressesin working plans (percentage of the area to be specified in the Agreement).

45. A forest Management Agreement shall provide for the designationof areas to be managed for conservationand customary land use purposes and designatethose areas to be proclaimedProtection Forest.

46. The State shall have the right to plant, manage and harvest timber on dedicated land, with a negotiated payment to landowners on original and successive crops.

47. On the advice of the National Forestry Board a dedicationmay also be made by the Minister independentlyfrom a Forest Management Agreement that authorizesharvesting of natural stands. - 128 - ANNEN 5 Page 27 of 44

DIVISION 2 - FOREST DEVELOPMENTPLAN

48. A Forest DevelopmentPlan shall include the followingdetailss

(i) as estimate of the timber resourcesin the area;

(ii) the sequenceof developmentof timber in the area, includingthe general locationsof main roads;

(iii) the feasibilityof processingin the country all or part of the timber in the area;

(iv) objectivesfor the regenerationof timber in the area through forestry or agro forestry;

(v) identifizationof sites and areas of archaeologicalcultural or social importancewith prescribedprotection measures;

(vi) identification of areas of economic importance other than timber production to landowners and with prescribed protection measures;

(vii) identificationof sites of hydrological,floral, faunal or geomorphologicalsE4gnificance with prescribedprotection measures;

(viii) in addition to (iv) a detailed silviculturaland or agricultural plan that will meet described (in the Forest DevelopmentPlan) land use objectives;

(ix) detailingthe environmentalimpact ameliorationand rehabilitationmeasures that will be undertakenon disturbed sites includingsign tracks, loading areas, quarry sites, road batters or other disturbedsites and in the case of a Timber Permit those measures prescribedin any EnvironmentalPlan;

(x) such other factors as the Ninister, acting on advice, considers relevant.

DIVISION 3 - NATIONALFORESTRY DEVELOPMENT AREAS

49. Acting on the advice of the National Forestry Board and in a notice in the National Gazette, the Minister may designate customaryor Government land as National Forestry DevelopmentArecs, having regard tos

(a) the nature of the forests in the area;

(b) the potential of the area or portion of it for producing timber under forestry or agro forestry plantationsor through natural regeneration; - 129 - ANNEX 5 Page 28 of 44

(d) the willingnessof customarylandowners in the area to enter into Forest ManagementAgreement to authorizethe harvestingof natural forest on the area, and to dedicate portions of the area for reforestationand or nature conservation.

50. Rights to harvest timber under a Timber Permit or Timber License from customary land shall not be granted unlesst

(a) the land has been designatedas a National Forestry Deve'opmentArea, except for areas under Timber Authority;

(b) a Forest DevelopmentPlan for the land has been prepared in the prescribed form and in accord with the prescribedprocess;

(c) customary landownershave entered into Forest ManagementAgreements for the area to be included in the Timber Permit or License.

51. The boundariesof a National Forestry DevelopmentArea may be revised subdivided, altered and a Forest Development Plan may be amended, by the Minister acting on advice in accord with Section 8.

PART V - DISPOSITION OF TIMBERRIGHTS

DIVISION 1 - FORMSOP RIGHTS

52. Statement that rights to harvest timber from Government land or customary land shall not be granted or acquired except in accordance with this Part.

53. Forms of Rights:

(a) Timber Permits;

(b) Timber License; and

54. The Minister may consider,on the advice of the National Forestry Board, the issuance of Timber Permits, Timber Licenses or Timber Authorities to an entity, other than the LandownerCompany if he is satisfiedthat the size and type of the projectwarrants the issuance of the Authority.

55. In giving advice under this Section the National Forestry Board will seek and have regard to the views of the relevantRegional Forestry Board. - 130 - ANNEX 5 Page 29 of 44

DIVISION 2 - TIMBER PERMITS

56. To be istued by the Minister on the advice of the National Forestry Board.

57. Mandatory requirements:

(a) must be within a National Forestry DevelopmentArea, National Forest, or Government land areas;

(b) describe a Permit area;

(d) for terms greater than 10 years, reviews by the Minister after the first ten and successivefive year periods;

Ce) require Forest Working Plans to be prepared by the holder as prescribedby the Regulationsfor approval of the Regional Forestry Board;

(f) require payment of royaltiescalculated according to Part VIII;

(g) must describe provisions for roads, bridges and other infrastructural requirements;

(h) consistentwith a Forest DevelopmentPlan;

(i) Require the Natioual ForestryBoard to seek the advice and comment of the relevant Regional ForestryBoard which will consult with Provincial Government and customary landowners. The Regional Forestry Board coment will be appended to the advice given to the Minister by the National Forestry Boerd;

(j) a replenishableBank Guaranteeas described in Part VI of not less than K100,000 (or a higher amount determinedby the Minister)being security against breaches of the Forest DevelopmentPlan which may be drawn upon by the Regional Forestry Board by way of prescribed penalty or for environmentalrehabilitation works; and

(k) satisfactorysubmission and acceptanceof an EnvironmentalPlan.

58. Optional requirementss

(a) the holder to carry out a forest inventoryof the Permit area and submit it to the DepartmentalHead;

(b) specify an allowableannual cut, and annual and other periodic limits within which harvesting rates shall be maintained;

(d) constructionor continuationof a timber processing facility by the holder a formula to be included in the Regulations;

(e) log exports, expressed in volumes of timber or a proportionof timber harvested;

(f) may be entered into in conjunctionwith a Project Agreement entered into by the Head of State;

(g) other terms and conditionsdetermined by the Minister;

(h) a forestry planning unit formed by the operator;

(i) the Permit holder should carry out logged-over inventory of all cut out areas as an on going exercise; and

(j) clearance from Department of Lands and Bureau of Water Resources.

DIVISION 3 - TIMBER LICENSES

59. To be issued by Mlnister on the advice of the National Forestry Board.

60. Mmndatory rgjuirementst

(a) must be witk n a National Forest Development Area, National Forest or Government l&:d areas;

(b) describe a License area;

(d) require payment of royalties calculated according to Part VIII;

(e) consistent with a Forest DevelopmentPlan; and

(f) Other clauses as described in 58(e) and (C) (but for E50,000).

61. Optional requirementss

(a) log exports, expressed in volumes of timber or a proportion of timber harvested; and

(b) other terms and conditions determined by the Minister.

DIVISION 4 - ALLOCATIONOF TIMBER PERMITSAND LICENSES

62. Timber Permits and Licenses shall be issued by tender unless the Minister acting on the advice of the National Forestry Board, determines otherwise. - 132 - ANNEX 5 Page 31 of 44

63. 'Wherea Timber Permit or License is to be issued by tender, the DepartmentalHead shall on request or on his own initiative,invite applicationsby notice prescribed in the Regulations. Applicationsmay contain proposals fort

(a) the payment of premium in addition to royalty otherwisepayable;

(b) the continuationor establishmentof a timber processing facility;

(d) other re$uirementsas determinedby the Minister on the advice of the National Forestry Board and

64. The Minister may accept an applicationor may decline to accept any applicationbut must give his reasons.

65. Restrictionswhere land occupied or inundatedunder the Water ResourcesAct (See current Section 11).

DIVISION 5 - TIMBER AUTHORITIES

66. Timber Authoritiesmay be issued by a Regional Forestry Board or, with the Regional Forestry'sBoard's consent, by a Forest Officer. A Timber Authoritymay be issued by the National Forestry Board within a Region with the agreementof the Minister.

67. Nothing in the Act prohibits a customary landownerfrom using timber or other products of the forest for his domestic use or selling them to others for domestic use.

(a) shall describe an area of the landowner;

(b) may provide for a mininmun payment to the landowner;

(d) applicationfee shall be determinedin the Regulation;

(e) the purchaser is not issued more than one Timber Authority in a calendar year;

(f) where a Regional Forestry Board or a Forest Officer issues Timber Authorities,the DepartmentalHead is notified monthly of those issued: and

(g) if a Timber Authority is issued in contraventionof the Act, the National Forestry Board may rescind it and, in that event, any cutting under it will be unlawful. - 133 - ANNL: 5 Page 32 of 44

68. The Minister on the advice of the National Forestry Board may withdraw his consent to a Regional Forestry Board or a Forest Officer issuing Timber Authorities.

69. Special provision for Timber Authoritiesto authorizeroad clearing across customary land outside National Forestry DevelopmentAreas, restricted to 25 meters on either side of centre line.

DIVISION 6 - REGISTRATIONOF FOREST PRODUCE OPERATIONS

70. Pre-registrationof all companies,national or foreign, to be involved in timber operation in excess of 5,000 m3 per year and payment of fee.

71. Registrationof minor forest product operators and payment of fee.

72. Registrationof timber exportersand importersand payment of fee.

PART IV - GENERAL FOREST MANAGEMENTPROVISIONS

DIVISION 1 - TRANSFERS

73. National Forestry Board to be notified in advance of proposed share transfers or allotments. Failure to notify will be a cause for authority cancellationas prescribed.

74. The Minister on the advice of the National Forestry Board may cancel a Timber Permit, License or Authority if it is transferredwithout his consent or, in the case of a corporation,issued share capital in any corporation cbanges.

DIVISION 2 - AMENDMENTS

75. With the agreement of the Minister on the advice of the National Forestry Board and its holder, a Timber Permit or License may be amended, updated, changed.

76. With agreementof the Minister on the advice of the National Forestry Board and its holder a Timber Permit or Licensemay be:

(a) withdrawn;

(b) surrendered;

(d) subdividedinto two or more Permits or Licenses. - 1- ANNEX5 Page 33 of 44

77. The withdrawal by the Minister surrender, consolidation or subdivision of a Timber Permit or License shall not affect the accrued rights and obligations of the parties.

DIVISION 3 - SECURITY GUARANTEES

78. In this se.tion a Security Guarantee is the Guarantee specified in Sections 58J and 61f.

79. Specify lodging of the Guarantee at a Bank approved by the Minister to be held by the National Forestry Board during tern of a Timber Permit or Timber License for due and proper performance of a Forest Development Plan and Forest Working Plan conditions.

80. The National Forestry Board may claim against the Bank as a liquidated amount for each and every liatility arising from briach of conditions notified in the Regulations or described in a Forest Development Plan or Forest Working Plan or the cost of repair of damage to the environment. At periods of not more than twelve months or any lesser period notified in writing by the National Forestry Board the Timber Permit or Timber License holder must deposit a further Bank Guarantee bringing the amount of the sum of the Guatrantees up to the level prescribed.

81. Ir ,&king a claim the National Forestry Board will act on the recommendations of a Regional Forestry Board and will respond to any such recommendations with 14 working days of their receipt and should show good cause in writing if such recommendations are not adopted. Such cause to be notified within 28 working days of receipt of the original recommendations. In the event of further disagreement the matter is to be referred to the Minister for decision.

DIVISION 4 - SUSPENSION

82. The Departmatal Bead may suspend a Timber Permit, License or Authority where its holder defaults under any of its provisions or for breaching any provis'.on of the Act. In doing so the Departmental Head shall as soon as it is practicable advise the holder of this within 7 days. The suspension remains for the duration of the default.

83. Where the default of a holder is causing or may imminently cause serious damage to the natural environment, the Chairman of the Regional Forestry Board may suspend without advance notice or hearing in which case the Departmental Head will be notified of this action as soon as practicable after the suspension. The Chairman may delegate this power to a Forest Officer, Forest Inspector or Log Grader.

84. Whether or not rights are under suspension, the Minister may cancel a Timber Permit, License or Authority, where its holder has failed to remedy the default or show in the view of the National Forestry Board major or repeated ANNEX 5 Page 34 of 44 disregard for the prescribed conditionsin an applicable Forest Development Plan or Forest Working Plan. At least 30 days notice of intentionto cancel shall be given and the hulder shall have an opportunityto be heard. Notice of cancellatioushall be published in the National Gazette.

85. An appeal lies to the National Court on a question of law or jurisdictionazising out of the cancellationof a Timber Permit, License or Authority.

DIVISION 5 - STATE PURCHASE OPTION

86. On any parcel of timber harvested pursuant to Part V. the National Forestry Board may purchase up to one quarter of the parcel at the prescribed cost. Notificatiouof an intentionto purchase may be made in writing by the Chairman of the Standing Committeeon Marketing and Economics to the official office of a Timbe: Permit, Timber License or Timber Authorityholder.

87. For the purposes of the above Section prescribed cost shall mean the average F.O.B. (Free on Board) cost for that shipment of timber less any transportcosts if the shipment is not at the point of export.

88. The upper limit on the proportion of timber purchasedmay be varied upwards (or downwardsbut not being less than one quarter) by the Minister on the advice of the National Forestry Board. Any such variation to be notified in the National Gazette.

89. Any exercise of purchase rights under this Division shall be known as the State Purchase Option.

PART IV - TIMBER MEASURING,NUMBERING AND OTHER MONITORING FUNCTIONS

90. Logs required to be measured and nun7ered individuallyby the holder of a Timber Permit or Timber License before they are moved after they are felled, unless the Regional Forestry Board, approvesmeasuring and numbering at another place.

91. The method of measurementshall be specifiedby the National Forestry Board and the National Forestry Board may designatepersons authorizedto measure. 92. A Forest Officermay designateone or more log brands to be impressed on logs produced under a Timber Permit, License or Authority.

93. Where logs have not been measured in accordancewith the Act, the Chairman of a Regional Forestry Board may appoint a Forest Officer to estimate the volume of logs and the estimate shall prevail. ANNEX 5 Page 35 of 44

94. The Regional Forestry Board may appoint Forest Officers to check log measurementsmade by Timber permit and License holders.

95. Provision for branding by Forest Officer. of logs left behind after logging and approval of such brands.

96. Forest Officers may be appointedas a Wildlife and Conservation Officer by the Minister for Conservationand Environmenton recommendationby the Minister for Forests.

97. A Forest Officer or Forest Inspectoras directedby a Regional Forestry Board or the :iationalForestry Board will conduct regular inspections of logging operationsto monitor compliancewith the provisionsof the Forest DevelopmentPlan and/or Forest Working Plan. Such inspectionswill be undertakenas prescribedin the Regulationsand will be reported as an EnvironmentalAudit Report of a Timber Permit or Timber License operation. An EnvironmentalAudit Report will include recommendationsfor any deductions from the Security Guaranteeprescribed in Section 80 as penalty for breaches of environmentalor utilizationconditions as mentioned and the cost of any repair of environmentaldamage.

98. A Reg$.onalForestr Board regularlyand at not less than 6 monthly intervals,will forward to the National Forestry Board a report detailing the nature and resu'ts of all environmentalaudits. The National Forestry Board will submit to the Minister, at intervalsof not more than 12 months, a report titled the National Forestry EnvironmentalAudit Report covering all. environmentalaudits of operationsin the reportingperiod. The Report will be submittednot more than 3 months followingthe end of the reportingperiod.

99. The National Forestry EnvironmentalAudit Report will be tabled before Parliamentwithin 1 month of receipt by the Minister.

PART VIII - FOREST FINANCE

DIVISION 1 - ROYALTIES

100. Royalty rate and other remunerationsshall be determinedusing the F.O.B. value of the wood as the basis, less deductionsas determinedin the Regulation,and inclusiveof loadings for premium species sufficientto ensure full rental appropriationsin royalty.

101. The amount of royaltypayable by the holder of a Timber Permit or Timber License shall be calculated by multiplying the volume of timber measured or estimated under Part VII by the rate of royalty determined under thiis Part.

102. To be based on Section 16 of the current Acts

(a) Minister authorized to fix royalty rates, and to review them annually or more often if circumstances require; - 137 - ANNE S .age 36 of 44

(b) royalty rates shall not be lower than the rates set out in the Regulations;and

103. The National Forestry Board may deduct from the royaltiesreceived from a Timber Permit, Timber License or a Timber Authority area the cost of preparing Forest Development Plans and the conducting of monitoring obligations as prescribed in Part IW and such deductions will be paid into the Planning and Monitoring Fund.

DIVISION 2 - FOREST DEVELOPMENTFUND

104. To establish a fund to be known as the Forest Development Fund.

105. Exporters of logs and other prescribedproducts shall pay into the Fund.a ReforestationLevy, calculatedaccording to the Regulations.

106. Any excess monies in the Timber MarketingAccount may be paid into the Fund.

107. The National Forestry Board will identify an amount from the Forest DevelopmentFund, being priority on any expenditurefrom the Fund, an adequate amount for research into silviculture,reforestation, agro forestry and tree breeding to be administered by the Standing Committee on Silviculture and Research.

108. The Forest DevelopmentFund shall be used only for the purpose of:

(a) research into for it regenerationand agro forestry;

(b) establishingplantations of trees on Government land or on customary land included in a National Forestry DevelopmentArea that is dedicated to forestry or agro forestry;

(d) developing and harvesting such plantations;

(e) payment of a lease rental for Production Forests (Section34); and

(f) all incidentaladministrative costs.

109. After de)ductingthe amount described in Section 110 the National Forestry Board will allocate the balance, on priorities it determines,to Regional Forestry Boards for the purposes describedin Sections 111 (b)(c)(d) and (e). - 1 - ANNn 5 Page 37 of 44

DIVISION 3 - FOREST INDUSTRYFUND

110. To establisha fund called Forest Industry Fund.

111. Exporters of logs and other prescribedproducts shall pay into the Fund a Levy, calculatedaccording to the Regulations.

112. The Levy shall be used only for the purpose of:

(a) establishmentand running of the Standing Committeeon Forest Industries;

(b) research and developmentin the most effectivemonitoring system in the Timber Industry to include quality control, logging operations, marketing and promotion;

(d) other purposes determinedby the DepartmentalHead to be necessary.

113. The Fund shall be administeredby the Standing Comumitteeon Forest Industries which is directly responsibleto the National Forestry Board.

DIVISION 4 - FOLLOWUP LAND USE FUND

114. Establish a fund called the Follow-upLand Use Fund.

115. Exporters of logs and other prescribedproducts shall pay into the Fund a Levy, calculatedaccording to the Regulations.

116. The Fund shall be used only for the purpose of:

(a) research and developmentfor follow-upland use in logged-over forests;

(b) administrationcosts;

(d) payment of lease rental for ProtectionForests (Section35)

(e) any other purposes determinedby the Regional Forestry Board concerned to be necessary in effectivelyexecuting projects funded by the Levy.

117. The Levy shall be paid to and administered by the Regional Forestry Board concerned responsiblefor the area where the exported logs were harvested. -139- ANNX 5 Page 38 of 44

DIVISION 5 - TIMBER MARKETINGFUND

118. Establish an account called the Timber MarketingAcceunt. Transactionsto and from the account shall bes

(a) payments for any exercisedState Purchase Optiont

(b) proceeds from the sale of timber parcels offered by the Standing Committee;

(d) cost of any marketing research on monitoring programme;

(e) proceeds of logs seized as a result of breaches of this Act; and

(f) proceeds from penalties imposed from breaches of the marketing or export provisions of this Act.

119. The Account shall be adminicered by the StandingCommittee on Marketing and Economics co-ordinatedby the National Forestry Board.

120. Moneys in the Account that are not immediatelyrequired may be invested (See Coffee Marketing Board Act, Sections 10-14):

(a) in any securitievof, or guaranteedby, the State, Australia or a Territoryof Australia;or

(b) on fixed deposit with an approved banks or

(c) in any other manner approvedby the Minister on the advice of the National Forestry Board, with the concurrenceof the Minister for Finance.

121. With the concurrenceof the Minister the National Forestry Board may borrow for the purposes of the Standing Committeeon Marketing and Economics such sums of money as it thinks proper.

122. The Minister with the concurrenceof the Minister for Finance, may, for and on behalf of the State, guaranteeto the Central Bank the repaymentof any loans, including interest on the loans, to the Board by that bank.

123. 'here the National Forestry Board is satisfied that the proceeds of its operations during any period of its operationshave exceeded the cost and expenses of its operationsduring that period, it may, when it thinks fit, aistributean amount equal to the excess, or such lesser amount as the Board determines,to the Forest DevelopmentFund. - 140 - ANNZX 5 Page 39 of 44

PART IX - LOG EXPORTS

124. Unprocessed logs shall not be exported from the country without the permission of the Minister on the advice of the National Forestry Board.

125. In determiningwhether or not to permit export, the Minister shall considers

(a) a level of log export that ccvers project infrastructure and followup development needs;

(b) the log requirementsof timber processors in the country, and the location of such processors in relation to the location of the logs to be exported - a formula to determinelevel of processing to be included in the Regulations;

(d) employment opportunitiesin the country from the export of logs and further processing in the country;

(e) that sufficient export tax is charged and that the tax captures an appropriate proportion of the value of premium species -- to be reflectedin the Regulations;and

(f) the export price of logs is fair and reflects the market situation.

126. The permission of the Minister may specify:

(a) the volume and species of logs to be exported;

(b) the time during which the logs may be exported, and may be included in a Timber Permit, License or Authority.

127. Notwithstandingthe above, exports of species of logs and processed forest products prescribed in the Regulationsare prohibited.

128. Logs are not to be exported unless the DepartmentalHead has certifiedthat ReforestationLevy on them has been paid and royaltiesof the exporter are not in arrears.

PART X - RECOVERY OF MONEY

129. Royalties and other money that are payable to the State under the Act or a Timber Permit, License or Authority:

(a) are due and payable on the date specified for payment in a statement issued by the Department to the person who is required to pay the money; - 141 - ANNEX 5 Page 40 of 44

(b) shall bear interest following such date, at a rate prescribed in the Regulations;

(c) may be recoveredin court as a debt due to the State, or by calling on a Security Bank Guaranteeplaced with respect to Timber Permits or Licenses, or both; and

(d) constitutea first lien in favor of the State on all timber, logs and processed forest products owned by the person who owes the money.

130. A person who acquires logs is responsiblefor paying outstanding royaltiesand other money owing on them.

131. Authority for a forest officer to seize and sell:

(a) timber, logs, etc. on which the State has a lien under;

(b) timber that has not been measured or numbered accordingto Part VII, or that is removed before it is measured;

(d) timber not removed after the expiry of a Timber Permit, License or Authority.

132. Money realized from the seizure and sale to be paid into the consolidatedRevenue Fund for timber cut from Government land or Forest management Agreement land, or to customary landowners where it is cut from customary land not included in a Forest Management Agreement or lease. Where it is cut from Forest Management Agreement land, portions of money to be designated as royalty at minimum rates specified in Regulations.

PART XI - FOREST PROTECTION

133. Where the Departmental Head considersthat an area of forest is endangeredby hazardous fire conditions,he may declare it to be a restricted area.

134. Except for cooking and warmth, prohibition against lighting fires in a restrictedarea without a burning permit issued by a Forest Officer.

135. Prohibitionagainst cutting, removing,damaging or destroying timber on Government land or customaryland, excepts

(a) under and in accordancewith a Timber Permit, Timber License, Timber Authority of Forest Management Agreement;

(b) by the owner of customary land, or a person dealing with the owner, for the domestic purposes of the owner or person; and

(c) under and in compliance with the grant of an interest in land under the Land Act or rights under the Water ResourcesAct or Min$nt Act. - 142 - ANNEX5 Page 41 of 44

136. In addition to any other penalty for trespass under the Act, the DepartmentalHead mays

(a) require the offender to pay to the State an amount equal to 10 times the calculatedroyalty presc.ioedfor the timber in the Regulations, where the timber is cut from Gvernment land or a Forest Management Agreement area; and

(b) require the offender to pay the same amount to customary landowners, where the timber is cut from customary land not included in a Forest Management Agreement or e lease under the Land Act.

137. Private remedies against trespassers by holders of Timber Permits, Licenses and Authorities are preserved.

138. For purposes of this part customary landowners and companies in which they hold shares are distinct legal entities.

139. Presumption as to ownership in the State or customary landowners.

PART XII - OFFENSES, PENALTIES AND ENFORCEMENT

DIVISION 1 - OFFENSESAND PENALTIES

140. Offenses shall include:

(a) cutting timber in trespass;

(b) removing logs or timber without measuring and numbering;

(d) non-compliancewith log export requirementst

(e) collusion in tenderingprocedures for Timber Permit and Timber Licenses;

(f) inadequateprecautions to control fires;

(g) starting a fire without a burning permit in a restrictedarea;

(h) unauthorized or purported use of a Department timber brand;

(i) destructionof boundary marks;

(j) failure to comply with lawful order of Forest Officer or Forest Inspector;

(k) unlawful possessionof forest products;

(1) receiving forest produce unlawfully obtaineds - 143 -

Page 42 of 44

(m) purchasing forest produce from a customary landowner except for domestic use or except under a Timber Authority; (n) failing to keep accurate records and books of account, etc.; and (o) removal and forfeiture (refer to Sections 18 and 19 of the existing Act). 141. Penalties MaximumK100,000 fine for offenses plus default (say R5,0001day). On conviction for collusion in tendering procedures, offender as well not eligible to apply for timber rights for 2 years following conviction. 142. Companies not to re-coumence operations until after fines and surcharges are paid.

DIVISION 2 - ENFORCEMENT

143. Entry and inspection by Department personnel on Timber Permits areas, Timber License areas and Timber Authority areas and sawmills, wharves, or any place where logs are stored or processed, to determine compliance with Act, Regulations, Permits, etc., for silviculture, fire suppression and insect and disease control. 144. Power to stop and search vehicles. 145. Conduct of proceedings by Forest Officers or Inspectors. 146. Search warrants for trespass cutting, non-payment of royalties, etc..

PART XIII - MISCELLANEOUS

147. Unless approved by the Departmental Head or approved in a Timber Permit, T;mber License or Timber Authority, prohibition against cutting, damaging or destroying trees of smaller than a size prescribed in the Regulations.

148. Preservation of rights under other Acts related to land and mining and of rights acquired under the former (current) Act. 149. Protection of Departmental personnel from liability for acts performed in the course of their duties. (see current Section 32).

PART XIV - REGULATIONS

150. The Head of State, acting on advice, etc., may make Regulations in relation to: (a) management of National Forests, forests of other Government land, and Forest Management Agreement areas, including harvesting; - 144- ANNEX S Page 43 of 44

(b) forms of Timber Permits, Timber Licenses and Timber Authoritiess

(c) procedures for issuing Timber Permits, Timber Licenses and Timber Authorities,by tender or otherwise, including application form, fees, deposits,advertising requirements, etc.;

(d) prescribingminimum royalty rates;

(e) reports and returns to be submittedto the Departmentin respect oft

(i) timber measured

(ii) royalty and other charges payable

(iii) productionand inventoriesof processed forest productc

(f) fees to be paid in respect of any matter under the Act;

(g) the inspectionof forest produce for export or local usu, and the forms and certificatesand the brands or marks to be used; sh) the training and certificationof inspectorsof forest produce for export or local use;

Ci) the registrationof persons intendingto apply for Timber Permits, Timber Licenses and Timber Authorities and limiting applicantsto persons who have been registered;

Cj) prohibitingthe export from the country of logs or processedforest products of any species;

(k) requiring the holder of any Timber Permit, Timber License or Timber Authority to produce for inspectionby Departmentpersonnel, books of account, returns and other documents to ascertain compliance with the Act, Regulations,Permit, etc.;

(1) lighting and use of fires on any forested land;

(m) regulatingtraffic in a National Forest, Governmentland or Forest Management Agreement;

(n) fixing an interest rate for overdue royaltiesand other payments owing to the State under the Act, Permits, etc.;

(o) fixing the rates at which exportersof logs and other prescribed products are to make payments into the Forest DevelopmentFund, prescribingsuch other productss

(p) any requirementin relation to the incorporationof a Landowner Company; and

(q) etc. refer to Section 34 of the existing Act. - 145 - ANNEX 5 Page 44 of 44

151. A Regulationmay be of general applicationor may be limited or restricted in its operationto National Forests, National Forest Development Areas and species.

152. Transfer of Forest IndustriesCouncil assets to the Standing Committee on Forest Industries.

153. Transfer of Forest IndustriesCouncil personnel to the Forest Service.

154. Transfer of ProvincialForestry Department personnel to the Forest Service.

155. Transfer f ProvincialForestry Departmentassets to the Forest Service.

PART XV - REPEAL

Repeal of the ForestryAct, the Forestrv (PrivateDealings) Act, and the Forest IndustriesCouncil Act.

Repeal of the Acts do not affect the validity of Permits, Licenses,Authorities and approvals issued under them for the first 12 months. - 146 - ANNEX 6 Page 1 of 5

SUGGESTEDAREAS FOR CONSERVATION/PRESERVATION

1. On the Huon Peninsula,Morobe Province, a World Heritage Area is proposed. It should include the summit areas of Mt. Bangeba (limestone),the terraces of the Huon Peninsula,and a broad area to its southern coast. This area includes ranges of bird of paradise species, especiallyAstrapia Rothschildi and Paradisaeaguilielmi, both of which are endemic to the Huon Peninsula. Plant comrunities in forests of this area are of particular interest. Dahl (1986, p. 28) has mentioned this area as a proposed national park.

2. At Morobe coast and Mt. Nissim a combined maritime and terrestrial reserve is proposed. The coastal area is importantwith an extreme beauty of its landscape,the inland areas having unique forests on ultrabasic parent material. The reserve needs to extend along the ranges to includeMt. Missim so as to protect diverse plant habitats and a rich bird and insect fauna.

3. At the Bismarck Falls a World Heritage Area of extreme conservation and scientific interest is proposed, extendingitself into the Madang, Eastern Highlands and Chimbu provinces. It should include the area from the Ramu to the summit regions of Mt. Otto and Mt. Wilhelm and is to extend to the Gahavisuka Provincial Park NE of Goroka. The area would need to be fragmented in southern sections from Bundi to Gembolg and to exclude the chromite deposits on ultrabasics near the Ramu. Areas of Lauterbachia (Honimiaceae) should be included since they representan endemic genus only known from this region. There are many other endemic plants and a very rich bird life. The park would range from 300 m to the summit of Mt. Wilhelm at 4,000 m.

4. The Okapa Araucaria stand in the Eastern Highlands Province should be protected since it belongs to the lower montane zone, which is the most threatenedone in the country. The proposed area has a large stand of Araucariawhich at the same time is the habitat of PNG's national emblem, the Paradisea raggiana.

5. A national park at Mt. Giluwe in the Southern Highlands Province is proposed, includinga mountain region of considerablebeauty and exceptional botanical interest. Several high altitude species of Bird of Paradise are common there. The area also includes the most extensivehigh altitude past bogs in PNG with their distinctiveflora i.e, mat forming rhododendronsand many high altitude plants of specific conservationinterest. The park should be extended to include areas of forest dominatedby NothofaRus arandis and N. pollei, locally known as Karapeh karapeh and Karapah pu, and areas dominated by celery top pine PhyllocladushyoDophyllus. The area is very rich in plant and animal species, includingan unnamed giant water rat and six other rat species. It also supports one of the few remainingwild dog populations.

6. At Tari Gap in the Southern Highland Province a park could be establishedcovering a mid to high altitude area. It is easily accessibleas the road from Mendi to Tari passes through subalpineforest at an altitude of about 3,000 m. The area which is very diverse botanicallyand zoologically should include the Doma Peak with the mountains of Mt. He and Amuba, two very - 147 - ANNEX6 Page 2 of 5 old volcanic peaks. A diverse high altitude bird fauna and scientifically interestiDO forests with majestic Nothofaaus stands and areas with Astrapia meyeri would be protected in the proposed park.

7. At Mt. Bosavi a protected area is proposed,occupying and sharing arear of the Southern,Western and Gulf Provinces. The mountain is an isolated volcano south of the Central Divide. The area has locally endemic plant species, e.g., the only known site of an endemic Gnetum species. There are also many bird species. The area should extend down to lowland forest to preserve areas dominatedby Vatica massak and other lowland species typical for this region.

8. At Galley Beach in the Central Province a reserve for mangrove communitiesshould be protected. The region is of great scientificinterest because of its diversemangrove communities. The area is accessible from Port Moresby and is ideally suited for study purposes, for mangrove walkways, etc. Many coastal bird species occur in the area.

9. At Wassi-Kussa in the Western Province a park is proposed to preserve the unique flora and fauna of southern PNG with its close relationshipsto the flora of Cape York Peninsula. The most diverse savannah areas are to be found in this region. They are still poorly known botanicallydespite the collectionmade by Brass.

10. The Lake Mawiumbu in Western Province should be protected as an importantregion in the Fly River basin. The lake contains a great variety of water plants includingfour endemic species of Blvza. Osborne (pers. comr.) states that this is the most important lake system of the basin due to its diversityof water plants and the very rich bird fauna of the region. It is more importantthan Lake Kutubu (originallylisted as a proposed reserve) even though Lake Kutubu has endemic fresh water species. Still Lake Kutubu should be declared as a site of scientificinterest as well as a National sanctuary because of its extreme beauty. It might be threatenedthrough the discovery of oil.

11. The Menyamya Asoki - Mt. Amungwiwa area in Morobe Province should be protected since botanicallyit is very diverse though yet poorly known. Mt. Amungwiwa is one of the two known sites for the endemic genus Piora (Compositae)which is representedby only a single species, and only known in PNG. Many other plant and animal species of scientificinterest occur in this large area of still undisturbedforest.

12. In the Oven Stanley Mountains a National Park shared between several provinces (Central,Oro, and Milne Bay) should be established. It should include the high altitude areas of the Owen Stanley Ranges, in particularMts. Albert Edward, Tafa, Scratchley,Obree, Victory (local name: Kerorova), Dayman, and Suckling. The area is of exceptionalbiological interestwith a great variety of plant and animal species. For example the Salvadori'sTeal, Anas walvivensis,occurs in this region. Seven giant water rats includinga yet undescribedspecies from the high altitude grasslandsof Mt. Albert Edward have been recorded. At CollingwoodBay the Northern Crown Pigeon, Goura victoria, and also the Southern species,G. scheemakarii, has been recorded in groups up to 15. Mt. Victory has one of the strongestpopulations of - 148 - ANNEX 6 Page 3 of 5 forest wallabies of the whole country. The Musa River area has also forest wallabies and Northern Crown Pigeons; it is furthermoreof interest because of its stands of Hoop and Klinkii pine trees. In conclusion there are strong reasons to propose the Owen Stanley Ranges for World Heritage Area listing.

13. On the islands of Goodenough,Normanby, and Fergussun in Milne Bay Province all areas over 700 to 1,000 m a.s.l. should be protected. They are of outstandingscientific interestwith many plants representedby local species at lower altitudesthan on the mainland which is due to the Massenerhebungeffect. There is also a very diverse bird fauna.

14. At Manus Island in Manus Province several smaller and mostly uninhabitedislands should be declared as reserves. On the central Manus Island an area from Mt. Dremsel to the south coast should also be protected, so as to preserve the very interestingflora and fauna of this area.

15. In the Adelbert Ranges in Madang Province an area should be set aside to protect the flora and fauna of this region, preferably from the central mountains to the northern coast.

16. In the Prince Alexander Ranges, East Sepik Province,a park should be establishedto protect the mountain region. The area is of great scientific interest though yet very little explored.

17. The TorricelliMountains in West Sepik Province should be protected as an extensivepark. It should include the limestoneregions and extend to the north coast where limestone cammunitiesare adjacent to coastal rainforest. The area includes the locallyendemic, monotypic species Rheopteris cheesmannii. This genus ic known from only two collectionsin this mountain block, both found on limestone,whereas the Cheesmanncollection was picked up from a log in the river (not on site). Petaurus abidi is a glider apparently found only in this area. Severalwater rat species have been | recorded includingHydromys hussoni. The area bas recently drawn conservation attention through the possible discoveryof a new tree kangaroo species.

18. The Tower Limestones in Gulf Province should be protected as an area of extreme scientific interest and diversity. The individualtowers are over 200 to 400 m tall and each support an isolated capping of rainforest. Possibly the Darai Hills south-eastof Mt. Bosavi should be included and the whole area be treated as part of the Mt. Bosavi National Park.

19. The Hunstein Mountains in East Sepik Province representa biologicallyvery diverse area which requires protection as a reserve. No collectionhas been made here since the German expedition in 1912, but botanical diversity is evident. The area is the type locality for Araucaria hunsteinii. It includes extensive stands of the endemic kauri speciesAgathis labillardieriwhich deserve protection. There is fear that the area might be logged to extract the kauri, hence it is an importantarea for protection as soon as possible.

20. The Whiteman Ranges in West New Britain representan extensivearea of rainforeston limestoneand mixed volcanic rocks. It should be protected because of its scenic beauty and scientificimportance. The flora is still - 149 - ANNEX6 Page 4 of 5 poorly know but very diverse. There is a high degree of avian endemism with at least 23 species. Endemism is particularlyimportant in high altitude Airds.

21. The Lake Dakataua in West Neu Britain is of exceptionalscenic beauty and scientific interest. The area has potential for a major tourist attraction. Strong efforts should be made urgently to stop the proposed replacementof the forest by oil palm plantations. Forests should be managed in a way to maintain their ecosystem and in coexistencewith a potential tourist industry development. The lake has a saltwatercrocodile population, an abundant bird life, and a myriad of insects, but interestinglyno fish; it thus representsa unique type of ecosystem.

22. The Nakanai Plateau in East New Britain is a region tvfimportant midmontane forest dominatedby two speciesof Nothofaguis.Forest is very diverse and comprises some local endemic species of Asplenium. The area deserves protection because of its scientificinterest.

23. In Southern New Ireland a World Heritage Area is proposed because of its exceptionalscenic beauty and extreme scientificinterest. The area should include the rift valley in the limestoneand the mountain ranges to the north and south of it. There is a great potential for further scientific exploration.

24. The Telei Plateau on New Ireland deserves protection especially because of its outstandingbotanical diversity. Mid altitude forest is particularlywell developed.

25. The Mt. Takuan in North Solomons Province is an area of great diversity, especiallyin respect of its flora. It includesmany Pacific elements and should be preserved. Adequate reserves should also be establishedin the stands of Terminaliabrassii in Bougainville. The mountain avifauna of the North Solomons apparently shows a high level of endemism.

26. The LouisiadeNational Marine and TerrestrialPark in Milne Bay Province is proposed for World Heritage Listing. Apart from a major marine park which should be established,but which is not further consideredhere because the present topic is the forest environment,a terrestrialpark is proposed mainly because of many locallyendemic species in the land based flora. Among them are severalendemic species of Hooea (Dipterocarpacea)and obony (Diospyros,Ebenaceae). In addition there are specieswith conmercial potential for the establishmentof forest plantations.

27. The Star Mountains in West Sepik and Western Province deserve protection as an importantarea for highland species. Many of them are in common with Irian Jaya. The occurrenceof Salvadori'sTeal has also been reported from this area.

28. The areas proposed for protection so far, togetherwith the conservationareas already establishedor officiallyproposed are believed to give a considerablecover to the major floristicand zoologic diversity in Papua New Guinea accordingto present knowledge. In additior.many '.ocal areas deserve some form of protection,i.e., Mt. Mithael in the Eastern - 150 - X , 6 Page 5 of 5

Highlands Province and Long Island in the Madang Province, but they are not considered as key areas for National Parks or World Heritage Listing. Furthermore, it should be borne in mind that the proposals here are confined to the forest environment only. There are many sites important for other conservation targets, e.g., protection of the marine environment, which are not included in this report.

Table 1: OVERVIEW OF EXISTING PROTECTED AREAS R'!LEVANT FOR FOREST ECOSYSTEM CONSERVATION

Name of Area and Year of Declaration Size (ha)

McAdam National Park (1970) 2,090 Mt. Wilhem National Park (1976) 4,856 Varirata National Park (1969) 1,063 Mt. Gahavisuka Provincial Park (1983) 77 Bagiai Wildlife Management Area (1977) 13,760 Garu Wildlife Management Area (1976) 8,700 lomare Wildlife Management Area (1987) 3,837 Lake Lavw Wildlife Management Area (1981) 2,640 Mojirau Wildlife Management Area (1978) 5,074 Ndrolowa Wildlife Management Area (1985) 5,850 Neiru Wildlife Management Area (1987) 3,984 Nuserang Wildlife Management Area (1986) 22 Oia Mada Wara Wildlife Management Area (1981) 22,840 Pokili Wildlife Management Area (1975) 11,000 Sawataetae Wildlife Management Area (1977) 700 Siva-Utame Wildlife Managemwnt Area (1977) 12,540 Tonda Wildlife Management Area (1975) 590,000 Zc-Oimaga Wildlife Management Area (1981) 1,488 Bayer River Sanctuary (1968) 120 Balek Wildlife Sanctuary 150 -151 - h7 Page 1 of 2

TERMS OF REFERENCESAND TYAP MISSION MEMBERS

1. The followingis an extract from terms of referenceissued to the Team Leader by the World Bank:

"The mission's objectivewill be to develop guidelines for policy development,investment and technicalinputs for the forestrl sector, under the TropicalForestry Action Plan guidelines,and covering the followingareas as identifiedin the Initiating Memorandum:

(i) forest legislationand policies, includingconcession arrangementsand forest management;

(ii) marketing of PNG forest products;

(iii) forest industry development;

(iv) sector trade and fiscal measures;

(v) institutionaland human resource development;and

(vi) forest land use planning and conservation."

2. The individualteam members, their organizationalaffiliation, and their terms of referenceare given below:

The Team Leader (J. Douglas,World Bank)s will lead the mission, with responsibilityfor coordinstingthe work of mission members. The Team Leader will also be responsiblefor taking the lead in the dialogue on policy issues with GOPNO.

The Economist (I. Ruzicka, ADB)t will review the existing and potential role of the sector in the economic growth of PNG. The consultantwill report on fiscal, trade and other economic policy measures affectingthe developmentof the sector, includingrelevant provisions in the new ForestryAct.

The Management and Marketing Expert (J. Carle, Consultantappointed by the New Zealand Ministry of External Relations and Trade): vili review present management standardsand pract4ces and the concession system. The consultantwill report on the effectivenessof present policies and changes needed to produce sustainablemanagement in PNG. The consultant will also review current log grading and pricing policies and practices in PNG. The consultantwill report on these, and on improvementsnecessary in methods of classificationand sale to maximize revenues to PNG.

The Resources and Lonaint Exoert (carriedout jointly by B. Kingston and V. Buenaflors,FAO)t will appraise and summarizethe existing resource and infoimationdata base, and identify deficiencies. The - -~ - ANNEX 7 Page 2 of 2 consultantwill appraise logging operationsin PNG, and suggest improvements. The consultantwill prepare a report on resourcesand an action plan for providingand updating resourcesdata.

The InstitutionalExDcrt (B. Leaver, Consultantappointed by the Australian InternationalDevelopment Assistance Bureau): will assess the capacity of existing institutionsto implementexisting and foreshadowedlegislation and policies,particularly those relatingto land tenure issues. The consultantwill draw up a program for strengtheninginstitutions where required,specifying the organizationalframework, training and administrativeneeds.

The IndustriesExpert (P. Eddowes, Consultantappointed by ADB): will summarizecurrent structureand performanceof the forest industries of PNG. He will identifyand report on upgrading and improvementsneeded, transportconstraints, and policy measures necessary for developmentof an efficientprocessing sector in PNG.

The Community Forestry Expert (C. Sargent, InternationalInstitute of Environmentand Development,funded by UNDP): will identify the role of communitiesand clans in forest management and conservation. The consultantwill report on the appropriatenessof governmentpolicies on tenure, and ecosystemconservation.

The EnvironmentalExDert (W. Butzler, Consultantappointed by the InternationalUnion for the Conservationof Nature,with funding by the German Agency for TechnicalCooperation (GTZ)): will identify sites of conservationsignificance and report on priorities for conservationinputs by donors. - 153 - ANNEX 8 Page 1 of 6

MAJOR FORMS OF TIMBER SALE AGREEMENTIN PNG

Timber Rights Purchase

1. The standardprocedure for major resource allocationhas been the TRP system under the Forestry Act (Amalgamated)1983.

2. A "Manualof Timber Rights Purchase Procedures@,published by the Department of Forests, 1986 details the current procedures. In suimary these includet

(a) TRP negotiationsare undertakenby national and provincial personnel;

(b) TRP funds come from the National Budget and from National Government submissionsto the TRP and Resource AcquisitionsOfficers through the NPEP system;

(d) negotiationscommence with landowners,primarily about potentially operable resources,and the payment schedv.lesfor deposits and royaltypayments;

(e) evaluation of resourcesis usually updated to gauge species composition, harvesting difficulty,proximity to markets, etc.;

(f) boundaries are demarcatedas far as feasible;

(g) land ownership is establishedand vendors appointed representatives, agents, etc. identified;

(h) draft agreement,royalty and deposit calculationsmade. and approval for final funding approved;

(i) final TRP agreementis executedby the landownerrepresentatives, the Minister of Forests and the Governor General; and

(j) the form of the TRP Agreement is a standard contract and a supplementary contractwith facility for inclusionof unique data for particularpurchase areas.

3. Negotiationof TRPs has fluctuatedconsiderably over the years. Table 1 summarizesTRPs negotiated from 1951-88: - 154 - ANNEX 8 Page 2 of 6

Table ': TRP'S NEGOTIATED1951-88

Period Areas Negotiated Average Annual Years (1,000ha) (1,000 ha)

1951-55 31.4 6.3 1956-60 116.1 23.2 1961-65 285.3 57.1 1966-70 1,353.5 270.7 1971-75 518.6 103.7 1976-80 374.2 74.8 1981-85 539.0 107.8 1986-88 895.1 298.4

Total 4,113.2 298.4

Sources: Compendiumof Statistics1986; ResourcesDivision Departmentof Forest

4. During the late 1960s and mid 19709 a concertedeffort was made to secure large areas under the TRPs. This coincideswith the increasedinterest in logging in PNG by overseas investors. Because a number of the large TRPs purchasedwere not developed,the program for purchase decreasedmarkedly during the late 1970s and 19809. Since 1983 the TRP negotiationshave increased,with a spectacularincrease from 1987 when the NFDP programwas adopted.

5. Timber Permits and Licences are issued by the Governmentto the successfulforestry developmentcompany granting cutting rights over the negotiated project area. Timber permits are granted for large scale projects exceeding40,000 m3/year annual cut and timber licences for annual cuts up to 40,000 m /year. ! 6. The company is granted a permit or licence subject to compliance with an approved working plan and environmentalplan. Compliancewith these plans is the direct responsibilityof the permit/licenceholder. In the landowner projects which have subcontractedthe logging, roading, trucking, log yard, timber processing and marketing operationsthere have been difficultiesin making sub-contractorscomply with the terms and conditions. Some projects (e.g.,Umboi Island Development)have been suspendeduntil the terms and conditionsare complied with.

7. Each permit or licence stipulatesa maximum annual allowablecut and maximum log export level. It is estimated that the TRP committed annual allowable cuts under permit or licencewas between 3.1-3.5 million m3 in March 1989. however, there is confusionwithin the industry as to what the level of committed resourceunder the TRP system is. This is bLought about becauset - 155 - ANNEX8 Page 3 of 6

(a) TiP agreements are simply the purchase of cutting rights by the Government from the landowners. (b) Timber Permits/Licences are the approved transfer of those cutting rights from a TRP agreement to a company or group. (c) Annual Allowable Cuts are stipulated in timber permits and licences, but companies rarely operate at these levels. (d) Not all approved TRP operations are operational at the same time- -some are phasing in, others phasing out, some suspended, etc.

Table 2 summarizes timber permits/licences approved during the 1979 - March 1989 period: Table 2: TIMBERPERMITSILICENCES APPROVED 1979 - March 1989

Approvals Year No Area (ha)

1979 6 34,386 1985 1 53,940 1986 8 636,728 1987 15 333,654 1988 23 744,130 1989 (Jan-Mar) 9 272,210

Sources Compendium Statistics 1979, 1986; Ministryof Forests

In line with the NFDPprogram approvals have been increased from 1986. 8. Table 3 summarizes timber permits/licences operational during selected years between 1979 and March 1989. - 156 - ANNEX8 Page 4 of 6

Table 3: TIMBER PERMITSILICENCESOPERATIONAL 1979 - March 1989

Annual Area Allowable Cut Max Log Export Year Number (1,000ha) (1,000i 3) (1,000m3)

1979 67 978.5 1985 59 1,435.1 1987 - 2,167.0 1989 (Jan-May) 74 2,417.3 3,141.2 1,806.5

Sources Compendium of Statistics1979, 1986; Ministry of Forest.

The timber permitsllicencesoperational have increasedby 682 (by area) since 1985. No comparativevolume data was available.

9. There is an abundance of confusing and misleading information relating to volumes and areas approved and operational under TRP. It is an area requiring urgent attention.

Declared Local Forest Areas

10. The procedures for LPA application and declaration are simple, relatively .'astand allow greater returns to landowners and landowner groups.

11. The application involves a R 50 applicationfee and sufficient project details for the Minister of Forests to establishthat the area is suitable for exploitation as an LFA with regard to:

(a) interest of the landownersby custom of the timber on the land;

(b) national interest;and

12. The Minister has three months on receipt of applicationto grant or refuse an application. Declarationif approved is by notice in the National Gazette. The LFAs declared in 1988 had special terms and conditions regarding working plans and :nvironmental plans as if they were TRPs. On declaration, a project agreement or a dealings is entered into between the customary owners and a forestry company. The project agreement has to be assented to by the Minister. Assent is given or refusedwithin 60 days. To give assent the Minister must be satisfied that the project agreements - 157 - ANNEX 8 Page 5 of 6

(a) complies with the Private Dealing Act;

(b) the price for sale or disposal is equitable;

(c) the rate of exploitation in the LIA has regard to the economics of forest operations on the one hand and the requirements of the proper exploitation of the timber resources on the other; and

td) that it converts a reasonable portion of annual allowable cut to sawn timber.

Assent can be withdrawn If terms and conditionsof the project agreement are not adhered to.

13. LPAs declared under the Private Dealing Act are summarized in Table 4 followings

Table 4: LOCAL FOREST AREAS DECLARED 1974 - MARCH 1989

Annual Area Allowable Cut Maz Log tort Year Number (1,000ha) (1,000m 3) (1,000m )

1974 3 122,750 1975 1 10,000 1976 1 9,000 1977-82 1983 1 5.000 1984 1085 1 34,000 1986 1987 3 40,000 1988 4 130,578 350.0 320.0

Sources Department of Forests

14. The declarationof LFAs commenced in 1974 and by 1976 141,750 ha had been committed, all in New Ireland. All but one of these operationshad been completed and operationsceased by March 1989. Prior to October 1988 only one LFA had been declared outside New Ireland (lN Britain 5,000 ha). Of the 351,000 ha of LFAs declared since 1974, 131,000 ha were declared during a three month period, between October-December1988. All four LFAs declared in this period amountingto 350,000m 3 annual allowablecut were outside New Ireland. Since aid-December1988, there have been no further LIAs declared. Controversysurrounds may of these declarations: the Commissionof Inquiry has devoted considerableattention to them. The situation in New Irelandhas come about largely as a result of LFAs under the Private Dealings Act. - 158 - ANNEX 8 Page 6 of 6

Timber Authority

15. TAs can be grantedby forest inspectorsunder the forestry regulations to landownersto harvest their timber for their own use. Generally TAs do not exceed 5,000 m3 per annum. The procedure is simple and approval is granted with minimal delay. Although TAs are small and require little planning, they do collectively account for significant areas of harvesting. Estimates for year data was available and are summarized in Table 5.

Table 5s TA HARVEST VOLUMES 1978-85

Volumes Harvested Year (1,000m3)

1978 95.8 1979 99.3 1985 158.2

Freehold Property Approvals

16. The forestry regulations allow approvals to be granted for logging on freehold property under special circumstances. Harvesting data available ist

Table 6: FREEHOLDPROPERTY - HARVEST VOLUMES1978-85

Volumes Harvested Year (1,000m 3 )

1978 101.0 1979 43.7 1985 37.8 - 159 - ANNEX9 Page I of 2

SUMMARY OF THE MINISTER'S DRAFTING INSTRUCTIONSFOR A NEWFORESTRY ACT

1. The main features of the Minister's Drafting Instructionsinclude:

(a) the Timber Rights Purchase and issuance of Timber Permits under the current Forestry Act and declarationof Local Forests Areas under the Private Dealings Act will be supersededby Forest Management Agreements (FMAs) authorizingthe State to manage the landowners' forest resource on their behalf;

(b) a portion of the forest area under the PMA will be dedicated to reforestation(10-20Z);

(d) it is aimed to have the FMA system implementedfaster than the existing TRP system;

(e) a reforestationlevy will be charged from a Forest DevelopmentLevy of K l.00/m3 and youth groups used to reforest dedicatedareas;

(f) amalgamationof the existing Forest IndustriesCouncil and the Marketing Division of the Department of Forests into a Forest IndustriesOffice for marketing promotionand monitoring marketing functionswith the aim of reducing transfer pricing;

(g) a levy will be charged on the industry for marketingmonitoring by way of the Forest Industry Office Levy at K 1.00lm3

(h) increasedpenalties for breaches in tbe Act;

(i) increase of export levy from 1OZ to 152 FOB to compensatefor transferpricing;

(j) increase in harvesting and marketingmonitoring resourcesat National and Provincial level;

(k) local processingwill become an integralpart of the timber permit;

(1) increased fees for registrationsand authorities;

(m) royalty rates will be linked to market value of the wood, with deductions on production factors;

(n) 1002 of royaltywill go to landowners;

(o) rationalizationof National and ProvincialGovernment authorities and responsibilities; - 160 - ANNEX 9 Page 2 of 2

(p) requirementfor forestry developmentplans for i1ationalForest Development Areas includingenvironmental plans;

(q) a follow-up lar4 use levy will be charged for follow up land use at K l.001m3

(r) increasedpriority for research at the Forest Research Institute;and

(s) requirements for forest working plans and annual loggingplans will become an integral part of the terms and conditions of timber permits.

2. These changeswere proposed to assist the forest industry tos

(a) more equitably distribute benefits of forestry development to landowners;

(b) become more accountable and commercial in operation;

Cd) maintain revenue flows to Government. - 161- AMINE 10 Page 1 of 24

SUGGESTEDPROJECT PROPOSALS

Proiect 1

Rapid Resource Appraisal

Rationale

It is essential, from the point of view of forestry and environmental planning in PNG, to obtain a rapid assessmentof the extent and conditionof the forest resource. As the Government of PNG has a constitutionalobligation to use the forests on a sustainablebasis, it is also critical to identify and promote mechanisms for bringing together the expectations of landowners, investors and the state. Major requirementsare for: detailed and accurate information on the resource to allow area management for sustainable yield, and the inventoryproposed in Project 2 will achieve this; and for the identification and legal registrationof landownerinterests enabling appropriatenegotia- cion structuresto be established. This must have a two pronged approach: strengtheninginstitutional capacity to address legal and political requirements, a feasibilitystudy for which will be covered by this project; and assisting landownersto participatesuccessfully in negotiaticansover their resource (Project5).

Givex that an inventorymay take four or five years to complete, and that la,adregistration is a slow and complex process, even when institutional capacity is available, interim informationand resource and population data for planning proposals are needed.

This informationshould, to the extent possible, include assessmentof areas for conversion,production and multi-use forests, and surveys of possible World Heritage sites in PNG.

Project Outline

Logically, this project should have these major objectives:

(a) to provide a quick estimate of the state of the PNG forest resource, for use in production planning under sustainableyield; and

(b) to utilize the mapping and imagery developedin (a) above to define the boundaries for a World Heritage declaration--incooperation with projects 3 and 7 in this listing of proposals.

(c) to identifymechanisms for ensuring effectivecooperation with landownersbased on registrationand the developmentof appropriate structuresfor negotiationin tandem with landownerassistance as outlined in Project 5. - 162 - ANNX 10 Page 2 of 24

Activities

(a) updating of PNGRIS and other photo and map data on forest cover and types, utilizing remote sensing data;

(b) use of logging reccrds, FRI data and field studies to estimate regrowth and yield on logged over areas;

(c) use of these and other data to reconcilegrowing stock estimatesand commercial forest area estimatescurrentAy held in Forests Department;

(d) preparationof resourcemaps for World Heritage sites, utilizing current ecological and other survey data and field surveys

(e) survey and study of social and community implications of Heritage declaration; and (f) preparationof a detailedmanagement plan for the World Heritage site(s).

(g) prepare land use recommendationsfor areas and vegetative types appropriatefot production,conversion, multiple use or protection.

(h) assemble population iata and identify groups concerned.

(i) establishpreliminary negotiations with concernedgroups, identify socio-economicissues.

(j) identify supportneeded to the DLPP, or the provision of a parallel structure,to provide for appropriateland registrationto support the goals of the Forestry Sector for sustainablemanagement and conservation of the resource.

(k) seek mechanisms and guidelinesfor setting up permanent negotiation systems with landowners.

(1) identify ways in which appropriate economic returns can be made to landowners.

(m) identify approachesto timber productionwhich can incorporate traditionalmulti-puzpose land uses. Examine potential land uses which will remain available to the landowner within a World Heritage context. Identify mechanisms for making available follow up and alternative land-use information.

(n) exemine employmentopportunities (i.e., in monitoring) which can be made available to the landowner in conservationand production forest.

(o) provide input to landownerawareness and support center. - 163 - ANNEX 10 Page 3 of 24

External Irnuts

A. Rapid ResourcesApDraisal

(a) Imagery production for updating resourcemaps-- subcontract $1,000,000

(b) Expert in resourcemapping/appraisal--12 m/im 120,000

B. Ecological Surveys and ManagementPlan

(a) Expert .. i park management--6m/m 60,000

(b) Expert in social and ecological survey design and interpretation--6m/m 60,000

tc) Vehicles and equipment 1 x FWD 30,000 Other 5.000

C. Land Tenure

(a) Expert in land tenure, social/institutional systems--12mlm 120,000

(b) Vehicles and equipment 1 x FWD 30,000 Other 50.000 1.467.000

Timetable

1990 1991 1 2 3 4 1 2 3 4

Imagery Resource map production Surveys UHmanagement plans - 164 - AMNEX 10 Page 4 of 24

Proiect 2

Forest ResourceAssessment

Rationale

While the rapid resource appraisaldiscussed in Project 1 will provide interim planning figures for determiningallowable cut in PNG, a full scale inventory will be needed to allow accurate and detailed management plans and operations to be designed. Such a procesi.will use the rapid resources appraisal as initial baseline mapping and resourcesinput.

Prolect Outline

The project envisagedwould entail forest resoutce mapping (bsased partially on existing data, but with new photographyand imagery being required);forest inventory, leadingto volume estimates,growth and yield models; and management scale data to allow design of regioaal and forest management plans.

Activities

(a) Forest resourcemapping: air photo cover; definitionof strata; photo interpretation;cartography;

(b) Inventorys national inventory;resource inventory;management inven- tories; continuousforest inventory;development of volume, growth, yield and managementmodels.

sc) Management plans: national forest developmentplan; regional plans; forest management plans.

External Inputs

This project would be a large undertaking, and detailed costings and inputs would need to be estimated under a consultancy process. A total commitment figure of $4-5 million may be needed before further steps to initiate this project are taken.

Timetable

1991 1992 1993 1994 1995

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Resource mapping Inventory Management plans - 1. -

Page S of 24

Project 3

National ConservationStratety

Rationale

A basis of legislationexists in PNG for conservationmanagement in PNG, and there is a requirementfor an agreed,national plan on what ecological resources requiresmanagement, and on what forms of managementare required. The best means to achieve this would be to hold a broadly based conferenceon this subject, with the object of producing r,commendationsand sites for protection and management,and on the criteria to be applied in environmental impact assessmentsand land use planning.

If the timing is right, this conferencecould also be used as the venue for launchingthe World Heritage Proposal discussed in the TYAP report.

Proiect Outline

A preparatoryphase would be needed, to consolidateexisting ecological data in PNG, and to assist various agencies,NGOs and other interest groups in the preparationof specific submissionsand proposals to the conference.

The conference i:self would be run over the course of a week, and would produce a publicatior.specifically aimed at summarizingproposals and recommendationsof the conference.

Activities

(a) preparationof maps, summariesof existing ecologicalresources data and past proposals for management of PNG's ecological resources. This should include material from the rapid resourcesappraisal project on establishmentof World Heritage areas;

(b) organizationand implementationof the conference;and

External Ir.outs

(a) Expert in conservation--3mlm 30,000

(b) Subcontractconference organization 100,000

Timetable

1990 1991 1 2 3 4 1 2 3 4

ProductionA Data and submissions Conference Publication

I I 1. ANN 10 Page 7 of 24

Prolect 4

Rehabilitation of Existina National Parks

Rationale

It is evident that in PNG some major rehabilitationwork is necessary to restore existingnational park areas to their proper functions this will include design of management plans where necessary. The 3a5orpriority at this point is to prepare an estimate of what needs to be done, so that a major rehabilitationproject can be prepared.

Proiect Outline

The first phase of the project will be a review of existing parks and their function and production of appropr..a:.c management plans, leading to an assessment of the work needed to restore t'md maintain these areas to their intended function.

The second phase of the project will be to implementthe required rehabilitationwork.

External Inputs (Phase I1)

(a) Expert in perk management 60,000 (b) Vehicle and other equipment--6m/m 50,000 (c) Travel and other eupport 30.000

(Phase II) (a) Physical rehabilitation (uncosted (b) Management training for GOPNG, NGO and local until Phase I or provincial officers data available Commitment limit: S5 million) ANNE% 10 Page 8 of 24

Proiect 5

LandownerAwareness and Su2port

Rationale

In the absence of landownercommitment and support to concepts of sustainablemanagement and conservationof the natural forest, attempts to ensure the productive and protectivecontinuation of this resource are likely to meet with only sporadic success. Such commitmentcould be promoted by a combined approach involvingeducation and the developmentof mechanisms to ensure adequate and continuousbenefit to the landowner. Most importantly,provision for long term negotiationwith the landownermust be made, as, under Melanesian customarypractice, land transactionsare not consideredto bcea permanent or binding nature; indefeasibilityis not recognized.

This project is among other things, a prerequisiteto any attempt to map or delineateareas for potentialWorld Heritage listing, and will closely underpin the drafting instructionsfor forestry legislationby developing mechanisms to ensure appropriate laadowner participation in the development of the forest resource. It proposesmechanisms to promote landowner'sawareness and the skills to enable them to participate effectively rather than taking recourse in destructiveredress.

Proiect Outline

The project will establish a landowner center under the Companies Act on a non-profit basis. A board comprisinggovernment, NGO, educationaland landowner representation will be formed. The objectivewill be to set up a training and informationcenter, where mobile teams will be trained to carry out extension activitieswith landholders.

External Inouts

(a) Expert in informationservices m/m, 60,000 (b) Expert in technical services--6m/m 60,000 (c) office and field eqpt. 100,000 (d) costs (24 months) 120.000 340.000

Timetable

1990 1991 1992 1993 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Establishment Initial operating Operational - 1 - ANNEX 10 Page 9 of 24

Proiect 6

Improved Ecoloical Survey and Monitorins

Rationale

The implementationof a national conservationstrategy, and of an effectivenational park system,will ultimately rely on adequate knowledge of the ecological resourcesof PNG. An ongoing process of survey and monitoring will be required to achieve this, and thus the staffing, training and back up needed to mount such a program will be needed.

Proiect Outline

The initial objectiveof the projectwill be to design and establish an appropriateecological data base systemwithin GOPNG, includinga priority program to collect data.

The major objective will be to create a GOPNGinfrastructure adequate to manage and maintain this data system, once established.

Activities

(a) design and establishmentof a data base system, compatiblewith existing international norms;

(b) development of a data collection program on a regional basis;

Cd) training of GOPNGpersonnel.

External Invuts

- Expert in ecological data base design and management--12 m/m 120,000

- Equipment and Software 20,000

- Training budget

in-country training 15,000 external training 40.000 195.000 - l1v - ANNEX 10 Page 10 of 24

Timetable

1990 1991 1992 1 2 3 4 1 2 3 4 1 2 3 4

Design data bank Develop collectionprogram Infrastructuraldesign Training

?' - 171 - AM=EX 10 Page 11 of 24

Proiect 7

The Wau Ecolouy Institute

Rationale

This NGO has been effective in PNG in scientific and monitoring work in environment and conservation. The group requires external support to allow its activities to continue.

Proiect Outline

The objective of the project vill be to allow WEI to recruit additional personnel, support running costs, and train some of its scientific officers overseas.

External Innuts

- Support annual salaries, 3 yearb 180,000

- Running costs and equipment 30,000

- Vehicles and other equipment 20,000

- Training of personnel

in-country--24 mlm 24,000 overseas--24 mIm 72.000 326.000

I - lid. - ANIKU 10 Page 12 of 24

Proiect 8

National Youth Movement in Forestry

Rationale

GOPNG gives high priority to the engagementof youth in PNG in nation building. Some limited involvementof the NYM program in forestry activityhas been successfullyundertaken in the past. and this could be built upon.

Proiect Outline

At this stage, what is required is an effective design for a program of involvementof youth in national forestry work. The initial phase of the project will therefore be aimed and producing a feasible program for expanded use of the NYM in forestrywork. A second, implementationphase could then be designed on this basis.

External Inputs

Timetable - 173 - AMNEX 10 Pag 13 of 24

Proiect 9

Agroforestrvby the Gau Land Group

Rationale

The Gau Land Group representssome 20,000 people in the upper Markham Valley in Marobe Province. The Group has proposed an agroforestryproject as a response to erosion and other environmental damage which has resulted from some forms of land use ir the area.

The project intendsto establish severalhundred hectares of fuelvood, fruit trees and cash crops in rotation over several years, to establish systems for harvest and sale of outputs, and to create a permanent infrastructureof nurseries, paddy and other elements for sustainabilityof the proposed project.

External Inputs

- Salaries and costs for

- (volunteer) coordinator--36 m/m 27,000 - counterpa-t--36 mlm 21,000 - nursery staff--48 mlm 19,500 - driver 12,000

- Consultant planningimanagement 9,000

- Equipment and buildings 104,000

- Running costs (36 months) 50.S0^ 243.200

. - 174 - ANNE 10 Page 14 of 24

Proiect 10 Human Resources Develolment Rationalr

Obviously,the effectivenessof the proposed new structure ior forestry in the TFAP report vill depend upon an adequate supply of well-trained professionalsand technicians. A lack of trained personnelwas identifiedas a major present constrainton forestry in PNG; there are interimmeasures proposed in projects to overcome it in the short term, but ultimatelythe skills needed to manage forestrymust be developedwithin P..G.

Proiect Outline

The immediatepurpose of external assistance ir this area will be to provide forestry academic expertiseto the existing institutionsin PNG, firstly to assist with redevelopmentof curriculaand courseswhere necessary, secondly to allow local academics to undertake further training,while maintaining staff numbers at the institutes,and thirdly to cover the costs of such training.

Activities

(a) design of appropriate curricula for training institutions; (b) design of human resources development program for institutions; (c) selection of academic staff for further training; (d) implementation of training programs for staff; and te) training of additional students.

External Innuts

- 3 Experts forestry education (variousdisciplines)--72 mlm 720,000

- Vehicles and other equipment 60,000

- Training

- external postgraduate training Masters level (3 students) 120,000

- external postgraduate training PD level (2 students) 120,000

- diploma and degree training for 100 additional forestry officers 1.000.000 2.020.000 - 175 - AX 10 Page 15 of 24

Timetable

1990 1991 1992 1993 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Curricula design HRD Program Staff training Student training - 176 - ANNEXl0_ Page 16 of £.

Proiect 11

Forest Management and Monitoring Task Forces

Rationale

The TFAP report identifies field ianagement of the forestry and logging programs as the major area requiring attention under the Action Program. As noted in the rationale for Project 12, this will ultimately require more better trained forestry professionals and technicians vithin PNG. However, it will take several years to implementthe human resourcesdevelopment program, and in the meantime forestry activitiesvill continue,and probably increase. Accordingly,GOPNG has agreed that as an interim solution,task forces to carry out essential tasks in forest management, and monitoring of the logging program, must be implenented.

Proiect Outline

The intention of this projectwill be to develop highly mobile task forces, centrallycontrolled within the new Forestry Service, to carry out essentialplanning and field tasks. The task forces will utilize as many foreiga experts in field roles as necessary to carry out their functions,with as many local officers attached to the structuresas possible so that a field training role is also achieved. The task forces will operate for a specified period, until locally trained officialscan take over their function completely.

Activities

A. Forest Management

- preparationof Forest HknagementPlans as defined under the new Forestry Act for each operationalarea;

- design and supervisionof necessary silviculturaland regeneration work;

- monitoring of logging standards to ensure compliance with environmental provisions in the new Act;

- training of local forest officers in the field; and

- research and review of appropriate systems for concession management and contracting. - 177 - AMWX 10 Page 17 of 24

: ~* LzrMiEa

I- design and implementation of new grading, scaling and utilization standards;

- supervision of logging plans and operations;

- implementation of improved checking and tallying procedures; and

- training of local forest officers in the field.

External Inputs

A. Forest Management

- 2 external forest management experts--1Z0m/m 1,200,000

- 1 policylplanningexpert--S0 /lm 600,000

- equipment/materials 500,000

- vehicles (50) 1,500,000

- training expenses 100,000

- travel expenses 500,000

- miscellaneous 500,000

B. Losingx

- 2 ext.ernal logging design/supervision experts--120 mim 1.200,000

- equipment/materials 200,000

- vehicles (5) 150,000

- training expenses 100,000

- travel expenses 400,000

- miscellaneous 250.000 7 .200.000 - 178 -

AM=EX 10 Page 18 of 24

Timetable

1990 1991 1992 1993 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Management Plans Silvic/Regen. Logging Monitor _ Training Research Grading Standards Supervision Logging Implementating new procedures

I - 179 - ANNEX10 Page 19 of 24

Proiect 12

Strenatheninathe State Purchasin Olption

Rationale

The TFAP review supports the concept of the State PurchasingOption as a means of raising prices for PNG logs, but argues that the current agency carrying out this activity is understaffedand underfunded. The report suggests a substantialboost in activity,based on external inputs from a firm or firms involved in covaercialmarketing of forest products,on a performancecontract brsis (i.e, an arrangemewtthat will require the firm to produce measurable improvementsin revenue).

Proiect Outline

The SPO will be made more independentof the GOPNG forestry administration,and will be placed in partnershipwith an international marketing firm for a fixed period. Sufficientfunding to allow the SPO to initially hire additional staff and purchase equipment and to cover part of the contract cost for the internationalfirm will be required.

Activities

(a) design of internationalmarketing firm contract;

(b) engagement of firm;

(d) implementationof reorderedmarketing program.

External Inputs

- Expert in marketing to design contract and select firm 144,000

- travel costs/promotinnexpenses 150,000

- equipment/materialsfor SPO 30,000

- miscellaneous

- initial contract subsidy (C year on a 3 year contract) 500.000 824.000 l - 180 - ANNEX 10 Page 20 of 24

Timetable

1990 1991 1992 1993 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Contract design Institutionalre-arrangement Internationalmarketing contract - 181 - ANNEX 10 Page 21 of 24

Proiect 13

Forest Industry DevelopmentStudies

Rationale

In the TFAP report It was argued that importantpolicy decisions-- namely, the imposition of log export bans to encouragedomestic processing,and the location of major plantation investments--shouldnot be taken in the absence of feasibilitystudies for forestry investments. Ideally, such studies should be carried out by the potential investors;in some cases GOPNG may be a joint venturer in some industry developments. In any event, the studies should be commerciallyoriented towards specificprojects, rather than generallybased on a sector.

Proiect Outline

At the present stage of developatentin PNG, three basic types of forest processing seem most worthy of considerationt an integratedsawing and board plant; voodchipping (for export) operations; and a pulp mill. The project should therefore select the most favorable sites for development of these options, and analyze the economic and commwrcialfeasibility of investmentin them. The studies should be carried out by commercialfirms with experience in the type of investment,and to the maximum extent possible should involve potentialjoint venturers and private sector investorsin the analysis. Thus, while some initial preparatory work might be done under the aegis of GOPNG and a donor agency, at some point relatively early in the cycle potential investors should take over. The project outlined here thus is limited in scale.

Activities

(a) selectionof potentialmajor investmentsites;

(b) analysis of resource requirementsfor economic scale operationsin each major category;and

External InDuts

(a) Resources/landuse expert to identify potential forest industry developmentsites--3 m/m 30,00G,

(b) Subcontract to commercial firm to make preparatory investigations for feasibilitystudies 450.000 480.000 - 182 - AN= 10 Page 22 of 24

Timetable

1990 _ 1991

1 2 3 4 1 2 3 4 Landiresourcesstudy Preparatoryfeasibility studies ANNEX10 Page 23 of 24

Proiect 14

Technical Surnort for TFAP Implementation

Rationale

In the TFAP -eport, It was noted that the combination of an internal restructuring of the forestry sector, and significant external inputs as envisaged under this Action Program, will require considerible coordination. GOPNGwill be in need of irmediate assistance to ensure the program is properly implemented--input that not only is capable of providing advice on internal restructuring, but is effectively linked in to the international agencies involved in the program. GOPNG has specificallyrequested that the World Bank should remain involved as lead agency in the forestry sector in PNG, and execu- tion by the bank of a project such as this would be the best means to achieve this.

Proiect Outline

The objective of this project will be to bring experts from a counter- part forestry agency well experiencedin institutionaldevelopment and project implementation,to work with GOPNG officialson a restructuringfor forestry, and on design and schedulingof donor agencies inputs, in collaborationwith project design imperativesfrom those agencies.

Activities

(a) advice and technicalassistance in design of new institutionalstructures, human resource developmentprogram.

(b) detailed assessmentand planning of TPAP component requirements;

(d) liaisonwith donor agencieson project design, contract inputs, terms of reference. - 184 - A_= 10 Page 24 of 24

External Inputs

- program coordinator-.24m/m 282,000

- forest economist-24 m/m 240,000

- forest Institutionsspecialist-.24 m/m 240.000

- administrativestaff--72 m/m

- travel 30,000

- training 80,000

- equirpment 50,000

- consultancies 240,000

- miscellanaous 10.000 1.172.000

Timetable

1990 1991 1992 1 2 3 4 1 2 3 4 1 2 3 4

Design new infrastructure Planning TFAP Project design Contracts, TORs - 1 , -

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