Forestry sector under threat

Papua New Guinea Forest Industries Association (PNGFIA) executive officer Bob Tate has warned that the forestry industry is on the brink of disaster, due to weak global prices and rising taxes.
He said thousands of landowners have already witnessed forestry projects shutting down and royalties disappearing. The worst may yet to come.
Tate’s comments came following the PNGFIA’s twice-yearly meeting recently.
Tens of thousands of landowners in hundreds of communities in PNG rely on royalties and levies from timber projects, on health and education services supported by the operators.
At the beginning of 2017, the industry provided 15,000 direct jobs, with another 25,000 jobs supported indirectly on the operations. These incomes have begun to vanish, as have government tax revenues.
Falling demand and rising taxes have resulted in the loss of over 2000 permanent jobs, mostly in remote communities.  Royalties and levies paid to landowners are also down to almost K8 million.  Taxes paid to government have been slashed by more than K32 million since the start of 2017, Tate says.
“Papua New Guinea’s timber companies are doing it tough,” reported said.
“Export prices for tropical logs are down to 12 per cent since the start of the year and volumes exported have fallen by 16 per cent – compared to the same period last year – to less than two million cubic metres.  As a result, foreign exchange earnings are sharply down. Export volumes for this year are expected to fall to 3 million cubic metres compared to 3.6 million in 2016, a decline of 17 per cent.”
Tate said there were several causes for the difficulties faced by the industry.  “Global timber prices are at historic lows, largely due to falling demand from China. The low value of kina has helped to some degree, but not enough to offset the effect of shrinking global demand,” he said.
“Even on the local market for our downstream processing industry, times are tough as our economy remains weak. One of our largest factories reports having laid off nearly 500 workers this year.”
One of the problems faced by the industry was that royalties and levies paid to landowners were fixed amounts per cubic metre of timber, regardless of export prices. According to Tate, this was unfair to operators and landowners alike.
“Operators pay landowners US$12 (about K39) per cubic metre harvested. When export prices are strong – for example, US$200 (about K658) per cubic metre – this represents 6 per cent of the sales price, which leaves enough revenue to pay taxes and operating costs,” he said.
“However, when the prices are below US$100 per cubic metre – as they have been throughout 2017 – the landowner payments account for 12 per cent or more of revenue, putting at risk the viability of many forestry projects. So when prices are high, landowners don’t get their fair share of the returns and when prices are low, the fixed royalties can become unaffordable for operators, leading to shutdowns. Then the landowners don’t get any royalties.”
Tate advocates on setting a fixed percentage of the sales price to flow to landowners, so that landowners benefit when prices are high, and projects are more likely to remain viable when prices are low.
“Exporters currently pay 32 per cent of their revenue in export taxes, up from 28.5 per cent last year. We hope that the Government realises that higher taxes lead to lower government revenue, if the increases result in less product being exported. This year, raising the tax rate resulted in the Government collecting K32 million less in tax revenue than last year. Further tax increases may result in revenues – and landowner royalties – falling to zero, and to thousands more jobs disappearing.”