Why Guyana keeps losing

Available data strongly suggest that the invoice prices for logs don't reflect market value
Thursday, November 30th 2006 (Stabroek News)

Dear Editor,

In his haste to respond to articles and correspondence in Stabroek News during the last two weeks, the Commissioner of the Guyana Forestry Commission (GFC) seems to have forgotten some aspects of national policy, legislation and the procedures of his GFC.

What the recent correspondence has shown is the increasing gap between the paper policies and procedures and their implementation. The Commissioner does not address this gap in his response letter which you published on 17 November.

Nor does he explain why the claimed inter-departmental coordination with the Guyana Revenue Authority and Go-Invest (and, one hopes, the Ministry of Tourism, Commerce and Industry) has failed to stimulate value addition to forest products leaving Guyana, in spite of extraordinarily generous terms for foreign direct investment. This "co-ordination" has instead permitted a huge increase in export of unprocessed logs to Asia, especially India and China, over the last few years. Yet, since at least 1996, there have been national policy statements which explicitly favour in-country timber processing and value-addition, in-country employment, in-country up-skilling. It is conventional for governments to back such national policy statements by taxing the export of unprocessed logs to the point at which only the very best logs will show a profit on export. That also helps to combat transfer pricing. Expressing it in somewhat simplified terms, the export tax rates are conventionally worked out backwards from the Cost, Insurance and Freight (CIF) value at the importing port minus insurance and ocean freight charges to reach the "true" Free-On-Board rate at the exporting port. The export tax then captures the excess "rent" caused by the initial underpricing of access to this national resource by the GFC. As it happens, Chinese Customs are assiduous in assessing log imports because they collect tax on the logs; see the reports by Greenpeace and the Environmental Investigation Agency on merbau timber logs exported from Indonesian Papua to China (merbau having timber properties similar to Guyanese purpleheart). So CIF rates (landed price) in Chinese ports are probably as close as you will get to "real" market prices for tropical logs.

There are no national policy statements which favour export of raw materials when they could be processed locally. There are no national policy statements in favour of exporting jobs to Asia, or skills to Asia, or leaving value addition to Asian countries.

Of course log export is more profitable than milling, as long as our government does not tax exports conventionally. This is not a plea for banning log exports, but for ensuring that Guyana obtains the best value overall from its natural resources.

So let us have a look at some data -

FOB export price declared to GFC in Georgetown for best quality purpleheart logs, as reported to the International Tropical Timber Organization US$ 130 per cubic metre CIF import price at Guangzhou City, China, as reported to the International Tropical Timber Organization (Y4600-4800) US$ 569 - 594 per cubic metre Ocean freight and insurance from Guyana to China on 20-foot containers holding 12 true cubic metres of logs not more than US$ 120 per cubic metre. Extraordinary difference between import price in China minus export price in Guyana minus freight and insurance (569-130-120) = US$ 319 per cubic metre. This extraordinary difference is what is known as "transfer pricing", the under-declaration of the export price, which is illegal under the Customs Act, Cap.82:01, Articles 158 and 159. As 15,000 cubic metres of logs are leaving Guyana per month (monthly data from the Forest Products Marketing Commission) this suggests that transfer pricing is of the order of almost US$ 4.8 million per month. This figure unfortunately tallies with the US$ 3 million per month which Ms. Bulkan estimated (Stabroek News, 13 November, 2006).

Yet the Commissioner of Forests denies that this is a problem. In his letter he said, "the GFC has no evidence to substantiate this allegation of transfer pricing . . . Invoices are provided for all exports".

Does the GFC employ any economists, or persons with MBAs? If yes, what do these public servants do during the course of a working day? Whose interests do they serve? The public interest or that of a small group of log traders?

Surely the scale of transfer pricing (almost US $4.8 million monthly) suggested by a routine check of a bi-weekly publicly available ITTO newsletter should have come to the attention of someone trained in economics and working in the public sector? Why is there not an official investigation? Surely this is a matter for a court case? When was the last time that the GFC took anyone to court, apart from small-scale lumber yards illegally situated on the ex-railway embankment?

Yours faithfully,

Mahadeo Kowlessar

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