Loopholes in Myanmar’s Forest Sector Cost Govt Million in Revenue

By Nan Lwin 11 July 2019

YANGON—Internationally known for forestry products such as teak, timber extraction in Myanmar is lucrative. The website of the Myanmar Timber Enterprise (MTE) boasts that the “forestry sector in Myanmar is one of the major contributors to the national economy.” A new report from the Myanmar Extractive Industries Transparency Initiative (MEITI) reveals that the forest sector earned more than US$463 million in fiscal year 2014-15 and nearly $480 million the following year, representing 0.2 percent of the country’s GDP.

On Thursday, MEITI released two reports on the forestry sector for fiscal years 2014-2015 and 2015-2016, shedding light on issues like the discrepancy in annual timber production numbers between the MTE and the Forest Department and the alarming rate of overharvesting (more than 200 percent of timber was cut than is annually allowed). The reports reconcile data provided by companies in forestry sectors with data provided by government bodies. They also aim to help the government identify positive contributions the forestry sectors have made to the economic and social development of the country and to improve resource management in a way that fully implements that MEITI principles and criteria.

The Irrawaddy spoke with Daw Khin Saw Htay, a policy analyst with Forest Trends, about the most significant findings from the MEITI forest report, potential reforms for the government and the MTE, and loopholes in forestry law. She works as an implementation partner and offers technical support to MEITI.

What are the most significant findings from the MEITI forest reports?

I would say that you would see several significant findings in both reports. These are the first reports that help the general public understand the context of the forest industry. There is a lot of important data in the reports. In the past, people were not allowed to know—how many tons of logs had been produced? How many of ton of logs has been sold? Now, MEITI reports comes out with official data. All of the data is obtained from the MTE, the Forest Department (FD), the Internal Revenue Department (IRD), customs and other related departments. We’ve reconciled all the data.

The most interesting data concerns timber production from fiscal year 2014-2015, which we received from the MTE and the FD. When we reconciled the data, we a big gap between the MTE and the FD. They are both supposed to have the same data sets. For example, when the FD data said timber production was 165,926 tons, the MTE said it was only 44,360 tons in the same year. That’s almost a three-fold difference. Three-times

Another interesting thing is that the report showed overharvesting. Timber was overharvested 200 percent more than the annual allowance from 2014 to 2016. This is not a good from a sustainability point of view. It harms both the environment and local people who rely on forest products. Some might lose their livelihoods due to the deforestation. The mass destruction of trees, deforestation, continues, and it sacrifices the long-term benefits of standing trees for short-term gain.

The report also detected a big gap in data between sales and profits. Between 2014 and 2015, according to MTE data, total sales were $698 million, but the profit is more than $995 million. When we look into the data, it is not logically correct. When there is a huge inconsistency between sales and profits, there is something terribly wrong. For example, when you sell something that’s worth $100, your profit should be $100.

Do you think the MTE is in need of major reform?

Yes. MTE has the full authority to monopolize the harvesting and sale of timber to traders and exporters according to the 1989 State-owned Economic Enterprises Law. It hasn’t happened just with MTE but with other state-owned enterprises (SOEs).

When it comes to talk about granting licenses to subcontractors, they can grant to companies they have close relationships with them because of monopoly power. So, there are a lot of questions about transparency issues regarding companies and subcontractors. MTE does not have a clear governance structure for their roles, rules and responsibilities. In other countries, SOEs must regularly submit performance reports and financial reports. Despite that MTE is an SOEs, it is not required to make public information about its annual financial report. In my opinion, instead of pressing to reform MTE, we need to push for a new SOE law to clarify SOEs’ roles and responsibilities and to mandate the disclosure of crucial information to the public.

Moreover, we need to look into illegal logging. The FD has mostly seized ownerless timber logs across the country. According to the law, when the FD seizes illegally logged timber, they can sell them back commercially at auction. A kind of illegal timber become legal. We can’t just blame illegal logging, we need to change the policy. We need to stop allowing illegally logged timber to be sold commercially.

Instead of selling them, I would suggest using them for development purposes, for example in infrastructure projects for schools and hospitals. I believe this will reduce the production of illegally logged timber. The reports found that over 30 percent of the country’s total teak and 6 percent of hardwood that goes into production is confiscated timber.

What does the government need to do if they want to change this?

The government should focus on SOE law reform. Only SOE law can control and give direction to the SOEs, define what their roles and responsibilities are and require them to disclose crucial information. SOEs are vital to our country, because they provide 50 percent of the government budget.

There are loopholes, red tape, weaknesses. In my opinion, if we can change the SOE law effectively, it will definitely push SOEs to become more profitable and efficient. Then, the government will get actual revenue.

Why do you say there are loopholes?

Let me talk about the forestry sector. According to revenue data from the MEITI report, of the MTE’s total net profits, 25 percent should go to corporate income tax, 20 percent should go to state contributions and 55 percent is supposed to go MTE’s other account under the Myanmar Economic Bank. But, looking at the data, we found they did not contribute these exact percentages to the related accounts. If an audit had been done, they’d have known it. Not only the Office of the Auditor General but also the Ministry of Planning and Finance (MOPF), Parliament and the Ministry of Natural Resources and Environmental Conservation (MONREC) have a duty to provide oversight of the MTE. Parliament is automatically allowed to provide checks and balance. These results show they did not do that. They might have a data and information accessibility problem. That’s why all the SOEs including the MTE should open their financial data and activity electronically. By allowing online data access, all the supervisory bodies can access the data easily and they can provide oversight and perform checks and balances properly.

Many experts pointed out that there are transparency issues, that the MTE is not required to make public information about their subcontractors. What is your opinion of that?

According to the MEITI forest report, private sector production represents 68 percent of total timber production, which means it belongs to the companies [subcontractors]. I have discussed this a lot with the MTE and other experts. According to the law, the MTE has a monopoly on the harvesting and sale of timber to traders and exporters. But the MTE doesn’t have the capacity to manage all these things. So, they hire subcontractors. The companies need to take responsibility for harvesting, production and transportations. But there is no data about the MTE purchase price and service fees set with the companies. Nobody knows the exact numbers. We can’t find it on a website, and we cannot confirm the exact data. Only the MTE knows about it. We also can’t find out who owns those companies. Everything is under the MTE. Since this data is unknown, it is hard to say there is any transparency.

Actually, 68 percent is a lot. Can you detect whether they are paying taxes or not?

According to the report, the government only received a small amount of tax from the companies even though they represent 68 percent of total timber production. The MTE only represents 42 percent of total timbers production. When we compare both of them, tax from the MTE is much higher than from the companies. It is of great interest to know whether the companies paid their actual tax rate to the government or not.

As far as I know, the MTE has practiced both direct sales and auction systems for selling timber. Does the MTE need to reform these systems?

The MTE has a duty to maximize profits for the country. For the best profit, they should sell the timber using the most competitive system. Auctions are better. Normally, direct sales only work between the MTE and companies, where there is no transparency. We can only see the profit and sales data. We don’t know how many tons they have sold or which grades were sold. In my opinion, direct sales should be stopped permanently. The auctions also should be opened up and conducted transparently.

You said the FD and the MTE data is totally different. Because of this gap, what does the government lose?

Without good governance of SOEs, the government may not get the actual revenue. We could not say the exact number but it could be in the millions to trillion of kyats. Currently, the government seriously needs revenue as they have been filling infrastructure gaps in the country. If they can make SOEs’ reform their governance structures, they will receive actual revenues two or three times higher than in the past.

According to many reports, the majority of illegally logged timber is sold to China. Did you find any data related to sales to China?

According to the Customs Department in Myanmar, we exported $14.6 million worth of timber to China in 2014. But the Chinese customs department said it was $347.3 millions. When we check the UN Food and Agriculture Organization data, we find it is almost $620.4 million.

MONREC signed Memorandum of understanding (MOU) with the China’s State Forestry Administration to make concerted efforts against the illegal timber trade, for the promotion of the legal trade, for forest law enforcement, to enhance industrial cooperation and scientific research and to prevent and control forest fires in border areas. But China does not have good business ethics. They mostly see their own interest. I hope they follow the MOU.

When we talk about illegal logging to China, it also depends on the peace process. Some armed groups are involved in illegal logging. However, China’s business ethic is vital to the control of it all.

You said they harvested more than 200 percent of the annual allowance from 2014 to 2016. Have you seen any change in that under the current National League for Democracy government?

In 2014, during the previous term, the government banned the logging, and in 2016, the current government also announced a 10-year prohibition on logging in the Bago Mountains. The production data has dropped. Under the military government, the MTE had only focused on revenue targets.

Last month there was an announcement that the government will allow logging from private plantations on a case-by-case basis. Many experts are concerned about how to follow the trail of timber from private plantations or natural forests. It is hard to detect.

The previous government decided to open an ‘other account’ to store revenue from SOEs. Since 2016, there’s been a lot of discussion between lawmakers, experts and policy analysts. Recently, the government ordered the shutdown of those ‘other accounts’. It is good that all the revenue will directly flow to the finance department. But it won’t help improvement SOEs, especially their performance, efficiency and effectiveness. The government needs to change the SOE law.

What can the government learn from the MEITI forest report?

We experienced many challenges getting data from the government departments for the report. They are weak in inter and intra ministry coordination. Most of the departments have missing links between each other. We had to collect all the data manually. If they had a computerized system, the data could be just one click away. The government needs to store the data electronically. There are more than eight departments under the MTE, they need to link data with each other and related ministries. The government needs to encourage all the related ministries to collaborate together to improve data coordination and reporting.

The NLD government should gear up SOE law reform as they have got the majority of seats in the Parliament. I have met with lawmakers several times. We pushed them to change the law. But I still have not heard yet about new a SOE law. They have only one and a half years. I hope they would do something that really benefits the people.

Since SOEs provide nearly half of the total government budget and most major businesses are SOEs, I believe that there may be a lot of interest groups involved. So, the challenges might be huge for the NLD lawmakers. But if we don’t push reforms because of challenges, we won’t overcome them.

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