FOREST AND LOG EXPORT MONITORING SYSTEM IN PAPUA NEW GUINEA
Bruce Telfer
SGS PNG Limited

Twelve years ago the Government of Papua New Guinea (through its agency the PNG Forest Authority) addressed
the issue of illegal log export practices by appointing the internationally known Swiss inspection company SGS to develop
and implement a monitoring system for all log exports from the Nation. The system (including modern log tracking
technology) introduced by SGS has been very successful in enhancing revenues for the Nation and providing international
credibility for the Government in demonstrating that this controversial sector is under control. The SGS system ties inclosely with the existing PNGFA monitoring system to assure buyers that a reputable independent inspection company
has verified that PNG logs have been exported in the quantity, quality, value (with taxes paid) and from the area as
approved by Government. This is an important foundation for any future legal verification requirements which may include
social and environmental factors as increasingly demanded by ENGOs. The adoption of such a legal verification system(on a voluntary basis) is being considered by the PNG Forest Industry Association.

BACKGROUND
The need for independent third-party monitoring
Although the processing industry is growing,
forest product exports from Papua New Guinea are still
dominated by raw logs. PNG exports 2 to 3 million m3 oflogs each year with a total fob value of US$150 to 200
million. A Royal Commission of Inquiry into Papua New
Guinea forest sector in the late 1980's revealed
widespread abuses in the forest industry - transfer
pricing through miss-declaration of log cargoes andartificial pricing being particularly rampant.
These
abuses were costing both Government and landowners
millions of dollars each year. The new Forestry Act of1991, designed to address the problems identified by
the Inquiry, also set up the Papua New Guinea Forest
Authority (PNGFA). The Government recognised thatit needed to act very quickly to halt losses to the Nationfrom export logging and accordingly tendered for a log
export monitoring system to be implemented promptly.
The tender was won by a Swiss-based inspection
company, SGS. By contracting this service out to a large
international verification company such as SGS, theGovernment was allowing the PNGFA to concentrate on
the vital role of monitoring forest operations at the
cutting face. The contract was also to facilitate theintroduction of new technology and management
systems to PNG citizens.
Over 12 years of operation the SGS system has
proven to be very cost effective in increasing revenues
to both Government and traditional resource owners.
Also the international credibility of the PNG forest sector
has been considerably enhanced by the engagement of
an independent and reputable company to verify log
exports. This was an extremely controversial areaprior to 1995 but since then the Government has gainedinternational kudos for taking prompt and effective
action to get this area of the economy under control.
This international credibility has also proven
important for protecting PNG’s overseas markets fortimber products.
Due to ENGO pressure many
overseas buyers and their Governments are moving to
restrict or stop purchases of forest products fromcountries where logging is regarded as out of control.
Increasingly it is becoming incumbent on the forest
industry to prove the legal origins of its log sources tomaintain offshore markets. With a system of
independent log export monitoring already wellestablished, PNG can assure overseas buyers that thelogs have not come from smuggled sources and thecountry is well placed to build on this system in future to
give additional proof of legality according to market
requirements.
GENERAL OVERVIEW OF VERIFICATION
Party responsible for issuing verification
Verification of forestry operations in PNG areprimarily the responsibility of the PNG Forest Authority
who have contracted out the monitoring of export log
shipments to SGS.
The PNGFA is responsible for granting permission
to harvest logs, monitoring the actual forest operations
and granting permission to export forest products.
However, it is a fundamental point under PNG law that
unaliented land (97% of PNG including all forest areas)
are owned by the people who have traditionally lived on
it for generations and development cannot occur without
their permission. All logging companies must be
registered as Forest Industry Participants with the
PNGFA which first checks that they are legally
registered with the Registrar of Companies under theInvestment Promotion Authority.
Under the Forest Act 1991 (and amendments) the
PNGFA issues a Timber Permit to a company only afteran extensive 34 step process that begins with providing
awareness to traditional landowners whose approval toenter into a Forest Management Agreement (FMA) is
required before any further action. A company isissued with the Timber permit only after a lengthy
consultation (at landowner, Provincial and National

Government level) and tender process. The Timber
Permit stipulates all the operating conditions such as
harvest/export/processing quotas, benefits to beprovided, royalties, levies and other charges to be paid
etc.
However, the bulk of PNG’s existing forest
concessions are operating under Permits that precedeand are preserved by the 1991 Forest Act. These are
generally operating through Timber Permits under
Timber Rights Purchase Agreements that have beensigned between the traditional landowners andGovernment or Local Forest Areas where Government
has granted landowners the right to negotiate directlywith logging companies. In most of these cases theTimber Permit or LFA is held directly by a landownercompany who engage a contractor to operate the area
under a Logging and Marketing Agreement.
Large-scale Agriculture and Roadline Projects can also
be granted permission to harvest and export logs undera Timber Authority (TA) Agreement.
All forest concessions in PNG are subject toplanning monitoring and control regulations establishedby the PNGFA. These ensure that logging proceeds inan orderly fashion in accordance with the Timber Permit,that socially and environmentally sensitive areas are
excluded from logging and that logging takes place inaccordance with sound forest management andenvironmental practices. Monitoring is carried out by the
120 staff of the PNGFA Field Services Division. Most
concessions have a PNGFA Project Officer based onsite and are equipped to undertake monitoring
operations.
PNGFA officers from the Marketing Section are also
involved in the export process. They must approve thespecies, volume and prices proposed and issue an
Export Permit (signed by the Minister) which shows all
this information. A copy is also provided to SGS who
are responsible for ensuring that the actual shipment
follows these approved specifications.
The
Department of Trade and Industry also issue an Export
Licence with the same information but only if the PNGFA
approves. This appears to be a duplication but is arequirement of PNG law.
The PNGFA is also responsible for the licensing oflog scalers. Companies are required to use licensed
scalers who must follow regulations that apply to themeasurement and declaration of logs in PNG. In general
the requirement is that all operators must declare theirmonthly log production in a prescribed format which
includes a summary of volumes extracted for eachlandowner plus the royalties owing to them.
The PNG log export monitoring service wasdeveloped and is run in conjunction with the PNGFA by
Société Générale de Surveillance (SGS) of Geneva,
Switzerland. The SGS group is the world’s largest
verification, testing and certification company. With its
headquarters in Geneva and 48,000 staff world-wide, it
operates a network of 1180 offices and 321 laboratories
in 145 countries. The Forestry Monitoring Programme of
SGS offers services to governments, companies andinternational institutions aimed at revenue protection,
trade facilitation, legal and sustainable use of natural
resources.

SGS PNG Limited was set up late in 1994 todevelop and operate the monitoring system. Currently
SGS PNG operates with a staff of 40 (including 31 field
inspectors) from a headquarters in Port Moresby and 4
field support offices. There are currently 42 active
export sites in PNG and so inspections are conducted
on a fly-in fly-out basis.
Outline of verification process
The PNGFA Field Services Division is responsible forthe field monitoring of all forest operations in PNG. All
operations are required to have 5 year, annual and individual
setup logging plans and actual operations are to be
conducted in accordance with the “Papua New Guinea
Logging Code of Practice” that is approved by both the
PNGFA and Department of Environment/Conservation andendorsed by the Prime Minister. The PNGFA has formal
documented (publicly available) procedures for themonitoring, reporting and approval processes. The PNGFA
has the power to close down operations that are notcompliant with these approved procedures.
Before issuing the Export Permit for each shipment,
the PNGFA Marketing Section checks that the company isoperating within its current and approved quota, that royalty
payments to landowners are up to date and that the export
prices for each species are satisfactory.
The SGS involvement in the verification process begins
at the time of initial log measurement (at the forest landing)where all companies are required to affix an official
bar-coded tag provided by SGS. This log number (which
includes a unique site-code identifier) is used right throughthe verification process to export. SGS will only issue thesetags when advised in writing by the PNGFA that thecompany has authority to harvest the area under one of thepermit arrangements outlined earlier.
Then, at least two weeks prior to the impending log
shipment an exporter must notify SGS so that inspection
arrangements can be put in place. At the export port
exporters must provide the SGS inspector with a log list in
both electronic and hard copy format. The SGS inspector
undertakes a pre-shipment inspection which involves a
scaling check (10%); species check (100%) and verificationthat the volumes and species mix are as per the PNGFA
Export Permit. Exporters are notified of any discrepancies
and only if the results are satisfactory will the PNGFA
officer on site permit ship loading to commence.
The SGS inspector then monitors the actual ship loading by
removing a section of the bar-coded log tag and produces
an independent tally of loaded logs. SGS has provided theinspectors with bar-code readers and portable computers
to facilitate efficient and accurate preparation of all reports
during the inspection process. An SGS Inspection Report isissued at the completion of loading. This Inspection Report
is used by all Government Authorities to check thecommercial and shipping documentation and clear the
shipment for export.
All field inspection documents and reports are sent into
the SGS head office which also receives copies of all
shipping and commercial documents directly from theexporter. All this information is entered into a central
database. A number of checks are made, for example, toconfirm that the export volume and prices for each species
in a shipment are as approved by the PNGFA (through the
Export Permit issued prior to shipment); that a project is
operating within its approved log export quota and that theexport tax paid has been calculated correctly.
Any serious discrepancies are immediately bought tothe attention of the relevant Government Authority –usually the PNGFA or Customs Office. Monthly reports
are also provided to a wide range of Government Authorities
to assist them with their audit and monitoring functions. In
addition to the PNGFA these include the Central Bank
(foreign exchange remittances), Customs (export tax) andthe Tax Office (export earnings declared on company tax
returns).
The central database maintained by SGS has also been
useful to verify if shipments declared as being from PNG
have in fact originated from this country. There have been
examples where logs have been detected in other Asian
countries with documents purporting to show they are of
PNG origin. In some cases a check of the SGS database wasable to confirm that these documents were false and thatthe logs are therefore illegal. In other cases the same checkrevealed that the logs were indeed exported from PNG via
the legitimate process.
SCHEME TO CHECK FOR LEGALITY AT THE TIME
OF LOGGING
Definition of legality
While there is no formal and separate “Definition of
Legality” in the context of the PNG forest industry,
operators must follow the requirements of the Forest Act(1991) and there are a number of checks and balances in the
PNG log export system that confirm many aspects oflegality. Specifically.
Official log tags are not issued to any company unlessthe PNGFA confirms that they are a legitimate operator.
This means that all logs inspected by SGS come from areasthat have officially approved for harvest by the PNGFA
through the Timber Permit or contract processes describedearlier in this paper. All forest operations are required tocomply with PNGFA regulations covering planning,
operations and monitoring. Operations are also required tohave their Environmental Plan approved by the Departmentof Environment and Conservation and follow Department ofLabour regulations governing workers health and safety plus
the employment of foreign workers.
Each export shipment must have a formal priceapproval and subsequent issue of an Export Permit by the
PNGFA. As mentioned earlier the PNGFA completes averification process prior to issuing this Export Permit
which includes checking the log price and volume plus
confirming that royalty payments due to traditionallandowners are paid up to date. An Export License isrequired separately for each shipment from the Departmentof Trade and Industry.
SGS will not even commence an inspection unlessthere is evidence of all these requirements having been
fulfilled. The SGS inspection confirms directly that the log
measurements and species identification are accurate andthat the volume and invoiced amounts on commercial trade
documents are as legally approved by the PNGFA.

Subsequent checks in the SGS head office confirm that theexport tax legally due has been paid in the correct amountand that logs have been cleared through the export
procedures of all relevant PNG Government Authorities.
In more than 12 years of operations to date, SGS has
not detected any instances of log smuggling. This therefore
means that all of PNG’s log exports for this period (25 mm3) have been independently verified as having met thelegal export requirements outlined above. By providing some
information of shipment details, the extensive databasemaintained by SGS can also be queried for verification by
overseas log buyers to confirm that they are dealing with alegitimate PNG export.
Procedures for retaining and verifying the evidence
The role of the PNGFA Field Services Division staff
in monitoring the day to day operations of the logging
companies has already been outlined. They follow clear
documented procedures for monitoring short and longterm logging plans plus they undertake field checks toverify that the PNG Logging Code of Practice is being
followed.
SGS are provided with copies of official Government
documents: Export Permit and Licence (which detailapproved volumes and prices). Log lists are provided
to SGS inspectors who then verify the data in the export
log yard by check scaling 10% of the logs andconfirming the species identification of the whole
shipment.
Any discrepancies are reported to theexporter and local PNGFA supervisor in writing. Logs
actually loaded onto a vessel are tallied by SGS whothen issue an Inspection Report. Again copies areprovided to the exporter and PNGFA.
In the SGS head office, the results of the inspection
activities are checked against the commercial
documentation and Government clearance documents(e.g. Export Entry) for any discrepancies. All informationis entered into a central database from which are
generated regular monthly reports plus special purpose
reports on demand for stakeholders (generally
Government agencies). All documents are stored in apermanent archive in case they are needed in future as
evidence by the PNG Authorities.

CHAIN OF CUSTODYPNG requirements
There is no formal chain of custody system
implemented across the PNG forest industry. However,the number on the SGS log tag (used for export
verification) is also the official log number used bycompanies to declare their monthly production records
to the PNGFA. For each number (log tag) thisdeclaration includes location (concession only), species,
diameter, length, volume and landowner.
So it is possible to trace a log back to aconcession and landowner area.
However, theproduction records are held in hard copy in Provincial
PNGFA offices and so tracking is not easy. Company
records can be used but this presents an obvious

problem with lack of independence. There is potential
in future for all the log production and log export records
to be stored in a single database. This would constitutethe beginnings of a national log tracking system and thisis under consideration by the PNGFA.
Chain of custody verification
As there is no formal CoC system there cannot be
a formal verification system. However, as alreadyexplained SGS does check the measurement andspecies identification of export logs and as the number
used is the same as that used by the company todeclare its production records to the PNGFA. Therefore
it is possible to check if there have been any
unauthorized changes to individual log records.
FUTURE TASK AND PERSPECTIVES
Criticisms and problems with the system
At the time that SGS was contracted to be theindependent monitor of log exports, the major concernof many stakeholders was the perceived revenue losses
that had been occurring through various transfer pricing
mechanisms. The export monitoring system run by
SGS has largely countered this. However, as is
occurring in most countries with tropical rainforest
resources, issues are being raised by international
stakeholders (particularly through the efforts of ENGOs)
over legality of wood sources and wood production froma much wider perspective.
In PNG, recognizing that log exports are largely
under control, this is focusing on social andenvironmental concerns and perceived breaches of
PNG Government laws and regulations covering theseissues. On paper, the regulations and monitoring
systems of the PNGFA are very strong but in practice,as is often the case in developing countries, resources
such as sufficient staff and logistical backup are lacking
due to funding constraints. Also, Government
Departments other than the PNGFA are responsible formonitoring key aspects such as social andenvironmental issues. These Government Departments
also have funding and performance issues that prevent
them from performing all their mandated tasks. Thus it isvery difficult for the PNG Government to be certain that
all its laws and regulations are being followed.
The key issue of customary landowner permission
has been highlighted earlier. ENGOs argue that for
many or even all forest concessions, the awarenessprocess and gaining of permission have been
inadequate. While this may be true of some areas, inpractice it is very difficult to have a long lasting
consensus that involves 100% of customary landowners
in a forest concession. Groups or factions in an area
(who may have been traditional enemies forgenerations) can struggle for a dominant position in thedecision making process and new generations may
disagree with decisions made by their older relatives. No
matter how careful the consultation process has been it
is nearly always possible for groups like ENGOs to finddisgruntled landowners who may or may not be justified
in their concerns. This can almost be described as aproblem of democracy where the majority rules.

Some stakeholders would like to see independent
monitoring extended back into the forest and to include
legal compliance issues such as harvesting practices,
environmental controls, plus the rights of traditionallandowners and workers. The lack of a formal link
between log production and log export records is also a
problem that was described earlier. This prevents easyreconciliation of records.
The SGS monitoring system only covers log exports
and not processed wood products. Although PNG’sforest exports are dominated by logs the processing
sector is gaining in importance at an increasing pace.
Currently there is a lack of accurate statistics to monitor
and support this desirable trend.
As with any system involved with legal verification,
there are criticisms that there is no verification ofsustainability – the major objective of most concerned
stakeholders. However, the present PNG log export
monitoring system does provide an important building
block on which to build legal and sustainability
verification systems.
Potential solutions and improvements
PNGFA is considering the development of a legal
definition for PNG forest operations to assist companies
and the Government to demonstrate legal wood
production. The development of such a definition
would need an extensive stakeholder consultation
process to ensure maximum credibility.
The PNG Forest Industries Association (whose
members are responsible for 80% of PNG’s forestry
production) is also very interested in seeing thedevelopment of a legal forestry standard for PNG which
can be adopted on a voluntary basis by their members.
This would to offer their international buyers assurances
regarding the legal origins of their log sources and legal
compliance of their production processes. SGS isalready consulting with the PNGFIA regarding theprocess and issues involved. This voluntary verification
approach would be funded by the operating companies
and would thus overcome the funding and co-ordination
issues that make it difficult for a range of Government
Departments to offer the assurances increasingly
required by international trade.
To facilitate improved chain of custody verificationthat must go hand in hand with such legality verification,
the PNGFA is considering the development of a single
centralised database to hold all log production,
processing and log export records. This could be
implemented as a logical extension of the existing SGS
export database.