Administration of the Federal Ban on Exports of Unprocessed Federal Timber

Published by the Government Accountability Office on 1990-03-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                       United States General Accounting   mce   / ‘7 I-J J I 1

”   GAO


    For Release        Administration  of the       Federal Ban on
    on Delivery        Exports of Unprocessed        Federal Timber
    Expected at
    1O:OO a.m. EST
    March 20, 1990

                       Statement  of William   E. Gahr, Associate Director
                       Food and Agriculture    Issues
                       Resources,   Community, and Economic Development
                       Before the subcommittee    on Nations3 Parks              and
                       Public Lands
                       Committee on Interior    and Insular  Affairs
                       House of Representatives

Mr. Chairman              and Members of the                    Subcommittee:

          We    are pleased                to present          information             on the        implementation                   of
the      federal         ban on exports               of    unprocessed              federal         timber.               The
current         restrictions               were established                  in    1973,     when the              Congress
banned         the export           of      unprocessed             timber        from     federal           lands         in much
of the western               United          States        because          of the       adverse           impact          on the
domestic          wood-processing                  industry.            Through          regulations,                however,
timber-exporting                   companies          have been allowed                    to maintain                  their
historic           export         levels      and to continue                 buying        federal              timber         for
replacement              of the       private         timber         they     exported.              It      is our
understanding               that,        as part       of your          hearing,          you will               consider
whether         changes           should      be made to the                 current        legislation.

          Retween         1984 and 1988,               exports          of    unprocessed                 timber         from
Washington           and Oregon ports                  have         increased          by about            1 billion              board
feet.]          Domestic           manufacturers             have been concerned                          that     this
increase,           coupled         with      other        restrictions             on federal               timber         sales,
has threatened               to cause           potential            domestic          timber        shortages              and
higher         prices.         The two principle                     agencies          responsible                for
administering               the     sale      of timber             from     federal        lands          are     the      Forest
Service,         Department              of Agriculture               and the          Bureau       of Land
Management,              Department           of    the     Interior.              At Congressman                  DeFazio's
request,         we examined               how these          agencies            have    administered                   the

lA board foot is the                       equivalent           to a piece             of wood l-inch                    thick,       l-
foot wide, and l-foot                       long.
regulations             governing             the      replacement                 of     private           timber      exports
with    federal           timber          purchases.

       In     summary,             we found:

            The Forest                  Service         and the                 Bureau      differ          considerably              in
              the       extent          to which         their             regulations               control         timber
              replacement.                    While      the          Forest            Service's           regulations          make
              it       fairly          difficult             for     a company to buy more Forest
              Service            timber            to replace              increased           exports          of private
              timber,            the      Bureau's            current             regulations               allow      companies           to
              increase             their           purchases             and exports,                over      time,      without
              limit.             Neither            agency          regulates              federal          timber      that     has
              been acquired                   through              intermediaries                 as replacement                for
              exported             private           timber.

       --   The         control           mechanisms                both         agencies         use to monitor                the
              level        of private                timber          exports             are vulnerable                because         they
              rely        almost          solely        on         reports         from purchasers.                     The
              accuracy             of these           reports              is     generally           not      tested      or
            audited.                   Both        agencies          also         depend       on members of the
              industry             to inform            them of suspected                         violations.              To the
            extent              that      inaccurate                reporting             occurs       and independent
            verification                    does not               occur,         the     Forest       Service          and the
            Eureau              have      little        assurance                 that      the      regulations           are being

          --    Enforcement             of    the        regulations            is difficult                because       the
                historic          export           levels       are established                 by geographic              area,
                the boundaries                of which           are     often         vague and,            therefore,
                disputable.              Also         the     penalties           available           to the      government
                for     violations            of the          regulations              are limited.

          Before        elaborating                on these          points,          I would        like     to provide
some background                on the             federal       timber         legislation            and to explain
briefly         the     regulations                governing           replacement             of    exported          private
timber         with     federal         timber.


          In October           1973,         a provision               was attached             to    the     Interior           and
Related         Agencies        Appropriations                   Act     of     1974 that,            in effect,
prohibited             the   export          of     any unprocessed                   timber        from     federal       lands
in the western               United          States.2            This      provision            has been attached                  to
all     subsequent           Interior              and Related           Agencies          Appropriations                 Acts.

          As written,             the    provision              also     prohibited             purchasers             from
using      timber        harvested                from      federal      lands         in their         processing
plants         while       exporting          private           timber         that     could        have been used in

2The provision    specifically                            identifies this as those federal                                 lands
in the contiguous    48 states                            west of the 100th meridian.
those       plants.         However,             in     a February               1974 letter          to the         Chief         of
the     Forest        Service,            the    Chairman,             Subcommittee             on Interior             and
Related        Agencies,            House Committee                    on Appropriations,                    explained             that
the     Canmittee          intended             to allow          historic          patterns          of trade          to
continue         without           disruption.                  According          to the Chajrman,                  this
provision            was intended               to prohibit              firms      in the          export      trade         from
increasinq            future        log     exports             by replacing              private       timber        with
federal        timber.

           The agencies             developed            regulations               that     permitted           firms         to
maintain         both      their       historic            export         levels          and their          purchases             of
federal        timber.           The regulations                      prohibit        what      is    called         direct
substitution--that                    is,       using      federal           timber        to exceed           the    level         of
replacement             established              by historic              purchasing            and exporting
patterns.             The regulations                   also      prohibit          companies           that     do not have
historic         exporting            patterns            from replacing                  private       exported            timber
with       federal       timber.

           Over ha3 f of the                permitted             timber          replacement           using        Forest
Service        timber       occurs          in Washington                 State:          the   remainder            occurs         in
California            and Oregon.                All     of the          replacement            using        Bureau         timber
occurs       in Oregon.              According             to Forest              Service       records,         53 firms               in
California,             Oregon,        and Washington                   have combined                annual      replacement
quotas       of nearly             570 million             board         feet.        The Bureau             could      not
provide        information             on the           total         amount of           annual      replacement

quotas      for         its         timber     purchasers                 because            the    quotas         were constantly
changing          as export                sales      were made.

         To provide                  a perspective              on the            amount of             replacement              taking
place,      we obtained                    information              covering             a 2-year            period.            In 1987,
9 companies              exported             private         timber            and bought              Forest         Service
and/or      Bureau             timber         for     danestic             processing.                  These companies
exported         a total              of     128 million             board            feet      of private             timber      and
purchased          189 million                 board         feet         of     federal           timber.           In 1988,          7
companies          exported                92 million          board            feet         of private            timber        and
purchased          235 million                 board         feet         of     federal           timber.

         Another              type     of     substitution,                    commonly            referred          to as indirect
or third-party                   substitution,                is     not        covered            by the      regulations.                In
this     type      of         substitution,                 a purchaser                of     federal         timber        resells
the    timber       to a company that                         is     ineligible                 to buy it            directly          from
the    federal           government                 because         of its            private         timber-export
activity.           The company buying                          the        timber            from the         original
purchaser          substitutes                 it     for     private             timber           normally          used in       its
processing          plants             and then             exports            this      private         timber.            However,
the company is                  prohibited              from directly                   exporting             the      federal         logs.

         The total               amount        of third-party                     substitution                of     federal       timber
is not      precisely                 known.          In 1987 and 1988,                         the     Forest         Service
estimated          107 million                 board         feet         and 114 million                    board       feet,
respectively,                  in     third-party             substitution                    in Washington               and Oregon.

Bureau       officials                   in Oregon had no statistics                                on such substitution
but      believed            it      to be limited.


          The Forest                 Service          established          its         regulations             in       1974:       the
Bureau       established                    its     regulations           in     1976.              Despite       their           common
origin,         the        two sets               of regulations           differ             significantly,                 with
respect         to computing                      what the         regulations               call     "historic             levels"            of
trade.          These             levels          serve     as the basis               for      computing              quotas       that
determine             the maximum amount of                           federal          timber         that     can replace
exported         private                 timber.

          Forest           Service           regulations             define        the historic                levels             as the
average         annual             volume          of unprocessed               timber          purchased              and exported
during       calendar                years         1971-73.          'Replacement               quotas        are       limited           to
whichever             is     less:          110 percent             of the       historic             level       of      exports           or
110 percent                of purchases.                    Exceeding           this         level     constitutes                 direct
substitution,                     which      is     prohibited.

          Although,                the      Forest         Service's       definition                 of the           historic
levels      makes it                 difficult             for     companies           to increase             their
replacement                levels,           they         can manage to do so by purchasing                                       other
companies             that         have established                  historic           quotas.              For example,                 when
two      companies                with      separate             replacement           levels         totaling            62 million
board*feet             a year              recently         combined,           the     new replacement                     level         rose

to 80 million               board         feet     a year.             One of these             companies                  had higher
purchase         levels         than       exports:          the       other      had higher                exports            than
purchase         levels.            The combination                    of the      two produced                    the higher
replacement            level.

          Ey contrast,              the     Bureau          defines        historjc            levels          as the volume
of purchases            and the            volume       of       exports        made during                 the       12    months
preceding         the last             export        date.            Accordingly,             a purchaser                  would
have to exceed               its       annual        historic           levels        for      both         purchases              and
exports         tc be in violation                    of the           Bureau      regulations.                       These
regulations,            in effect,                permit         purchasers           to increase                  either          their
annual      purchases              or annual          exports           over      the       prior          historic            level.

          Under      this       definition,             a purchaser               can increase                  Bureau          timber
purchases         while         holding           private         exports         constant             in the          first        year,
purchase         Eureau         timber           at the      same level            the       second           year         while
increasing           exports,           increase            Bureau        purchases            again          the      third        year
while      holding          exports         constant,             and continue               this          pattern
indefinitely.                This       practice            is    called         "ratcheting."                     Thus,        the
Bureau's         regulations               allow      companies            to     increase            their           federal
timber      purchases              and private              export        volumes,           over          time,       without

          An example            will       clarify          how ratcheting                  works.            Before           1980,       a
certain      company did                not have a historic                       level        of     timber           exports.
In 1980,        this        company exported                     8 million         board            feet      of      private

timber        and purchased              68 million             board            feet     of      Bureau     timber.            By
1985,        the    company had increased                       its        exports          to 92 million               board
feet     while        continuing             to buy Bureau                 timber.

         The Bureau's                Oregon        State      Office             proposed          changes          in Bureau
regulations            in     1986 that            would     have made this                    practice           more
difficult.             In September                1989,     a Bureau               official         said        that    the
impetus         behind        the     proposed         changes             died         when the company sold                    its
processing           plant         and stopped             buying          Bureau         timber.           The Bureau           and
the Department                of     Interior's            Assistant               Secretary         for     Land and
Minerals           Management           decided        not      to pursue                changes      to the
regulations.                while       this       was the         only          company that              has taken
significant            advantage             of increasing                 its      historical             levels       under        the
Bureau's           regulations,              the    potential              still         exists      for     other
companies           to take          advantage         of the          regulations.


         To monitor            compliance,            both         agencies              require      the        purchasers            to
submit        certified            reports         showing         their           export      activities.               However,
officials           of both          agencies        said       that         they        generally          do not verify
the reported               amounts       by independent                    test         or audit.           In addition,
they     said       that      they      rely       on members of                   the    industry          to    inform        them
of suspected               violations          by other            members.

         These limited              control         mechanisms            are vulnerable                 because
purchasers           could       report        false      information                on their       export
activities           that     could       go undetected.                  For example,              in      two recent
instances,           purchasers           had submitted                the     required         reports         to the
Forest       Service,         but     had omitted              the     sections           indicating          private
exports.           Both companies                had been exporting                     and were suspected                   of
exceeding          their      historic           quotas.            When the          Forest     Service            requested
and finally            received          the     completed            reports,          both    companies            were
found      to have exceeded                 their       quotas.

         In our       opinion,           good internal                controls          including         at least
selective          testing        of information                   submitted          by the     companies             would
allow      the     agencies         to have better                  assurance           that    the      regulations
are being          followed.             Bureau        officials          told        us that       their
regulations           require         purchasers              to retain          records        of Eureau            timber
acquisitions              and private            timber        exports         for      3 years.          However,           they
said     that      they      have not          audited         the     purchaser's             records.             Forest
Service         officials         said      that       they        do not      routinely         verify         the
information           reported.             Instead,           they     audit         a purchaser's             records
only     when they           suspect       violations.

         According           to an industry               expert,         because          agencies          rely      on the
industries           to inform           them of suspected                   violations          by other
companies,           violators           often      continue           their         illegal     practices             for
lengthy         periods       before       the      government            can be convinced                   that
violations           are occurring.                 For example,               a case of possible                     illegal

substitutions               that      occurred                    in    1986,      1987,            and 1988,           was brought             to
the    Forest         Service's            attention                    in the          spring          of 1988 but             was not
resolved         until       August             1989.

ENFORCEMENTACTIVITIES                            AND

         In addition               to problems                     in detecting                 violators,              the     Forest
Service       and the          Bureau            encounter                 difficulties                   in     enforcing
regulations              when violations                          are     found.             First       of      all,     the
boundaries            of the         geographic                    areas        used to determine                       the historic
export      quotas         are often                 vague and disputable.                                 These general
geographic            areas,         called            tributary                areas         or marketing                areas,         are
the designated               territory                 for         a processing                    facility's           log         supply.
Ordinarily,              tributary              area         boundaries                 are     not       specified            until      a
purchaser         makes a request                       for            assistance             or a complaint                   is
received.             As a result,                   detecting                a violation                 is     difficult.

         Furthermore,                unless            criminal               intent          and/or            fraud     can be
proven,         the      penalty          for        violation                of   log        export            regulations--the
cancellation              of related                  federal            timber          sale         contracts           or non-award
of pending            contracts--               is     generally                inconsequential.                        A Forest
Service       official             said         that         if        contracts             are      cancelled,              the
government            may resell                the     contract.                  If        the      proceeds          on resale             are
less     than     the current               contract                    values          at    the       time      of termination,
the violator              can be charged                          damages for                the      difference.               He stated

that       if   the     contract                sells      for     the    same or higher                price,       there       are
no damages.                 For more serious                      offenses,        violators            can be debarred
or suspended                from bidding                 on future         awards         of    federal          timber

           From 1981 to August                          1989,      the    Forest       Service          and the       Bureau
identified             eight         instances             involving            seven purchasers,                 in which
purchasers             of    federal             timber          had allegedly            or actually             violated
substitution                rules,          The agencies                 took     no action         against          two
purchasers             because            the violations                 were considered                minor.        The
agencies         cancelled                the     affected          federal        timber        sale      contracts          for
the other          five        purchasers.                  However,            in only        one instance           could         the
cancellation                be considered                  to have a significant                    effect          on the
purchaser:             forfeiture                of the      costs        that     had already            been incurred
for     site     preparation                and logging               roads.

           Officials           of both            agencies          advised        us that         no purchasers              have
been debarred                for      substitution                 violations          since       the     regulations
have been in effect.                             However,          as of August            1989,        a Forest          Service
official         stated            that     the         decision         on debarring            one violator              was
still       pending.               In addition,              Bureau        officials            stated       that     this       same
violator         has been suspended                         for     one year.


         We have not               reviewed             the merits                   of    the     policy          of banning            the
export      of      federal           timber.                Nor did           we review            the      use of historic
levels      as determining                    the basis                 for      the       replacement              of    federal
timber      for      exported              private            timber.                If,      however,         the       Congress
desires       to effectively                    limit             the    export            of     federal          timber,        several
steps      should         be taken.               It         is    clear,            first,        that      the      implementing
regulations              adopted           by the            Forest           Service            and the       Bureau         are
inconsistent              and need to be made uniform.                                            The Bureau's               regulations
allow      companies             to     increase              their           levels,            over     time,       without           limit:
whereas       the        Forest         Service              limits           the      levels           to the      1971-73         period.
In   addition,            penalties             for          noncompliance                      should      be increased                to
encourage          compliance.                  Furthermore,                     both          agencies'           monitoring
mechanisms           need to be improved                              and strengthened.

          In our         testimony            of November                     7, 1989,            we recommended                 that        the
Congress          take         action       to make changes                          in       the current            legislation               to:
(1) clarify              its      intent        with          regard           to the            use of historic                 levels
which      serve         as the basis                  for        the    replacement                 of     federal          timber          for
exported          private          timber        and (2) establish                               appropriate             penalties             for
those      companies             that       violate               the    law.

         We also          recommended                  that        the        Secretary            of Agriculture                 and the
Secretary          of the          Interior             direct           the         Forest        Service           and the        Bureau,
respectively,                  to institute                  improved               internal            controls         which      would

include      at least      selected      testing         of information          provided          by the
companies.        In January          1990,   both       the   Department        of Agriculture
and the      Department      of    the   Interior         responded       that    they      agreed     with
our recunmendation           and would        take       actions    during       this     fiscal      year.

      This     concludes      my statement,              Mr.   Chairman.         I will      be happy         to
answer    any questions           you or the other             members may have.