Administration of the Federal Ban on Exports of Unprocessed Federal Timber

Published by the Government Accountability Office on 1990-05-08.

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

                 United States General Accounting Oface /f/      3 s 7


For Release       Administration     of the   Federal  Ban on
on Delivery       Exports    of Unprocessed    Federal  Timber
Expected at
10100 a.m. EST
May 8, 1990

                  Statement  of William  E. Gahr, Associate   Director
                  Food and Agriculture   Issues
                  Resources,  Community,   and Economic Development
                  Before the Subcommittee       on Forests,      Family
                  Farms, and Energy
                  Committee on Agriculture
                  House of Representatives

                                                                 GAO Form 160 (12/87)
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
histc3ri.c      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.

         Between 1984 and 1988, exports                           of unprocessed               timber         from
Washington        and Oregon ports                 have increased            by about 1 billion                        board
feet.1        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            t-he 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
-y:y,pep-    .-- ..-... . ~.,".
       'J!"L.-*-             . _ ..--_- -             I;                --. _.
               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
                 Bureau 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.               A,lso 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.*       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
                         -----      --

*The'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 Committee            intended        to allow      historic         patterns        of trade           to
continue       without       disruption.            According          to the Chairman,              this
provision          was intended          to prohibit          firms     in the export              trade        from
increasing          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 half       of the permitted              timkr          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 *-year      period.          In 1987,
9 companies          exported          private         timber      and bought           Forest      Service
and/or      Bureau timber              for     domestic          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.

          By contrast,'           the Bureau defines               historic        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       to 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        Bureau 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             Oreg,on 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
~~&h.?-f;-s~wcr-e- r21,_>I' .-Iax-dad..
                                  ^l-l....~-. -_.-..
              impetus behind the proposed changes died when~the-.&&$any 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 Bureau 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
vio;ations          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.


         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
    w         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 recommendation       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.