BURMA: HOW MTE PROFITS FROM TIMBER SALES

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000699 SIPDIS STATE FOR EAP/MLS, INR/EAP, EEB/TFS OES FOR ANN COVINGTON BANGKOK FOR REO OFFICE PACOM FOR FPA TREASURY FOR OASIA, OFAC E.O. 12958: DECL: 09/02/2018 TAGS: ECON SENV PREL PGOV ETRD BM SUBJECT: BURMA: HOW MTE PROFITS FROM TIMBER SALES RANGOON 00000699 001.2 OF 003 Classified By: CDA Tom Vajda for Reasons 1.4 (b and d) ¶1. (C) Summary. The Burmese Government, through state-owned Myanmar Timber Enterprise (MTE),heavily regulates Burma's timber trade, exporting logs, sawed lumber, and finished products for substantial profits. In order to earn the regime's annual revenue quota of USD 300 million, MTE holds monthly auctions, selling teak and hardwood logs to the highest bidder. Additionally, MTE pre-sells uncut timber to well-connected Burmese companies at below-market prices, enabling it to secure hard currency quickly. Timber industry officials confirmed that for the past five years, MTE and private Burmese logging companies exceeded the Forestry Department's annual allowable cuts (AAC),contributing to significant deforestation. According to private consulting firm Business Investment Group, MTE and private Burmese companies earned more than USD 560 million in timber exports in 2007. End Summary. Timber Resources Abound, For Now -------------- ¶2. (C) Burma is home to more than half of mainland Southeast Asia's closed forests and holds more than 70 percent of the world's teak. While the Ministry of Forestry claims that 51 percent of Burma is forest, former Director General of the Forestry Department Dr. Kyaw Tint told us that with the recent rate of timber extraction, forests cover approximately 47 percent of the country. Burma is known for its teak forests, but also has large reserves of ironwood, rosewood, and other valuable hardwoods. Seeing the Profits through the Trees -------------- ¶3. (C) The Burmese Government uses two Ministry of Forestry institutions - the Forestry Department and Myanmar Timber Enterprise (MTE) - to regulate the timber industry. The Forestry Department, which is responsible for forest conservation and management, sets each year the annual allowable cut (AAC) for the industry and physically marks the specific trees MTE can cut down. Since 2003, the AAC has been set at 250,000 cubic meters for teak and 1.5 million cubic meters for other hardwoods, according to former Forestry Department Director General Dr. Kyaw Tint. The Forestry Department also monitors the felling of trees, and has the power to sanction any company (except MTE) that illegally cuts logs. State-owned MTE is responsible for the utilization and extraction of the forests. Burmese law stipulates that only MTE can export cut logs, although MTE in recent years has allowed specific companies to both cut and export timber. Additionally, MTE sets the local price of teak and other hardwoods. According to official MTE documents, the price of timber varies between USD 431 and USD 8324 per cubic ton, depending on the type and quality. ¶4. (C) U Khin Zaw, former Deputy General Manager of MTE, confirmed that the regime's interest in the timber industry was profit rather than conservation. While the Forestry Department pursued sustainable forest management, MTE practices undermined these efforts, he noted. The Ministry of Forestry required that MTE earn at least USD 300 million in revenues annually. Since the quality of Burmese timber had eroded over the past 15 years, MTE had been forced to exceed the AAC and cut a greater number of lower-priced trees to reach its revenue quota, he explained. When we pointed out that the price of Burmese timber, set by MTE and RANGOON 00000699 002.2 OF 003 influenced by world demand, had increased in the past five years, he agreed, admitting that the regime's desire for more revenue led MTE to over-cut. According to MTE statistics, MTE in 2007 cut down more than 300,000 cubic meters of teak and two million cubic meters of other hardwoods, the majority of which was exported at a total value of $561 million. Former Forestry Department official Dr. Kyaw Tint criticized the Forestry Department's inability to sanction MTE and promote sustainable forestry, noting that the Minister of Forestry encouraged MTE to cut down "as many trees as possible." ¶5. (C) U Khin Zaw explained that to maximize profits, MTE sold teak and other hardwood logs to private Burmese companies via monthly auctions. (Note: Burmese law prohibits foreign companies from engaging in Burma's timber trade. End Note.) In 2007, MTE sold an average of 6,500 cubic meters of logs per month, yielding a gross income of USD 230 million. Private companies either processed the wood into sawed lumber or furniture for export or domestic sale. Some companies opted to resell the cut logs to overseas buyers, but since MTE by law was the only entity that could export logs, companies must export under MTE's name. MTE, which reimbursed the companies for the sale of logs, often took a percentage cut, bringing more money into the regime's coffers, U Khin Zaw stated. ¶6. (C) U Win Aung of United International, one of Burma's larger private timber companies, told us that MTE also earned hard currency by pre-selling logs (before they are cut) to select private companies at below-market value. Even though this process reduced slightly MTE's profits, it guaranteed that MTE would reach its revenue goal, he noted. Well-connected private companies, including Tay Za's Htoo Trading, Win Aung's Dagon Timber, Tin Win's Tin Wun Tun Company, and Nay Aung and Pyi Aung's (sons of Minister of Industry 1) IGE Company Ltd., purchase the logs, secure overseas buyers, and then eventually ship them out under MTE's name. ¶7. (C) According to Win Aung, these private firms used their connections to ensure they received the best quality timber, and often felled them in place of MTE. The companies, like others in the industry, exported all logs under MTE's name, but in their case MTE did not take a percentage cut. Because official figures list MTE as the exporter of all logs, we are unable to ascertain how much these private companies earn from timber sales. However, representatives of Tay Za's Htoo Trading told us that in 2007 the company earned more than USD 75 million from registered exports of teak. (Note: There is a vibrant illegal trade of timber across Burma's porous borders, which is not included in official trade figures. End Note.) Comment -------------- ¶8. (C) Burma's forests are quickly eroding as the regime sells the country's finite timber resources to secure foreign exchange and pad the elite's own pockets. Arguments justifying MTE's over-cutting of trees to compensate for the eroding quality of timber appear flawed, since the price of Burmese timber has increased substantially in the past few years. MTE could cut down less and still meet its USD 300 million revenue government quota, but like all Burmese state-owned enterprises, it is driven by profit. Forestry Department officials recognize the problem, but have no power RANGOON 00000699 003.2 OF 003 to sanction MTE or the crony companies, so the over-felling continues. VAJDA